Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 83113 May 19, 1992

RAFAEL S. BELTRAN and MA. VIOLETA BELTRAN, petitioners,

vs.
PAIC FINANCE CORPORATION, SERVICE EQUIPMENT SPECIALISTS CO., INC.,
RODRIGO REYES and IRAIDA REYES, respondents.

G.R. No. 83256 May 19, 1992

PAIC FINANCE CORPORATION, petitioner,

vs.
SPOUSES RAFAEL BELTRAN and MARIA VIOLETA BELTRAN, SERVICE
EQUIPMENT SPECIALIST CO., INC., RODRIGO REYES and IRAIDA G. REYES and
COURT OF APPEALS, respondents.

Goño Law Office for petitioner in 83256.

Cesar Villanueva for respondents in 83113.

FELICIANO, J.:

The consolidated Petitions here before the Court compel us to consider the nature and at least
some of the legal effects of a "financing lease" or "financial lease." Such an instrument must
seem an exotic creation in the eyes of many civil law jurists; for a financial lease does not fit
neatly into the tight and orderly categories of the Civil Code. But financial leases are quite
commonplace in today's commercial and financial world and the law must take account of
developments and practice in that world.

On 15 July 1980, the Beltran spouses purchased from Service Equipment Specialists Co.
("SESCO") one unit of Infra-Red Performance Analyzer with Serial No. 19B2870, SUN 1115,
FOR P137,000.00. Upon delivery of the unit on the same day, the Beltrans returned to SESCO a
Performance Analyzer SUN 1011 previously purchased from SESCO, and the payments made
thereon, plus two (2) other checks made out by the Beltrans in the name of SESCO, were applied
as downpayment on the new Performance Analyzer SUN 1115. Further, SESCO agreed with the
Beltrans that the balance of the purchase price of the new SUN 1115 would be placed under a
financing arrangement which SESCO was to enter into with PAIC. 1

On 3 September 1980, the Beltrans issued another check in favor of SESCO in the amount of
P3,780.00. On the same date, SESCO assigned the sales invoice it issued to the Beltran spouses
to PAIC; the documentation dated 3 September 1980 stated that the Performance Analyzer SUN
1115 with Serial No. 19B2870 was delivered to PAIC. At the same time, PAIC executed a
contract of lease over the SUN 1115 with the spouses Beltran as lessees for a term of 36 months
at a monthly rental of P3,903.52 commencing on 2 September 1980 and ending on 2 October
1983. On 19 September 1980, SESCO executed in favor of PAIC a surety undertaking under
which SESCO guaranteed solidarily the faithful performance of all obligations of the Beltran
lessees to PAIC.

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Sometime in October 1980, the SUN 1115 malfunctioned. The Beltrans sought the assistance of
SESCO which in turn promised to repair the equipment. The repairs made on the SUN 1115
were, however, found to be unsatisfactory by the Beltrans who thereupon decided to return the
unit and discontinued the monthly rental payments to PAIC.

When the spouses Beltran failed to pay four (4) succeeding monthly payments, PAIC sent them a
letter demanding payment of the rentals in arrears. When the spouses Beltran failed to pay the
arrearages, PAIC, on 23 February 1981, filed a complaint for a sum of money against the
spouses. On 31 March 1981, the spouses Beltran filed an answer with counterclaim and a third-
party complaint against SESCO. SESCO eventually filed an answer to the third-party complaint
as required by the trial court.

On 16 October 1985, the trial court rendered a decision in favor of the spouses Beltran. The trial
court held that the transaction between PAIC and the spouses Beltran was one of lease and
dismissed the complaint of PAIC, as well as the Beltrans' counterclaim against PAIC and their
third party complaint against SESCO. The trial court held:

Under the terms of the lease, in case of fault of the lessee (defendant Beltran), the
plaintiff may declare any and all sums due and to become due and payable and in
addition the lessor shall be entitled to take possession of the leased equipment and
to recover as damages an amount equal to the difference of the rent for the
unexpired term of the lease and aggregate rental value of the leased equipment.

Categorizing the transaction had between plaintiff and defendant Rafael

S. Beltran as one of lease, which binds the plaintiff; we are constrained to dismiss
the plaintiff's case.

Under Article 1654 of the Civil Code, the lessor is obliged to deliver the object of
the lease in such condition as to render it fit for the use intended; to make on the
same during the lease all the necessary repairs in order to keep it suitable for the
use to which it has been devoted and to maintain the lessee in the peaceful
enjoyment of the lease during the contract.

Defendants Beltran's evidence, without contradiction is that the performance

analyzer became unfit for the use intended soon after delivery. Plaintiff [PAIC]
has not repaired such defect in order to keep the equipment suitable for the use to
which it is devoted.

Consequently, the lease must be deemed extinguished because the thing leased
was totally unfit for the purposes of the lease. 2 (Emphasis and brackets supplied)

The Beltran spouses filed a notice of appeal dated 12 April 1986 with the trial court in view of
the failure of the trial court to rule on the liability of SESCO on its contract of sale. The notice of
appeal was, however, denied due course by the trial court for having been filed late. The motion
for reconsideration filed by the spouses Beltran was denied on the ground that the period for
appeal is jurisdictional. A second motion for reconsideration was filed with, but was not acted
upon by, the trial court. Instead, the trial court transmitted the records of the case to the Court of
Appeals since PAIC had filed its own appeal in a timely manner. Upon such transmittal, the
Court of Appeals assumed jurisdiction of the appealed case.

The judgment of the trial court was affirmed by the Court of Appeals in a decision dated 30 June
1987. In that decision, however, the Court of Appeals held the transaction between the Beltrans
and PAIC to be one of sale rather than a lease:

We agree with the contention of the defendants-appellees. An examination of the

records shows that indeed the Contract of lease "is but a scheme to simulate the
real agreement between the parties which is a financing arrangement for the
defendants Beltran to pay the unpaid price of the performance analyzer with

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 Serial No. SUN 1115 to the plaintiff." (p. 251, Record). The equipment in
question was sold to defendant-appellee Rafael S. Beltran on July 15, 1980 by
Service Equipment Specialist Co., Inc. (SESCO) as evidenced by Sales Invoice
No. 050 (p. 10, Folder of Exhibits), by Warranty Certificate dated July 15, 1980
(p. 11, Folder of Exhibits), and by a letter of SESCO addressed to defendant
appellee dated October 21, 1980 (p. 13, Folder of Exhibits).

Plaintiff-appellant's evidence shows some glaring inconsistencies. The contract of

lease covers the equipment in question which was already sold and delivered to
defendant-appellee. The date of the contract of lease is July 31, 1980 but the
subject of the lease was "sold" to plaintiff-appellant only on September 3, 1980
(p. 4, Folder of Exhibits). The original of Sales Invoice No. 050 reflect both
plaintiff-appellant and defendant-appellee Rafael S. Beltran as vendees of the
equipment in question but the contract of lease shows that defendant-appellee is
the lessee and the plaintiff-appellant is the lessor. The delivery receipts show that
the equipment in question was delivered to defendant-appellee on July 15, 1980
(p.10, Folder of Exhibits) by SESCO, on September 2, 1980 by plaintiff-
appellant, and on September 3, 1980 by SESCO (pp. 5-6, Folder of Exhibits).
Exhibit D shows that the equipment in question was delivered to both plaintiff-
appellant and defendant-appellee on September 3, 1980 by SESCO (p. 6, Folder
of Exhibits). These inconsistencies belie plaintiff-appellant's contention that the
contract of lease is not a "scheme to simulate real agreement between the parties
which is a financing arrangement."

Defendants-appellees [Beltrans] cannot be held liable for the breakdown of the

equipment in question pursuant to the Warranty Certificate of SESCO dated July
15, 1980 (p. 11, Folder of Exhibits). It is admitted that the cause of the breakdown
was when one of SESCO's technicians "accidentally damaged the PCB of the
equipment" (p. 13 Folder of Exhibits). When the equipment was not repaired
despite SESCO's assurance, defendants-appellees decided to return the equipment
and discontinued amortization payments (pp. 12-13, Folder of Exhibits). As found
by the trial court:

Defendant Beltran's evidence, without contradiction is that the

performance analyzer became unfit for the use intended soon after
delivery. Plaintiff has pot repaired such defect in order to keep the
equipment suitable for the use it is devoted. (p. 252, Record).

Defendants-appellees seek a rescission of the contract of sale pursuant to Article

1599 of the Civil Code which provides for such a remedy when there is a breach
of warranty by the seller. Since the records show that the equipment in question
became unfit for the use it is intended, defendants-appellees are entitled to
rescission of the contract of sale with SESCO or its (SESCO's) assigns.

xxx xxx xxx 3

(Emphasis supplied)

Both PAIC and the Beltrans moved for reconsideration of the Court of Appeals' decision. In a
resolution dated 28 April 1988, the Court of Appeals rejected both motions and ruled that the
Beltrans, not having perfected any appeal from the decision of the trial court, could not seek
modification of that decision.

A Petition for Review on Certiorari was then filed by the Beltran spouses with this Court and
docketed as G.R. No. 83113, assailing the Court of Appeals' refusal to entertain their appeal. In a
Resolution dated 4 January 1989, the Court dismissed the petition of the Beltran spouses for
"insufficiency in form and substance and for lack of merit." The Beltrans moved for
reconsideration, without success. A second motion for reconsideration was filed by the Beltrans.

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Meantime, PAIC also filed a Petition for Review on certiorari before this Court, docketed as
G.R. No. 83256. On 25 January 1989, the Court issued a Resolution in G.R. No. 83256, granting
the motion of the spouses Beltran for consolidation of G.R. No. 83256 with G.R. No. 83113, in
effect reconsidering the previous dismissal of the petition in G.R. No. 83113.

PAIC, in its petition, mainly alleges that the Court of Appeals erred in applying the provisions of
the Civil Code in the construction of its contract with the Beltran spouses. PAIC maintains that
the Court of Appeals should have applied instead the provisions of R.A. No. 5980 entitled "An
Act Regulating the Organization and Operation of Financing Companies," in characterizing the
relationship between PAIC and the spouses Beltran. It is argued that the contract of lease is
actually a financial lease governed by Section 3 (a) of R.A. No. 5980; that under such scheme,
PAIC under took no warranty as to the fitness, design or condition of, or as to the quality or
capacity of the equipment.54

The threshold problem relates to characterization of the relationships between the three (3)
parties: PAIC, the Beltrans and SESCO. Characterization of these relationships requires us to
examine the real nature of the commercial transactions entered into by these parties inter se, and
in doing so, we need to look through the forms of the agreements and related documents and to
examine the effective intent of the parties as well as the economic facts and circumstances which
existed at the time of establishment of such agreements. 4

We begin by summarizing the claims asserted by each of the parties against the others.

The Beltrans asserted against PAIC and against SESCO two (2) principal claims. The first claim
was for rescission of the lease agreement with PAIC, which had obligated the Beltrans to make
monthly payments to PAIC, for failure of PAIC to render the SUN 1115 fit for the purpose for
which the Beltrans wanted it in the first place. The second was a claim to recover the
downpayment that the Beltrans had made to SESCO on the purchase price of the SUN 1115.

The principal claim of PAIC was asserted against the Beltrans under the lease agreement. That
claim was for specific performance of the Beltrans' obligations under the lease agreement, i.e.,
payment of the specified monthly payments all of which had become due and payable in view of
the default on the part of the Beltrans. The aggregate of those monthly payments in effect
represented the payment which PAIC had previously made to SESCO for the balance of the
purchase price (remaining after the Beltrans' downpayment) of the SUN 1115, plus financing
charges which included PAIC's profit. PAIC also had a cause of action against SESCO under the
suretyship agreement which SESCO had signed guaranteeing solidarily with the Beltrans
payment of the amounts due from the Beltrans under the lease agreement. PAIC did not
originally implead SESCO as a defendant in the complaint against the Beltrans. SESCO was
originally brought in as a party-litigant through the medium of the third-party complaint filed by
the Beltrans against SESCO before the trial court. Later, PAIC amended its complaint, this time
bringing in SESCO as a defendant; the amended complaint was admitted and SESCO in due time
filed an answer.

SESCO sought to defend itself against PAIC's claims by asserting that PAIC's remedies were
against the Beltrans under their lease contract; that by entering into the lease with the Beltrans,
PAIC had waived any rights it had as a buyer from SESCO; that SESCO's solidary guarantee in
favor of PAIC had been extinguished or prescribed; that the Beltrans had prevented SESCO from
complying with its warranty on the SUN 1115; and that any defect of the SUN 1115 was due to
the acts and negligence of the users, i.e., the Beltrans. SESCO did not appeal from the trial
court's decision but was, of course, a party to the proceedings before the Court of Appeals and is
a party to the two (2)Petitions for Review. In each of the Petitions for Review (G.R. Nos. 83113
and 83256) now consolidated before our Court, SESCO was served with a copy of the Petition.
Clearly, therefore, the Supreme Court has jurisdiction over the person of SESCO.

We turn to the important circumstances constituting and attending the transactions between
SESCO, PAIC and the Beltrans:

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1. Initially, SESCO sold the Performance Analyzer SUN 1115 to the Beltran spouses as
evidenced by SESCO's Sales Invoice No. 050 dated 15 July 1980. 5 Accompanying this Sales
Invoices was a Certificate of Warranty issued by SESCO in favor of the Beltrans, also dated 15
July 1980. 6 Thereupon, delivery of the Performance Analyzer was made to the Beltrans, as
indicated in the Sales Invoice and in the delivery receipt dated 15 July 1980. 7 As downpayment
fort his purchase, the Beltrans paid SESCO the total amount of P29,672.11.

2. Next, SESCO sold to PAIC the same equipment it had earlier sold to the Beltran spouses. The
sale to PAIC is evidenced by SESCO's Sales Invoice No. 050 dated 3 September 1980 and issued
in the name of both PAIC and the Beltrans as vendees. For this transaction, PAIC paid SESCO
the amount of P91,751.60. A delivery receipt covering the SUN 1115 and dated 3 September
1980 was issued in the name of both PAIC and the Beltrans. A close examination of the records
will, however, show that PAIC never took physical possession of the SUN 1115, since on the
stated date of delivery to PAIC, the SUN 1115 was already physically in the hands of the
Beltrans.

3. Shortly after the transaction between SESCO and PAIC, a lease contract dated 19 September
1990 was entered into between PAIC and the Beltrans. The lease agreement provided for a fixed
monthly rental payment for a period of thirty-six (36) months. It is important to note that under
this lease contract, the lessor PAIC undertook no warranty of the fitness, design and condition of,
or of the quality or capacity of, the leased Performance Analyzer SUN 1115. The relevant
provision of the lease agreement reads as follows:

2.1. –– Warranties; Negation –– Lessor not being the manufacturer of the

Equipment, nor manufacturer's agent, makes no warranty or representation,
either expressed or implied, as to the fitness, design or condition of, or as to the
quality or capacity of the material, equipment or workmanship in the Equipment,
nor any warranty that the equipment will satisfy the requirements of any law, rule,
specification or contract which provides for specific machinery or operation, or
special methods, it being agreed that all such risks as between the Lessor and the
Lessee are to be borne by the Lessee at its sole risk and expense. No oral
agreement, guaranty, promise, condition, representation or warranty shall be
binding; all prior conversations, agreements, or representations related hereto
and/or to the Equipment are integrated herein, and no modification hereof shall be
binding unless in writing signed by Lessor. All repairs, parts, supplies,
accessories, equipment and device, furnished or added to any Equipment under
lease shall become the property of the Lessor. The Lessee also agrees that each
Equipment under lease is of a design, capacity and size selected and approved by
the Lessee, and the Lessee is satisfied that the same is suitable for its purposes.
The Lessor shall not be liable to the Lessee for any loss, damage or expense of
any kind or nature, caused directly or indirectly, by any Equipment under lease, or
the use or maintenance thereof, or the repairs, servicing or adjustments thereto, or
by any delay or failure to provide the same, or by any interruption of service or
loss of use thereof or for any loss of business or damage whatever and however
the same may have been caused. (Emphasis supplied)

The lease contract also provided that "the lessee shall have no option to purchase or otherwise
acquire title or ownership of any of the leased equipment and shall have only he right to use the
same under and subject to the terms and conditions of [the] lease."

4. Pursuant to the lease agreement, another delivery receipt was issued, this time in the name of
the Beltrans by PAIC, and dated 2 September 1980. It may be noted that this delivery receipt
dated 2 September 1980 was in fact dated a day earlier than the date when SESCO, per its own
documentation, delivered the equipment to PAIC.

5. Since the Beltrans were in possession of the SUN 1115 before PAIC, per SESCO's
documentation, purchased the same from SESCO, it necessarily follows that the Beltrans, rather
than PAIC, had selected and inspected the equipment.

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6. The amount paid by PAIC to SESCO represented the discounted value of the total amount
receivable by SESCO from the Beltrans. 8 At the time of the sale by SESCO to PAIC, the
amount receivable by SESCO from the Beltrans (i.e., the balance of the purchase price of the
equipment remaining after application of the downpayment) was P107,327.89 (P137,000.00 -
P29,672.11 = P107,327.89).

7. The rental payments stipulated in the lease contract between PAIC and the Beltrans were so
computed as to cover the amount paid by PAIC to SESCO plus the financing charges. 9

8. Although the lease contract gave no option to the Beltrans to purchase or to acquire the SUN
1115, the declarations of the parties in their different pleadings 10 afford clear indication that the
parties had contemplated that the ownership of the SUN 1115 would pass to the Beltrans after
the end of the lease period. It was not, therefore, anticipated by the parties that the SUN 1115
would be returned to the lessor PAIC. PAIC was not in the business of leasing out machinery or
equipment and did not maintain a warehouse or workshop nor service and maintenance
personnel for the repair and servicing of machinery or equipment.

It will be recalled that the trial court concluded that the contract between PAIC and the Beltrans
was a real lease or a "civil law lease" and held that the lease was extinguished because the thing
leased was or had become totally unfit for the purposes of the lease, in accordance with the
provisions of Article 1654 of the Civil Code. It will also be recalled that the Court of Appeals
had concluded after examination of the above circumstances that the contract of lease was "a
scheme to simulate the real agreement between the parties" which "real agreement" was a
composite of a contract of sale between the Beltrans as vendees and SESCO (or SESCO's assigns
[PAIC]) as vendor, and a "financing arrangement."

We believe that the Court of Appeals was substantially correct in holding that the principal
transactions were two-fold: firstly, a sale of the SUN No. 1115 from SESCO to PAIC/the
Beltrans and, secondly, a financing arrangement that would permit the ultimate users of the SUN
1115 — the Beltrans — to use that equipment and pay for it by installments, spread out over
thirty-six (36) months. Their consistencies in the details of the documentation of the transactions
may be seen to be due, not so much to "simulation" of the "real agreement of the parties" but
rather to the fact that the financing company was chosen and the financing arrangement
concluded sometime after the original sale transaction between SESCO and the Beltrans. That
original transaction was in effect remodelled or restructured to conform with the financing
arrangement, which took the form of a financial lease. A financial lessor, like all lessors, is legal
owner of the thing leased. Accordingly, SESCO documented a sale to PAIC; because the SUN
1115 had earlier been sold to the Beltrans, the SESCO invoice was modified and made out to
both PAIC and the Beltrans. The possession originally held by the Beltrans in concept of owner,
was transmuted into possession by the Beltrans in concept of lessee.

In this jurisdiction, financial leases as a species of secured financing are of fairly recent vintage.
Financial leases, while they are complex arrangements, cannot be casually dismissed as
"simulated contracts." To the contrary, they are genuine or legitimate contracts which have been
accorded statutory and administrative recognition. Section 3 (a) of Republic Act No. 5980, as
amended by Presidential Decrees Nos. 1454 and 1793, known as the "Financing Company Act,"
defines financing companies in the following manner:

Financing companies, hereinafter called companies, are corporations, or

partnerships, except those regulated by the Central Bank of the Philippines, the
Insurance Commissioner and the Cooperatives Administration Office, which are
primarily organized for the purpose of extending credit facilities toconsumers and
to industrial, commercial, or agricultural enterprises, either by discounting or
factoring commercial papers or accounts receivables, or by buying and selling
contracts, leases, chattel mortgages, or other evidences of indebtedness, or by
leasing motor vehicles, heavy equipment and industrial machinery, business and
office machines and equipment, appliances and other movable
property. 11 (Emphasis supplied)

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Section 1, paragraph 1 of the Revised Rules and Regulations Implementing the Provisions of the
Financing Company Act, as amended, adopted jointly by the Securities and Exchange
Commission and the Monetary Board of the Central Bank of the Philippines, defines leasing in
the following terms:

1. "LEASING" shall refer to financial leasing which is a mode of extending credit

through a non-cancellable contract under which the lessor purchases or acquires
at the instance of the lessee heavy equipment, motor vehicles,
industrial machinery, appliances, business and office machines, and other
movable property in consideration of the periodic payment by the lessee of a fixed
amount of money sufficient to amortize at least 70% of the purchase price or
acquisition cost, including any incidental expenses and a margin of profit, over
the lease period. The contract shall extend over an obligatory period during which
the lessee has the right to hold and use the leased property and shall bear the cost
of repairs, maintenance, insurance and preservation thereof, but with no
obligation or option on the part of the lessee to purchase the leased property at
the end of the lease contract. (Emphasis supplied)

The tax treatment of lease agreements, as distinguished from conditional sales contracts, is
governed by Revenue Regulations No. 19-86, promulgated by the Department of Finance on 1
January 1987. These Revenue Regulations recognize two (2) types of leases. The first type,
denominated an "operating lease", is defined as

. . . a contract under which the asset is not wholly amortized during the primary
period of the lease, andwhere the lessor does not rely solely on the rentals during
the primary period for his profits, but looks for the recovery of the balance of his
costs and for the rest of his profits from the sale or re-lease of the returned
asset at the end of the primary lease period. (Emphasis supplied)

The second type of recognized lease is designated as a "finance lease" and defined in the
Revenue Regulations in the following manner:

. . . "Finance lease," or "Full payout lease" is a contract involving payment over

an obligatory period (also called primary or basic period) of specified rental
amount for the use of a lessor's property, sufficient in total to amortize the capital
outlay of lessor and to provide for the lessor's borrowing costs and profits. The
obligatory period refers to the primary or basic non-cancellable period of the lease
which in no case shall be less than 730 days. The lessee, not the lessor, exercises
the choice of the asset and is normally responsible for maintenance, insurance
and such other expenses pertinent to the use, preservation and operation of the
asset. Finance leases may be extended, after the expiration of the primary period,
by non-cancellable secondary or subsequent periods with the rentals significantly
reduced. The residual value shall in no instance be less than five per cent (5%) of
the lessor's acquisition cost of the leased asset. (Emphasis supplied)

The basic purpose of a financial leasing transaction is to enable the prospective buyer of
equipment, who is unable to pay for such equipment in cash in one lump sum, to lease such
equipment in the meantime for his use, at a fixed rental sufficient to amortize at least 70% of the
acquisition cost (including the expenses and a margin of profit for the financial lessor) with the
expectation that at the end of the lease period, the buyer/financial lessee will be able to pay any
remaining balance of the purchase price. 12 Generally speaking, a financing company is not a
buyer or seller of goods; it is not a trading company. Neither is it an ordinary leasing company; it
does not make its profit by buying equipment and repeatedly leasing out such equipment to
different users thereof. But a financial lease must be preceded by a purchase and sale contract
covering the equipment which becomes the subject matter of the financial lease. The financial
lessor takes the role of the buyer of equipment leased. And so the formal or documentary tie
between the seller and the real buyer of the equipment, i.e., the financial lessee, is apparently
severed. In economic reality, however, that relationship remains. The sale of the equipment by

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the supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to
secure the repayment over time of the purchase price of the equipment, plus financing charges,
through the payment of lease rentals; that legal title is the upfront security held by the financial
lessor, a security probably superior in some instances to a chattel mortgagee's lien.

A financing lease may be seen to be a contract sui generis, possessing some but not necessarily
all of the elements of an ordinary or civil law lease. Thus, legal title to the equipment leased is
lodged in the financial lessor. The financial lessee is entitled to the possession and use of the
leased equipment. At the same time, the financial lessee is obligated to make periodic payments
denominated as lease rentals, which enable the financial lessor to recover the purchase price of
the equipment which had been paid to the supplier thereof. However, the financial lessor, being a
financing company, i.e., an extender of credit rather than an ordinary equipment rental company,
does not extend a warranty of the fitness of the equipment for any particular use. In the instant
case, the contract of lease between PAIC and the Beltrans, in addition to expressly disclaiming
any obligation on the part of PAIC to warrant the fitness of the SUN 1115 for any particular use,
had specified that the equipment warranty, issued by SESCO the supplier of the equipment,
"shall be passed on by [PAIC] to the lessee." In fact, as noted, SESCO issued a Certificate of
Warranty to the Beltrans. Thus, the financial lessee was precisely in a position to enforce such
warranty directly against the supplier of the equipment and not against the financial lessor. We
find nothing contra legem or contrary to public policy in such a contractual arrangement.

Considering all the circumstances listed earlier, and bearing in mind the economic and legal
nature and objectives of a financing lease, we conclude and so hold that the financial lease
between PAIC and the Beltrans was a valid and enforceable contract as between the two (2)
contracting parties. The Beltrans are therefore bound to pay to PAIC all the rental payments
which accrued and are due and payable under that contract.

At the same time, PAIC is entitled to require SESCO to respond under its solidary guarantee of
the obligations of the Beltrans under the lease contract. PAIC may thus opt to recover from either
the Beltrans or SESCO alone, or from both the Beltrans and SESCO solidarily at the same time.

Should PAIC recover fully or partially the amounts due from the Beltrans, we believe and so
hold that the Beltrans are entitled to reimbursement from SESCO of such amounts as they shall
have been compelled to pay PAIC. In addition, the Beltrans are entitled to recover from SESCO
the downpayment they had previously made to SESCO on the SUN 1115, and as well to require
SESCO to take back that equipment. These rights of the Beltrans flow from their rescission of
the contract of sale covering the SUN 1115 for failure of SESCO to make good on its warranty
against defects in materials and workmanship set out in its "Warranty Certificate," and on its
warranty against hidden defects which render the thing sold "unfit for the use of which it is
intended" under the general law on sales. 13

It is clear to the Court that it is SESCO who must bear the legal consequences of its failure to
make good on the warranty it had given as vendor of the SUN 1115. SESCO received the full
value of the SUN 1115: (a) the downpayment from the Beltrans; and (b) the balance of the
purchase price from PAIC. The record shows that PAIC had not breached any of its undertakings
to the Beltrans under the financial lease. Upon the other hand, the Beltrans, because of failure of
the equipment warranty given by SESCO, could not benefit either from the purchase of the
equipment or from the financial lease. Clearly, it would be inequitable and unconscionable to
permit SESCO to hold on to the purchase price and to shift the burden of its own failure either to
the ultimate buyers or to the company which financed the bulk of the purchase price.

The Court is aware that the Beltrans were unable to file a timely appeal from the ruling of the
trial court which had dismissed their claim against SESCO. However, guided by the principle
that technicality should not be allowed to stand in the way of equitably and completely resolving
the rights and obligations of the parties, 14 , this Court now resolves to treat the Beltrans' appeal
as having been seasonably filed so as to permit complete resolution of this trilateral controversy
on the merits.

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IN VIEW OF THE ALL THE FOREGOING, the Decision of the Court of Appeals dated 30
June 1987 in C.A.-G.R. CV No. 10078 and the decision of the Regional Trial Court of Manila
dated 16 October 1985 in Civil Case No. 138233, are hereby SET ASIDE, and a new judgment is
hereby ENTERED providing as follows:

1. The spouses Beltran and SESCO are hereby ORDERED to pay, jointly and severally, to PAIC
the rental payments accrued and remaining unpaid under the lease agreement, with interest at six
percent (6%) per annumstarting from 16 October 1985 and until full payment thereof.

2. SESCO is also hereby ORDERED to reimburse the spouses Beltran any amount that they are
actually compelled to pay to PAIC under paragraph 1 of the dispositive portion of this Decision,
with interest thereon at six percent (6%)per annum counting from the date of payment by the
Beltran spouses and until full reimbursement thereof.

3. The spouses Beltran are hereby REQUIRED to return the Infra-Red Performance Analyzer
SUN 1115 to SESCO, at the expense of SESCO. SESCO is in turn hereby ORDERED to accept
that equipment.

4. SESCO is, finally, hereby ORDERED to return to the spouses Beltran the downpayment of
P29,672.11 made on the SUN 1115, with interest thereon at six percent (6%) per
annum counting from 16 October 1985 and until full payment thereof.

No pronouncement as to costs. This Decision is immediately executory.

SO ORDERED.

9|Page
 FIRST DIVISION

[G.R. No. 107199. July 22, 2003]

CEBU CONTRACTORS CONSORTIUM CO., petitioner, vs. COURT OF APPEALS and

MAKATI LEASING & FINANCE CORPORATION, respondents.

DECISION

AZCUNA, J.:

The instant Petition for Review on Certiorari stems from a complaint for collection of a sum
of money with replevin[1] filed by respondent Makati Leasing and Finance Corporation (MLFC)
against petitioner Cebu Contractors Consortium Company (CCCC) before the Regional Trial
Court of Makati.[2]

MLFC alleges that on August 25, 1976 a lease agreement[3] relating to various equipment
was entered into between MLFC, as lessor, and CCCC, as lessee. The terms and conditions of
the lease were defined in said agreement and in two lease schedules of payment. [4] To secure the
lease rentals, a chattel mortgage, and a subsequent amendment thereto, were executed in favor of
MLFC over other various equipment owned by CCCC.[5]

On June 30, 1977, CCCC began defaulting on the lease rentals,[6] prompting MLFC to send
demand letters.[7] When the demand letters were not heeded, MLFC filed a complaint for the
payment of the rentals due and prayed that a writ of replevin be issued in order to obtain
possession of the equipment leased and to foreclose on the equipment mortgaged.[8]

For its part, CCCC alleges[9] that it had a contract with the then Ministry of Public
Highways[10] for the construction of the Iligan-Cagayan de Oro-Butuan Road. Being in need of
additional capital, it approached MLFC for the purpose of securing a loan. MLFC agreed to
extend financial assistance to CCCC but, instead of a customary loan covered by a security,
MLFC induced CCCC to adopt and apply a sale and lease back scheme. The arrangement
provided for the equipment of CCCC to be made to appear as sold to MLFC and then leased
back to CCCC which will then pay lease rentals to MLFC. The rentals will be treated as
installment payments to repurchase the equipment. It is CCCCs claim that the arrangement is
nothing more than an equitable mortgage.

Pursuant to the sale and lease back scheme, CCCC executed two deeds of sale over its
equipment in favor of MLFC, which were then leased back to CCCC.[11] To facilitate payment of
the rentals, MLFC required CCCC to execute a deed of assignment of its collectibles from the
Ministry of Public Highways.[12] In addition, CCCC was also required to execute a chattel
mortgage over its other properties as a security.

CCCCs position is that it is no longer indebted to MLFC because the total amounts collected
by the latter from the Ministry of Public Highways, by virtue of the deed of assignment, and
from the proceeds of the foreclosed chattels were more than enough to cover CCCCs
liabilities. Finally, CCCC submits that, in any event, the deed of assignment itself already freed
CCCC from its obligation to MLFC.

The trial court rendered a decision[13] upholding the lease agreement and finding CCCC
liable to MLFC for P1,067,861.79 in lease rentals plus 25% attorneys fees and P486,442.28 in
litigation expenses.[14]On appeal[15] by CCCC, the appellate court affirmed the trial courts
decision but reduced the attorneys fees to 10% and totally eliminated the awarded litigation
expenses.[16] CCCC is now before this Court seeking to reverse the decision of the Court of
Appeals.[17]

CCCC presents the following assigned errors:

10 | P a g e
 I. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN UPHOLDING
THE SO-CALLED SALE-LEASE BACK SCHEME OF THE PRIVATE
RESPONDENT WHEN THE SAME IS IN REALITY NOTHING BUT AN
EQUITABLE MORTGAGE.

II. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN [NOT]

HOLDING THAT THE DEED OF ASSIGNMENT EXECUTED BY PETITIONER
IN FAVOR OF PRIVATE RESPONDENT FOR THE LATTER TO COLLECT
FROM THE MINISTRY OF HIGHWAYS COMPLETELY FREED PETITIONER
OF ITS OBLIGATION TO THE PRIVATE RESPONDENT.

III. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN FINDING

PETITIONER STILL LIABLE TO THE PRIVATE RESPONDENT DESPITE THE
FACT THAT PETITIONER HAD ALREADY OVER-PAID SAID RESPONDENT.

IV. WITH DUE RESPECT, THE RESPONDENT COURT ERRED IN NOT

GRANTING PETITIONERS CLAIM FOR DAMAGES AGAINST THE PRIVATE
RESPONDENT.

With respect to the first assigned error, this Court finds in favor of CCCC.

It is clear that the transaction between CCCC and MLFC is what is popularly known as a
financial leasing or financing lease. Transactions of this sort are not new to the commercial
world and have been recognized as genuine or legitimate contracts, accorded with statutory and
administrative recognition.[18]

In Beltran v. PAIC Finance Corporation,[19] this Court had occasion to discuss the nature of
a financing lease:

A financing lease may be seen to be a contract sui generis, possessing some but not necessarily
all the elements of an ordinary or civil law lease. Thus, legal title to the equipment leased is
lodged in the financial lessor. The financial lessee is entitled to the possession and use of the
leased equipment. At the same time, the financial lessee is obligated to make periodic payments
denominated as lease rentals, which enable the financial lessor to recover the purchase price of
the equipment which had been paid to the supplier thereof.

MLFCs own evidence discloses that it offers two types of financing lease: a direct lease and
a sale-lease back. A direct lease is one where the client buys equipment through a financing
company. MLFC would, in effect, initially purchase equipment that is needed by the client and
then lease it to the latter. In a sale-lease back, the client already has the equipment but needs
working capital. The client sells to MLFC equipment that it owns, which will be leased back to
him. The transaction between CCCC and MLFC involved the second type of financing lease.[20]

CCCC argues that the sale and lease back scheme is nothing more than an equitable
mortgage and, consequently, asks for its reformation.

Section 3 (d) of Republic Act No. 5980,[21] otherwise known as the Financing Company Act,
defines Financial leasing as:

a mode of extending credit through a non-cancelable lease contract under which the lessor
purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy percent (70%) of the purchase price or acquisition cost, including any
incidental expenses and a margin of profit over an obligatory period of not less than two (2)
years during which the lessee has the right to hold and use the leased property with the right to
expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance

11 | P a g e
and preservation thereof, but with no obligation or option on his part to purchase the leased
property from the owner-lessor at the end of the lease contract.[22]

The above definition was originally found in Section 1 (i) of the Revised Rules and
Regulations implementing the original Republic Act No. 5980. When Republic Act No. 8556
was enacted, amending Republic Act No. 5980, the definition was given a statutory nature.

In Investors Finance Corporation v. Court of Appeals,[23] the Court, applying the definition
of financial leasing, differentiated between a true financial leasing and an ordinary loan with
mortgage in the guise of a lease. It was explained that the definition contemplates the extension
of credit to assist a buyer in acquiring movable property which he can use and eventually own.
Thus, in a true financial leasing, a finance company purchases on behalf of or at the instance of
the lessee the equipment which the latter is interested to buy but has insufficient funds for the
purpose. The finance company therefore leases the equipment to the lessee in consideration of
the periodic payment by the lessee of a fixed amount of rental. However, where the client already
owns the equipment but needs additional working capital and the finance company purchases
such equipment with the intention of leasing it back to him, the lease agreement is simulated to
disguise the true transaction that is a loan with security. In that instance, it is clear that the
intention of the parties was not to enable the client to acquire and use the equipment, but to
extend to him a loan.

Going back to the case at bar, MLFC admits that the transaction with CCCC involved the
purchase of already-owned equipment. Consequently, there can be no doubt that the transaction
between the parties is not one of financial leasing, as defined by law, but simply a loan secured
by a chattel mortgage over CCCCs equipment.

When the true intention of the parties to a contract is not expressed in the instrument
purporting to embody their agreement by reason of mistake, fraud, inequitable conduct or
accident, the remedy of the aggrieved party is to ask for reformation of the instrument under
Articles 1359 and 1362 of the Civil Code, to the end that their true agreement may be expressed
therein.[24] Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a
written contract and for reformation of an instrument is ten years.[25] The right of action for
reformation accrued from the date of execution of the contract of lease in 1976.[26] This was
properly exercised by CCCC when it filed its answer with counterclaim to MLFCs complaint in
1978 and asked for the reformation of the lease contract.[27]

Moving on to the second assigned error, CCCC claims that it had assigned to MLFC its
collectibles from the Ministry of Public Highways, amounting to P2,469,142.50. The assignment
was duly approved by the Ministry of Public Highways. Consequently, CCCC argues that MLFC
should be barred from suing because the obligation had been transferred to and assumed by the
Ministry of Public Highways.

This Court finds that the execution of the deed of assignment in favor of MLFC did not
completely free CCCC from its obligations to MLFC under the lease agreement. On its face, the
deed speaks of an assignment. However, in light of the circumstances obtaining at the time of the
execution of said deed of assignment, this Court cannot regard the transaction as an absolute
conveyance. In the interpretation of contracts, if the terms are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of the stipulations shall control. But when
the words appear contrary to the evident intention of the parties, the latter shall prevail over the
former. In order to judge the intention of the parties, their contemporaneous and subsequent acts
shall principally be considered.[28]

The deed of assignment was dated August 27, 1976. CCCC, by its own evidence,[29] was
shown to have made partial payments on the obligation, apart from those obtained by MLFC
from the Ministry of Public Highways. These partial payments were made after the execution of
the deed of assignment. Since subsequent payments were made by CCCC itself, it follows that
the execution of the deed of assignment did not extinguish its obligation.

12 | P a g e
 In addition, the fact that a chattel mortgage was executed after the execution of the deed of
assignment further confirms the existence of CCCCs obligation under the lease agreement. If
indeed the deed of assignment extinguished the obligation, there was no reason to execute a
chattel mortgage. Evidently, the only conceivable reason for the execution of a chattel mortgage
was because the obligation under the lease agreement subsisted.

In Citizens Surety and Insurance Co., Inc. v. Court of Appeals,[30] this Court was faced with
the same issue. Petitioner in that case, a surety company, issued two surety bonds in behalf of
respondent therein to guaranty the fulfillment of an obligation under a contract of sale the latter
had entered into with the Singer Sewing Machine Company. In consideration of the bonds, two
indemnity agreements were executed by said respondent followed by a deed of assignment
executed on the same date. After respondents failure to comply with its obligation under the
contract of sale, petitioner was compelled to pay under the surety bonds. When respondent failed
to reimburse it, petitioner filed a collection suit. Respondent opposed the money claim, and
asserted that the surety bonds and the indemnity agreements had been extinguished by the
execution of the deed of assignment.

The Court held therein that the deed of assignment cannot be regarded as an absolute
conveyance whereby the obligation under the surety bonds was automatically
extinguished. Respondents subsequent acts showed that the deed of assignment was intended
merely as a security for the issuance of the two bonds. The Court found that partial payments
were made after the execution of the deed of assignment to satisfy the obligation under the two
surety bonds. Moreover, a second real estate mortgage in favor of petitioner was executed by
respondent. These circumstances showed that no debt was extinguished upon the execution of
the deed of assignment, which was intended merely as another security for the issuance of the
surety bonds.

This Court now comes to the issue of overpayment. While the lease agreement is in reality
an equitable mortgage, the records show that the equipment have already been sold by
MLFC,[31] and that the proceeds from the sale were credited to CCCCs account.

The Court of Appeals ruled that CCCC is indebted to MLFC in the amount of P1,048,655.00
and disregarded CCCCs own computation showing an alleged overpayment. This Court agrees
with this finding. CCCCs computation proved to be incomplete and unreliable. Noticeably absent
from the computation are the penalties incurred by CCCC, when it defaulted on the lease rentals,
which would have the effect of substantially increasing CCCCs debt.[32] Moreover, the Court of
Appeals computation is part of the findings of fact made by the appellate court. Such findings
and conclusions should not be disturbed on appeal, in the absence of any showing that these are
unfounded or arbitrarily arrived at or that the Court of Appeals had failed to consider an
important evidence to the contrary.[33]

Finding that CCCC is still indebted to MLFC, the formers claim for damages must also fail.

WHEREFORE, the decision appealed from is hereby AFFIRMED. No costs.

SO ORDERED.

13 | P a g e
 FIRST DIVISION

PCI LEASING AND FINANCE, INC., G.R. No. 142618

Petitioner,

Present:

PUNO, C.J., Chairperson,

*
- versus - SANDOVAL-GUTIERREZ,

CORONA,

AZCUNA, and

GARCIA, JJ.

GIRAFFE-X CREATIVE IMAGING, INC.,

Respondent. Promulgated:

July 12, 2007

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

DECISION

GARCIA, J.:

On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as
amended by R.A. No. 8556 in relation to Articles 1484 and 1485 of the Civil Code, petitioner
PCI Leasing and Finance, Inc. (PCI LEASING, for short) has directly come to this Court via this
petition for review under Rule 45 of the Rules of Court to nullify and set aside the Decision and
Resolution dated December 28, 1998 and February 15, 2000, respectively, of the Regional Trial
Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q-98-34266, a suit for a sum of

14 | P a g e
money and/or personal property with prayer for a writ of replevin, thereat instituted by the
petitioner against the herein respondent, Giraffe-X Creative Imaging, Inc. (GIRAFFE, for
brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into
a Lease Agreement,[1] whereby the former leased out to the latter one (1) set of Silicon High
Impact Graphics and accessories worth P3,900,00.00 and one (1) unit of Oxberry Cinescan
6400-10 worth P6,500,000.00. In connection with this agreement, the parties subsequently
signed two (2) separate documents, each denominated as Lease Schedule.[2] Likewise forming
parts of the basic lease agreement were two (2) separate documents denominated Disclosure
Statements of Loan/Credit Transaction (Single Payment or Installment Plan)[3] that GIRAFFE
also executed for each of the leased equipment. These disclosure statements inter alia described
GIRAFFE, vis--visthe two aforementioned equipment, as the borrower who acknowledged
the net proceeds of the loan, the net amount to be financed, the financial charges, the total
installment payments that it must pay monthly for thirty-six (36) months, exclusive of the
36% per annum late payment charges. Thus, for the Silicon High Impact
Graphics, GIRAFFE agreed to pay P116,878.21 monthly, and for Oxberry
Cinescan, P181.362.00 monthly. Hence, the total amount GIRAFFE has to pay PCI LEASING
for 36 months of the lease, exclusive of monetary penalties imposable, if proper, is as indicated
below:

P116,878.21 @ month (for the Silicon High

Impact Graphics) x 36 months = P 4,207,615.56

-- PLUS--

P181,362.00 @ month (for the Oxberry

Cinescan) x 36 months = P 6,529,032.00

Total Amount to be paid by GIRAFFE

(or the NET CONTRACT AMOUNT) P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount
of P3,120,000.00 by way of guaranty deposit, a sort of performance and compliance bond for the
two equipment. Furthermore, the same agreement embodied a standard acceleration clause,
operative in the event GIRAFFE fails to pay any rental and/or other accounts due.

15 | P a g e
 A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental-
payment obligations. And following a three-month default, PCI LEASING, through one Atty.
Florecita R. Gonzales, addressed a formal pay-or-surrender-equipment type of demand
letter[4] dated February 24, 1998 to GIRAFFE.

The demand went unheeded.

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the instant
case against GIRAFFE. In its complaint,[5] docketed in said court as Civil Case No. 98-
34266 and raffled to Branch 227[6] thereof, PCI LEASING prayed for the issuance of a writ of
replevin for the recovery of the leased property, in addition to the following relief:

2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING]

and against the defendant [GIRAFFE], as follows:

a. Declaring the plaintiff entitled to the possession of the subject

properties;

b. Ordering the defendant to pay the balance of rental/obligation in

the total amount of P8,248,657.47 inclusive of interest and
charges thereon;

c. Ordering defendant to pay plaintiff the expenses of litigation and

cost of suit. (Words in bracket added.)

Upon PCI LEASINGs posting of a replevin bond, the trial court issued a writ of replevin,
paving the way for PCI LEASING to secure the seizure and delivery of the equipment covered
by the basic lease agreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein

arguing that the seizure of the two (2) leased equipment stripped PCI LEASING of its cause of
action. Expounding on the point, GIRAFFE argues that, pursuant to Article 1484 of the Civil
Code on installment sales of personal property, PCI LEASING is barred from further pursuing
any claim arising from the lease agreement and the companion contract documents, adding that
the agreement between the parties is in reality a lease of movables with option to buy. The given
situation, GIRAFFE continues, squarely brings into applicable play Articles 1484 and 1485 of
the Civil Code, commonly referred to as the Recto Law. The cited articles respectively provide:

16 | P a g e
 ART. 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more
installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee's failure to pay cover two or more installments. In
this case, he shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary shall be void.
(Emphasis added.)

ART. 1485. The preceding article shall be applied to contracts purporting

to be leases of personal property with option to buy, when the lessor has deprived
the lessee of the possession or enjoyment of the thing.

It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil Code applies
to its contractual relation with PCI LEASING because the lease agreement in question, as
supplemented by the schedules documents, is really a lease with option to buy under the
companion article, Article 1485. Consequently, so GIRAFFE argues, upon the seizure of the
leased equipment pursuant to the writ of replevin, which seizure is equivalent to foreclosure, PCI
LEASING has no further recourse against it. In brief, GIRAFFE asserts in its Motion to Dismiss
that the civil complaint filed by PCI LEASING is proscribed by the application to the case of
Articles 1484 and 1485, supra, of the Civil Code.

In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract with
GIRAFFE is a straight lease without an option to buy. Prescinding therefrom, PCI LEASING
rejects the applicability to the suit of Article 1484 in relation to Article 1485
of the Civil Code, claiming that, under the terms and conditions of the basic agreement, the
relationship between the parties is one between an ordinary lessor and an ordinary lessee.

In a decision[7] dated December 28, 1998, the trial court granted GIRAFFEs motion to
dismiss mainly on the interplay of the following premises: 1) the lease agreement package, as
memorialized in the contract documents, is akin to the contract contemplated in Article 1485 of
the Civil Code, and 2) GIRAFFEs loss of possession of the leased equipment consequent to the
enforcement of the writ of replevin is akin to foreclosure, the condition precedent for application
of Articles 1484 and 1485 [of the Civil Code]. Accordingly, the trial court dismissed Civil Case
No. Q-98-34266, disposing as follows:

17 | P a g e
 WHEREFORE, premises considered, the defendant [GIRAFFE] having
relinquished any claim to the personal properties subject of replevin which are
now in the possession of the plaintiff [PCI LEASING], plaintiff is DEEMED fully
satisfied pursuant to the provisions of Articles 1484 and 1485 of the New Civil
Code. By virtue of said provisions, plaintiff is DEEMED estopped from further
action against the defendant, the plaintiff having recovered thru (replevin) the
personal property sought to be payable/leased on installments, defendants being
under protection of said RECTO LAW. In view thereof, this case is hereby
DISMISSED.

With its motion for reconsideration having been denied by the trial court in its resolution
of February 15, 2000,[8] petitioner has directly come to this Court via this petition for review
raising the sole legal issue of whether or not the underlying Lease Agreement, Lease Schedules
and the Disclosure Statements that embody the financial leasing arrangement between the parties
are covered by and subject to the consequences of Articles 1484 and 1485 of the New Civil
Code.

As in the court below, petitioner contends that the financial leasing arrangement it
concluded with the respondent represents a straight lease covered by R.A. No.
5980, the Financing Company Act, as last amended by R.A. No. 8556, otherwise known
as Financing Company Act of 1998, and is outside the application and coverage of the Recto
Law. To the petitioner, R.A. No. 5980 defines and authorizes its existence and business.

The recourse is without merit.

R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or
regulatory legislation, merely providing a regulatory framework for the organization,
registration, and regulation of the operations of financing companies. As couched, it does not
specifically define the rights and obligations of parties to a financial leasing arrangement. In fact,
it does not go beyond defining commercial or transactional financial leasing and other financial
leasing concepts. Thus, the relevancy of Article 18 of the Civil Code which reads:

Article 18. - In matters which are governed by special laws, their

deficiency shall be supplied by the provisions of this [Civil] Code.

Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on
installment sales of movable property, does not apply to a financial leasing agreement because
such agreement, by definition, does not confer on the lessee the option to buy the property
subject of the financial lease. To the petitioner, the absence of an option-to-buy stipulation in a
financial leasing agreement, as understood under R.A. No. 8556, prevents the application thereto
of Articles 1484 and 1485 of the Civil Code.

We are not persuaded.

18 | P a g e
 The Court can allow that the underlying lease agreement has the earmarks or made to
appear as a financial leasing,[9] a term defined in Section 3(d) of R.A. No. 8556 as -

a mode of extending credit through a non-cancelable lease contract under

which the lessor purchases or acquires, at the instance of the lessee, machinery,
equipment, office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money
sufficient to amortize at least seventy (70%) of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the lessee has the
right to hold and use the leased property but with no obligation or option on his
part to purchase the leased property from the owner-lessor at the end of the lease
contract.

In its previous holdings, however, the Court, taking into account the following mix: the
imperatives of equity, the contractual stipulations in question and the actuations of parties vis--
vis their contract, treated disguised transactions technically tagged as financing lease, like here,
as creating a different contractual relationship. Notable among the Courts decisions because of
its parallelism with this case is BA Finance Corporation v. Court of Appeals[10] which involved a
motor vehicle. Thereat, the Court has treated a purported financial lease as actually a sale of a
movable property on installments and prevented recovery beyond the buyers arrearages. Wrote
the Court in BA Finance:

The transaction involved is one of a "financial lease" or "financial

leasing," where a financing company would, in effect, initially purchase a
mobile equipment and turn around to lease it to a client who gets, in
addition, an option to purchase the property at the expiry of the lease
period. xxx.

xxx xxx xxx

The pertinent provisions of [RA] 5980, thus implemented, read:

"'Financing companies,' are primarily organized for the

purpose of extending credit facilities to consumers either
by leasing of motor vehicles, and office machines and equipment,
and other movable property."

"'Credit' shall mean any loan, any contract to sell, or sale or

contract of sale of property or service, under which part or all of

19 | P a g e
 the price is payable subsequent to the making of such sale or
contract; any rental-purchase contract; .;"

The foregoing provisions indicate no less than a mere financing scheme

extended by a financing company to a client in acquiring a motor vehicle and
allowing the latter to obtain the immediate possession and use thereof pending full
payment of the financial accommodation that is given.

In the case at bench, xxx. [T]he term of the contract [over a motor
vehicle] was for thirty six (36) months at a "monthly rental" (P1,689.40), or for a
total amount of P60,821.28. The contract also contained [a] clause [requiring the
Lessee to give a guaranty deposit in the amount of P20,800.00] xxx

After the private respondent had paid the sum of P41,670.59, excluding
the guaranty deposit of P20,800.00, he stopped further payments. Putting the two
sums together, the financing company had in its hands the amount of P62,470.59
as against the total agreed "rentals" of P60,821.28 or an excess of P1,649.31.

The respondent appellate court considered it only just and equitable for the
guaranty deposit made by the private respondent to be applied to his arrearages
and thereafter to hold the contract terminated.Adopting the ratiocination of the
court a quo, the appellate court said:

xxx In view thereof, the guaranty deposit of P20,800.00

made by the defendant should and must be credited in his favor, in
the interest of fairness, justice and equity. The plaintiff should not
be allowed to unduly enrich itself at the expense of the
defendant. xxx This is even more compelling in this case where
although the transaction, on its face, appear ostensibly, to be a
contract of lease, it is actually a financing agreement, with the
plaintiff financing the purchase of defendant's automobile
. The Court is constrained, in the interest of truth and justice, to go
into this aspect of the transaction between the plaintiff and the
defendant with all the facts and circumstances existing in this
case, and which the court must consider in deciding the case, if it
is to decide the case according to all the facts. xxx.

xxx xxx xxx

Considering the factual findings of both the court a quo and the appellate
court, the only logical conclusion is that the private respondent did opt, as he
has claimed, to acquire the motor vehicle, justifying then the application of
the guarantee deposit to the balance still due and obligating the petitioner to
recognize it as an exercise of the option by the private respondent. The result
would thereby entitle said respondent to the ownership and possession of the

20 | P a g e
 vehicle as the buyer thereof. We, therefore, see no reversible error in the
ultimate judgment of the appellate court.[11] (Italics in the original; underscoring
supplied and words in bracket added.)

In Cebu Contractors Consortium Co. v. Court of Appeals,[12] the Court viewed and thus
declared a financial lease agreement as having been simulated to disguise a simple loan with
security, it appearing that the financing company purchased equipment already owned by a
capital-strapped client, with the intention of leasing it back to the latter.

In the present case, petitioner acquired the office equipment in question for their
subsequent lease to the respondent, with the latter undertaking to pay a monthly fixed rental
therefor in the total amount of P292,531.00, or a total of P10,531,116.00 for the whole 36
months. As a measure of good faith, respondent made an up-front guarantee deposit in the
amount of P3,120,000.00. The basic agreement provides that in the event the respondent fails to
pay any rental due or is in a default situation, then the petitioner shall have cumulative remedies,
such as, but not limited to, the following:[13]

1. Obtain possession of the property/equipment;

2. Retain all amounts paid to it. In addition, the guaranty deposit may
be applied towards the payment of liquidated damages;

3. Recover all accrued and unpaid rentals;

4. Recover all rentals for the remaining term of the lease had it not
been cancelled, as additional penalty;

5. Recovery of any and all amounts advanced by PCI LEASING

for GIRAFFEs account xxx;

6. Recover all expenses incurred in repossessing, removing, repairing

and storing the property; and,

7. Recover all damages suffered by PCI LEASING by reason of the

default.

21 | P a g e
 In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be
forfeited in the event the respondent, for any reason, returns the equipment before the expiration
of the lease.

At bottom, respondent had paid the equivalent of about a years lease rentals, or a total
of P3,510,372.00, more or less. Throw in the guaranty deposit (P3,120,000.00) and the
respondent had made a total cash outlay of P6,630,372.00 in favor of the petitioner. The
replevin-seized leased equipment had, as alleged in the complaint, an estimated residual
value of P6,900.000.00 at the time Civil Case No. Q-98-34266 was instituted on May 4, 1998.
Adding all cash advances thus made to the residual value of the equipment, the total value which
the petitioner had actually obtained by virtue of its lease agreement with the respondent amounts
to P13,530,372.00 (P3,510,372.00 + P3,120,000.00 + P6,900.000.00 = P13,530,372.00).

The acquisition cost for both the Silicon High Impact Graphics equipment and the
Oxberry Cinescan was, as stated in no less than the petitioners letter to the respondent dated
November 11, 1996[14] approving in the latters favor a lease facility,
was P8,100,000.00. Subtracting the acquisition cost of P8,100,000.00 from the total
amount, i.e., P13,530,372.00, creditable to the respondent, it would clearly appear that petitioner
realized a gross income of P5,430,372.00 from its lease transaction with the respondent. The
amount of P5,430,372.00 is not yet a final figure as it does not include the rentals in arrears,
penalties thereon, and interest earned by the guaranty deposit.

As may be noted, petitioners demand letter[15] fixed the amount of P8,248,657.47 as

representing the respondents rental balance which became due and demandable consequent to the
application of the acceleration and other clauses of the lease agreement. Assuming, then, that the
respondent may be compelled to pay P8,248,657.47, then it would end up paying a total
of P21,779,029.47 (P13,530,372.00 + P8,248,657.47 = P21,779,029.47) for its use - for a year
and two months at the most - of the equipment. All in all, for an investment of P8,100,000.00,
the petitioner stands to make in a years time, out of the transaction, a total of P21,779,029.47, or
a net of P13,679,029.47, if we are to believe its outlandish legal submission that the PCI
LEASING-GIRAFFE Lease Agreement was an honest-to-goodness straight lease.

A financing arrangement has a purpose which is at once practical and salutary. R.A. No.
8556 was, in fact, precisely enacted to regulate financing companies operations with the end in
view of strengthening their critical role in providing credit and services to small and
medium enterprises and to curtail acts and practices prejudicial to the public interest, in general,
and to their clienteles, in particular.[16] As a regulated activity, financing arrangements are not
meant to quench only the thirst for profit. They serve a higher purpose, and R.A. No. 8556 has
made that abundantly clear.

We stress, however, that there is nothing in R.A. No. 8556 which defines the rights and
obligations, as between each other, of the financial lessor and the lessee. In determining the
respective responsibilities of the parties to the agreement, courts, therefore, must train a keen eye
on the attendant facts and circumstances of the case in order to ascertain the intention of the
parties, in relation to the law and the written agreement. Likewise, the public interest and policy
involved should be considered. It may not be amiss to state that, normally, financing contracts
come in a standard prepared form, unilaterally thought up and written by the financing
companies requiring only the personal circumstances and signature of the borrower or lessee; the

22 | P a g e
rates and other important covenants in these agreements are still largely imposed unilaterally by
the financing companies. In other words, these agreements are usually one-sided in favor of such
companies. A perusal of the lease agreement in question exposes the many remedies available to
the petitioner, while there are only the standard contractual prohibitions against the respondent.
This is characteristic of standard printed form contracts.

There is more. In the adverted February 24, 1998 demand letter[17] sent to the respondent,
petitioner fashioned its claim in the alternative: payment of the full amount of P8,248,657.47,
representing the unpaid balance for the entire 36-month lease period or the surrender of the
financed asset under pain of legal action. To quote the letter:

Demand is hereby made upon you to pay in full your outstanding balance
in the amount of P8,248,657.47 on or before March 04, 1998 OR to surrender to
us the one (1) set Silicon High Impact Graphics and one (1) unit Oxberry
Cinescan 6400-10

We trust you will give this matter your serious and preferential attention.
(Emphasis added).

Evidently, the letter did not make a demand for the payment of
the P8,248,657.47 AND the return of the equipment; only either one of the two was required.
The demand letter was prepared and signed by Atty. Florecita R. Gonzales, presumably
petitioners counsel. As such, the use of or instead of and in the letter could hardly be treated as a
simple typographical error, bearing in mind the nature of the demand, the amount involved, and
the fact that it was made by a lawyer. Certainly Atty. Gonzales would have known that a world
of difference exists between and and or in the manner that the word was employed in the letter.

A rule in statutory construction is that the word "or" is a disjunctive term

signifying dissociation and independence of one thing from other things
enumerated unless the context requires a different interpretation.[18]

In its elementary sense, "or", as used in a statute, is a disjunctive article

indicating an alternative. It often connects a series of words or propositions
indicating a choice of either. When "or" is used, the various members of the
enumeration are to be taken separately.[19]

The word "or" is a disjunctive term signifying disassociation and

independence of one thing from each of the other things enumerated.[20]

The demand could only be that the respondent need not return the equipment if it paid
the P8,248,657.47 outstanding balance, ineluctably suggesting that the respondent can keep

23 | P a g e
possession of the equipment if it exercises its option to acquire the same by paying the unpaid
balance of the purchase price. Stated otherwise, if the respondent was not minded to exercise its
option of acquiring the equipment by returning them, then it need not pay the outstanding
balance. This is the logical import of the letter: that the transaction in this case is a lease in name
only. The so-called monthly rentals are in truth monthly amortizations of the price of the leased
office equipment.

On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE
lease agreement is in reality a lease with an option to purchase the equipment. This has been
made manifest by the actions of the petitioner itself, foremost of which is the declarations made
in its demand letter to the respondent. There could be no other explanation than that if the
respondent paid the balance, then it could keep the equipment for its own; if not, then it should
return them. This is clearly an option to purchase given to the respondent. Being so, Article 1485
of the Civil Code should apply.

The present case reflects a situation where the financing company can withhold and
conceal - up to the last moment - its intention to sell the property subject of the finance lease, in
order that the provisions of the Recto Law may be circumvented. It may be, as petitioner pointed
out, that the basic lease agreement does not contain a purchase option clause. The absence,
however, does not necessarily argue against the idea that what the parties are into is not a straight
lease, but a lease with option to purchase. This Court has, to be sure, long been aware of the
practice of vendors of personal property of denominating a contract of sale on installment as one
of lease to prevent the ownership of the object of the sale from passing to the vendee until and
unless the price is fully paid. As this Court noted in Vda. de Jose v. Barrueco:[21]

Sellers desirous of making conditional sales of their goods, but who do

not wish openly to make a bargain in that form, for one reason or another, have
frequently resorted to the device of making contracts in the form of leases
either with options to the buyer to purchase for a small consideration at the
end of term, provided the so-called rent has been duly paid, or with
stipulations that if the rent throughout the term is paid, title shall thereupon
vest in the lessee. It is obvious that such transactions are leases only in
name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of
the bargain, in the transfer of title to the lessee.

In another old but still relevant case of U.S. Commercial v. Halili,[22] a lease agreement
was declared to be in fact a sale of personal property by installments. Said the Court:

. . . There can hardly be any question that the so-called contracts of lease
on which the present action is based were veritable leases of personal property
with option to purchase, and as such come within the purview of the above article
[Art. 1454-A of the old Civil Code on sale of personal property by
installment]. xxx

24 | P a g e
 Being leases of personal property with option to purchase as contemplated
in the above article, the contracts in question are subject to the provision that
when the lessor in such case has chosen to deprive the lessee of the enjoyment of
such personal property, he shall have no further action against the lessee for the
recovery of any unpaid balance owing by the latter, agreement to the contrary
being null and void.

In choosing, through replevin, to deprive the respondent of possession of the leased

equipment, the petitioner waived its right to bring an action to recover unpaid rentals on the said
leased items. Paragraph (3), Article 1484 in relation to Article 1485 of the Civil Code, which we
are hereunder re-reproducing, cannot be any clearer.

ART. 1484. In a contract of sale of personal property the price of which is

payable in installments, the vendor may exercise any of the following remedies:

xxx xxx xxx

(3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee's failure to pay cover two or more installments. In
this case, he shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary shall be void.

ART. 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of
the possession or enjoyment of the thing.

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,[23] the

remedies provided for in Article 1484 of the Civil Code are alternative, not cumulative. The
exercise of one bars the exercise of the others. This limitation applies to contracts purporting to
be leases of personal property with option to buy by virtue of the same Article 1485. The
condition that the lessor has deprived the lessee of possession or enjoyment of the thing for the
purpose of applying Article 1485 was fulfilled in this case by the filing by petitioner of the
complaint for a sum of money with prayer for replevin to recover possession of the office
equipment.[24] By virtue of the writ of seizure issued by the trial court, the petitioner has
effectively deprived respondent of their use, a situation which, by force of the Recto Law, in turn
precludes the former from maintaining an action for recovery of accrued rentals or the recovery
of the balance of the purchase price plus interest.[25]

The imperatives of honest dealings given prominence in the Civil Code under the
heading: Human Relations, provide another reason why we must hold the petitioner to its word
as embodied in its demand letter. Else, we would witness a situation where even if the

25 | P a g e
respondent surrendered the equipment voluntarily, the petitioner can still sue upon its claim. This
would be most unfair for the respondent. We cannot allow the petitioner to renege on its word.
Yet more than that, the very word or as used in the letter conveys distinctly its intention not to
claim both the unpaid balance and the equipment. It is not difficult to discern why: if we add up
the amounts paid by the respondent, the residual value of the property recovered, and the amount
claimed by the petitioner as sued upon herein (for a total of P21,779,029.47), then it would end
up making an instant killing out of the transaction at the expense of its client, the respondent.
The Recto Law was precisely enacted to prevent this kind of aberration. Moreover, due to
considerations of equity, public policy and justice, we cannot allow this to

happen. Not only to the respondent, but those similarly situated who may fall prey to a similar
scheme.

WHEREFORE, the instant petition is DENIED and the trial courts decision
is AFFIRMED.

Costs against petitioner.

SO ORDERED.

26 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G. R. No. 91378 June 9, 1992

FIRST MALAYAN LEASING AND FINANCE CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, CRISOSTOMO B. VITUG and ESTATE OF
VICENTE TRINIDAD, Represented by Widow GLORIA D. TRINIDAD, respondents.

GRIÑO-AQUINO. J.:

This case brings to the fore the importance of motor vehicle registration in determining who
should be liable for the death or injuries suffered by passengers or third persons as a consequence
of the operation of a motor vehicle.

On June 26, 1984, Crisostomo B. Vitug filed Civil Case No. 84-25186 in the Regional Trial
Court of Manila. Branch XLIII, against the defendant. First Malayan Leasing and Finance
Corporation (FMLFC for short), to recover damages for physical injuries, loss of personal
effects, and the wreck of his car as a result of a three-vehicle collision on December 14, 1983.
involving his car, another car, and an Isuzu cargo truck registered in the name of FMLFC and
driven by one Crispin Sicat.

The evidence shows that while Vitug's car was at a full stop at the intersection of New York
Street and Epifanio delos Santos Avenue (EDSA) in Cubao, Quezon City, northward-bound, the
on-coming Isuzu cargo truck bumped, a Ford Granada car behind him with such force that the
Ford car was thrown on top of Vitug's car crushing its roof. The cargo truck thereafter struck
Vitug's car in the rear causing the gas tank to explode and setting the car ablaze.

Stunned by the impact. Vitug was fortunately extricated from his car by solicitous bystanders
before the vehicle exploded. However, two of his passengers were burned to death. Vitug's car,
valued at P70,000, was a total loss.

When he regained consciousness in the hospital, Vitug discovered that he had lost various
personal articles valued at P48,950, namely a necklace with a diamond pendant, a GP watch, a
pair of Christian Dior eyeglasses. a gold Cross pen and a pair of Bally shoes. Vitug also suffered
injuries producing recurring pains in his neck and back. Upon his physician's advice, he received
further medical treatment in the United States which cost him US$2,373.64 for his first trip, and
US$5,596.64 for the second.

At the time of the accident on December 14, 1983, the Isuzu cargo truck was registered in the
name of the First Malayan Leasing and Finance Corporation (FMLFC).

However, FMLFC denied any liability, alleging that it was not the owner of the truck. neither the
employer of the driver Crispin Sicat, because it had sold the truck to Vicente Trinidad on
September 24. 1980, after the latter had paid all his monthly amortizations under the financing
lease agreement between FMLFC and Trinidad.

On FMLFC's motion, the lower court granted FMLFC's leave to file a third-party complaint
against Trinidad and admitted the third-party complaint filed therewith.

27 | P a g e
Answering the third-party complaint the Estate of Vicente Trinidad admitted that the truck was
operated by the deceased during his lifetime. Nevertheless it raised the defense that the estate of
Vicente Trinidad was no longer existing because the same had long been settled and partitioned
extra judicially by his heirs.

On August 25, 1986, the trial court rendered a decision sentencing FMLFC to pay Vitug the sum
of P133,950 with interest at the legal rate from the filing of the complaint until fully paid, plus
the sum of P10,000 as attorneys fees and costs.

FMLFC appealed in due time to the Court of Appeals which rendered a decision on November
27, 1989 modifying the appealed judgment by ordering the third-party defendant-appellee (Estate
of Vicente Trinidad) to indemnify the appellant, FMLFC, for whatever amount the latter may
pay Vitug under the judgment. In all other respects, the trial court's decision was affirmed.

FMLFC has filed this petition for review on certiorari praying that the decision of the appellate
court be reversed and set aside.

On February 14, 1990, the Court dismissed the petition for insufficiency in form and substance,
having failed to comply with the Rules of Court and Circular 1-88 requiring the submission of
(1) proof of service of the petition on the adverse party, and (2) a certified true copy of the
decision of the Court of Appeals. Moreover, the petition was filed late on February 1, 1990, the
due date being January 27, 1990.

The petitioner filed a motion for reconsideration. On April 16, 1990. we granted the same and
reinstated the petition. Without giving it due course, we required the respondents to comment.

After deliberating on the petition, the comments of the private respondents and the petitioner's
reply thereto, we find the petition to be bereft of merit, hence, resolved to deny it.

In the first place, the factual finding of the trial court and the Court of Appeals that the Isuzu
vehicle which figured in the mishap was still registered in the name of FMLFC at the time of the
accident is not reviewable by this Court in a petition for certiorari under Rule 45 of Rules of
Court.

This Court has consistently ruled that regardless of who the actual owner of a motor vehicle
might be, the registered owner is the operator of the same with respect to the public and third
persons, and as such, directly and primarily responsible for the consequences of its operation. In
contemplation of law, the owner/operator of record is the employer of the driver, the actual
operator and employer being considered merely as his agent (MYC-Agro-Industrial Corporation
vs. Vda. de Caldo, 132 SCRA 10. citing Vargas vs. Langcay. 6 SCRA 174; Tamayo vs. Aquino.
105 Phil. 949).

We believe that it is immaterial whether or not the driver was actually employed
by the operator of record. It is even not necessary to prove who the actual owner
of the vehicle and the employer of the driver is. Granting that, in this case, the
father of the driver is the actual owner and that he is the actual employer,
following the well-settled principle that the operator of record continues to be the
operator of the vehicle in contemplation of law, as regards the public and third
persons, and as such is responsible for the consequences incident to its operation
we must hold and consider such owner-operator of record as the employer, in
contemplation of law, of the driver. And, to give effect to this policy of law as
enunciated in the above cited decisions of this Court, we must now extend the
same and consider the actual operator and employer as the agent of the operator of
record." (Vargas vs. Langcay, 6 SCRA 178; citing Montoya vs. Ignacio, G.R. No.
L-5868, Dec. 29, 1953; Timbol vs. Osias, G.R. No. L-7547, April 30, 1955; Vda.
de Medina vs. Cresencia, G.R. No. L-8194, July 11, 1956; Necesito vs. Paras,
G.R. No. L10605, June 30, 1955.)

28 | P a g e
 . . . Were the registered owner allowed to evade responsibility by proving who the
supposed transferee or owner is, it would be easy for him by collusion with others
or otherwise, to escape said responsibility and transfer the same to an indefinite
person, or to one who possesses no property with which to respond financially for
the damage or injury done (Erezo vs. Jepte, 102 Phil 103.)

. . . The registered owner or operator of record is the one liable for damages
caused by a vehicle regardless of any alleged sale or lease made thereon." (MYC-
Agro- Industrial Corp. vs. Vda. de Caldo, 132 SCRA 11.)

In order for a transfer of ownership of a motor vehicle to be valid against third persons. it must
be recorded in the Land Transportation Office. For, although valid between the parties, the sale
cannot affect third persons who rely on the public registration of the motor vehicle as conclusive
evidence of ownership. In law, FMLFC was the owner and operator of the Izusu cargo truck,
hence, fully liable to third parties injured by its operation due to the fault or negligence of the
driver thereof.

WHEREFORE, the petition for review is DENIED for lack of merit. Costs against the petitioner.

SO ORDERED.

29 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 98275 November 13, 1992

BA FINANCE CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS, REGIONAL TRIAL COURT OF ANGELES CITY,
BRANCH LVI, CARLOS OCAMPO, INOCENCIO TURLA, SPOUSES MOISES
AGAPITO and SOCORRO M. AGAPITO and NICOLAS CRUZ, respondents.

MELO, J.:

The question of petitioner's responsibility for damages when on March 6, 1983, an accident
occurred involving petitioner's Isuzu ten-wheeler truck then driven by an employee of Lino
Castro is the thrust of the petition for review on certiorari now before Us considering that neither
the driver nor Lino Castro appears to be connected with petitioner.

On October 13, 1988, the disputed decision in the suit below was rendered by the court of origin
in this manner:

1. Ordering Rock B.A. and Rogelio Villar y Amare jointly and severally to pay
the plaintiffs as follows:

a) To the plaintiff Carlos Ocampo — P121,650.00;

b) To the plaintiff Moises Ocampo — P298,500.00

c) To the plaintiff Nicolas Cruz — P154,740.00

d) To the plaintiff Inocencio Turla, Sr. — 48,000.00

2. Dismissing the case against Lino Castro

3. Dismissing the third-party complaint against STRONGHOLD

4. Dismissing all the counterclaim of the defendants and third-party defendants.

5. Ordering ROCK to reimburse B.A. the total amount of P622,890.00 which the
latter is adjudged to pay to the plaintiffs. (p. 46, Rollo)

Respondent Court of Appeals affirmed the appealed disposition in toto through Justice Rasul,
with Justices De Pano, Jr. and Imperial concurring, on practically the same grounds arrived at by
the court a quo (p. 28, Rollo). Efforts exerted towards re-evaluation of the adverse were futile (p.
37, Rollo). Hence, the instant petition.

The lower court ascertained after due trial that Rogelio Villar y Amare, the driver of the Isuzu
truck, was at fault when the mishap occurred in as much as he was found guilty beyond
reasonable doubt of reckless imprudence resulting in triple homicide with multiple physical
injuries with damage to property in a decision rendered on February 16, 1984 by the Presiding
Judge of Branch 6 of the Regional Trial Court stationed at Malolos, Bulacan. Petitioner was
adjudged liable for damages in as much as the truck was registered in its name during the

30 | P a g e
incident in question, following the doctrine laid down by this Court in Perez vs. Gutierrez (53
SCRA 149 [1973]) and Erezo, et al. vs. Jepte (102 Phil. 103 [1957]). In the same breadth, Rock
Component Philippines, Inc. was ordered to reimburse petitioner for any amount that the latter
may be adjudged liable to pay herein private respondents as expressly stipulated in the contract
of lease between petitioner and Rock Component Philippines, Inc. Moreover, the trial court
applied Article 2194 of the new Civil Code on solidary accountability of join tortfeasors insofar
as the liability of the driver, herein petitioner and Rock Component Philippines was concerned
(pp. 6-7, Decision; pp. 44-45, Rollo).

To the question of whether petitioner can be held responsible to the victim albeit the truck was
leased to Rock Component Philippines when the incident occurred, the appellate court answered
in the affirmative on the basis of the jurisprudential dogmas which, as aforesaid, were relied
upon by the trial court although respondent court was quick to add the caveat embodied in the
lease covenant between petitioner and Rock Component Philippines relative to the latter's duty to
reimburse any amount which may be adjudged against petitioner (pp. 32-33, Rollo).

Petitioner asseverates that it should not have been haled to court and ordered to respond for the
damage in the manner arrived at by both the trial and appellate courts since paragraph 5 of the
complaint lodged by the plaintiffs below would indicate that petitioner was not the employer of
the negligent driver who was under the control an supervision of Lino Castro at the time of the
accident, apart from the fact that the Isuzu truck was in the physical possession of Rock
Component Philippines by virtue of the lease agreement.

Aside from casting clouds of doubt on the propriety of invoking the Perez and Erezo doctrines,
petitioner continue to persist with the idea that the pronouncements of this Court in Duavit vs.
Court of Appeals (173 SCRA 490 [1989]) and Duquillo vs. Bayot (67 Phil 131 [1939]) dovetail
with the factual and legal scenario of the case at hand. Furthermore, petitioner assumes, given the
so-called hiatus on the basis for the award of damages as decreed by the lower and appellate
courts, that Article 2180 of the new Civil Code on vicarious liability will divest petitioner of any
responsibility absent as there is any employer-employee relationship between petitioner and the
driver.

Contrary to petitioner's expectations, the recourse instituted from the rebuffs it encountered may
not constitute a sufficient foundation for reversal of the impugned judgment of respondent court.
Petitioner is of the impression that the Perez and Erezo cases are inapplicable due to the variance
of the generative facts in said cases as against those obtaining in the controversy at bar.
A contrario, the lesson imparted by Justice Labrador in Erezo is still good law, thus:

. . . In previous decisions, We already have held that the registered owner of a

certificate of public convenience is liable to the public for the injuries or damages
suffered by passengers or third persons caused by the operation of said vehicle,
even though the same had been transferred to a third person. (Montoya vs.
Ignacio, 94 Phil., 182 50 Off. Gaz., 108; Roque vs. Malibay Transit, Inc., G.R.
No. L-8561, November 18, 1955; Vda. de Medina vs. Cresencia, 99 Phil., 506, 52
Off. Gaz., [10], 4606.) The principle upon which this doctrine is based is that in
dealing with vehicles registered under the Public Service Law, the public has the
right to assume or presumed that the registered owner is the actual owner thereof,
for it would be difficult with the public to enforce the actions that they may have
for injuries caused to them by the vehicles being negligently operated if the public
should be required to prove who actual the owner is. How would the public or
third persons know against whom to enforce their rights in case of subsequent
transfer of the vehicles? We do not imply by this doctrine, however, that the
registered owner may not recover whatever amount he had paid by virtue of his
liability to third persons from the person to whom he had actually sold, assigned
or conveyed the vehicle.

Under the same principle the registered owner of any vehicle, even if not used for
a public service, should primarily responsible to the public or to the third persons

31 | P a g e
 for injuries caused the latter while the vehicle is being driven on the highways or
streets. The members of the Court are in agreement that the defendant-appellant
should be held liable to plaintiff-appellee for the injuries occasioned to the latter
because of the negligence of the driver, even if the defendant-appellant was no
longer an owner of the vehicle at the time of the damage because he had
previously sold it to another. What is the legal basis for his (defendants-
appellant's) liability?

There is a presumption that the owner of the guilty vehicle is the defendant-
appellant as he is the registered owner in the Motor Vehicle Office. Should he not
be allowed to prove the truth, that he had sold it to another and thus shift the
responsibility for the injury to the real and the actual owner? The defendants hold
the affirmative of this proposition; the trial court hold the negative.

The Revised Motor Vehicle Law (Act No. 3992, as amended) provides that the
vehicle may be used or operated upon any public highway unless the same is
properly registered. It has been stated that the system of licensing and the
requirement that each machine must carry a registration number, conspicuously
displayed, is one of the precautions taken to reduce the danger of injury of
pedestrians and other travelers from the careless management of automobiles, and
to furnish a means of ascertaining the identity of persons violating the laws and
ordinances, regulating the speed and operation of machines upon the highways (2
R. C. L. 1176). Not only are vehicles to be registered and that no motor vehicles
are to be used or operated without being properly registered from the current year,
furnish the Motor Vehicle Office a report showing the name and address of each
purchaser of motor vehicle during the previous month and the manufacturer's
serial number and motor number. (Section 5[c], Act No. 3992, as amended.)

Registration is required not to make said registration the operative act by which
ownership in vehicles is transferred, as in land registration cases, because the
administrative proceeding of registration does not bear any essential relation to
the contract of sale between the parties (Chinchilla vs. Rafael and Verdaguer, 39
Phil. 888), but to permit the use and operation of the vehicle upon any public
highway (section 5[a], Act No. 3992, as amended). the main aim of motor vehicle
registration is to identify the owner so that if any accident happens, or that any
damage or injury is caused by the vehicle on the public highways, responsibility
therefor can be fixed on a definite individual, the registered owner. Instances are
numerous where vehicles running on public highways caused accidents or injuries
to pedestrians or other vehicles without positive identification of the owner or
drivers, or with very scant means of identification. It is to forestall these
circumstances, so inconvenient or prejudicial to the public, that the motor vehicle
registration is primarily obtained, in the interest of the determinations of persons
responsible for damages or injuries caused on public highways.

One of the principle purposes of motor vehicles legislation is

identification of the vehicle and of the operator, in case of
accident; and another is that the knowledge that means of detection
are always available my act as a deterrent from lax observance of
the law and of the rules of conservative and safe operation.
Whatever purpose there may be in these statutes, it is subordinate
at the last to the primary purpose of rendering it certain that the
violator of the law or of the rules of safety shall not escape because
of lack of means to discover him. The purpose of the statute is
thwarted, and the displayed number becomes a "share and
delusion," if courts would entertain such defenses as that put
forward by appellee in this case. No responsible person or
corporation could be held liable for the most outrageous acts of

32 | P a g e
 negligence, if they should be allowed to pace a "middleman"
between them and the public, and escape liability by the manner in
which they recompense their servants. (King vs. Breham
Automobile Co., Inc. 145 S. W. 278, 279.)

With the above policy in mind, the question that defendant-appellant poses is:
should not the registered owner be allowed at the trial to prove who the actual and
real owner is, and in accordance with such proof escape or evade responsibility
and lay the same on the person actually owning the vehicle? We hold with the
trial court that the law does not allow him to do so; the law, with its aim and
policy in mind, does not relieve him directly of the responsibility that the law
fixes and places upon him as an incident or consequence of registration. Were a
registered owner allowed to evade responsibility by proving who the supposed
transferee or owner is, it would be easy for him, by collusion with others or
otherwise, to escape said responsibility and transfer the same to an indefinite
person, or to one who possesses no property with which to respond financially for
the damage or injury done. A victim of recklessness on the public highways is
usually without means to discover or Identify the person actually causing the
injury or damage. He has no means other then by a recourse to the registration in
the Motor Vehicles Office to determine who is the owner. The protection that the
law aims to extend to him would become illusory were the registered owner given
the opportunity to escape liability by disproving his ownership. If the policy of the
law is to be enforced and carried out, the registered owner should not be allowed
to prove the contrary to the prejudice of the person injured, that is, to prove that a
third person or another has become the owner, so that he may thereby be relieved
of the responsibility to the injured person.

The above policy and application of the law may appear quite harsh and would
seem to conflict with truth and justice. We do not think it is so. A registered
owner who has already sold or transferred a vehicle has the recourse to a third-
party complaint, in the same action brought against him to recover for the damage
or injury done, against the vendee or transferee of the vehicle. The inconvenience
of the suit is no justification for relieving him of liability; said inconvenience is
the price he pays for failure to comply with the registration that the law demands
and requires.

In synthesis, we hold that the registered owner, the defendant-appellant herein, is

primarily responsible for the damage caused to the vehicle of the plaintiff-
appellee, but he (defendant-appellant) has a right to be indemnified by the real or
actual owner of the amount that he may be required to pay as damage for the
injury caused to the plaintiff-appellant.

If the foregoing words of wisdom were applied in solving the circumstance whereof the vehicle
had been alienated or sold to another, there certainly can be no serious exception against utilizing
the same rationale to the antecedents of this case where the subject vehicle was merely leased by
petitioner to Rock Component Philippines, Inc., with petitioner retaining ownership over the
vehicle.

Petitioner's reliance on the ruling of this Court in Duavit vs. Court of Appeals and in Duquillo vs.
Bayot (supra) is legally unpalatable for the purpose of the present discourse. The vehicles
adverted to in the two cases shared a common thread, so to speak, in that the jeep and the truck
were driven in reckless fashion without the consent or knowledge of the respective owners.
Cognizant of the inculpatory testimony spewed by defendant Sabiniano when he admitted that he
took the jeep from the garage of defendant Dauvit without the consent or authority of the latter,
Justice Gutierrez, Jr. in Duavit remarked;

. . . Herein petitioner does not deny ownership of the vehicle involved in the
mishap but completely denies having employed the driver Sabiniano or even

33 | P a g e
 having authorized the latter to drive his jeep. The jeep was virtually stolen from
the petitioner's garage. To hold, therefore, the petitioner liable for the accident
caused by the negligence of Sabiniano who was neither his driver nor employee
would be absurd as it would be like holding liable the owner of a stolen vehicle
for an accident caused by the person who stole such vehicle. In this regard, we
cannot ignore the many cases of vehicles forcibly taken from their owners at
gunpoint or stolen from garages and parking areas and the instances of service
station attendants or mechanics of auto repair shops using, without the owner's
consent, vehicles entrusted to them for servicing or repair.(at p. 496.)

In the Duquillo case, the defendant therein cannot, according to Justice Diaz, be held liable for
anything because of circumstances which indicated that the truck was driven without the consent
or knowledge of the owner thereof.

Consequently, there is no need for Us to discuss the matter of imputed negligence because
petitioner merely presumed, erroneously, however, that judgment was rendered against it on the
basis of such doctrine embodied under Article 2180 of the new Civil Code.

WHEREFORE, the petition is hereby DISMISSED and decision under review AFFIRMED
without special pronouncement as to costs.

SO ORDERED.

34 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 162267 July 4, 2008

PCI LEASING AND FINANCE, INC., petitioner,

vs.
UCPB GENERAL INSURANCE CO., INC., respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
seeking a reversal of the Decision1 of the Court of Appeals (CA) dated December 12, 2003
affirming with modification the Decision of the Regional Trial Court (RTC) of Makati City
which ordered petitioner and Renato Gonzaga (Gonzaga) to pay, jointly and severally,
respondent the amount of P244,500.00 plus interest; and the CA Resolution2 dated February 18,
2004 denying petitioner's Motion for Reconsideration.

The facts, as found by the CA, are undisputed:

On October 19, 1990 at about 10:30 p.m., a Mitsubishi Lancer car with Plate Number
PHD-206 owned by United Coconut Planters Bank was traversing the Laurel Highway,
Barangay Balintawak, Lipa City. The car was insured with plantiff-appellee [UCPB
General Insurance Inc.], then driven by Flaviano Isaac with Conrado Geronimo, the Asst.
Manager of said bank, was hit and bumped by an 18-wheeler Fuso Tanker Truck with
Plate No. PJE-737 and Trailer Plate No. NVM-133, owned by defendants-appellants PCI
Leasing & Finance, Inc. allegedly leased to and operated by defendant-appellant Superior
Gas & Equitable Co., Inc. (SUGECO) and driven by its employee, defendant appellant
Renato Gonzaga.

The impact caused heavy damage to the Mitsubishi Lancer car resulting in an explosion
of the rear part of the car. The driver and passenger suffered physical injuries. However,
the driver defendant-appellant Gonzaga continued on its [sic] way to its [sic] destination
and did not bother to bring his victims to the hospital.

Plaintiff-appellee paid the assured UCPB the amount of P244,500.00 representing the
insurance coverage of the damaged car.

As the 18-wheeler truck is registered under the name of PCI Leasing, repeated demands
were made by plaintiff-appellee for the payment of the aforesaid amounts. However, no
payment was made. Thus, plaintiff-appellee filed the instant case on March 13, 1991.3

PCI Leasing and Finance, Inc., (petitioner) interposed the defense that it could not be held liable
for the collision, since the driver of the truck, Gonzaga, was not its employee, but that of its co-
defendant Superior Gas & Equitable Co., Inc. (SUGECO).4 In fact, it was SUGECO, and not
petitioner, that was the actual operator of the truck, pursuant to a Contract of Lease signed by
petitioner and SUGECO.5 Petitioner, however, admitted that it was the owner of the truck in
question.6

After trial, the RTC rendered its Decision dated April 15, 1999,7 the dispositive portion of which
reads:

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 WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff
UCPB General Insurance [respondent], ordering the defendants PCI Leasing and Finance,
Inc., [petitioner] and Renato Gonzaga, to pay jointly and severally the former the
following amounts: the principal amount of P244,500.00 with 12% interest as of the
filing of this complaint until the same is paid; P50,000.00 as attorney's fees;
and P20,000.00 as costs of suit.

SO ORDERED.8

Aggrieved by the decision of the trial court, petitioner appealed to the CA.

In its Decision dated December 12, 2003, the CA affirmed the RTC's decision, with certain
modifications, as follows:

WHEREFORE, the appealed decision dated April 15, 1999 is hereby AFFIRMED with
modification that the award of attorney's fees is hereby deleted and the rate of interest
shall be six percent (6%) per annum computed from the time of the filing of the
complaint in the trial court until the finality of the judgment. If the adjudged principal and
the interest remain unpaid thereafter, the interest rate shall be twelve percent (12%) per
annum computed from the time the judgment becomes final and executory until it is fully
satisfied.

SO ORDERED.9

Petitioner filed a Motion for Reconsideration which the CA denied in its Resolution dated
February 18, 2004.

Hence, herein Petition for Review.

The issues raised by petitioner are purely legal:

Whether petitioner, as registered owner of a motor vehicle that figured in a quasi-

delict may be held liable, jointly and severally, with the driver thereof, for the damages
caused to third parties.

Whether petitioner, as a financing company, is absolved from liability by the enactment

of Republic Act (R.A.) No. 8556, or the Financing Company Act of 1998.

Anent the first issue, the CA found petitioner liable for the damage caused by the collision since
under the Public Service Act, if the property covered by a franchise is transferred or leased to
another without obtaining the requisite approval, the transfer is not binding on the Public Service
Commission and, in contemplation of law, the grantee continues to be responsible under the
franchise in relation to the operation of the vehicle, such as damage or injury to third parties due
to collisions.10

Petitioner claims that the CA's reliance on the Public Service Act is misplaced, since the said law
applies only to cases involving common carriers, or those which have franchises to operate as
public utilities. In contrast, the case before this Court involves a private commercial vehicle for
business use, which is not offered for service to the general public.11

Petitioner's contention has partial merit, as indeed, the vehicles involved in the case at bar are not
common carriers, which makes the Public Service Act inapplicable.

However, the registered owner of the vehicle driven by a negligent driver may still be held liable
under applicable jurisprudence involving laws on compulsory motor vehicle registration and the
liabilities of employers for quasi-delicts under the Civil Code.

36 | P a g e
The principle of holding the registered owner of a vehicle liable for quasi-delicts resulting from
its use is well-established in jurisprudence. Erezo v. Jepte,12 with Justice Labrador
as ponente, wisely explained the reason behind this principle, thus:

Registration is required not to make said registration the operative act by which
ownership in vehicles is transferred, as in land registration cases, because the
administrative proceeding of registration does not bear any essential relation to the
contract of sale between the parties (Chinchilla vs. Rafael and Verdaguer, 39 Phil. 888),
but to permit the use and operation of the vehicle upon any public highway (section 5 [a],
Act No. 3992, as amended.) The main aim of motor vehicle registration is to identify the
owner so that if any accident happens, or that any damage or injury is caused by the
vehicle on the public highways, responsibility therefor can be fixed on a definite
individual, the registered owner. Instances are numerous where vehicles running on
public highways caused accidents or injuries to pedestrians or other vehicles without
positive identification of the owner or drivers, or with very scant means of identification.
It is to forestall these circumstances, so inconvenient or prejudicial to the public, that the
motor vehicle registration is primarily ordained, in the interest of the determination of
persons responsible for damages or injuries caused on public highways.

"'One of the principal purposes of motor vehicles legislation is identification of

the vehicle and of the operator, in case of accident; and another is that the
knowledge that means of detection are always available may act as a deterrent
from lax observance of the law and of the rules of conservative and safe
operation. Whatever purpose there may be in these statutes, it is subordinate at the
last to the primary purpose of rendering it certain that the violator of the law or of
the rules of safety shall not escape because of lack of means to discover him.' The
purpose of the statute is thwarted, and the displayed number becomes a 'snare and
delusion,' if courts would entertain such defenses as that put forward by appellee
in this case. No responsible person or corporation could be held liable for the
most outrageous acts of negligence, if they should be allowed to place a
'middleman' between them and the public, and escape liability by the manner in
which they recompense their servants." (King vs. Brenham Automobile Co., 145
S.W. 278, 279.)

With the above policy in mind, the question that defendant-appellant poses is: should not
the registered owner be allowed at the trial to prove who the actual and real owner is, and
in accordance with such proof escape or evade responsibility and lay the same on the
person actually owning the vehicle? We hold with the trial court that the law does not
allow him to do so; the law, with its aim and policy in mind, does not relieve him directly
of the responsibility that the law fixes and places upon him as an incident or consequence
of registration. Were a registered owner allowed to evade responsibility by proving who
the supposed transferee or owner is, it would be easy for him, by collusion with others or
otherwise, to escape said responsibility and transfer the same to an indefinite person, or to
one who possesses no property with which to respond financially for the damage or
injury done. A victim of recklessness on the public highways is usually without means to
discover or identify the person actually causing the injury or damage. He has no means
other than by a recourse to the registration in the Motor Vehicles Office to determine who
is the owner. The protection that the law aims to extend to him would become illusory
were the registered owner given the opportunity to escape liability by disproving his
ownership. If the policy of the law is to be enforced and carried out, the registered owner
should not be allowed to prove the contrary to the prejudice of the person injured, that is,
to prove that a third person or another has become the owner, so that he may thereby be
relieved of the responsibility to the injured person.

The above policy and application of the law may appear quite harsh and would seem to
conflict with truth and justice. We do not think it is so. A registered owner who has
already sold or transferred a vehicle has the recourse to a third-party complaint, in the

37 | P a g e
 same action brought against him to recover for the damage or injury done, against the
vendee or transferee of the vehicle. The inconvenience of the suit is no justification for
relieving him of liability; said inconvenience is the price he pays for failure to comply
with the registration that the law demands and requires.

In synthesis, we hold that the registered owner, the defendant-appellant herein, is

primarily responsible for the damage caused to the vehicle of the plaintiff-appellee, but
he (defendant-appellant) has a right to be indemnified by the real or actual owner of the
amount that he may be required to pay as damage for the injury caused to the plaintiff-
appellant.13

The case is still good law and has been consistently cited in subsequent cases.14 Thus, there is no
good reason to depart from its tenets.

For damage or injuries arising out of negligence in the operation of a motor vehicle, the
registered owner may be held civilly liable with the negligent driver either 1) subsidiarily, if the
aggrieved party seeks relief based on a delict or crime under Articles 100 and 103 of the Revised
Penal Code; or 2) solidarily, if the complainant seeks relief based on a quasi-delict under
Articles 2176 and 2180 of the Civil Code. It is the option of the plaintiff whether to waive
completely the filing of the civil action, or institute it with the criminal action, or file it
separately or independently of a criminal action;15 his only limitation is that he cannot recover
damages twice for the same act or omission of the defendant.16

In case a separate civil action is filed, the long-standing principle is that the registered owner of a
motor vehicle is primarily and directly responsible for the consequences of its operation,
including the negligence of the driver, with respect to the public and all third persons.17 In
contemplation of law, the registered owner of a motor vehicle is the employer of its driver, with
the actual operator and employer, such as a lessee, being considered as merely the owner's
agent.18 This being the case, even if a sale has been executed before a tortious incident, the sale,
if unregistered, has no effect as to the right of the public and third persons to recover from the
registered owner.19 The public has the right to conclusively presume that the registered owner is
the real owner, and may sue accordingly.20

In the case now before the Court, there is not even a sale of the vehicle involved, but a mere
lease, which remained unregistered up to the time of the occurrence of the quasi-delict that gave
rise to the case. Since a lease, unlike a sale, does not even involve a transfer of title or ownership,
but the mere use or enjoyment of property, there is more reason, therefore, in this instance to
uphold the policy behind the law, which is to protect the unwitting public and provide it with a
definite person to make accountable for losses or injuries suffered in vehicular accidents.21 This
is and has always been the rationale behind compulsory motor vehicle registration under the
Land Transportation and Traffic Code and similar laws, which, as early as Erezo, has been
guiding the courts in their disposition of cases involving motor vehicular incidents. It is also
important to emphasize that such principles apply to all vehicles in general, not just those offered
for public service or utility.22

The Court recognizes that the business of financing companies has a legitimate and
commendable purpose.23 In earlier cases, it considered a financial lease or financing lease a legal
contract,24 though subject to the restrictions of the so-called Recto Law or Articles 1484 and
1485 of the Civil Code.25 In previous cases, the Court adopted the statutory definition of a
financial lease or financing lease, as:

[A] mode of extending credit through a non-cancelable lease contract under which the
lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor
vehicles, appliances, business and office machines, and other movable or immovable
property in consideration of the periodic payment by the lessee of a fixed amount of
money sufficient to amortize at least seventy (70%) of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit over an obligatory period
of not less than two (2) years during which the lessee has the right to hold and use the

38 | P a g e
 leased property, x x x but with no obligation or option on his part to purchase the leased
property from the owner-lessor at the end of the lease contract. 26

Petitioner presented a lengthy discussion of the purported trend in other jurisdictions, which
apparently tends to favor absolving financing companies from liability for the consequences
of quasi-delictual acts or omissions involving financially leased property.27 The petition adds
that these developments have been legislated in our jurisdiction in Republic Act (R.A.) No.
8556,28 which provides:

Section 12. Liability of lessors. - Financing companies shall not be liable for loss, damage
or injury caused by a motor vehicle, aircraft, vessel, equipment, machinery or other
property leased to a third person or entity except when the motor vehicle, aircraft, vessel,
equipment or other property is operated by the financing company, its employees or
agents at the time of the loss, damage or injury.1avvphi1

Petitioner's argument that the enactment of R.A. No. 8556, especially its addition of the new Sec.
12 to the old law, is deemed to have absolved petitioner from liability, fails to convince the
Court.

These developments, indeed, point to a seeming emancipation of financing companies from the
obligation to compensate claimants for losses suffered from the operation of vehicles covered by
their lease. Such, however, are not applicable to petitioner and do not exonerate it from liability
in the present case.

The new law, R.A. No. 8556, notwithstanding developments in foreign jurisdictions, do not
supersede or repeal the law on compulsory motor vehicle registration. No part of the law
expressly repeals Section 5(a) and (e) of R.A. No. 4136, as amended, otherwise known as the
Land Transportation and Traffic Code, to wit:

Sec. 5. Compulsory registration of motor vehicles. - (a) All motor vehicles and trailer of
any type used or operated on or upon any highway of the Philippines must be registered
with the Bureau of Land Transportation (now the Land Transportation Office, per
Executive Order No. 125, January 30, 1987, and Executive Order No. 125-A, April 13,
1987) for the current year in accordance with the provisions of this Act.

xxxx

(e) Encumbrances of motor vehicles. - Mortgages, attachments, and other encumbrances

of motor vehicles, in order to be valid against third parties must be recorded in the
Bureau (now the Land Transportation Office). Voluntary transactions or voluntary
encumbrances shall likewise be properly recorded on the face of all outstanding copies of
the certificates of registration of the vehicle concerned.

Cancellation or foreclosure of such mortgages, attachments, and other encumbrances

shall likewise be recorded, and in the absence of such cancellation, no certificate of
registration shall be issued without the corresponding notation of mortgage, attachment
and/or other encumbrances.

x x x x (Emphasis supplied)

Neither is there an implied repeal of R.A. No. 4136. As a rule, repeal by implication is frowned
upon, unless there is clear showing that the later statute is so irreconcilably inconsistent and
repugnant to the existing law that they cannot be reconciled and made to stand together.29 There
is nothing in R.A. No. 4136 that is inconsistent and incapable of reconciliation.

Thus, the rule remains the same: a sale, lease, or financial lease, for that matter, that is not
registered with the Land Transportation Office, still does not bind third persons who are
aggrieved in tortious incidents, for the latter need only to rely on the public registration of a

39 | P a g e
motor vehicle as conclusive evidence of ownership.30 A lease such as the one involved in the
instant case is an encumbrance in contemplation of law, which needs to be registered in order for
it to bind third parties.31 Under this policy, the evil sought to be avoided is the exacerbation of
the suffering of victims of tragic vehicular accidents in not being able to identify a guilty party.
A contrary ruling will not serve the ends of justice. The failure to register a lease, sale, transfer or
encumbrance, should not benefit the parties responsible, to the prejudice of innocent victims.

The non-registration of the lease contract between petitioner and its lessee precludes the former
from enjoying the benefits under Section 12 of R.A. No. 8556.

This ruling may appear too severe and unpalatable to leasing and financing companies, but the
Court believes that petitioner and other companies so situated are not entirely left without
recourse. They may resort to third-party complaints against their lessees or whoever are the
actual operators of their vehicles. In the case at bar, there is, in fact, a provision in the lease
contract between petitioner and SUGECO to the effect that the latter shall indemnify and hold
the former free and harmless from any "liabilities, damages, suits, claims or judgments" arising
from the latter's use of the motor vehicle.32 Whether petitioner would act against SUGECO based
on this provision is its own option.

The burden of registration of the lease contract is minuscule compared to the chaos that may
result if registered owners or operators of vehicles are freed from such responsibility. Petitioner
pays the price for its failure to obey the law on compulsory registration of motor vehicles for
registration is a pre-requisite for any person to even enjoy the privilege of putting a vehicle on
public roads.

WHEREFORE, the petition is DENIED. The Decision dated December 12, 2003 and
Resolution dated February 18, 2004 of the Court of Appeals are AFFIRMED.

Costs against petitioner.SO ORDERED.

40 | P a g e
 SECOND DIVISION

FEB LEASING AND FINANCE G.R. No. 181398

CORPORATION (now BPI

LEASING CORPORATION) , Present:

Petitioner,

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,*

BRION,

- versus - PEREZ, and

SERENO, JJ.

SPOUSES SERGIO P. BAYLON

and MARITESS VILLENA-BAYLON,

BG HAULER, INC., and Promulgated:

MANUEL Y. ESTILLOSO,

Respondents. June 29, 2011

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

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari1 of the 9 October 2007 Decision2 and the 18 January
2008 Resolution3 of the Court of Appeals in CA-G.R. CV No. 81446. The 9 October 2007
Decision affirmed the 30 October 2003 Decision4 of the Regional Trial Court (Branch 35)

41 | P a g e
of Gapan City in Civil Case No. 2334 ordering petitioner to pay respondents damages. The 18
January 2008 Resolution denied petitioners motion for reconsideration.

The Facts

On 2 September 2000, an Isuzu oil tanker running along Del Monte Avenue in Quezon City and
bearing plate number TDY 712 hit Loretta V. Baylon (Loretta), daughter of respondent spouses
Sergio P. Baylon and Maritess Villena-Baylon (spouses Baylon). At the time of the accident, the
oil tanker was registered5 in the name of petitioner FEB Leasing and Finance
Corporation6 (petitioner). The oil tanker was leased7 to BG Hauler, Inc. (BG Hauler) and was
being driven by the latters driver, Manuel Y. Estilloso. The oil tanker was insured8 by FGU
Insurance Corp. (FGU Insurance).

The accident took place at around 2:00 p.m. as the oil tanker was coming from Balintawak and
heading towards Manila. Upon reaching the intersection of Bonifacio Street and Del Monte
Avenue, the oil tanker turned left. While the driver of the oil tanker was executing a left turn side
by side with another vehicle towards Del Monte Avenue, the oil tanker hit Loretta who was then
crossing Del Monte Avenue coming from Mayon Street. Due to the strong impact, Loretta was
violently thrown away about three to five meters from the point of impact. She fell to the ground
unconscious. She was brought for treatment to the Chinese General Hospital where she remained
in a coma until her death two days after.9

The spouses Baylon filed with the RTC (Branch 35) of Gapan City a Complaint10 for damages
against petitioner, BG Hauler, the driver, and FGU Insurance. Petitioner filed its answer with
compulsory counterclaim while FGU Insurance filed its answer with counterclaim. On the other
hand, BG Hauler filed its answer with compulsory counterclaim and cross-claim against FGU
Insurance.

Petitioner claimed that the spouses Baylon had no cause of action against it because under its
lease contract with BG Hauler, petitioner was not liable for any loss, damage, or injury that the
leased oil tanker might cause. Petitioner claimed that no employer-employee relationship existed
between petitioner and the driver.

BG Hauler alleged that neither do the spouses Baylon have a cause of action against it since the
oil tanker was not registered in its name. BG Hauler contended that the victim was guilty of
contributory negligence in crossing the street. BG Hauler claimed that even if its driver was at
fault, BG Hauler exercised the diligence of a good father of a family in the selection and
supervision of its driver. BG Hauler also contended that FGU Insurance is obliged to assume all
liabilities arising from the use of the insured oil tanker.

For its part, FGU Insurance averred that the victim was guilty of contributory negligence. FGU
Insurance concluded that the spouses Baylon could not expect to be paid the full amount of their
claims. FGU Insurance pointed out that the insurance policy covering the oil tanker limited any
claim to a maximum of P400,000.00.

42 | P a g e
During trial, FGU Insurance moved that (1) it be allowed to deposit in court the amount
of P450,000.00 in the joint names of the spouses Baylon, petitioner, and BG Hauler and (2) it be
released from further participating in the proceedings. After the RTC granted the motion, FGU
Insurance deposited in the Branch Clerk of Court a check in the names of the spouses Baylon,
petitioner, and BG Hauler. The RTC then released FGU Insurance from its contractual
obligations under the insurance policy.

The Ruling of the RTC

After weighing the evidence submitted by the parties, the RTC found that the death of Loretta
was due to the negligent act of the driver. The RTC held that BG Hauler, as the employer,
was solidarily liable with the driver. The RTC further held that petitioner, as the registered owner
of the oil tanker, was also solidarily liable.

The RTC found that since FGU Insurance already paid the amount of P450,000.00 to the
spouses Baylon, BG Hauler, and petitioner, the insurers obligation has been satisfactorily
fulfilled. The RTC thus dismissed the cross-claim of BG Hauler against FGU Insurance.
The decretal part of the RTCs decision reads:

Wherefore, premises considered, judgment is hereby rendered in favor of the plaintiffs

and against defendants FEB Leasing (now BPI Leasing), BG Hauler, and
Manuel Estilloso, to wit:

1. Ordering the defendants, jointly and severally, to pay plaintiffs the following:

a. the amount of P62,000.00 representing actual expenses incurred by the plaintiffs;

b. the amount of P50,000.00 as moral damages;

c. the amount of P2,400,000.00 for loss of earning capacity of the deceased victim,
Loretta V. Baylon;

d. the sum of P50,000.00 for death indemnity;

e. the sum of P50,000.00 for and as attorneys fees; and

f. with costs against the defendants.

2. Ordering the dismissal of defendants counter-claim for lack of merit and the cross
claim of defendant BG Hauler against defendant FGU Insurance.

SO ORDERED.11

43 | P a g e
Petitioner, BG Hauler, and the driver appealed the RTC Decision to the Court of Appeals.
Petitioner claimed that as financial lessor, it is exempt from liability resulting from any loss,
damage, or injury the oil tanker may cause while being operated by BG Hauler as financial
lessee.

On the other hand, BG Hauler and the driver alleged that no sufficient evidence existed proving
the driver to be at fault. They claimed that the RTC erred in finding BG Hauler negligent despite
the fact that it had exercised the diligence of a good father of a family in the selection and
supervision of its driver and in the maintenance of its vehicles. They contended that petitioner, as
the registered owner of the oil tanker, should be solely liable for Lorettas death.

The Ruling of the Court of Appeals

The Court of Appeals held that petitioner, BG Hauler, and the driver are solidarily liable for
damages arising from Lorettas death. Petitioners liability arose from the fact that it was the
registered owner of the oil tanker while BG Haulers liability emanated from a provision in the
lease contract providing that the lessee shall be liable in case of any loss, damage, or injury the
leased oil tanker may cause.

Thus, the Court of Appeals affirmed the RTC Decision but with the modification that the award
of attorneys fees be deleted for being speculative. The dispositive part of the appellate courts
Decision reads:

WHEREFORE, in the light of the foregoing, the instant appeal is DENIED.

Consequently, the assailed Decision of the lower court is AFFIRMED with the
MODIFICATION that the award of attorneys fees is DELETED.

IT IS SO ORDERED.12

Dissatisfied, petitioner and BG Hauler, joined by the driver, filed two separate motions for
reconsideration. In its 18 January 2008 Resolution, the Court of Appeals denied both motions for
lack of merit.

Unconvinced, petitioner alone filed with this Court the present petition for review on
certiorari impleading the spouses Baylon, BG Hauler, and the driver as respondents.13

The Issue

44 | P a g e
The sole issue submitted for resolution is whether the registered owner of a financially leased
vehicle remains liable for loss, damage, or injury caused by the vehicle notwithstanding an
exemption provision in the financial lease contract.

The Courts Ruling

Petitioner contends that the lease contract between BG Hauler and petitioner specifically
provides that BG Hauler shall be liable for any loss, damage, or injury the leased oil tanker may
cause even if petitioner is the registered owner of the said oil tanker. Petitioner claims that the
Court of Appeals erred in holding petitioner solidarily liable with BG Hauler despite having
found the latter liable under the lease contract.

For their part, the spouses Baylon counter that the lease contract between petitioner and BG
Hauler cannot bind third parties like them. The spouses Baylon maintain that the existence of the
lease contract does not relieve petitioner of direct responsibility as the registered owner of the oil
tanker that caused the death of their daughter.

On the other hand, BG Hauler and the driver argue that at the time petitioner and BG Hauler
entered into the lease contract, Republic Act No. 598014 was still in effect. They point out that
the amendatory law, Republic Act No. 8556,15 which exempts from liability in case of any loss,
damage, or injury to third persons the registered owners of vehicles financially leased to another,
was not yet enacted at that time.

In point is the 2008 case of PCI Leasing and Finance, Inc. v. UCPB General Insurance Co.,
Inc.16 There, we held liable PCI Leasing and Finance, Inc., the registered owner of an 18-wheeler
Fuso Tanker Truck leased to Superior Gas & Equitable Co., Inc. (SUGECO) and being driven by
the latters driver, for damages arising from a collision. This despite an express provision in the
lease contract to the effect that the lessee, SUGECO, shall indemnify and hold the registered
owner free from any liabilities, damages, suits, claims, or judgments arising from SUGECOs use
of the leased motor vehicle.

In the instant case, Section 5.1 of the lease contract between petitioner and BG Hauler provides:

Sec. 5.1. It is the principle of this Lease that while the title or ownership of the
EQUIPMENT, with all the rights consequent thereof, are retained by the LESSOR, the
risk of loss or damage of the EQUIPMENT from whatever source arising, as well as any
liability resulting from the ownership, operation and/or possession thereof, over and
above those actually compensated by insurance, are hereby transferred to and
assumed by the LESSEE hereunder which shall continue in full force and
effect.17 (Emphasis supplied)

If it so wishes, petitioner may proceed against BG Hauler to seek enforcement of the latters
contractual obligation under Section 5.1 of the lease contract. In the present case, petitioner did

45 | P a g e
not file a cross-claim against BG Hauler. Hence, this Court cannot require BG Hauler to
reimburse petitioner for the latters liability to the spouses Baylon. However, as the registered
owner of the oil tanker, petitioner may not escape its liability to third persons.

Under Section 5 of Republic Act No. 4136,18 as amended, all motor vehicles used or operated on
or upon any highway of the Philippines must be registered with the Bureau of Land
Transportation (now Land Transportation Office) for the current year.19 Furthermore, any
encumbrances of motor vehicles must be recorded with the Land Transportation Office in order
to be valid against third parties.20

In accordance with the law on compulsory motor vehicle registration, this Court has consistently
ruled that, with respect to the public and third persons, the registered owner of a motor vehicle is
directly and primarily responsible for the consequences of its operation regardless of who the
actual vehicle owner might be.21 Well-settled is the rule that the registered owner of the vehicle
is liable for quasi-delicts resulting from its use. Thus, even if the vehicle has already been sold,
leased, or transferred to another person at the time the vehicle figured in an accident, the
registered vehicle owner would still be liable for damages caused by the accident. The sale,
transfer or lease of the vehicle, which is not registered with the Land Transportation Office, will
not bind third persons aggrieved in an accident involving the vehicle. The compulsory motor
vehicle registration underscores the importance of registering the vehicle in the name of the
actual owner.

The policy behind the rule is to enable the victim to find redress by the expedient recourse of
identifying the registered vehicle owner in the records of the Land Transportation Office. The
registered owner can be reimbursed by the actual owner, lessee or transferee who is known to
him. Unlike the registered owner, the innocent victim is not privy to the lease, sale, transfer or
encumbrance of the vehicle. Hence, the victim should not be prejudiced by the failure to register
such transaction or encumbrance. As the Court held in PCI Leasing:

The burden of registration of the lease contract is minuscule compared to the chaos that
may result if registered owners or operators of vehicles are freed from such
responsibility. Petitioner pays the price for its failure to obey the law on compulsory
registration of motor vehicles for registration is a pre-requisite for any person to even
enjoy the privilege of putting a vehicle on public roads.22

In the landmark case of Erezo v. Jepte,23 the Court succinctly laid down the public policy behind
the rule, thus:

The main aim of motor vehicle registration is to identify the owner so that if any accident
happens, or that any damage or injury is caused by the vehicle on the public highways,
responsibility therefor can be fixed on a definite individual, the registered owner.
Instances are numerous where vehicles running on public highways caused accidents or
injuries to pedestrians or other vehicles without positive identification of the owner or
drivers, or with very scant means of identification. It is to forestall these circumstances,
so inconvenient or prejudicial to the public, that the motor vehicle registration is

46 | P a g e
 primarily ordained, in the interest of the determination of persons responsible for
damages or injuries caused on public highways.

xxx

Were a registered owner allowed to evade responsibility by proving who the supposed
transferee or owner is, it would be easy for him, by collusion with others or, or otherwise,
to escape said responsibility and transfer the same to an indefinite person, or to one who
possesses no property with which to respond financially for the damage or injury done. A
victim of recklessness on the public highways is usually without means to discover or
identify the person actually causing the injury or damage. He has no means other than
by a recourse to the registration in the Motor Vehicles Office to determine who is the
owner. The protection that the law aims to extend to him would become illusory were the
registered owner given the opportunity to escape liability by disproving his ownership. If
the policy of the law is to be enforced and carried out, the registered owner should not be
allowed to prove the contrary to the prejudice of the person injured, that is to prove that a
third person or another has become the owner, so that he may be thereby be relieved of
the responsibility to the injured person.24

In this case, petitioner admits that it is the registered owner of the oil tanker that figured in an
accident causing the death of Loretta. As the registered owner, it cannot escape liability for the
loss arising out of negligence in the operation of the oil tanker. Its liability remains even if at the
time of the accident, the oil tanker was leased to BG Hauler and was being driven by the latters
driver, and despite a provision in the lease contract exonerating the registered owner from
liability.

As a final point, we agree with the Court of Appeals that the award of attorneys fees by the RTC
must be deleted for lack of basis. The RTC failed to justify the award of P50,000 attorneys fees
to respondent spouses Baylon. The award of attorneys fees must have some factual, legal and
equitable bases and cannot be left to speculations and conjectures.25 Consistent with prevailing
jurisprudence,26attorneys fees as part of damages are awarded only in the instances enumerated
in Article 2208 of the Civil Code.27 Thus, the award of attorneys fees is the exception rather than
the rule. Attorneys fees are not awarded every time a party prevails in a suit because of the
policy that no premium should be placed on the right to litigate.28

WHEREFORE, we DENY the petition. We AFFIRM the 9 October 2007 Decision and the 18
January 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 81446 affirming with
modification the 30 October 2003 Decision of the Regional Trial Court (Branch 35)
of Gapan City in Civil Case No. 2334 ordering petitioner FEB Leasing and Finance Corporation,
BG Hauler, Inc., and driver Manuel Y. Estilloso to solidarily pay respondent spouses Sergio
P. Baylon and Maritess Villena-Baylon the following amounts:

a. P62,000.00 representing actual expenses incurred by the plaintiffs;

47 | P a g e
 b. P50,000.00 as moral damages;

c. P2,400,000.00 for loss of earning capacity of the deceased victim, Loretta V. Baylon;
and

d. P50,000.00 for death indemnity.

Costs against petitioner.

SO ORDERED.

48 | P a g e
REPUBLIC ACT No. 3765

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN

CONNECTION WITH EXTENSIONS OF CREDIT.

Section 1. This Act shall be known as the "Truth in Lending Act."

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of credit to the user by assuring a full
disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of
the national economy.

Section 3. As used in this Act, the term

(1) "Board" means the Monetary Board of the Central Bank of the Philippines.

(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional
sales contract; any contract to sell, or sale or contract of sale of property or services, either for
present or future delivery, under which part or all of the price is payable subsequent to the
making of such sale or contract; any rental-purchase contract; any contract or arrangement for
the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim
against, or for the delivery of, property or money; any purchase, or other acquisition of, or any
credit upon the security of, any obligation of claim arising out of any of the foregoing; and any
transaction or series of transactions having a similar purpose or effect.

(3) "Finance charge" includes interest, fees, service charges, discounts, and such other charges
incident to the extension of credit as the Board may be regulation prescribe.

(4) "Creditor" means any person engaged in the business of extending credit (including any
person who as a regular business practice make loans or sells or rents property or services on a
time, credit, or installment basis, either as principal or as agent) who requires as an incident to
the extension of credit, the payment of a finance charge.

(5) "Person" means any individual, corporation, partnership, association, or other organized
group of persons, or the legal successor or representative of the foregoing, and includes the
Philippine Government or any agency thereof, or any other government, or of any of its
political subdivisions, or any agency of the foregoing.

Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

49 | P a g e
Section 5. The Board shall prescribe such rules and regulations as may be necessary or proper in
carrying out the provisions of this Act. Any rule or regulation prescribed hereunder may contain
such classifications and differentiations as in the judgment of the Board are necessary or proper
to effectuate the purposes of this Act or to prevent circumvention or evasion, or to facilitate the
enforcement of this Act, or any rule or regulation issued thereunder.

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of P100 or in an amount equal to twice the finance charged required
by such creditor in connection with such transaction, whichever is the greater, except that such
liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the violation, in any
court of competent jurisdiction. In any action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court costs as
determined by the court.

(b) Except as specified in subsection (a) of this section, nothing contained in this Act or
any regulation contained in this Act or any regulation thereunder shall affect the validity
or enforceability of any contract or transactions.

(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for
not less than 6 months, nor more than one year or both.

(d) No punishment or penalty provided by this Act shall apply to the Philippine
Government or any agency or any political subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under this Act to the
effect that a defendant has willfully violated this Act shall be prima facie evidence
against such defendant in an action or proceeding brought by any other party against such
defendant under this Act as to all matters respecting which said judgment would be an
estoppel as between the parties thereto.

Section 7. This Act shall become effective upon approval.

G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners, vs. PHILIPPINE NATIONAL

BANK,

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the
most important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a
party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates
imposed. Premium may not be placed upon a stipulation in a contract which grants one party the
right to choose whether to continue with or withdraw from the agreement if it discovers that what
the other party has been doing all along is improper or illegal.

This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28,
2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of
Kalibo, Aklan in Civil Case No. 5975.

Factual Antecedents

50 | P a g e
 Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two
decades of operating a department store and buying and selling of ready-to-wear apparel.
Respondent Philippine National Bank (PNB) is a banking corporation organized and existing
under Philippine laws.

To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners
constituted in August 1987 a Real Estate Mortgage5 over a 370-square meter lot in Kalibo, Aklan
covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was
increased to ₱1.8 million and the mortgage was correspondingly increased to ₱1.8 million.6

And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to
cover the same credit line, which was increased to ₱2.5 million, and additional security was
given in the form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners
issued eight Promissory Notes8 and signed a Credit Agreement.9 This July 1989 Credit
Agreement contained a stipulation on interest which provides as follows:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum.
Interest shall be payable in advance every one hundred twenty days at the rate prevailing at the
time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank
has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over
the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.10 (Emphases supplied)

The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the
right to increase or reduce interest rates "within the limits allowed by law or by the Monetary
Board."11

The Real Estate Mortgage agreement provided the same right to increase or reduce
interest rates "at any time depending on whatever policy PNB may adopt in the future."12

Petitioners religiously paid interest on the notes at the following rates:

1. 1st Promissory Note dated July 24, 1989 – 19.5%;

2. 2nd Promissory Note dated November 22, 1989 – 23%;

3. 3rd Promissory Note dated March 21, 1990 – 22%;

4. 4th Promissory Note dated July 19, 1990 – 24%;

5. 5th Promissory Note dated December 17, 1990 – 28%;

6. 6th Promissory Note dated February 14, 1991 – 32%;

7. 7th Promissory Note dated March 1, 1991 – 30%; and

8. 8th Promissory Note dated July 11, 1991 – 24%.13

In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with
the following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment thereof

51 | P a g e
at the rate per annum which is determined by the Bank to be prime rate plus applicable spread in
effect as of the date of each Availment.15 (Emphases supplied)

Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the
following 18 Promissory Notes, which petitioners settled – except the last (the note covering the
principal) – at the following interest rates:

1. 9th Promissory Note dated November 8, 1991 – 26%;

2. 10th Promissory Note dated March 19, 1992 – 25%;

3. 11th Promissory Note dated July 11, 1992 – 23%;

4. 12th Promissory Note dated November 10, 1992 – 21%;

5. 13th Promissory Note dated March 15, 1993 – 21%;

6. 14th Promissory Note dated July 12, 1993 – 17.5%;

7. 15th Promissory Note dated November 17, 1993 – 21%;

8. 16th Promissory Note dated March 28, 1994 – 21%;

9. 17th Promissory Note dated July 13, 1994 – 21%;

10. 18th Promissory Note dated November 16, 1994 – 16%;

11. 19th Promissory Note dated April 10, 1995 – 21%;

12. 20th Promissory Note dated July 19, 1995 – 18.5%;

13. 21st Promissory Note dated December 18, 1995 – 18.75%;

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;

15. 23rd Promissory Note dated July 22, 1996 – 18.5%;

16. 24th Promissory Note dated November 25, 1996 – 18%;

17. 25th Promissory Note dated May 30, 1997 – 17.5%; and

18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate
the Bank may at any time without notice, raise within the limits allowed by law x x x."17

On the other hand, the 18th up to the 26th promissory notes – including PN 9707237,
which is the 26th promissory note – carried the following provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the Borrower in
the event of changes in interest rate prescribed by law or the Monetary Board of the Central
Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the
event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have the
option top repay the loan or credit facility without penalty within ten (10) calendar days from the
Interest Setting Date.18 (Emphasis supplied)

Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good
on the promissory notes, religiously paying the interests without objection or fail. But in 1997,
petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners’

52 | P a g e
sole outstanding promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and due
120 days later or on October 28, 1997 – became past due, and despite repeated demands,
petitioners failed to make good on the note.

Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case
of default, as follows:

Without need for notice or demand, failure to pay this note or any installment thereon, when due,
shall constitute default and in such cases or in case of garnishment, receivership or bankruptcy or
suit of any kind filed against me/us by the Bank, the outstanding principal of this note, at the
option of the Bank and without prior notice of demand, shall immediately become due and
payable and shall be subject to a penalty charge of twenty four percent (24%) per annum based
on the defaulted principal amount. x x x19 (Emphasis supplied)

PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and
demandable from petitioners in the total amount of ₱3,620,541.60, broken down as follows:

Principal P 2,500,000.00

Interest 538,874.94

Penalties 581,666.66

Total P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on
the mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for
the amount of ₱4,324,172.96.21 The sheriff’s certificate of sale was registered on March 11,
1999.

More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975,
seeking annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners
theorized that after the first promissory note where they agreed to pay 19.5% interest, the
succeeding stipulations for the payment of interest in their loan agreements with PNB – which
allegedly left to the latter the sole will to determine the interest rate – became null and void.
Petitioners added that because the interest rates were fixed by respondent without their prior
consent or agreement, these rates are void, and as a result, petitioners should only be made liable
for interest at the legal rate of 12%. They claimed further that they overpaid interests on the
credit, and concluded that due to this overpayment of steep interest charges, their debt should
now be deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208 became
unnecessary and wrongful. As for the imposed penalty of ₱581,666.66, petitioners alleged that
since the Real Estate Mortgage and the Supplement thereto did not include penalties as part of
the secured amount, the same should be excluded from the foreclosure amount or bid price, even
if such penalties are provided for in the final Promissory Note, or PN 9707237.22

In addition, petitioners sought to be reimbursed an alleged overpayment of ₱848,285.00

made during the period August 21, 1991 to March 5, 1998,resulting from respondent’s
imposition of the alleged illegal and steep interest rates. They also prayed to be awarded
₱200,000.00 by way of attorney’s fees.23

In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners
agreed that without prior notice, PNB may modify interest rates depending on future policy
adopted by it; and that the imposition of penalties was agreed upon in the Credit Agreement. It
added that the imposition of penalties is supported by the all-inclusive clause in the Real Estate

53 | P a g e
Mortgage agreement which provides that the mortgage shall stand as security for any and all
other obligations of whatever kind and nature owing to respondent, which thus includes penalties
imposed upon default or non-payment of the principal and interest on due date.

On pre-trial, the parties mutually agreed to the following material facts, among others:

a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
₱3,484,287.00;25 and

b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26

During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the
Amendment to Credit Agreement, Real Estate Mortgage and the Supplement thereto were all
prepared by respondent PNB and were presented to her and her husband Eduardo only for
signature; that she was told by PNB that the latter alone would determine the interest rate; that as
to the Amendment to Credit Agreement, she was told that PNB would fill up the interest rate
portion thereof; that at the time the parties executed the said Credit Agreement, she was not
informed about the applicable spread that PNB would impose on her account; that the interest
rate portion of all Promissory Notes she and Eduardo issued were always left in blank when they
executed them, with respondent’s mere assurance that it would be the one to enter or indicate
thereon the prevailing interest rate at the time of availment; and that they agreed to such
arrangement. She further testified that the two Real Estate Mortgage agreements she signed did
not stipulate the payment of penalties; that she and Eduardo consulted with a lawyer, and were
told that PNB’s actions were improper, and so on March 20, 2000, they wrote to the latter
seeking a recomputation of their outstanding obligation; and when PNB did not oblige, they
instituted Civil Case No. 5975.27

On cross-examination, Lydia testified that she has been in business for 20 years; that she
also borrowed from other individuals and another bank; that it was only with banks that she was
asked to sign loan documents with no indicated interest rate; that she did not bother to read the
terms of the loan documents which she signed; and that she received several PNB statements of
account detailing their outstanding obligations, but she did not complain; that she assumed
instead that what was written therein is correct.28

For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness
for respondent, stated on cross-examination that as a practice, the determination of the prime
rates of interest was the responsibility solely of PNB’s Treasury Department which is based in
Manila; that these prime rates were simply communicated to all PNB branches for
implementation; that there are a multitude of considerations which determine the interest rate,
such as the cost of money, foreign currency values, PNB’s spread, bank administrative costs,
profitability, and the practice in the banking industry; that in every repricing of each loan
availment, the borrower has the right to question the rates, but that this was not done by the
petitioners; and that anything that is not found in the Promissory Note may be supplemented by
the Credit Agreement.29

Ruling of the Regional Trial Court

On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30

It ruled that:

1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating
interest rate at any time depending on whatever policy it may adopt in the future, it likewise
allows for the decrease at any time of the same. Thus, such stipulation authorizing both the

54 | P a g e
 increase and decrease of interest rates as may be applicable is valid,31 as was held in
Consolidated Bank and Trust Corporation (SOLIDBANK) v. Court of Appeals;32

2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be
made dependent on prevailing rates upon which to peg such variable interest rates;33

3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails over the
Credit Agreement and the Real Estate Mortgage.

As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory Note
prevail over those mentioned in the Credit Agreement and the Real Estate Mortgage
agreements;34

4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct;35

5. Because the loan was admittedly due and demandable, the foreclosure was regularly made;36

6. By the admission of petitioners during pre-trial, all payments made to PNB were properly
applied to the principal, interest and penalties.37

The dispositive portion of the trial court’s Decision reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the

respondent and against the petitioners by DISMISSING the latter’s petition.

Costs against the petitioners.

SO ORDERED.38

Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court
granted only a modification in the award of attorney’s fees, reducing the same from 10% to 1%.
Thus, PNB was ordered to refund to petitioner the excess in attorney’s fees in the amount of
₱356,589.90, viz:

WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate
charged by the respondent as well as the extra-judicial foreclosure proceedings and the
Certificate of Sale. However, respondent is directed to refund to the petitioner the amount of
₱356,589.90 representing the excess interest charged against the latter.

No pronouncement as to costs.

SO ORDERED.40

Ruling of the Court of Appeals

Petitioners appealed to the CA, which issued the questioned Decision with the following
decretal portion:

WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The
modified Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby
AFFIRMED with MODIFICATIONS, to wit:

1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest
period for PN. No. 9707237 should be 12% per annum;

2. [T]hat the attorney’s fees of10% is valid and binding; and

3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of
₱377,505.99 which is the difference between the total amount due [PNB] and the amount
of its bid price.

55 | P a g e
 SO ORDERED.41

On the other hand, respondent did not appeal the June 4,2003 Order of the trial court
which reduced its award of attorney’s fees. It simply raised the issue in its appellee’s brief in the
CA, and included a prayer for the reversal of said Order.

In effect, the CA limited petitioners’ appeal to the following issues:

1) Whether x x x the interest rates on petitioners’ outstanding obligation were unilaterally

and arbitrarily imposed by PNB;

2) Whether x x x the penalty charges were secured by the real estate mortgage; and

3) Whether x x x the extrajudicial foreclosure and sale are valid.42

The CA noted that, based on receipts presented by petitioners during trial, the latter
dutifully paid a total of ₱3,027,324.60 in interest for the period August 7, 1991 to August 6,
1997, over and above the ₱2.5 million principal obligation. And this is exclusive of payments for
insurance premiums, documentary stamp taxes, and penalty. All the while, petitioners did not
complain nor object to the imposition of interest; they in fact paid the same religiously and
without fail for seven years. The appellate court ruled that petitioners are thus estopped from
questioning the same.

The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB
wrongly applied an interest rate of 25.72% instead of the agreed 25%; thus it overcharged
petitioners, and the latter paid, an excess of ₱736.56 in interest.

On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage
agreements contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the amount
to be secured by the mortgaged property, thus –

For and in consideration of certain loans, overdrafts and other credit accommodations
obtained from the MORTGAGEE and to secure the payment of the same and those others that
the MORTGAGEE may extend to the MORTGAGOR, including interest and expenses, and
other obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books and records of the MORTGAGEE,
the MORTGAGOR does hereby transfer and convey by way of mortgage unto the
MORTGAGEE x x x43 (Emphasis supplied)

The CA believes that the 24% penalty is covered by the phrase "and other obligations
owing by the mortgagor to the mortgagee" and should thus be added to the amount secured by
the mortgages.44

The CA then proceeded to declare valid the foreclosure and sale of properties covered by
TCTs T-14250 and T-16208, which came as a necessary result of petitioners’ failure to pay the
outstanding obligation upon demand.45The CA saw fit to increase the trial court’s award of 1% to
10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage agreement
which authorized the collection of the higher rate.46

Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the difference
between PNB’s bid price of ₱4,324,172.96 and petitioners’ total computed obligation as of
January 14, 1999, or the date of the auction sale, in the amount of ₱3,946,667.87.47

Hence, the present Petition.

Issues

The following issues are raised in this Petition:

56 | P a g e
 I

A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT

NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT AGREEMENT
DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT AGREEMENT
DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL
DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL FIXING OF
INTEREST RATE AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO
LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO
ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND
CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN APPLYING THE
PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED DELAYED COMPLAINT
OF PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST CHARGED.

B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN

NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST
EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT APPLYING THE
EXCESS OVER THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT OF
₱3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF ₱2,500,000.[00] LEAVING AN
OVERPAYMENT OF₱984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S]
WITH INTEREST OF 12% PER ANNUM.

II

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO
FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN
THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE
AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.

III

THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER

COURT, WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY
1%, AND [AWARDING] 10% ATTORNEY’S FEES.48

Petitioners’ Arguments

Petitioners insist that the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement should be declared null and void, for they relegated to PNB the
sole power to fix interest rates based on arbitrary criteria or factors such as bank policy,
profitability, cost of money, foreign currency values, and bank administrative costs; spaces for
interest rates in the two Credit Agreements and the promissory notes were left blank for PNB to
unilaterally fill, and their consent or agreement to the interest rates imposed thereafter was not
obtained; the interest rate, which consists of the prime rate plus the bank spread, is determined
not by agreement of the parties but by PNB’s Treasury Department in Manila. Petitioners
conclude that by this method of fixing the interest rates, the principle of mutuality of contracts is
violated, and public policy as well as Circular 90549 of the then Central Bank had been breached.

Petitioners question the CA’s application of the principle of estoppel, saying that no
estoppel can proceed from an illegal act. Though they failed to timely question the imposition of
the alleged illegal interest rates and continued to pay the loan on the basis of these rates, they
cannot be deemed to have acquiesced, and hence could recover what they erroneously paid.50

57 | P a g e
 Petitioners argue that if the interest rates were nullified, then their obligation to PNB is
deemed extinguished as of July 1997; moreover, it would appear that they even made an over
payment to the bank in the amount of ₱984,287.00.

Next, petitioners suggest that since the Real Estate Mortgage agreements did not include
nor specify, as part of the secured amount, the penalty of 24% authorized in PN 9707237, such
amount of ₱581,666.66 could not be made answerable by or collected from the mortgages
covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals,51 petitioners insist that the phrase "and other
obligations owing by the mortgagor to the mortgagee"52 in the mortgage agreements cannot
embrace the ₱581,666.66 penalty, because, as held in the PBCom case, "[a] penalty charge does
not belong to the species of obligations enumerated in the mortgage, hence, the said contract
cannot be understood to secure the penalty";53while the mortgages are the accessory contracts,
what items are secured may only be determined from the provisions of the mortgage contracts,
and not from the Credit Agreement or the promissory notes.

Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be
maintained, given that in foreclosures, a lawyer’s work consists merely in the preparation and
filing of the petition, and involves minimal study.54 To allow the imposition of a staggering
₱396,211.00 for such work would be contrary to equity. Petitioners state that the purpose of
attorney’s fees in cases of this nature "is not to give respondent a larger compensation for the
loan than the law already allows, but to protect it against any future loss or damage by being
compelled to retain counsel x x x to institute judicial proceedings for the collection of its
credit."55 And because the instant case involves a simple extrajudicial foreclosure, attorney’s fees
may be equitably tempered.

Respondent’s Arguments

For its part, respondent disputes petitioners’ claim that interest rates were unilaterally
fixed by it, taking relief in the CA pronouncement that petitioners are deemed estopped by their
failure to question the imposed rates and their continued payment thereof without opposition. It
adds that because the Credit Agreement and promissory notes contained both an escalation
clause and a de-escalation clause, it may not be said that the bank violated the principle of
mutuality. Besides, the increase or decrease in interest rates have been mutually agreed upon by
the parties, as shown by petitioners’ continuous payment without protest. Respondent adds that
the alleged unilateral imposition of interest rates is not a proper subject for review by the Court
because the issue was never raised in the lower court.

As for petitioners’ claim that interest rates imposed by it are null and void for the reasons
that 1) the Credit Agreements and the promissory notes were signed in blank; 2) interest rates
were at short periods; 3) no interest rates could be charged where no agreement on interest rates
was made in writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards
left to its choosing; and 5) interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary – PNB counters:

a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank –
Respondent claims that this issue was never raised in the lower court. Besides, documentary
evidence prevails over testimonial evidence; Lydia Silos’ testimony in this regard is self-
serving, unsupported and uncorroborated, and for being the lone evidence on this issue. The
fact remains that these documents are in proper form, presumed regular, and endure, against
arbitrary claims by Silos – who is an experienced business person – that she signed
questionable loan documents whose provisions for interest rates were left blank, and yet she
continued to pay the interests without protest for a number of years.56

58 | P a g e
 b. That interest rates were at short periods – Respondent argues that the law which governs and
prohibits changes in interest rates made more than once every twelve months has been
removed57 with the issuance of Presidential Decree No. 858.58

c. That no interest rates could be charged where no agreement on interest rates was made in
writing in violation of Article 1956 of the Civil Code, which provides that no interest shall be
due unless it has been expressly stipulated in writing – Respondent insists that the stipulated
25% per annum as embodied in PN 9707237 should be imposed during the interim, or the
period after the loan became due and while it remains unpaid, and not the legal interest of 12%
as claimed by petitioners.59

d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its
choosing – According to respondent, interest rates were fixed taking into consideration
increases or decreases as provided by law or by the Monetary Board, the bank’s overall costs
of funds, and upon agreement of the parties.60

e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary
– On this score, respondent submits there are various factors that influence interest rates, from
political events to economic developments, etc.; the cost of money, profitability and foreign
currency transactions may not be discounted.61

On the issue of penalties, respondent reiterates the trial court’s finding that during pre-
trial, petitioners admitted that the Statement of Account as of October 12, 1998 – which detailed
and included penalty charges as part of the total outstanding obligation owing to the bank – was
correct. Respondent justifies the imposition and collection of a penalty as a normal banking
practice, and the standard rate per annum for all commercial banks, at the time, was 24%.

Respondent adds that the purpose of the penalty or a penal clause for that matter is to
ensure the performance of the obligation and substitute for damages and the payment of interest
in the event of non-compliance.62 And the promissory note – being the principal agreement as
opposed to the mortgage, which is a mere accessory – should prevail. This being the case, its
inclusion as part of the secured amount in the mortgage agreements is valid and necessary.

Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-

empting consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners filed
Civil Case No. 5975 ostensibly to question the foreclosure and sale of properties covered by
TCTs T-14250 and T-16208 in a desperate move to retain ownership over these properties,
because they failed to timely redeem them.

Respondent directs the attention of the Court to its petition in G.R. No. 181046,63 where the
propriety of the CA’s ruling on the following issues is squarely raised:

1. That the interest rate to be applied after the expiration of the first 30-day interest period
for PN 9707237 should be 12% per annum; and

2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99
which is the difference between the total amount due to PNB and the amount of its bid
price.

Our Ruling

The Court grants the Petition.

Before anything else, it must be said that it is not the function of the Court to re-examine or re-
evaluate evidence adduced by the parties in the proceedings below. The rule admits of certain

59 | P a g e
well-recognized exceptions, though, as when the lower courts’ findings are not supported by the
evidence on record or are based on a misapprehension of facts, or when certain relevant and
undisputed facts were manifestly overlooked that, if properly considered, would justify a
different conclusion. This case falls within such exceptions.

The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First Division
denying respondent’s petition in G.R. No. 181046, due to late filing, failure to attach the required
affidavit of service of the petition on the trial court and the petitioners, and submission of a
defective verification and certification of non-forum shopping. On June 25, 2008, the Court
issued another Resolution denying with finality respondent’s motion for reconsideration of the
March 5, 2008 Resolution. And on August 15, 2008, entry of judgment was made. This thus
settles the issues, as above-stated, covering a) the interest rate – or 12% per annum– that applies
upon expiration of the first 30 days interest period provided under PN 9707237, and b)the

CA’s decree that PNB should reimburse petitioner the excess in the bid price of ₱377,505.09.

It appears that respondent’s practice, more than once proscribed by the Court, has been carried
over once more to the petitioners. In a number of decided cases, the Court struck down
provisions in credit documents issued by PNB to, or required of, its borrowers which allow the
bank to increase or decrease interest rates "within the limits allowed by law at any time
depending on whatever policy it may adopt in the future." Thus, in Philippine National Bank v.
Court of Appeals,64 such stipulation and similar ones were declared in violation of Article
130865 of the Civil Code. In a second case, Philippine National Bank v. Court of Appeals,66 the
very same stipulations found in the credit agreement and the promissory notes prepared and
issued by the respondent were again invalidated. The Court therein said:

The Credit Agreement provided inter alia, that —

(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future; Provided, that the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in
the maximum interest rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without
notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."

The Real Estate Mortgage contract likewise provided that —

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by
this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.

xxxx

60 | P a g e
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future and provided, that, the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 ("The Usury Law"), as amended, thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as
follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits
may stipulate that the rate of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased bylaw or by the Monetary Board; Provided,
That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate
of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board; Provided further, That the adjustment in the rate of
interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the
maximum rate of interest.

Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe the
maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the
Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which
provides:

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:

Sec. 1303. Interest and Other Charges.

— The rate of interest, including commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate
freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward,
the interest previously stipulated. However, contrary to the stubborn insistence of petitioner

61 | P a g e
bank, the said law and circular did not authorize either party to unilaterally raise the interest rate
without the other’s consent.

It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds
of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts. In
Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s
loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void . . . . Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality essential in contracts. It
would have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker party’s (the debtor) participation being
reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition.67 (Emphases
supplied)

Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court invalidated the very
same provisions in the respondent’s prepared Credit Agreement, declaring thus:

The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties, is likewise, invalid.

62 | P a g e
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly
stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due
unless it has been expressly stipulated in writing." What has been "stipulated in writing" from a
perusal of interest rate provision of the credit agreement signed between the parties is that
petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-
escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the
limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact
readily resolved by a careful reading of the credit agreement because the same plainly uses the
phrase "interest rate agreed upon," in reference to the original 21% interest rate. x x x

xxxx

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent
bank in contravention to the tenor of their credit agreement. That an increase in interest rates
from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and
1984, petitioners had paid an amount equivalent to virtually half of the entire principal
(₱7,735,004.66) which was applied to interest alone. By the time the spouses tendered the
amount of ₱40,142,518.00 in settlement of their obligations; respondent bank was demanding
₱58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above, not
only [are] the increases of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and reasonable standards upon
which the increases are anchored.

xxxx

In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral
and progressive increases imposed by respondent PNB were null and void. Their effect was to
increase the total obligation on an eighteen million peso loan to an amount way over three times
that which was originally granted to the borrowers. That these increases, occasioned by crafty
manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.69 (Emphases supplied)

Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above doctrine was
reiterated:

The promissory note contained the following stipulation:

For value received, I/we, [private respondents] jointly and severally promise to pay to the
ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the
sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency, together with interest
thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time
without notice, raise within the limits allowed by law, and I/we also agree to pay jointly and
severally ____% per annum penalty charge, by way of liquidated damages should this note be
unpaid or is not renewed on due dated.

Payment of this note shall be as follows:

*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE

63 | P a g e
On the reverse side of the note the following condition was stamped:

All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition
that any and/or all extensions hereof that will leave any portion of the amount still unpaid after
730 days shall automatically convert the outstanding balance into a medium or long-term
obligation as the case may be and give the Bank the right to charge the interest rates prescribed
under its policies from the date the account was originally granted.

To secure payment of the loan the parties executed a real estate mortgage contract which
provided:

(k) INCREASE OF INTEREST RATE:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGEE, in accordance with the
provision hereof, shall be subject during the life of this contract to such an increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.

xxxx

To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s
ruling. The Court of Appeals nullified the interest rate increases not because the promissory note
did not comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of
such provision made the clause so one-sided as to make it unreasonable.

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank
v. Navarro that although P.D. No. 1684 is not to be retroactively applied to loans granted before
its effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sidedness of
the escalation clause. Indeed because of concern for the unequal status of borrowers vis-à-vis the
banks, our cases after Banco Filipino have fashioned the rule that any increase in the rate of
interest made pursuant to an escalation clause must be the result of agreement between the
parties.

Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to
increase the stipulated interest per annum" within the limits allowed by law at any time
depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate on
this note shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board." The real estate mortgage likewise provided:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGEE, in accordance with the
provisions hereof, shall be subject during the life of this contract to such an increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to
41% and then to 48%. This Court declared the increases unilaterally imposed by [PNB] to be in
violation of the principle of mutuality as embodied in Art.1308 of the Civil Code, which

64 | P a g e
provides that "[t]he contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them." As the Court explained:

In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the ₱1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest rate
at will during the term of the loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal footing,
the weaker party’s (the debtor) participation being reduced to the alternative "to take it or leave
it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap
for the weaker party whom the courts of justice must protect against abuse and imposition.

A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit
agreement in that case provided:

The BANK reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future: Provided, that the interest rate on
this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary Board. . . .

As in the first case, PNB successively increased the stipulated interest so that what was originally
12% per annum became, after only two years, 42%. In declaring the increases invalid, we held:

We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.

Only recently we invalidated another round of interest increases decreed by PNB pursuant to a
similar agreement it had with other borrowers:

[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the
said circular could possibly be read as granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of
their assets.

In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents’ assent to the increases can not be
implied from their lack of response to the letters sent by PNB, informing them of the increases.
For as stated in one case, no one receiving a proposal to change a contract is obliged to answer
the proposal.71 (Emphasis supplied)

65 | P a g e
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc.
v. Philippine

National Bank,72 thus –

Courts have the authority to strike down or to modify provisions in promissory notes that grant
the lenders unrestrained power to increase interest rates, penalties and other charges at the
latter’s sole discretion and without giving prior notice to and securing the consent of the
borrowers. This unilateral authority is anathema to the mutuality of contracts and enable lenders
to take undue advantage of borrowers. Although the Usury Law has been effectively repealed,
courts may still reduce iniquitous or unconscionable rates charged for the use of money.
Furthermore, excessive interests, penalties and other charges not revealed in disclosure
statements issued by banks, even if stipulated in the promissory notes, cannot be given effect
under the Truth in Lending Act.73 (Emphasis supplied)

Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,74 the above
pronouncements were reiterated to debunk PNB’s repeated reliance on its invalidated contract
stipulations:

We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of
PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used
in the present case to justify the increased interest rates is no different from the escalation clause
assailed in the 1996 PNB case; in both, the interest rates were increased from the agreed 12% per
annum rate to 42%. x x x

xxxx

On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest
the increased interest rates that were purportedly reflected in the statements of account and the
demand letters sent by the bank amounted to their implied acceptance of the increase – should
likewise fail.

Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates
prompted the lower courts to declare excessive and illegal the interest rates imposed. Togo
around this lower court finding, PNB alleges that the ₱206,297.47 deficiency claim was
computed using only the original 12% per annum interest rate. We find this unlikely. Our
examination of PNB’s own ledgers, included in the records of the case, clearly indicates that
PNB imposed interest rates higher than the agreed 12% per annum rate. This confirmatory
finding, albeit based solely on ledgers found in the records, reinforces the application in this case
of the rule that findings of the RTC, when affirmed by the CA, are binding upon this
Court.75 (Emphases supplied)

Verily, all these cases, including the present one, involve identical or similar provisions found in
respondent’s credit agreements and promissory notes. Thus, the July 1989 Credit Agreement
executed by petitioners and respondent contained the following stipulation on interest:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest
shall be payable in advance every one hundred twenty days at the rate prevailing at the time of
the renewal.

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(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank
has imposed on the Loan interest at a rate per annum which is equal to the Bank’s spread over
the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.76 (Emphases supplied)

while the eight promissory notes issued pursuant thereto granted PNB the right to increase or
reduce interest rates "within the limits allowed by law or the Monetary Board"77 and the Real
Estate Mortgage agreement included the same right to increase or reduce interest rates "at any
time depending on whatever policy PNB may adopt in the future."78

On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in
blank, and respondent later on entered their corresponding interest rates, as follows:

1st Promissory Note dated July 24, 1989 – 19.5%;

2nd Promissory Note dated November 22, 1989 – 23%;

3rd Promissory Note dated March 21, 1990 – 22%;

4th Promissory Note dated July 19, 1990 – 24%;

5th Promissory Note dated December 17, 1990 – 28%;

6th Promissory Note dated February 14, 1991 – 32%;

7th Promissory Note dated March 1, 1991 – 30%; and

8th Promissory Note dated July 11, 1991 – 24%.79

On the other hand, the August 1991 Amendment to Credit Agreement contains the following
stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment
from date of each Availment up to but not including the date of full payment thereof at the rate
per annum which is determined by the Bank to be prime rate plus applicable spread in effect as
of the date of each Availment.80 (Emphases supplied)

and under this Amendment to Credit Agreement, petitioners again executed and signed the
following promissory notes in blank, for the respondent to later on enter the corresponding
interest rates, which it did, as follows:

9th Promissory Note dated November 8, 1991 – 26%;

10th Promissory Note dated March 19, 1992 – 25%;

11th Promissory Note dated July 11, 1992 – 23%;

12th Promissory Note dated November 10, 1992 – 21%;

13th Promissory Note dated March 15, 1993 – 21%;

14th Promissory Note dated July 12, 1993 – 17.5%;

15th Promissory Note dated November 17, 1993 – 21%;

16th Promissory Note dated March 28, 1994 – 21%;

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 17th Promissory Note dated July 13, 1994 – 21%;

18th Promissory Note dated November 16, 1994 – 16%;

19th Promissory Note dated April 10, 1995 – 21%;

20th Promissory Note dated July 19, 1995 – 18.5%;

21st Promissory Note dated December 18, 1995 – 18.75%;

22nd Promissory Note dated April 22, 1996 – 18.5%;

23rd Promissory Note dated July 22, 1996 – 18.5%;

24th Promissory Note dated November 25, 1996 – 18%;

25th Promissory Note dated May 30, 1997 – 17.5%; and

26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank
may at any time without notice, raise within the limits allowed by law x x x."82 On the other
hand, the 18th up to the 26th promissory notes – which includes PN 9707237 – carried the
following provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are
not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to
prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest
Setting Date.83 (Emphasis supplied)

These stipulations must be once more invalidated, as was done in previous cases. The common
denominator in these cases is the lack of agreement of the parties to the imposed interest rates.
For this case, this lack of consent by the petitioners has been made obvious by the fact that they
signed the promissory notes in blank for the respondent to fill. We find credible the testimony of
Lydia in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch
Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in
Manila, which were then simply communicated to all PNB branches for implementation. If this
were the case, then this would explain why petitioners had to sign the promissory notes in blank,
since the imposable interest rates have yet to be determined and fixed by respondent’s Treasury
Department in Manila.

Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes –
such as cost of money, foreign currency values, bank administrative costs, profitability, and
considerations which affect the banking industry – it can be seen that considerations which affect
PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the
nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his
business or borrowing, etc. – these are not factors which influence the fixing of interest rates to
be imposed on him. Clearly, respondent’s method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is
arbitrary for there is no fixed standard or margin above or below these considerations.

The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According
to said stipulation:

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The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.

It should be pointed out that the authority to review the interest rate was given [to] UCPB alone
as the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition;(2) the rate
of interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or(3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case
of the interest rate provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB
as to the interest to be imposed, as both options violate the principle of mutuality of
contracts.84 (Emphases supplied)

To repeat what has been said in the above-cited cases, any modification in the contract, such as
the interest rates, must be made with the consent of the contracting parties.1âwphi1 The minds of
all the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof must be mutually
agreed upon; otherwise, it has no binding effect.

What is even more glaring in the present case is that, the stipulations in question no longer
provide that the parties shall agree upon the interest rate to be fixed; -instead, they are worded in
such a way that the borrower shall agree to whatever interest rate respondent fixes. In credit
agreements covered by the above-cited cases, it is provided that:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future: Provided, that, the interest rate on
this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in maximum interest rate.85 (Emphasis supplied)

Whereas, in the present credit agreements under scrutiny, it is stated that:

IN THE JULY 1989 CREDIT AGREEMENT

(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank
has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over
the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.86 (Emphases supplied)

IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment
from date of each Availment up to but not including the date of full payment thereof at the rate
per annum which is determined by the Bank to be prime rate plus applicable spread in effect as
of the date of each Availment.87 (Emphasis supplied)

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Plainly, with the present credit agreement, the element of consent or agreement by the borrower
is now completely lacking, which makes respondent’s unlawful act all the more reprehensible.

Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is against public policy."88

It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No.
3765, which was enacted "to protect x x x citizens from a lack of awareness of the true cost of
credit to the user by using a full disclosure of such cost with a view of preventing the uninformed
use of credit to the detriment of the national economy."89 The law "gives a detailed enumeration
of the specific information required to be disclosed, among which are the interest and other
charges incident to the extension of credit."90 Section 4 thereof provides that a disclosure
statement must be furnished prior to the consummation of the transaction, thus:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to
the extension of credit such as interest or discounts, collection fees, credit investigation fees,
attorney’s fees, and other service charges. The total finance charge represents the difference
between (1) the aggregate consideration (down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and non-finance charges.91

By requiring the petitioners to sign the credit documents and the promissory notes in blank, and
then unilaterally filling them up later on, respondent violated the Truth in Lending Act, and was
remiss in its disclosure obligations. In one case, which the Court finds applicable here, it was
held:

UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:

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 (1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the true
cost thereof, proceeding from the experience that banks are able to conceal such true cost by
hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and
the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to the contract, and to properly evaluate
their options in arriving at business decisions. Upholding UCPB’s claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied to
the loan covered by said promissory notes.92 (Emphases supplied)

However, the one-year period within which an action for violation of the Truth in Lending Act
may be filed evidently prescribed long ago, or sometime in 2001, one year after petitioners
received the March 2000 demand letter which contained the illegal charges.

The fact that petitioners later received several statements of account detailing its outstanding
obligations does not cure respondent’s breach. To repeat, the belated discovery of the true cost of
credit does not reverse the ill effects of an already consummated business decision.93

Neither may the statements be considered proposals sent to secure the petitioners’ conformity;
they were sent after the imposition and application of the interest rate, and not before. And even
if it were to be presumed that these are proposals or offers, there was no acceptance by
petitioners. "No one receiving a proposal to modify a loan contract, especially regarding interest,
is obliged to answer the proposal."94

Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low
initial interest rates, but actually accompanied by provisions written in fine print that allow
lenders to later on increase or decrease interest rates unilaterally, without the consent of the
borrower, and depending on complex and subjective factors. Because they have been lured into
these contracts by initially low interest rates, borrowers get caught and stuck in the web of
subsequent steep rates and penalties, surcharges and the like. Being ordinary individuals or
entities, they naturally dread legal complications and cannot afford court litigation; they succumb
to whatever charges the lenders impose. At the very least, borrowers should be charged rightly;
but then again this is not possible in a one-sided credit system where the temptation to abuse is
strong and the willingness to rectify is made weak by the eternal desire for profit.

Given the above supposition, the Court cannot subscribe to respondent’s argument that in every
repricing of petitioners’ loan availment, they are given the right to question the interest rates
imposed. The import of respondent’s line of reasoning cannot be other than that if one out of

71 | P a g e
every hundred borrowers questions respondent’s practice of unilaterally fixing interest rates, then
only the loan arrangement with that lone complaining borrower will enjoy the benefit of review
or re-negotiation; as to the 99 others, the questionable practice will continue unchecked, and
respondent will continue to reap the profits from such unscrupulous practice. The Court can no
more condone a view so perverse. This is exactly what the Court meant in the immediately
preceding cited case when it said that "the belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated business decision;"95 as to the 99 borrowers
who did not or could not complain, the illegal act shall have become a fait accompli– to their
detriment, they have already suffered the oppressive rates.

Besides, that petitioners are given the right to question the interest rates imposed is, under the
circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing
with the respondent. It is doubtful that any borrower who finds himself in petitioners’ position
would dare question respondent’s power to arbitrarily modify interest rates at any time. In the
second place, on what basis could any borrower question such power, when the criteria or
standards – which are really one-sided, arbitrary and subjective – for the exercise of such power
are precisely lost on him?

For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the
26th promissory notes, petitioners are granted the option to prepay the loan or credit facility
without penalty within 10 calendar days from the Interest Setting Date if they are not agreeable
to the interest rate fixed. It has been shown that the promissory notes are executed and signed in
blank, meaning that by the time petitioners learn of the interest rate, they are already bound to
pay it because they have already pre-signed the note where the rate is subsequently entered.

Besides, premium may not be placed upon a stipulation in a contract which grants one party the
right to choose whether to continue with or withdraw from the agreement if it discovers that what
the other party has been doing all along is improper or illegal.

Thus said, respondent’s arguments relative to the credit documents – that documentary evidence
prevails over testimonial evidence; that the credit documents are in proper form, presumed
regular, and endure, against arbitrary claims by petitioners, experienced business persons that
they are, they signed questionable loan documents whose provisions for interest rates were left
blank, and yet they continued to pay the interests without protest for a number of years – deserve
no consideration.

With regard to interest, the Court finds that since the escalation clause is annulled, the principal
amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the
amount due shall be subject to legal interest at the rate of 12% per annum. This is the uniform
ruling adopted in previous cases, including those cited here.96 The interests paid by petitioners
should be applied first to the payment of the stipulated or legal and unpaid interest, as the case
may be, and later, to the capital or principal.97 Respondent should then refund the excess amount
of interest that it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to
that paid by petitioners when they had no obligation to do so."98 Thus, the parties’ original
agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply
only to the first promissory note which expired on November 21, 1989 and was paid by
petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher
interest rates have been declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum.
However, the 12% interest shall apply only until June 30, 2013. Starting July1, 2013, the
prevailing rate of interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery
Frames99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.

Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment
thereon, when due, shall constitute default, and a penalty charge of 24% per annum based on the
defaulted principal amount shall be imposed. Petitioners claim that this penalty should be
excluded from the foreclosure amount or bid price because the Real Estate Mortgage and the
Supplement thereto did not specifically include it as part of the secured amount. Respondent

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justifies its inclusion in the secured amount, saying that the purpose of the penalty or a penal
clause is to ensure the performance of the obligation and substitute for damages and the payment
of interest in the event of non-compliance.100 Respondent adds that the imposition and collection
of a penalty is a normal banking practice, and the standard rate per annum for all commercial
banks, at the time, was 24%. Its inclusion as part of the secured amount in the mortgage
agreements is thus valid and necessary.

The Court sustains petitioners’ view that the penalty may not be included as part of the secured
amount. Having found the credit agreements and promissory notes to be tainted, we must accord
the same treatment to the mortgages. After all, "[a] mortgage and a note secured by it are deemed
parts of one transaction and are construed together."101 Being so tainted and having the attributes
of a contract of adhesion as the principal credit documents, we must construe the mortgage
contracts strictly, and against the party who drafted it. An examination of the mortgage
agreements reveals that nowhere is it stated that penalties are to be included in the secured
amount. Construing this silence strictly against the respondent, the Court can only conclude that
the parties did not intend to include the penalty allowed under PN 9707237 as part of the secured
amount. Given its resources, respondent could have – if it truly wanted to – conveniently
prepared and executed an amended mortgage agreement with the petitioners, thereby including
penalties in the amount to be secured by the encumbered properties. Yet it did not.

With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it
was not raised by the petitioners in their appeal; it was the respondent that improperly brought it
up in its appellee’s brief, when it should have interposed an appeal, since the trial court’s
Decision on this issue is adverse to it. It is an elementary principle in the subject of appeals that
an appellee who does not himself appeal cannot obtain from the appellate court any affirmative
relief other than those granted in the decision of the court below.

x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to
make counter assignments of error in ordinary actions, when the purpose is merely to defend
himself against an appeal in which errors are alleged to have been committed by the trial court
both in the appreciation of facts and in the interpretation of the law, in order to sustain the
judgment in his favor but not when his purpose is to seek modification or reversal of the
judgment, in which case it is necessary for him to have excepted to and appealed from the
judgment.102

Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no
authority to pass upon it at the instance of respondent. The ruling of the trial court in this respect
should remain undisturbed.

For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor
and to the petitioners who are entitled to a refund as a consequence of overpayment considering
that they paid more by way of interest charges than the 12% per annum103 herein allowed – the
case should be remanded to the lower court for proper accounting and computation, applying the
following procedure:

1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;

2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall
carry an interest rate of only 12% per annum.104 Thus, interest payment made in excess of
12% on the 2nd promissory note shall immediately be applied to the principal, and the
principal shall be accordingly reduced. The reduced principal shall then be subjected to
the 12%105 interest on the 3rd promissory note, and the excess over 12% interest payment
on the 3rd promissory note shall again be applied to the principal, which shall again be
reduced accordingly. The reduced principal shall then be subjected to the 12% interest on
the 4th promissory note, and the excess over12% interest payment on the 4th promissory
note shall again be applied to the principal, which shall again be reduced accordingly.
And so on and so forth;

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 3. After the above procedure is carried out, the trial court shall be able to conclude if
petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and
interest);

4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12%

per annum interest from October 28, 1997 until January 14, 1999, which is the date of the
auction sale;

5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty
from August 14, 1997 until January 14, 1999. But from this total penalty, the petitioners’
previous payment of penalties in the amount of ₱202,000.00made on January 27,
1998106 shall be DEDUCTED;

6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and
executory award of 1% attorney’s fees shall be ADDED;

7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.)
shall be DEDUCTED from the bid price of ₱4,324,172.96. The penalties (5.) are not
included because they are not included in the secured amount;

8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance (3.),
interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO THE
PETITIONERS;

9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;

10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that
petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and the award of
1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the
amount of the principal and interest;

11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award
of 1% attorney’s fees (6.), the excess shall be RETURNED to the petitioners, with legal
interest, under the principle of solutio indebiti;107

12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of
1% attorney’s fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL
FORECLOSURE AND SALE;

13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.)
exceed petitioners’ overpayment, then the excess shall be DEDUCTED from the bid
price of ₱4,324,172.96;

14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1%
attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;

15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208.
The outstanding penalties, if any, shall be collected by other means.

From the above, it will be seen that if, after proper accounting, it turns out that the
petitioners made payments exceeding what they actually owe by way of principal,
interest, and attorney’s fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the contrary, respondent must
refund the excess to petitioners.1âwphi1 In such case, the extrajudicial foreclosure and
sale of the properties shall be declared null and void for obvious lack of basis, the case
being one of solutio indebiti instead. If, on the other hand, it turns out that petitioners’
overpayments in interests do not exceed their total obligation, then the respondent may

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 consolidate its ownership over the properties, since the period for redemption has
expired. Its only obligation will be to return the difference between its bid price
(₱4,324,172.96) and petitioners’ total obligation outstanding – except penalties – after
applying the latter’s overpayments.

WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of
the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is
hereby rendered as follows:

1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes
are DECLARED NULL AND VOID, and such notes shall instead be subject to interest at
the rate of twelve percent (12%) per annum up to June 30, 2013, and starting July 1,
2013, six percent (6%) per annum until full satisfaction;

2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED
from the amounts secured by the real estate mortgages;

3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;

4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo,
Aklan for the computation of overpayments made by petitioners spouses Eduardo and
Lydia Silos to respondent Philippine National Bank, taking into consideration the
foregoing dispositions, and applying the procedure hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination as to the validity of

the extrajudicial foreclosure and sale, declaring the same null and void in case of
overpayment and ordering the release and return of Transfer Certificates of Title Nos. T-
14250 and TCT T-16208 to petitioners, or ordering the delivery to the petitioners of the
difference between the bid price and the total remaining obligation of petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is ENJOINED from

consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until all the
steps in the procedure above set forth have been taken and applied;

7. The reimbursement of the excess in the bid price of ₱377,505.99, which respondent
Philippine National Bank is ordered to reimburse petitioners, should be HELD IN
ABEYANCE until the true amount owing to or owed by the parties as against each other
is determined;

8. Considering that this case has been pending for such a long time and that further
proceedings, albeit uncomplicated, are required, the trial court is ORDERED to proceed
with dispatch.

SO ORDERED.

UNITED COCONUT PLANTERS BANK, G.R.

No. 159912
Petitioner, - versus -SPOUSES SAMUEL and
ODETTE BELUSO,

Respondents.

CHIC

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 This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which
seeks to annul the Court of Appeals Decision[1] dated 21 January 2003 and its
Resolution[2] dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals
Decision and Resolution affirmed in turn the Decision[3] dated 23 March 2000 and Order[4] dated
8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-
314, declaring void the interest rate provided in the promissory notes executed by the
respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United
Coconut Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a
Credit Agreement whereby the latter could avail from the former credit of up to a maximum
amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso
constituted, other than their promissory notes, a real estate mortgage over parcels of land
in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as additional
security for the obligation. The Credit Agreement was subsequently amended to increase the
amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the
term thereof to 28 February 1998.

The spouses Beluso availed themselves of the credit line under the following Promissory
Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 P 700,000

8314-96-00085-0 2 May 1996 30 August 1996 P 500,000

8314-96-000292-2 20 November 1996 20 March 1997 P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment
of the principal and interest of the latter two promissory notes were debited from the spouses
Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the
spouses Beluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the P2.35 Million credit line extended to them by
UCPB, the spouses Beluso executed two more promissory notes for a total of P350,000.00:

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 P 200,000

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 98-00002-4 2 January 1998 28 February 1998 P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissory
notes were never released or credited to their account and, thus, claimed that the principal
indebtedness was only P2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging from
18% to 34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum
of P763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty
on the obligations of the spouses Beluso, as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 P 200,000 31% 36% P 225,313.24

97-00366-6 P 700,000 30.17% 32.786% P 795,294.72

(102 days)
(7 days)

97-00368-2 P 1,300,000 28% 30.41% P 1,462,124.54

(102 days)
(2 days)

98-00002-4 P 150,000 33% 36% P 170,034.71

(102 days)

The spouses Beluso, however, failed to make any payment of the foregoing amounts.

On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation
of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply
therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by the spouses
Beluso to secure their credit line, which, by that time, already ballooned to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and
Damages against UCPB with the RTC of Makati City.

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 On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case
as follows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the

interest rate used by [UCPB] void and the foreclosure and Sheriffs Certificate
of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso] the
properties subject of the foreclosure; to pay [the spouses Beluso] the amount
of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [The spouses
Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.[5]

On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,[6] prompting
UCPB to appeal the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the
RTC Decision, to wit:

WHEREFORE, premises considered, the decision dated March 23,

2000 of the Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-
314 is hereby AFFIRMED subject to the modification that defendant-appellant
UCPB is not liable for attorneys fees or the costs of suit.[7]

On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration
for lack of merit. UCPB thus filed the present petition, submitting the following issues for our
resolution:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED
THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE
PROVISION ON INTEREST RATE AGREED UPON BETWEEN PETITIONER
AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED
THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS
INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER
THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY
THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)

III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED
THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE
FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO
AN ALLEGED INCORRECT COMPUTATION OF RESPONDENTS
INDEBTEDNESS

IV

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 WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED
THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER
LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO
ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS
ARE GUILTY OF FORUM SHOPPING[8]

Validity of the Interest Rates

The Court of Appeals held that the imposition of interest in the following provision found
in the promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor
were determined solely by petitioner UCPB:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS.

SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally
promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or order
at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of
______________ PESOS, (P_____), Philippine Currency, with interest thereon at
the rate indicative of DBD retail rate or as determined by the Branch Head.[9]

UCPB asserts that this is a reversible error, and claims that while the interest rate was not
numerically quantified in the face of the promissory notes, it was nonetheless categorically fixed,
at the time of execution thereof, at the rate indicative of the DBD retail rate. UCPB contends that
said provision must be read with another stipulation in the promissory notes subjecting to review
the interest rate as fixed:

The interest rate shall be subject to review and may be increased or

decreased by the LENDER considering among others the prevailing financial and
monetary conditions; or the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations; and/or
the resulting profitability to the LENDER after due consideration of all dealings
with the BORROWER.[10]

In this regard, UCPB avers that these are valid reference rates akin to a prevailing rate or
prime rate allowed by this Court in Polotan v. Court of Appeals.[11] Furthermore, UCPB argues
that even if the proviso as determined by the branch head is considered void, such a declaration
would not ipso facto render the connecting clause indicative of DBD retail rate void in view of
the separability clause of the Credit Agreement, which reads:

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 Section 9.08 Separability Clause. If any one or more of the provisions
contained in this AGREEMENT, or documents executed in connection herewith
shall be declared invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions hereof shall not in any way
be affected or impaired.[12]

According to UCPB, the imposition of the questioned interest rates did not infringe on
the principle of mutuality of contracts, because the spouses Beluso had the liberty to choose
whether or not to renew their credit line at the new interest rates pegged by petitioner.[13] UCPB
also claims that assuming there was any defect in the mutuality of the contract at the time of its
inception, such defect was cured by the subsequent conduct of the spouses Beluso in availing
themselves of the credit line from April 1996 to February 1998 without airing any protest with
respect to the interest rates imposed by UCPB. According to UCPB, therefore, the spouses
Beluso are in estoppel.[14]

We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

We applied this provision in Philippine National Bank v. Court of Appeals,[15] where we

held:

In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on their
essential equality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties,
is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that
the P1.8 million loan agreement between the PNB and the private respondent gave
the PNB a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker party's (the debtor)
participation being reduced to the alternative "to take it or leave it" (Qua vs. Law
Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against abuse and
imposition.

The provision stating that the interest shall be at the rate indicative of DBD retail rate or
as determined by the Branch Head is indeed dependent solely on the will of petitioner

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UCPB. Under such provision, petitioner UCPB has two choices on what the interest rate shall be:
(1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As
UCPB is given this choice, the rate should be categorically determinable in both choices. If
either of these two choices presents an opportunity for UCPB to fix the rate at will, the bank can
easily choose such an option, thus making the entire interest rate provision violative of the
principle of mutuality of contracts.

Not just one, but rather both, of these choices are dependent solely on the will of
UCPB. Clearly, a rate as determined by the Branch Head gives the latter unfettered discretion on
what the rate may be. The Branch Head may choose any rate he or she desires. As regards the
rate indicative of the DBD retail rate, the same cannot be considered as valid for being akin to a
prevailing rate or prime rate allowed by this Court in Polotan. The interest rate in Polotan reads:

The Cardholder agrees to pay interest per annum at 3% plus the prime rate of
Security Bank and Trust Company. x x x.[16]

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties
can easily determine the interest rate by applying simple arithmetic. On the other hand, the
provision in the case at bar does not specify any margin above or below the DBD retail
rate. UCPB can peg the interest at any percentage above or below the DBD retail rate, again
giving it unfettered discretion in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According
to said stipulation:

The interest rate shall be subject to review and may be increased or

decreased by the LENDER considering among others the prevailing financial and
monetary conditions; or the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations; and/or
the resulting profitability to the LENDER after due consideration of all dealings
with the BORROWER.[17]

It should be pointed out that the authority to review the interest rate was given UCPB alone as
the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate
of interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case
of the interest rate provision, there is no fixed margin above or below these considerations.

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 In view of the foregoing, the Separability Clause cannot save either of the two options of
UCPB as to the interest to be imposed, as both options violate the principle of mutuality of
contracts.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a contract,

validity cannot be given to it by estoppel if it is prohibited by law or is against public policy.[18]

The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed later,
because they violate the Truth in Lending Act. Not disclosing the true finance charges in
connection with the extensions of credit is, furthermore, a form of deception which we cannot
countenance. It is against the policy of the State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the

State to protect its citizens from a lack of awareness of the true cost of credit to
the user by assuring a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy.[19]

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending
provisions are found in the promissory notes themselves, not in the credit line. In fixing the
interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to
itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined
by the Branch Head.

Error in Computation

UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates
imposed by UCPB, both failed to include in their computation of the outstanding obligation of
the spouses Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges
were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II
on Interest and other Bank Charges of the subject Credit Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in

Section 2.01 of this ARTICLE, any principal obligation of the CLIENT hereunder
which is not paid when due shall be subject to a penalty charge of one percent
(1%) of the amount of such obligation per month computed from due date until
the obligation is paid in full. If the bank accelerates teh (sic) payment of
availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall
be used on the total principal amount outstanding and unpaid computed from the
date of acceleration until the obligation is paid in full.[20]

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 Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity, I/We,

jointly and severally, agree to pay an additional sum equivalent to twenty-five
percent (25%) of the total due on the Note as attorneys fee, aside from the
expenses and costs of collection whether actually incurred or not, and a penalty
charge of one percent (1%) per month on the total amount due and unpaid from
date of default until fully paid.[21]

Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section
9.06 of the Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement of its
rights under this AGREEMENT, the Note(s), the collaterals and other related
documents, the BANK shall be entitled to recover attorneys fees equivalent to not
less than twenty-five percent (25%) of the total amounts due and outstanding
exclusive of costs and other expenses.[22]

Another alleged computational error pointed out by UCPB is the negation of the
Compounding Interest agreed upon by the parties under Section 2.02 of the Credit Agreement:

Section 2.02 Compounding Interest. Interest not paid when due shall form part of
the principal and shall be subject to the same interest rate as herein stipulated.[23]

and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and become part of the principal and
shall likewise bear interest at the same rate.[24]

UCPB lastly avers that the application of the spouses Belusos payments in the disputed
computation does not reflect the parties agreement. The RTC deducted the payment made by the
spouses Beluso amounting to P763,693.00 from the principal of P2,350,000.00. This was
allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties as
to the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and Motion on
Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties agreed that
the amount of P763,693.00 was applied to the interest and not to the principal, in accord with
Section 3.03, Article II of the Credit Agreement on Order of the Application of Payments, which
provides:

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 Section 3.03 Application of Payment. Payments made by the CLIENT
shall be applied in accordance with the following order of preference:

1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;

3. Penalty charges;

4. Past due interest;

5. Principal amortization/Payment in arrears;

6. Advance interest;

7. Outstanding balance; and

8. All other obligations of CLIENT to the BANK, if any.[25]

Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had
been erroneously excluded by the RTC and the Court of Appeals from the computation of the
total amount due and demandable from spouses Beluso.

The spouses Belusos defense as to all these issues is that the demand made by UCPB is
for a considerably bigger amount and, therefore, the demand should be considered void. There
being no valid demand, according to the spouses Beluso, there would be no default, and therefore
the interests and penalties would not commence to run. As it was likewise improper to foreclose
the mortgaged properties or file a case against the spouses Beluso, attorneys fees were not
warranted.

We agree with UCPB on this score. Default commences upon judicial or extrajudicial
demand.[26] The excess amount in such a demand does not nullify the demand itself, which is
valid with respect to the proper amount. A contrary ruling would put commercial transactions in
disarray, as validity of demands would be dependent on the exactness of the computations
thereof, which are too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso
are considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed, thus: There being no valid stipulation as to
interest, the legal rate of interest shall be charged.[27] It seems that the RTC inadvertently
overlooked its non-inclusion in its computation.

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 The spouses Beluso had even originally asked for the RTC to impose this legal rate of
interest in both the body and the prayer of its petition with the RTC:

12. Since the provision on the fixing of the rate of interest by the sole will
of the respondent Bank is null and void, only the legal rate of interest which is
12% per annum can be legally charged and imposed by the bank, which would
amount to only about P599,000.00 since 1996 up to August 31, 1998.

WHEREFORE, in view of the foregoing, petiitoners pray for judgment or

order:

2. By way of example for the public good against the Banks taking unfair
advantage of the weaker party to their contract, declaring the legal rate of 12% per
annum, as the imposable rate of interest up to February 28, 1999 on the loan of
2.350 million.[28]

All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay
a 12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its
computation, however, the spouses Beluso merely defended in the appellate courts this non-
inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12%
legal interest in favor of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the compounding of

interest. The provisions in the Credit Agreement and in the promissory notes providing for the
compounding of interest were neither nullified by the RTC or the Court of Appeals, nor assailed
by the spouses Beluso in their petition with the RTC. The compounding of interests has
furthermore been declared by this Court to be legal. We have held in Tan v. Court of
Appeals,[29] that:

Without prejudice to the provisions of Article 2212, interest due and

unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added principal,
shall earn new interest.

As regards the imposition of penalties, however, although we are likewise upholding the
imposition thereof in the contract, we find the rate iniquitous. Like in the case of grossly
excessive interests, the penalty stipulated in the contract may also be reduced by the courts if it is
iniquitous or unconscionable.[30]

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous
considering the fact that this penalty is already over and above the compounded interest likewise
imposed in the contract. If a 36% interest in itself has been declared unconscionable by this

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Court,[31] what more a 30.41% to 36% penalty, over and above the payment of compounded
interest?UCPB itself must have realized this, as it gave us a sample computation of the spouses
Belusos obligation if both the interest and the penalty charge are reduced to 12%.

As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if
there had been no demand. Filing a case in court is the judicial demand referred to in Article
1169[32]of the Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses
Beluso were forced to litigate the issue on the illegality of the interest rate provision of the
promissory notes. The award of attorneys fees, it must be recalled, falls under the sound
discretion of the court.[33] Since both parties were forced to litigate to protect their respective
rights, and both are entitled to the award of attorneys fees from the other, practical reasons
dictate that we set off or compensate both parties liabilities for attorneys fees. Therefore, instead
of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award
of attorneys fees to the spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a compounded legal
interest of 12% per annum and a penalty charge of 12% per annum. We also hold that, instead of
awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of
attorneys fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had already been
consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses
Beluso failed to exercise their right of redemption which expired on 25 March 2000. The RTC,
however, annulled the foreclosure of mortgage based on an alleged incorrect computation of the
spouses Belusos indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present
in the case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates
of sale were mooted by the subsequent issuance of new certificates of title in the name of said
bank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a
collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree
No. 1529, otherwise known as the Property Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. A certificate of title

shall not be subject to collateral attack. It cannot be altered, modified or cancelled
except in a direct proceeding in accordance with law.

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 The spouses Beluso retort that since they had the right to refuse payment of an excessive
demand on their account, they cannot be said to be in default for refusing to pay the
same.Consequently, according to the spouses Beluso, the enforcement of such illegal and
overcharged demand through foreclosure of mortgage should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we
already found that a valid demand was made by UCPB upon the spouses Beluso, despite being
excessive, the spouses Beluso are considered in default with respect to the proper amount of their
obligation to UCPB and, thus, the property they mortgaged to secure such amounts may be
foreclosed.Consequently, proceeds of the foreclosure sale should be applied to the extent of the
amounts to which UCPB is rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are
present in this case. The grounds for the proper annulment of the foreclosure sale are the
following: (1) that there was fraud, collusion, accident, mutual mistake, breach of trust or
misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted; or
(3) that the price was inadequate and the inadequacy was so great as to shock the conscience of
the court.[34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs
alleged violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in
Lending Act which mandates the filing of an action to recover such penalty must be made under
the following circumstances:

Section 6. (a) Any creditor who in connection with any credit transaction
fails to disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the amount of P100
or in an amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is greater, except that such liability
shall not exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the date of the
occurrence of the violation, in any court of competent jurisdiction. x x
x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that [a]dmittedly the original
complaint did not explicitly allege a violation of the Truth in Lending Act and no action to
formally admit the amended petition [which expressly alleges violation of the Truth in Lending
Act] was made either by [respondents] spouses Beluso and the lower court. x x x.[35]

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 UCPB further claims that the action to recover the penalty for the violation of the Truth
in Lending Act had been barred by the one-year prescriptive period provided for in the
Act. UCPB asserts that per the records of the case, the latest of the subject promissory notes had
been executed on 2 January 1998, but the original petition of the spouses Beluso was filed before
the RTC on 9 February 1999, which was after the expiration of the period to file the same on 2
January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of
Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the Truth
in Lending Act and no action to formally admit the amended petition was made
either by [respondents] spouses Beluso and the lower court. In such transactions,
the debtor and the lending institutions do not deal on an equal footing and this law
was intended to protect the public from hidden or undisclosed charges on their
loan obligations, requiring a full disclosure thereof by the lender. We find that its
infringement may be inferred or implied from allegations that when [respondents]
spouses Beluso executed the promissory notes, the interest rate chargeable
thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to
disclose in full to [respondents] Spouses Beluso the charges applicable on their
loans.[36]

We agree with the Court of Appeals. The allegations in the complaint, much more than
the title thereof, are controlling. Other than that stated by the Court of Appeals, we find that the
allegation of violation of the Truth in Lending Act can also be inferred from the same allegation
in the complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent

bank has relied on the provision of their promissory note granting respondent
bank the power to unilaterally fix the interest rates, which rate was not determined
in the promissory note but was left solely to the will of the Branch Head of the
respondent Bank, x x x.[37]

The allegation that the promissory notes grant UCPB the power to unilaterally fix the
interest rates certainly also means that the promissory notes do not contain a clear statement in
writing of (6) the finance charge expressed in terms of pesos and centavos; and (7) the
percentage that the finance charge bears to the amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.[38] Furthermore, the spouses
Belusos prayer for such other reliefs just and equitable in the premises should be deemed to
include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.

UCPBs contention that this action to recover the penalty for the violation of the Truth in
Lending Act has already prescribed is likewise without merit. The penalty for the violation of the
act is P100 or an amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is greater, except that such liability shall not

88 | P a g e
exceed P2,000.00 on any credit transaction.[39] As this penalty depends on the finance charge
required of the borrower, the borrowers cause of action would only accrue when such finance
charge is required. In the case at bar, the date of the demand for payment of the finance charge
is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the
case on 9 February 1999 is therefore within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense,
cannot be inferred nor implied from the allegations made in the complaint.[40] Pertinent
provisions of the Act read:

Sec. 6. (a) Any creditor who in connection with any credit transaction
fails to disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the amount of P100
or in an amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is the greater, except that such
liability shall not exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the date of the
occurrence of the violation, in any court of competent jurisdiction. In any action
under this subsection in which any person is entitled to a recovery, the creditor
shall be liable for reasonable attorneys fees and court costs as determined by the
court.

(c) Any person who willfully violates any provision of this Act or
any regulation issued thereunder shall be fined by not less than P1,000 or more
than P5,000 or imprisonment for not less than 6 months, nor more than one year or
both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said
Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section
6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty
therefor is an amount of P100 or in an amount equal to twice the finance charge required by the
creditor in connection with such transaction, whichever is greater, except that the liability shall
not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be
instituted by the aggrieved private person separately and independently from the criminal case
for the same offense.

In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of
the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in
the promissory notes void, and (2) the action to declare the foreclosure void. This joinder is
allowed under Rule 2, Section 5 of the Rules of Court, which provides:

SEC. 5. Joinder of causes of action.A party may in one pleading assert, in

the alternative or otherwise, as many causes of action as he may have against an
opposing party, subject to the following conditions:

89 | P a g e
 (a) The party joining the causes of action shall comply with the rules on
joinder of parties;

(b) The joinder shall not include special civil actions or actions governed
by special rules;

(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional Trial
Court provided one of the causes of action falls within the jurisdiction of said
court and the venue lies therein; and

(d) Where the claims in all the causes of action are principally for recovery
of money, the aggregate amount claimed shall be the test of jurisdiction.

In attacking the RTCs disposition on the violation of the Truth in Lending Act since the
same was not alleged in the complaint, UCPB is actually asserting a violation of due
process. Indeed, due process mandates that a defendant should be sufficiently apprised of the
matters he or she would be defending himself or herself against. However, in the 1 July
1999 pre-trial brief filed by the spouses Beluso before the RTC, the claim for civil sanctions for
violation of the Truth in Lending Act was expressly alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in Lending Act
in not informing the borrower in writing before the execution of the Promissory
Notes of the interest rate expressed as a percentage of the total loan, the
respondent bank instead is liable to pay petitioners double the amount the bank is
charging petitioners by way of sanction for its violation.[41]

In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the
Truth in Lending Act provision to express the interest rate as a simple annual
percentage of the loan?[42]

These assertions are so clear and unequivocal that any attempt of UCPB to feign
ignorance of the assertion of this issue in this case as to prevent it from putting up a defense
thereto is plainly hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to
try and adjudicate the alleged violation of the Truth in Lending Act, considering that the present
action allegedly involved a single credit transaction as there was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under Section
6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare the
interests in the promissory notes void, and (2) the action to declare the foreclosure void. There

90 | P a g e
had been no question that the above actions belong to the jurisdiction of the RTC. Subsection (c)
of the above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:

(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional Trial
Court provided one of the causes of action falls within the jurisdiction of said
court and the venue lies therein.

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum,
since the former is merely a preparatory contract to the contract of loan or mutuum. Under such
credit line, the bank is merely obliged, for the considerations specified therefor, to lend to the
other party amounts not exceeding the limit provided. The credit transaction thus occurred not
when the credit line was opened, but rather when the credit line was availed of. In the case at bar,
the violation of the Truth in Lending Act allegedly occurred not when the parties executed the
Credit Agreement, where no interest rate was mentioned, but when the parties executed the
promissory notes, where the allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is

extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be

acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2)

(4) the charges, individually itemized, which are paid or to be paid by

such person in connection with the transaction but which are not
incident to the extension of credit;

(5) the total amount to be financed;

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 (6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such true cost by
hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and
the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to the contract, and to properly evaluate
their options in arriving at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed, the
interest rate provision therein does not sufficiently indicate with particularity the interest rate to
be applied to the loan covered by said promissory notes.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in
RTC, Makati City) on the ground that the spouses Beluso instituted another case (Civil Case No.
V-7227) before the RTC of Roxas City, involving the same parties and issues. UCPB claims that
while Civil Case No. V-7227 initially appears to be a different action, as it prayed for the
issuance of a temporary restraining order and/or injunction to stop foreclosure of spouses
Belusos properties, it poses issues which are similar to those of the present case.[43] To prove its
point, UCPB cited the spouses Belusos Amended Petition in Civil Case No. V-7227, which
contains similar allegations as those in the present case. The RTC of Makati denied UCPBs
Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue
with the Court of Appeals, and is raising the same issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of
Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of the foreclosure
before the true account of spouses Beluso is determined. On the other hand, the issue in Case No.
99-314 before the RTC of Makati City is the validity of the interest rate provision. The spouses
Beluso claim that Civil Case No. V-7227 has become moot because, before the RTC of Roxas
City could act on the restraining order, UCPB proceeded with the foreclosure and auction
sale. As the act sought to be restrained by Civil Case No. V-7227 has already been
accomplished, the spouses Beluso had to file a different action, that of Annulment of the
Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.

92 | P a g e
 Even if we assume for the sake of argument, however, that only one cause of action is
involved in the two civil actions, namely, the violation of the right of the spouses Beluso not to
have their property foreclosed for an amount they do not owe, the Rules of Court nevertheless
allows the filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of
Roxas City before the filing of Case No. 99-314 with the RTC of Makati City, since the venue of
litigation as provided for in the Credit Agreement is in Makati City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in the
following instances:

SEC. 5. Effect of dismissal.Subject to the right of appeal, an order

granting a motion to dismiss based on paragraphs (f), (h) and (i) of section 1
hereof shall bar the refiling of the same action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph (c) of
Section 1, not in paragraphs (f), (h) and (i):

SECTION 1. Grounds.Within the time for but before filing the answer to
the complaint or pleading asserting a claim, a motion to dismiss may be made on
any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending
party;

(b) That the court has no jurisdiction over the subject matter of the claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the
same cause;

(f) That the cause of action is barred by a prior judgment or by the

statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiffs pleading has
been paid, waived, abandoned, or otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable

under the provisions of the statute of frauds; and

(j) That a condition precedent for filing the claim has not been complied
with.[44] (Emphases supplied.)

93 | P a g e
 When an action is dismissed on the motion of the other party, it is only when the ground
for the dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be
refiled. As regards all the other grounds, the complainant is allowed to file same action, but
should take care that, this time, it is filed with the proper court or after the accomplishment of the
erstwhile absent condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed
by the spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not
yet been ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of
Makati. Hence, there were allegedly two pending actions between the same parties on the same
issue at the time of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of
Makati. This will still not change our findings. It is indeed the general rule that in cases where
there are two pending actions between the same parties on the same issue, it should be the later
case that should be dismissed. However, this rule is not absolute. According to this Court
in Allied Banking Corporation v. Court of Appeals[45]:

In these cases, it is evident that the first action was filed in anticipation of
the filing of the later action and the purpose is to preempt the later suit or provide
a basis for seeking the dismissal of the second action.

Even if this is not the purpose for the filing of the first action, it may
nevertheless be dismissed if the later action is the more appropriate vehicle
for the ventilation of the issues between the parties.Thus, in Ramos v.
Peralta, it was held:

[T]he rule on litis pendentia does not require that the later
case should yield to the earlier case. What is required merely is that
there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case
No. 4102 and the location of the property involved, no error was
committed by the lower court in deferring to the Bataan court's
jurisdiction.

Given, therefore, the pendency of two actions, the following are the
relevant considerations in determining which action should be dismissed: (1) the
date of filing, with preference generally given to the first action filed to be
retained; (2) whether the action sought to be dismissed was filed merely to
preempt the later action or to anticipate its filing and lay the basis for its
dismissal; and (3) whether the action is the appropriate vehicle for litigating the
issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action
for injunction against a foreclosure sale that has already been held, while Civil Case No. 99-314
before the RTC of Makati City includes an action for the annulment of said foreclosure, an
action certainly more proper in view of the execution of the foreclosure sale. The former case

94 | P a g e
was improperly filed in Roxas City, while the latter was filed in Makati City, the proper venue of
the action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-
314 is the more appropriate vehicle for litigating the issues between the parties, as compared to
Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not
dismissing Civil Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the
following MODIFICATIONS:

1. In addition to the sum of P2,350,000.00 as determined by the courts a quo,

respondent spouses Samuel and Odette Beluso are also liable for the following amounts:

a. Penalty of 12% per annum on the amount due[46] from the date of demand; and

b. Compounded legal interest of 12% per annum on the amount due[47] from date of demand;

2. The following amounts shall be deducted from the liability of the spouses Samuel and
Odette Beluso:

a. Payments made by the spouses in the amount of P763,692.00. These payments shall be
applied to the date of actual payment of the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of the time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be
deducted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to
the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the

amounts which the Regional Trial Court and the Court of Appeals ordered respondents to pay,
as modified in this Decision, shall be deducted from the proceeds of the foreclosure sale. SO
ORDERED.

DEVELOPMENT BANK OF PHILIPPINES,- versus -FELIPE P. ARCILLA, JR.,

FELIPE P. ARCILLA, JR., Petitioner - versus - PUNO, J., Chairman,AUSTRIA-

MARTINEZ, CALLEJO, SR.,TINGA, andDEVELOPMENT BANK OF CHICO-
NAZARIO, JJ.

THE PHILIPPINES,

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Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP) in
October 1981. About five or six months thereafter, he was assigned to the legal department, and
thereafter, decided to avail of a loan under the Individual Housing Project (IHP) of the
bank.[1] On September 12, 1983, DBP and Arcilla executed a Deed of Conditional Sale[2] over a
parcel of land, as well as the house to be constructed thereon, for the price of P160,000.00.
Arcilla borrowed the said amount from DBP for the purchase of the lot and the construction of a
residential building thereon. He obliged himself to pay the loan in 25 years, with a monthly
amortization of P1,417.91, with 9% interest per annum, to be deducted from his monthly
salary.[3]

DBP obliged itself to transfer the title of the property upon the payment of the loan,
including any increments thereof. It was also agreed therein that if Arcilla availed of optional
retirement, he could elect to continue paying the loan, provided that the loan/amount would be
converted into a regular real estate loan account with the prevailing interest assigned on real
estate loans, payable within the remaining term of the loan account.[4]

Arcilla was notified of the periodic release of his loan.[5] During the period of July 1984
to December 31, 1986, the monthly amortizations for the said account were deducted from his
monthly salary, for which he was issued receipts.[6]

The monthly amortization was increased to P1,468.92 in November 1984, and to P1,691.51
beginning January 1985. However, Arcilla opted to resign from the bank in December 1986.
Conformably with the Deed of Conditional Sale, the bank informed him, on June 11, 1987, that
the balance of his loan account with the bank had been converted to a regular housing loan, thus:

Amount converted Interest Rate Remaining Term Monthly

toPH Loan
Amortization

P 155,218.79 - 1 9% 22 yrs. & 6 mos P1,342.72

6,802.45 - 2 9% 21 yrs. &10 mos. 59.41

24,342.91 - 3 9% 22 yrs. 212.07

Plus: MRI at PC. 41/thousand P1,614.20

76.41

P186,364.15 Total P1,690.61[7] ========

On July 24, 1987, Arcilla signed three Promissory Notes[8] for the total amount of P186,364.15.
He was also obliged to pay service charge and interests, as follows:

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 a.1 On the amount advanced or balance thereof that remains unpaid for 30
days* or less:

i. Interest on advances at 7% p.a. over DBPs borrowing cost:

ii. No 2% service charge

iii. No 8% penalty charge

a.2 On the amount advanced or balance thereof that remains unpaid for more than
30 days:

i. Interest on the advance at 7% p.a. ] over DBPs borrowing cost; ]

ii. One time 2% service charge ]-- To be computed from

iii. Interest on the service charge ] the start of the 30-day

iv. 8% penalty charge on the balances ] period of the advances and service
charge.[9]

Arcilla also agreed to pay to DBP the following:

*Insurance Premiums - 30-day period to be computed from date ofadvances

Other Advances - 30-day period to be computed from date ofnotification

b. Taxes

b.1 One time service charge 2% of the amount advanced

b.2 Interest and penalty charge Interest 7% p.a. over borrowing cost

Penalty charge 8% p.a. if unpaidafter 30 days from date of advance

i. Interest of the advance at ]7% p.a. over DBPs ]borrowing costs; ]-- To be
computed from start

ii One time 2% service charge ] of 30-day period

iii Interest on the service charge]

iv. 8% penalty charge on the ] balances of the advance and ] service charge.
]

*Insurance Premiums - 30-day period to be computed from date of advances.

Other Advances - 30-day period to be computed from date of notification.

b. Taxes

b.1 One time service charge 2% of the amount advanced

b.2 Interest and penalty charge Interest 7% p.a. over borrowing cost Penalty charge 8% p.a. if
unpaid

97 | P a g e
after 30 days from date of advance

However, Arcilla also agreed to the reservation by the DBP of its right to increase (with
notice to him) the rate of interest on the loan, as well as all other fees and charges on loans and
advances pursuant to such policy as it may adopt from time to time during the period of the loan;
Provided, that the rate of interest on the loan shall be reduced by law or by the Monetary Board;
Provided, further, that the adjustment in the rate of interest shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest.[10]

Upon his request, DBP agreed to grant Arcilla an additional cash advance of P32,000.00.
Thereafter, on May 23, 1984, a Supplement to the Conditional Sale Agreement was executed in
which DBP and Arcilla agreed on the following terms of the loan:

Amount Interest Rate Per Annum Terms Amortization

P32,000.00 Nine (9%) per cent MRI 24 years P271.57 for P32,000.00 at P0.40/

1,000.00 12.80

P32,000.00 same to be consolidated with the (Est. P 284.37

original advance in accordance Amort.) =======

with Condition No. 8 hereof.[11]

The additional advance was, thus, consolidated to the outstanding balance of Arcillas original
advance, payable within the remaining term thereof at 9% per annum. However, he failed to pay
his loan account, advances, penalty charges and interests which, as of October 31, 1990,
amounted to P241,940.93.[12] DBP rescinded the Deed of Conditional Sale by notarial act on
November 27, 1990.[13] Nevertheless, it wrote Arcilla, on January 3, 1992, giving him until
October 24, 1992, within which to repurchase the property upon full payment of the current
appraisal or updated total, whichever is lesser; in case of failure to do so, the property would be
advertised for bidding.[14] DBP reiterated the said offer on October 7, 1992.[15] Arcilla failed to
respond. Consequently, the property was advertised for sale at public bidding on February 14,
1994.[16]

Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo,
Rizal, on February 21, 1994. He alleged that DBP failed to furnish him with the disclosure
statement required by Republic Act (R.A.) No. 3765 and Central Bank (CB) Circular No. 158
prior to the execution of the deed of conditional sale and the conversion of his loan account with
the bank into a regular housing loan account. Despite this, DBP immediately deducted the
account from his salary as early as 1984. Moreover, the bank applied its own formula and
imposed its usurious interests, penalties and charges on his loan account and advances. He
further alleged, thus:

98 | P a g e
 13. That when plaintiff could no longer cope-up with defendants illegal and
usurious impositions, the DBP unilaterally increased further the rate of interest,
without notice to the latter, and heaped-up usurious interests, penalties and
charges;

14. That to further bend the back of the plaintiff, defendant rescinded the subject
deed of conditional sale on 4 December 1990 without giving due notice to
plaintiff;

15. That much later, on 10 October 1993, plaintiff received a letter from
defendant dated 19 September 1993, informing plaintiff that the subject deed of
conditional sale was already rescinded on 4 December 1990 (xerox copy of the
same is hereto attached and made an integral part hereof as Annex C;[17]

In its answer to the complaint, the DBP alleged that it substantially complied with R.A. No. 3765
and CB Circular No. 158 because the details required in said statements were particularly
disclosed in the promissory notes, deed of conditional sale and the required notices sent to
Arcilla. In any event, its failure to comply strictly with R.A. No. 3765 did not affect the validity
and enforceability of the subject contracts or transactions. DBP interposed a counterclaim for the
possession of the property.

On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified the
notarial rescission of the deeds executed by the parties. The fallo of the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of the plaintiff and against the defendant. Defendant is hereby directed to
furnish the disclosure statement to the plaintiff within five (5) days upon receipt
hereof in the manner and form provided by R.A. No. 3765 and submit to this
Court for approval the total obligation of the plaintiff as of this date, within ten
(10) days from receipt of this order. The Notarial Rescission (Exh. 16) dated
November 27, 1990 is hereby declared null and void. Costs against the defendant.
SO ORDERED.[18]

DBP appealed the decision to the Court of Appeals (CA) wherein it made the following
assignment of errors:

4.1. The trial court erred in ruling that the provision of the details of the loan
without the issuance of a Disclosure Statement is not compliance with the Truth
in Lending Act;

4.2. The trial court erred in declaring the Notarial Rescission null and void; and

4.3. The trial court erred in denying DBPs counterclaims for recovery of
possession, back rentals and litigation expenses.[19]

99 | P a g e
On May 29, 2003, the CA rendered judgment setting aside and reversing the decision of the
RTC. In ordering the dismissal of the complaint, the appellate court ruled that DBP substantially
complied with R.A. No. 3765 and CB Circular No. 158. Arcilla filed a motion for
reconsideration of the decision. For its part, DBP filed a motion for partial reconsideration of the
decision, praying that Arcilla be ordered to vacate the property. However, the appellate court
denied both motions.

The parties filed separate petitions for review on certiorari with this Court. The first petition,
entitled Development Bank of the Philippines v. Court of Appeals, was docketed as G.R. No.
161397; the second petition, entitled Felipe Arcilla, Jr. v. Court of Appeals, was docketed as
G.R. No. 161426. The Court resolved to consolidate the two cases.

The issues raised in the two petitions are the following: a) whether or not petitioner DBP
complied with the disclosure requirement of R.A. No. 3765 and CB Circular No. 158, Series of
1978, in the execution of the deed of conditional sale, the supplemental deed of conditional sale,
as well as the promissory notes; and b) whether or not respondent Felipe Arcilla, Jr. is mandated
to vacate the property and pay rentals for his occupation thereof after the notarial rescission of
the deed of conditional sale was rescinded by notarial act, as well as the supplement executed by
DBP.

On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the
DBP, as the creditor bank, was mandated to furnish him with the requisite information in such
form prescribed by the Central Bank before the commutation of the loan transaction. He avers
that the disclosure of the details of the loan contained in the deed of conditional sale and the
supplement thereto, the promissory notes and release sheet, do
not constitute substantial compliance with the law and the CB Circular. He avers that the
required disclosure did not include the following:

[T]he percentage of Finance Charges to Total Amount Financed (Computed in

accordance with Sec. 2(i) of CB Circular 158; the Additional Charges in case
certain stipulations in the contract are not met by the debtor; Total Non-Finance
Charges; Total Finance Charges, Effective Interest Rate, etc. [20]

Arcilla further posits that the failure of DBP to comply with its obligation under R.A. No. 3765
and CB Circular No. 158 forecloses its right to rescind the transaction between them, and to
demand compliance of his obligation arising from said transaction. Moreover, the bank had no
right to deduct the monthly amortizations from his salary without first complying with the
mandate of R.A. No. 3765.

DBP, on the other hand, avers that all the information required by R.A. No. 3765 was
already contained in the loan transaction documents. It posits that even if it failed to comply
strictly with the disclosure requirement of R.A. No. 3765, nevertheless, under Section 6(b) of the
law, the validity and enforceability of any action or transaction is not affected. It asserts that
Arcilla was estopped from invoking R.A. No. 3765 because he failed to demand compliance with
R.A. No. 3765 from the bank before the consummation of the loan transaction, until the time his
complaint was filed with the trial court.

100 | P a g e
 In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not rendering
judgment on its counterclaim for the possession of the subject property, and the liability of
Arcilla for rentals while in the possession of the property after the notarial rescission of the deeds
of conditional sale. For his part, Arcilla (in G.R. No. 161426) insists that the respondent failed to
comply with its obligation under R.A. No. 3765; hence, the notarial rescission of the deed of
conditional sale and the supplement thereof was null and void. Until DBP complies with its
obligation, he is not obliged to comply with his.

The petition of Arcilla has no merit.

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the
bank, as creditor, is obliged to furnish a client with a clear statement, in writing, setting forth, to
the extent applicable and in accordance with the rules and regulations prescribed by the
Monetary Board of the Central Bank of the Philippines, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person
in connection with the transaction but which are not incident to the extension of
credit;

(5) the total amount to be financed;

(6) the finance charges expressed in terms of pesos and centavos; and

(7) the percentage that the finance charge bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765
shall be included in the contract covering the credit transaction or any other document to be
acknowledged and signed by the debtor, thus:

The contract covering the credit transaction, or any other document to be

acknowledged and signed by the debtor, shall indicate the above seven items of
information. In addition, the contract or document shall specify additional
charges, if any, which will be collected in case certain stipulations in the contract
are not met by the debtor.

Furthermore, the contract or document shall specify additional charges, if any, which will
be collected in case certain stipulations in the contract are not met by the debtor.[21]

101 | P a g e
 If the borrower is not duly informed of the data required by the law prior to the
consummation of the availment or drawdown, the lender will have no right to collect such charge
or increases thereof, even if stipulated in the promissory note.[22] However, such failure shall not
affect the validity or enforceability of any contract or transaction.[23]

In the present case, DBP failed to disclose the requisite information in the disclosure
statement form authorized by the Central Bank, but did so in the loan transaction documents
between it and Arcilla. There is no evidence on record that DBP sought to collect or collected
any interest, penalty or other charges, from Arcilla other than those disclosed in the said
deeds/documents.

The Court is convinced that Arcillas claim of not having been furnished the
data/information required by R.A. No. 3765 and CB Circular No. 158 was but an afterthought.
Despite the notarial rescission of the conditional sale in 1990, and DBPs subsequent repeated
offers to repurchase the property, the latter maintained his silence. Arcilla filed his complaint
only on February 21, 1994, or four years after the said notarial rescission. The Court finds and so
holds that the following findings and ratiocinations of the CA are correct:

After a careful perusal of the records, We find that the appellee had been
sufficiently informed of the terms and the requisite charges necessarily included
in the subject loan. It must be stressed that the Truth in Lending Act (R.A. No.
3765), was enacted primarily to protect its citizens from a lack of awareness of
the true cost of credit to the user
by using a full disclosure of such cost with a view of preventing the uninformed
use of credit to the detriment of the national economy (Emata vs. Intermediate
Appellate Court, 174, SCRA 464 [1989]; Sec. 2, R.A. No. 3765). Contrary to
appellees claim that he was not sufficiently informed of the details of the loan, the
records disclose that the required informations were readily available in the three
(3) promissory notes he executed. Precisely, the said promissory notes were
executed to apprise appellee of the remaining balance on his loan when the same
was converted into a regular housing loan. And on its face, the promissory notes
signed by no less than the appellee readily shows all the data required by the
Truth in Lending Act (R.A. No. 3765).

Apropos, We agree with the appellant that appellee, a lawyer, would not be so
gullible or negligent as to sign documents without knowing fully well the legal
implications and consequences of his actions, and that appellee was a former
employee of appellant. As such employee, he is as well presumed knowledgeable
with matters relating to appellants business and fully cognizant of the terms of the
loan he applied for, including the charges that had to be paid.

It might have been different if the borrower was, say, an ordinary

employee eager to buy his first house and is easily lured into accepting onerous
terms so long as the same is payable on installments. In such cases, the Court
would be disposed to be stricter in the application of the Truth in Lending Act,
insisting that the borrower be fully informed of what he is entering into. But in the
case at bar, considering appellees education and training, We must hold, in the
light of the evidence at hand, that he was duly informed of the necessary charges
and fully understood their implications and effects. Consequently, the trial courts
annulment of the rescission anchored on this ground was unjustified.[24]

102 | P a g e
 Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor
from 1990, a review of the records has shown that it failed to adduce evidence on the reasonable
amount of rentals for Arcillas occupancy of the property. Hence, the Court orders a remand of
the case to the court of origin, for the parties to adduce their respective evidence on the banks
counterclaim.

IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426

is DENIED for lack of merit. The petition in G.R. No. 161397 is
PARTIALLY GRANTED. The case is hereby REMANDED to the Regional Trial Court of
Antipolo, Rizal, Branch 73, for it to resolve the counterclaim of the Development Bank of the
Philippines for possession of the property, and for the reasonable rentals for Felipe P. Arcilla,
Jr.s occupancy thereof after the notarial rescission of the Deed of Conditional Sale in 1990.Costs
against petitioner Felipe P. Arcilla, Jr. SO ORDERED.NEW SAMPAGUITA BUILDERS
CONSTRUCTION, INC. (NSBCI) and Spouses EDUARDO R. DEE Present: and
ARCELITA M. DEE, Petitioners, Panganiban, J,Chairman,Sandoval-Gutierrez,

Corona,* and - versus - Carpio Morales, JJ PHILIPPINE NATIONAL BANK, Respondent.

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

__________________

* On leave.

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

The Case

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

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

The Facts

The facts are narrated by the CA as follows:

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

On August 15, 1989, Resolution No. 77 was approved by granting the request of
[Respondent] PNB thru its Board NSBCI for an P8 Million loan broken down into a
revolving credit line of P7.7M and an unadvised line of P0.3M for additional operating and
working capital[7] to mobilize its various construction projects, namely:

1) MWSS Watermain; 2) NEA-Liberty farm; 3) Olongapo City Pag-Asa Public Market;

4) Renovation of COA-NCR Buildings 1, 2 and 9; 5) Dupels, Inc., Extensive prawn farm

development project; 6) Banawe Hotel Phase II; 7) Clark Air Base -- Barracks and
Buildings; and 8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and
AngelesCity.

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

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

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

In addition, [petitioner] corporation also signed the Credit Agreement dated August 31, 1989
relating to the revolving credit line of P7.7 Million x x x and the Credit Agreement dated
September 5, 1989 to support the unadvised line of P300,000.00.

104 | P a g e
 On August 31, 1989, [petitioner-spouses] executed a Joint and Solidary Agreement (JSA) in
favor of [Respondent] PNB unconditionally and irrevocably binding themselves to be jointly
and severally liable with the borrower for the payment of all sums due and payable to the
Bank under the Credit Document.

Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory
notes.

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

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

In a meeting held on August 12, 1991, [Respondent] PNBs representative[,] Mr. Rolly
Cruzabra, was informed by [Petitioner] Eduardo Dee of his intention to remit to
[Respondent] PNB post-dated checks covering interests, penalties and part of the loan
principals of his due account.

On August 22, 1991, [Respondent] banks Crispin Carcamo wrote [Petitioner] Eduardo Dee[,]
informing him that [Petitioner] NSBCIs proposal [was] acceptable[,] provided the total
payment should be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as
principal, P3,056,058.03 as interests and penalties[,] and P53,678.93 for insurance[,] with the
issuance of post-dated checks to be dated not later than November 29, 1991.

On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager reiterating
his proposals for the settlement of [Petitioner] NSBCIs past due loan account amounting
to P7,019,231.33.

[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks
aggregating P1,111,306.67 in favor of [Respondent] PNB, viz:

Check No. Date Amount

03500087 Sept. 29, 1991 P277,826.70

03500088 Oct. 29, 1991 P277,826.70

03500089 Nov. 29, 1991 P277,826.70

105 | P a g e
03500090 Dec. 20, 1991 P277,826.57

Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September 29
and October 29, 1991 were dishonored by the drawee bank and returned due [to] a stop
payment order from [petitioners].

On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him
that unless the dishonored checks [were] made good, said PNB branch shall recall its
recommendation to the Head Office for the restructuring of the loan account and refer the
matter to its legal counsel for legal action.[] [Petitioners] did not heed [respondents] warning
and as a result[,] the PNB Dagupan Branch sent demand letters to [Petitioner] NSBCI at its
office address at 1611 ERDC Building, E. Rodriguez Sr. Avenue, Quezon City[,] asking it to
settle its past due loan account.

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

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

On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen,
Pangasinan foreclosed the real estate mortgage and sold at public auction the mortgaged
properties of [petitioner-spouses,] with [Respondent] PNB being declared the highest bidder
for the amount of P10,334,000.00.

On March 2, 1992, copies of the Sheriffs Certificate of Sale were sent by registered mail to
[petitioner] corporations address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City and [petitioner-spouses] address at 213 Wilson St., San Juan, Metro Manila.

On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their
address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing them
that the properties securing their loan account [had] been sold at public auction, that the
Sheriffs Certificate of Sale had been registered with the Registry of Deeds of Pangasinan on
March 13, 1992[,] and that a period of one (1) year therefrom [was] granted to them within
which to redeem their properties.

106 | P a g e
 [Petitioners] failed to redeem their properties within the one-year redemption period[,] and so
[Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to the
properties in its name. TCT Nos. 189935 to 189944 were later issued to [Petitioner] PNB by
the Registry of Deeds of Pangasinan.

On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of the
sale conducted on February 26, 1992 were not sufficient to cover its total claim amounting
to P12,506,476.43[,] and thus demanded from the latter the deficiency of P2,172,476.43 plus
interest and other charges[,] until the amount [was] fully paid.

[Petitioners] refused to pay the above deficiency claim which compelled [Respondent] PNB
to institute the instant [C]omplaint for the collection of its deficiency claim.

Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI the
benefits under the program, the court a quo ruled in favor of [petitioners] in its Decision
dated December 28, 1995, the fallo of which reads:

In view of the foregoing, the Court believes and so holds that the [respondent] has no cause
of action against the [petitioners].WHEREFORE, the case is hereby DISMISSED, without
costs.[9]

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

Ruling of the Court of Appeals

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

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

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

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

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

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

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

Finally, the appellate court concluded that the extrajudicial foreclosure proceedings and
auction sale were valid for the following reasons: (1) personal notice to the mortgagors, although
unnecessary, was actually made; (2) the notice of extrajudicial sale was duly published and
posted; (3) the extrajudicial sale was conducted through the deputy sheriff, under the direction of
the clerk of court who was concurrently the ex-oficio provincial sheriff and acting as agent of
respondent; (4) the sale was conducted within the province where the mortgaged properties were
located; and (5) such sale was not shown to have been attended by fraud.

Hence this Petition.[10]

Issues

Petitioners submit the following issues for our consideration.

108 | P a g e
 Whether or not the Honorable Court of Appeals correctly ruled that petitioners did
not avail of PNBs debt relief package and were not entitled thereto as a matter of
right.

II

Whether or not petitioners have adduced sufficient and convincing evidence to

overthrow the presumption of regularity and correctness of the PNB entries in the
subsidiary ledgers of the loan accounts of petitioners.

III

Whether or not the Honorable Court of Appeals seriously erred in not holding that
the Respondent PNB bloated the loan account of petitioner corporation by
imposing interests, penalties and attorneys fees without legal, valid and equitable
justification.

IV

Whether or not the auction price at which the mortgaged properties was sold was
disproportionate to their actual fair mortgage value.

Whether or not Respondent PNB is not entitled to recover the deficiency in the
mortgage account not realized in the foreclosure sale, considering that:

A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation which
has a separate personality from the [petitioner-spouses].

B. The joint and solidary agreement executed by [petitioner- spouses] are contracts of
adhesion not binding on them;

C. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses] because
they were compelled to execute the said Resolution[;] otherwise[,] Respondent PNB would
not grant petitioner corporation the loan;

D. The Respondent PNB had already in its possession the properties of the [petitioner-
spouses] which served as a collateral to the loan obligation of petitioner corporation[,] and to
still allow Respondent PNB to recover the deficiency claim amounting to a very substantial
amount of P2.1 million would constitute unjust enrichment on the part of Respondent PNB.

VI

Whether or not the extrajudicial foreclosure proceedings and auction sale,

including all subsequent proceedings[,] are null and void for non-compliance with
jurisdictional and other mandatory requirements; whether or not the petition for
extrajudicial foreclosure of mortgage was filed prematurely; and whether or not
the finding of fraud by the trial court is amply supported by the evidence on
record.[11]

The foregoing may be summed up into two main issues: first, whether the loan accounts are
bloated; and second, whether the extrajudicial foreclosure and subsequent claim for deficiency
are valid and proper.

The Courts Ruling

109 | P a g e
 The Petition is partly meritorious.

First Main Issue:

Bloated Loan Accounts

At the outset, it must be stressed that only questions of law[12] may be raised in a petition for
review on certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact cannot be
the subject of this mode of appeal,[13] for [t]he Supreme Court is not a trier of facts.[14] As
exceptions to this rule, however, factual findings of the CA may be reviewed on
appeal[15] when, inter alia, the factual inferences are manifestly mistaken;[16] the judgment is
based on a misapprehension of facts;[17] or the CA manifestly overlooked certain relevant and
undisputed facts that, if properly considered, would justify a different legal conclusion. [18] In the
present case, these exceptions exist in various instances, thus prompting us to take cognizance of
factual issues and to decide upon them in the interest of justice and in the exercise of our sound
discretion.[19]

Indeed, Petitioner NSBCIs loan accounts with respondent appear to be bloated with some
iniquitous imposition of interests, penalties, other charges and attorneys fees. To demonstrate
this point, the Court shall take up one by one the promissory notes, the credit agreements and the
disclosure statements.

Increases in Interest Baseless

Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be
charged: 19.5 percent in the first, and 21.5 percent in the second and again in the third.However,
a uniform clause therein permitted respondent to increase the rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future x x x,[20] without even
giving prior notice to petitioners. The Court holds that petitioners accessory duty to pay
interest[21] did not give respondent unrestrained freedom to charge any rate other than that which
was agreed upon. No interest shall be due, unless expressly stipulated in writing.[22] It would be
the zenith of farcicality to specify and agree upon rates that could be subsequently upgraded at
whim by only one party to the agreement.

The unilateral determination and imposition[23] of increased rates is violative of the principle of
mutuality of contracts ordained in Article 1308[24] of the Civil Code.[25] One-sided impositions do
not have the force of law between the parties, because such impositions are not based on the
parties essential equality.

Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the
value of money on long-term contracts,[27] giving respondent an unbridled right to adjust the
interest independently and upwardly would completely take away from petitioners the right to
assent to an important modification in their agreement[28] and would also negate the element of
mutuality in their contracts. The clause cited earlier made the fulfillment of the contracts
dependent exclusively upon the uncontrolled will[29] of respondent and was therefore
void. Besides, the pro forma promissory notes have the character of a contract
dadhsion,[30] where the parties do not bargain on equal footing, the weaker partys [the debtors]
participation being reduced to the alternative to take it or leave it.[31]

110 | P a g e
While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No.
905,[33] nothing in the said Circular grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.[34] In
fact, we have declared nearly ten years ago that neither this Circular nor PD 1684, which further
amended the Usury Law,
[35]
authorized either party to unilaterally raise the interest rate without the others consent.

Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that
borrowing signified a capital transfusion from lending institutions to businesses and industries
and was done for the purpose of stimulating their growth; yet respondents continued unilateral
and lopsided policy[36] of increasing interest rates without the prior assent[37] of the borrower not
only defeats this purpose, but also deviates from this pronouncement. Although such increases
are not usurious, since the Usury Law is now legally inexistent[38] -- the interest ranging from 26
percent to 35 percent in the statements of account[39] -- must be equitably reduced for being
iniquitous, unconscionable and exorbitant.[40] Rates found to be
iniquitous or unconscionable are void, as if it there were no express contract thereon.[41] Above
all, it is undoubtedly against public policy to charge excessively for the use of money.[42]

It cannot be argued that assent to the increases can be implied either from the June 18, 1991
request of petitioners for loan restructuring or from their lack of response to the statements of
account sent by respondent. Such request does not indicate any agreement to an interest increase;
there can be no implied waiver of a right when there is no clear, unequivocal and decisive act
showing such purpose.[43] Besides, the statements were not letters of information sent to secure
their conformity; and even if we were to presume these as an offer, there was no acceptance. No
one receiving a proposal to modify a loan contract, especially interest -- a vital component -- is
obliged to answer the proposal.[44]

Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for the
automatic conversion of the portion that remained unpaid after 730 days -- or two years from
date of original release -- into a medium-term loan, subject to the applicable interest rate to be
applied from the dates of original release.[45]

In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained unpaid as of
October 27, 1989, December 1989 and January 4, 1990 -- their respective due dates -- should
have been automatically converted by respondent into medium-term loans on June 30, 1991,
September 2, 1991, and September 7, 1991, respectively. And on this unpaid amount should
have been imposed the same interest rate charged by respondent on other medium-term loans;
and the rate applied from June 29, 1989, September 1, 1989 and September 6, 1989 -- their
respective original release -- until paid. But these steps were not taken. Aside from sending
demand letters, respondent did not at all exercise its option to enforce collection as of these
Notes due dates. Neither did it renew or extend the account.

In these three Promissory Notes, evidently, no complaint for collection was filed with the
courts. It was not until January 30, 1992 that a Petition for Sale of the mortgaged properties was
filed -- with the provincial sheriff, instead.[49] Moreover, respondent did not supply the interest
rate to be charged on medium-term loans granted by automatic conversion. Because of this

111 | P a g e
deficiency, we shall use the legal rate of 12 percent per annum on loans and forbearance of
money, as provided for by CB Circular 416.[50]

Credit Agreements. Aside from the promissory notes, another main document involved in the
principal obligation is the set of credit agreements executed and their annexes.

The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted in evidence,
and even referred to in the first Promissory Note -- cannot be given weight.

First, it was not signed by respondent through its branch manager.[52] Apparently it was
surreptitiously acknowledged before respondents counsel, who unflinchingly declared that it had
been signed by the parties on every page, although respondents signature does not appear
thereon.[53]

Second, it was objected to by petitioners,[54] contrary to the trial courts findings.[55] However, it
was not the Agreement, but the revolving credit line[56] of P5,000,000, that expired one year from
the Agreements date of implementation.[57]

Third, there was no attached annex that contained the General Conditions.[58] Even the
Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions could be added
to the Agreement other than those already stated therein.

Since the first Credit Agreement cannot be given weight, the interest rate on the first availment
pegged at 3 percent over and above respondents prime rate[60] on the date of such
availment[61] has no bearing at all on the loan. After the first Notes due date, the rate
of 19 percent agreed upon should continue to be applied on the availment, until its automatic
conversion to a medium-term loan.

The second Credit Agreement[62] dated August 31, 1989, provided for interest -- respondents
prime rate, plus the applicable spread[63] in effect as of the date of each availment,[64] on a
revolving credit line of P7,700,000[65] -- but did not state any provision on its increase or
decrease.[66] Consequently, petitioners could not be made to bear interest more than such prime
rate plus spread. The Court gives weight to this second Credit Agreement for the following
reasons.

First, this document submitted by respondent was admitted by petitioners.[67] Again,

contrary to their assertion, it was not the Agreement -- but the credit line -- that expired one year
from the Agreements date of implementation.[68] Thus, the terms and conditions continued to
apply, even if drawdowns could no longer be made.

Second, there was no 7-page annex[69] offered in evidence that contained the General
Conditions,[70] notwithstanding the Acknowledgment of its existence by respondents

112 | P a g e
counsel. Thus, no terms or conditions could be appended to the Agreement other than those
specified therein.

Third, the 12-page General Conditions[71] offered and admitted in evidence had no probative
value. There was no reference to it in the Acknowledgment of the Agreement; neither was
respondents signature on any of the pages thereof. Thus, the General Conditions stipulations on
interest adjustment,[72] whether on a fixed or a floating scheme, had no effect whatsoever on the
Agreement. Contrary to the trial courts findings,[73] the General Condition were correctly
objected to by petitioners.[74] The rate of 21.5 percent agreed upon in the second Note thus
continued to apply to the second availment, until its automatic conversion into a medium-term
loan.

The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of interest as
that in the second Agreement. This rate was to be applied to availments of an unadvised line
of P300,000. Since there was no mention in the third Agreement, either, of any stipulation on
increases or decreases[76] in interest, there would be no basis for imposing amounts higher than
the prime rate plus spread. Again, the 21.5 percent rate agreed upon would continue to apply to
the third availment indicated in the third Note, until such amount was automatically converted
into a medium-term loan.

The Court also finds that, first, although this document was admitted by petitioners,[77] it was the
credit line that expired one year from the implementation of the Agreement.[78]The terms and
conditions therein continued to apply, even if availments could no longer be drawn after expiry.

Second, there was again no 7-page annex[79] offered that contained the General
Conditions,[80] regardless of the Acknowledgment by the same respondents counsel affirming its
existence. Thus, the terms and conditions in this Agreement relating to interest cannot be
expanded beyond that which was already laid down by the parties.

Disclosure Statements. In the present case, the Disclosure Statements[81] furnished by respondent
set forth the same interest rates as those respectively indicated in the Promissory
Notes. Although no method of computation was provided showing how such rates were arrived
at, we will nevertheless take up the Statements seriatim in order
to determine the applicable rates clearly.

As to the first Disclosure Statement on Loan/Credit Transaction[82] dated June 13, 1989, we hold
that the 19.5 percent effective interest rate per annum[83] would indeed apply to the first
availment or drawdown evidenced by the first Promissory Note. Not only was this Statement
issued prior to the consummation of such availment or drawdown, but the rate shown therein can
also be considered equivalent to 3 percent over and above respondents prime rate in
effect. Besides, respondent mentioned no other rate that it considered to be the prime rate
chargeable to petitioners. Even if we disregarded the related Credit Agreement, we assume that
this private transaction between the parties was fair and regular,[84] and that the ordinary course
of business was followed.[85]

113 | P a g e
As to the second Disclosure Statement on Loan/Credit Transaction[86] dated September 2, 1989,
we hold that the 21.5 percent effective interest rate per annum[87] would definitely apply to the
second availment or drawdown evidenced by the second Promissory Note. Incidentally, this
Statement was issued only after the consummation of its related availment or drawdown, yet
such rate can be deemed equivalent to the prime rate plus spread, as stipulated in the
corresponding Credit Agreement. Again, we presume that this private transaction was fair and
regular, and that the ordinary course of business was followed. That the related Promissory Note
was pre-signed would also bolster petitioners claim although, under cross-examination Efren
Pozon -- Assistant Department Manager I[88] of PNB, Dagupan Branch -- testified that the
Disclosure Statements were the basis for preparing the Notes.[89]

As to the third Disclosure Statement on Loan/Credit Transaction[90] dated September 6, 1989, we

hold that the same 21.5 percent effective interest rate per annum[91] would apply to the third
availment or drawdown evidenced by the third Promissory Note. This Statement was made
available to petitioner-spouses, only after the related Credit Agreement had been executed, but
simultaneously with the consummation of the Statements related availment or
drawdown. Nonetheless, the rate herein should still be regarded as equivalent to the prime rate
plus spread, under the similar presumption that this private transaction was fair and regular and
that the ordinary course of business was followed.

In sum, the three disclosure statements, as well as the two credit agreements considered by this
Court, did not provide for any increase in the specified interest rates. Thus, none would now be
permitted. When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB,
Dagupan Branch, even testified that the bases for computing such rates were those sent by the
head office from time to time, and not those indicated in the notes or disclosure statements.[92]

In addition to the preceding discussion, it is then useless to labor the point that the
increase in rates violates the impairment[93] clause of the Constitution,[94] because the sole
purpose of this provision is to safeguard the integrity of valid contractual agreements against
unwarranted interference by the State[95] in the form of laws. Private individuals intrusions on
interest rates is governed by statutory enactments like the Civil Code.

Penalty, or Increases Thereof, Unjustified

No penalty charges or increases thereof appear either in the Disclosure Statements[96] or in any of
the clauses in the second and the third Credit Agreements[97] earlier discussed.While a standard
penalty charge of 6 percent per annum has been imposed on the amounts stated in all three
Promissory Notes still remaining unpaid or unrenewed when they fell due,[98] there is no
stipulation therein that would justify any increase in that charges. The effect, therefore, when the
borrower is not clearly informed of the Disclosure Statements -- prior to the consummation of
the availment or drawdown -- is that the lender will have no right to collect upon such
charge[99] or increases thereof, even if stipulated in the Notes. The time is now ripe to give teeth
to the often ignored forty-one-year old Truth in Lending Act[100] and thus transform it from a
snivelling paper tiger to a growling financial watchdog of hapless borrowers.

114 | P a g e
Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per
se, any apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed
against respondent who caused it.[101] Worse, in the statements of account, the penalty rate has
again been unilaterally increased by respondent to 36 percent without petitioners consent. As a
result of its move, such
liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch [102] for
being iniquitous or unconscionable.[103]

Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution of
the transaction, it is not a contract that can be modified by the related Promissory Note, but a
mere statement in writing that reflects the true and effective cost of loans from
respondent. Novation can never be presumed,[104] and the animus novandimust appear by express
agreement of the parties, or by their acts that are too clear and unequivocal to be
mistaken.[105] To allow novation will surely flout the policy of the State to protect
its citizens from a lack of awareness of the true cost of credit.[106]

With greater reason should such penalty charges be indicated in the second and third
Disclosure Statements, yet none can be found therein. While the charges are issued after the
respective availment or drawdown, the disclosure statements are given simultaneously
therewith. Obviously, novation still does not apply.

Other Charges Unwarranted

In like manner, the other charges imposed by respondent are not warranted. No particular values
or rates of service charge are indicated in the Promissory Notes or Credit Agreements, and no
total value or even the breakdown figures of such non-finance charge are specified in the
Disclosure Statements. Moreover, the provision in the Mortgage that requires the payment of
insurance and other charges is neither made part of nor reflected in such Notes, Agreements, or
Statements.[107]

Attorneys Fees Equitably Reduced

We affirm the equitable reduction in attorneys fees.[108] These are not an integral part of the cost
of borrowing, but arise only when collecting upon the Notes becomes necessary.The purpose of
these fees is not to give respondent a larger compensation for the loan than the law already
allows, but to protect it against any future loss or damage by being compelled to retain counsel
in-house or not -- to institute judicial proceedings for the collection of its credit.[109] Courts have
has the power[110] to determine their reasonableness[111] based on quantum meruit[112] and to
reduce[113] the amount thereof if excessive.[114]

In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no

longer holds water, inasmuch as Act 496[115] has repealed the Spanish Notarial Law.[116] In the
same vein, their engagement of their counsel in another capacity concurrent with the practice of
law is not prohibited, so long as the roles being assumed by such counsel is made clear to the
client.[117] The only reason for this clarification requirement is that certain ethical considerations
operative in one profession may not be so in the other.[118]

Debt Relief Package Not Availed Of

115 | P a g e
We also affirm the CAs disquisition on the debt relief package (DRP).

Respondents Circular is not an outright grant of assistance or extension of payment,[119] but a

mere offer subject to specific terms and conditions.

Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected
by the economic slowdown in the peripheral areas of the then US military bases. Its allegations,
devoid of any verification, cannot lead to a supportable conclusion. In fact, for short-term loans,
there is still a need to conduct a thorough review of the borrowers repayment possibilities.[120]

Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the latest loan value
of hard collaterals,[122] to be eligible for the package. Additional accommodations on an
unsecured basis may be granted only when regular payment amortizations have been established,
or when the merits of the credit application would so justify.[123]

The branch managers recommendation to restructure or extend a total outstanding loan

not exceeding P8,000,000 is not final, but subject to the approval of respondents Branches
Department Credit Committee, chaired by its executive vice-president.[124] Aside from being
further conditioned on other pertinent policies of respondent,[125] such approval nevertheless
needs to be reported to its Board of Directors for confirmation.[126] In fact, under the General
Banking Law of 2000,[127] banks shall grant loans and other credit accommodations only in
amounts and for periods of time essential to the effective completion of operations to be
financed, consistent with safe and sound banking practices.[128] The Monetary Board -- then and
now -- still prescribes, by regulation, the conditions and limitations under which banks may grant
extensions or renewals of their loans and other credit accommodations.[129]

Entries in Subsidiary Ledgers

Regular and Correct

Contrary to petitioners assertions, the subsidiary ledgers of respondent properly reflected all
entries pertaining to Petitioner NSBCIs loan accounts. In accordance with the Generally
Accepted Accounting Principles (GAAP) for the Banking Industry,[130] all interests accrued or
earned on such loans, except those that were restructured and non-accruing,[131] have been
periodically taken into income.[132] Without a doubt, the subsidiary ledgers in a manual
accounting system are mere private documents[133] that support and are controlled by the general
ledger.[134] Such ledgers are neither foolproof nor standard in format, but are periodically subject
to audit. Besides, we go by the presumption that the recording of private transactions has been
fair and regular, and that the ordinary course of business has been followed.

Second Main Issue:

Extrajudicial Foreclosure Valid, But

Deficiency Claims Excessive

116 | P a g e
Respondent aptly exercised its option to foreclose the mortgage,[135] after petitioners had failed to
pay all the Notes in full when they fell due.[136] The extrajudicial sale and subsequent
proceedings are therefore valid, but the alleged deficiency claim cannot be recovered.

Auction Price Adequate

In the accessory contract[137] of real mortgage,[138] in which immovable property or real rights
thereto are used as security[139] for the fulfillment of the principal loan obligation,[140] the bid
price may be lower than the propertys fair market value.[141] In fact, the loan value itself is only
70 percent of the appraised value.[142] As correctly emphasized by the appellate court, a low bid
price will make it
[143] [144]
easier for the owner to effect redemption by subsequently reacquiring the property or by
selling the right to redeem and thus recover alleged losses. Besides, the public auction sale has
been regularly and fairly conducted,[145] there has been ample authority to effect the sale,[146] and
the Certificates of Title can be relied upon. No personal notice[147] is even required,[148] because
an extrajudicial foreclosure is an action in rem, requiring only notice by publication and posting,
in order to bind parties interested in the foreclosed property.[149]

As no redemption[150] was exercised within one year after the date of registration of the
Certificate of Sale with the Registry of Deeds,[151] respondent -- being the highest bidder -- has
the right to a writ of possession, the final process that will consummate the extrajudicial
foreclosure. On the other hand, petitioner-spouses, who are mortgagors herein, shall lose all their
rights to the property.[152]

No Deficiency Claim Receivable

After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is
extinguished. Although the mortgagors, being third persons, are not liable for any deficiency in
the absence of a contrary stipulation,[153] the action for recovery of such amount -- being clearly
sureties to the principal obligation -- may still be directed against them.[154]However, respondent
may impose only the stipulated interest rates of 19.5 percent and 21.5 percent on the respective
availments -- subject to the 12 percent legal rate revision upon automatic conversion into
medium-term loans -- plus 1 percent attorneys fees, without additional charges on penalty,
insurance or any increases thereof.

Accordingly, the excessive interest rates in the Statements of Account sent to petitioners
are reduced to 19.5 percent and 21.5 percent, as stipulated in the Promissory Notes; upon loan
conversion, these rates are further reduced to the legal rate of 12 percent. Payments made by
petitioners are pro-rated, the charges on penalty and insurance eliminated, and the resulting total
unpaid principal and interest of P6,582,077.70 as of the date of public auction is then subjected
to 1 percent attorneys fees. The total outstanding obligation is compared to the bid price. On the
basis of these rates and the comparison made, the deficiency claim receivable amounting
to P2,172,476.43 in fact vanishes. Instead, there is an overpayment by more than P3 million, as
shown in the following Schedules:

SCHEDULE 1: PN (1) drawdown amount on 6/29/89

117 | P a g e
 Less: Interest deducted in advance (per 6/13/89 Disclosure
Statement)

Net proceeds

Principal

Add:

Interest at 19.5% p.a.

10/28/89-12/31/89 (5,000,000 x 19.5% x [65/365]) 1

1/1/90-1/5/90 (5,000,000 x 19.5% x

[5/365])

Amount due as of 1/5/90

Less: Payment on 1/5/90 (pro-rated upon interest)

Balance

Add:

Interest at 19.5% p.a.

1/6/90-3/30/90 ([5,000,000-356,821.30] x 19.5% x

[84/365])

Amount due as of 3/30/90

Less: Payment on 3/30/90 (pro-rated upon interest)

Balance

Add:

Interest at 19.5% p.a.

3/31/90-5/31/90 ([5,000,000-356,821.30] x 19.5% x

[62/365])

Amount due as of 5/31/90

Less: Payment on 5/31/90 (pro-rated upon interest)

Balance

Add:

Interest at 19.5% p.a.

6/1/90-6/29/90 ([5,000,000-(356,821.30+821.33)] x 19.5% x [29/365])

Amount due as of 6/29/90

Less: Payment on 6/29/90 (pro-rated upon interest)

Balance

118 | P a g e
 Add:

Interest at 19.5% p.a.

6/30/90-12/31/90 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x [185/365]) 3

1/1/91-6/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x

[180/365]) 3

Interest at 12% p.a. upon automatic

conversion

6/30/91-8/8/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x

[40/365])

Amount due as of 8/8/91

Less: Payment on 8/8/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

8/9/91-8/15/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x

[7/365])

Amount due as of 8/15/91

Less: Payment on 8/15/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

8/16/91-11/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [106/365])

Amount due as of 11/29/91

Less: Payment on 11/29/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

11/30/91-12/20/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [21/365])

Amount due as of 12/20/91

Less: Payment on 12/20/91 (pro-rated upon

119 | P a g e
 interest)

Balance

Add:

Interest at 12% p.a.

12/21/91-12/31/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [11/365])

1/1/92-2/26/92 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x

[57/365])

Amount due on PN (1) as of 2/26/92

SCHEDULE 2: PN (2) drawdown amount on

9/1/89

Less: Interest deducted in advance (per 9/1/89 Disclosure

Statement)

Net proceeds

Principal

Add:

Interest at 21.5% p.a.

12/31/89 (2,700,000 x 21.5% x [1/365])

1/1/90-1/5/90 (2,700,000 x 21.5% x

[5/365])

Amount due as of 1/5/90

Less: Payment on 1/5/90 (pro-rated upon interest)

Balance

Add:

Interest at 21.5% p.a.

1/6/90-3/30/90 ([2,700,000-18,209.65] x 21.5% x

[84/365])

Amount due as of 3/30/90

Less: Payment on 3/30/90 (pro-rated upon

interest)

Balance

Add:

120 | P a g e
 Interest at 21.5% p.a.

3/31/90-5/31/90 ([2,700,000-18,209.65] x 21.5% x

[62/365])

Amount due as of 5/31/90

Less: Payment on 5/31/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

6/1/90-6/29/90 ([2,700,000-(18,209.65+523.04)] x 21.5% x [29/365])

Amount due as of 6/29/90

Less: Payment on 6/29/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

6/30/90-12/31/90 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [185/365]) 23

1/1/91-8/8/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x

[220/365]) 28

Amount due as of 8/8/91

Less: Payment on 8/8/91 (pro-rated upon interest)

Balance

Add:

Interest at 21.5% p.a.

8/9/91-8/15/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x

[7/365])

Amount due as of 8/15/91

Less: Payment on 8/15/91 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

121 | P a g e
 8/16/91-9/1/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x
[17/365]) 2

Interest at 12% p.a. upon automatic

conversion

9/2/91-11/29/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x

[89/365]) 6

Amount due as of 11/29/91

Less: Payment on 11/29/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

11/30/91-12/20/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x

[21/365])

Amount due as of 12/20/91

Less: Payment on 12/20/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

12/21/91-12/31/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x

[11/365])

1/1/92-2/26/92 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x

[57/365]) 4

Amount due on PN (2) as of 2/26/92

SCHEDULE 3: PN (3) drawdown amount on

9/6/89

Less: Interest deducted in advance (per 9/6/89 Disclosure

Statement)

Net proceeds

Principal

Add:

Interest at 21.5% p.a.

1/5/90 (300,000 x 21.5% x [1/365])

Amount due as of 1/5/90

122 | P a g e
 Less: Payment on 1/5/90 (pro-rated upon
interest)

Balance

Add:

Interest at 21.5% p.a.

1/6/90-3/30/90 ([300,000-337.22] x 21.5% x [84/365])

Amount due as of 3/30/90

Less: Payment on 3/30/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

3/31/90-5/31/90 ([300,000-337.22] x 21.5% x [62/365])

Amount due as of 5/31/90

Less: Payment on 5/31/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

6/1/90-6/29/90 ([300,000-(337.22+58.44)] x 21.5% x

[29/365])

Amount due as of 6/29/90

Less: Payment on 6/29/90 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

6/30/90-12/31/90 ([300,000-(337.22+58.44+54,583.14)] x 21.5% x

[185/365]) 2

1/1/91-8/8/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [220/365]) 3

Amount due as of 8/8/91

Less: Payment on 8/8/91 (pro-rated upon

123 | P a g e
 interest)

Balance

Add:

Interest at 21.5% p.a.

8/9/91-8/15/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [7/365])

Amount due as of 8/15/91

Less: Payment on 8/15/91 (pro-rated upon

interest)

Balance

Add:

Interest at 21.5% p.a.

8/16/91-9/6/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [22/365])

Interest at 12% p.a. upon automatic

conversion

9/7/91-11/29/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [84/365])

Amount due as of 11/29/91

Less: Payment on 11/29/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

11/30/91-12/20/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x

[21/365])

Amount due as of 12/20/91

Less: Payment on 12/20/91 (pro-rated upon

interest)

Balance

Add:

Interest at 12% p.a.

12/21/91-12/31/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x

[11/365])

1/1/92-2/26/92 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [57/365])

Amount due on PN (3) as of 2/26/92

124 | P a g e
 SCHEDULE 4: Application of Payments Upon
Interest

Date Interest

Payable Pro-rated

1/5/90 PN (1) P 186,986.30 P 543,807.61

PN (2) 9,542.47 27,752.12

PN (3) 176.71 513.93

196,705.48 572,073.65

3/30/90 PN (1) 208,370.59 163,182.85

PN (2) 132,693.52 103,917.28

PN (3) 14,827.15 11,611.70

355,891.26 278,711.83

5/31/90 PN (1) 198,985.09 199,806.42

PN (2) 126,716.69 127,239.72

PN (3) 14,159.30 14,217.74

339,861.08 341,263.89

6/29/90 PN (1) 71,924.74 839,012.66

PN (2) 45,801.92 534,286.14

PN (3) 5,117.90 59,701.04

122,844.56 1,432,999.84

8/8/91 PN (1) 806,639.99 493,906.31

PN (2) 523,113.94 320,303.08

PN (3) 58,452.66 35,790.61

1,388,206.59 850,000.00

125 | P a g e
 8/15/91 PN (1) 321,652.11 86,593.37

PN (2) 211,852.33 57,033.69

PN (3) 23,672.34 6,372.93

557,176.79 150,000.00

11/29/91 PN (1) 370,109.22 161,096.81

PN (2) 240,937.94 104,872.65

PN (3) 27,241.23 11,857.24

638,288.39 277,826.70

12/20/91 PN (1) 235,767.70 162,115.78

PN (2) 151,204.51 103,969.45

PN (3) 17,075.64 11,741.35

P 404,047.85 P 277,826.57

In the preparation of the above-mentioned schedules, these basic legal principles were followed:

First, the payments were applied to debts that were already due.[155] Thus, when the first
payment was made and applied on January 5, 1990, all Promissory Notes were already due.

Second, payments of the principal were not made until the interests had been
covered.[156] For instance, the first payment on January 15, 1990 had initially been applied to all
interests due on the notes, before deductions were made from their respective principal
amounts. The resulting decrease in interest balances served as the bases for subsequent pro-
ratings.

Third, payments were proportionately applied to all interests that were due and of the
same nature and burden.[157] This legal principle was the rationale for the pro-rated computations
shown on Schedule 4.

Fourth, since there was no stipulation on capitalization, no interests due and unpaid were
added to the principal; hence, such interests did not earn any additional interest. [158]The simple --
not compounded -- method of interest calculation[159] was used on all Notes until the date of
public auction.

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In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency receivable in
favor of PNB, but rather an excess claim or surplus[162] payable by respondent; this excess should
immediately be returned to petitioner-spouses or their assigns -- not to mention the buildings and
improvements[163] on and the fruits of the property -- to the end that no one may be unjustly
enriched or benefited at
[164]
the expense of another. Such surplus is in the amount of P3,686,101.52, computed as follows:

Total unpaid principal and interest on the

promissory notes as of February 26, 1992:

Drawdown on June 29, 1989

(Schedule 1) P 4,037,204.10

Drawdown on September 1, 1989

(Schedule 2) 2,289,040.38

Drawdown on September 6, 1989

(Schedule 3) 255,833.22

6,582,077.70

Add: 1% attorneys fees 65,820.78

Total outstanding obligation 6,647,898.48

Less: Bid price 10,334,000.00

Excess P 3,686,101.52

Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their Joint
and Solidary Agreement (JSA)[165] was indubitably a surety, not a guaranty.[166] They consented
to be jointly and severally liable with Petitioner NSBCI -- the borrower -- not only for the
payment of all sums due and payable in favor of respondent, but also for the faithful and prompt
performance of all the terms and conditions thereof.[167] Additionally, the corporate secretary of
Petitioner NSBCI certified as early as February 23, 1989, that the spouses should act as such
surety.[168] But, their solidary liability should be carefully studied, not sweepingly assumed to
cover all availments instantly.

First, the JSA was executed on August 31, 1989. As correctly adverted to by petitioners,[169] it
covered only the Promissory Notes of P2,700,000 and P300,000 made after that date. The terms
of a contract of suretyship undeniably determine the suretys liability[170] and cannot extend
beyond what is stipulated therein.[171] Yet, the total amount petitioner-spouses agreed to be held
liable for was P7,700,000; by the time the JSA was executed, the first Promissory Note was still
unpaid and was thus brought within the JSAs ambit.[172]

Second, while the JSA included all costs, charges and expenses that respondent might incur or
sustain in connection with the credit documents,[173] only the interest was imposed under the

127 | P a g e
pertinent Credit Agreements. Moreover, the relevant Promissory Notes had to be resorted to for
proper valuation of the interests charged.

Third, although the JSA, as a contract of adhesion, should be taken contra proferentum against
the party who may have caused any ambiguity therein, no such ambiguity was found.Petitioner-
spouses, who agreed to be accommodation mortgagors,[174] can no longer be held individually
liable for the entire onerous obligation[175] because, as
it turned out, it was respondent that still owed them.

To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5
percent and 21.5 percent stipulated in the Promissory Notes may be imposed by respondent on
the respective availments. After 730 days, the portions remaining unpaid are automatically
converted into medium-term loans at the legal rate of 12 percent. In all instances, the simple
method of interest computation is followed. Payments made by petitioners are applied and pro-
rated according to basic legal principles. Charges on penalty and insurance are eliminated, and 1
percent attorneys fees imposed upon the total unpaid balance of the principal and interest as of
the date of public auction. The P2 million deficiency claim therefore vanishes, and a refund
of P3,686,101.52 arises.

WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court
of Appeals is AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund the
sum of P3,686,101.52 representing the overcollection computed above, plus interest thereon at
the legal rate of six percent (6%) per annum from the filing of the Complaint until the finality of
this Decision. After this Decision becomes final and executory, the applicable rate shall be
twelve percent (12%) per annum until its satisfaction. No costs.

SO ORDERED.

Republic of the Philippines

Congress of the Philippines
Metro Manila

Fourteenth Congress
Second Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eighth day of July, two thousand eight.

Republic Act No. 9576 April 29, 2009

AN ACT INCREASING THE MAXIMUM DEPOSIT INSURANCE COVERAGE, AND

IN CONNECTION THEREWITH, TO STRENGTHEN THE REGULATORY AND
ADMINISTRATIVE AUTHORITY, AND FINANCIAL CAPABILITY OF THE
PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC), AMENDING FOR
THIS PURPOSE REPUBLIC ACT NUMBERED THREE THOUSAND FIVE HUNDRED
NINETY-ONE, AS AMENDED, OTHERWISE KNOWN AS THE PDIC CHARTER,
AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled::

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Section 1. Statement of State Policy and Objectives. - It is hereby declared to be the policy of
the State to strengthen the mandatory deposit insurance coverage system to generate, preserve,
maintain faith and confidence in the country's banking system, and protect it from illegal
schemes and machinations.

Towards this end, the government must extend all means and mechanisms necessary for the
Philippine Deposit Insurance Corporation to effectively fulfill its vital task of promoting and
safeguarding the interests of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits, and in helping develop a sound and stable
banking system at all times.

Section 2. Section 4 (f) of Republic Act No. 3591, as amended, is hereby amended by adding an
additional paragraph, to read as follows:

"(f) The term "deposit" means the unpaid balance of money or its equivalent received by a
bank in the usual course of business and for which it has given or is obliged to give credit to a
commercial, checking, savings, time or thrift account, or issued in accordance with Bangko
Sentral rules and regulations and other applicable laws, together with such other obligations of
a bank, which, consistent with banking usage and practices, the Board of Directors shall
determine and prescribe by regulations to be deposit liabilities of the bank: Provided, That any
obligation of a bank which is payable at the office of the bank located outside of the
Philippines shall not be a deposit for any of the purposes of this Act or included as part of the
total deposits or of insured deposits: Provided, further, That, subject to the approval of the
Board of Directors, any insured bank which is incorporated under the laws of the Philippines
which maintains a branch outside the Philippines may elect to include for insurance its deposit
obligations payable only at such branch.

The corporation shall not pay deposit insurance for the following accounts or transactions,
whether denominated, documented, recorded or booked as deposit by the bank:

"(1) Investment products such as bonds and securities, trust accounts, and other similar
instruments;

"(2) Deposit accounts or transactions which are unfunded, or that are fictitious or fraudulent;

"(3) Deposits accounts or transactions constituting, and/or emanating from, unsage and
unsound banking practice/s, as determined by the Corporation, in consultation with the BSP,
after due notice and hearing, and publication of a cease and desist order issued by the
Corporation against such deposit accounts or transactions; and

"(4) Deposits that are determined to be the proceeds of an unlawful activity as defined under
republic act 9160, as amended.

"The actions of the Corporation taken under this section shall be final and executory, and may
not be restrained or set aside by the court, except on appropriate petition for certiorari on the
ground that the action was taken in excess of jurisdiction or with such grave abuse of discretion
as to amount to a lack or excess of jurisdiction. The petition for certiorari may only be filed
within thirty (30) days from notice of denial of claim for deposit insurance."

Section. 3. Section 4(g) of the same Act is hereby amended to read as follows:

"(g) The term "insured deposit" means the amount due to any bona fide depositor for
legitimate deposits in an insured bank net of any obligation of the depositor to the insured
bank as of date of closure, but not to exceed Five hundred thousand pesos (P500,000.00).
Such net amount shall be determined according to such regulations as the Board of
Directors may prescribe, In determining such amount due to any depositor, there shall be
added together all deposits in the bank maintained in the same right and capacity for his
benefits either in his own name or in the name of others. A joint account regardless of

129 | P a g e
 whether the conjunction 'and,' 'or,' 'and/or' is used, shall be insured separately from any
individually-owned deposit account: Provided, That (1) If the account is held jointly by
two or more natural persons, or by two or more juridical persons or entities, the
maximum insured deposit shall be divided into as many equal shares as there are
individuals, juridical persons or entities, unless a different sharing is stipulated in the
document of deposit, and (2) If the account is held by a juridical person or entity jointly
with one or more natural persons, the maximum insured deposits shall be presumed to
belong entirely to such juridical person or entity: Provided, further, That the aggregate of
the interest of each co-owner over several joint accounts, whether owned by the same or
different combinations of individuals, juridical persons or entities, shall likewise be
subject to the maximum insured deposit of Five hundred thousand pesos
(P500,000.00): Provided, Furthermore, The the provisions of any law to the contrary
notwithstanding, no owner/holder of any negotiable certificate of deposit shall be
recognized as a depositor entitled to the rights provided in this Act unless his name is
registered as owner/holder thereof in the books of the issuing bank: Provided, Finally,
That, in case of a condition that threatens the monetary and financial stability of the
banking system that may have systemic consequences, as defined in section 17 hereof, as
determined by the monetary board, the maximum deposit insurance cover may be
adjusted in such amount, for such a period, and/or for such deposit products, as may be
determined by a unanimous vote of the Board of Directors in a meeting called for the
purpose and chaired by the Secretary of Finance, subject to the approval of the President
of the Philippines."

Section 4. The maximum deposit insurance coverage of Five hundred thousand pesos
(P500,000.00) provided in Section 4(g) of Republic Act 3591, as amended herein, shall be paid
by the Corporation: Provided, That for the first three (3) years from the effectivity of this Act,
the first Two hundred fifty thousand pesos (P250,000.00) of the deposited insurance coverage
shall be for the account of the Corporation, and those in excess of Two hundred fifty thousand
pesos (P250,000.00) but not more than Five hundred thousand pesos (P500,000.00) shall be for
the account of the National Government. The Congress shall annually appropriate the necessary
funding to reimburse the Corporation for any payment to insured depositors paid in excess of
Two hundred fifty thousand pesos (P250,000.00).

Section 5. Section 8, paragraph Eighth of the same Act is hereby amended to read as follows:

"Eighth - To conduct examination of banks with prior approval of the Monetary

Board: Provided, That no examination can be conducted within twelve (12) months from
the last examination date: Provided, however, That the Corporation may, in coordination
with the Bangko Sentral, conduct a special examination as the Board of Directors, by an
affirmative vote of a majority of all of its members, if there is a threatened or impending
closure of a bank: Provided, further, That notwithstanding the provisions of Republic Act
No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and
other laws, the Corporation and/or Bangko Sentral may inquire into or examine deposit
accounts and all information related thereto in case there is a finding of unsafe or
unsound banking practice: Provided, finally, That to avoid overlapping of efforts, the
examination shall maximize the efficient use of the relevant reports, information, and
findings of the Bangko Sentral, which it shall make available to the Corporation."

Section 6. A new Section 9 (h) of the same Act is hereby added to read as follows:

"(h) Unless the actions of the Corporation or any of its officers and employees are found
to be in willful violation of this Act, performed in bad faith, with malice and/or gross
negligence, the Corporation, its directors, officers, employees and agents are held free
and harmless to the fullest extent permitted by law from any liability, and they shall be
indemnified for any and all liabilities, losses, claims, demands, damages, deficiencies,
costs and expenses of whatsoever kind and nature that may arise in connection with the
performance of their functions, without prejudice to any criminal liability under existing
laws."

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Section 7. Section 9 (h) of the same Act is accordingly renumbered as Section 9 (i).

Section 8. An additional paragraph to Section 17 of the same Act is hereby added after
subparagraph (b) to read as follows:

"(c) It is hereby declared to be the policy of the State that the Deposit Insurance Fund of
the Corporation shall be preserved and maintained at all times. Accordingly, all tax
obligations of the Corporation for a period of five (5) years reckoned from the date of
effectivity of this Act shall be chargeable to the Tax Expenditure Fund (TEF) in the
annual General Appropriation Act pursuant to the provisions of Executive Order No. 93,
series of 1986: Provided, That, on the 6th year and thereafter, the Corporation shall be
exempt from income tax, final withholding tax, value-added tax on assessments collected
from member banks and local taxes."

Section 9. Section 17 (c) of the same Act shall be accordingly renumbered as Section 17 (d).

Section 10. Section 19 is hereby amended to read as follows.

"SEC. 19. With the approval of the President of the Philippines, the Corporation is
authorized to issue bonds, debentures, and other obligations, both local or foreign, as may
be necessary for purposes of providing liquidity for settlement of insured deposits in
closed banks as well as for financial assistance as provided herein: Provided, That the
Board of Directors shall determine the interest rates, maturity and other requirements of
said obligations: Provided, further, That the Corporation shall provide for appropriate
reserves for the redemption or retirement of said obligation.

All notes, debentures, bonds, or such obligations issued by the Corporation shall be
exempt from taxation both as to principal and interest, and shall be fully guaranteed by
the Government of the Republic of the Philippines. Such guarantee, which in no case
shall exceed two times the Deposit Insurance Fund as of date of the debt issuance, shall
be expressed on the face thereof.

The Board of Directors shall have the power to prescribe rules and regulations for the
issuance, reissuance, servicing, placement and redemption of the bonds herein authorized
to be issued as well as the registration of such bonds at the request of the holders
thereof."

Section 11. Section 21, paragraph (f)(5) is hereby amended to read as follows.

"5) splitting of deposits or creation of fictitious loans or deposits accounts.

"Splitting of deposits occurs whenever a deposit account with an outstanding balance of

more that the statutory maximum amount of insured deposit maintained under the name
of natural or juridical persons is broken down and transferred into two (2) or more
accounts in the name/s of natural or juridical persons or entities who have no beneficial
ownership on transferred deposits in their names within one hundred twenty (120) days
immediately preceding or during a bank-declared bank holiday, or immediately preceding
a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the
purpose of availing of the maximum deposit insurance coverage."

Section 12. An additional paragraph shall be inserted under Section 2, to read as follows:

"SEC. 2. xxx The Board of Directors shall have the authority:

"xxx

"7. To review the organizational set-up of the Corporation and adopt a new or revised
organizational structure as it may deem necessary for the Corporation to undertake its
mandate and functions."

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Section 13. Joint Congressional Oversight Committee. - There is hereby created a joint
congressional oversight committee to oversee the implementation of this Act. The committee
shall be composed of the chairpersons of the Senate Committee on Banks, Financial Institutions
and Currencies and the Committee on Finance and five (5) senators to be appointed by the
President of the Senate, and the chairpersons of the House Committee on Banks and Financial
Intermediaries and the Committee on Appropriations and five (5) members to be appointed by
the Speaker of the House of Representatives.

Section 14. Separability Clause. - If any provision or section of this Act or the application
thereof to any person or circumstances is held invalid, the other provisions or sections of this
Act, in the application of such provision or section to other persons or circumstances, shall not be
affected thereby.

Section 15. Repealing Clause. - All acts or parts of acts and executive orders, administrative
orders, or parts thereof, which are inconsistent with the provisions of this Act are hereby
repealed.

Section 16. Effectivity Clause. - This Act shall take effect fifteen (15) days following the
completion of its publication in the Official Gazette or in two (2) newspapers of general
circulation.

REPUBLIC ACT NO. 3591

AN ACT ESTABLISHING THE PHILIPPINE DEPOSIT INSURANCE

CORPORATION, DEFINING ITS POWERS AND DUTIES AND FOR OTHER
PURPOSES

SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation hereinafter

referred to as the “Corporation” which shall insure, as herein provided, the deposits of all banks
which are entitled to the benefits of insurance under this Act, and which shall have the powers
hereinafter granted.

SECTION 2. The powers and functions of the Corporation shall be vested in a board of directors
consisting of three (3) members one of whom shall be the Governor of the Central Bank of the
Philippines and two of whom shall be citizens of the Republic of the Philippines to be appointed
by the President of the Philippines with the advice and consent of the Commission on
Appointments. One of the appointive members shall be the Chairman of the Board of Directors
of the Corporation who shall be appointed on a full time basis for a term of six (6) years at an
annual salary of twenty-four thousand pesos (P24,000.00). The other appointive member, who
shall be appointed for a term of four (4) years and the Governor of the Central Bank shall each
receive a per diem of not exceeding fifty pesos (P50.00) for each day of meeting actually
attended by them but in no case shall each of them receive more than five hundred pesos
(P500.00) a month. In the event of a vacancy in the Office of the Governor of the Central Bank
of the Philippines, and pending the appointment of his successor or during the absence of the
Governor, the Acting Governor of the Central Bank of the Philippines shall act as member of the
Board of Directors. In the event of a vacancy in the Office of the Chairman of the Board of
Directors and pending the appointment of his successor, the Governor of the Central Bank of the
Philippines shall act as Chairman. The members of the Board of Directors shall be ineligible
during the time they are in office and for a period of two years thereafter to hold any office,
position or employment in any insured bank, except that this restriction shall not apply to any
member who has served the full term for which he was appointed. No member of the Board of
Directors shall be an officer or director of any insured bank; and before entering upon his duties
as member of the Board of Directors he shall certify under oath that he has complied with this
requirement and such certification shall be filed with the Secretary of the Board of Directors.
Any vacancy in the Board created by the death, resignation, or removal of an appointive member
shall be filled by the appointment of new member to complete the unexpired period of the term
of the member concerned.{{1}}

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The Board of Directors shall have the authority:

1. To prepare and issue rules and regulations as it considers necessary for the effective discharge
of its responsibilities;

2. To direct the management, operations and administration of the Corporation;

3. To appoint, fix the remunerations and remove all officers and employees of the Corporation,
subject to the Civil Service Law; and{{2}}

4. To authorize such expenditures by the Corporation as are in the interest of the effective
administration and operation of the Corporation.{{3}}

[See additions as per RA 9302{{4}} and RA 9576{{5}}]

SECTION 3. As used in this Act —

(a) The term “Board of Directors” means the Board of Directors of the Corporation.

(b) The term “Bank” and “Banking Institution” shall be synonymous and interchangeable and
shall include banks, commercial banks, savings banks, mortgage banks, rural banks,
development banks, cooperative banks, trust companies, branches and agencies in the Philippines
of foreign banks and all other companies, corporations, partnership performing banking
functions in the Philippines.

(c) The term “receiver” includes a receiver, liquidating agent, conservator, commission, person,
or other agency charged by law with the duty of winding up the affairs of a bank.

(d) The term “insured bank” means any bank the deposit of which are insured in accordance with
the provision of this Act;

(e) The term “non-insured bank” means any bank the deposit of which are not insured.

(f) The term “deposit” means the unpaid balance of money or its equivalent received by a bank
in the usual course of business and for which it has given or is obliged to give credit to a
commercial, checking, savings, time or thrift account or which is evidenced by its certificate of
deposit, and trust funds held by such bank whether retained or deposited in any department of
such bank or deposited in another bank, together with such other obligations of a bank as the
Board of Directors shall find and shall prescribe by regulations to be deposit liabilities of the
Bank: Provided, That any obligation of a bank which is payable at the office of the bank located
outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as
part of the total deposits or of the insured deposit: Provided, further, That any insured bank
which is incorporated under the laws of the Philippines which maintains a branch outside the
Philippines may elect to include for insurance its deposit obligation payable only at such branch.

(g) The term “insured deposit” means the net amount due to any depositor for deposits in an
insured bank (after deducting offsets) less any part thereof which is in excess of P10,000. Such
net amount shall be determined according to such regulations as the Board of Directors may
prescribe and in determining the amount due to any depositor there shall be added together all
deposits in the bank maintained in the same capacity and the same right for his benefit or in his
own name or in the names of others.

(h) The term “transfer deposit” means a deposit in an insured bank made available to a depositor
by the Corporation as payment of insured deposit of such depositor in a closed bank and assumed
by another insured bank.

(i) The term “trust funds” means funds held by an insured bank in a fiduciary capacity and
includes without being limited to, funds held as trustee, executor, administrator, guardian, or
agent.{{6}}

133 | P a g e
SECTION 4. Any bank or banking institution which is engaged in the business of receiving
deposits as herein defined on the effective date of this Act, or which thereafter may engage in the
business of receiving deposits, may insure its deposit liabilities with the Corporation. Before
approving the application of such bank to become an insured bank, the Board of Directors shall
give consideration to the factors enumerated in Section 5 and shall determine upon the basis of a
thorough examination of such bank, that its assets in excess of its capital requirements are
adequate to enable it to meet all its liabilities to depositors and other creditors as shown by the
books of the bank.{{7}}

SECTION 5. The factors to be considered by the Board of Directors under the preceding section
shall be the following: the financial history and condition of the Bank, the adequacy of its capital
structure, its future earning prospects, the general character of its management, the convenience
and needs of the community to be served by the Bank and whether or not its corporate powers
are consistent with the purposes of this Act.{{8}}

SECTION 6. (a) The assessment rate shall be determined by the Board of Directors: Provided,
That the assessment rate shall not exceed one-twelfth of one per centum per annum. The
semiannual assessment for each insured bank shall be in the amount of the product of one-half
(1/2) the assessment rate multiplied by the assessment base. The assessment base shall be the
amount of the liability of the bank for deposits, according to the definition of the term “deposit”
in and pursuant to subsection (f) of Section 3 without any deduction for indebtedness of
depositors: Provided, further, That the bank —

(1) may deduct (i) from the deposit balance due to an insured bank the deposit balance due from
such insured bank (other than trust funds deposited by it in such bank) which is subject to an
immediate withdrawal; and (ii) cash items as determined by either of the following methods, at
the option of the bank: (aa) by multiplying by 2 the total of the cash items forwarded for
collection on the assessment base days (being the days on which the average deposits are
computed) and cash items held for clearings at the close of business on said days, which are in
the process of collection and which the bank has paid in the regular course of business or
credited to deposit accounts; or (bb) by deducting the total of cash items forwarded for collection
on the assessment base days and cash items held for clearings at the close of business on said
days, which are in the process of collection and which the bank has paid in the regular course of
business or credited to deposit accounts, plus such uncollected items paid or credited on
preceding days which are in the process of collection: Provided, That the Board of Directors may
define the terms “cash items”, “process of collection”, and “uncollected items” and shall fix the
maximum period for which any such item may be deducted; and

(2) may exclude from its assessment base (i) drafts drawn by it on deposit accounts in other
banks which are issued in the regular course of business; and the amount of devices or
authorizations issued by it for cash letters received, directing that its deposit account in the
sending bank be charged with the amount thereof; and (ii) cash funds which are received and
held solely for the purpose of securing a liability to the bank but not in an amount in excess of
such liability, and which are not subject to withdrawal by the obligor and are carried in a special
non-interest bearing account designated to properly show their purpose.

Each insured bank, as a condition to the right to make any such deduction or exclusion in
determining its assessment base, shall maintain such records as will readily permit verification of
the correctness thereof. The semiannual assessment base for one semi-annual period shall be the
average of the assessment base of the bank as of the close of business on March thirty-one and
June thirty, and the semi-annual assessment base for the other semi-annual period shall be the
average of the assessment base of the bank as of the close of business on September thirty and
December thirty-one: Provided, That when any of said days is a nonbusiness day or a legal
holiday, either National or Provincial, the preceding business day shall be used. The certified
statements required to be filed with the Corporation under subsections (b) and (c) of this section
shall be in such form and set forth such supporting information as the Board of Directors shall
prescribe. The assessment payments required from insured banks under subsections (b) and (c) of
this section shall be made in such manner and at such time or times as the Board of Directors

134 | P a g e
shall prescribe, provided the time or times so prescribed shall not be later than sixty days after
filing the certified statement setting forth the amount of assessment.{{9}}{{10}}

(b) On or before the 15th of July of each year, each insured bank shall file with the Corporation a
certified statement showing for the six months ending on the preceding June thirty the amount of
the assessment base and the amount of the semi-annual assessment due to the Corporation for the
period ending on the following December thirty-one, determined in accordance with subsection
(a) of this section, which shall contain or be verified by a written declaration that it is made
under the penalties of perjury. Each insured bank shall pay to the Corporation the amount of the
semi-annual assessment it is required to certify. On or before the 15th day of January of each
year, each insured bank shall file with the Corporation a similar certified statement for the six
months ending on the preceding December thirty-one and shall pay to the Corporation the
amount of the semi-annual assessment for the period ending on the following June thirty which it
is required to certify.{{11}}

(c) Each bank which becomes an insured bank shall not be required to file any certified statement
or pay any assessment for the semi-annual period in which it becomes an insured bank. On the
expiration of such period, each such bank shall comply with the provisions of subsection (b) of
this section except that the semi-annual assessment base for its first certified statement shall be
the assessment base of the bank as of the close of business on the preceding June thirty or
December thirty-one, whichever is applicable, determined in accordance with subsection (a) of
this section. If such bank has assumed the liabilities for deposits of another bank or banks, it
shall include such liabilities in its assessment base. The first certified statement shall show as the
amount of the first semi-annual assessment due to the Corporation, an amount equal to the
product of one-half of the annual assessment rate multiplied by such assessment base.

(d) As of December thirty-one nineteen hundred sixty-four and as of December thirty-one of

each calendar year thereafter, the Corporation shall transfer 40 per centum of its net assessment
income to its capital account and the balance of the net assessment income shall be credited pro
rata to the insured banks based upon the assessment of each bank becoming due during the said
calendar year. Each year such credit shall be applied by the Corporation toward the payment of
the total assessment becoming due for the semi-annual assessment period beginning the next
ensuing July 1 and any excess credit shall be applied upon the assessment next becoming due.
The term “net assessment income” as used therein means the total assessments which become
due during the calendar year less (1) the operating costs and expenses of the Corporation for the
calendar year; (2) additions to reserve to provide for insurance losses during the calendar year,
except that any adjustment to reserve which result in a reduction of such reserve shall be added;
and (3) the insurance losses sustained in said calendar year plus losses from any preceding years
in excess of such reserves. If the above deductions exceed in amount the total assessments which
become due during the calendar year, the amount of such excess shall be restored by deduction
from total assessments becoming due in subsequent years.{{12}}

(e) The Corporation (1) may refund to an insured bank any payment of assessment in excess of
the amount due to the Corporation or (2) may credit such excess toward the payment of the
assessment next becoming due from such bank and upon succeeding assessments until the credit
is exhausted.

(f) Any insured bank which fails to file any certified statement required to be filed by it in
connection with determining the amount of any assessment payable by the bank to the
Corporation may be compelled to file such statement by mandatory injunction or other
appropriate remedy in a suit brought for such purpose by the Corporation against the bank and
any officer or officers thereof in any court of the Philippines of competent jurisdiction in which
such bank is located.

(g) The Corporation, in a suit brought in any court of competent jurisdiction, shall be entitled to
recover from any insured bank the amount of any unpaid assessment lawfully payable by such
insured bank to the Corporation, whether or not such bank shall have filed any such certified
statement and whether or not suit shall have been brought to compel the bank to file any such

135 | P a g e
statement. No action or proceeding shall be brought for recovery of any assessment due to the
Corporation or for the recovering of any amount paid to the Corporation in excess of the amount
due to it, unless such action or proceeding shall have been brought within five years after the
right accrued for which the claim is made, except where the insured bank has made or filed with
the Corporation a false or fraudulent certified statement with the intent to evade, in whole or in
part, the payment of assessment, in which case the claim shall not have been deemed to have
accrued until the discovery by the Corporation that the certified statement is false or fraudulent.

(h) Should any insured bank fail or refuse to pay any assessment required to be paid by such
bank under any provision of this Act, and should the bank not correct such failure or refusal
within thirty days after written notice has been given by the Corporation to an officer of the
bank, citing this subsection, and stating that the bank has failed or refused to pay as required by
law the insured status of such bank shall be terminated by the Board of Directors. The remedies
provided in this subsection and in the two preceding subsections shall not be construed as
limiting any other remedies against an insured bank but shall be in addition thereto.{{13}}

(i) Trust funds held by an insured bank in a fiduciary capacity whether held in trust or deposited
in any other department or in another bank shall be insured like other forms of deposits, in an
amount not to exceed P10,000 for each trust estate, and when deposited by the fiduciary bank in
another insured bank, such trust funds shall be similarly insured to the fiduciary bank according
to the trust estates represented. Notwithstanding any other provision of this Act, such insurance
shall be separate from and additional to that covering other deposits of the owners of such trust
funds or the beneficiaries of such trust estates: Provided, That where the fiduciary bank deposits
any of such trust funds in other insured banks, the amount so held by other insured banks on
deposit shall not for the purpose of any certified statement required under subsections (b) and (c)
of this section be considered to be a deposit liability of the fiduciary bank, but shall be
considered to be a deposit liability of the bank in which such funds are so deposited by such
fiduciary bank. The Board of Directors shall have the power by regulation to prescribe the
manner of reporting and of depositing such trust funds.

SECTION 7. (a) Any insured bank may, upon not less than ninety days, written notice to the
Corporation, and to the Development Bank of the Philippines if it owns or holds as pledges any
preferred stock, capital notes, or debentures of such bank, terminate its status as an insured bank.
Whenever the Board of Directors shall find that an insured bank or its directors or trustees have
continued unsafe or unsound practices in conducting the business of the bank or which have
knowingly or negligently permitted any of its officers or agents to violate any provisions of any
law or regulation to which the insured bank is subject, the Board of Directors shall first give to
the Central Bank of the Philippines a statement with respect to such practices or violations for
the purpose of securing the correction thereof and shall give a copy thereof to the bank. Unless
such correction shall be made within one hundred twenty days or such shorter period of time as
the Central Bank of the Philippines shall require, the Board of Directors, if it shall determine to
proceed further, shall give to the bank not less than thirty days’ written notice of intention to
determine the status of the bank as an insured bank, and shall fix a time and place for a hearing
before the Board of Directors or before a person designated by it to conduct such hearing, at
which evidence may be produced, and upon such evidence the Board of Directors shall make
written findings which shall be conclusive. Unless the bank shall appear at the hearing by a duly
authorized representative, it shall be deemed to have consented to the termination of its status as
an insured bank. If the Board of Directors shall find that any unsafe or unsound practice or
violation specified in such notice has been established and has not been corrected within the time
above prescribed in which to make such correction, the Board of Directors may order that the
insured status of the bank be terminated on a date subsequent to such finding and to the
expiration of the time specified in such notice of intention. The Corporation may publish notice
of such termination and the bank shall give notice of such termination to each of the depositors at
his last address of record on the books of the bank, in such a manner and at such a time as the
Board of Directors may find to be necessary and may order for the protection of the depositors.
After the termination of the insured status of any bank under the provisions of this subsection,
the insured deposits of each depositor in the bank on the date of such termination, less all

136 | P a g e
subsequent withdrawals from any deposits of such depositor, shall continue for a period of two
years to be insured, and the bank shall continue to pay to the Corporation assessments as in the
case of an insured bank during such period. No additions to any such deposits and no new
deposits in such bank made after the date of such termination shall be insured by the
Corporation, and the bank shall not advertise or hold itself out as having insured deposits unless
in the same connection it shall also state equal prominence that such additions to deposits and
new deposits made after such date are not so insured. Such bank shall, in all other respects, be
subject to the duties and obligations of an insured bank for the period of two years from the date
of such termination, and in the event that such bank shall be closed on account of insolvency
within such period of two years, the Corporation shall have the same powers and rights with
respect to such bank as in case of an insured bank.{{14}}

(b) Notwithstanding any other provision of law, whenever the Board of Directors shall determine
that an insured banking institution is not engaged in the business of receiving deposits, the
Corporation shall notify the banking institution that its insured status will terminate at the
expiration of the first full semi-annual assessment period following such notice. A finding by the
Board of Directors that a banking institution is not engaged in the business of receiving deposits
shall be conclusive. The Board of Directors shall prescribe the notice to be given by the banking
institution of such termination and the Corporation may publish notice thereof. Upon the
termination of the insured status of any such banking institution, its deposits shall thereupon
cease to be insured and the banking institution shall thereafter be relieved of all future
obligations to the Corporation, including the obligation to pay future assessments.{{15}}

(c) Whenever the liabilities of an insured bank for deposits shall have been assumed by another
insured bank or banks, the insured status of the bank whose liabilities are so assumed shall
terminate on the date of receipt by the Corporation of satisfactory evidence of such assumption
with like effect as if its insured status had been terminated on said date by the Board of Directors
after proceedings under subsection (a) of this section: Provided, That if the bank whose liabilities
are so assumed gives to its depositors notice of such assumption within thirty days after such
assumption takes effect, by publication or by any reasonable means, in accordance with
regulations to be prescribed by the Board of Directors, the insurance of its deposits shall
terminate at the end of six months from the date such assumption takes effect. Such bank shall be
subject to the duties and obligations of an insured bank for the period its deposits are insured:
Provided, further, That if the deposits are assumed by a newly insured bank, the bank whose
deposits are assumed shall not be required to pay any assessment upon the deposits which have
been so assumed after the semi-annual period in which the assumption takes effect.

SECTION 8. The Corporation as a corporate body shall have the power —

First. — To adopt and use a corporate seal.

Second. — To have succession until dissolved by an Act of Congress.

Third. — To make contracts.

Fourth. — To sue and be sued, complain and defend, in any court of law in the Philippines. All
suits of a civil nature to which the corporation shall be a part shall be deemed to arise under the
laws of the Philippines. No attachment or execution shall be issued against the Corporation or its
property before final judgment in any suit, action, or proceeding in any court. The Board of
Directors shall designate an agent upon whom service of process may be made in any province
or city or jurisdiction in which any insured bank is located.

Fifth. — To appoint by its Board of Directors such officers and employees as are not otherwise
provided for in this Act to define their duties, fix their compensation, require bonds of them and
fix penalty thereof and to dismiss such officers and employees for cause.

137 | P a g e
Sixth. — To prescribe, by its Board of Directors, by-laws not inconsistent with law, regulating
the manner in which its general business may be conducted, and the privileges granted to it by
law may be exercised and enjoyed.

Seventh. — To exercise by its Board of Directors, or duly authorized officers or agents, all
powers specifically granted by the provisions of this Act, and such incidental powers as shall be
necessary to carry on the powers so granted.

Eighth. — To make examinations of and to require information and reports from banks, as
provided in this Act.{{16}}

Ninth. — To act as receiver.

Tenth. — To prescribe by its Board of Directors such rules and regulations as it may deem
necessary to carry out the provisions of this Act.{{17}}

[See additions as per PD 1940{{18}} and RA 7400{{19}}]

SECTION 9. (a) The Board of Directors shall administer the affairs of the Corporation fairly and
impartially and without discrimination. The Corporation shall be entitled to the free use of
Philippine mail in the same manner as the other offices of the national government.

(b) The Board of Directors shall appoint examiners who shall have power, on behalf of the
Corporation to examine any insured bank or any bank making application to become an insured
bank, whenever in the judgment of the Board of Directors an examination of the bank is
necessary. Each such examiner shall have power to make a thorough examination of all the
affairs of the bank and in doing so he shall have power to administer oaths and to examine and
take and preserve the testimony of any of the officers and agents thereof, and shall make a full
and detailed report of the condition of the bank to the Corporation. The Board of Directors in like
manner shall appoint claim agents who shall have power to investigate and examine all claims
for insured deposits and transferred deposits. Each claim agent shall have power to administer
oaths and to examine under oath and take and preserve the testimony of any person relating to
such claims.{{20}}{{21}}

(c) Each insured bank shall make to the Corporation reports of condition in such form and at
such times as the Board of Directors may require such reports to be published in such manner,
not inconsistent with any applicable law, as it may direct. Every such bank which fails to make
or publish any such report within such time, not less than five days, as the Board of Directors
may require, shall be subject to a penalty of not more than P100 for each day of such failure
recoverable by the Corporation for its use.

(d) The Corporation shall have access to reports of examination made by, and reports of
condition made to the Superintendent of Banks or the Governor of the Central Bank of the
Philippines, and the Superintendent of Banks or the Governor of the Central Bank of the
Philippines shall also have access to reports of examination made on behalf of, and reports of
condition made to the Corporation.{{22}}{{23}}

(e) The members of the Board of Directors and the officers and employees of the Corporation are
prohibited from revealing any information relating to the condition or business of any insured
bank and any member of the Board of Directors, officer or employee of the Corporation violating
this provision shall be held liable for any loss or injury suffered by the Corporation.{{24}}

[See additions as per RA 9302, RA 9576, and RA 7400{{25}}]

SECTION 10. (a) A permanent insurance fund in the amount of P5,000,000 to be appropriated
from the General Fund is hereby created to be used by the Corporation to carry out the purposes
of this Act; Provided, That the maximum amount of the insured deposit of any depositor shall be
P10,000.{{26}}

138 | P a g e
(b) For the purposes of this Act an insured bank shall be deemed to have been closed on account
of insolvency in any case in which it has been closed for the purpose of liquidation without
adequate provision being made for payment of its depositors.{{27}}

(c) Whenever an insured bank shall have been closed on account of insolvency, payment of the
insured deposits in such bank shall be made by the Corporation as soon as possible either (1) by
cash or (2) by making available to each depositor a transferred deposit in another insured bank in
an amount equal to the insured deposit of such depositor: Provided, That the Corporation, in its
discretion, may require proof of claims to be filed before paying the insured deposits, and that in
any case where the Corporation is not satisfied as to the validity of a claim for an insured
deposit, it may require the final determination of a court of competent jurisdiction before paying
such claim.{{28}}

(d) The Corporation, upon the payment of any depositor as provided for in subsection (c) of this
section shall be subrogated to all rights of the depositor against the closed bank to the extent of
such payment. Such subrogation shall include the right on the part of the Corporation to receive
the same dividends from the proceeds of the assets of such closed bank and recoveries on
account of stockholders’ liability as would have been payable to the depositor on a claim for the
insured deposits, but such depositor shall retain his claim for any uninsured portion of his
deposit.

SECTION 11. (a) Payment of an insured deposit to any person by the Corporation shall
discharge the Corporation, and payment of a transferred deposit to any person by the new bank
or by an insured bank in which a transferred deposit has been made available shall discharge the
Corporation and such new bank or other insured bank, to the same extent that payment to such
person by the closed bank would have discharged it from liability for the insured deposit.

(b) Except as otherwise prescribed by the Board of Directors, neither the Corporation nor such
other insured bank shall be required to recognize as the owner of any portion of a deposit
appearing on the records of the closed bank under a name other than that of the claimant, any
person whose name or interest as such owner is not disclosed on the records of such closed bank
as part owner of said deposit, if such recognition would increase the aggregate amount of the
insured deposits in such closed bank.

(c) The Corporation may withhold payment of such portion of the insured deposit of any
depositor in a closed bank as may be required to provide for the payment of any liability of such
depositor as a stockholder of the closed bank, or of any liability of such depositor to the closed
bank or its receiver, which is not offset against a claim due from such bank, pending the
determination and payment of such liability by such depositor or any other person liable therefor.

(d) If, after the Corporation shall have given at least three months notice to the depositor by
mailing a copy thereof to his last-known address appearing on the records of the closed bank,
any depositor in the closed bank shall fail to claim his insured deposit from the Corporation
within eighteen months after the Monetary Board of the Central Bank of the Philippines or the
proper court shall have ordered the conversion of the assets of such closed bank into money, all
rights of the depositor against the Corporation with respect to the insured deposit shall be barred,
and all rights of the depositor against the closed bank and its shareholders or the receivership
estate to which the Corporation may have become subrogated, shall thereupon revert to the
depositor.{{29}}

SECTION 12. (a) Money of the Corporation not otherwise employed shall be invested in
obligations of the Republic of the Philippines or in obligations guaranteed as to principal and
interest by the Republic of the Philippines: Provided, That the Corporation shall not sell or
purchase any such obligations for its own account and in its own right and interest, at any one
time aggregating in excess of P100,000, without the approval of the Insurance Commissioner:
And Provided, further, That the Insurance Commissioner may waive the requirement of his
approval with respect to any transaction or classes of transactions subject to the provisions of this
subsection for such period of time and under such conditions as he may determine.

139 | P a g e
(b) The banking or checking accounts of the Corporation shall be kept with the Central Bank of
the Philippines, with the Philippine National Bank, or with any other bank designated as
depository or fiscal agent of the Philippine Government.

(c) When the Corporation has determined that an insured bank is in danger of closing, in order to
prevent such closing, the Corporation, in the discretion of its Board of Directors, is authorized to
make loans to, or purchase the assets of, or make deposits in, such insured bank, upon such terms
and conditions as the Board of Directors may prescribe, when in the opinion of the Board of
Directors, the continued operation of such bank is essential to provide adequate banking service
in the community. Such loans and deposits may be in subordination to the rights of depositors
and other creditors.{{30}}{{31}}

SECTION 13. The corporation is authorized to borrow from the Central Bank of the Philippines
and the Central Bank is authorized and directed to loan the Corporation on such terms as may be
fixed by the Corporation and the Central Bank, such funds as in the judgment of the Board of
Directors of the Corporation are from time to time required for insurance purposes not exceeding
in the aggregate of one hundred million pesos outstanding at any one time: Provided, That the
rate of interest to be charged in connection with any loan made pursuant to this section shall not
be less than the current average rate on outstanding marketable and nonmarketable obligations of
the Republic of the Philippines as of the last day of the month preceding the making of such
loan. Any such loan shall be used by the Corporation solely in carrying out its functions with
respect to such insurance.{{32}}

SECTION 14. All notes, debentures, bonds or such obligations issued by the Corporation shall
be exempt from taxation.{{33}}

SECTION 15. (a) The Corporation shall annually make a report of its operations to the Congress
as soon as practicable after the 1st day of January in each year.

(b) The financial transactions of the Corporation shall be audited by the General Auditing Office
in accordance with the principles and procedures applicable to commercial corporate transactions
and under such rules and regulations as may be prescribed by the Auditor General. The audit
shall be conducted at the place or places where accounts of the Corporation are normally kept.
The representatives of the General Auditing Office shall have access to all books, accounts,
records, reports, files, and all other papers, things, or property belonging to or in use by the
Corporation pertaining to its financial transactions and necessary to facilitate the audit, and they
shall be afforded full facilities for verifying transactions with the balances or securities held by
depositaries, fiscal agents, and custodians. All such books, accounts, records, reports, files,
papers, and property of the Corporation shall remain in possession and custody of the
Corporation.

(c) A report of the Audit for each fiscal year ending on June 30 shall be made by the Auditor
General to the Congress not later than January 15 following the close of such fiscal year. On or
before December 15 following such fiscal year the Auditor General shall furnish the Corporation
a short form report showing the financial position of the Corporation at the close of fiscal year.
The report to the Congress shall set forth the scope of the audit and shall include a statement of
assets and liabilities and surplus or deficit; a statement of surplus or deficit analysis; a statement
of income and expenses; a statement of sources and application of funds and such comments and
information as may be deemed necessary to inform Congress of the financial operations and
condition of the Corporation, together with such recommendations with respect thereto as the
Auditor General may deem advisable. The report shall also show specifically any program,
expenditure, or other financial transactions or undertaking observed in the course of the audit,
which in the opinion of the Auditor General, has been carried on or made without authority of
law. A copy of each report shall be furnished to the President of the Philippines, to the Governor
of the Central Bank of the Philippines, and to the Corporation at the time submitted to the
Congress.{{34}}

140 | P a g e
SECTION 16. (a) Every insured bank shall display at each place of business maintained by it a
sign or signs, and shall include a statement to the effect that its deposits are insured by the
Corporation in all of its advertisements: Provided, That the Board of Directors may exempt from
this requirement advertisements which do not relate to deposits or when it is impractical to
include such statement therein. The Board of Directors shall prescribe by regulation the forms of
such signs and the manner of display and the substance of such statements and the manner of
use. For each day an insured bank continues to violate any provisions of this subsection or any
lawful provisions of said regulations, it shall be subject to a penalty of not more than P100,
which the Corporation may recover for its use.{{35}}

(b) No insured bank shall pay any dividend on its capital stock or interest on its capital notes or
debentures (if such interest is required to be paid only out of net profits) or distribute any of its
capital assets while it remains in default in the payment of any assessment due to the
Corporation; and any director or officer of any insured bank who participates in the declaration
or payment of any such dividend or interest or in any such distribution shall, upon conviction, be
fined not more than P1,000 or imprisoned not more than one year, or both: Provided, That if such
default is due to a dispute between the insured bank and the Corporation over the amount of such
assessment, this subsection shall not apply, if such bank shall deposit security satisfactory to the
Corporation of payment upon final determination of the issue.{{36}}

(c) Without prior written consent by the Corporation, no insured bank shall (1) merge or
consolidate with any noninsured bank or institution or convert into a noninsured bank or
institution or (2) assume liability to pay any deposits made in, or similar liabilities of, any
noninsured bank or institution or (3) transfer assets to any noninsured bank or institution in
consideration of the assumption of liabilities for any portion of the deposits made in such insured
bank.{{37}}

(d) The Corporation may require any insured bank to provide protection and indemnity against
burglary, defalcation, and other similar insurable losses. Whenever any insured bank refuses to
comply with any such requirement the Corporation may contract for such protection and
indemnity and add the cost thereof to the assessment otherwise payable by such bank.{{38}}

(e) Any insured bank which willfully fails or refuses to file any certified statement or pay any
assessment required under this Act shall be subject to a penalty of not more than P100 for each
day that such violations continue, which penalty the Corporation may recover for its use:
Provided, That this subsection shall not be applicable under the circumstances stated in the
provisions of subsection (b) of this section.{{39}}

SECTION 17. Except with the written consent of the Corporation, no person shall serve as a
director, officer, or employee of an insured bank who has been convicted, or who is hereafter
convicted, of any criminal offense involving dishonesty or a breach of trust. For each willful
violation of this prohibition, the bank involved shall be subject to a penalty of not more than
P100 for each day this prohibition is violated, which the Corporation may recover for its
use.{{40}}{{41}}{{42}}{{43}}{{44}}

SECTION 18. If any provision or section of this Act or the application thereof to any person or
circumstances is held invalid, the other provisions or sections of this Act, in the application of
such provision or section to other persons or circumstances, shall not be affected
thereby.{{45}}{{46}}

SECTION 19. All Acts or parts of Acts and executive orders, administrative orders, or parts
thereof which are inconsistent with the provisions of this Act are hereby repealed.{{47}}

SECTION 20. This Act shall take effect upon approval. The Philippine Deposit Insurance
Corporation shall commence business upon organization of the Board of Directors and
certification by the Treasurer of the Philippines that the Permanent Insurance Fund has been
appropriated.{{48}}

141 | P a g e
[

Approved: June 22, 1963

Published in the Official Gazette, Vol. 59, No. 36, p. 6003 on September 9, 1963.

Source: CD Asia

[[1]] As amended by Republic Act No. 9302, August 12, 2004:

SECTION 2. The powers and functions of the Corporation shall be vested in and exercised by a
Board of Directors which shall be composed of five (5) members as follows:

a. The Secretary of Finance who shall be the ex-officio Chairman of the Board without
compensation.

b. The Governor of the Bangko Sentral ng Pilipinas, who shall be ex-officio member of the
Board without compensation.

c. The President of the Corporation, who shall be appointed by the President of the Philippines
from either the Government or private sector to serve on a full-time basis for a term of six (6)
years. The President of the Corporation shall also serve as Vice Chairman of the Board.

d. Two (2) members from the private sector, to be appointed for a term of six (6) years without
reappointment by the President of the Philippines: Provided, That of those first appointed, the
first appointee shall serve for a period of two (2) years.

No person shall be appointed as member of the Board unless he be of good moral character and
of unquestionable integrity and responsibility, and who is of recognized competence in
economics, banking and finance, law, management administration or insurance, and shall be at
least thirty-five (35) years of age. For the duration of their tenure or term in office and for a
period of one year thereafter, the appointive members of the Board shall be disqualified from
holding any office, position or employment in any insured bank.

The Secretary of Finance and the Governor of the Bangko Sentral may each designate a
representative, whose position shall not be lower than an undersecretary or deputy governor
respectively, to attend such meetings and to vote on behalf of their respective principals.
Whenever the Chairman of the Board is unable to attend a meeting of the Board, or in the event
of a vacancy in the office of the Secretary of Finance, the President of the Corporation shall act
as Chairman.

The presence of three (3) members shall constitute a quorum. All decisions of the Board of
Directors shall require the concurrence of at least three (3) members.

The Secretary of Finance shall fix the rate of per diem for every Board meeting attended by the
members of the Board of Directors from the private sector. The President of the Philippines may
fix such emoluments that may be received by the Board of Directors comparable to the
emoluments of members of the Board of Directors of other government financial
institutions.[[1]]

[[2]] As amended by RA 9302:

3. To establish a human resource management system which shall govern the selection, hiring,
appointment, transfer, promotion, or dismissal of all personnel. Such system shall aim to
establish professionalism and excellence at all levels of the Corporation in accordance with
sound principles of management.

A compensation structure, based on job evaluation studies and wage surveys and subject to the
Board’s approval, shall be instituted as an integral component of the Corporation’s human

142 | P a g e
resource development program: Provided, That all positions in the Corporation shall be governed
by a compensation, position classification system and qualification standards approved by the
Board based on a comprehensive job analysis and audit of actual duties and responsibilities. The
compensation plan shall be comparable with the prevailing compensation plans of other
government financial institutions and shall be subject to review by the Board no more than once
every two (2) years without prejudice to yearly merit reviews or increases based on productivity
and profitability. The Corporation shall therefore be exempt from existing laws, rules and
regulations on compensation, position classification and qualification standards. It shall however
endeavor to make its system conform as closely as possible with the principles under Republic
Act No. 6758, as amended.[[2]]

[[3]]As amended by RA 9302:

4. To appoint, establish the rank, fix the remuneration, approve local and foreign training of, and
remove any officer or employee of the Corporation, for cause, subject to pertinent civil service
laws: Provided, That the Board of Directors may delegate this authority to the President subject
to specific guidelines;[[3]]

[[4]] As added by RA 9302:

5. To adopt an annual budget for, and authorize such expenditures by the Corporation as are in
the interest of the effective administration and operation of the Corporation; and

6. To approve the methodology for determining the level and amount of provisioning for
insurance and financial assistance losses, which shall establish reasonable levels of deposit
insurance reserves.[[4]]

[[5]] As added by RA 9576:

7. To review the organizational set-up of the Corporation and adopt a new or revised
rganizational structure as it may deem necessary for the Corporation to undertake its mandate
and functions.[[5]]

[[6]] Renumbered from Sec. 2 by RA 9302:

SECTION 3. The President of the Corporation shall be the Chief Executive thereof and his salary
shall be fixed by the President of the Philippines at a sum commensurate to the importance and
responsibility attached to the position. The sum total of the salary of the President and the
allowances and other emoluments which the Board of Directors may grant him shall be the
ceiling for fixing the salary, allowances and other emoluments of all other personnel in the
Corporation.

The powers and duties of the President of the Corporation are:

a. To prepare the agenda for the meeting of the Board and to submit for the consideration of the
Board the policies and measures which he believes to be necessary to carry out the purposes and
provisions of this Act;

b. To execute and administer the policies and measures approved by the Board;

c. To direct and supervise the operations and internal administration of the Corporation in
accordance with the policies established by the Board. The President may delegate certain of his
administrative responsibilities to other officers of the Corporation, subject to the rules and
regulations of the Board;

d. To represent the Corporation, upon prior authority of the Board, in all dealings with other
offices, agencies and instrumentalities of the government and with all other persons or entities,
public or private, whether domestic, foreign or international;

143 | P a g e
e. To authorize, with his signature, upon prior authority of the Board, contracts entered into by
the Corporation, notes and securities issued by the Corporation, and the annual reports, balance
sheets, profits and loss statements, correspondence and other documents of the Corporation. The
signature of the President may be in facsimile wherever appropriate;

f. To represent the Corporation, either personally or through counsel, in all legal proceedings or
actions;

g. To delegate, with the prior approval of the Board of Directors, his power to represent the
Corporation, as provided in subsections (d) and (f) of this Section, to other officers of the
Corporation; and

h. To exercise such other powers as may be vested in him by the Board.

The President shall be assisted by a Vice President and other officials whose appointment and
removal for cause shall be approved and whose salary shall be fixed by the Board of Directors
upon recommendation of the President of the Corporation. During the absence or temporary
incapacity of the President, or in case of vacancy or permanent incapacity and pending the
appointment of a new President of the Corporation by the President of the Philippines, the Vice
President shall act as President and discharge the duties and responsibilities thereof (as amended
by Executive Order No. 890, April 8, 1983; RA 7400, April 13, 1992).[[6]]

[[7]] Renumbered from Sec. 3 by RA 9302:

SECTION 4. As used in this Act –

a. The term “Board of Directors” means the Board of Directors of the Corporation.

b. The term “Bank” and “Banking Institution” shall be synonymous and interchangeable and
shall include banks, commercial banks, savings bank, mortgage banks, rural banks, development
banks, cooperative banks, stock savings and loan associations and branches and agencies in the
Philippines of foreign banks and all other corporations authorized to perform banking functions
in the Philippines (as amended by RA 7400).

c. The term “receiver” includes a receiver, commission, person or other agency charged by law
with the duty to take charge of the assets and liabilities of a bank which has been forbidden from
doing business in the Philippines, as well as the duty to gather, preserve and administer such
assets and liabilities for the benefit of the depositors and creditors of said bank, and to continue
into liquidation whenever authorized under this Act or other laws, and to dispose of the assets
and to wind up the affairs of such bank (as amended by RA 7400).

d. The term “insured bank” means any bank the deposits of which are insured in accordance with
the provisions of this Act.

e. The term “non-insured bank” means any bank the deposits of which are not insured.

f. The term “deposit” means the unpaid balance of money or its equivalent received by a bank in
the usual course of business and for which it has given or is obliged to give credit to a
commercial, checking, savings, time or thrift account, or issued in accordance with Bangko
Sentral rules and regulations and other applicable laws, together with such other obligations of a
bank, which, consistent with banking usage and practices, the Board of Directors shall determine
and prescribe by regulations to be deposit liabilities of the bank: Provided, That any obligation of
a bank which is payable at the office of the bank located outside of the Philippines shall not be a
deposit for any of the purposes of this Act or included as part of the total deposits or of insured
deposit: Provided, further, That, subject to the approval of the Board of Directors, any insured
bank which is incorporated under the laws of the Philippines which maintains a branch outside
the Philippines may elect to include for insurance its deposit obligations payable only at such
branch.

144 | P a g e
The Corporation shall not pay deposit insurance for the following accounts or transactions,
whether denominated, documented, recorded or booked as deposit by the bank:

1. Investment products such as bonds and securities, trust accounts, and other similar
instruments;

2. Deposit accounts or transactions which are unfunded, or that are fictitious or fraudulent;

3. Deposit accounts or transactions constituting, and/or emanating from, unsafe and

unsound banking practice/s, as determined by the Corporation, in consultation with the
BSP, after due notice and hearing, and publication of a cease and desist order issued by
the Corporation against such deposit accounts or transactions; and

4. Deposits that are determined to be the proceeds of an unlawful activity as defined

under Republic Act 9160, as amended.

The actions of the Corporation taken under this section shall be final and executory, and may not
be restrained or set aside by the court, except on appropriate petition for certiorari on the ground
that the action was taken in excess of jurisdiction or with such grave abuse of discretion as to
amount to a lack or excess of jurisdiction. The petition for certiorari may only be filed within
thirty (30) days from notice of denial of claim for deposit insurance (as amended by Presidential
Decree 1940, June 27, 1984; RA 7400; RA 9302; RA 9576).

g. The term “insured deposit” means the amount due to any bona fide depositor for legitimate
deposits in an insured bank net of any obligation of the depositor to the insured bank as of the
date of closure, but not to exceed Five Hundred Thousand Pesos (P500,000.00). Such net amount
shall be determined according to such regulations as the Board of Directors may prescribe. In
determining such amount due to any depositor, there shall be added together all deposits in the
bank maintained in the same right and capacity for his benefit either in his own name or in the
name of others. A joint account regardless of whether the conjunction “and,” “or,” “and/or” is
used, shall be insured separately from any individually-owned deposit account: Provided, That
(1) If the account is held jointly by two or more natural persons, or by two or more juridical
persons or entities, the maximum insured deposit shall be divided into as many equal shares as
there are individuals, juridical persons or entities, unless a different sharing is stipulated in the
document of deposit, and (2) if the account is held by a juridical person or entity jointly with one
or more natural persons, the maximum insured deposit shall be presumed to belong entirely to
such juridical person or entity: Provided, further, That the aggregate of the interest of each co-
owner over several joint accounts, whether owned by the same or different combinations of
individuals, juridical persons or entities, shall likewise be subject to the maximum insured
deposit of Five Hundred Thousand Pesos (P500,000.00): Provided, furthermore, That the
provisions of any law to the contrary notwithstanding, no owner/holder of any negotiable
certificate of deposit shall be recognized as a depositor entitled to the rights provided in this Act
unless his name is registered as owner/holder thereof in the books of the issuing bank: Provided,
finally, That, in case of a condition that threatens the monetary and financial stability of the
banking system that may have systemic consequences, as defined in section 17 hereof, as
determined by the Monetary Board, the maximum deposit insurance cover may be adjusted in
such amount, for such a period, and/or for such deposit products, as may be determined by a
unanimous vote of the Board of Directors in a meeting called for the purpose and chaired by the
Secretary of Finance, subject to the approval of the President of the Philippines (as amended by
RA 9302; RA 9576).

h. The term “transfer deposit” means a deposit in an insured bank made available to a depositor
by the Corporation as payment of insured deposit of such depositor in a closed bank and assumed
by another insured bank.

i. The term “trust funds” means funds held by an insured bank in a fiduciary capacity and
includes without being limited to, funds held as trustee, executor, administrator, guardian or
agent.[[7]]

145 | P a g e
[[8]] As amended by RA 6037, August 4, 1969; renumbered from Sec. 4 by RA 9302:

SECTION 5. The deposit liabilities of any bank or banking institution, which is engaged in the
business of receiving deposits as herein defined on the effective date of this Act, or which
thereafter may engage in the business of receiving deposits, shall be insured with the
Corporation.[[8]]

[[9]] As amended by RA 9302:

SECTION 6.

a. The assessment rate shall be determined by the Board of Directors: Provided, That the
assessment rate shall not exceed one-fifth (1/5) of one per centum (1%) per annum. The
semiannual assessment for each insured bank shall be in the amount of the product of one-half
(1/2) the assessment rate multiplied by the assessment base but in no case shall it be less than
Five thousand pesos (P5,000.00). The assessment base shall be the amount of the liability of the
bank for deposits as defined under subsection (f) of Section 4 without any deduction for
indebtedness of depositors.[[9]]

[[10]] As amended by RA 7400:

The semi-annual assessment base for one semi-annual period shall be the average of the
assessment base of the bank as of the close of business on March thirty-one and June thirty and
the semi-annual assessment base for the other semi-annual period shall be the average of the
assessment base of the bank as of the close of business on September thirty and December thirty-
one: Provided, That when any of said days is a non-business day or legal holiday, either national
or provincial, the preceding business day shall be used. The certified statements required to be
filed with the Corporation under subsections (b) and (c) of this Section shall be in such form and
set forth such supporting information as the Board of Directors shall prescribe. The assessment
payments required from the insured banks under subsections (b) and (c) of this Section shall be
made in such manner and at such time or times as the Board of Directors shall prescribe,
provided the time or times so prescribed shall not be later than sixty (60) days after filing the
certified statement setting forth the amount of assessment.[[10]]

[[11]]As amended by PD 1940:

b. On or before the 31st of July of each year, each insured bank shall file with the Corporation a
certified statement showing for the six months ending on the preceding June thirty the amount of
the assessment base and the amount of the semi-annual assessment due to the Corporation for the
period ending on the following December thirty-one, determined in accordance with subsection
(a) of this Section, which shall contain or be verified by a written declaration that it is made
under the penalties of perjury. Each insured bank shall pay to the Corporation the amount of the
semi-annual assessment it is required to certify. On or before the 31st day of January of each
year, each insured bank shall file with the Corporation a similar certified statement for the six
months ending on the preceding December thirtyone and shall pay to the Corporation the amount
of the semi-annual assessment for the period ending on the following June thirty which it is
required to certify.[[11]]

[[12]] As amended by RA 9302:

d. All assessment collections and income from operations after expenses and charges shall be
added to the Deposit Insurance Fund under Section 13 hereof. Such expenses and charges are:
(1) the operating costs and expenses of the Corporation for the calendar year; (2) additions to
reserve to provide for insurance and financial assistance losses, net of recoverable amounts from
applicable assets and collaterals, during the calendar year; and (3) the net insurance and financial
assistance losses sustained in said calendar year.[[12]]

[[13]] As amended by RA 9302:

146 | P a g e
h. The Corporation shall not terminate the insured status of any bank which continues to operate
or receive deposits. Should any insured bank fail or refuse to pay any assessment required to be
paid by such bank under any provision of this Act, and should the bank not correct such failure
or refusal within thirty (30) days after written notice has been given by the Corporation to an
officer of the bank citing this subsection, and stating that the bank has failed or refused to pay as
required by the law, the Corporation may, at its discretion, file a case for collection before the
appropriate court without prejudice to the imposition of administrative sanctions allowed under
the provisions of this Law on the bank officials responsible for the non-payment of assessment
fees.[[13]]

[[14]] As amended by RA 7400; RA 9302:

a. Whenever upon examination by the Corporation into the condition of any insured bank, it shall
be disclosed that an insured bank or its directors or agents have committed, are committing or
about to commit unsafe or unsound practices in conducting the business of the bank, or have
violated, are violating or about to violate any provisions of any law or regulation to which the
insured bank is subject, the Board of Directors shall submit the report of the examination to the
Monetary Board to secure corrective action thereon. If no such corrective action is taken by the
Monetary Board within forty-five (45) days from the submission of the report, the Board of
Directors shall, motu proprio, institute corrective action which it deems necessary. The Board of
Directors may thereafter issue a cease and desist order, and require the bank or its directors or
agents concerned to correct the practices or violations within forty-five (45) days. However, if
the practice or violation is likely to cause insolvency or substantial dissipation of assets or
earnings of the bank, or is likely to seriously weaken the condition of the bank or otherwise
seriously prejudice the interests of its depositors and the Corporation, the period to take
corrective action shall not be more than fifteen (15) days. The order may also include the
imposition of fines provided in Section 21 (f) hereof. The Board of Directors shall duly inform
the Monetary Board of the Bangko Sentral ng Pilipinas of action it has taken under this
subsection with respect to such practices or violations.[[14]]

[[15]] As amended by EO 890; RA 7400:

b. The actions and proceedings provided in the preceding subsection may be undertaken by the
Corporation if, in its opinion, an insured bank or its directors or agents have violated, are
violating or about to violate any provision of this Act or any order, rule or instruction issued by
the Corporation or any written condition imposed by the Corporation in connection with any
transaction with or grant by the Corporation. [[15]]

[[16]] As amended by RA 9302; RA 9576:

Eighth – To conduct examination of banks with prior approval of the Monetary Board: Provided,
That no examination can be conducted within twelve (12) months from the last examination
date: Provided, however, That the Corporation may, in coordination with the Bangko Sentral,
conduct a special examination as the Board of Directors, by an affirmative vote of a majority of
all of its members, if there is a threatened or impending closure of a bank; Provided, further,
That, notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No.
6426, as amended, Republic Act No. 8791, and other laws, the Corporation and/or the Bangko
Sentral, may inquire into or examine deposit accounts and all information related thereto in case
there is a finding of unsafe or unsound banking practice; Provided, finally, That to avoid
overlapping of efforts, the examination shall maximize the efficient use of the relevant reports,
information, and findings of the Bangko Sentral, which it shall make available to the
Corporation;[[16]]

[[17]] As amended by RA 6037:

Tenth – To prescribe by its Board of Directors such rules and regulations as it may deem
necessary to carry out the provisions of this Act;[[17]]

147 | P a g e
[[18]] As amended by PD 1940:

Eleventh – The Corporation may establish its own provident fund which shall consist of
contributions made both by the Corporation and by its officers and employees to a common fund
for the payment of benefits to such officers or employees or their heirs. The Board of Directors
shall prepare and issue rules and regulations as it may deem necessary to make effective the
establishment and operation of the fund;[[18]]

[[19]] As added by RA 7400:

Twelfth – To compromise, condone or release, in whole or in part, any of claim or settled

liability to the Corporation, regardless of the amount involved, under such terms and conditions
as may be imposed by the Board of Directors to protect the interest of the Corporation.[[19]]

[[20]] As amended by EO 890; RA 7400:

b. The Board of Directors shall appoint examiners who shall have power, on behalf of the
Corporation to examine any insured bank. Each such examiner shall have the power to make a
thorough examination of all the affairs of the bank and in doing so, he shall have the power to
administer oaths, to examine and take and preserve the testimony of any of the officers and
agents thereof, and, to compel the presentation of books, documents, papers, or records necessary
in his judgment to ascertain the facts relative to the condition of the bank; and shall make a full
and detailed report of the condition of the bank to the Corporation. The Board of Directors in like
manner shall appoint claim agents who shall have the power to investigate and examine all
claims for insured deposits and transferred deposits. Each claim agent shall have the power to
administer oaths and to examine under oath and take and preserve testimony of any person
relating to such claim.[[20]]

[[21]] As added by RA 9302:

(b-1) The investigators appointed by the Board of Directors shall have the power on behalf of the
Corporation to conduct investigations on frauds, irregularities and anomalies committed in
banks, based on reports of examination conducted by the Corporation and Bangko Sentral ng
Pilipinas or complaints from depositors or from other government agency. Each such
investigator shall have the power to administer oaths, and to examine and take and preserve the
testimony of any person relating to the subject of investigation.[[21]]

[[22]] As amended by EO 890; RA 7400; RA 9302:

d. The Corporation shall have access to reports of examination made by, and reports of condition
made to the Bangko Sentral ng Pilipinas or its appropriate supervising departments, and
the Bangko Sentral ng Pilipinas shall also have access to reports of examination made by, and
reports of condition made to the Corporation:Provided, That the provisions of any law to the
contrary notwithstanding, the Corporation shall likewise have access to reports, findings and any
other information derived from any special or general examination or inquiry conducted by
the Bangko Sentral in respect to bank fraud or serious irregularity in an insured bank: Provided,
That the Corporation shall use reports and findings under similar terms and conditions prescribed
by applicable laws on the Bangko Sentral.[[22]]

[[23]] As added by RA 9302:

(d-1) Each insured bank shall keep and maintain a true and accurate record or statement of its
daily deposit transactions consistent with the standards set by the Bangko Sentral ng
Pilipinas and the Corporation. Compliance with such standards shall be duly certified by the
president of the bank or the compliance officer:Provided, That refusal or willful failure to issue
the required certification shall constitute a violation of this Section and shall subject such officers
of the bank to the sanctions provided for under Section 21 (f) of this Act.[[23]]

148 | P a g e
[[24]] As added by RA 7400:

e. Personnel of the Corporation are hereby prohibited from:

1. being an officer, director, consultant, employee or stockholder, directly or indirectly, of

any bank or banking institution except as otherwise provided in this Act;

2. receiving any gift or thing of value from any officer, director or employee thereof;

3. revealing in any manner, except as provided in this Act or under order of the court,
information relating to the condition or business of any such institution. This prohibition
shall not apply to the giving of information to the Board of Directors, the President of the
Corporation, Congress, any agency of government authorized by law, or to any person
authorized by either of them in writing to receive such information (as amended by RA
9302).[[24]]

[[25]] f. The Corporation shall underwrite or advance litigation costs and expenses, including
legal fees and other expenses of external counsel, or provide legal assistance to, directors,
officers, employees or agents of the Corporation in connection with any civil, criminal,
administrative or any other action or proceeding, to which such director, officer, employee or
agent is made a party by reason of, or in connection with, the exercise of authority or
performance of functions and duties under this Act: Provided, That such legal protection shall
not apply to any civil, criminal, administrative or any action or proceeding that may be initiated
by the Corporation, in whatever capacity, against such director, officer, employee or
agent: Provided, further, That directors, officers, employees or agents who shall resign, retire,
transfer to another agency or be separated from the service, shall continue to be provided with
such legal protection in connection with any act done or omitted to be done by them in good faith
during their tenure or employment with the Corporation: Provided, finally, That in the event of a
settlement or compromise, indemnification shall be provided only in connection with such
matters covered by the settlement as to which the Corporation is advised by counsel that the
persons to be indemnified did not commit any negligence or misconduct (as added by RA 9302).

g. The costs and expenses incurred in defending the aforementioned action, suit or proceeding
may be paid by the Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or
agent to repay the amount advanced should it ultimately be determined by the Board of Directors
that he is not entitled to be indemnified as provided in this subsection (as added by RA 9302).

h. Unless the actions of the Corporation or any of its officers and employees are found to be in
willful violation of this Act, performed in bad faith, with malice and/or gross negligence, the
Corporation, its directors, officers, employees and agents are held free and harmless to the fullest
extent permitted by law from any liability, and they shall be indemnified for any and all
liabilities, losses, claims, demands, damages, deficiencies, costs and expenses of whatsoever
kind and nature that may arise in connection with the performance of their functions, without
prejudice to any criminal liability under existing laws (as added by RA 9576).

i. Legal assistance shall include the grant or advance of reasonable legal fees as determined by
the Board of Directors to enable the concerned director, officer, employee or agent to engage
counsel of his choice, subject to approval by the Board of Directors.

Notwithstanding the provisions of this Section and Section 2, members of the Board of Directors
and personnel of the Corporation may become directors and officers of any bank and banking
institution and of any entity related to such institution in connection with financial assistance
extended by the Corporation to such institution and when, in the opinion of the Board, it is
appropriate to make such designation to protect the interest of the Corporation (as amended by
RA 9302).

149 | P a g e
Borrowing from any bank or banking institution by examiners and other personnel of the
examination departments of the Corporation shall be prohibited only with respect to the
particular institution in which they are assigned, or are conducting an examination. Personnel of
other departments, offices or units of the Corporation shall likewise be prohibited from
borrowing from any bank or banking institution during the period of time that a transaction of
such institution with the Corporation is being evaluated, processed or acted upon by such
personnel: Provided, however, That the Board may, at its discretion, indicate the position levels
or functional groups to which the prohibition is applicable (as amended by RA 7400).

Borrowing by all full-time personnel of the Corporation from any bank or banking institution
shall be secured and disclosed to the Board, and shall be subject to such further rules and
regulations as the Board may prescribe (as amended by RA 7400).[[25]]

[[26]] As amended/renumbered from Sec. 9-A by RA 9302:

SECTION 10. a. The provisions of other laws, general or special, to the contrary otwithstanding,
whenever it shall be appropriate for the Monetary Board of the Bangko Sentral ng Pilipinas to
appoint a receiver of any banking institution pursuant to existing laws, the Monetary Board shall
give prior notice and appoint the Corporation as receiver.[[26]]

[[27]] As added by RA 9302:

b. The Corporation as receiver shall control, manage and administer the affairs of the closed
bank. Effective immediately upon takeover as receiver of such bank, the powers, functions and
duties, as well as all allowances, remunerations and perquisites of the directors, officers, and
stockholders of such bank are suspended, and the relevant provisions of the Articles of
Incorporation and By-laws of the closed bank are likewise deemed suspended.

The assets of the closed bank under receivership shall be deemed in custodia legis in the hands of
the receiver. From the time the closed bank is placed under such receivership, its assets shall not
be subject to attachment, garnishment, execution, levy or any other court processes. Therefore, a
judge, officer of the court or any person who shall issue, order, process or cause the issuance or
implementation of the writ of garnishment, levy, attachment or execution shall be liable under
Section 21 hereof.[[27]]

[[28]] As amended and added by RA 9302:

c. In addition to the powers of a receiver pursuant to existing laws, the Corporation is

empowered to:

1. bring suits to enforce liabilities to or recoveries of the closed bank;

2. appoint and hire persons or entities of recognized competence in banking or finance as its
deputies and assistants, to perform such powers and functions of the Corporation as
receiver or liquidator of the closed bank;

3. suspend or terminate the employment of officers and employees of the closed

bank: Provided, That payment of separation pay or benefits shall be made only after the
closed bank has been placed under liquidation pursuant to the order of the Monetary
Board under Section 30 of R.A. 7653, and that such payment shall be made from
available funds of the bank after deducting reasonable expenses for receivership and
liquidation;

4. pay accrued utilities, rentals and salaries of personnel of the closed bank, for a period not
exceeding three (3) months, from available funds of the closed bank;

5. collect loans and other claims of the closed bank, and for the purpose, modify,
compromise or restructure the terms and conditions of such loans or claims as may be
deemed advantageous to the interest of the creditors and claimants of the closed bank;

150 | P a g e
 6. hire or retain private counsels as may be necessary;

7. borrow or obtain a loan, or mortgage, pledge or encumber any asset of the closed bank,
when necessary to preserve or prevent dissipation of the assets, or to redeem foreclosed
assets of the closed bank, or to minimize losses to the depositors and creditors;

8. if the stipulated interest on deposits is unusually high compared with the prevailing
applicable interest rate, the Corporation as receiver may exercise such powers which may
include a reduction of the interest rate to a reasonable rate: Provided, That any
modification or reduction shall apply only to unpaid interest; and and

9. exercise such other powers as are inherent and necessary for the effective discharge of the
duties of the Corporation as a receiver.

The Board of Directors shall adopt such policies and guidelines as may be necessary for the
performance of the above powers by personnel, deputies and agents of the Corporation.[[28]]

[[29]] As added by RA 9302:

SECTION 11. In all cases or actions filed by the Corporation as receiver for the recovery of, or
involving any asset of the closed bank, payment of all docket and other court fees shall be
deferred until the action is terminated with finality. Any such fees shall constitute as a first lien
on any judgment in favor of the closed bank or in case of unfavorable judgment, such fees shall
be paid as administrative expenses during the distribution of the assets of the closed bank.[[29]]

[[30]] As added by RA 7400; renumbered from Sec. 9-B by RA 9302:

Before any distribution of the assets of the closed bank in accordance with the preference
established by law, the Corporation shall periodically charge against said assets reasonable
receivership expenses and subject to approval by the proper court, reasonable liquidation
expenses, it has incurred as part of the cost of receivership/liquidation proceedings and collect
payment therefore from available assets.[[30]]

[[31]] As added by RA 9302:

After the payment of all liabilities and claims against the closed bank, the Corporation shall pay
any surplus dividends at the legal rate of interest from date of takeover to date of distribution, to
creditors and claimants of the closed bank in accordance with legal priority before distribution to
the shareholders of the closed bank.[[31]]

[[32]] As amended and added by RA 9302:

SECTION 13. To carry out the purposes of this Act, the permanent insurance fund shall be Three
billion pesos (P3,000,000,000.00).

The Deposit Insurance Fund shall be the capital account of the Corporation and shall principally
consist of the following: (i) the Permanent Insurance Fund; (ii) assessment collections, subject to
the charges enumerated in Section 6 (d); (iii) reserves for insurance and financial assistance
losses; and (iv) retained earnings: Provided, That the reserves for insurance and financial
assistance losses and retained earnings shall be maintained at a reasonable level to ensure capital
adequacy: Provided, further, That the Corporation may, within two (2) years from the passage of
this Act, and every five (5) years thereafter, conduct a study on the need to adjust the amount of
the Permanent Insurance Fund, insurance cover, assessment rate and assessment base, and
thereafter make the necessary recommendation to Congress. For this purpose, the Corporation
may hire the services of actuarial consultants to determine, among others, the affordability of
assessment rates, analysis and evaluation of insurance risk, and advisability of imposing varying
assessment rates or insurance cover of different bank categories.[[32]]

[[33]] As amended by RA 9302:

151 | P a g e
SECTION 14. Whenever an insured bank shall have been closed by the Monetary Board
pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank shall
be made by the Corporation as soon as possible either (1) by cash or (2) by making available to
each depositor a transferred deposit in another insured bank in an amount equal to insured
deposit of such depositor: Provided, however, That the Corporation, in its discretion, may require
proof of claims to be filed before paying the insured deposits, and that in any case where the
Corporation is not satisfied as to the viability of a claim for an insured deposit, it may require
final determination of a court of competent jurisdiction before paying such claim: Provided,
further, That failure to settle the claim, within six (6) months from the date of filing of claim for
insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad
faith, or malice, shall, upon conviction, subject the directors, officers or employees of the
Corporation responsible for the delay, to imprisonment from six (6) months to one (1)
year: Provided, furthermore, That the period shall not apply if the validity of the claim requires
the resolution of issues of facts and or law by another office, body or agency including the case
mentioned in the first proviso or by the Corporation together with such other office, body or
agency.[[33]]

[[34]] As amended by PD 1940; RA 7400; renumbered from Sec. 10(d) by RA 9302:

SECTION 15. The Corporation, upon payment of any depositor as provided for in subsection (c)
of this Section, shall be subrogated to all rights of the depositor against the closed bank to the
extent of such payment. Such subrogation shall include the right on the part of the Corporation to
receive the same dividends and payments from the proceeds of the assets of such closed bank
and recoveries on account of stockholders’ liability as would have been payable to the depositor
on a claim for the insured deposits but, such depositor shall retain his claim for any uninsured
portion of his deposit. All payments by the Corporation of insured deposits in closed banks
partake of the nature of public funds, and as such, must be considered a preferred credit similar
to taxes due to the National Government in the order of preference under Article 2244 of the
New Civil Code: Provided, further, That this preference shall be likewise effective upon
liquidation proceedings already commenced and pending as of the approval of this Act, where no
distribution of assets has been made.[[34]]

[[35]] As added by RA 9302:

a. The Corporation shall commence the determination of insured deposits due the depositors of a
closed bank upon its actual takeover of the closed bank. The Corporation shall give notice to the
depositors of the closed bank of the insured deposits due them by whatever means deemed
appropriate by the Board of Directors: Provided, That the Corporation shall publish the notice
once a week for at least three (3) consecutive weeks in a newspaper of general circulation or,
when appropriate, in a newspaper circulated in the community or communities where the closed
bank or its branches are located.[[35]]

[[36]] Renumbered from Sec. 11 (a) by RA 9302:

b. Payment of an insured deposit to any person by the Corporation shall discharge the
Corporation, and payment of transferred deposit to any person by the new bank or by an insured
bank in which a transferred deposit has been made available shall discharge the Corporation and
such new bank or other insured bank, to the same extent that payment to such person by the
closed bank would have discharged it from liability for the insured deposit.[[36]]

[[37]] Renumbered from Sec. 11 (b) by RA 9302:

c. Except as otherwise prescribed by the Board of Directors, neither the Corporation nor such
other insured bank shall be required to recognize as the owner of any portion of a deposit
appearing on the records of the closed bank under a name other than that of the claimant, any
person whose name or interest as such owner is not disclosed on the records of such closed bank
as part owner of said deposit, if such recognition would increase the aggregate amount of the
insured deposits in such closed bank.[[37]]

152 | P a g e
[[38]] Renumbered from Sec. 11 (c) by RA 9302:

d. The Corporation may withhold payment of such portion of the insured deposit of any
depositor in a closed bank as may be required to provide for the payment of any liability of such
depositor as a stockholder of the closed bank, or of any liability of such depositor to the closed
bank or its receiver, which is not offset against a claim due from such bank, pending the
determination and payment of such liability by such depositor or any other liable therefor.[[38]]

[[39]] As amended by RA 9302:

e. Unless otherwise waived by the Corporation, if the depositor in the closed bank shall fail to
claim his insured deposits with the Corporation within two (2) years from actual takeover of the
closed bank by the receiver, or does not enforce his claim filed with the corporation within two
(2) years after the two-year period to file a claim as mentioned hereinabove, all rights of the
depositor against the Corporation with respect to the insured deposit shall be barred; however, all
rights of the depositor against the closed bank and its shareholders or the receivership estate to
which the Corporation may have become subrogated, shall thereupon revert to the depositor.
Thereafter, the Corporation shall be discharged from any liability on the insured deposit.[[39]]

[[40]] As amended by RA 6037; renumbered from Sec. 12 by RA 9302:

SECTION 17. a. Money of the Corporation not otherwise employed shall be invested in
obligations of the Republic of the Philippines or in obligations guaranteed as to principal and
interest by the Republic of the Philippines.[[40]]

[[41]] As amended by RA 9302:

b. The banking or checking accounts of the Corporation shall be kept with the Bangko Sentral ng
Pilipinas, with the Philippine National Bank, or with any other bank designated as depository or
fiscal agent of the Philippine government.[[41]]

[[42]] As amended by RA 9576:

c. It is hereby declared to be the policy of the State that the Deposit Insurance Fund of the
Corporation shall be preserved and maintained at all times. Accordingly, all tax obligations of
the Corporation for a period of five (5) years reckoned from the date of effectivity of this Act
shall be chargeable to the Tax Expenditure Fund (TEF) in the annual General Appropriations Act
pursuant to the provisions of Executive Order No. 93, series of 1986; Provided, That, on the 6th
year and thereafter, the Corporation shall be exempt from income tax, final withholding tax,
value-added tax on assessments collected from member banks, and local taxes (as added by RA
9576).

d. When the Corporation has determined that an insured bank is in danger of closing, in order to
prevent such closing, the Corporation, in the discretion of its Board of Directors, is authorized to
make loans to, or purchase the assets of, or assume liabilities of, or make deposits in, such
insured bank, upon such terms and condition as the Board of Directors may prescribe, when in
the opinion of the Board of Directors, the continued operation of such bank is essential to
provide adequate banking service in the community or maintain financial stability in the
economy (renumbered from Sec. 17 (c) by RA 9576).[[42]]

[[43]] As amended by RA 7400:

The authority of the Corporation under the foregoing paragraph to extend financial assistance to,
assume liabilities of, purchase the assets of an insured bank may also be exercised in the case of
a closed insured bank if the Corporation finds that the resumption of operations of such bank is
vital to the interests of the community, or a severe financial climate exists which threatens the
stability of a number of banks possessing significant resources: Provided, That the reopening and

153 | P a g e
resumption of operations of the closed bank shall be subject to the prior approval of the
Monetary Board.

The Corporation may provide any corporation acquiring control of, merging or consolidating
with or acquiring the assets of an insured bank in danger of closing in order to prevent such
closing or of a closed insured bank in order to restore to normal operations, with such financial
assistance as it could provide an insured bank under this subsection: Provided, That, within sixty
(60) days from date of assistance the Corporation shall submit a report thereof to the Monetary
Board.[[43]]

[[44]] As amended by RA 9302:

The Corporation, prior to the exercise of the powers under this Section, shall determine that
actual payoff and liquidation thereof will be more expensive than the exercise of this power:
Provided, That when the Monetary Board has determined that there are systemic consequences
of a probable failure or closure of an insured bank, the Corporation may grant financial
assistance to such insured bank in such amount as may be necessary to prevent its failure or
closure and/or restore the insured bank to viable operations, under such terms and conditions as
may be deemed necessary by the Board of Directors, subject to concurrence by the Monetary
Board and without additional cost to the Deposit Insurance Fund.

A systemic risk refers to the possibility that failure of one bank to settle net transactions with
other banks will trigger a chain reaction, depriving other banks of funds leading to a general
shutdown of normal clearing and settlement activity. Systemic risk also means the likelihood of a
sudden, unexpected collapse of confidence in a significant portion of the banking or financial
system with potentially large real economic effects. Finally, the Corporation may not use its
authority under this subsection to purchase the voting or common stock of an insured bank but it
can enter into and enforce agreements that it determines to be necessary to protect its financial
interests: Provided, That the financial assistance may take the form of equity or quasiequity of
the insured bank as may be deemed necessary by the Board of Directors with concurrence by the
Monetary Board: Provided, further, That the Corporation shall dispose of such equity as soon as
practicable.[[44]]

[[45]] As amended/renumbered from Sec. 13 by RA 9302:

SECTION 18. The Corporation is authorized to borrow from the Bangko Sentral ng
Pilipinas and theBangko Sentral is authorized to lend the Corporation on such terms as may be
agreed upon by the Corporation and the Bangko Sentral, such funds as in the judgment of the
Board of Directors of the Corporation are from time to time required for insurance purposes and
financial assistance provided for in Section 17(d) of this Act: Provided, That any such loan as
may be granted by the Bangko Sentral shall be consistent with monetary policy; Provided,
further, That the rate of interest thereon shall be fixed by the Monetary Board but shall not
exceed the treasury bill rate.[[45]]

[[46]] As amended by RA 6037; PD 653, February 1, 1975; PD 1940; RA 7400:

When in the judgment of the Board of Directors the funds of the Corporation are not sufficient to
provide for an emergency or urgent need to attain the purposes of this Act, the Corporation is
likewise authorized to borrow money, obtain loans or arrange credit lines or other credit
accommodations from any bank designated as depository or fiscal agent of the Philippine
Government: Provided, That such loan shall be of short-term duration.[[46]]

[[47]] As amended by RA 9576:

SECTION 19. With the approval of the President of the Philippines, the Corporation is
authorized to issue bonds, debentures, and other obligations, both local or foreign, as may be
necessary for purposes of providing liquidity for settlement of insured deposits in closed banks
as well as for financial assistance as provided herein: Provided, That the Board of Directors shall

154 | P a g e
determine the interest rates, maturity and other requirements of said obligations: Provided,
further, That the Corporation shall provide for appropriate reserves for the redemption or
retirement of said obligation.

All notes, debentures, bonds, or such obligations issued by the Corporation shall be exempt from
taxation both as to principal and interest, and shall be fully guaranteed by the Government of the
Republic of the Philippines. Such guarantee, which in no case shall exceed two times the Deposit
Insurance Fund as of date of the debt issuance, shall be expressed on the face thereof.

The Board of Directors shall have the power to prescribe rules and regulations for the issuance,
reissuance, servicing, placement and redemption of the bonds herein authorized to be issued as
well as the registration of such bonds at the request of the holders thereof.[[47]]

[[48]] As amended by RA 9302:

SECTION 20. a. The Corporation shall annually make a report of its operations to the Congress
as soon as practicable after the 1st day of January in each year (renumbered from Sec. 15 (a) by
RA 9302).

b. The financial transactions of the Corporation shall be audited by the Commission on Audit in
accordance with the principles and procedures applicable to commercial corporate transactions
and under such rules and regulations as may be prescribed by the Commission on Audit. The
audit shall be conducted at the place or places where accounts of the Corporation are normally
kept. Except as to matters relating to the function of the Corporation as receiver which shall be
subject to visitorial audit only, the representatives of the Commission on Audit shall have access
to all books, accounts, records, reports, files and all other papers, things, or property belonging to
or in use by the Corporation pertaining to its financial transactions and necessary to facilitate the
audit, and they shall be afforded full facilities for verifying transactions with the balances or
securities held by depositories, fiscal agents, and custodians. All such books, accounts, records,
reports, files, papers, and property of the Corporation shall remain in possession and custody of
the Corporation (as amended/renumbered from Sec. 15 (b) by RA 9302).

c. A report of the Audit for each fiscal year ending on June 30 shall be made by the Auditor
General to the Congress not later than January 15 following the close of such fiscal year. On or
before December 15 following such fiscal year, the Auditor General shall furnish the
Corporation a short form report showing the financial position of the Corporation at the close of
fiscal year. The report to the Congress shall set forth the scope of the audit and shall include a
statement of assets and liabilities and surplus or deficit; a statement of surplus or deficit analysis;
a statement of income and expenses; a statement of sources and application of funds and such
comments and information as may be deemed necessary to inform Congress of the financial
operations and condition of the Corporation, together with such recommendations with respect
thereto as the Auditor General may deem advisable. The report shall also show specifically any
program, expenditure, or other financial transactions or undertaking observed in the course of the
audit, which in the opinion of the Auditor General, has been carried on or made without authority
of law. A copy of each report shall be furnished to the President of the Philippines, to the
Governor of the Bangko Sentral ng Pilipinas, and to the Corporation at the time submitted to the
Congress (as amended/renumbered from Sec. 15 (c) by RA 9302).[[48]]

[[49]]SECTION 21.

a. Every insured bank shall display at each place of business maintained by it a sign or signs, and
shall include a statement in all its advertisements to the effect that its deposits are insured by the
Corporation: Provided, That the Board of Directors may exempt from this requirement
advertisements which do not relate to deposits or when it is impractical to include such statement
therein. The Board of Directors shall prescribe by regulations the forms of such signs and the
manner of use (as amended/renumbered from Sec. 16 (a) by RA 9302).

155 | P a g e
b. No insured bank shall pay any dividend on its capital stock or interest on its capital notes or
debentures (if such interest is required to be paid only out of net profits) or distribute any of its
capital assets while it remains in default in the payment of any assessment due to the
Corporation: Provided, That if such default is due to a dispute between the insured bank and the
Corporation over the amount of such assessment, this subsection shall not apply if such bank
shall deposit security satisfactory to the Corporation for payment upon final determination of the
issue (as amended/renumbered from Sec. 16 (b) by RA 9302).

c. Without prior written consent by the Corporation, no insured bank shall (1) merge or
consolidate with any bank or institution or (2) assume liability to pay any deposits made in, or
similar liabilities of, any bank or institution or (3) transfer assets to any bank or institution in
consideration of the assumption of liabilities for any portion of the deposits made in such insured
bank (as amended by EO 890; renumbered from Sec. 16 (c) by RA 9302).

d. The Corporation may require an insured bank to provide protection and indemnity against
burglary, defalcation, losses arising from discharge of duties by, or particular acts of defaults of
its directors, officers, or employees, and other similar insurable losses. The Board of Directors in
consultation with the Bangko Sentral, shall determine the bonding requirement as it refers to
directors, officers and employers of the insured bank as well as the form and amount of the bond.
Whenever any insured bank refuses to comply with any such requirement the Corporation may
contract for such protection and add the cost thereof to the assessment otherwise payable by such
bank (as amended by RA 7400; RA 9302).

e. Any assessment payable by an insured bank under this Act shall be subject to payment of
interest computed from the date such assessment became due and payable and at the legal rate
for loans as prescribed by law or appropriate authority and in case of willful failure or refusal to
pay such assessment and interest thereon, there shall be added a penalty equivalent to twice the
amount of interest payable as computed herein for each day such violations continue, which the
interest and penalty the Corporation may recover for its use: Provided, That the penalty shall not
be applicable under the circumstances stated in the provisions of subsection (b) of this Section
(as amended by EO 890; RA 7400).

f. The penalty of prision mayor or a fine of not less than Fifty thousand pesos (P50,000.00) but
not more than Two million pesos (P2,000,000.00), or both, at the discretion of the court, shall be
imposed upon any director, officer, employee or agent of a bank (as amended by RA 9302):

1. for any willful refusal to submit reports as required by law, rules and regulations
(as amended by RA 9302);

2. any unjustified refusal to permit examination and audit of the deposit records or the
affairs of the institution (as amended by RA 9302);

3. any willful making of a false statement or entry in any bank report or document required
by the Corporation (as amended by RA 9302);

4. submission of false material information in connection with or in relation to any financial

assistance of the Corporation extended to the bank (as added by RA 9302);

5. splitting of deposits or creation of fictitious loans or deposit accounts (as added by RA

9302).

Splitting of deposits occurs whenever a deposit account with an outstanding balance of

more than the statutory maximum amount of insured deposit maintained under the name
of natural or juridical persons is broken down and transferred into two (2) or more
accounts in the name/s of natural or juridical persons or entities who have no beneficial
ownership on transferred deposits in their names within one hundred twenty (120) days
immediately preceding or during a bankdeclared bank holiday, or immediately preceding
a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the

156 | P a g e
 purpose of availing of the maximum deposit insurance coverage (as added by RA 9302;
as amended by RA 9576);

6. refusal to allow the Corporation to take over a closed bank placed under its receivership
or obstructing such action of the Corporation (as added by RA 9302);

7. refusal to turn over or destroying or tampering bank records (as added by RA 9302);

8. fraudulent disposal, transfer or concealment of any asset, property or liability of the

closed bank under the receivership of the Corporation (as added by RA 9302);

9. violation of, or causing any person to violate, the exemption from garnishment, levy,
attachment or execution provided under this Act and the New Central Bank Act (as added
by RA 9302);

10. any willful failure or refusal to comply with, or violation of any provision of this Act, or
commission of any other irregularities, and/or conducting business in an unsafe or
unsound manner as may be determined by the Board of Directors (as amended by RA
9302).

g. The Board of Directors is hereby authorized to impose administrative fines for any act or
omission enumerated in the preceding subsection, and for violation of any order, instruction, rule
or regulation issued by the Corporation, against a bank and/or any of its directors, officers or
agents responsible for such act, omission, or violation, in amounts as it may be determined to be
appropriate, but in no case to exceed three times the amount of the damages or costs caused by
the transaction for each day that the violation subsists, taking into consideration the attendant
circumstances, such as the nature and gravity of the violation or irregularity and the size of the
bank (as amended by RA 9302).[[49]]

[[50]] SECTION 22. No court, except the Court of Appeals, shall issue any temporary
restraining order, preliminary injunction or preliminary mandatory injunction against the
Corporation for any action under this Act (as added by RA 9302).

This prohibition shall apply in all cases, disputes or controversies instituted by a private party,
the insured bank, or any shareholder of the insured bank (as added by RA 9302).

The Supreme Court may issue a restraining order or injunction when the matter is of extreme
urgency involving a constitutional issue, such that unless a temporary restraining order is issued,
grave injustice and irreparable injury will arise. The party applying for the issuance of a
restraining order or injunction shall file a bond in an amount to be fixed by the Supreme Court,
which bond shall accrue in favor of the Corporation if the court should finally decide that the
applicant was not entitled to the relief sought (as added by RA 9302).

Any restraining order or injunction issued in violation of this Section is void and of no force and
effect and any judge who has issued the same shall suffer the penalty of suspension of at least
sixty (60) days without pay (as added by RA 9302).[[50]]

[[51]] SECTION 23. The Corporation may be reorganized by the Board of Directors by
adopting if it so desires, an entirely new staffing pattern or organizational structure to suit the
operations of the Corporation under this Act. No preferential or priority right shall be given to or
enjoyed by any personnel for appointment to any position in the new staffing pattern nor shall
any personnel be considered as having prior or vested rights with respect to retention in the
Corporation or in any position which may be created in the new staffing pattern, even if he
should be the incumbent of a similar position prior to reorganization. The reorganization shall be
completed within six (6) months after the effectivity of this Act. Personnel who are not retained
are deemed separated from the service (as added by RA 9302).[[51]]

157 | P a g e
[[52]] SECTION 24. The Board of Directors is hereby authorized to provide separation
incentives, and all those who shall retire or be separated from the service on account of
reorganization under the preceding section shall be entitled to such incentives which shall be in
addition to all gratuities and benefits to which they may be entitled under existing laws (as added
by RA 9302).[[52]]

[[53]] SECTION 25. The words “Central Bank” and the “Central Bank of the Philippines”
wherever they appear in Republic Act No. 3591, as amended, is hereby replaced with Bangko
Sentral and/or Bangko Sentral ng Pilipinas, respectively (as added by RA 9302).[[53]]

[[54]] SECTION 26. Separability Clause. – If any provision or section of this Act or the
application thereof to any person or circumstances is held invalid, the other provisions or
sections of this Act, in the application of such provision or section to other persons or
circumstances, shall not be affected thereby (as added by RA 9302).[[54]]

[[55]] SECTION 27. Repealing Clause. – All acts or parts of acts and executive orders,
administrative orders, or parts thereof which are inconsistent with the provisions of this Act are
hereby repealed (as added by RA 9302).[[55]]

[[56]] SECTION 28. Effectivity Clause. – This Act shall take effect fifteen (15) days following
the completion of its publication in the Official Gazette or in two (2) newspapers of general
circulation (as added by RA 9302).[[56]]

PHILIPPINE DEPOSIT INSURANCE CORPORATION,Petitioner - vs CITIBANK, N.A.

and BANK OF AMERICA, S.T. & N.A.,

This is a petition for review under Rule 45 of the 1997 Revised Rules of Civil Procedure,
assailing the October 27, 2005 Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No.
61316, entitled Citibank, N.A. and Bank of America, S.T. & N.A. v. Philippine Deposit Insurance
Corporation.

The Facts

Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government

instrumentality created by virtue of Republic Act (R.A.) No. 3591, as amended by R.A. No.
9302.[2]

Respondent Citibank, N.A. (Citibank) is a banking corporation while respondent Bank of

America, S.T. & N.A. (BA) is a national banking association, both of which are duly organized
and existing under the laws of the United States of America and duly licensed to do business in
the Philippines, with offices in Makati City.[3]

In 1977, PDIC conducted an examination of the books of account of Citibank. It

discovered that Citibank, in the course of its banking business, from September 30, 1974 to June
30, 1977, received from its head office and other foreign branches a total of P11,923,163,908.00
in dollars, covered by Certificates of Dollar Time Deposit that were interest-bearing with
corresponding maturity dates.[4] These funds, which were lodged in the books of Citibank under
the account Their Account-Head Office/Branches-Foreign Currency, were not reported to PDIC
as deposit liabilities that were subject to assessment for insurance.[5] As such, in a letter
dated March 16, 1978, PDIC assessed Citibank for deficiency in the sum of P1,595,081.96.[6]

158 | P a g e
 Similarly, sometime in 1979, PDIC examined the books of accounts of BA which
revealed that from September 30, 1976 to June 30, 1978, BA received from its head office and its
other foreign branches a total of P629,311,869.10 in dollars, covered by Certificates of Dollar
Time Deposit that were interest-bearing with corresponding maturity dates and lodged in their
books under the account Due to Head Office/Branches.[7] Because BA also excluded these from
its deposit liabilities, PDIC wrote to BA on October 9, 1979, seeking the remittance
of P109,264.83 representing deficiency premium assessments for dollar deposits.[8]

Believing that litigation would inevitably arise from this dispute, Citibank and BA each
filed a petition for declaratory relief before the Court of First Instance (now the Regional Trial
Court) of Rizal on July 19, 1979 and December 11, 1979, respectively.[9] In their petitions,
Citibank and BA sought a declaratory judgment stating that the money placements they received
from their head office and other foreign branches were not deposits and did not give rise to
insurable deposit liabilities under Sections 3 and 4 of R.A. No. 3591 (the PDIC Charter) and, as
a consequence, the deficiency assessments made by PDIC were improper and erroneous.[10] The
cases were then consolidated.[11]

On June 29, 1998, the Regional Trial Court, Branch 163, Pasig City (RTC) promulgated
its Decision[12] in favor of Citibank and BA, ruling that the subject money placements were not
deposits and did not give rise to insurable deposit liabilities, and that the deficiency assessments
issued by PDIC were improper and erroneous. Therefore, Citibank and BA were not liable to pay
the same. The RTC reasoned out that the money placements subject of the petitions were not
assessable for insurance purposes under the PDIC Charter because said placements were deposits
made outside of the Philippines and, under Section 3.05(b) of the PDIC Rules and
Regulations,[13] such deposits are excluded from the computation of deposit liabilities. Section
3(f) of the PDIC Charter likewise excludes from the definition of the term deposit any obligation
of a bank payable at the office of the bank located outside the Philippines. The RTC further
stated that there was no depositor-depository relationship between the respondents and their head
office or other branches. As a result, such deposits were not included as third-party deposits that
must be insured. Rather, they were considered inter-branch deposits which were excluded from
the assessment base, in accordance with the practice of the United States Federal Deposit
Insurance Corporation (FDIC) after which PDIC was patterned.

Aggrieved, PDIC appealed to the CA which affirmed the ruling of the RTC in its October
27, 2005 Decision. In so ruling, the CA found that the money placements were received as part
of the banks internal dealings by Citibank and BA as agents of their respective head offices. This
showed that the head office and the Philippine branch were considered as the same entity. Thus,
no bank deposit could have arisen from the transactions between the Philippine branch and the
head office because there did not exist two separate contracting parties to act as depositor and
depositary.[14]Secondly, the CA called attention to the purpose for the creation of PDIC which
was to protect the deposits of depositors in the Philippines and not the deposits of the same bank
through its head office or foreign branches.[15] Thirdly, because there was no law or
jurisprudence on the treatment of inter-branch deposits between the Philippine branch of a
foreign bank and its head office and other branches for purposes of insurance, the CA was
guided by the procedure observed by the FDIC which considered inter-branch deposits as non-
assessable.[16] Finally, the CA cited Section 3(f) of R.A. No. 3591, which specifically excludes
obligations payable at the office of the bank located outside the Philippines from the definition of
a deposit or an insured deposit. Since the subject money placements were made in the respective
head offices of Citibank and BA located outside the Philippines, then such placements could not
be subject to assessment under the PDIC Charter.[17]

159 | P a g e
 Hence, this petition.

The Issues

PDIC raises the issue of whether or not the subject dollar deposits are assessable for insurance
purposes under the PDIC Charter with the following assigned errors:

A.

The appellate court erred in ruling that the subject dollar deposits are
money placements, thus, they are not subject to the provisions of Republic
Act No. 6426 otherwise known as the Foreign Currency Deposit Act of
the Philippines.

B.

The appellate court erred in ruling that the subject dollar deposits are not
covered by the PDIC insurance.[18]

Respondents similarly identify only one issue in this case:

Whether or not the money placements subject matter of these petitions are
assessable for insurance purposes under the PDIC Act.[19]

The sole question to be resolved in this case is whether the funds placed in the Philippine branch
by the head office and foreign branches of Citibank and BA are insurable deposits under the
PDIC Charter and, as such, are subject to assessment for insurance premiums.

The Courts Ruling

The Court rules in the negative.

A branch has no separate legal personality;Purpose of the PDIC

PDIC argues that the head offices of Citibank and BA and their individual foreign branches are
separate and independent entities. It insists that under American jurisprudence, a banks head
office and its branches have a principal-agent relationship only if they operate in the same
jurisdiction. In the case of foreign branches, however, no such relationship exists because the
head office and said foreign branches are deemed to be two distinct entities.[20] Under Philippine
law, specifically, Section 3(b) of R.A. No. 3591, which defines the terms bank and banking
institutions, PDIC contends that the law treats a branch of a foreign bank as a separate and
independent banking unit.[21]

The respondents, on the other hand, initially point out that the factual findings of the RTC and
the CA, with regard to the nature of the money placements, the capacity in which the same were
received by the respondents and the exclusion of inter-branch deposits from assessment, can no
longer be disturbed and should be accorded great weight by this Court.[22] They also argue that
the money placements are not deposits. They postulate that for a deposit to exist, there must be at
least two parties a depositor and a depository each with a legal personality distinct from the
other.Because the respondents respective head offices and their branches form only a single legal
entity, there is no creditor-debtor relationship and the funds placed in the Philippine branch
belong to one and the same bank. A bank cannot have a deposit with itself.[23]

160 | P a g e
 This Court is of the opinion that the key to the resolution of this controversy is the
relationship of the Philippine branches of Citibank and BA to their respective head offices and
their other foreign branches.

The Court begins by examining the manner by which a foreign corporation can establish its
presence in the Philippines. It may choose to incorporate its own subsidiary as a domestic
corporation, in which case such subsidiary would have its own separate and independent legal
personality to conduct business in the country. In the alternative, it may create a branch in
the Philippines, which would not be a legally independent unit, and simply obtain a license to do
business in the Philippines.[24]

In the case of Citibank and BA, it is apparent that they both did not incorporate a separate
domestic corporation to represent its business interests in the Philippines. Their Philippine
branches are, as the name implies, merely branches, without a separate legal personality from
their parent company, Citibank and BA. Thus, being one and the same entity, the funds placed by
the respondents in their respective branches in the Philippines should not be treated as deposits
made by third parties subject to deposit insurance under the PDIC Charter.

For lack of judicial precedents on this issue, the Court seeks guidance from American
jurisprudence. In the leading case of Sokoloff v. The National City Bank of New York,[25] where
the Supreme Court of New York held:

Where a bank maintains branches, each branch becomes a separate business entity with
separate books of account. A depositor in one branch cannot issue checks or drafts upon
another branch or demand payment from such other branch, and in many other respects the
branches are considered separate corporate entities and as distinct from one another as any
other bank. Nevertheless, when considered with relation to the parent bank they are not
independent agencies; they are, what their name imports, merely branches, and are
subject to the supervision and control of the parent bank, and are instrumentalities whereby
the parent bank carries on its business, and are established for its own particular purposes, and
their business conduct and policies are controlled by the parent bank and their property and
assets belong to the parent bank, although nominally held in the names of the particular
branches. Ultimate liability for a debt of a branch would rest upon the parent
bank. [Emphases supplied]

This ruling was later reiterated in the more recent case of United States v. BCCI Holdings
Luxembourg[26] where the United States Court of Appeals, District of Columbia Circuit,
emphasized that while individual bank branches may be treated as independent of one another,
each branch, unless separately incorporated, must be viewed as a part of the parent bank rather
than as an independent entity.

In addition, Philippine banking laws also support the conclusion that the head office of a
foreign bank and its branches are considered as one legal entity. Section 75 of R.A. No. 8791
(The General Banking Law of 2000) and Section 5 of R.A. No. 7221 (An Act Liberalizing the
Entry of Foreign Banks) both require the head office of a foreign bank to guarantee the prompt
payment of all the liabilities of its Philippine branch, to wit:

Republic Act No. 8791:

Sec. 75. Head Office Guarantee. In order to provide effective protection of the interests of the
depositors and other creditors of Philippine branches of a foreign bank, the head office of such
branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.

161 | P a g e
 Residents and citizens of the Philippines who are creditors of a branch in the Philippines of
foreign bank shall have preferential rights to the assets of such branch in accordance with the
existing laws.

Republic Act No. 7721:

Sec. 5. Head Office Guarantee. The head office of foreign bank branches shall guarantee
prompt payment of all liabilities of its Philippine branches.

Moreover, PDIC must be reminded of the purpose for its creation, as espoused in Section
1 of R.A. No. 3591 (The PDIC Charter) which provides:

Section 1. There is hereby created a Philippine Deposit Insurance Corporation

hereinafter referred to as the Corporation which shall insure, as herein provided,
the deposits of all banks which are entitled to the benefits of insurance under this
Act, and which shall have the powers hereinafter granted.

The Corporation shall, as a basic policy, promote and safeguard the interests of
the depositing public by way of providing permanent and continuing insurance
coverage on all insured deposits.

R.A. No. 9576, which amended the PDIC Charter, reaffirmed the rationale for the
establishment of the PDIC:

Section 1. Statement of State Policy and Objectives. - It is hereby declared to be

the policy of the State to strengthen the mandatory deposit insurance coverage
system to generate, preserve, maintain faith and confidence in the country's
banking system, and protect it from illegal schemes and machinations.

Towards this end, the government must extend all means and mechanisms
necessary for the Philippine Deposit Insurance Corporation to effectively fulfill
its vital task of promoting and safeguarding the interests of the depositing public
by way of providing permanent and continuing insurance coverage on all insured
deposits, and in helping develop a sound and stable banking system at all times.

The purpose of the PDIC is to protect the depositing public in the event of a bank
closure. It has already been sufficiently established by US jurisprudence and Philippine statutes
that the head office shall answer for the liabilities of its branch. Now, suppose the Philippine
branch of Citibank suddenly closes for some reason. Citibank N.A. would then be required to
answer for the deposit liabilities of Citibank Philippines. If the Court were to adopt the posture of
PDIC that the head office and the branch are two separate entities and that the funds placed by
the head office and its foreign branches with the Philippine branch are considered deposits within
the meaning of the PDIC Charter, it would result to the incongruous situation where Citibank, as
the head office, would be placed in the ridiculous position of having to reimburse itself, as
depositor, for the losses it may incur occasioned by the closure of Citibank Philippines. Surely
our law makers could not have envisioned such a preposterous circumstance when they created
PDIC.

Finally, the Court agrees with the CA ruling that there is nothing in the definition of a bank and a
banking institution in Section 3(b) of the PDIC Charter[27] which explicitly states that the head
office of a foreign bank and its other branches are separate and distinct from their Philippine
branches.

There is no need to complicate the matter when it can be solved by simple logic bolstered by law
and jurisprudence. Based on the foregoing, it is clear that the head office of a bank and its
branches are considered as one under the eyes of the law. While branches are treated as separate
business units for commercial and financial reporting purposes, in the end, the head office
remains responsible and answerable for the liabilities of its branches which are under its

162 | P a g e
supervision and control. As such, it is unreasonable for PDIC to require the respondents,
Citibank and BA, to insure the money placements made by their home office and other
branches. Deposit insurance is superfluous and entirely unnecessary when, as in this case, the
institution holding the funds and the one which made the placements are one and the same legal
entity.

Funds not a deposit under the definition

of the PDIC Charter;

Excluded from assessment

PDIC avers that the funds are dollar deposits and not money placements. Citing R.A. No.
6848, it defines money placement as a deposit which is received with authority to
invest. Because there is no evidence to indicate that the respondents were authorized to invest the
subject dollar deposits, it argues that the same cannot be considered money placements.[28] PDIC
then goes on to assert that the funds received by Citibank and BA are deposits, as contemplated
by Section 3(f) of R.A. No. 3591, for the following reasons: (1) the dollar deposits were received
by Citibank and BA in the course of their banking operations from their respective head office
and foreign branches and were recorded in their books as Account-Head Office/Branches-Time
Deposits pursuant to Central Bank Circular No. 343 which implements R.A. No. 6426; (2) the
dollar deposits were credited as dollar time accounts and were covered by Certificates of Dollar
Time Deposit which were interest-bearing and payable upon maturity, and (3) the respondents
maintain 100% foreign currency cover for their deposit liability arising from the dollar time
deposits as required by Section 4 of R.A. No. 6426.[29]

To refute PDICs allegations, the respondents explain the inter-branch transactions which
necessitate the creation of the accounts or placements subject of this case. When the Philippine
branch needs to procure foreign currencies, it will coordinate with a branch in another country
which handles foreign currency purchases. Both branches have existing accounts with their head
office and when a money placement is made in relation to the acquisition of foreign currency
from the international market, the amount is credited to the account of the Philippine branch with
its head office while the same is debited from the account of the branch which facilitated the
purchase. This is further documented by the issuance of a certificate of time deposit with a stated
interest rate and maturity date. The interest rate represents the cost of obtaining the funds while
the maturity date represents the date on which the placement must be returned. On the maturity
date, the amount previously credited to the account of the Philippine branch is debited, together
with the cost for obtaining the funds, and credited to the account of the other branch. The
respondents insist that the interest rate and maturity date are simply the basis for the debit and
credit entries made by the head office in the accounts of its branches to reflect the inter-branch
accommodation.[30] As regards the maintenance of currency cover over the subject money
placements, the respondents point out that they maintain foreign currency cover in excess of
what is required by law as a matter of prudent banking practice.[31]

PDIC attempts to define money placement in order to impugn the respondents claim that
the funds received from their head office and other branches are money placements and not
deposits, as defined under the PDIC Charter. In the process, it loses sight of the important issue
in this case, which is the determination of whether the funds in question are subject to
assessment for deposit insurance as required by the PDIC Charter. In its struggle to find an
adequate definition of money placement, PDIC desperately cites R.A. No. 6848, The Charter of
the Al-Amanah Islamic Investment Bank of the Philippines. Reliance on the said law is
unfounded because nowhere in the law is the term money placement defined. Additionally, R.A.
No. 6848 refers to the establishment of an Islamic bank subject to the rulings of Islamic Sharia to
assist in the development of the Autonomous Region of Muslim Mindanao (ARMM),[32] making

163 | P a g e
it utterly irrelevant to the case at bench. Since Citibank and BA are neither Islamic banks nor are
they located anywhere near the ARMM, then it should be painfully obvious that R.A. No. 6848
cannot aid us in deciding this case.

Furthermore, PDIC heavily relies on the fact that the respondents documented the money
placements with certificates of time deposit to simply conclude that the funds involved are
deposits, as contemplated by the PDIC Charter, and are consequently subject to assessment for
deposit insurance. It is this kind of reasoning that creates non-existent obscurities in the law and
obstructs the prompt resolution of what is essentially a straightforward issue, thereby causing this
case to drag on for more than three decades.

Noticeably, PDIC does not dispute the veracity of the internal transactions of the
respondents which gave rise to the issuance of the certificates of time deposit for the funds the
subject of the present dispute. Neither does it question the findings of the RTC and the CA that
the money placements were made, and were payable, outside of the Philippines, thus, making
them fall under the exclusions to deposit liabilities. PDIC also fails to impugn the truth of the
testimony of John David Shaffer, then a Fiscal Agent and Head of the Assessment Section of the
FDIC, that inter-branch deposits were excluded from the assessment base. Therefore, the
determination of facts of the lower courts shall be accepted at face value by this Court, following
the well-established principle that factual findings of the trial court, when adopted and confirmed
by the CA, are binding and conclusive on this Court, and will generally not be reviewed on
appeal.[33]

As explained by the respondents, the transfer of funds, which resulted from the inter-
branch transactions, took place in the books of account of the respective branches in their head
office located in the United States. Hence, because it is payable outside of the Philippines, it is
not considered a deposit pursuant to Section 3(f) of the PDIC Charter:

Sec. 3(f) The term deposit means the unpaid balance of money or its equivalent
received by a bank in the usual course of business and for which it has given or is
obliged to give credit to a commercial, checking, savings, time or thrift account
or which is evidenced by its certificate of deposit, and trust funds held by such
bank whether retained or deposited in any department of said bank or deposit in
another bank, together with such other obligations of a bank as the Board of
Directors shall find and shall prescribe by regulations to be deposit liabilities of
the Bank; Provided, that any obligation of a bank which is payable at the
office of the bank located outside of the Philippines shall not be a deposit for
any of the purposes of this Act or included as part of the total deposits or of
the insured deposits; Provided further, that any insured bank which is
incorporated under the laws of the Philippines may elect to include for insurance
its deposit obligation payable only at such branch. [Emphasis supplied]

The testimony of Mr. Shaffer as to the treatment of such inter-branch deposits by the FDIC, after
which PDIC was modelled, is also persuasive. Inter-branch deposits refer to funds of one branch
deposited in another branch and both branches are part of the same parent company and it is the
practice of the FDIC to exclude such inter-branch deposits from a banks total deposit liabilities
subject to assessment.[34]

All things considered, the Court finds that the funds in question are not deposits within the
definition of the PDIC Charter and are, thus, excluded from assessment.

WHEREFORE, the petition is DENIED. The October 27, 2005 Decision of the Court of
Appeals in CA-G.R. CV No. 61316 is AFFIRMED.

164 | P a g e
PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC), - versus - PHILIPPINE
COUNTRYSIDE RURAL BANK, INC., RURAL BANK OF CARMEN (CEBU), INC.,
BANK OF EAST ASIA(MINGLANILLA, CEBU), INC., and PILIPINO RURAL BANK
(CEBU), INC.,

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by the
Philippine Deposit Insurance Corporation (PDIC) assailing the September 18, 2006 Decision of
the Court of Appeals-Cebu (CA-Cebu), which granted the petition for injunction filed by
respondents Philippine Countryside Rural Bank, Inc. (PCRBI), Rural Bank of Carmen (Cebu),
Inc. (RBCI), Bank of East Asia (Minglanilla, Cebu), Inc. (BEAI), and Pilipino Rural Bank
(Cebu), Inc. (PRBI), all collectively referred to as Banks. The dispositive portion of the CA-Cebu
decision reads:

WHEREFORE, in view of all the foregoing premises, the petition for injunction is
hereby GRANTED. The respondent PDIC is restrained from further conducting investigations or
examination on petitioners-banks without the requisite approval from the Monetary Board. SO
ORDERED.[1]

In a resolution dated January 25, 2007, the CA-Cebu denied petitioners motion for
reconsideration for lack of merit.[2]

THE FACTS

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

On May 25, 2005, the PDIC Board adopted another resolution, Resolution No. 2005-05-
[4]
056, approving the conduct of an investigation on PCRBI based on a Complaint-Affidavit filed
by a corporate depositor, the Philippine School of Entrepreneurship and
Management (PSEMI) through its president, Jacinto L. Jamero.

On June 3, 2005, in accordance with the two PDIC Board resolutions, then PDIC President and
Chief Executive Officer Ricardo M. Tan issued the Notice of Investigation[5] to the President or
The Highest Ranking Officer of PCRBI.

On June 7, 2005, the PDIC Investigation Team personally served the Notice of Investigation on
PCRBI at its Head Office in Pajo, Lapu-Lapu City.[6]

According to PDIC, in the course of its investigation, PCRBI was found to have granted loans to
certain individuals, which were settled by way of dacion of properties. These properties,
however, had already been previously foreclosed and consolidated under the names of PRBI,
BEAI and RBCI.[7]

On June 15, 2005, PDIC issued similar notices of investigation to PRBI[8] and BEAI.[9]

The notices stated that the investigation was to be conducted pursuant to Section 9 (b-1) of the
PDIC Charter and upon authority of PDIC Board Resolution No. 2005-03-032 authorizing the
twelve (12) named representatives of PDIC to conduct the investigation.[10]

165 | P a g e
The investigation was sought because the Banks were found to be among the ten (10) banks
collectively known as Legacy Banks. The Reports of General and Special Examinations of the
BSP as of June 30, 2004, disclosed, among others, that the Legacy Banks were commonly owned
and/or controlled by Legacy Plans Inc. (now Legacy Consolidated Plans, Inc.), and Celso
Gancayco delos Angles, Jr. and his family.[11]

The notice of investigation was served on PRBI the next day, June 16, 2005.[12]

On June 25, 2005, a separate notice of investigation[13] was served on RBCI. The latter provided
the PDIC Investigation Team with certified copies of the loan documents they had requested,
until its president received an order directing him not to allow the investigation.[14]

Subsequently, PRBI and BEAI refused entry to their bank premises and access to their records
and documents by the PDIC Investigation Team, upon advice of their respective counsels.[15]

On June 16 and 17, 2005, Atty. Victoria G. Noel (Atty. Noel) of the Tiongson & Antenor Cruz
Law Office sent letters to the PDIC[16] informing it of her legal advice to PCRBI and BEAI not to
submit to PDIC investigation on the ground that its investigatory power pursuant to Section 9(b-
1) of R.A. No. 3591, as amended (An Act Establishing The Philippine Deposit Insurance
Corporation, Defining Its Powers And Duties And For Other Purposes), cannot be differentiated
from the examination powers accorded to PDIC under Section 8, paragraph 8 of the same law,
under which, prior approval from the Monetary Board is required.

On June 17, 2005, PDIC General Counsel Romeo M. Mendoza sent a reply to Atty. Noel stating
that PDICs investigation power, as distinguished from the examination power of the PDIC under
Section 8 of the same law, does not need prior approval of the Monetary Board.[17] PDIC then
urged PRBI and BEAI not to impede the conduct of PDICs investigation as the same constitutes
a violation of the PDIC Charter for which PRBI and BEAI may be held criminally and/or
administratively liable.[18]

On June 27 and 28, 2005, the Banks, through counsel, sought further clarification from PDIC on
its source of authority to conduct the impending investigations and requested that PDIC refrain
from proceeding with the investigations.[19]

Simultaneously, the Banks wrote to the Monetary Board requesting a clarification on the
parameters of PDICs power of investigation/examination over the Banks and for an issuance of a
directive to PDIC not to pursue the investigations pending the requested clarification.[20]

On June 28, 2005, PRBI and BEAI again received letters from PDIC, dated June 24, 2005, which
appeared to be final demands on them to allow its investigation.[21] PRBI and BEAI replied that
letters of clarification had been sent to PDIC and the Monetary Board.[22] Pending action on such
requests, PDIC was requested to refrain from proceeding with the investigation.[23]

166 | P a g e
Notwithstanding, on July 11, 2005, the Banks received a letter, dated July 8, 2005, from the
PDIC General Counsel reiterating its position that prior Monetary Board approval was not a pre-
requisite to PDICs exercise of its investigative power.[24]

Not in conformity, on July 28, 2005, the Banks filed a Petition for Declaratory Relief with a
Prayer for the Issuance of a TRO and/or Writ of Preliminary Injunction (RTC Petition) before
the Regional Trial Court of Makati (RTC-Makati) which was docketed as Civil Case No. 05-
697.[25]

In the RTC Petition, the Banks prayed for a judgment interpreting Section 9(b-1) of the PDIC
Charter, as amended, to require prior Monetary Board approval before PDIC could exercise its
investigation/examination power over the Banks.[26]

PDIC filed a motion to dismiss alleging that the RTC had no jurisdiction over the said petition
since a breach had already been committed by the Banks when they received the notices of
investigation, and because PDIC need not secure prior Monetary Board approval since
examination and investigation are two different terms.[27]

Later, the Banks withdrew their application for a temporary restraining order (TRO) reasoning
that lower courts cannot issue injunctions against PDIC. Thus, the Banks instituted a petition for
injunction with application for TRO and/or Preliminary Injunction (CA-Manila petition) before
the Court of Appeals-Manila (CA-Manila). The case was docketed as CA-G.R. SP No. 91038.[28]

Even before the CA-Manila could rule on the application for a TRO and/or writ of preliminary
injunction, the RTC-Makati dismissed the petition on the ground that there already existed a
breach of law that isolated the case from the jurisdiction of the trial court.[29]

The Banks filed a motion for reconsideration but it was denied by the RTC for lack of
merit.[30] On February 10, 2006, the Banks filed a notice of appeal[31] which they later withdrew
on February 28, 2006.[32]

In view of the dismissal of the RTC-Makati petition, the CA-Manila dismissed the petition for
injunction for being moot and academic. In its Decision, dated February 1, 2006,[33] the CA-
Manila wrote:

What remained for the petitioners to do was to litigate over the breach or violation
by ordinary action, as the circumstances ensuing from the breach or violation
warrant. The ordinary action may either be in the same case, if the RTC permitted
the conversion, in which event the RTC may allow the parties to file such
pleadings as may be necessary or proper, pursuant to Sec. 5, Rule 63; or the
petitioners may file another action in the proper court (e.g. including the Court of
Appeals, should injunction be among the reliefs to be sought) upon some cause of
action that has arisen from the breach or violation.[34]

167 | P a g e
 Thereafter, on March 14, 2006, the Banks filed their Petition for Injunction with Prayer
for Preliminary Injunction[35] (CA-Cebu Petition) with the CA-Cebu (CA-Cebu).

On March 15, 2006, the CA-Cebu issued a resolution granting the Banks application for a
TRO. This enjoined the PDIC, its representatives or agents or any other persons or agency
assisting them or acting for and in their behalf from conducting examinations/investigations on
the Banks head and branch offices without securing the requisite approval from the Monetary
Board of BSP.[36]

During the pendency of the CA-Cebu petition, PDIC filed with this Court a Petition for
Certiorari, Prohibition and Mandamus with Prayer for Issuance of Temporary Restraining
Order and/or Writ of Preliminary Injunction under Rule 65 docketed as G.R. No. 173370.[37] It
alleged that the CA-Cebu committed grave abuse of discretion amounting to lack or excess of
jurisdiction in taking cognizance of the Banks petition, and in issuing a TRO and a writ of
preliminary injunction.[38]

On July 31, 2006, this Court issued a resolution dismissing the petition for certiorari in
G.R. No. 173370. The Resolution reads:

Considering the allegations, issues and arguments adduced in the petition for
certiorari, prohibition and mandamus with prayer for preliminary injunction
and/or restraining order dated 19 July 2006, the Court resolves to DISMISS the
petition for failure to sufficiently show that the questioned resolution of the Court
of Appeals is tainted with grave abuse of discretion. Moreover, the petition failed
to conform with Rule 65 and other related provisions of the 1997 Rules of Civil
Procedure, as amended, governing petitions for certiorari, prohibition and
mandamus filed with the Supreme Court, since petitioner failed to submit a
verified statement of material date of receipt of the assailed resolution dated 16
May 2006 in accordance with Section 4, Rule 65 in relation to the second
paragraph of Section 3, Rule 46. In any event, the petition is premature since no
motion for reconsideration of the questioned resolution of the Court of Appeals
was filed prior to the availment of this special civil action and there are no
sufficient allegations to bring the case within the recognized exceptions to this
rule.[39]

On September 18, 2006, after both parties had submitted their respective memoranda, the
CA-Cebu rendered a decision granting the writ of preliminary injuction,[40] pertinent portions of
which read:

[A]fter undergoing a series of amendments, the controlling law with respect to

PDICs power to conduct examination of banks is-prior approval of the Monetary
Board is a condition sine qua non for PDIC to exercise its power of
examination. To rule otherwise would disregard the amendatory law of the PDICs
charter.

The Court is not also swayed by the contention of respondent that what it seeks to
conduct is an investigation and not an examination of petitioners transactions,
hence prior approval of the Monetary Board is a mere surplusage.

The ordinary definition of the words examination and investigation would lead
one to conclude that both pertain to the same thing and there seems to be no fine
line differentiating one from the other. Blacks Law Dictionary defines the word
investigate as to examine and inquire into with care and accuracy; to find out by
careful inquisition; examination and the word examination as an investigation. In

168 | P a g e
 Collins Dictionary of Banking and Finance, the word investigation is defined as
an examination to find out what is wrong.

In the case of Anti-Graft League of the Philippines, Inc. vs. Hon. Ortega, et
al.,[41] the Supreme Court using Ballentines Law Dictionary defines an
investigation as an inquiry, judicial or otherwise, for the discovery or collection of
facts concerning the matter or matters involved. Such common definitions would
show that there is really nothing to distinguish between these two (2) terms as to
support the PDIC view differentiating Section 9 (b-1) from paragraph 8, Section 8
of the PDIC Charter.

In the realm of the PDIC rules, specifically under Section 3 of PDIC Regulatory
Issuance No. 2205-02[42] investigation is defined as: Investigation shall refer to
fact-finding examination, study, inquiry, for determining whether the allegations
in a complaint or findings in a final report of examination may properly be the
subject of an administrative, criminal or civil action.

From the foregoing definition alone, it can be easily deduced that

investigation and examination are synonymous terms. Simply stated, investigation
encompasses a fact-finding examination.Thus, it is inconsistent with the rules if
respondent PDIC be (sic) allowed to conduct an investigation without the
approval of the Monetary Board.

Moreover, the Court sees that the rationale of the law in requiring a (sic)
prior approval from the Monetary Board whenever an examination or in this case
an investigation needs to be conducted by the PDIC is obviously to ensure that
there is no overlapping of efforts, duplication of functions and more importantly
to provide a check and balance to the otherwise unrestricted power of respondent
PDIC to conduct investigations on banks insured by it.

With the foregoing premises, this Court rules that a prior approval from
the Monetary Board is necessary before respondent PDIC can proceed with its
investigations on petitioners-banks.[43]

PDIC moved for reconsideration but it was denied in a resolution dated January 25,
2007.[44]

Hence, this petition.

THE ISSUES

I.

WHETHER RESPONDENT BANKS VIOLATED THE RULE AGAINST

FORUM SHOPPING WHEN THEY FILED THE PETITION FOR
INJUNCTION BEFORE THE COURT OF APPEALS-CEBU.

II.

WHETHER THE PRONOUNCEMENT OF THE REGIONAL TRIAL

COURT OF MAKATI IN THE PETITION FOR DECLARATORY
RELIEF CONSTITUTES RES JUDICATA TO THE PETITION FOR
INJUNCTION IN THE COURT OF APPEALS-CEBU.

III.

WHETHER PETITIONER WAS DEPRIVED OF ITS OPPORTUNITY TO

BE HEARD WHEN THE COURT OF APPEALS-CEBU ISSUED THE
WRIT OF INJUNCTION.

169 | P a g e
 IV.

WHETHER THE ISSUES RAISED BY PETITIONERS ARE THE SAME

ISSUES RAISED IN G.R. NO. 173370 WHICH WAS EARLIER
DISMISSED BY THIS COURT.

V.

WHETHER THE COURT OF APPEALS ERRED IN FINDING THAT

PRIOR APPROVAL OF THE MONETARY BOARD OF THE BANGKO
SENTRAL NG PILIPINAS IS NECESSARY BEFORE THE PDIC MAY
CONDUCT AN INVESTIGATION OF RESPONDENT BANKS.

THE COURTS RULING

I - Whether respondent banks violated the rule against forum shopping when they filed the
petition for injunction before the Court of Appeals-Cebu.

II - Whether the pronouncement of the Regional Trial Court of Makati in the petition for
declaratory relief constitutes res judicata to the petition for injunction in the Court of
Appeals-Cebu.

In the recent case of Sameer Oversees Placement Agency, Inc. v. Mildred R. Santos,[45] the Court
discussed the matter of forum shopping:

Forum shopping is defined as an act of a party, against whom an adverse judgment or order has
been rendered in one forum, of seeking and possibly getting a favorable opinion in another
forum, other than by appeal or special civil action for certiorari. It may also be the institution
of two or more actions or proceedings grounded on the same cause on the supposition that one
or the other court would make a favorable disposition. There is forum shopping where the
elements of litis pendentia are present, namely: (a) there is identity of parties, or at least such
parties as represent the same interest in both actions; (b) there is identity of rights asserted and
relief prayed for, the relief being founded on the same set of facts; and (c) the identity of the
two preceding particulars is such that any judgment rendered in the pending case, regardless of
which party is successful, would amount to res judicata in the other. It is expressly prohibited
by this Court because it trifles with and abuses court processes, degrades the
administration of justice, and congests court dockets. A willful and deliberate violation of the
rule against forum shopping is a ground for summary dismissal of the case, and may also
constitute direct contempt.[46]

Juxtaposing the RTC-Makati, CA-Manila and CA-Cebu petitions, what must be

determined here, is whether the elements of litis pendentia are present between and among these
petitions, i.e. whether (a) there is identity of parties, or at least such parties as represent the same
interest in both actions; (b) there is identity of rights asserted and relief prayed for, the relief
being founded on the same set of facts; and (c) the identity of the two preceding particulars is
such that any judgment rendered in the pending case, regardless of which party is successful,
would amount to res judicata in the other.

170 | P a g e
 The first element is clearly present as between the RTC-Makati petition and the CA-Cebu
petition. Both involved the Banks on one hand, and the PDIC on the other.

The second and third elements of litis pendentia, however, are patently wanting. The
rights asserted and reliefs prayed for were different, though founded on the same set of facts. The
RTC-Makati Petition was one for declaratory relief while the CA-Manila Petition was one for
injunction with a prayer for preliminary injunction.

A petition for declaratory relief is filed by any person interested under a deed, will,
contract or other written instrument, or whose rights are affected by a statute, executive order or
regulation, ordinance, or any other governmental regulation, before breach or violation, thereof,
to determine any question of construction or validity arising, and for a declaration of his rights or
duties thereunder.[47]

Injunction, on the other hand, is a judicial writ, process or proceeding whereby a party is
directed either to do a particular act, in which case it is called a mandatory injunction, or to
refrain from doing a particular act, in which case it is called a prohibitory injunction. As a main
action, injunction seeks to permanently enjoin the defendant through a final injunction issued by
the court and contained in the judgment.[48]

Clearly, there is a marked difference between the reliefs sought under an action for
declaratory relief and an action for injunction. While an action for declaratory relief seeks a
declaration of rights or duties, or the determination of any question or validity arising under a
statute, executive order or regulation, ordinance, or any other governmental regulation, or under
a deed, will, contract or other written instrument, under which his rights are affected, and before
breach or violation, an action for injunction ultimately seeks to enjoin or to compel a party to
perform certain acts.

Moreover, as stated in the RTC-Makati Decision, because the Banks had already
breached the provisions of law on which declaratory judgment was being sought, it was without
jurisdiction to take cognizance of the same. Any judgment rendered in the RTC-Makati petition
would not amount to res judicata in the CA-Manila Petition. Thus, the RTC was correct in
dismissing the case, having been bereft of jurisdiction to take cognizance of the action for
declaratory judgment.

As between the CA-Manila and the CA-Cebu petitions, the second and third elements
of litis pendentia are absent. The rights asserted and reliefs prayed for were different, although
founded on the same set of facts.

The CA-Manila Petition is a petition for injunction wherein the Banks prayed that:

1) Immediately upon filing of this Petition, a Writ of Preliminary

Injunction and/or Temporary Restraining Order be issued commanding the
respondent and all its officers, employees and agents to cease and desist from
proceeding with the investigations sought to be conducted on the petitioners head
and branch offices while the Petition for Declaratory Relief before Branch 58 of
the Makati Regional Trial Court is pending.

2) After due proceedings, judgment be rendered declaring as permanent

the Writ of Preliminary Injunction and/or Temporary Restraining Order prayed
for above.

Other equitable reliefs are likewise prayed for.[49]

The CA-Cebu Petition, on the other hand, is denominated as a Petition for Injunction
With Prayer for Writ of Preliminary Injunction and/or Restraining Order. The Banks prayed
therein that:

171 | P a g e
 1) Upon filing of this Petition, a Writ of Preliminary Injunction and/or Temporary
Restraining Order be issued forthwith, enjoining Respondent PDIC and all its
officers, employees and agents to cease and desist from conducting
examinations/investigations on Petitioner Banks head and branch offices without
securing the requisite approval from the Monetary Board of the Bangko Sentral
ng Pilipinas, as required by Sec. 8, Paragraph 8 of the PDIC Charter, as amended;

2) After due proceedings, judgment be rendered declaring as permanent the Writ

of Preliminary Injunction and/or Temporary Restraining Order prayed for above.

Other equitable reliefs are likewise prayed for.[50]

As can be gleaned from the above-cited portions of the CA-Manila and CA-Cebu
petitions, the petitions seek different reliefs.

Therefore, as between and among the RTC Makati, and the CA-Manila and CA-Cebu
petitions, there is no forum shopping.

III - Whether petitioner was deprived of its opportunity to be heard when the Court of
Appeals-Cebu issued the writ of injunction.

PDIC alleges that the CA-Cebu, in issuing the TRO in its March 15, 2006 Resolution, and
subsequently, the preliminary injunction in its May 16, 2006 Resolution, violated the
fundamental rule that courts should avoid issuing injunctive relief which would in effect dispose
of the main case without trial.[51] PDIC argues that a TRO is intended only as a restraint until the
propriety of granting a temporary injunction can be determined, and it goes no further than
to preserve the status until that determination.[52] Moreover, its purpose is merely to suspend
proceedings until such time when there may be an opportunity to inquire whether any injunction
should be granted, and it is not intended to operate as an injunction pendente lite, and should not,
in effect, determine the issues involved before the parties can have their day in court, or give an
advantage to either party by proceeding in the acquisition or alteration of the property the right to
which is disputed while the hands of the other party are tied.[53]

On the other hand, the Banks claim that PDIC was given every opportunity to present its
arguments against the issuance of the injunction.[54] Its active participation in the proceedings
negates its assertion that it was denied procedural due process in the issuance of the writ of
injunction.[55] Citing Salonga v. Court of Appeals,[56] the Banks state that the essence of due
process is the reasonable opportunity to be heard and to submit evidence one may have in
support of ones defense,[57] and PDIC was able to do so.

On March 15, 2006, the CA-Cebu issued a resolution granting their prayer for a 60-day
TRO, and requiring PDIC to file its comment.[58] The
[59]
latter thereafter filed its Comment ad Cautelamdated March 30, 2006. [Underscoring ours]

On May 16, 2006, the CA-Cebu issued another resolution, this time granting the prayer
for a preliminary injunction and requiring the parties to file their respective memoranda. PDIC
thereafter filed its memorandum dated July 31, 2006.[60]

172 | P a g e
 On September 18, 2006, the CA-Cebu promulgated its Decision granting the Petition for
Injunction.[61] PDIC filed a motion for reconsideration dated October 10, 2006,[62] which was
subsequently denied.

The essence of procedural due process is found in the reasonable opportunity to be heard
and submit ones evidence in support of his defense.[63] The Court finds that procedural due
process was observed by the CA-Cebu. The parties were afforded equal opportunity to present
their arguments. In the absence of any indication to the contrary, the CA-Cebu must be accorded
the presumption of regularity in the performance of their functions. However, as discussed
herein, the matter of whether it erred in its conclusion and issuance of the TRO, preliminary
injunction and final injunction is another matter altogether.

IV Whether the issues raised by petitioner are the same issues raised in G.R. No. 173370
which was earlier dismissed by this Court.

In G.R. 173370, a petition for certiorari under Rule 65 of the Rules of Court, PDIC
alleged that the CA-Cebu committed grave abuse of discretion amounting to lack or excess of
jurisdiction in taking cognizance of the Banks petition, and in issuing a TRO and a writ of
preliminary injunction.[64]

In the case at bench, a petition for review under Rule 45, PDICs core contention is that
the CA-Cebu erred in finding that prior approval of the
Monetary Board of the BSP is necessary before it may conduct an investigation of the Banks.

Clearly then, the two petitions were of different nature raising different issues.

G.R. 173370 challenged the CA-Cebus having taken cognizance of the Banks petition
and interlocutory orders on the issuance of a TRO and a writ of preliminary injunction. This
case, however, strikes at the core of the final decision on the merits of the CA-Cebu, and not
merely the interlocutory orders. While both G.R. 173370 and the present case may have been
anchored on the same set of facts, that is, the refusal of the Banks to allow PDIC to conduct an
investigation without the prior consent of the Monetary Board, the issues raised in the two
petitions are not identical.Moreover, the disposal of the first case does not amount to res
judicata in this case.

V Whether the Court of Appeals-Cebu erred in finding that prior approval of the Monetary
Board of the Bangko Sentral ng Pilipinas is necessary before the PDIC may conduct an
investigation of respondent banks.

PDIC is of the position that in order for it to exercise its power of investigation, the law requires
that:

173 | P a g e
 (a) The investigation is based on a complaint of a depositor or any other
government agency, or on the report of examination of [the] Bangko Sentral ng
Pilipinas (BSP) and/or PDIC; and,

(b) The complaint alleges, or the BSP and/or PDIC Report of Examination
contains adverse findings of, fraud, irregularities or anomalies committed by the
Bank and/or its directors, officers, employees or agents; and,

(c) The investigation is upon the authority of the PDIC Board of Directors.[65]

It argues that when it commenced its investigation on the Banks, all of the aforementioned
requirements were met. PDIC stresses that its power of examination is different from its power
of investigation, in such that the former requires prior approval of the Monetary Board while the
latter requires merely the approval of the PDIC Board.[66] It further claims that the power of
examination cannot be exercised within twelve (12) months from the last examination
conducted, whereas the power of investigation is without limitation as to the frequency of its
conduct. It states that the purpose of the PDICs power of examination is merely to look into the
condition of the bank, whereas the power of investigation aims to address fraud, irregularities
and anomalies based on complaints from depositors and other government agencies or upon
reports of examinations conducted by the PDIC itself or by the BSP.[67]

The Banks, on the other hand, are of the opinion that a holistic reading of the PDIC charter
shows that petitioners power of examination is synonymous with its power of
investigation.[68] They cite, as bases, the law
dictionary definitions, Section 8, Eighth paragraph[69] and Section 9(b-1)[70] of the PDIC Charter,
and Rule 1, Section 3(1) of PDIC Regulatory Issuance No. 2005-02, which defines investigation
as follows:

(l) Investigation shall refer to fact-finding examination, study or inquiry

for determining whether the allegations in a complaint or findings in a final report
of examination may properly be the subject of an administrative, criminal or civil
action.

The Banks further cite Section X658 of the Manual of Regulations for Banks, which states:

Sec. X658 - Examination by the BSP. The term examination shall, henceforth,
refer to an investigation of an institution under the supervisory authority of the
BSP to determine compliance with laws and regulations. It shall include
determination that the institution is conducting its business on a safe and sound
basis. Examination requires full and comprehensive looking into the operations

174 | P a g e
 and books of institutions, and shall include, but need not be limited to the
following:

a. Determination of the banks solvency and liquidity

position;

b. Evaluation of asset quality as well as determination of

sufficiency of valuation reserves on loans and other risk assets;

c. Review of all aspects of bank operations;

d. Assessment of risk management system, including the

evaluation of the effectiveness of the bank managements oversight
functions, policies, procedures, internal control and audit;

e. Appraisal of overall management of the bank;

f. Review of compliance and applicable laws, rules and

regulations; and any other activities relevant to the above.

After an evaluation of the respective positions of the parties, the Court is of the view that the
Monetary Board approval is not required for PDIC to conduct an investigation on the Banks.

The disagreement stems from the interpretation of these two key provisions of the PDIC
Charter. The confusion can be attributed to the fact that although investigation and examination
are two separate and distinct procedures under the charter of the PDIC and the BSP, the words
seem to be used loosely and interchangeably.

It does not help that indeed these terms are very closely related in a generic sense. However,
while examination connotes a mere generic perusal or inspection, investigation refers to a more
intensive scrutiny for a more specific fact-finding purpose. The latter term is also usually
associated with proceedings conducted prior to criminal prosecution.

The PDIC was created by R.A. No. 3591 on June 22, 1963 as an insurer of deposits in all banks
entitled to the benefits of insurance under the PDIC Charter to promote and safeguard the
interests of the depositing public by way of providing permanent and continuing insurance
coverage of all insured deposits. It is a government instrumentality that operates under the
Department of Finance. Its primary purpose is to act as deposit insurer, as a co-regulator of
banks, and as receiver and liquidator of closed banks.[71]

Section 1 of the PDIC Charter states:

SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation

hereinafter referred to as the Corporation which shall insure, as herein provided,
the deposits of all banks which are entitled to the benefits of insurance under this
Act, and which shall have the powers hereinafter granted.

175 | P a g e
 The Corporation shall, as a basic policy, promote and safeguard the interests of
the depositing public by way of providing permanent and continuing insurance
coverage on all insured deposits.

Section 1 of R.A. No. 9576 further provides: An Act Increasing the Maximum Deposit Insurance
Coverage, and in connection therewith, to Strengthen the Regulatory and Administrative
Authority, and Financial Capability of the Philippine Deposit Insurance Corporation (PDIC),
amending for this purpose R.A. No. 3591, as Amended, otherwise known as the PDIC Charter.

SECTION 1. Statement of State Policy and Objectives. - It is hereby declared to

be the policy of the State to strengthen the mandatory deposit insurance coverage
system to generate, preserve, maintain faith and confidence in the countrys
banking system, and protect it from illegal schemes and machinations.

Towards this end, the government must extend all means and mechanisms
necessary for the Philippine Deposit Insurance Corporation to effectively fulfill its
vital task of promoting and safeguarding the interests of the depositing public by
way of providing permanent and continuing insurance coverage on all insured
deposits, and in helping develop a sound and stable banking system at all times.

Under its charter, the PDIC is empowered to conduct examination of banks with prior
approval of the Monetary Board:

Eighth To conduct examination of banks with prior approval of the Monetary

Board: Provided, That no examination can be conducted within twelve (12)
months from the last examination date:Provided, however, That the Corporation
may, in coordination with the Bangko Sentral, conduct a special examination as
the Board of Directors, by an affirmative vote of a majority of all its members, if
there is a threatened or impending closure of a bank; Provided, further, That,
notwithstanding the provisions of Republic Act No. 1405, as amended, Republic
Act No. 6426, as amended, Republic Act No. 8791, and other laws, the
Corporation and/or the Bangko Sentral, may inquire into or examine deposit
accounts and all information related thereto in case there is a finding of unsafe or
unsound banking practice; Provided, That to avoid overlapping of efforts, the
examination shall maximize the efficient use of the relevant reports, information,
and findings of the Bangko Sentral, which it shall make available to the
Corporation; (As amended by R.A. 9302, 12 August 2004, R.A. 9576, 1 June 2009)

Section 9(b-1) of the PDIC Charter further provides that the PDIC Board shall have the
power to:

POWERS AND RESPONSIBILITIES AND PROHIBITIONS

SECTION 9. x

176 | P a g e
 (b) The Board of Directors shall appoint examiners who shall have power, on
behalf of the Corporation to examine any insured bank. Each such examiner shall
have the power to make a thorough examination of all the affairs of the bank and
in doing so, he shall have the power to administer oaths, to examine and take and
preserve the testimony of any of the officers and agents thereof, and, to compel
the presentation of books, documents, papers, or records necessary in his
judgment to ascertain the facts relative to the condition of the bank; and shall
make a full and detailed report of the condition of the bank to the
Corporation. The Board of Directors in like manner shall appoint claim agents
who shall have the power to investigate and examine all claims for
insured deposits and transferred deposits. Each claim agent shall have the power
to administer oaths and to examine under oath and take and preserve testimony of
any person relating to such claim. (As amended by E.O. 890, 08 April 1983; R.A.
7400, 13 April 1992)

(b-1) The investigators appointed by the Board of Directors shall have the power
on behalf of the Corporation to conduct investigations on frauds, irregularities and
anomalies committed in banks, based on reports of examination conducted by the
Corporation and Bangko Sentral ng Pilipinas or complaints from depositors or
from other government agency. Each such investigator shall have the power to
administer oaths, and to examine and take and preserve the testimony of any
person relating to the subject of investigation. (As added by R.A. 9302, 12 August
2004)

xxx. [Underscoring supplied]

As stated above, the charter empowers the PDIC to conduct an investigation of a bank
and to appoint examiners who shall have the power to examine any insured bank. Such
investigators are authorized to conduct investigations on frauds, irregularities and anomalies
committed in banks, based on an examination conducted by the PDIC and the BSP or on
complaints from depositors or from other government agencies.

The distinction between the power to investigate and the power to examine is emphasized
by the existence of two separate sets of rules governing the procedure in the conduct of
investigation and examination. Regulatory Issuance (RI) No. 2005-02 or the PDIC Rules on
Fact-Finding Investigation of Fraud, Irregularities and Anomalies Committed in Banks covers
the procedural requirements of the exercise of the PDICs power of investigation. On the other
hand, RI No. 2009-05 sets forth the guidelines for the conduct of the power of examination.

The definitions provided under the two aforementioned regulatory issuances elucidate on
the distinction between the power of examination and the power of investigation.

Section 2 of RI No. 2005-02 states that its coverage shall be applicable to all fact-
finding investigations on fraud, irregularities and/or anomalies committed in banks that are
conducted by PDIC based on: [a] complaints from depositors or other government agencies;

177 | P a g e
and/or [b] final reports of examinations of banks conducted by the Bangko Sentral ng Pilipinas
and/or PDIC.

The same issuance states that the Final Report of Examination[72] is one of the three pre-
requisites to the conduct of an investigation, in addition to the authorization of the PDIC
Board[73]and a complaint.[74] Juxtaposing this provision with Section 9(b-1) of the PDIC Charter,
since an examination is explicitly made the basis of a fact-finding examination, then clearly
examination and investigation are two different proceedings. It would obviously defy logic to
make the result of an investigation the basis of the same proceeding. Thus, RI No. 2005-02
defines an investigation as a fact-finding examination, study or inquiry for determining whether
the allegations in a complaint or findings in a final report of examination may properly be the
subject of an administrative, criminal or civil action.[75]

The Banks cite the dictionary definitions of examination and investigation to justify their
conclusion that these terms refer to one and the same proceeding. It is tempting to use these two
terms interchangeably, which practice may be perfectly justified in a purely literary
sense. Indeed, a reading of the PDIC Charter shows that the two terms have been used
interchangeably at some point.However, based on the provisions aforecited, the intention of the
laws is clearly to differentiate between the process of investigation and that of examination.

In 2009, to clarify procedural matters, PDIC released RI No. 2009-05 or the Rules and
Regulations on Examination of Banks. Section 2 thereof differentiated between the two types of
examination as follows:

Section 2. Types of Examination

a. Regular Examination - An examination conducted independently or jointly

with the BSP. It requires the prior approval of the PDIC Board of Directors and
the Monetary Board (MB). It may be conducted only after an interval of at least
twelve (12) months from the closing date of the last Regular Examination.

b. Special Examination An examination conducted at any time in coordination

with the BSP, by an affirmative vote of a majority of all the members of the PDIC
Board of Directors, without need of prior MB approval, if there is a threatened or
impending bank closure as determined by the PDIC Board of Directors.
[Underscoring supplied]

Section 3 of RI No. 2009-05 provides for the general scope of the PDIC
examination:

Section 3. Scope of Examination

178 | P a g e
 The examination shall include, but need not be limited to, the following:

a. Determination of the banks solvency and liquidity position;

b. Evaluation of asset quality as well as determination of

sufficiency of valuation reserves on loans and other risk assets;

c. Review of all aspects of bank operations;

d. Assessment of risk management system, including the

evaluation of the effectiveness of the bank managements oversight
functions, policies, procedures, internal control and audit

e. Appraisal of overall management of the bank;

f. Review of compliance with applicable banking laws, and

rules and regulations, including PDIC issuances;

g. Follow-through of specific exceptions/ violations noted

during a previous examination; and

h. Any other activity relevant to the above.

Rule 2, Section 1 of PDIC RI No. 2005-02 or the PDIC Rules on Fact-Finding

Investigation of Fraud, Irregularities and Anomalies Committed in Banks provides for the scope
of fact-finding investigations as follows:

SECTION 1. Scope of the Investigation.

Fact-finding Investigations shall be limited to the particular acts or

omissions subject of a complaint or a Final Report of Examination.

From the above-cited provisions, it is clear that the process of examination covers a wider
scope than that of investigation.

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

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

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

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

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

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

The practical justification for not requiring the Monetary Board approval to conduct an
investigation of banks is the administrative hurdles and paperwork it entails, and the
correspondent time to complete those additional steps or requirements. As in other types of
investigation, time is always of essence, and it is prudent to expedite the proceedings if an
accurate conclusion is to be arrived at, as an investigation is only as precise as the evidence on
which it is based. The promptness with which such evidence is gathered is always of utmost
importance because evidence, documentary evidence in particular, is remarkably fungible. A
PDIC investigation is conducted to determine[e] whether the allegations in a complaint or
findings in a final report of examination may properly be the subject of an administrative,
criminal or civil action.[76] In other words, an investigation is based on reports of examination
and an examination is conducted with prior Monetary Board approval.Therefore, it would be
unnecessary to secure a separate approval for the conduct of an investigation. Such would merely
prolong the process and provide unscrupulous individuals the opportunity to cover their tracks.

Indeed, while in a literary sense, the two terms may be used interchangeably, under the
PDIC Charter, examination and investigation refer to two different processes. To reiterate, an
examination of banks requires the prior consent of the Monetary Board, whereas an investigation
based on an examination report, does not.

WHEREFORE, the petition is GRANTED. The Decision and Resolution of the Court
of Appeals in CA G.R. CEB SP. No. 01550, dated September 18, 2006 and January 25,
2007 are REVERSED and SET ASIDE.

SO ORDERED.

180 | P a g e
PRESIDENTIAL DECREE No. 679 April 2, 1975

AMENDING ACT NUMBERED THIRTY NINE HUNDRED AND THIRTY SIX, AN

ACT REQUIRING BANKS, TRUST CORPORATIONS, AND BUILDING AND LOAN
ASSOCIATIONS, TO TRANSFER UNCLAIMED BALANCES HELD BY THEM TO
THE TREASURER OF THE PHILIPPINES AND FOR OTHER PURPOSES.

WHEREAS, Act No. 3936 requires the publication of a sworn statement of unclaimed balances
in banks once a week of three consecutive weeks in at least two newspapers of general
circulation in the locality where the banks are situated, if there be any, and if there is none, in the
City of Manila, one in English and one in Spanish, the cost of which shall be paid by the Bureau
of Treasury, which shall be reimbursed out of the escheated funds;

WHEREAS, the law also provides for the publication of summons and a notice upon the
commencement of the prescribed judicial proceedings for the escheat of unclaimed balances;

WHEREAS, past experience has shown that the cost of publication required by law, the increase
of which has been substantial the past few years, is more than the aggregate amount of the
unclaimed balances to be escheated, the average amount of which is small;

WHEREAS, there is a felt need to simplify the procedure for the escheat of unclaimed balances
for the purpose of reducing the expenses therefor;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of

the powers in me vested by the Constitution, do hereby decree and order:

Section 1. Sections 1, 2, 3, 4, and 5 of Act No. 3936 are hereby amended to read as follows:

"Sec. 1. "Unclaimed balances", within the meaning of this Act, shall include credits or deposits
of money, bullion, security or other evidence of indebtedness of any kind, and interest thereon
with banks, buildings and loan associations, and trust corporations, as hereinafter defined, in
favor of any person known to be dead or who has not made further deposits or withdrawals
during the preceding ten years or more. Such unclaimed balances, together with the increase and
proceeds thereof, shall be deposited with the Treasurer of the Philippines to the credit of the
Government of the Republic of the Philippines to be used as the National Assembly may direct.

"Banks", "building and loan associations" and "trust corporations", within the meaning of this
Act, shall refer to institutions defined under Section two, thirty-nine and fifty-six, respectively,
of Republic Act Numbered Three Hundred Thirty Seven, otherwise known as the General
Banking Act, as amended, whether organized under special charters or not.

"Sec. 2. Immediately after the taking effect of this Act and within the month of January of every
odd year, all banks, building and loan associations, and trust corporations shall forward to the
Treasurer of the Philippines a statement, under oath, of their respective managing officers, of all
credits and deposits held by them in favor of persons known to be dead, or who have not made
further deposits or withdrawals during the preceding ten years or more, arranged in alphabetical
order according to the names of creditors and depositors, and showing:

"(a) The names and last known place of residence or post office addresses of the persons
in whose favor such unclaimed balances stand;

"(b) The amount and the date of the outstanding unclaimed balance and whether the same
is in money or in security, and if the latter, the nature of the same;

"(c) The date when the person in whose favor the unclaimed balance stands died, if
known, or the date when he made his last deposit or withdrawal; and

"(d) The interest due on such unclaimed balance, if any, and the amount thereof.

181 | P a g e
"A copy of the above sworn statement shall be posted in a conspicuous place in the premises of
the bank, building and loan association, or trust corporation concerned for at least sixty days
from the date of filing thereof: Provided, That immediately before filing the above sworn
statement, the bank, building and loan association, and trust corporation shall communicate with
the person in whose favor the unclaimed balance stands at his last known place of residence or
post office address.

"It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from time
to time the existence of unclaimed balances held by banks, building and loan associations, and
trust corporations.

"Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed balances, he shall
commence an action or actions in the name of the People of the Republic of the Philippines in
the Court of First Instance of the province or city where the bank, building and loan association
or trust corporation is located, in which shall be joined as parties the bank, building and loan
association or trust corporation and all such creditors or depositors. All or any of such creditors
or depositors or banks, building and loan association or trust corporations may be included in one
action. Service of process in such action or actions shall be made by delivery of a copy of the
complaint and summons to the president, cashier, or managing officer of each defendant bank,
building and loan association or trust corporation and by publication of a copy of such summons
in a newspaper of general circulation, either in English, in Filipino, or in a local dialect,
published in the locality where the bank, building and loan association or trust corporation is
situated, if there be any, and in case there is none, in the City of Manila, at such time as the court
may order. Upon the trial, the court must hear all parties who have appeared therein, and if it be
determined that such unclaimed balances in any defendant bank, building and loan association or
trust corporation are unclaimed as hereinbefore stated, then the court shall render judgment in
favor of the Government of the Republic of the Philippines, declaring that said unclaimed
balances have escheated to the Government of the Republic of the Philippines and commanding
said bank, building and loan association or trust corporation to forthwith deposit the same with
the Treasurer of the Philippines to credit of the Government of the Republic of the Philippines to
be used as the National Assembly may direct.

"At the time of issuing summons in the action above provided for, the clerk of court shall also
issue a notice signed by him, giving the title and number of said action, and referring to the
complaint therein, and directed to all persons, other than those named as defendants therein,
claiming any interest in any unclaimed balance mentioned in said complaint, and requiring them
to appear within sixty days after the publication or first publication, if there are several, of such
summons, and show cause, if they have any, why the unclaimed balances involved in said action
should not be deposited with the Treasurer of the Philippines as in this Act provided and
notifying them that if they do not appear and show cause, the Government of the Republic of the
Philippines will apply to the court for the relief demanded in the complaint. A copy of said notice
shall be attached to, and published with the copy of, said summons required to be published as
above, and at the end of the copy of such notice so published, there shall be a statement of the
date of publication, or first publication, if there are several, of said summons and notice. Any
person interested may appear in said action and become a party thereto. Upon the publication or
the completion of the publication, if there are several, of the summons and notice, and the service
of the summons on the defendant banks, building and loan associations or trust corporations, the
court shall have full and complete jurisdiction in the Republic of the Philippines over the said
unclaimed balances and over the persons having or claiming any interest in the said unclaimed
balances, or any of them, and shall have full and complete jurisdiction to hear and determine the
issues herein, and render the appropriate judgment thereon.

"Sec. 4. If the president, cashier or managing officer of the bank, building and loan association,
or trust corporation neglects or refuses to make and file the sworn statement required by this
action, such bank, building and loan association, or trust corporation shall pay to the Government
the sum of five hundred pesos a month for each month or fraction thereof during which such
default shall continue.

182 | P a g e
"Sec. 5. Any bank, building and loan association or trust corporation which shall make any
deposit with the Treasurer of the Philippines in conformity with the provisions of this Act shall
not thereafter be liable to any person for the same and any action which may be brought by any
person against in any bank, building and loan association, or trust corporation for unclaimed
balances so deposited with the Treasurer of the Philippines shall be defended by the Solicitor
General without cost to such bank, building and loan association or trust corporation."

Section 2. This Decree shall take effect immediately.

183 | P a g e
 Republic of the Philippines
Supreme Court
Manila

SECOND DIVISION

RIZAL COMMERCIAL BANKING G.R. No. 192413

CORPORATION,

Petitioner,
Present:

CARPIO, J., Chairperson,

versus
BRION,

PEREZ,

SERENO, and
HI-TRI DEVELOPMENT
CORPORATION and LUZ R. REYES, JJ.
BAKUNAWA,

Respondents.
Promulgated:

June 13, 2012

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

DECISION

SERENO, J.:

Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner Rizal
Commercial Banking Corporation (RCBC) against respondents Hi-Tri Development Corporation
(Hi-Tri) and Luz R. Bakunawa (Bakunawa). Petitioner seeks to appeal from the 26 November
2009 Decision and 27 May 2010 Resolution of the Court of Appeals (CA), [1] which reversed and
set aside the 19 May 2008 Decision and 3 November 2008 Order of the Makati City Regional
Trial Court (RTC) in Civil Case No. 06-244.[2] The case before the RTC involved the Complaint
for Escheat filed by the Republic of the Philippines (Republic) pursuant to Act No. 3936, as
amended by Presidential Decree No. 679 (P.D. 679), against certain deposits, credits, and
unclaimed balances held by the branches of various banks in the Philippines. The trial court
declared the amounts, subject of the special proceedings, escheated to the Republic and ordered
them deposited with the Treasurer of the Philippines (Treasurer) and credited in favor of the
Republic.[3] The assailed RTC judgments included an unclaimed balance in the amount of
₱1,019,514.29, maintained by RCBC in its Ermita Business Center branch.

We quote the narration of facts of the CA[4] as follows:

184 | P a g e
 x x x Luz [R.] Bakunawa and her husband Manuel, now deceased
(Spouses Bakunawa) are registered owners of six (6) parcels of land covered by
TCT Nos. 324985 and 324986 of the Quezon City Register of Deeds, and TCT
Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of Deeds. These
lots were sequestered by the Presidential Commission on Good Government
[(PCGG)].

Sometime in 1990, a certain Teresita Millan (Millan), through her

representative, Jerry Montemayor, offered to buy said lots for ₱6,724,085.71, with
the promise that she will take care of clearing whatever preliminary obstacles
there may[]be to effect a completion of the sale. The Spouses Bakunawa gave to
Millan the Owners Copies of said TCTs and in turn, Millan made a
down[]payment of ₱1,019,514.29 for the intended purchase. However, for one
reason or another, Millan was not able to clear said obstacles. As a result, the
Spouses Bakunawa rescinded the sale and offered to return to Millan her
down[]payment of ₱1,019,514.29. However, Millan refused to accept back the
₱1,019,514.29 down[]payment. Consequently, the Spouses Bakunawa, through
their company, the Hi-Tri Development Corporation (Hi-Tri) took out on October
28, 1991, a Managers Check from RCBC-Ermita in the amount of ₱1,019,514.29,
payable to Millans company Rosmil Realty and Development Corporation
(Rosmil) c/o Teresita Millan and used this as one of their basis for a complaint
against Millan and Montemayor which they filed with the Regional Trial Court of
Quezon City, Branch 99, docketed as Civil Case No. Q-91-10719 [in 1991],
praying that:

1. That the defendants Teresita Mil[l]an and Jerry Montemayor

may be ordered to return to plaintiffs spouses the Owners
Copies of Transfer Certificates of Title Nos. 324985, 324986,
103724, 98827, 98828 and 98829;

2. That the defendant Teresita Mil[l]an be correspondingly

ordered to receive the amount of One Million Nineteen
Thousand Five Hundred Fourteen Pesos and Twenty Nine
Centavos (₱1,019,514.29);

3. That the defendants be ordered to pay to plaintiffs spouses

moral damages in the amount of ₱2,000,000.00; and

4. That the defendants be ordered to pay plaintiffs attorneys fees

in the amount of ₱50,000.00.

Being part and parcel of said complaint, and consistent with their prayer in
Civil Case No. Q-91-10719 that Teresita Mil[l]an be correspondingly ordered to
receive the amount of One Million Nineteen Thousand Five Hundred Fourteen
Pesos and Twenty Nine [Centavos] (₱1,019,514.29)[], the Spouses Bakunawa,
upon advice of their counsel, retained custody of RCBC Managers Check No. ER
034469 and refrained from canceling or negotiating it.

All throughout the proceedings in Civil Case No. Q-91-10719, especially

during negotiations for a possible settlement of the case, Millan was informed that
the Managers Check was available for her withdrawal, she being the payee.

On January 31, 2003, during the pendency of the abovementioned case

and without the knowledge of [Hi-Tri and Spouses Bakunawa], x x x RCBC
reported the ₱1,019,514.29-credit existing in favor of Rosmil to the Bureau of
Treasury as among its unclaimed balances as of January 31, 2003. Allegedly, a
copy of the Sworn Statement executed by Florentino N. Mendoza, Manager and

185 | P a g e
 Head of RCBCs Asset Management, Disbursement & Sundry Department
(AMDSD) was posted within the premises of RCBC-Ermita.

On December 14, 2006, x x x Republic, through the [Office of the

Solicitor General (OSG)], filed with the RTC the action below for Escheat [(Civil
Case No. 06-244)].

On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute

with Rosmil and Millan. Instead of only the amount of ₱1,019,514.29, [Spouses
Bakunawa] agreed to pay Rosmil and Millan the amount of ₱3,000,000.00,
[which is] inclusive [of] the amount of []₱1,019,514.29. But during negotiations
and evidently prior to said settlement, [Manuel Bakunawa, through Hi-Tri]
inquired from RCBC-Ermita the availability of the ₱1,019,514.29 under RCBC
Managers Check No. ER 034469. [Hi-Tri and Spouses Bakunawa] were however
dismayed when they were informed that the amount was already subject of the
escheat proceedings before the RTC.

On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x

RCBC, viz:

We understand that the deposit corresponding to the amount of Php

1,019,514.29 stated in the Managers Check is currently the subject
of escheat proceedings pending before Branch 150 of the Makati
Regional Trial Court.

Please note that it was our impression that the deposit would be
taken from [Hi-Tris] RCBC bank account once an order to debit is
issued upon the payees presentation of the Managers Check. Since
the payee rejected the negotiated Managers Check, presentation of
the Managers Check was never made.

Consequently, the deposit that was supposed to be allocated for the

payment of the Managers Check was supposed to remain part of
the Corporation[s] RCBC bank account, which, thereafter,
continued to be actively maintained and operated. For this reason,
We hereby demand your confirmation that the amount of Php
1,019,514.29 continues to form part of the funds in the
Corporations RCBC bank account, since pay-out of said amount
was never ordered. We wish to point out that if there was any
attempt on the part of RCBC to consider the amount indicated in
the Managers Check separate from the Corporations bank account,
RCBC would have issued a statement to that effect, and repeatedly
reminded the Corporation that the deposit would be considered
dormant absent any fund movement. Since the Corporation never
received any statements of account from RCBC to that effect, and
more importantly, never received any single letter from RCBC
noting the absence of fund movement and advising the Corporation
that the deposit would be treated as dormant.

On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x RCBC

reiterating their position as above-quoted.

In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-Tri
and Spouses Bakunawa] that:

The Banks Ermita BC informed Hi-Tri and/or its principals

regarding the inclusion of Managers Check No. ER034469 in the

186 | P a g e
 escheat proceedings docketed as Civil Case No. 06-244, as well as
the status thereof, between 28 January 2008 and 1 February 2008.

xxx xxx xxx

Contrary to what Hi-Tri hopes for, the funds covered by the

Managers Check No. ER034469 does not form part of the Banks
own account. By simple operation of law, the funds covered by the
managers check in issue became a deposit/credit susceptible for
inclusion in the escheat case initiated by the OSG and/or Bureau of
Treasury.

xxx xxx xxx

Granting arguendo that the Bank was duty-bound to make good the
check, the Banks obligation to do so prescribed as early as October
2001.

(Emphases, citations, and annotations were omitted.)

The RTC Ruling

The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the trial court
rendered its assailed Decision declaring the deposits, credits, and unclaimed balances subject of
Civil Case No. 06-244 escheated to the Republic. Among those included in the order of
forfeiture was the amount of ₱1,019,514.29 held by RCBC as allocated funds intended for the
payment of the Managers Check issued in favor of Rosmil. The trial court ordered the deposit of
the escheated balances with the Treasurer and credited in favor of the Republic. Respondents
claim that they were not able to participate in the trial, as they were not informed of the ongoing
escheat proceedings.

Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking the
partial reconsideration of the RTC Decision insofar as it escheated the fund allocated for the
payment of the Managers Check. They asked that they be included as party-defendants or, in the
alternative, allowed to intervene in the case and their motion considered as an answer-in-
intervention. Respondents argued that they had meritorious grounds to ask reconsideration of the
Decision or, alternatively, to seek intervention in the case. They alleged that the deposit was
subject of an ongoing dispute (Civil Case No. Q-91-10719) between them and Rosmil since
1991, and that they were interested parties to that case.[5]

On 3 November 2008, the RTC issued an Order denying the motion of respondents. The
trial court explained that the Republic had proven compliance with the requirements of
publication and notice, which served as notice to all those who may be affected and prejudiced
by the Complaint for Escheat. The RTC also found that the motion failed to point out the
findings and conclusions that were not supported by the law or the evidence presented, as
required by Rule 37 of the Rules of Court. Finally, it ruled that the alternative prayer to intervene
was filed out of time.

The CA Ruling

On 26 November 2009, the CA issued its assailed Decision reversing the 19 May 2008
Decision and 3 November 2008 Order of the RTC. According to the appellate court,[6] RCBC
failed to prove that the latter had communicated with the purchaser of the Managers Check (Hi-
Tri and/or Spouses Bakunawa) or the designated payee (Rosmil) immediately before the bank
filed its Sworn Statement on the dormant accounts held therein. The CA ruled that the banks
failure to notify respondents deprived them of an opportunity to intervene in the escheat
proceedings and to present evidence to substantiate their claim, in violation of their right to due
process. Furthermore, the CA pronounced that the Makati City RTC Clerk of Court failed to

187 | P a g e
issue individual notices directed to all persons claiming interest in the unclaimed balances, as
well as to require them to appear after publication and show cause why the unclaimed balances
should not be deposited with the Treasurer of the Philippines. It explained that the jurisdictional
requirement of individual notice by personal service was distinct from the requirement of notice
by publication. Consequently, the CA held that the Decision and Order of the RTC were void for
want of jurisdiction.

Issue

After a perusal of the arguments presented by the parties, we cull the main issues as
follows:

I. Whether the Decision and Order of the RTC were void for failure to send
separate notices to respondents by personal service

II. Whether petitioner had the obligation to notify respondents immediately

before it filed its Sworn Statement with the Treasurer

III. Whether or not the allocated funds may be escheated in favor of the Republic

Discussion

Petitioner bank assails[7] the CA judgments insofar as they ruled that notice by personal
service upon respondents is a jurisdictional requirement in escheat proceedings. Petitioner
contends that respondents were not the owners of the unclaimed balances and were thus not
entitled to notice from the RTC Clerk of Court. It hinges its claim on the theory that the funds
represented by the Managers Check were deemed transferred to the credit of the payee or holder
upon its issuance.

We quote the pertinent provision of Act No. 3936, as amended, on the rule on service of
processes, to wit:

Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed

balances, he shall commence an action or actions in the name of the People of
the Republic of the Philippines in the Court of First Instance of the province or
city where the bank, building and loan association or trust corporation is
located, in which shall be joined as parties the bank, building and loan
association or trust corporation and all such creditors or depositors. All or any
of such creditors or depositors or banks, building and loan association or trust
corporations may be included in one action. Service of process in such action or
actions shall be made by delivery of a copy of the complaint and summons to
the president, cashier, or managing officer of each defendant bank, building
and loan association or trust corporation and by publication of a copy of such
summons in a newspaper of general circulation, either in English, in Filipino, or
in a local dialect, published in the locality where the bank, building and loan
association or trust corporation is situated, if there be any, and in case there is
none, in the City of Manila, at such time as the court may order. Upon the trial,
the court must hear all parties who have appeared therein, and if it be
determined that such unclaimed balances in any defendant bank, building
and loan association or trust corporation are unclaimed as hereinbefore stated,
then the court shall render judgment in favor of the Government of the
Republic of the Philippines, declaring that said unclaimed balances have
escheated to the Government of the Republic of the Philippines and commanding
said bank, building and loan association or trust corporation to forthwith deposit
the same with the Treasurer of the Philippines to credit of the Government of the
Republic of the Philippines to be used as the National Assembly may direct.

188 | P a g e
 At the time of issuing summons in the action above provided for, the clerk of
court shall also issue a notice signed by him, giving the title and number of said
action, and referring to the complaint therein, and directed to all persons, other
than those named as defendants therein, claiming any interest in any
unclaimed balance mentioned in said complaint, and requiring them to
appear within sixty days after the publication or first publication, if there are
several, of such summons, and show cause, if they have any, why the
unclaimed balances involved in said action should not be deposited with the
Treasurer of the Philippines as in this Act provided and notifying them that if
they do not appear and show cause, the Government of the Republic of the
Philippines will apply to the court for the relief demanded in the
complaint. A copy of said notice shall be attached to, and published with the
copy of, said summons required to be published as above, and at the end of the
copy of such notice so published, there shall be a statement of the date of
publication, or first publication, if there are several, of said summons and
notice. Any person interested may appear in said action and become a party
thereto. Upon the publication or the completion of the publication, if there are
several, of the summons and notice, and the service of the summons on the
defendant banks, building and loan associations or trust corporations, the court
shall have full and complete jurisdiction in the Republic of the Philippines
over the said unclaimed balances and over the persons having or claiming
any interest in the said unclaimed balances, or any of them, and shall have
full and complete jurisdiction to hear and determine the issues herein, and
render the appropriate judgment thereon. (Emphasis supplied.)

Hence, insofar as banks are concerned, service of processes is made by delivery of a

copy of the complaint and summons upon the president, cashier, or managing officer of the
defendant bank.[8] On the other hand, as to depositors or other claimants of the unclaimed
balances, service is made by publication of a copy of the summons in a newspaper of general
circulation in the locality where the institution is situated.[9] A notice about the forthcoming
escheat proceedings must also be issued and published, directing and requiring all persons who
may claim any interest in the unclaimed balances to appear before the court and show cause why
the dormant accounts should not be deposited with the Treasurer.

Accordingly, the CA committed reversible error when it ruled that the issuance of
individual notices upon respondents was a jurisdictional requirement, and that failure to effect
personal service on them rendered the Decision and the Order of the RTC void for want of
jurisdiction. Escheat proceedings are actions in rem,[10] whereby an action is brought against the
thing itself instead of the person.[11] Thus, an action may be instituted and carried to judgment
without personal service upon the depositors or other claimants.[12] Jurisdiction is secured by the
power of the court over the res.[13] Consequently, a judgment of escheat is conclusive upon
persons notified by advertisement, as publication is considered a general and constructive notice
to all persons interested.[14]

Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the funds
allocated for the payment of the Managers Check in the escheat proceedings.

Escheat proceedings refer to the judicial process in which the state, by virtue of its
sovereignty, steps in and claims abandoned, left vacant, or unclaimed property, without there
being an interested person having a legal claim thereto.[15] In the case of dormant accounts, the
state inquires into the status, custody, and ownership of the unclaimed balance to determine
whether the inactivity was brought about by the fact of death or absence of or abandonment by
the depositor.[16] If after the proceedings the property remains without a lawful owner interested
to claim it, the property shall be reverted to the state to forestall an open invitation to self-service
by the first comers.[17] However, if interested parties have come forward and lain claim to the
property, the courts shall determine whether the credit or deposit should pass to the claimants or
be forfeited in favor of the state.[18] We emphasize that escheat is not a proceeding to penalize

189 | P a g e
depositors for failing to deposit to or withdraw from their accounts. It is a proceeding
whereby the state compels the surrender to it of unclaimed deposit balances when there is
substantial ground for a belief that they have been abandoned, forgotten, or without an owner.[19]

Act No. 3936, as amended, outlines the proper procedure to be followed by banks and
other similar institutions in filing a sworn statement with the Treasurer concerning dormant
accounts:

Sec. 2. Immediately after the taking effect of this Act and within the month of
January of every odd year, all banks, building and loan associations, and trust
corporations shall forward to the Treasurer of the Philippines a statement,
under oath, of their respective managing officers, of all credits and deposits held
by them in favor of persons known to be dead, or who have not made further
deposits or withdrawals during the preceding ten years or more, arranged in
alphabetical order according to the names of creditors and depositors,
and showing:

(a) The names and last known place of residence or post office addresses of the
persons in whose favor such unclaimed balances stand;

(b) The amount and the date of the outstanding unclaimed balance and whether
the same is in money or in security, and if the latter, the nature of the same;

(c) The date when the person in whose favor the unclaimed balance stands died,
if known, or the date when he made his last deposit or withdrawal; and

(d) The interest due on such unclaimed balance, if any, and the amount thereof.

A copy of the above sworn statement shall be posted in a conspicuous place

in the premises of the bank, building and loan association, or trust corporation
concerned for at least sixty days from the date of filing thereof: Provided,
That immediately before filing the above sworn statement, the bank, building
and loan association, and trust corporation shall communicate with the person
in whose favor the unclaimed balance stands at his last known place of
residence or post office address.

It shall be the duty of the Treasurer of the Philippines to inform the Solicitor
General from time to time the existence of unclaimed balances held by banks,
building and loan associations, and trust corporations. (Emphasis supplied.)

As seen in the afore-quoted provision, the law sets a detailed system for notifying
depositors of unclaimed balances. This notification is meant to inform them that their deposit
could be escheated if left unclaimed. Accordingly, before filing a sworn statement, banks and
other similar institutions are under obligation to communicate with owners of dormant accounts.
The purpose of this initial notice is for a bank to determine whether an inactive account has
indeed been unclaimed, abandoned, forgotten, or left without an owner. If the depositor simply
does not wish to touch the funds in the meantime, but still asserts ownership and dominion over
the dormant account, then the bank is no longer obligated to include the account in its sworn
statement.[20] It is not the intent of the law to force depositors into unnecessary litigation and
defense of their rights, as the state is only interested in escheating balances that have been
abandoned and left without an owner.

190 | P a g e
 In case the bank complies with the provisions of the law and the unclaimed balances
are eventually escheated to the Republic, the bank shall not thereafter be liable to any person for
the same and any action which may be brought by any person against in any bank xxx for
unclaimed balances so deposited xxx shall be defended by the Solicitor General without cost to
such bank.[21]Otherwise, should it fail to comply with the legally outlined procedure to the
prejudice of the depositor, the bank may not raise the defense provided under Section 5 of Act
No. 3936, as amended.

Petitioner asserts[22] that the CA committed a reversible error when it required RCBC to
send prior notices to respondents about the forthcoming escheat proceedings involving the funds
allocated for the payment of the Managers Check. It explains that, pursuant to the law, only those
whose favor such unclaimed balances stand are entitled to receive notices. Petitioner argues that,
since the funds represented by the Managers Check were deemed transferred to the credit of the
payee upon issuance of the check, the proper party entitled to the notices was the payee Rosmil
and not respondents. Petitioner then contends that, in any event, it is not liable for failing to send
a separate notice to the payee, because it did not have the address of Rosmil. Petitioner avers that
it was not under any obligation to record the address of the payee of a Managers Check.

In contrast, respondents Hi-Tri and Bakunawa allege[23] that they have a legal interest in
the fund allocated for the payment of the Managers Check. They reason that, since the funds
were part of the Compromise Agreement between respondents and Rosmil in a separate civil
case, the approval and eventual execution of the agreement effectively reverted the fund to the
credit of respondents. Respondents further posit that their ownership of the funds was evidenced
by their continued custody of the Managers Check.

An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank

(drawee),[24] requesting the latter to pay a person named therein (payee) or to the order of the
payee or to the bearer, a named sum of money.[25] The issuance of the check does not of itself
operate as an assignment of any part of the funds in the bank to the credit of the drawer.[26] Here,
the bank becomes liable only after it accepts or certifies the check.[27] After the check is accepted
for payment, the bank would then debit the amount to be paid to the holder of the check from the
account of the depositor-drawer.

There are checks of a special type called managers or cashiers checks. These are bills of
exchange drawn by the banks manager or cashier, in the name of the bank, against the bank
itself.[28]Typically, a managers or a cashiers check is procured from the bank by allocating a
particular amount of funds to be debited from the depositors account or by directly paying or
depositing to the bank the value of the check to be drawn. Since the bank issues the check in its
name, with itself as the drawee, the check is deemed accepted in advance.[29] Ordinarily, the
check becomes the primary obligation of the issuing bank and constitutes its written promise to
pay upon demand.[30]

Nevertheless, the mere issuance of a managers check does not ipso facto work as an
automatic transfer of funds to the account of the payee. In case the procurer of the managers or
cashiers check retains custody of the instrument, does not tender it to the intended payee, or fails
to make an effective delivery, we find the following provision on undelivered instruments under
the Negotiable Instruments Law applicable:[31]

Sec. 16. Delivery; when effectual; when presumed. Every contract on a

negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between immediate
parties and as regards a remote party other than a holder in due course,
the delivery, in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing, as the case
may be; and, in such case, the delivery may be shown to have been conditional, or
for a special purpose only, and not for the purpose of transferring the property in
the instrument. But where the instrument is in the hands of a holder in due course,
a valid delivery thereof by all parties prior to him so as to make them liable to him

191 | P a g e
 is conclusively presumed. And where the instrument is no longer in the
possession of a party whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved. (Emphasis supplied.)

Petitioner acknowledges that the Managers Check was procured by respondents, and that the
amount to be paid for the check would be sourced from the deposit account of Hi-Tri.[32] When
Rosmil did not accept the Managers Check offered by respondents, the latter retained custody of
the instrument instead of cancelling it. As the Managers Check neither went to the hands of
Rosmil nor was it further negotiated to other persons, the instrument remained undelivered.
Petitioner does not dispute the fact that respondents retained custody of the instrument.[33]

Since there was no delivery, presentment of the check to the bank for payment did not
occur. An order to debit the account of respondents was never made. In fact, petitioner confirms
that the Managers Check was never negotiated or presented for payment to its Ermita Branch,
and that the allocated fund is still held by the bank.[34] As a result, the assigned fund is deemed to
remain part of the account of Hi-Tri, which procured the Managers Check. The doctrine that the
deposit represented by a managers check automatically passes to the payee is inapplicable,
because the instrument although accepted in advance remains undelivered. Hence, respondents
should have been informed that the deposit had been left inactive for more than 10 years, and
that it may be subjected to escheat proceedings if left unclaimed.

After a careful review of the RTC records, we find that it is no longer necessary to
remand the case for hearing to determine whether the claim of respondents was valid. There was
no contention that they were the procurers of the Managers Check. It is undisputed that there was
no effective delivery of the check, rendering the instrument incomplete. In addition, we have
already settled that respondents retained ownership of the funds. As it is obvious from their
foregoing actions that they have not abandoned their claim over the fund, we rule that the
allocated deposit, subject of the Managers Check, should be excluded from the escheat
proceedings. We reiterate our pronouncement that the objective of escheat proceedings is state
forfeiture of unclaimed balances. We further note that there is nothing in the records that would
show that the OSG appealed the assailed CA judgments. We take this failure to appeal as an
indication of disinterest in pursuing the escheat proceedings in favor of the Republic.

WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27 May
2010 Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are hereby AFFIRMED.

SO ORDERED.

192 | P a g e
 Republic of the Philippines
Congress of the Philippines
Metro Manila

Fourteenth Congress
Second Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand eight.

Republic Act No. 9510 October 31, 2008

AN ACT ESTABLISHING THE CREDIT INFORMATION SYSTEM AND FOR OTHER

PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled::

Section 1. Title. - This Act shall be known as the "Credit Information System Act".

Section 2. Declaration of Policy. - The State recognizes the need to establish a comprehensive
and centralized credit information system for the collection and dissemination of fair and
accurate information relevant to, or arising from, credit and credit-related activities of all entities
participating in the financial system. A credit information system will directly address the need
for reliable credit information concerning the credit standing and track record of borrowers.

The operations and services of a credit information system can be expected to: greatly improve
the overall availability of credit especially to micro, small and medium-scale enterprises; provide
mechanisms to make credit more cost-effective; and reduce the excessive dependence on
collateral to secure credit facilities.

The State shall endeavor to have credit information provided at the least cost to all participants
and shall ensure the protection of consumer rights and the existence of fair competition in the
industry at all times.

An efficient credit information system will also enable financial institutions to reduce their over-
all credit risk, contributing to a healthier and more stable financial system.

Section 3. Definition of Terms. - For purposes of this Act:

(a) "Accessing Entity" refers to any submitting entity or any other entity authorized by the
Corporation to access basic credit data from the Corporation.

(b) "Basic Credit Data" refers to positive and negative information provided by a
borrower to a submitting entity in connection with the application for and availment of a
credit facility and any information on the borrower’s creditworthiness in the possession
of the submitting entity and other factual and objective information related or relevant
thereto in the submitting entity’s data files or that of other sources of
information: Provided, that in the absence of a written waiver duly accomplished by the
borrower, basic credit data shall exclude confidential information on bank deposits and/or
clients funds under Republic Act No. 1405 (Law on Secrecy of Bank Deposits), Republic
Act No. 6426 (The Foreign Currency Deposit Act), Republic Act No. 8791 (The General
Banking Law of 2000), Republic Act No. 9160 (Anti-Money Laundering Law) and their
amendatory laws.

193 | P a g e
 (c) "Borrower" refers to a natural or juridical person, including any local government unit
(LGU), its subsidiaries and affiliates, that applies for and/or avails of a credit facility.

(d) "BSP" refers to the Bangko Sentral ng Pilipinas, created under Republic Act No.7653.

(e) "Corporation" refers to the Credit Information Corporation established under Section
5 of this Act.

(f) "Credit facility" refers to any loan, credit line, guarantee or any other form of financial
accommodation from a submitting entity: Provided, That for purposes of this Act,
deposits in banks shall not be considered a credit facility extended by the depositor in
favor of the bank.

(g) "Credit Rating" refers to an opinion regarding the creditworthiness of a borrower or

of an issuer of debt security, using an established and defined ranking system.

(h) "Credit Report" refers to a summary of consolidated and evaluated information on

creditworthiness, credit standing, credit capacity, character and general reputation of a
borrower.

(i) "Government Lending Institutions" refers to existing and future government (GFIs),
government-owned and controlled corporations (GOCCs) primarilly engaged in lending
activities.

(j) "Negative Credit Information" refers to information/data concerning the poor credit
performance of borrowers such as, but not limited to, defaults on loans, adverse court
judgments relating to debts and reports on bankruptcy, insolvency, petitions or orders on
suspension of payments and corporate rehabilitation.

(k) "Non-Accessing Entity" refers to an entity other than a Submitting Entity, Special
Accessing Entity or Borrower that is authorized by the Corporation to access credit
information from a Special Accessing Entity.

(l) "Outsource entity" refers to any accredited third party provider to whom the
Corporation may outsource the processing and consolidation of basic credit data
pertaining to a borrower or issuer of debt or convertible securities under such
qualifications, criteria and strict confidentiality guidelines that the Corporation shall
prescribe and duly publish.

(m) "Positive credit information" refers to information/data concerning the credit

performance of a borrower such as, but not limited to, information on timely repayments
or non-delinquency.

(n) "Relevant Government Agencies" refers to the Department of Finance, Department of

Trade and Industry, Bangko Sentral ng Pilipinas, Insurance Commission and the
Cooperative Development Authority.

(o) "SEC" refers to the Securities and Exchange Commission.

(p) "Special Accessing Entity" refers to a duly accredited private corporation engaged
primarily in the business of providing credit reports, ratings and other similar credit
information products and services.

(q) "Submitting Entity" refers to any entity that provides credit facilities such as, but not
limited to, banks, quasi-banks, trust entities, investment houses, financing companies,
cooperatives, nongovernmental, micro-financing organizations, credit card companies,
insurance companies and government lending institutions.

194 | P a g e
Section 4. Establishment of the Credit Information System. - In furtherance of the policy set
forth in Section 2 of this Act, a credit information system is hereby established.

(a) Banks, quasi-banks, their subsidiaries and affiliates, life insurance companies, credit
card companies and other entities that provide credit facilities are required to submit
basic credit data and updates thereon on a regular basis to the Corporation.

(b) The Corporation may include other credit providers to be subject to compulsory
participation: Provided, That all other entities qualified to be submitting entities may
participate subject to their acceptance by the Corporation: Provided, further, That, in all
cases, participation under the system shall be in accordance with such standards and rules
that the SEC in coordination with the relevant government agencies my prescribe.

(c) Participating submitting entities are required to submit to the Corporation any
negative and positive credit information that tends to update and/or correct the credit
status of borrowers. The Corporation shall fix the time interval for such
submission: Provided, That such interval shall not be less than fifteen (15) working days
but not more than thirty (30) working days.

(d) The Corporation should regularly collect basic credit data of borrowers at least on a
quarterly basis to correct/update the basic credit data of said borrowers.

(e) The Corporation may also access credit and other relevant information from
government offices, judicial and administrative tribunals, prosecutorial agencies and
other related offices, as well as pension plans administered by the government.

(f) Each submitting entity shall notify its borrowers of the former’s obligation to submit
basic credit data to the Corporation and the disclosure thereof to the Corporation, subject
to the provisions of this Act and the implementing rules and regulations.

(g) The Corporation is in turn authorized to release consolidated basic credit data on the
borrower, subject to the provisions of Section 6 of this Act.

(h) The negative information on the borrower as contained in the credit history files of
borrowers should stay in the database of the Corporation unless sooner corrected, for not
more than three (3) years from and after the date when the negative credit information
was rectified through payment or liquidation of the debt, or through settlement of debts
through compromise agreements or court decisions that exculpate the borrower from
liability. Negative information shall be corrected and updated within fifteen (15) days
from the time of payment, liquidation or settlement of debts.

(i) Special Accessing Entities shall be accredited by the Corporation in accordance with
such standards and rules as the SEC in coordination with the relevant government
agencies, may prescribe.

(j) Special accessing entities shall be entitled access to the Corporation’s pool of
consolidated basic credit data, subject to the provisions of Section s 6 and 7 of this Act
and related implementing rules and regulations.

(k) Special accessing entities are prohibited from releasing basic credit data received
from the Corporation or credit reports and credit ratings derived from the basic credit data
received from the Corporation, to non-accessing entities unless the written consent or
authorization has been obtained from the Borrower: Provided, however, That in case the
borrower is a local government unit (LGU) or its subsidiary or affiliate, the special
accessing entity may release credit information on the LGU, its subsidiary or affiliate
upon written request and payment of reasonable fees by a constituent of the concerned
LGU.

195 | P a g e
 (l) Outsource Entities, which may process and consolidate basic credit data, are
absolutely prohibited from releasing such data received from the Corporation other than
to the Corporation itself.

(m) Accessing Entities shall hold strictly confidential any credit information they receive
from the Corporation.

(n) The borrower has the right to know the causes of refusal of the application for credit
facilities or services from a financial institution that uses basic credit data as basis or
ground for such a refusal.

(o) The borrower, for a reasonable fee, shall have, as a matter of right, ready and
immediate access to the credit information pertinent to the borrower. In case of
erroneous, incomplete or misleading credit information, the subject borrower shall have
the right to dispute the erroneous, incomplete, outdated or misleading credit information
before the Corporation. The Corporation shall investigate and verify the disputed
information within five (5) working days from receipt of the complaint. If its accuracy
cannot be verified and cannot be proven, the disputed information shall be deleted. The
borrower and the accessing entities and special accessing entities who have received such
information shall be informed of the corresponding correction or removal within five (5)
working days. The Corporation should use a simplified dispute resolution process to fast
track the settlement/resolution of disputed credit information. Denial of these borrowers’
rights, without justifiable reason, shall entitle the borrower to indemnity.

Section 5. Establishment of the Central Credit Information Corporation. - There is hereby

created a Corporation which shall be known as the Credit Information Corporation, whose
primary purpose shall be to receive and consolidate basic credit data, to act as a central registry
or central repository of credit information, and to provide access to reliable, standardized
information on credit history and financial condition of borrowers.

(a) The Corporation is hereby authorized to adopt, alter, and use a corporate seal which
shall be judicially noticed; to enter into contracts; to incur liabilities; to lease or own real
or personal property, and to sell or otherwise dispose of the same; to sue and be sued; to
compromise, condone or release any liability and otherwise to do and perform any and all
things that may be necessary or proper to carry out the purposes of this Act.

(b) The authorized capital stock of the Corporation shall be Five hundred million pesos
(P500,000,000.00) which shall be divided into common and preferred shares which shall
be non-voting. The National Government shall own and hold sixty percent (60%) of the
common shares while the balance of forty percent (40%) shall be owned by and held by
qualified investors which shall be limited to industry associations of banks, quasi-banks
and other credit related associations including associations of consumers. The amount of
Seventy-five million pesos (PhP75,000,000.00) shall be appropriated in the General
Appropriations Act for the subscription of common shares by the National Government
to represent its sixty percent (60%) equity share and the amount of Fifty million pesos
(PhP50,000,000.00) shall be subscribed and paid up by such qualified investors in
accordance with Section 5(d) hereof.

(c) The National Government may subscribe or purchase securities or financial

instrument that may be issued by the Corporation as a supplement to capital.

(d) Equal equity participation in the Corporation shall be offered and held by qualified
private sector investors but in no case shall each of the qualified investor represented by
an association of banks, quasi-banks and other credit-related associations including the
associations of consumers have more than ten percent (10%) each of the total common
shares issued by the Corporation.

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 (e) The SEC in coordination with relevant government agencies, shall prescribe
additional requirements for the establishment of the Corporation, such as industry
representation, capital structure, number of independent directors, and the process for
nominating directors, and such other requirements to ensure consumer protection and
free, fair and healthy competition in the industry.

(f) The Chairman of the SEC shall be the Chairman of the Board of Directors of the
Corporation. Whenever the Chairman of the SEC is unable to attend a meeting of the
Board, he/she shall designate an Associate Commissioner of the SEC to act as his/her
alternate.

The powers and functions of the Corporation shall be exercised by a board of directors
composed of fifteen (15) members. The directors representing the government shares
shall be appointed by the President of the Philippines.

(g) The directors and principal officers of the Corporation, shall be qualified by the "fit
and proper" rule for bank directors and officers. To maintain the quality of management
of the Corporation and afford better protection to the system and the public in general, the
SEC in coordination with the relevant government agencies, shall prescribe, pass upon
and review the qualifications and disqualifications of individuals elected or appointed
directors of the Corporation and disqualify those found unfit. After due notice to the
board of directors of the Corporation, the SEC may disqualify, suspend or remove any
director who commits or omits an act which render him unfit for the position. In
determining whether an individual is fit and proper to hold the position of a director of
the Corporation, due regard shall be given to his integrity, experience, education, training
and competence.

The members of the Board of Directors must be Filipino citizens and at least thirty (30)
years of age. In addition, they shall be persons of good moral character, of
unquestionable integrity, of known probity, and have attained competence in the fields of
law, finance, economics, computer science or information technology. In addition to the
disqualifications imposed by the Corporation Code, as amended, no person shall be
nominated by the national government if he has been connected directly with a banking
or financial institution as a director or officer, or has substantial interest therein within
three (3) years prior to his appointment.

(h) The Board of Directors may appoint such officers and employees as are not otherwise
provided for in this Act, define their duties, fix their compensations and impose
disciplinary sanctions upon such officers and employees, for cause. The salaries and other
compensation of the officers and employees of the Corporation shall be exempt from the
Salary Standardization Law. Appointments in the Corporation, except to those which are
policy-determining, primarily confidential or highly technical in nature, shall be made
only according to the Civil Service Law.

(i) The Corporation shall acquire and use state-of-the-art technology and facilities in its
operations to ensure its continuing competence and capability to provide updated
negative and positive credit information; to enable the Corporation to relay credit
information electronically as well as in writing to those authorized to have access to the
credit information system; and to insure accuracy of collected, stored and disseminated
credit information. The Corporation shall implement a borrower’s identification system
for the purpose of consolidating credit information.

(j) The provisions of any general or special law to the contrary notwithstanding, the
importation by the Corporation of all equipment, hardware or software, as well as all
other equipment needed for its operations shall be fully exempt from all customs duties
and from all other taxes, assessments and charges related to such importation.

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 (k) The Corporation shall have its principal place of business in Metro Manila, but may
maintain branches in such other places as the proper conduct of its business may require.

(l) Any and all acquisition of goods and services by the Corporation shall be subject to
Procurement Laws.

(m) The national government shall continue to hold sixty percent (60%) of the common
shares for a period not to exceed five (5) years from the date of commencement of
operations of the Corporation. After the said period, the national government shall
dispose of at least twenty percent (20%) of its stockholdings in the Corporation to
qualified investors which shall be limited to industry associations of banks, quasi-banks
and other credit-related associations, including associations of consumers. The national
government shall offer equal equity participation in the Corporation to all qualified
investors. When the ownership of the majority of the common voting shares of the
Corporation passes to private investors, the stockholders shall cause the adoption and
registration with the SEC of the amended articles of incorporation within three (3)
months from such transfer of ownership.

Section 6. Confidentiality of Credit Information. - The Corporation, the submitting entities, the
accessing entities, the outsource entities, the special accessing entities and the duly authorized
non-accessing entities shall hold the credit information under strict confidentiality and shall use
the same only for the declared purpose of establishing the creditworthiness of the borrower.
Outsource entities which may process and consolidate basic credit data are absolutely prohibited
from releasing such data received from the Corporation other than to the Corporation.

The accreditation of an accessing entity, a special entity and/or an outsource entity which
violates the confidentiality of, or which misuses, the credit information accessed from the
Corporation, may be suspended or revoked. Any entity which violates this section may be barred
access to the credit information system and penalized pursuant to Section 11 of this Act.

The Corporation shall be authorized to release and disclose consolidated basic credit data only to
the Accessing Entities, the Special Accessing Entities, the Outsource Entities and Borrowers.
Basic Consolidated basic credit data released to Accessing Entities shall be limited to those
pertaining to existing Borrowers or Borrowers with pending credit applications. Credit
information shall not be released to entities other than those enumerated under this Section
except upon order of the court.

Section 7. Educational Campaign. - A continuing nationwide educational campaign shall be

developed and undertaken by the Corporation to promote the benefits of a credit information
system to the economy; to create awareness on the rights of consumers/borrowers to access their
credit reports collected, stored and disseminated by the Corporation; to disseminate the rights of
the borrowers to dispute any incorrect/inaccurate credit information in the database file of the
Corporation; to familiarize consumers of the procedure in collecting, storing and disseminating
credit information of borrowers by the Corporation; and to brief consumers of other related
information.

Section 8. Rules and Regulations. - For purposes of creating a healthy balance between the need
for reliable credit information and safeguarding consumer protection, ensuring free and healthy
competition in the industry, the SEC, in coordination with relevant government agencies and
existing industry stakeholders, shall issue the implementing rules and regulations (IRRs), which
shall be reviewed, revised and approved by the Oversight Committee to ensure consistency and
compliance with the provisions of this Act, embodying among others:

(a) The basic credit data shall be limited or confined in form and content to an objective
and factual information and shall exclude any subjective information or opinion;

(b) Restrictions on the use and transfer of credit information;

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 (c) Rights of the borrowers to access their respective credit information and to dispute the
factual accuracy of such credit information;

(d) Requirements and standards for the establishment of the Corporation including, but
not limited to, ownership, industry representation, independent directors and process of
nomination of directors;

(e) Accreditation standards for submitting entities and special accessing entities and non-
accessing entities;

(f) Sanctions to be imposed by the Corporation on:

(i) The submitting entities for non-submission of reports and for delayed and/or
erroneous reporting;

(ii) Accessing entities, special accessing entities, outsource entities and duly
authorized non-accessing entities, for breaches of the confidentiality of misuse of,
the credit information obtained from the credit information system; and

(iii) Violations of other applicable rules and regulations: Provided, That these
administrative sanctions shall be in the form of fines in amounts as may be
determined by the Corporation but in no case to exceed Thirty thousand pesos
(PhP30,000.00) a day for each violation, taking into consideration the attendant
circumstances, such as the nature and gravity of the violation or irregularity.
Imposition of administrative sanctions shall be without prejudice to any criminal
and other sanctions as may be applicable under this Act and relevant laws;

(g) Suspension or cancellation of the rights of any Accessing Entity or Special Accessing
Entity to access Credit Information from the Corporation; Provided, That the SEC in
coordination with relevant government agencies and existing industry stakeholders, may
issue subsequent regulations consistent with the IRR as approved by the Congressional
Oversight Committee.

In addition, the SEC may regulate access to the credit information system as well as the
fees that shall be collected by the Corporation from the Accessing and Special Accessing
Entities, taking into consideration the policy of lowering the cost of credit, promoting fair
competition, and the need of the Corporation to employ state-of-the-art technology; and

(h) The basic credit data about a borrower shall be limited to credit information existing
on the date of the enactment of this Act and thereafter.

Section 9. Congressional Oversight Committee. - There is hereby created a congressional

oversight committee, composed of seven (7) members from the Senate and seven (7) members
from the House of Representatives. The Members from the Senate shall be appointed by the
Senate President with at least three (3) Senators representing the minority. The Members of the
House of Representatives shall be appointed by the Speaker with at least three (3) members
representing the minority.

After the Oversight Committee approved the implementing rules and regulations, it shall
thereafter become functus officio, and therefore cease to exist: Provided, That the Congress may
revive the Congressional Oversight Committee in case of a need for any major revision/s in the
implementing rules and regulations.

Section 10. Indemnity in Favor of the Corporation, its Officers and Employees. - Unless the
Corporation or any of its officers and employees is found liable for any willful violation of this
Act, bad faith, malice and/or gross negligence, the Submitting Entities, Accessing Entities,
Special Accessing Entities, Outsource Entities and duly authorized non-accessing entities shall
hold the Corporation, its directors, officers and employees free and harmless to the fullest extent

199 | P a g e
permitted by law and shall indemnify them from any and all liabilities, losses, claims, demands,
damages, deficiencies, costs and expenses of whatsoever kind and nature that may arise in
connection with the performance of their functions without prejudice to any criminal liability
under existing laws.

Section 11. Penalties. - Any person who willfully violates any of the provisions of this Act or
the rules and regulations promulgated by the SEC in coordination with the relevant government
agencies shall, upon conviction, suffer a fine of not less than Fifty thousand pesos
(PhP50,000.00). nor more than One million pesos (PhP1,000,000.00) or imprisonment of not less
than one (1) year nor more than five (5) years, or both, at the discretion of the court.

Section 12. Inviolable Nature of the Secrecy of Bank Deposits and/or Client Funds. -Pursuant
to Republic Act No. 1405 (Law on Secrecy of Bank Deposits), Republic Act No. 6426 (The
Foreign Currency Deposit Act), Republic Act No. 8791 (The General Banking Law of 2000),
Republic Act No. 9160 (Anti-Money Laundering Law) and their amendatory laws, nothing in
this Act shall impair the secrecy of bank deposits and and/or client funds and investments in
government securities or funds.

Section 13. Annual Report. - The SEC shall submit an annual report to Congress on the status of
the implementation of this Act.

Sec. 14. Principal Government Agency. - The SEC shall be the lead government agency to
implement and enforce this Act. As lead agency, the SEC shall consult and coordinate with other
relevant government agencies in the adoption of all rules and regulations for the full and
effective implementation and enforecement of this Act, taking into account the policy objectives
contained in Section 2 hereof.

Section 15. Separability Clause. - Should any provision of this Act or the application thereof to
any person or circumstance be held invalid, the other provisions or sections of this Act shall not
be affected thereby.

Section 16. Repealing Clause. - This Act repeals Presidential Decree No. 1941 in its entirety.
All laws, decrees, executive orders, rules and regulations or parts thereof which are inconsistent
with this Act are hereby repealed, amended or modified accordingly.

Section 17. Effectivity Clause. - This Act shall take effect fifteen (15) days following its
publication in the Official Gazette or in at least two (2) newspapers of general circulation.

200 | P a g e
 MALACAÑANG
Manila

PRESIDENTIAL DECREE No. 129 February 15, 1973

GOVERNING THE ESTABLISHMENT, OPERATION AND REGULATION OF

INVESTMENT HOUSES

WHEREAS, there were pending before Congress, prior to the promulgation of Proclamation No.
1081, dated September 21, 1972, urgent measures proposing the regulation of the so-called
investment banks;

WHEREAS, an extensive survey and study of the Philippine financial system had been
undertaken in order to determine its adequacy in Philippine economic development, and an
integrated set of recommendations were submitted;

WHEREAS, the recommendations, as endorsed with modifications by the monetary authorities

and made the basis of this Decree, advocated the enactment of the statutory framework within
which the underwriting of securities may be governed and, to the extent that these entities
perform quasi-banking functions, to harmonize their operations with national monetary goals.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of

the powers vested in me by the Constitution as Commander-in-Chief of all the Armed Forces of
the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General
Order No. 1, dated September 22, 1972, as amended, and in order to effect the desired changes
and reforms in the social, economic, and political structure of our society, do hereby order and
decree and make part of the law of the land the following:

Section 1. Title. This Decree shall be known as "The Investment Houses Law".

Section 2. Scope. Any enterprise which engages in the underwriting of securities of other
corporations shall be considered an "Investment House" and shall be subject to the provisions of
this Decree and of other pertinent laws.

Nothing in this Decree shall be understood to preclude other enterprises from engaging in the
mere buying and selling of short-term securities of other persons or enterprises.

Section 3. Definitions. For the purpose of this Decree, unless the context otherwise indicates, the
following definition of terms are hereby adopted:

(a) "Underwriting" is the act or process of guaranteeing the distribution and sale of
securities of any kind issued by another corporation.

(b) "Securities" are written evidences of ownership, interest, or participation, in an

enterprise, or written evidences of indebtedness of a person or enterprise. It includes, but
is not limited to the instruments enumerated in Section 2 of the Securities Act
(Commonwealth Act No. 83, as amended).

Section 4. Organization and registration. Investment Houses shall be organized in the form of
stock corporations.

The Securities and Exchange Commission shall not register the articles of incorporation of any
Investment House, or any amendment thereto, unless it is satisfied from the evidence submitted
to it:

(a) That all the requirements of this Decree and of existing laws or regulations to engage
in the business have been complied with;

201 | P a g e
 (b) That the proposed enterprise will not be in conflict with public interest and economic
growth;

(c) That the amount of capital, the proposed organization, direction and administration, as
well as the integrity, experience and expertise of the organizers and the proposed
managerial staff, provide reasonable assurance that the enterprise will be conducted with
financial prudence.

In determining compliance with the provisions of subsections (b) and (c) above, the Securities
and Exchange Commission shall consult the Monetary Board of the Central Bank of the
Philippines.

All applications for registration of the articles of incorporation of Investment Houses shall be
accompanied by:

1. At least three copies of the proposed articles of incorporation; lawphi1.net

2. A statement under oath of the educational background and experience of the

organizers, directors, and the proposed managerial staff, as well as in information on any
position concurrently held by them in other financial or banking institutions, if any;

3. A projected statement of assets and liabilities of the proposed Investment House;

4. A tentative program of operation for one year, including its investment direction and
volume; and

5. Such other information as the Securities and Exchange Commission may require in
support of the application and to enable the Commission to determine the justifiability of
establishing the proposed enterprise.

Any enterprise already in operation and exercising the powers of an Investment House prior to
the effectivity of this Decree shall, within six months therefrom, file an information sheet with
the Securities and Exchange Commission in such form and containing such data as the Securities
and Exchange Commission may, at its discretion, require, to enable the Commission to
determine, in consultation with the Monetary Board, whether the enterprise meets the
requirements of this Decree.

Section 5. Citizenship requirements. The majority of the voting stock of any Investment House
shall be owned by citizens of the Philippines. In determining the percentage of foreign-owned
voting stocks in Investment Houses, the basis for the computation shall be the citizenship of each
stockholder, and, with respect to corporate owners of voting stock, the citizenship of the
individual owners of voting stock in the corporation holding shares in that Investment House.

The majority of the members of the Board shall be citizens of the Philippines.

Section 6. Prohibitions. Except as may be authorized by the Monetary Board, no director or

officer of an Investment House shall concurrently be a director or officer of a bank, as defined in
Section 2 of the Republic Act No. 337, as amended: Provided, however, That in no event can a
person be authorized to be concurrently an officer of an Investment House and of a bank.

No Investment House shall engage in banking operations as defined in Section 2 of Republic Act
No. 337, as amended.

Section 7. Powers. In addition to the powers granted to corporations in general, an Investment

House is authorized to do the following:

1. Arrange to distribute on a guaranteed basis securities of other corporations and of the

Government or its instrumentalities;

202 | P a g e
 2. Participate in a syndicate undertaking to purchase and sell, distribute or arrange to
distribute on a guaranteed basis securities of other corporations and of the Government or
its instrumentalities;

3. Arrange to distribute or participate in a syndicate undertaking to purchase and sell on a

best-efforts basis securities of other corporations and of the Government or its
instrumentalities;

4. Participate as soliciting dealer or selling group member in tender offers, block sales, or
exchange offering or securities; deal in options, rights or warrants relating to securities
and such other powers which a dealer may exercise under the Securities Act (Act No. 83,
as amended);

5. Promote, sponsor, or otherwise assist and implement ventures, projects and programs
that contribute to the economy's development;

6. Act as financial consultant, investment adviser, or broker;

7. Act as porfolio manager, and/or financial agent, but not as trustee of a trust fund or
trust property as provided for in Chapter VII of Republic Act No. 337, as amended;

8. Encourage companies to go public, and initiate and/or promote, whenever warranted,

the formation, merger, consolidation, reorganization, or recapitalization of productive
enterprises, by providing assistance or participation in the form of debt or equity
financing or through the extension of financial or technical advice or service;

9. Undertake or contract for researches, studies and surveys on such matters as business
and economic conditions of various countries, the structure of financial markets, the
institutional arrangements for mobilizing investments;

10. Acquire, own, hold, lease or obtain an interest in real and/or personal property as may
be necessary or appropriate to carry on its objectives and purposes;

11. Design pension, profit-sharing and other employee benefits plans; and

12. Such other activities or business ventures as are directly or indirectly related to the
dealing in securities and other commercial papers, unless otherwise governed or
prohibited by special laws, in which case the special law shall apply.

Nothing in this section shall preclude other enterprises not covered by this Decree from engaging
in the activities listed under subsections (3) to (11) of this section, except as may otherwise be
governed by special laws.

Section 8. Capital. The minimum initial paid-in-capital of any Investment House shall be twenty
million (P20,000,000) pesos.

Section 9. Credit policies. Investment Houses shall coordinate their credit policies with the
general credit policies of the Monetary Board of the Central Bank.

Section 10. Reports. Investment Houses shall submit to the Securities and Exchange
Commission and to the Central Bank a semi-annual report of operations and financial condition,
signed under oath by its chief accountant and verified by its president.

The Securities and Exchange Commission may, at its discretion, require Investment Houses to
include their underwriting commitments as contingent accounts in their financial statements.

Section 11. Regulations. Within six months after the approval of this Decree, the Securities and
Exchange Commission, in coordination with the Central Bank, shall promulgate the necessary
rules and regulations implementing the provisions of this Decree.

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Section 12. Central Bank regulatory powers. Investment Houses shall be subject to such
regulations of the Central Bank or non-bank financial intermediaries as may be promulgated
pursuant to Section 2-B of Republic Act No. 337, as amended. The regulations which may
include, but need not be limited to (a) minimum size of fund acceptance or receipt, (b) methods
of marketing and distribution, (c) terms of placement and maturities, and (d) uses of funds may
be modified by the Monetary Board insofar as they apply to Investment Houses.

The Monetary Board may, at its discretion, determine whether Investment Houses may be
permitted to perform quasi- banking functions as defined in Section 2-D, subsection (b) of
Republic Act No. 337, as amended. The Monetary Board is hereby authorized, at its discretion,
to require any enterprise which is engaged or proposes to engage in quasi-banking functions to
incorporate as an Investment House. If the Monetary Board decides to permit Investment Houses
to engage in quasi-banking functions, the Board may require as a condition precedent the
obtaining of a certificate of authority for the purpose from the Monetary Board.

Whenever the Monetary Board authorizes an Investment House to engage in quasi-banking

functions, in accordance with the provisions of this section, the Board may subject Investment
Houses to further regulations, pursuant to Republic Act 337, as amended, which may include but
need not necessarily be limited to (a) liquidity reserve requirements; (b) capital-to-risk assets
ratios; (c) interest rate ceilings; and (d) such other constraints as the Board may deem necessary.

In the exercise of its authority in this section, the Monetary Board may, whenever, it determines
that the circumstances so warrant subject an Investment House to special examination.

Whenever on the basis of the reports submitted by, or upon examination of the books and records
of, an Investment House, the Central Bank finds that the Investment House is not complying
with the provisions of this section, with the pertinent provisions of this Decree, of other laws, or
of orders, instructions, rules or regulations issued by the Monetary Board pertaining non-bank
financial intermediaries and quasi-banking activities, said Board shall forthwith issue a cease-
and-desist order upon the Investment House concerned. Failure on the part of an Investment
House to comply with the cease-and-desist order shall subject said Investment House to a fine
not exceeding two hundred (P200) pesos for every day the order is violated, to be imposed by the
Monetary Board, without prejudice to the penalties provided in Section 16 of this Decree.

Section 13. Applicability of Securities Act. An Investment House may engage in the business of
a dealer or a broker under the Securities Act without obtaining a separate license for the purpose
as required in Section 14 of the Securities Act (C.A. No. 83, as amended).

Section 14. Applicability of Corporation Law. The provisions of the Corporation Law (Act No.
1459, as amended) insofar as they are not in conflict or inconsistent with the provisions of this
Decree shall apply to Investment Houses.

Section 15. Transitory provisions. Existing enterprises which are operating as Investment
Houses shall, within one year following the approval of this Decree, comply with the
requirements hereof, except with respect to the filing of an information sheet which shall be
complied with within six months as provided in the last paragraph of Section 4 of this Decree.

Section 16. Penalties for violation. Upon proof that an Investment House is violating or not
complying with the provisions of this Decree, of other pertinent laws, of the terms or conditions
of its certificate of registration or charter, or of orders, decisions, rulings or regulations issued by
the Securities and Exchange Commission or by the Central Bank of the Philippines, the
Securities and Exchange Commission shall impose upon the Investment House and collect a fine
not exceeding two hundred (P200) pesos per day for every day during which such violation or
non-compliance continues, and/or suspend its certificate of registration. The officer or director of
the Investment House who ordered or authorized the violation or non-compliance shall be
solidarily liable. The fine so imposed shall be paid to the Government of the Philippines through
the Securities and Exchange Commission.

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Without prejudice to the provisions of the preceding paragraph any person, or any director or
officer of an Investment House who violates or does not comply with the provisions of this
Decree, of other pertinent laws, of the terms or conditions of its certificate of registration or
charter, or of orders, decisions, rulings or regulations issued by the Securities and Exchange
Commission or by the Central Bank of the Philippines, shall be punished by a fine of not more
than twenty thousand (P20,000) pesos, or an imprisonment of not more than five years or both, at
the discretion of the Court.

Section 17. Separability clause. The provisions of this Decree are hereby declared separable, and
if any clause, sentence, provision or section hereof, or its application to any person or
circumstance should be declared invalid, such invalidity shall not affect the other provisions of
this Decree which can be given force and effect without the provisions which have been declared
invalid.

Section 18. Repeal. All Acts and existing laws inconsistent with this Decree are hereby repealed.

Section 19. Effectivity. This Decree shall take effect immediately.

205 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 111797 July 17, 1995

CARLOS ANG GOBONSENG, JR. and THERESITA MIMIE ONG-

GOBONSENG, petitioners,
vs.
HON. COURT OF APPEALS, STATE INVESTMENT HOUSE, INC., and BENJAMIN V.
DISPUTADO, in his capacity as the Clerk of Court of the Regional Trial Court and Sheriff
of the Province of Negros Oriental, respondents.

DAVIDE, JR., J.:

Well-settled is the rule that the jurisdiction of this Court in cases brought before it from the Court
of Appeals is limited to the review or revision of errors of law and not to analyze or weigh the
evidence all over again.1 The findings of fact of the Court of Appeals are thus final and
conclusive, except in some cases as where such findings are contrary to those of the trial
court, 2 as in this case where the Court of Appeals and the trial court are hopelessly opposed to
each other on their respective findings concerning the issues presented. This Court is thus called
upon to peruse the voluminous records of the case with the trial court and the Court of Appeals
and re-evaluate the evidence adduced by the parties.

The petitioners seek the review and reversal of the decision3 of 16 December 1992 of the Court
of Appeals in CA-G.R. CV No. 30380, as well as its Resolution 4 of 17 February 1993 denying
their motion for its reconsideration. This decision reversed the decision5 of the Regional Trial
Court (RTC), Branch 30, Negros Oriental, of 15 October 1990 in Civil Case No. 8428, entitled
"Carlos Ang Gobonseng, Jr., et al. vs. State Investment House, Inc., et al."

Civil Case No. 8428 was commenced on 21 June 1984 with the filing of a complaint6 for the
annulment of/or reformation of documents, signed in blank, such as promissory notes, credit
agreement, real estate mortgage contracts, amended real estate mortgage contracts, credit
agreement, deed of absolute sale, agreement to sell, dacion en pago, and others, and for damages
with preliminary injunction and restraining order by the petitioners (hereinafter Gobonsengs)
against private respondent State Investment House, Inc. (hereafter SIHI) and public respondent
sheriff.

The factual antecedents which led to the filing of the complaint are briefly summarized in the
assailed decision of the Court of Appeals as follows:

Sometime in December, 1982, spouses Carlos A. Gobonseng, Jr. and Theresita

Mimie P. Gobonseng filed with the State Investment House, Inc. at its Branch
Office in Cebu City an application for a P2-million loan. Whereupon, the parties
executed a Credit Agreement [Exhibit "A"] whereby SIHI granted the
Gobonsengs a credit line or accommodation in the sum of P2-million.
Accordingly, the Gobonsengs constituted a Real Estate Mortgage over their three
(3) parcels of land in Dumaguete City covered by Transfer Certificates of Title
Nos. 12979, 13535 and 13607 as collaterals. The mortgage contract was annotated
at the back of said titles [Exhibits "VV-2", "WW-2", and "KK-2"].

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 On January 19, 1983, the parties agreed to reduce the amount of the loan from P2-
million to P900,000.00 [Exhibits "5", "5-A"]. An Amended Real Estate Mortgage
[Exhibit "6"] was executed by the parties to reflect the said amount.

Later, the Gobonsengs again applied for an additional loan of P800,000.00. SIHI
approved the application under the same terms and conditions as the first loan but
with an additional collateral [Exhibit "9"].

Pursuant to their Credit Agreement [Exhibit "7"], SIHI granted the Gobonsengs
credit lines for such amounts which they desire to avail of. The availments of such
amounts, renewable from time to time, have an average term of sixty (60) days
each.

On January 21, 1983, the Gobonsengs availed of the full amount of P900,000.00
which they renewed from time to time. With respect to the loan of P800,000.00,
the Gobonsengs obtained various amounts in installments. The term of each loan
granted has an average of 60 days. For each renewal, a corresponding promissory
note was executed by the Gobonsengs. Their last availment of P900,000.00 was
on March 15, 1984 payable on May 2, 1984. As to the loan of P800,000.00 their
last availment thereof was on March 2, 1984 payable also on May 2, 1984. These
availments are correspondingly covered by two promissory notes signed by the
Gobonsengs [Exhibits "12" and "13"].

On January 21, 1983, SIHI and the Gobonsengs executed a Consultancy Contract
[Exhibit "8"] whereby the Gobonsengs agreed to pay SIHI for its consultancy
services and professional advice.

Claiming that the Gobonsengs failed to pay the two loans on their due date on
May 2, 1984 and that despite demands, failed to remit the payment due, SIHI
instituted an extrajudicial foreclosure proceedings with defendant Provincial
Sheriff Benjamin V. Diputado, who scheduled the auction sale of the spouses'
properties on July 18, 1984 at 9:00 A.M.

On June 21, 1984, before the scheduled date of the foreclosure sale, the
Gobonsengs filed with the court a quo a complaint for annulment/reformation of
documents and damages with prayer for a temporary restraining order and
preliminary injunction against SIHI and Benjamin V. Diputado, in his capacity as
Clerk of Court of the Regional Trial Court and Sheriff of Negros Oriental. As
stated above, the complaint was docketed as Civil Case No. 8428.7

On 27 June 1984, the trial court issued a temporary restraining order directing the provincial
sheriff of Negros Oriental to cease and desist, until further orders from the court, from
conducting extrajudicial foreclosure proceedings of the real estate mortgages executed by the
Gobonsengs.8 It also set for hearing on 11 July 1984 the application for a writ of preliminary
injunction9 which SIHI vigorously opposed. 10

In its Answer filed on 30 July 1984, 11 SIHI denied the material allegations in the complaint and
alleged the following: (1) the credit agreement for P2 million which the Gobonsengs signed on
27 December 1982 was amended and correspondingly adjusted to P900,000.00 on 19 January
1983; (2) on 21 January 1983, the Gobonsengs executed a Consultancy Contract; (3) they later
availed of their P900,000.00 credit line and were granted by SIHI a loan in the said amount
which was renewed from time to time for a term averaging sixty days; (4) on 23 August 1983,
the Gobonsengs, upon an additional collateral, applied for and were granted an additional loan of
P800,000.00 which was renewed from time to time on an average term of sixty days, the last of
which prior to the filing of the complaint, was on 2 March 1984 to mature sixty-one days
thereafter, or on 2 May 1984; (5) the loan of P900,000.00 was last renewed on 15 March 1984
prior to the filing of the case and which was to mature forty-eight days thereafter, or on 2 May
1984; (6) when both the P800,000.00 and P900,000.00 loans matured on 2 May 1984, the

207 | P a g e
Gobonsengs failed to remit correct payments thus placing their loans on past-due status; and (7)
since demands for payment were to no avail, SIHI initiated the extrajudicial foreclosure of the
real estate mortgage contracts.

After due hearing, the trial court denied on 10 July 1985 the application for a writ of preliminary
injunction for lack of "clear, convincing and unquestioned evidence." 12 After their motion for its
reconsideration 13 was denied in an order dated 13 September 1985, 14 the Gobonsengs sought
relief therefrom in the then Intermediate Appellate Court through a special civil action
for certiorari which was docketed as AC-G.R. SP No. 07153. In its decision of 20 September
1985, 15 the said court dismissed the case for lack of merit. The Gobonsengs then filed with this
Court a petition under Rule 45 of the Rules of Court to seek the review of the dismissal of AC-
G.R. SP No. 07153. That petition was docketed as G.R. No. 72131. Upon its filing, this Court
issued a temporary restraining order enjoining the provincial sheriff of Negros Oriental from
proceeding with the publication of the notice of the auction sale of the mortgaged lots set on 28
September 1985, 5 October 1985, 12 October 1985, and 16 October 1985. 16 Eventually, in a
resolution dated 22 October 1986, this Court denied the petition for lack of merit considering that
"the basic controversy between the parties involves factual issues, particularly, the maturity dates
of the promissory notes evidencing the indebtedness, petitioners claiming six (6) years, while the
SIHI 60 to 48 days" 17 The Gobonsengs seasonably filed a motion for reconsideration which was
denied with finality in the resolution of 18 February 1987.18With leave of court, 19 they filed a
second motion for reconsideration 20 based on alleged newly discovered evidence consisting of
photocopies of advice slips sent by SIHI to the Gobonsengs and an inter-office memorandum
dated 13 December 1992 of one Shirley T. Uy addressed to Marline Chiu Ostia, who were the
officer-in-charge and assistant officer-in-charge of SIHI's Cebu City Branch Office, respectively,
showing that the Gobonsengs' loans were for a period of six years. This Court granted the motion
in the resolution of 20 May 1987, 21 and set aside the decision of the Court of Appeals, remanded
the case to the trial court for trial on the merits of the main case, and issued a temporary
restraining order enjoining SIHI from foreclosing the real estate mortgage executed by the
Gobonsengs until after the merits of the main case shall have been resolved. In the said
resolution, this Court stated, inter alia:

Considering the conflicting factual allegations of the parties; the admitted fact that
petitioners were made to sign blank promissory notes, real estate mortgages, etc.,
by SIHI (Rejoinder to Reply, p. 298,Rollo; Opposition to Petitioners' Motion for
Reconsideration, p. 406, ibid.); the "newly discovered evidence" of petitioners,
the genuineness and authenticity of which will have to be inquired into and which,
if proven, would materially affect the results of the case, the Court Resolved to
SET ASIDE the Decision of respondent Appellate Court and to REMAND this
case to the Regional Trial Court of Negros Oriental, Branch XXX, Dumaguete
City, for trial on the merits of the main case, which said Court is hereby directed
to conduct with deliberate dispatch. 22

As a consequence of the foregoing resolution, the trial court issued two separate orders: the first,
denying SIHI's urgent motion to require the sheriff to proceed with the foreclosure sale, 23 and
the second, setting the case for pre-trial. 24

At the pre-trial on 26 August 1987, the parties stipulated on the issues to be resolved, to wit:

1 Whether or not the term of the loans for P900,000.00 and P800,000.00 are for
six (6) years, respectively; and

2 Whether the documents known as Credit Agreements, Promissory Notes, Real

Estate Mortgage Contracts, Consultancy Contracts and Agreements ancillary
thereto are the result of a meeting of the minds of the parties and actually
reflected their true intentions.

208 | P a g e
and agreed that the evidence they had adduced on the application for preliminary injunction
would be deemed reproduced as part of their evidence on the merits of the main
case. 25 Thereafter, they presented their additional evidence.

On 15 October 1990, the trial court rendered its decision, 26 the dispositive portion of which
reads as follows:

WHEREFORE, judgment is hereby rendered:

(1) Declaring the term of Plaintiffs' indebtedness to Defendant SIHI to be SIX (6)
Years from and after January, 1983 in the case of P900,000.00 Loan and from and
after August, 1983 in the case of the P800,000.00 Loan;

(2) Declaring the promissory notes covering the Loan indebtedness of Plaintiffs to
Defendant SIHI to be unenforceable insofar as they contain terms of 61 days or
Less for maturity;

(3) Ordering the parties Plaintiffs and Defendant SIHI to reform the promissory
notes so as to change the term of the indebtedness of P1,700,000.00 to SIX (6)
Years from January, 1983 on the P900,000.00 Loan and from August, 1983 on the
P800,000.00 Loan;

(4) Applying the total amount of P327,300.00 paid by Plaintiff as consultancy

fees to advance interest, effective after May, 1984;

(5) Ordering Defendant SIHI to reimburse Plaintiffs the amounts of P2,000.00

and P2,800.00 they paid to the Dumaguete Informer and the Vanguard,
respectively, for publication of the notice of extrajudicial sale with interest at the
legal rate from December 10, 1986 and September 11, 1987, respectively;

(6) Ordering Defendant SIHI to release, from the Real Estate Mortgage, the
properties of Plaintiffs situated along Alfonso XIII Street in Dumaguete City,
covered by Transfer Certificate of Title No. 12992 and at the corner of Real and
Urdaneta Sts. in Dumaguete City covered by Transfer Certificate of Title No.
13607;

(7) Ordering Defendant SIHI to pay Plaintiffs the amount of P10,000.00 in moral
damages and P10,000.00 as and for attorney's fees;

(8) Ordering the Defendant Provincial Sheriff or anyone presently occupying and
discharging the duties of said office to desist and refrain from proceeding with the
extrajudicial foreclosure and sale of the mortgaged properties of the Plaintiff
which are involved in this case; and

(9) Ordering Defendant SIHI to pay the costs.

(10) Dismissing Defendant SIHI's counterclaim for lack of merit.

SO ORDERED. 27

It found "overwhelming evidence that the term of Plaintiffs' loan with Defendant SIHI was SIX
(6) years — evidence which Defendant SIHI failed to overthrow," and "[s]ince the loan[s] of
P900,000.00 and P800,000.00 were obtained by Plaintiffs sometime in the year 1983, they did
not yet mature sometime in June, 1984 when Defendant SIHI wrote to the Provincial Sheriff of
Negros Oriental seeking foreclosure of the mortgages." 28

In upholding the theory of the Gobonsengs that the term of the loans of P900,000.00 and
P800,000.00 was six years, the trial court gave credit to the testimonies of petitioner Carlos
Gobonseng, Jr. and Joaquin Castro. It also favorably considered Exhibits "GGG" and "EEEE"

209 | P a g e
which are photocopies of the alleged inter-office memorandum of 13 December 1982 on a
letterhead of SIHI from Shirley T. Uy to Marline Chiu Ostia (Officer-in-charge and Assistant
officer-in-charge, respectively, of SIHI's Cebu office) with Exhibit "EEEE" purporting to be a
true photocopy certified by one Azonne Tan (Loan-in-charge), as well as the photocopies of
alleged credit advice slips marked as Exhibits "III," "JJJ," "JJJ-1," "JJJ-2," and "JJJ-3," which
indicate the following notations:

PERIOD-PRINCIPAL/6 years
PERIOD-INTEREST/30-60 days
TERM: Six (6) years.

Exhibit "EEEE," which is quoted in the challenged decision of the Court of Appeals, reads as
follows:

INTER OFFICE MEMO: STATE INVESTMENT HOUSE, INC.

Your Ref :
Our Ref :
Dated : Dec. 13, 1982

TO: MS. MARLINE CHIU OSTIA

Asst. Officer-In-Charge

FROM: MS. SHIRLEY T. Uy

Officer-In-Charge

SUBJECT: CARLOS A. GOBONSENG, JR. LOANS

Received Telex Advice from VP Tito

Lopez-Dee approved Gobonseng
Loans of P4.3 M.

P2.0 M — Secured with TCT Nos.

12979, 13607 and 13535

P2.3 M — Secured with TCT No.

12992

TERM: 6 years

INTEREST: 15.5% P.A..

(Sgd) SHIRLEY T.
UY
Shirley T. Uy

CERTIFIED TRUE XEROX COPY

Loan-In-Charge
11/19/87
48-6461
Azonne Tan 29

The trial court believed the allegations of the Gobonsengs that they obtained Exhibit "GGG"
from SIHI's Manila Office on 23 March 1987 and Exhibit "EEEE" on 19 November 1987 and
that they came into possession of Exhibits "III," "JJJ," "JJJ-1," "JJJ-2," and "JJJ-3," contained in
SIHI's window envelopes (Exhibits "CCCC-1" to "CCCC-4"), only sometime in March 1987
when Carlos Gobonseng, Jr. was told by his septuagenarian mother while they were in their
beach house in Bacong, Negros Oriental, that she received them at his old address. Carlos
Gobonseng, Jr. further testified that when he went to SIHI's office in Manila in March 1987 he

210 | P a g e
was shown his loan record and on that occasion saw the credit availment and the inter-office
memorandum (Exhibit "GGG").

Joaquin Castro, former Credit Supervisor and later Assistant Manager of SIHI's Cebu Branch
who was the first appraiser assigned by SIHI to appraise the properties offered as security by the
Gobonsengs, confirmed the existence of the inter-office memorandum (Exhibits "GGG" and
"EEEE") and described the loan of the Gobonsengs as "long term," for a term of six years.

The trial court disregarded the testimony of Augusto Lopez-Dee, SIHI's Vice-President, that he
did not send any telex to the Cebu Branch because Shirley Uy failed to categorically deny the
inter-office memorandum which Joaquin Castro said he saw at the time it was prepared. It also
disregarded the documentary evidence for SIHI showing that the original copies (Exhibits "26,"
"27," "28," "29," and "30") of the credit advice slips offered in evidence by the Gobonsengs have
unfilled blanks for the lines PERIOD-PRINCIPAL and PERIOD-INTEREST while the box
for Description in each has the entry Purchase of Commercial Papers for (days indicated)
because the photocopies presented by the Gobonsengs appear to be that of the CLIENT'S COPY
of a set of credit advices and, although Dee testified that SIHI does not "normally" send
photocopies thereof, there was no evidence that the normal practice was followed with respect to
the Gobonsengs' credit advices.30

In concluding that the promissory notes did not reflect the true intention of the parties, the trial
court relied heavily on the signing by the Gobonsengs of several documents, including blank
promissory notes and authority to apply loan proceeds (Exhibits "II," "II-A" to "II-J") whose
blanks were thereafter filled up by SIHI without the participation of the Gobonsengs. The
signing by the Gobonsengs of these documents in blank is admitted by SIHI in its Answer and by
its witnesses Mariano Borromeo, who executed on 28 April 1983 a receipt (Exhibit "K")
acknowledging delivery to him by the Gobonsengs of six sets of signed blank promissory notes,
and Shirley Uy, who explicitly admitted that the Gobonsengs were made to sign blank SIHI
forms such as promissory notes. The trial court also considered the receipt by SIHI of twenty sets
of blank promissory notes (Exhibit "L") from the Gobonsengs on 13 November 1983. In the
authority to apply loan proceeds, the Gobonsengs "purportedly authorized Defendant SIHI to
apply the plaintiffs' 'loan proceeds' under certain Code numbers as 'full/partial payment' of
another loan with another Code based on certain maturity dates." 31

The trial court also observed that the Consultancy Contract dated 21 January 1983 (Exhibit
"UU," also Exhibit "8") provides, inter alia, "that (such consultancy) services and professional
advises can be communicated with directly or indirectly, verbally or in writing," and such fees
are to be fixed "on the basis of manhours spent in rendering the service or on the basis of the
volume of consultancy work"; such fees are "payable to the CONSULTANT (SIHI) by the
CLIENT upon presentation of the bill to the CLIENT." 32 It found, however, that SIHI had not
presented satisfactory evidence of consultancy service, for it had not communicated to the
Gobonsengs "either directly or indirectly, verbally or in writing" the nature and extent of such
consultancy services and had not presented to them a "bill" therefor based on manhours spent in
rendering the same. Moreover, it noted that the official receipts issued by SIHI to the
Gobonsengs for the so-called consultancy services show that the amounts periodically paid are
almost uniform, despite the fact that such fees are supposed to be based on "manhours spent" or
on "volume of consultancy work"; and considering that "it may be assumed that the manhours
spent or the volume of consultancy work are bigger at the beginning of any business venture,
they [should] considerably decrease to a minimum as time goes on and the businessman, in the
process, acquires certain skills and familiarity with appropriate business techniques [such] that
he naturally would need only a little more help or even none of it at all, from his consultant." 33It
then concluded that this uniformity is indicative of payment of interests and not of consultancy
fees.

In allowing the release of excess collaterals, the trial court gave credit to the evidence of the
Gobonsengs that the assessed or market value of the four mortgaged lots is "much bigger than
their loan indebtedness of P1,700,000.00, which is now even reduced by P7,415.86 as of May 2,
1984 (Exh. "16-A")," 34 and since the offer of the said properties "was predicated on the

211 | P a g e
availability of a credit line of P4,300,000.00 which was approved by Defendant SIHI but was not
fully satisfied," it then "stands to reason that some of those properties must be . . . released." 35

On appeal to the Court of Appeals (CA-G.R. CV No. 30380), this decision was "reversed and set
aside" in the appellate court's decision of 16 December 1992. 36

The findings and conclusion of the Court of Appeals revolve on the "basic issue [of] whether or
not the 'newly discovered evidence' of the Gobonsengs . . . have proved that the term of the two
loans is 6 years instead of the terms reflected in the loan documents." Resolving the said issue, it
stated:

We have closely examined appellees' xerox copies of SIHI's advice slips and
found the entries "6 years" after the printed words "Period-Principal." We
likewise scrutinized the original copies of SIHI's advice slips and observed that
the spaces after the printed words "Period-Principal" and "Period-interest" are
blank.

Section 2, Rule 130 of the Revised Rules of Court is pertinent, thus:

Sec. 2 Original writing must be produced, exceptions. — There can be no

evidence of a writing the contents of which is the subject of inquiry, other than the
original writing itself, except in the following cases:

(a) When the original has been Lost, destroyed, or cannot be

produced in court;

(b) When the original is in the possession of the party against

whom the evidence is offered, and the latter fails to produce it after
reasonable notice;

xxx xxx xxx

In the case at bar, SIHI produced the original copies of the advice slips before the
trial court. Consequently, pursuant to the above Rule, the trial court should not
have admitted in evidence the xerox copies offered by the appellees. Indeed, We
are inclined to believe that the window-envelopes received by the appellees from
SIHI contained the pink copies or duplicate originals. For why should SIHI send
them mere xerox copies which were not even duly certified? We agree with SIHI
that the appellees would not produce these pink copies for the same would be
adverse to them. At this juncture, suffice it to state that obviously these pink
copies can easily be xerox copied, with prior alteration/s of the entries therein.

Similarly, the inter-office-memo, also in xerox copy, should not have been
admitted in evidence and given weight by the trial court. An inter-office memo is
supposed to be kept only in the office concerned. Moreover, Corazon "Azonne"
Tan vehemently denied that she has been authorized by SIHI to certify the
authenticity of xerox copies of documents and more importantly, that she made
the certification in question.

Verily, the appellees' reliance on their "newly discovered evidence" to prove that
the terms of the two loans is 6 years is misplaced.

A close scrutiny of the Credit Agreement and SIHI's original advice slips shows
that every availment of the loans, either wholly or partially, is renewable from
time to time and has an average term of 60 days. Appellees' last availment of the
P900,000.00 loan was on March 15, 1984 payable on May 2, 1984. Their last
availment of the loan of P800,000.00 was on March 2, 1984, also due on May 2,
1984. These terms are clearly reflected in the two promissory notes signed by the

212 | P a g e
 appellees. The words of these promissory notes are clear and leave no doubt upon
the true intention of the contracting parties.

On the matter of excessive consultancy fees, the appellees' posture is that they did
not willingly agree to the Consultancy Contract which "they signed in blank."

By signing the various loan documents, such as Credit Agreement, Real Estate
Mortgages, Promissory Notes and Consultancy Contract, the appellees' are
presumed to be aware of the consequences of their action. Considering that Carlos
A. Gobonseng, Jr. is a certified public accountant, a law graduate and a
businessman, he is supposed to have acted with due care by meticulously reading
the terms and conditions of those contracts before affixing his signature thereon
and to have signed those loan agreements with full knowledge of their contents as
well as the corresponding obligations and responsibilities.

It bears stressing that contracts are respected as the law between the contracting
parties and that they may not be reformed "simply because a party later finds
itself at the shorter end of an unwise bargain."

In Mata vs. Court of Appeals, et al. [G.R. No. 87880, April 7, 1992, citing Tan
Sua Sia vs. Yu Baio Sontua, 56 Phil. 711], the Supreme Court pertinently held:

. . . The rule that one who signs a contract is presumed to know its
contents has been applied even to contracts of illiterate persons on
the ground that if such persons are unable to read, they are
negligent if they fail to have the contract read to them. If a person
cannot read the instrument, it is as much his duty to procure some
reliable persons to read and explain it to him, before he signs it, as
it would be to read it before he signed it if he were able to do so
and his failure to obtain a reading and explanation of it is such
gross negligence as will estop him from avoiding it on the ground
that he was ignorant of its contents. (Emphasis supplied).

The requisites of reformation of a contract as enumerated in Article 1359 of the

Civil Code are:

1 There must have been a meeting of the minds to a contract;

2 The instrument or document evidencing the contract does not express the true
intention of the parties; and

3 The failure of the instrument to express the true intention of the parties must be
due to mistake, fraud, inequitable conduct or accident.

The reason why reformation is not available here is that contrary to the second
requisite, the promissory notes in question do express the true intention of the
parties as to the terms of the two loans.

As to the holding of the trial court that certain collaterals should be released, well
entrenched in law is the rule that a mortgage directly and immediately subjects the
property upon which it is imposed [Article 2126, Civil Code], the same being
indivisible even though the debt may be divided [Article 2089, Ibid.] and such
indivisibility likewise being unaffected by the fact that the debtors are not
solidarily liable. [Article 2090, Ibid.] . . . .

All told, the intention of the parties is quite clear to the effect that the term of the
two loans is not 6 years, but up to May 2, 1984 only; so also their intentions in
their Consultancy Contract and Real Estate Mortgages. 37

213 | P a g e
Since their motion for a reconsideration of the decision was denied, the petitioners filed on 24
September 1993 the instant petition for review. They impute to the Court of Appeals the
commission of the following errors:

THE RESPONDENT COURT OF APPEALS COMMITTED A GRAVE

MISAPPREHENSION OF THE FACTS AND A GROSS MISAPPRECIATION
OF THE EVIDENCE WHEN IT HELD THAT THE TERM OF THE LOANS
OF PETITIONERS WITH PRIVATE RESPONDENT SIHI IS SIXTY (60)
DAYS ONLY, AND NOT SIX (6) YEARS AS CLEARLY BORNE OUT BY
THE EVIDENCE AND THE RECORD OF THIS CASE AS WELL AS
RESPONDENT SIHI'S DOCUMENTS.

II

THE RESPONDENT COURT OF APPEALS COMMITTED A PATENT AND

GRAVE REVERSIBLE ERROR WHEN IT DID NOT DECLARE NULL AND
VOID THE COLLECTION OF CONSULTANCY FEES BY THE PRIVATE
RESPONDENT SIHI. THE COLLECTION THEREOF BEING UNJUSTIFIED
AND INVALID.

III

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT

UPHOLDING THE DECISION OF THE LOWER COURT ORDERING THE
RELEASE OF EXCESS COLLATERALS IN FAVOR OF THE PETITIONERS.

IV

THE RESPONDENT COURT OF APPEALS, IN SUMMARILY DENYING

PETITIONERS' MOTION FOR RECONSIDERATION, VIOLATED THE
PROVISIONS OF THE CONSTITUTION.

THE RESPONDENT COURT OF APPEALS SERIOUSLY ERRED IN NOT

AWARDING DAMAGES AND ATTORNEY'S FEES IN FAVOR OF THE
PETITIONERS. 38

The parties themselves are to be blamed for the difficulty in determining the term of the loans in
question and the disagreement thereon between the trial court and the Court of Appeals. For
reasons only known to themselves, they did not disclose to the trial court all the pieces of
evidence which could establish their true agreement as to such term. The Gobonsengs did not ask
for the production of the entire records of their transactions with SIHI which necessarily started
with their application for a credit line. Neither did SIHI offer them in evidence. The application
and the approval thereof would shed much light on the issue, yet SIHI opted to suppress from the
court the said records. SIHI's Vice-President, Augusto Lopez-Dee, proved to be of little help
since he could not categorically testify that the actual term of the credit facility was six years.
The best that he could do was to state that it was short term, "around 60 days normally," 39 and to
deny having sent a telex advice on 13 December 1982 to the Cebu Branch Office to the effect
that the approved Gobonseng loan was for P4.3 million for the term of six years with interest of
15.5% per annum as purportedly indicated in Exhibit "GGG." 40 Further compounding the matter
is Shirley Uy's claim that "there was no such arrangement on such terms" 41 and the established
fact that the Gobonsengs affixed their signatures even before the approval of the application for a
credit line on blank SIHI standard forms of credit agreement, real estate mortgage contracts,
promissory notes, consultancy agreement, authority to apply loans, and other documents.

214 | P a g e
All that we have then on the alleged 6-year term of the credit line are the declarations of Carlos
Gobonseng, Jr. and Joaquin Castro that such was the term with interest at 15.5% per annum, and
Exhibits "GGG," "EEEE," "III," "JJJ," "JJJ-1," "JJJ-2" and "JJJ-3."

Carlos Ang Gobonseng, Jr. declared as follows:

Atty. Lumjod:

Q What else did you talk with Vice-President Roxas with respect
to your loan if any?

A After I talked with Allen Roxas, he told me that he will send a

telex to Shirley Uy about my loan for P2,000,000.00 and after
which, I also met Daniel Chong, the President of State Investment
House, Inc. and I requested him that I needed a longer term
because my loan here at IBAA was also for a longer term and to
which, Daniel Chong granted my request. So, when I came to
Cebu, Shirley Uy showed me the telex that the loan is
P2,000,000.00 for 6 year term and at the rate of 15.5% per annum.

xxx xxx xxx

Q So, a term of 6 years and with an interest at 15.5% per

annum was granted to you in Manila by Pres. Daniel Chong and
Vice President Alien Roxas?

A Yes.

Q And so, with that, you went to Cebu City and you met Shirley
Uy, the Branch Manager of State Investment House, Inc. and she
also showed you the telex and the loan was for 6 years and the
interest was at 15.5% per annum?

A Yes.

Q How about the payment of the interest, what was the manner of
payment of interest?

A As per our arrangement with Vice-President Allen Roxas and

President Daniel Chong, the interest is payable every 60 days. 42

xxx xxx xxx

Q . . . now, you said, Mr. Gobonseng, that after you have agreed
with President Daniel Chong and Vice-President Allen Roxas of
your P2,000,000.00 loan with an interest of 15.5% for a term of six
(6) years, you went to Shirley Uy in Cebu City to their Cebu
Branch, and you saw a telex to the effect that the term of your loan
is 6 years, among others, how did you happen to see the telex?

A Because I just wanted to follow-up whether Daniel Chong had

telex to Cebu and as per advice of Daniel Chong and Allen Roxas,
they really sent a telex to Cebu that the term of my loan is for 6
years at 15.5% interest per annum.

Q Whom did you ask in Cebu if there was any telex?

A Shirley Uy.

215 | P a g e
 Q And, when you asked Shirley Uy whether there was a telex,
what was the reply?

A Well, Shirley Uy said that the instruction from the top is here so,
that is the term payable for 6 years and at 15.5% interest per
annum.

Q When Shirley Uy told you it's here, what did Shirley Uy show to
you?

A A PT & T Telex paper, a piece of bond paper.

Q Did you read the message?

A Yes, she showed me.

Q And, to the best of your recollection, what was the substance of

the telex?

A Carlos Ang Gobonseng and Theresita Mimie Ong-Gobonseng,

the term of the loan is 6 years at the rate of interest 15.5% payable
for 6 years.

Q To that effect?

A Yes. 43

He further testified that on 23 March 1987 when he went to the head office of SIHI in Binondo,
Manila, the officer-in-charge of the Branch Department showed him a folder pertaining to his
credit line availment which disclosed that his approved loan applications was for six years with
interest of 15.5% per annum. 44

Joaquin Castro also testified that the Gobonsengs' loan was for a period of six years at 15.5%
interest per annum. Thus:

Atty. Lumjod:

Q And, what transpired between Shirley Uy and Gobonseng in

your presence?

A They were discussing about the term of the loan.

Q And, what was the term of the loan granted by SIHI to Mr.
Gobonseng?

xxx xxx xxx

A The amount of the loan is P2 million at 15.5% interest per

annum for a term of 6 years.

Atty. Lumjod:

Q That was the agreement or conversation between Shirley Uy and

Mr. Gobonseng?

A Yes.

xxx xxx xxx

216 | P a g e
 Q Now, in that conversation between Shirley Uy and Mr.
Gobonseng, did you notice if Mr. Gobonseng was shown by
Shirley Uy a communication from the Head Office, Manila?

A Yes.

Q What was that communication?

A We have a Telex facility in our office and communications

coming from Manila are relayed thru our Telex facility in the
office of course, thru our OIC.

Q Did you see that Telex communication from Manila?

A Yes.

xxx xxx xxx

Q What was in this telex communication?

A Advice of approval for P2 million.

Q With respect to the terms and interests?

A As I said, the interest is 15.5% for a term of 6 years. 45

Castro further stated that the Gobonsengs' loan was a long term loan because it was in excess of
P500,000.00 and, therefore, carried a longer maturity period of over two years, 46 and that
although he knew that SIHI charged consultancy fees, he did not know the reason
therefor 47 because he did not see SIHI render any such service. 48

Confronted with these direct and positive testimonies, SIHI should have produced its file of the
Gobonseng account to demonstrate beyond doubt that the documents claimed to have been seen
by Carlos Gobonseng, Jr. and Castro are but figments of their imagination. Nevertheless, unlike
the trial court, we cannot give credit to the claims of Carlos Gobonseng, Jr. and Joaquin Castro
that they saw the telex indicating that the approved loan was for P4.2 million for a term of six
years with interest of 15.5% per annum.

On cross-examination, Carlos Gobonseng, Jr. admitted that he saw the telex before he signed the
documents in blank. Thus:

Atty. Hermosisima, Jr.:

Q When did you see the telex for the first time before or after you
signed all those documents that you said you were made to sign in
blank?

A I think, that was before the signing of the documents.

Q So, you saw the telex before you signed all those documents?

A Before. 49

However, his previous testimony on direct examination, during the hearing for the Petition for
Injunction, is to the effect that he signed the documents in blank before the approval of the
application of the credit line. 50 This was confirmed by Shirley Uy herself who testified on cross-
examination as follows:

Q The application of Mr. Gobonseng for P2 million when you

forwarded the same to Manila, it was not yet approved?

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 A No.

Q And, you told Mr. Gobonseng, you said you told Mr. Gobonseng
that it will take sometime before he will know whether the loan
will be approved or disapproved?

A Yes, of course.

Q And, you said Mr. Gobonseng signed certain documents while

his application is still in Manila?

A Pending approval.

xxx xxx xxx

Q At that time when you said that you told Mr. Gobonseng that it
will still take time for his application to be approved or
disapproved, you said that Mr. Gobonseng signed certain papers,
certain documents, you said that Mr. Gobonseng signed certain
papers and documents, did you not say that?

A Yes, I did. 51

Clearly then, since the signing of the blank documents took place before the approval of the
application for a credit line, Carlos Gobonseng, Jr. could not have seen the telex he imagined he
saw. Also, the Gobonsengs, thru Exhibits "GGG" and "EEEE," tried to represent that, as
conveyed by Vice-President Augusto Lopez-Dee through the telex of 13 December 1982, the
approved loans were for a total of P4.3 million with a term of six years and with interest of
15.5% per annum. They forgot that by their oral evidence they had proved another version, i.e.,
the approved loan was for P2 million. Carlos Gobonseng, Jr. was very emphatic in his testimony
that in December of 1982 his transaction with SIHI involved only a loan of P2 million, thus:

Q Now, sometime in December, 1982, do you recall if you had any

transaction with defendant State Investment House, Inc.?

A Yes, sir.

Q What was your transaction?

A It is a credit accommodation of P2,000,000.00 loan. 52

and that the telex purportedly shown to him by Shirley Uy mentioned a grant of his request for a
P2 million loan. Thus:

Q What else did you talk with Vice President Roxas with respect to
your loan if any?

A After I talked with Allen Roxas, he told me that he will send a

telex to Shirley Uy about my loan for P2,000,000.00 and after
which, I also met Daniel Chong, the President of State Investment
House, Inc. and I requested him that I needed a longer term and to
which, Daniel Chong granted my request. So, when I came to
Cebu, Shirley Uy showed me the telex that the loan is
P2,000,000.00 for 6 year term and at the rate of 15.5% per
annum. 53 [emphasis supplied]

As also earlier shown in the quoted portion of his testimony, Joaquin Castro referred to an
approved loan of P2 million and a telex relative to the approval thereof. Furthermore, the
Gobonsengs exerted no effort in securing the production through compulsory process of the

218 | P a g e
original copies of this telex and the inter-office memorandum supposedly referring to it. Their
existence then becomes doubtful.

We agree with the Court of Appeals that Exhibits "GGG" and "EEEE" are inadmissible in
evidence, not because the inter-office memorandum concerned ought to be kept only in the office
of SIHI or that Corazon (Azonne) Tan was not authorized by SIHI to certify the authenticity of
the photocopy or that the so-called certification by Corazon Tan on Exhibit "EEEE" was
fraudulently obtained as disclosed in her testimony, but because of the fact that they are mere
photocopies, hence their admission is barred by the best evidence rule under Section 2, Rule 130
of the Rules of Court. The fraud in obtaining the certification of Corazon Tan is, of course,
obvious upon the face of the exhibit itself. It is placed at the bottom left hand corner of the paper
several inches below the body of the alleged inter-office memorandum that occupies only the
upper half of the paper. This strange and unusual location of the certification is consistent with
and strengthens the testimony of Corazon Tan that what she was asked to do was merely to write
her name and telephone number which she did on a folded white bond paper as requested by a
"boy" who came to the office as a representative of Carlos Gobonseng, Jr.54 It may be noted that
Exhibit "EEEE" is a photocopy with the words CERTIFIED TRUE XEROX COPY typed
thereon as shown by the impression at the back thereof. Moreover, it appears in Exhibit "EEEE"
that Corazon Tan was the Loan-in-charge, when in fact she was the Security Custodian of the
loans section of SIHI.55

The Court of Appeals also correctly ruled that Exhibits "III," "JJJ," JJJ-1," "JJJ-2," and "JJJ-3"
are inadmissible in evidence. They are plain photocopies, hence, their admission in evidence are
also barred by the best evidence rule. The explanation of Carlos Gobonseng, Jr. that these were
received by his 75-year old mother in his old address who told him about the said window
envelopes 56 only on 8 March 1987 does not inspire belief because he candidly admitted on
cross-examination that aside from these exhibits he never received from SIHI photocopies of any
other documents. 57 In other words, what he used to receive were not photocopies. What can be
concluded then is that the Gobonsengs actually received the original documents which they
should have produced and that the said exhibits were photocopies of the client's copies for the
words Client Copy are clearly reproduced therein. 58

Nonetheless, even if Exhibits "GGG," "EEEE," "III," "JJJ", "JJJ-1,""JJJ-2" and "JJJ-3" are to be
disregarded, the attendant circumstances in this case overwhelmingly support a conclusion that
the credit line applied for was for a longer term or duration which is to be availed of by
promissory notes based on the interest period of, normally, sixty days. Firstly, Shirley Uy
convincingly testified that the Gobonsengs applied for a credit line which, when approved,
would be evidenced by a credit agreement. 59 According to Shirley Uy, a credit agreement is
"merely a general agreement wherein SIHI gives clients the privilege of [its] credit line until
such time that the line is revoked, cancelled or the line has defaulted." 60 Thus, it is indefinite.

Secondly, the Gobonsengs, on two separate occasions, had stated that the credit facility was
needed to finance the working capital for their palay and corn grits business, as testified to by
Shirley Uy, 61 and/or for their drugstore, as testified to by Augusto Lopez Dee. 62 Indeed, the
Attachment to the Credit Agreement (Exhibit "7"), 63 expressly provides:

AS PARAGRAPH 2 OF THE AGREEMENT. The proceeds of the loan shall be

used and applied exclusively by the BORROWER for working capital
purposes as presented in detail by the BORROWER in its/his loan application and
the papers, documents, or reports submitted in connection therewith to the
LENDER.

And because the unequivocal purpose of obtaining the credit facility or the loan is to finance
the working capital for any of their businesses, the parties, SIHI and the Gobonsengs, could not
have contemplated a short term credit line.

Thirdly, a credit line may be availed of by the issuance of promissory notes for as long as the
credit line lasts. It was precisely for this reason that the Gobonsengs signed even before the

219 | P a g e
approval of their application for a credit line SIHI's standard promissory notes the blanks of
which would be filled up by SIHI at appropriate times, such as upon the release of the original
loans or upon the subsequent renewals or roll-overs, if the principal is unpaid, on the basis of the
interest period. Under the credit line in question, no fresh money was given to the Gobonsengs
after the first and succeeding renewals of their P900,000.00 and P800,000.00 loans because they
were not able to pay the principals. The succeeding availments by way of promissory notes were
issued in "payment" of the immediately preceeding availments or promissory notes with,
however, the obligation to pay the interests. This arrangement was made possible because the
Gobonsengs had signed in advance several copies of so-called written authority authorizing SIHI
to apply the proceeds of succeeding availments to the immediately preceeding
availments. 64 Also, the Attachment to the Credit Agreement 65 authorizes the use of the proceeds
of the roll-overs or renewals of the promissory notes, to wit:

AUTHORITY TO APPLY PROCEEDS. "The BORROWER agrees and consents

that the proceeds of any roll over, renewal or restructuring of any loan availed of
or to be availed in the future may, at the LENDER'S option, be used or applied by
the latter to the payment of any matured/renewed obligation without the need to
execute a new agreement. The liability remaining and the time for payment of the
balance resulting after such application, if any, shall not be affected by such roll-
over, renewal or restructuring, unless it is expressly modified in writing by the
parties."

The Gobonsengs are estopped from denying these roll-overs or renewals because they
voluntarily paid the interests thereon 66 and received the receipts therefor. 67 They even wrote a
letter to Shirley Uy on 25 May 1984 advising the latter that the amount of P21,411.11 which they
remitted on 2 May 1984 "represents prepaid interest for the P800,000.00 and not for the
P900,000.00" and "covers the interest good for 61 days from May 02nd 1984 or until July 02nd
1984"; and that on the P900,000.00 loan, they "already paid the interest for 60 days from March
15th to May 14th 1984," hence, "[t]he interest for the next term of 60 days will cover from May
14th 1984 to July 13th 1984" for which they "will be remitting the corresponding interest on or
before July 13th 1984." 68

Clearly then, the credit line granted to the Gobonsengs was for a period longer than sixty days
but is not six years as asserted by the Gobonsengs. The credit line was availed of by promissory
notes with interest duration of, normally, sixty days, 69 and that for as long as the interests were
paid, roll-overs of the promissory notes within the term of the credit line were automatic since it
was SIHI itself which filled up for the purpose the unfilled promissory notes signed by the
Gobonsengs.

It was duly established by the Gobonsengs that interests on the last renewal of the P800,000.00
and the P900,000.00 loan evidenced by the promissory notes dated 2 March 1984 to be due on 2
May 1984 70 and 15 March 1984 to be due also on 2 May 1984, 71 respectively, were duly paid
by them as indicated in their letter of 25 May 1984 72 and as evidenced by Exhibits "DDD" and
"DDD-2". As a matter of fact, an amount of P7,417.86 was credited to the principal in the
promissory note with the code IF-84-CB022-
GG 73 per Official Receipt No. 14173 dated 2 May 1984. 74 This partial payment for the principal
clearly proves that the interest due had been paid. Article 1253 of the Civil Code provides that if
the debt produces interest, payment of the principal shall not be deemed to have been made until
the interests have been covered. Consequently, automatic renewal of the loans by way of
promissory notes for the succeeding interest period was unavoidable.

Indisputably, the application for foreclosure of the mortgage on 9 June 1984 75 was premature
because by then, the Gobonsengs had not yet defaulted on the payments of either the principal or
the interest of their loans. As the Gobonsengs stated in their 25 May 1994 letter to Shirley Uy,
the interest on the P800,000.00 loan for the period ending 2 July 1994 had already been pre-paid
on 2 May 1994, and the payment for the interest on the P900,000.00 loan was due at the end of
the next term which was 13 July 1994 yet. SIHI never controverted these claims by the
Gobonsengs and so we are constrained to accept them as true. Nevertheless, because the

220 | P a g e
Gobonsengs did not pay the remaining unpaid portion of the principal and the interests due
thereon every sixty days thereafter at any time after the foreclosure proceedings were initiated,
the real estate mortgages could have been validly foreclosed after the Gobonsengs failed to make
payments and even if the Gobonsengs are correct and the term of the credit line was six years,
which then expired on 19 January 1989.

Likewise, there is no evidence that the Gobonsengs had made any payment on the interest and on
the unpaid balance of the principal even after the filing of Civil Case No. 8428. The payment
therefor has long become overdue. Justice end equity demand that they be required to pay them
within thirty days from their receipt of this decision, otherwise the real estate mortgages may be
foreclosed.

On the amount purportedly due SIHI as consultancy fees, we agree with the trial court that it has
no basis in fact. As correctly found by it, SIHI had not communicated to the Gobonsengs, as
required in the consultancy contract, the nature and extent of its consultancy services and had not
presented to them a bill therefor based on manhours spent in the rendition thereof. There is no
proof that SIHI performed its obligation under the consultancy contract (Exhibits "UU" and "8"),
which is "to render financial consultancy services to the Gobonsengs for the formulation of
financial plans, financial advisory matters and financial packaging for medium and long term
capital requirements." The consultancy fees thus paid were not legally due for absence of proof
of its rendition and must be returned to the Gobonsengs. However, by way of set-off, the fees
already paid by the Gobonsengs may be applied as partial payment of the interests due on the
principal of the loans in question. They are not to be treated as interests, contrary to the view of
the trial court, because SIHI is an "investment" house, and as such it can render the above
mentioned consultancy services for which fees can be charged.

Finally, the release of alleged excess collaterals is unwarranted. The Gobonsengs voluntarily
offered the collaterals and they did not protest when the credit line was reduced from P2 million
to P900,000.00 after a re-appraisal of the loan value of the collaterals. They did not even intimate
in their complaint a desire for the return of excess collaterals.

WHEREFORE, the petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV No. 30380 is SET ASIDE, and another is hereby rendered:

1 DISMISSING the complaint in Civil Case No. 8428 insofar as reformation of

the documents subject thereof is concerned;

2 ORDERING the petitioners to pay to the private respondent the unpaid balance
of P1,692,582.14 [P1,700,000.00 (P900,000.00 + P800,000.00) - P7,4l7.86] less
the amount of P327,300.00 erroneously paid as consultancy fees, plus interests on
the difference at the rate of fifteen and one-half per centum(15.5%) per
annum commencing on 2 July 1984, within thirty (30) days from their receipt of a
copy of this decision; and AUTHORIZING the foreclosure of the real estate
mortgages in question upon the failure of the petitioners to pay the obligations
within the said period; and

3 DISMISSING the counterclaim of the private respondent for lack of merit.

No pronouncement as to costs.

SO ORDERED.

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 REPUBLIC ACT NO. 2629

REPUBLIC ACT NO. 2629 - INVESTMENT COMPANY ACT

Section 1. Short title. — This Act may be cited as the "Investment Company Act."

Sec. 2. Declaration of policy. — It is hereby declared that the policy and purposes of this Act
in accordance with which the provisions of this Act shall be interpreted, are to mitigate and, so
far as is feasible, to eliminate the following conditions which adversely affect the national public
interest and the interest of investors:

(a) When investors purchase, pay for, exchange, receive dividends upon, vote, refrain from
voting, sell, or surrender securities issued by investment companies without adequate, accurate,
and explicit information fairly presented, concerning the character of such securities and the
circumstances, policies, and financial responsibility of such companies and their management;

(b) When investment companies are organized, operated, managed, or their portfolio securities
are selected, in the interest of directors, officers, investment advisers, depositors, or other
affiliated persons thereof, in the interest of underwriters, brokers, or dealers, in the interest of
special classes of their security holders, or in the interest of other investment companies or
persons engaged in other lines of business, rather than in the interest of all classes of such
companies' security holders;

(c) When investment companies issue securities containing inequitable or discriminatory

provisions, or fail to protect the preferences and privileges of the holders of their outstanding
securities;

(d) When the control of investment companies is unduly concentrated through pyramiding or
inequitable methods of control, or is inequitably distributed, or when investment companies are
managed by irresponsible persons;

(e) When investment companies, in keeping their accounts, in maintaining reserves, and in
computing their earnings and the asset value of their outstanding securities, employ unsound or
misleading methods, or are not subjected to adequate independent scrutiny;

(f) When investment companies are reorganized, become inactive, or change the character of
their business, or when the control or management thereof is transferred, without the consent of
their security holders;

(g) When investment companies by excessive borrowing and the issuance of excessive
amounts of senior securities increase unduly the speculative character of their junior securities;
or

(h) When investment companies operate without adequate assets or reserves.

Sec. 3. Definitions. — When used in this Act, unless the context otherwise requires — (a)
"Advisory board" means a board, whether elected or appointed, which is distinct from the board
of directors or board of trustees, or an investment company, and which is composed solely of
persons who do not serve such company in any other capacity, whether or not the functions of
such board are such as to render its members "directors" within the definition of that term, which
board has advisory functions as to investments but has no power to determine that any security or
other investment shall be purchased or sold by such company.

(b) "Affiliated company" means a company which is an affiliated person.

222 | P a g e
(c) "Affiliated person" of another person means (1) any person directly or indirectly owning,
controlling or holding with power to vote, ten per centum or more of the outstanding voting
securities of such other person; (2) any person ten per centum or more of whose outstanding
voting securities are directly or indirectly owned, controlled, or held with power to vote, by such
other person; (3) any person directly or indirectly controlling, controlled by, or under common
control with, such other person; (4) any officer, director, partner, copartner, or employee of such
other person; and (5) if such other person is an investment company, any investment adviser
thereof or any member of an advisory board thereof.

(d) "Bank" means (1) a banking institution organized under the laws of the Philippines, (2) any
other banking institution or trust company, doing business under the laws of the Philippines, a
substantial portion of the business of which consists of receiving deposits or exercising fiduciary
powers similar to those permitted to national banks.

(e) "Broker" means any person engaged in the business of effecting transactions in securities
for the account of others, but does not include a bank or any person solely by reason of the fact
that such person is an underwriter for one or more investment companies.

(f) "Commission" means the Securities and Exchange Commission.

(g) "Company" means a corporation, a registered partnership, or an association lawfully

transacting business in the Philippines.

(h) "Control" means the power to exercise a controlling influence over the management or
policies of a company, unless such power is solely the result of an official position with such
company.

Any person who owns beneficially, either directly or through one or more controlled companies,
more than thirty per centum of the voting securities of a company shall be presumed to control
such company. Any person who does not so more than thirty per centum of the voting securities
of any company shall be presumed not to control such company. A natural person shall be
presumed not to be a controlled person within the meaning of this Act. Any such presumption
may be rebutted by evidence, but except as hereinafter provided, shall continue until a
determination to the contrary is made by the Commission by order either on its own motion or on
application by an interested person. If an application filed hereunder is not granted or denied by
the Commission within sixty days after filing thereof, the determination sought by the
application shall be deemed to have been temporarily granted pending final determination of the
Commission thereon. The Commission, upon its own motion or upon application, may by order
revoke or modify any order issued under this paragraph whenever it shall find that the
determination embraced in such original order is no longer consistent with the facts.

(i) "Convicted" includes a verdict judgment, or plea of guilty, if such verdict, judgment or plea
has not been reversed, set aside, or withdrawn, whether or not sentence has been imposed.

(j) "Dealers" means any person regularly engaged in the business of buying and selling
securities for his own account, through a broker or otherwise, but does not include a bank,
insurance company, or investment company, or any person insofar as he is engaged in investing,
reinvesting, or trading in securities, or in owning or holding securities, for his own account,
either individually or in some fiduciary capacity, but not as a part of a regular business.

(k) "Director" means any director of a corporation or any person performing similar functions
with respect to any organization.

(l) "Exchange" means any organization, association, or group of persons which constitutes,
maintains, or provides a market place or facilities for bringing together purchasers and sellers of
securities or for otherwise performing with respect to securities the functions commonly

223 | P a g e
performed by a stock exchange as that term is generally understood, and includes the market
place and the market facilities maintained by such exchange.

(m) "Government security" means any security issued or guaranteed as to principal or interest
by the Republic of the Philippines, or by a person controlled or supervised by and acting as an
instrumentality of the Government of the Republic of the Philippines pursuant to authority
granted by the Congress of the Philippines; or any certificate of deposit for any of the foregoing.

(n) "Insurance company" means a company which is organized as an insurance company,

whose primary and predominant business activity is the writing of insurance or the reinsuring of
risks underwritten by insurance companies, and which is subject to supervision by the Insurance
Commissioner; or any receiver or similar official or any liquidating agent for such a company, in
his capacity as such.

(o) "Investment adviser" of an investment company means (1) any person (other than a bona
fide officer, director, trustee, member of an advisory board, or employee of such company as
such) who pursuant to contract with such company regularly furnishes advice to such company
with respect to the desirability of investing in, purchasing or selling securities or other property,
or is empowered to determine what securities or other property shall be purchased or sold by
such company, and (2) any other person who pursuant to contract with a person described in
clause (1) of this paragraph regularly performs substantially all of the duties undertaken by such
person described in said clause (1); but does not include (A) a person whose advice is furnished
solely through uniform publications distributed to subscribers thereto, (B) a person who
furnishes only statistical and other factual information, advice regarding economic factors and
trends, or advice as to occasional transactions in specific securities, but without generally
furnishing advice or making recommendations regarding the purchase or sale of securities, (C) a
company furnishing such services at cost to one or more investment companies, insurance
companies, or other financial institutions, (D) any person the character and amount of whose
compensation for such services must be approved by a court or (E) such other persons as the
Commission may by rules and regulations or order determine not to be within the intent of this
definition.

( p) "Investment banker" means any person engaged in the business of underwriting securities
issued by other persons, but does not include an investment company, any person who acts as an
underwriter in isolated transactions, but not as a part of a regular business, or any person solely
by reason of the fact that such person is an underwriter for one or more investment companies.

(q) "Issuer" means every person who issues or proposes to issue any security, or has
outstanding any security which it has issued.

(r) "Lend" includes a purchase coupled with an agreement by the vendor to repurchase;
"borrow" includes a sale coupled with a similar agreement.

(s) "Majority-owned subsidiary" of a person means a company fifty per centum or more of the
outstanding voting securities of which are owned by such person, or by a company which, within
the meaning of this paragraph, is a majority-owned subsidiary of such person.

(t) "Periodic payment plan certificate" means (1) any certificate, investment contract, or other
security providing for a series of periodic payments by the holders, and representing an
undivided interest in certain specified securities or in a unit or fund of securities purchased
wholly or partly with the proceeds of such payments, and (2) any security the issuer of which is
also issuing securities of the character described in clause (1) and the holder of which has
substantially the same rights and privileges as those which holders of securities of the character
described in said clause (1) have upon completing the periodic payments for which such
securities provide.

(u) "Person" means a natural person or a company.

224 | P a g e
(v) "Principal underwriter" of or for any investment company other than a closed-end
company, or of any security issued by such a company, means any underwriter who as principal
purchases from such company, or pursuant to contract has the right (whether absolute or
conditional) from time to time purchase from such company, any such security for distribution,
or who as agent for such company sells or has the right to sell any such security to a dealer or to
the public or both, but does not include a dealer who purchases from such company through a
principal underwriter acting as agent for such company. "Principal underwriter " of or for a
closed-end company or any issuer which is not an investment company, or of any security issued
by such a company or issuer, means any underwriter who, in connection with a primary
distribution of securities, (1) is in privity of contract with the issuer or an affiliated person of the
issuer; (2) acting alone or in concert with one or more other persons, initiates or directs the
formation of an underwriting syndicate; or (3) is allowed a rate of gross commission, spread, or
other profit greater than the rate allowed another underwriter participating in the distribution.

(w) "Promoter" of a company or a proposed company means a person who, acting alone or in
concert with other persons, is initiating or directing, or has within one year initiated or directed,
the organization of such company.

(x) "Redeemable security" means any security, other than short-term paper, under the terms of
which the holder, upon its presentation to the issuer or to a person designated by the issuer, is
entitled to receive approximately his proportionate share of the issuer's current net assets, or the
cash equivalent thereof.

( y) "Reorganization" means (1) a reorganization under the supervision of a court of competent

jurisdiction; (2) a merger or consolidation; (3) a sale of seventy-five per centum or more in value
of the assets of a company; (4) a restatement of the capital of a company, or an exchange of
securities issued by a company for any of its own outstanding securities; (5) a voluntary
dissolution or liquidation of a company; (6) a recapitalization or other procedure or transaction
which has for its purpose the alteration, modification, or elimination of any of the rights,
preferences, or privileges of any class of securities issued by a company, as provided in its
charter or other instrument creating or defining such rights, preferences, and privileges; (7) an
exchange of securities issued by another company or companies, preliminary to and for the
purpose of effecting or consummating any of the foregoing; or (8) any exchange of securities by
a company which is not an investment company for securities issued by a registered investment
company.

(z) "Sale", "sell", "offer to sell", or "offer for sale" includes every contract of sale or disposition
of, attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in
security, for value. Any security given or delivered with, or as a bonus on account of, any
purchase of securities or any other thing, shall be conclusively presumed to constitute a part of
the subject of such purchase and to have been sold for value.

(aa) "Sales load" means the difference between the price of a security to the public and that
portion of the proceeds from its sale which is received and invested or held for investment by the
issuer, less any portion of such difference deducted for trustee's or custodian's fees, insurance
premiums, issue taxes, or administrative expenses or fees which are not properly chargeable to
sales or promotional activities. In the case of a periodic payment plan certificate, "sales load"
includes the sales load on any investment company securities in which the payments made on
such certificate are invested, as well as the sales load on the certificate itself.

(bb) "Security" means any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-
trust certificate, preorganization certificate or subscription transferable share, investment
contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest
in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as
a "security" or any certificate of interest or participation in, temporary or interim certificate for,

225 | P a g e
receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

(cc) "Short-term paper" means any note, draft, bill of exchange, or banker's acceptance payable
on demand or having a maturity at the time of issuance of not exceeding nine months, exclusive
of days of grace, or any renewal thereof payable on demand or having a maturity likewise
limited; and such other classes of securities, of a commercial rather than an investment character,
as the Commission may designate by rules and regulations.

(dd) "Underwriter" means any person who has purchased from an issuer with a view to, or sells
for an issuer in connection with, the distribution of any security or participates or has a direct or
indirect participation in any such undertaking, or participates or has a participation in the direct
or indirect underwriting of any such undertaking; but such term shall not include a person whose
interest is limited to a commission from an underwriter or dealer not in excess of the usual and
customary distributor's or seller's commission, As used in this paragraph the term "issuer" shall
include, in addition to an issuer, any person directly or indirectly controlling or controlled by the
issuer, or any person under direct or indirect common control with the issuer. When the
distribution of the securities in respect of which any person is an underwriter is completed such
person shall cease to be an underwriter in respect of such securities or the issuer thereof.

(ee) "Value", with respect to assets of registered investment companies, means —

(1) As used in section four, (A) with respect to securities owned at the end of the last preceding
fiscal quarter for which market quotations are readily available, the market value at the end of
such quarter; (B) with respect to other securities and assets owned at the end of the last preceding
fiscal quarter, fair value at the end of such quarter, as determined in good faith by the board of
directors; and (C) with respect to securities and other assets acquired after the end of the last
preceding fiscal quarter, the cost thereof; and

(2) As used elsewhere in this Act, (A) with respect to securities for which market quotations
are readily available, the market value of such securities; and (B) with respect to other securities
and assets, fair value as determined in good faith by the board of directors; in each case as of
such time or times as determined pursuant to this Act, and the rules and regulations issued by the
Commission thereunder. Notwithstanding the fact that market quotations for securities issued by
controlled companies are available, the board of directors may in good faith determine the value
of such securities: Provided, That the value so determine is not in excess of the higher of market
value or asset value of such securities in the case of majority-owned subsidiaries, and is not in
excess of market value in the case of other controlled companies.

The foregoing definition shall not derogate from the authority of the Commission with respect to
the reports, information, and documents to be filed with the Commission by any registered
company, or with respect to the accounting policies and principles to be followed by any such
company, as provided in sections seven, twenty-seven and twenty-eight.

(ff) "Voting security" means any security presently entitling the owner or holder thereof to vote
for the election of directors of a company.

(gg) "Wholly-owned subsidiary" of a person means a company ninety-five per centum or more
of the outstanding voting securities of which are owned by such person, or by a company which,
within the meaning of this paragraph is a wholly-owned subsidiary of such person.

(hh) "Securities Act" means Commonwealth Act Numbered Eighty-three as heretofore or

hereafter amended.

No provision in this Act shall apply to, or be deemed to include, the Philippines or any political
subdivision thereof, or any agency, authority, or instrumentality of any one or more of the
foregoing, or any corporation which is wholly owned directly or indirectly by any one or more of
the foregoing, or any officer, agent, or employee of any of the foregoing acting as such in the

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course of his official duty, unless such provision makes specific reference thereto.

Sec. 4. Definition of investment company. — (a) when used in this Act "investment company"
means any issuer which is or holds itself out as being engaged primarily, or proposes to engage
primarily, in the business of investing, reinvesting, or trading in securities;

(b) Notwithstanding subsection (a), none of the following persons is an investment company
within the meaning of this Act;

(1) Any issuer primarily engaged, directly or through a wholly-owned subsidiary or

subsidiaries, in a business or businesses other than that of investing, reinvesting, or trading in
securities.

(2) Any issuer which the Commission, upon application by such issuer, finds and by order
declares to be primarily engaged in a business or businesses other than that of investing,
reinvesting, or trading in securities either directly or (A) through majority-owned subsidiaries or
(B) through controlled companies conducting similar types of business. The filing of an
application under this paragraph by an issuer other than a registered investment company shall
exempt the applicant for a period of sixty days from all provisions of this Act applicable to
investment companies as such. For cause shown, the Commission by order may extend such
period of exemption for an additional period or periods. Whenever the Commission, upon its
own motion or upon application, finds that the circumstances which gave rise to the issuance of
an order granting an application under this paragraph no longer exist, the Commission shall by
order revoke such order.

(3) Any issuer all the outstanding securities of which (other than short-term paper and
directors' qualifying shares) are directly or indirectly owned by a company excepted from the
definition of investment company.

(c) Notwithstanding subsection (a), and (b), none of the following persons is an investment
company within the meaning of this Act:

(1) Any issuer whose outstanding securities (other than short-term paper) are beneficially
owned by not more than twenty-five persons and which is not making and does not presently
propose to make a public offering of its securities. For the purpose of this paragraph, beneficial
ownership by a company shall be deemed to be beneficial ownership by one person; except that,
if such company owns ten per centum or more of the outstanding voting securities of the issuer,
the beneficial ownership shall be deemed to be that of the holders of such company's outstanding
securities (other than short-term paper).

(2) Any person primarily engaged in the business of underwriting and distributing securities
issued by other persons, selling securities to customers, and acting as broker, or any one or more
of such activities, whose gross income normally is derived principally from such business and
related activities.

(3) Any bank or insurance company; any savings and loan association, building and loan
association, cooperative bank, homestead association, or similar institution, or any receiver,
conservator, liquidator, liquidating agent, or similar official or person thereof or therefor; any
common trust fund or similar fund maintained by a bank exclusively for the collective
investment and reinvestment of moneys contributed thereto by the bank in its capacity as a
trustee, executor, administrator, or guardian.

(4) Any person substantially all of whose business is confined to industrial banking or similar
business.

(5) Any person who is primarily engaged in one or more of the following business: (A)
Purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other

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obligations representing part or all of the sales price of merchandise, insurance, and services; (B)
making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of,
specified merchandise, insurance, and service; and (C) purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate.

(6) Any company primarily engaged, directly or through majority-owned subsidiaries, in one
or more of the businesses described in paragraphs (3), (4) and (5), or in one or more of such
businesses (from which not less than forty per centum of such company's gross income during its
last fiscal year was derived) together with an additional business or businesses other than
investing, reinvesting, owning, holding or trading in securities.

(7) Any company ninety per centum or more of the value of whose investment securities are
represented by securities of a single issuer included within a class of persons enumerated in
paragraphs (4), (5), or (6).

(8) Any person substantially all of whose business consist of owning or holding oil, gas, or
other mineral royalties or leases, or fractional interests therein, or certificates of interest or
participation in or investment contracts relative to such royalties, leases, or fractional interests.

(9) Any company organized and operated exclusively for religious, educational, benevolent,
fraternal, charitable, or reformatory purposes, no part of the net earnings of which inures to the
benefit of any private shareholders or individual.

(10) Any employees' stock bonus, pension, or profit- sharing trust.

(11) Any voting trust the assets of which consist exclusively of securities of a single issuer
which is not an investment company.

(12) Any security holders' protective committee or similar issuer having outstanding and
issuing no securities other than certificates of deposit and short-term paper.

Sec. 5. Classification of investment companies. — (a) For the purposes of this Act, investment
companies are divided into open-end and closed-end companies, defined as follows:

(1) "Open-end company" means an investment company which is offering for sale or has
outstanding any redeemable security of which it is the issuer.

(2) "Closed-end company" means any investment company other than an open-end company.

Sec. 6. Transactions by investment companies. — (a) No investment company organized or

otherwise created under the laws of the Philippines and having a board of directors, unless
registered under section seven, shall directly or indirectly —

(1) offer for sale, sell, or deliver after sale, within the Philippines, any security or any interest
in a security, whether the issuer of such security is such investment company or another person;

(2) purchase, redeem, retire, or otherwise acquire or attempt to acquire, within the Philippines,
any security, or any interest in a security, whether the issuer of such security is such investment
company or another person;

(3) control any investment company which does any of the acts enumerated in paragraphs (1)
and (2).

The provisions of this subsection shall not apply to transactions of an investment company which
are merely incidental to its dissolution.

(b) No depositor or trustee of or underwriter for any investment company, organized or

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otherwise created under the laws of the Philippines and not having a board of directors, unless
such company is registered under section eight or exempt under section six, shall directly or
indirectly —

(1) offer for sale, sell, or deliver after sale, within the Philippines, any security or any interest
in a security of which such company is the issuer;

(2) purchase, redeem, or otherwise acquire or attempt to acquire, within the Philippines, any
security, or interest in a security of which such company is the issuer; or

(3) sell or purchase for the account of such company, within the Philippines, any security or
interest in a security, by whomsoever issued.

The provisions of this subsection shall not apply to transactions which are merely incidental to
the dissolution of an investment company.

Sec. 7. Registration of investment companies. — (a) Any investment company organized or

otherwise created under the laws of the Philippines may register for the purposes of this Act by
filing with the Commission a registration statement, in such form as the Commission shall by
rules and regulations prescribe as necessary or appropriate in the public interest or for the
protection of investors. An investment company shall be deemed to be registered upon approval
by the Commission of such registration statement and the publication thereof in the Official
Gazette for two consecutive weeks and in two dailies of general circulation for two consecutive
days.

(b) Every investment company shall file with the Commission an original and such copies of a
registration statement, in such form and containing such of the following information and
documents as the Commission shall, by rules and regulations, prescribe as necessary or
appropriate in the public interest or for the protection of investors:

(1) a recital of the policy of the registrant in respect of each of the following types of activities,
such recital consisting in each case of a statement whether the registrant reserves freedom of
action to engage in activities of such type, and if such freedom of action is reserved, a statement
briefly indicating, insofar as is practicable, the extent to which the registrant intends to engage
therein: (A) the classification, as defined in section five, within which the registrant proposes to
operate; (B) borrowing money; (C) the issuance of senior securities; (D) engaging in the business
of underwriting securities issued by other persons; (E) concentrating investments in a particular
industry or group of industries; (F) the purchase and sale of real estate and commodities, or
either of them; (G) making loans to other persons; and (H) portfolio turn-over (including a
statement showing the aggregate peso amount of purchases and sales of portfolio securities, other
than Government securities, in each of the full fiscal years preceding the filing of such
registration statement);

(2) a recital of the policy of the registrant in respect of matters, not enumerated in paragraph
(1), which the registrant deems matters of fundamental policy and elects to treat as such;

(3) the name and address of each affiliated person of the registrant; the name and principal
address of every company, other than the registrant, of which each such person is an officer,
director or partner; a brief statement of the business experience for the preceding five years of
each officer and director of the registrant; and

(4) the information and documents which would be required to be filed in order to register
under the Securities Act all securities (other than short-term paper) which the registrant has
outstanding or proposes to issue.

(c) The Commission shall make provision, by permissive rules and regulations or order, for the
filing of the following, or so much of the following as the Commission may designate, in lieu of

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the information and documents required pursuant to subsection (b):

(1) copies of the most recent registration statement filed by the registrant under the Securities
Act and currently effective under such Act;

(2) a report containing reasonably current information regarding the matters included in copies
filed pursuant to paragraph (1), and such further information regarding matters not included in
such copies as the Commission is authorized to require under subsection (b).

(d) Every investment company as defined in this Act, existing on the date of effectivity hereof
shall register pursuant to the provisions of this section within six months from the approval of
this Act.

(e) The Commission, in the exercise of its sound judgment and discretion, shall have power to
limit the registration of investment companies to such number as the investment opportunities
then obtaining would permit, and to allow the registration of new investment companies only
when the conditions warrant it. This provision, however, shall not apply to investment companies
already existing on the date of effectivity of this Act.

(f) If it appears to the Commission that a registered investment company has failed to file the
registration statement required by this section or a report required pursuant to section twenty-
seven (a), or (b), or has filed such registration statement or report but omitted therefrom material
facts required to be stated therein, or has filed such a registration statement or report in violation
of section thirty-one (b), the Commission shall notify such company by registered mail of the
failure to file such registration statement or report, or of the respects in which such registration
statement or report appears to be materially incomplete or misleading, as the case may be, and
shall fix a date (in no event earlier than thirty days after the mailing of such notice) prior to
which such company may file such registration statement or report or correct the same. If such
registration statement or report is not filed or corrected within the time so fixed by the
Commission or any extension thereof, the Commission, after appropriate notice and opportunity
for hearing, and upon such conditions and with such exemptions as it deems appropriate for the
protection of investors, may by order suspend the registration of such company until such
statement or report is filed or corrected, or may by order revoke such registration, if the evidence
establishes —

(1) that such company has failed to file a registration statement required by this section or a
report required pursuant to section twenty-seven (a) or (b), or has filed such a registration
statement or report but omitted therefrom material facts required to be stated therein, or has filed
such a registration statement or report in violation of section thirty-one (b); and

(2) that such suspension or revocation is in the public interest.

(g) Whenever the Commission, on its own motion or upon application, finds that a registered
investment company has ceased to be an investment company, it shall so declare by order and
upon the taking effect of such order the registration of such company shall cease to be in effect.
If necessary for the protection of investors, an order under this subsection may be made upon
appropriate conditions. The Commission's denial of any application under this subsection shall
be by order.

Sec. 8. Ineligibility of certain affiliated persons and underwriters. — (a) It shall be unlawful for
any of the following persons to serve or act in the capacity of officer, or director, member of an
advisory board, investment adviser, or depositor of any registered investment company, or
principal underwriter for any registered open-end company;

(1) any person who within ten years has been convicted of any felony or misdemeanor
involving the purchase or sale of any security or arising out of such person's conduct as an
underwriter, broker, dealer, or investment adviser, or as an affiliated person, salesman, or

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employee or any investment company, bank, or insurance company;

(2) any person who, by reason of any misconduct, is permanently or temporarily enjoined by
order, judgment, or decree of any court of competent jurisdiction from acting as an underwriter,
broker, dealer, or investment adviser, or as an affiliated person, salesman, or employee of any
investment company, bank, or insurance company, or from engaging in or continuing any
conduct or practice in connection with any such activity or in connection with the purchase or
sale of any security; or

(3) a company any affiliated person of which is ineligible, by reason of paragraph (1) or (2), to
serve or act in the foregoing capacities.

(b) Any person who is ineligible, by reason of subsection (a), to serve or act in the capacities
enumerated in such subsection, may file with the Commission an application for an exemption
from the provisions of such subsection. The Commission shall by order grant such application,
either unconditionally or on an appropriate temporary or other conditional basis, if it is
established that the prohibitions of such subsection, as applied to such person, are unduly or
disproportionately severe or that the conduct of such person has been such as not to make it
against the public interest or protection of investors to grant such application.

Sec. 9. Affiliations of directors, officers and employees. — (a) After one year from the
effective date of this Act, no registered investment company shall have a board of directors more
than fifty per centum of the members of which are persons who are investment advisers of, or
officers or employees of, such registered company.

(b) After one year from the effective date of this Act, no registered investment company shall
—

(1) employ as regular broker any director, officer, or employee of such registered company, or
any person of which any such director, officer, or employee is an affiliated person;

(2) use a principal underwriter of securities issued by it any director, officer, or employee of
such registered company or may person of which any such director, officer, employee is an
affiliated person; or

(3) have as director, officer, or employee any investment banker, or any affiliated person of an
investment banker. For the purposes of this paragraph, a person shall not be deemed an affiliated
person of an investment banker solely by reason of the fact that he is an affiliated person of a
company (A) all the outstanding securities of which (other than short-term paper, securities
representing bank loans and directors' qualifying shares) are, or after such acquisition will be,
owned by one or more registered investment companies; and (B) which is primarily engaged in
the business of underwriting and distributing securities issued by other persons, selling securities
to customers, or any one or more of such or related activities, and the gross income of such
person normally is derived principally from such business or related activities.

(c) After the effective date of this Act no registered investment company shall have a majority
of its board of directors consisting of persons who are officers or directors of any one bank:
Provided, That, if prior to the effective date of this Act, any registered investment company shall
have had a majority of its directors consisting or persons who are directors, officers, or
employees of any one bank, such registered company may continue to have the same percentage
of its board of directors consisting of persons who are directors, officers, or employees of such
bank.

(d) If by reason of the death, disqualification, or bona fide resignation of any director or
directors, the requirements of the foregoing provisions of this section in respect of directors shall
not be met by a registered investment company, the operation of such provision shall be
suspended as to such registered company for a period of thirty days if the vacancy or vacancies

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may be filled by action of the board of directors, and for a period of sixty days if a vote of
stockholders is required to fill the vacancy or vacancies, or for such longer period as the
Commission may prescribe, by rules and regulations upon its own motion or by order upon
application, as not inconsistent with the protection of investors.

(e) No registered investment company shall knowingly purchase or otherwise acquire, during
the existence of any underwriting or selling syndicate, any security (except a security of which
such company is the issuer) a principal underwriter of which is an officer, director, member of an
advisory board, investment adviser, or employee of such registered company, or is a person
(other than a company of the character described in paragraphs (A) and (B) of subsection (b) (3)
of which any such officer, director, member of an advisory board, investment adviser, or
employee is an affiliated person, unless in acquiring such security such registered company is
itself acting as a principal underwriter for the issuer. The Commission, by rules and regulations
upon its own motion or by order upon application, may conditionally or unconditionally exempt
any transaction or classes of transactions from any of the provisions of this subsection, if and to
the extent that such exemption is consistent with the protection of investors.

(f) In the case of a registered investment company which has an advisory board, such board, as
a distinct entity, shall be subject to the same restrictions as to its membership as are imposed
upon a board of directors by this section.

(g) In the case of a registered investment company which does not have a board of directors,
the provisions of this section shall apply as follows:

(1) the provisions of subsection (a), as modified by subsection (d), shall apply to the board of
directors of the depositor of such company;

(2) the provisions of subsection (b) and (c), as modified by subsection (d), shall apply to the
board of directors of the depositor and of every investment adviser of such company; and

(3) the provisions of subsection (e) shall apply to purchases and other acquisitions for the
account of such company of securities a principal underwriter of which is the depositor or an
investment adviser of such company, or an affiliated person of such depositor or investment
adviser.

Section 10. Offers to exchange securities. — (a) It shall be unlawful for any registered open-
end company or any principal underwriter for such a company to make or cause to be made an
offer to the holder of a security of such company or of any other open-end investment company
to exchange his security for a security in the same or another such company on any basis other
than the relative net asset values of the respective securities to be exchanged, unless the terms of
the offer have first been submitted to and approved by the commission or are in accordance with
such rules and regulations as the Commission may have prescribed in respect of such offers
which are in effect at the time such offer is made. For the purposes of this section, (1) an offer by
a principal underwriter means an offer communicated to holders of securities of a class or series
but does not include an offer made by such principal underwriter to an individual investor in the
course of a retail business conducted by such principal underwriter, and (2) the net asset value
means the net asset value which is in effect for the purpose of determining the price at which the
securities, or class or series of securities involved are offered for sale to the public either (A) at
the time of the receipt by the offeror of the acceptance of the offer or (B) at such later time as is
specified in the offer.

(b) The provisions of this section shall not apply to any offer made pursuant to (1) any plan of
reorganization, which is submitted to and requires the approval of the holders of at least a
majority of the outstanding shares of the class or series to which the security owned by the
offeree belongs; or (2) the right of conversion, at the option of the holder, from one class or
series into another class or series of securities issued by the same company upon such terms as
are specified in the charter, certificate of incorporation, articles of association, by-laws, or trust

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indenture subject to which the securities to be converted were issued or are to be issued.

Section 11. Functions and activities of investment companies. — (a) It shall be unlawful for
any registered investment company, in contravention of such rules and regulations or orders as
the Commission may prescribe as necessary or appropriate in the public interest or for the
protection of investors —

(1) to purchase any security on margin, except such short-term credits as are necessary for the
clearance of transactions;

(2) to participate on a joint or a joint and several basis in any trading account in securities,
except in connection with an underwriting in which such registered company is a participant; or

(3) to effect a short sale of any security, except in connection with an underwriting in which
such registered company is a participant.

(b) It shall be unlawful for any registered open-end company (other than a company complying
with the provisions of section ten) to act as a distributor of securities of which it is the issuer,
except through an underwriter, in contravention of such rules and regulations as the Commission
may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(c) It shall be unlawful for any investment company to —

(1) Generate funds for promoting the private business or industry of any employee, official,
director, organizer, incorporator or stockholder thereof;

(2) Allow any of its employee, official, director, organizer, incorporator or stockholder to buy
real estate, personal property or any other kind of property and sell the same to the company at a
price higher than the procurement cost or sell any property of the company, or a portion thereof,
at a price below the market value thereof to any of the aforementioned persons.

Section 12. Changes in investment policy. — (a) No registered investment company shall,
unless authorized by the vote of a majority of its outstanding voting securities —

(1) borrow money, issue senior securities, underwrite securities issued by other persons,
purchase or sell real estate or commodities or make loans to other persons, except in each case in
accordance with the recitals of policy contained in its registration statement in respect thereto;

(2) deviate from its policy in respect of concentration of investments in any particular industry
or group of industries as recited in its registration statement, or deviate from any fundamental
policy recited in its registration statement pursuant to section seven (b) (2); or

(3) change the nature of its business so as to cease to be an investment company.

(b) Where the change will involve an amendment of the organization papers of the investment
company, the pertinent provisions of law on the vote necessary and other requisites to effectuate
the same, shall likewise be complied with.

Section 13. Size of investment companies. — No registered investment company organized

after the effective date of this Act, and principal underwriter for such a company, shall make a
public offering of securities of which such company is the issuer, unless —

(1) such company has a paid-up capital of at least five hundred thousand pesos, as certified to
by an independent certified public accountant; or

(2) such company has previously made a public offering of its securities, and at the time of
such offering had a paid-up capital of at least five hundred thousand pesos, as certified to by an

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independent certified public accountant: Provided, however, That no investment company shall
redeem, directly or indirectly, any security of which such company is the issuer unless the
remaining unimpaired capital shall be at least two hundred fifty thousand pesos or fifty per cent
of its outstanding liabilities to the creditors of said company, whichever is higher.

Section 14. Contracts of advisers and underwriters. — (a) After the effective date of this Act it
shall be unlawful for any person to serve or act as investment adviser of a registered investment
company, except pursuant to a written contract, which contract, whether with such registered
company or with an investment adviser of such registered company, unless in effect prior to the
effective date of this Act, has been approved by the vote of a majority of the outstanding voting
securities of such registered company and —

(1) precisely describes all compensation to be paid thereunder;

(2) shall continue in effect for a period more than two years from the date of its execution, only
so long as such continuance is specifically approved at least annually by the board of directors or
by vote of a majority of the outstanding voting securities of such company;

(3) provides, in substance, that it may be terminated at any time, without the payment of any
penalty, by the board of directors of such registered company or by vote of two-thirds of the
outstanding voting securities of such company on not more than sixty days' written notice to the
investment adviser; and

(4) provides, in substance, for its automatic termination in the event of its assignment by the
investment adviser.

(b) After one year from the effective date of this Act, it shall be unlawful for any principal
underwriter for a registered open-end company to offer for sale, sell, or deliver after sale any
security of which such company is the issuer, except pursuant to a written contract with such
company, which contract, unless in effect prior to the effective date of this Act —

(1) shall continue in effect for a period more than two years from the date of its execution, only
so long as such continuance is specifically approved at least annually by the board of directors or
by vote of two-thirds of the outstanding voting securities of such company; and

(2) provides, in substance, for its automatic termination in the event of its assignment by such
underwriter.

(c) In addition to the requirements of subsections (a) and (b) it shall be unlawful for any
registered investment company having a board of directors to enter into, renew, or perform any
contract or agreement, written or oral, except a written agreement which was in effect prior to the
effective date of this Act, whereby a person undertakes regularly to serve or act as investment
adviser of or principal underwriter for such company, unless the terms of such contract or
agreement and any renewal thereof have been approved (1) by a majority of the directors who
are not parties to such contract or agreement or affiliated persons of any such party, or (2) by the
vote of a majority of the outstanding voting securities of such company.

(d) It shall be unlawful for any person, after the effective date of this Act —

(1) to serve or act as investment adviser of a registered investment company, pursuant to a

written contract which was in effect prior to the effective date of this Act; or

(2) as principal underwriter for a registered opened investment company to offer for sale, sell,
or deliver after sale any security of which such company is the issuer, pursuant to a written
contract which was in effect prior to the effective date of this Act, unless such contract is
renewed in such form that it complies with the requirements of subsection (a) or (b), as the case
may be, and approved in the manner required by this section.

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(e) Nothing contained in this section shall be deemed to require or contemplate any action by
an advisory board of any registered company or by any of the members of such a board.

Section 15. Board of directors; election; term vacancies; and salaries. — No person shall serve
as a director of a registered investment company unless he is a Filipino citizen and elected to that
office by the holders of the outstanding voting securities of such company, at an annual or a
special meeting duly called for the purpose; except that vacancies occurring between such
meeting may be filed in any otherwise legal manner if immediately after filing any such vacancy
at least two-thirds of the directors then holding office shall have been elected to such office by
the holders' of the outstanding voting securities of the company at such an annual or special
meeting. In the event that at any time less than a majority of the directors of such company
holding office at that time were so elected by the holders of the outstanding voting securities, the
board of directors or proper officer of such company shall forthwith cause to be held as promptly
as possible and in any event within sixty days a meeting of such holders for the purpose of
electing directors to fill any existing vacancies in the board of directors unless the Commission
shall by order extend such period. The foregoing provisions shall not apply to members of an
advisory board.

No member of the Board of Directors or any executive official shall receive any salary or
emolument from the investment company at a rate higher than that fixed by the Commission
after taking into consideration; the experience and qualifications of the official concerned; the
amount and nature of securities issued by the company; the size and standing of the company in
the business community; the volume of business done by the company; the number of years the
company has been in business; and other pertinent conditions and circumstances: Provided,
however, That in no case shall the operational expenses of such company exceed ten per cent of
the total investment fund received from the investors; And provided, finally, That non-
compliance with the provisions of this Act shall cause the cancellation of its registration and the
liquidation of its assets for redistribution to investors.

Section 16. Transactions of certain affiliated persons and underwriters — (a) It shall be
unlawful for any affiliated person or promoter of or principal underwriter for a registered
investment company (other than a company of the character described in section nine (b) (3) (A)
and (B) or any affiliated person of such a person, promoter, or principal underwriter, acting as
principal —

(1) knowingly to sell any security or other property to such registered company or to any
company controlled by such registered company, unless such sale involves solely (A) securities
of which the buyer is the issuer, or (B) securities of which the seller is the issuer and which are
part of a general offering to the holders of a class of its securities;

(2) knowingly to purchase from such registered company, or from any company controlled by
such registered company, any security or other property (except securities of which the seller is
the issuer); or

(3) to borrow money or other property from such registered company or from any company
controlled by such registered company (unless the borrower is controlled by the lender) except as
permitted in section twenty (b).

(b) Notwithstanding subsection (a), any person may file with the Commission an application
for an order exempting a proposed transaction of the applicant from one or more provisions of
said subsection. The Commission shall grant such application and issue such order of exemption
if evidence establishes that —

(1) the terms of the proposed transaction, including the consideration to be paid or received, are
reasonable and fair and do not involve overreaching on the part of any person concerned;

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(2) the proposed transaction is consistent with the policy of each registered investment
company concerned, as recited in its registration statement and reports filed under this Act; and

(3) the proposed transaction is consistent with the general purposes of this Act.

(c) Notwithstanding subsection (a), a person may, in the ordinary course of business, sell to or
purchase from any company merchandise or may enter into a lessor-lessee relationship with any
person and furnish the services incident thereto.

(d) It shall be unlawful for any affiliated person of or principal underwriter for a registered
investment company (other than a company of the character described in section nine (b) (3) (A)
and (B), or any affiliated person of such a person or principal underwriter, acting as principal to
effect any transaction in which such registered company, or a company controlled by such
registered company, is a joint or a joint and several participant with such person, principal
underwriter, or affiliated person, in contravention of such rules and regulations as the
Commission may prescribe for the purpose of limiting or preventing participating by such
registered or controlled company on a basis different from or less advantageous than that of such
other participant. Nothing contained in this subsection shall be deemed to preclude any affiliated
person from acting as manager of any underwriting syndicate or other group in which such
registered or controlled company is a participant and receiving compensation therefor.

(e) It shall be unlawful for any affiliated person of a registered investment company, or any
affiliated person of such person —

(1) acting as agent, to accept from any source any compensation (other than a regular salary or
wages from such registered company) for the purchase or sale of any property to or for such
registered company or any controlled company thereof, except in the course of such person's
business as an underwriter or broker; or

(2) acting as broker, in connection with the sale of securities to or by such registered company
or any controlled company thereof, to receive from any source a commission, fee, or other
remuneration for effecting such transaction which exceeds (A) the usual and customary broker's
commission if the sale is effected on a securities exchange, or (B) two per centum of the sales
price if the sale is effected in connection with a secondary distribution of such securities, or (C)
one per centum of the purchase or sale price of such securities if the sale is otherwise effected
unless the Commission shall, by rules and regulations or order in the public interest and
consistent with the protection of investors, permit a larger commission.

(f) Every registered investment company shall place and maintain its securities and similar
investments in the custody of (1) a duly organized local commercial bank of good repute; or (2) a
company which is a member of a securities exchange as defined in the Securities Act, subject to
such rules and regulations as the Commission may from time to time prescribe for the protection
of investors; or (3) such registered company, but only in accordance with such rules and
regulations or orders as the Commission may from time to time prescribe for the protection of
investors. Rules, regulations, and orders of the Commission under this subsection, among other
things, shall make appropriate provision with respect to such matters as the earmarking,
segregation, and hypothecation of such securities and investments, and shall provide for or
require periodic or other inspections by any or all of the following: independent public
accountants, employees and agents of the Commission, and such other persons as the
Commission may designate. No such member who trades in securities for his own account may
act as custodian except in accordance with rules and regulations prescribed by the Commission
for the protection of investors.

(g) The Commission is authorized to require by rules and regulations or orders for the
protection of investors that any officer and employee of a registered investment company who
may singly, jointly with others, have access to securities of funds of any registered company,
either directly or through authority to draw upon such funds or to direct generally the disposition

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of such securities, be bonded by a reputable fidelity insurance company against larceny and
embezzlement in such reasonable minimum amounts as the Commission may prescribe.

(h) After the effective date of this Act neither the charter, certificate of incorporation, articles
of association, nor the by-laws of any registered investment company, nor any other instrument
pursuant to which such a company is organized or administered, shall contain any provision
which protects or purports to protect any director or officer of such company against any liability
to the company or to its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.

In the event that any such instrument does not at the effective date of this Act comply with the
requirements of this subsection and is not amended to comply therewith, such company may
nevertheless continue to be a registered investment company and shall not be deemed to violate
this subsection if each such director or officer shall immediately file with the Commission a
waiver in writing of any protective provision of the instrument to the extent that it does not
comply with this subsection, and each such person subsequently elected or appointed shall before
assuming office file a similar waiver.

(i) After one year from the effective date of this Act no contract or agreement under which any
person undertakes to act as investment adviser of, or principal underwriter for, a registered
investment company shall contain any provision which protects or purports to protect such
person against any liability to such company or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence, in the performance of
his duties, or by reason of his reckless disregard of his obligations and duties under such contract
or agreement.

In the event that any such contract or agreement does not at the effective date of this Act comply
with the requirements of this subsection and is not amended to comply therewith prior to the
expiration of said one year, this subsection shall not be deemed to have been violated if prior to
said expiration date each such investment adviser as principal underwriter shall have filed with
the Commission a waiver in writing of any protective provisions of the contract or agreement to
the extent that it does not comply with this subsection.

Section 17. Capital structure of investment companies. — (a) It shall be unlawful for any
registered closed-end company to issue any class of senior security, or to sell any such security
of which it is the issuer, unless —

(1) if such class of senior security represents an indebtedness —

(A) immediately after such issuance or sale, it will have an asset coverage of at least three
hundred per centum;

(B) provision is made to prohibit the declaration of any dividend (except a dividend payable in
stock of the issuer), or the declaration of any other distribution, upon any class of the capital
stock of such investment company, or the purchase of any such capital stock, unless, in every
such case, such class of senior securities has at the time of the declaration of any such dividend
or distribution or at the time of any such purchase an asset coverage of at least three hundred per
centum after deducting the amount of such dividend, distribution, or purchase price, as the case
may be, except that dividends may be declared upon any preferred stock if such senior security
representing indebtedness has an asset coverage of at least two hundred per centum at the time of
declaration thereof after deducting the amount of such dividend; and

(C) provision is made either —

(i) that, if on the last business day of each twelve consecutive calendar months such class of
senior securities shall have an asset coverage of less than one hundred per centum, the holders of

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such securities voting as a class shall be entitled to elect at least a majority of the members of the
board of directors of such registered company, such voting right to continue until such class of
senior security shall have an asset coverage of one hundred and ten per centum or more on the
last business day of each of three consecutive calendar months or

(ii) that, if on the last business day of each twenty-four consecutive calendar months such class
of senior securities shall have an asset coverage of less than one hundred per centum an event of
default shall be deemed to have occurred;

(2) if such class of senior security is a stock —

(A) immediately after the issuance or sale it will have an asset coverage of at least two hundred
per centum;

(B) provision is made to prohibit the declaration of any dividend (except a dividend payable in
common stock of the issuer), or the declaration of any other distribution, upon the common stock
of such investment company, or the purchase of any such common stock, unless in every such
case such class of senior security has at the time of the declaration of any such dividend or
distribution or at the time of any such purchase an asset coverage of at least two hundred per
centum after deducting the amount of such dividend, distribution or purchase price, as the case
may be;

(C) provision is made to entitle the holders of such senior securities, voting as a class, to elect
at last two directors at all times, and, subject to the prior rights, if any of the holders of any other
class of senior securities outstanding, to elect a majority of the directors if at any time dividends
on such class of securities shall be unpaid in an amount equal to two full years' dividends on
such securities, and to continue to be so represented until all dividends in arrears shall have been
paid or otherwise provided for;

(D) provision is made requiring approval by the vote of a majority of such securities, voting as
a class, of any plan of reorganization adversely affecting such securities or of any action
requiring a vote of security holders as in section twelve (a) provides; and

(E) such class of stock shall have complete priority over any other class as to distribution of
assets and payment of dividends, which dividends shall be cumulative.

(b) The assets coverage in respect of a senior security provided for in subsection (a) may be
determined on the basis of values calculated as of a time within forty-eight hours (not including
Sundays or holidays) next preceding the time of such determination. The time of issue or sale
shall, in the case of an offering of such securities to existing stockholders of the issuer, be
deemed to be the first date on which such offering is made, and in all other cases shall be deemed
to be the time as of which a firm commitment to issue or sell and to take or purchase such
securities shall be made.

(c) Notwithstanding the provisions of subsection (a) it shall be unlawful for any registered
closed-end investment company to issue or sell any senior security representing indebtedness if
immediately thereafter such company will have outstanding more than one class of senior
security representing indebtedness, or to issue or sell any senior security which is a stock if
immediately thereafter such company will have outstanding more than one class of senior
security which is a stock, except that (1) any such class of indebtedness or stock may be issued in
one or more series: Provided, That no such series shall have a preference or priority over any
other series upon the distribution of the assets of such registered closed-end company or-in
respect of the payment of interest or dividends, and (2) promissory notes or other evidence of
indebtedness issued in consideration of any loan, extension, or renewal thereof, made by a bank
or other person and privately arranged, and not intended to be publicly distributed, shall not be
deemed to be a separate class or senior securities representing indebtedness within the meaning
of this subsection.

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(d) It shall be unlawful for any registered investment company to issue any warrant or right to
subscribe to or purchase a security of which such company is the issuer, except in the form of
warrants or rights to subscribe expiring not later than one hundred and twenty days after their
issuance and issued exclusively and ratably to be a class or classes of such company's security
holders; except that any warrant may be issued in exchange for outstanding warrants in
connection with a plan of reorganization.

(e) The provisions of this section shall not apply to any senior security issued or sold by any
registered closed-end company —

(1) pursuant to any firm contract to purchase or sell entered into prior to the effective date of
this Act;

(2) for the purpose of refunding through payment, purchase, redemption, retirement, or
exchange, any senior security of such registered investment company except that no senior
security representing indebtedness shall be so issued or sold for the purpose of refunding any
senior security which is a stock; or

(3) pursuant to any plan of reorganization (other than for refunding as referred to in subsection
(e) (2), provided —

(A) that such senior securities are issued or sold for the purpose of substituting or exchanging
such senior securities for outstanding senior securities, and if such senior securities represent
indebtedness they are issued or sold for the purpose of substituting or exchanging such senior
securities for outstanding senior securities representing indebtedness, of any registered
investment company which is a party to such plan of reorganization; or

(B) that the total amount of such senior securities so issued or sold pursuant to such plan does
not exceed that total amount of senior securities of all the companies which are parties to such
plan, and the total amount of senior securities representing indebtedness so issued or sold
pursuant to such plan does not exceed the total amount of senior securities representing
indebtedness of all such companies, or, alternatively the total amount of such senior securities so
issued or sold pursuant to such plan does not have the effect of increasing the ratio of senior
securities representing indebtedness to the securities representing stock or the ratio of senior
securities representing stock to securities junior thereto when compared with such ratios as they
existed before such reorganization.

(f) (1) It shall be unlawful for any registered opened company to issue any class of senior
security or to sell any senior security of which it is the issuer, except that any such registered
company shall be permitted to borrow from any bank: Provided, That immediately after any such
borrowing there is an asset coverage of at least three hundred per centum for all borrowing of
such registered company: And provided, further, That in the event that such asset coverage shall
at any time fall below three hundred per centum such registered company shall, within three days
thereafter (not including Sundays and holidays) or such longer period as the Commission may
prescribe by rules and regulations, reduce the amount of its borrowings to an extent that the asset
coverage of such borrowings shall be at least three hundred per centum. Notwithstanding the
provisions of this section, however, a registered open-end company may guarantee the senior
securities of a controlled person: Provided, That such guarantee is limited to a percentage of the
value of the senior securities equivalent to the percentage of the company's interest in the
controlled person: And provided, further, That such senior securities have an asset coverage by
the said controlled person of at least two hundred per centum.

(2) "Senior security" shall not, in the case a registered open-end company, include a class or
classes or a number of series or preferred or special stock each of which is preferred over all
other classes or series in respect of assets specifically allocated to that class or series; Provided,
(A) That such company has outstanding no class or series of stock which is not so preferred over

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all other classes or series; or (B) that the only other outstanding class of the issuer's stock consist
of a common stock upon which no dividend (other than a liquidating dividend) is permitted to be
paid and which in the aggregate represents not more than one-half of one per centum of the
issuer's outstanding voting securities.

(g) Unless otherwise provided: "Senior security" means any bond, debenture, note, or similar
obligation or instrument constituting a security and evidencing indebtedness, and any stock of a
class having priority over any other class as to distribution of assets or payment of dividends; and
"senior security representing indebtedness" means any senior security other than stock.

The term "senior security", when used in subparagraphs (B) and (C) of paragraph (1) of
subsection (a), shall not include any promissory note or other evidence of indebtedness issued in
consideration of any loan, extension or renewal thereof, made by a bank or other person and
privately arranged, and not intended to be publicly distributed; nor shall such term, when used in
this section, include any such promissory note or other evidence of indebtedness in any case
where such a loan is for temporary purposes only and in an amount not exceeding five per
centum of the value of the total assets of the issuer at the time when the loan is made. A loan
shall be presumed to be for temporary purposes if it is repaid within sixty days and is not
extended or renewed; otherwise it shall be presumed not to be for temporary purposes. Any such
presumption may be rebutted by evidence.

(h) "Asset coverage" of a class of senior security representing an indebtedness of an issuer

means the ratio which the value of the total assets of such issuer, less all liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount of senior
securities representing indebtedness of such issuer. "Asset coverage" of a class of senior security
of an issuer which is a stock means the ratio which the value of the total assets of such issuer,
less all liabilities and indebtedness not represented by senior securities, bears to the aggregate
amount of senior securities representing indebtedness of such issuer plus the aggregate of the
involuntary liquidation preference of such class of senior security which is a stock. The
involuntary liquidation preference of a class of senior security which is a stock shall be deemed
to mean the amount to which such class of senior security would be entitled on involuntary
liquidation of the issuer in preference to a security junior to it.

(i) Except as provided in subsection (a) of this section, or as otherwise required by law, every
share of stock hereafter issued by a registered investment company shall be a voting stock and
have equal voting rights with every other outstanding voting stock: Provided, That this
subsection shall not apply to shares issued pursuant to the terms of any warrant or subscription
right outstanding prior to the effective date of this Act, or any firm contract entered into before
the effective date of this Act to purchase such securities from such company nor to shares issued
in accordance with any rules, regulations, or orders which the Commission may make permitting
such issue.

Section 18. Dividends. — It shall be unlawful for any registered investment company to pay
any dividend, or to make any distribution in the nature of a dividend payment, wholly or partly
from any source other than —

(1) such company's accumulated undistributed net income, determined in accordance with
good accounting practice and including profits or losses realized upon the sale of securities or
other properties; or

(2) such company's earned surplus so determined for current or preceding fiscal year; unless
such payment is accompanied by a written statement which adequately discloses the source or
sources of such payment. The Commission may prescribe the form of such statement by rules
and regulations or by order in the public interest and for the protection of investors.

It shall likewise be unlawful to advertise such dividends in terms of centavos or pesos per share
without also stating the percentage they bear to the par value per share.

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Section 19. Proxies; voting trusts. — (a) It shall be unlawful for any person except the duly
constituted custodian to solicit or to permit the use of his name to solicit any proxy or consent or
authorization in respect of any security of which a registered investment company is the issuer in
contravention of such rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors: Provided, however, That no
proxies shall be used as a device to control the management of any investment company.

(b) It shall be unlawful for any registered investment company or affiliated person thereof, any
issuer of voting-trust certificate relating to any security of a registered investment company, or
any underwriter of such a certificate to offer for sale, sell, or deliver after sale, in connection with
a public offering, any such voting-trust certificate. The prohibitions of this subsection shall not
apply to a class of voting-trust certificates, if any certificate of such class was made the subject
of a public offering by the issuer or by or through an underwriter prior to the effective date of
this Act.

Sec. 20. Loans by investment companies. — It shall be unlawful for any registered investment
company to lend money or property to any person, directly or indirectly, if —

(a) the investment policies of such registered company, as recited in its registration statement
and reports filed under this Act, do not permit such a loan; or

(b) such person controls or is under common control with such registered company; except that
the provision of this paragraph shall not apply to the extension or renewal of any such loan made
prior to the effective date of this Act or to any loan from a registered company to a company
which owns all of the outstanding securities of such registered company, except directors'
qualifying shares.

Sec. 21. Investment Company prohibited to guarantee obligations. — It shall be unlawful for
any investment company to guarantee any obligation of whatever kind or nature.

Sec. 22. Distribution, redemption, and repurchase of securities. — (a) No registered investment
company shall sell any redeemable security issued by it to any person except either to or through
a principal underwriter for distribution or at a current public offering price described in the
prospectus, and, if such class of security is being currently offered to the public by or through an
underwriter, no principal underwriter of such security and no dealer shall sell any such security
to any person except a dealer, a principal underwriter or the issuer, except at a current public
offering price described in the prospectus: Provided, however, That nothing in this subsection
shall prevent a sale made (i) pursuant to an offer of exchange permitted by section 10 including
any offer made pursuant to clause (1) or (2) of section ten (b); (ii) pursuant to an offer made
solely to all registered holders of the securities, or of a particular class or series of securities
issued by the company proportionate to their holdings or proportionate to any cash distribution
made to them by the company (subject to appropriate qualifications designed solely to avoid
issuance of fractional securities); or (iii) in accordance with rules and regulations of the
Commission made pursuant to section eleven (b); Provided, further, That no investment
Company shall sell any security issued by it to any person who is not a Filipino citizen or any
company or entity sixty per cent of the capital of which is not owned by Filipino citizens, when
the effect of such sale would be a violation or circumvention of Section one, Article XIII of the
Constitution on the limitation of the disposition, exploitation, development or utilization of the
natural resources of the Philippines nor shall said company sell any such security to any person
when the effect of such sale would be a violation or circumvention of Section thirteen,
subparagraph five of the Corporation Law regarding the limitation of ownership by individuals
or corporations to fifteen per cent of the capital of corporations engaged in mining or
agriculture.

(b) The provisions of the Corporation Law (Act Numbered Fourteen hundred and fifty-nine, as
amended) notwithstanding, no registered investment company shall suspend the right of

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redemption or postpone the date of payment or satisfaction upon redemption of any redeemable
security in accordance with its terms as appears in its prospectus, for more than seven days after
the tender of such security to the company or its agent designated for that purpose for redemption
except —

(1) for any period (A) during which the Manila Stock Exchange is closed other than customary
weekend and holiday closings or (B) during which trading on the Manila Stock Exchange is
restricted;

(2) for any period during which an emergency exists as a result of which (A) disposal by the
company of securities owned by it is not reasonably practicable or (B) it is not reasonably
practicable for such company fairly to determine the value of its net assets; or

(3) for such other periods as the Commission may by order permit for the protection of security
holders of the company.

The Commission shall by rules and regulations determine the conditions under which (i) trading
shall be deemed to be restricted and (ii) an emergency shall be deemed to exist within the
meaning of this subsection. Any company which, prior to the effective date of this Act, was
required by provision of its charter, certificate of incorporation, article of association, or trust
indenture, or of a by-law or regulation duly adopted thereunder, to postpone the date of payment
or satisfaction upon redemption of redeemable securities issued by it, shall be exempt from the
requirements of this subsection; but such exemption shall terminate upon the expiration of one
year from the effective date of this Act, or upon the repeal or amendment of such provision, or
upon the sale by such company after the effective date of this Act of any security (other than
short-term paper) of which it is the issuer, whichever first occurs.

(c) No registered open-end company shall restrict the transferability or negotiability of any
security of which it is the issuer except in conformity with the statements with respect thereto
contained in its registration statement nor in contravention of such rules and regulations as the
Commission may prescribe in the interests of the holders of all of the outstanding securities of
such investment company.

(d) No registered open-end company shall issue any of its securities (1) for services; or (2) for
property other than cash or securities (including securities of which such registered company is
the issuer), except as a dividend or distribution to its security holders or in connection with a
reorganization.

(e) The pertinent provisions of section seventeen of the Corporation Law (Act Numbered
Fourteen hundred and fifty-nine, as amended) or any other provision of the said law in conflict
with this section, shall not apply to a registered open-end company.

Sec. 23. Distribution and repurchase of securities; closed-end companies. — (a) No registered
closed-end company shall issue any of its securities (1) for services; or (2) for property other
than cash or securities (including securities of which such registered company is the issuer),
except as a dividend or distribution to its security holders or in connection with a reorganization.

(b) No registered closed-end company shall sell any common stock of which it is the issuer at a
price below the current net asset value of such stock exclusive of any distributing commission or
discount (which net asset value shall be determined as of a time within forty-eight hours,
excluding Sundays and holidays, next preceding the time of such determination), except (1) in
connection with an offering to the holders of one or more classes of its capital stock; (2) with the
consent of a majority of its common stockholders; (3) upon conversion of a convertible security
in accordance with its terms; (4) upon the exercise of any warrant outstanding prior to the
effective date of this Act or issued in accordance with the provisions of section eighteen (d); (5)
under such other circumstances as the Commission may permit by rules and regulations or orders
for the protection of investors.

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(c) No registered closed-end company shall purchase any securities of any class of which it is
the issuer except —

(1) on a securities exchange or such other open market as the Commission may designate by
rules and regulations or orders; Provided, That if such securities are stock, such registered
company shall, within the preceding six months, have informed stockholders of its intention to
purchase stock of such class by letter or report addressed to stockholders of such class; or

(2) pursuant to tenders, after reasonable opportunity to submit tenders given to all holders of
securities of the class to be purchased; or

(3) under such other circumstances as the Commission may permit by rules and regulations or
orders for the protection of investors in order to insure that such purchases are made in a manner
or on a basis which does not unfairly discriminate against any holders of the class of classes of
securities to be purchased.

Sec. 24. Registration of securities under the Securities Act. — (a) In registering under the
Securities Act any security of which it is the issuer, a registered investment company, in lieu of
furnishing a registration statement containing the information and documents specified in section
seven of the said Act, may file a registration statement containing the information and
documents:

(1) such copies of the registration statement filed by such company under this Act and of such
reports filed by such company pursuant to section twenty-seven or such copies of portions of
such registration statement and reports as the Commission shall designate by rules and
regulations; and

(2) such additional information and documents (including a prospectus) as the Commission
shall prescribe by rules and regulations as necessary or appropriate in the public interest or for
the protection of investors.

(b) Where the registered statement which an investment company filed under this Act includes
a description of its securities and the requirements for the registration and/or licensing thereof
under the Securities Act have already been complied with, no separate registration of such
securities under the latter Act shall be necessary.

(c) It shall be unlawful for any registered open-end company or for any underwriter for such a
company, in connection with a public offering of any security of which such company is the
issuer, to transmit any advertisement, pamphlet, circular, form letter, or other sales literature
addressed to or intended for distribution to prospective investors unless three copies of the full
text thereof have been filed with the Commission or are filed with the Commission within ten
days thereafter.

(d) The Commission is authorized to require, by rules and regulations or order, that the
information contained in any prospectus relating to any periodic payment plan certificate
registered under the Securities Act on or after the effective date of this Act be presented in such
form and order of items, and such prospectus contain such summaries of any portion of such
information, as are necessary or appropriate in the public interest or for the protection of
investors.

(e) The exemption provided by section five of the Securities Act shall not apply to any security
of which an investment company is the issuer, except that periodic payment plan certificates
issued by a registered investment company or its agent, sub-agent, or underwriter or by a dealer
pursuant to a contract with said company, or its agent, sub-agent, or underwriter, the proceeds of
the payments under which are invested wholly in securities of which the registered investment
company is the issuer, need not be registered under the Securities Act: Provided, That (1) the

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said securities purchased with the proceeds of the payments under the periodic payment plan
certificates shall be issued in the name of the holder of the said certificates and (2) the said
securities of the issuer investment company are registered under the Securities Act: And
provided, That an exemption from such registration is secured from the Commission.

Sec. 25. Reorganization plans, reports by Commission. — (a) Any person who solicits or
permits the use of his name to solicit any proxy, consent, authorization, power of attorney,
ratification, deposit, or dissent in respect of any plan of reorganization of any registered
investment company shall file with, or mail to, the Commission for, its information, within
twenty-four hours after the commencement of any such solicitation, a copy of such plan and any
deposit agreement relating thereto and of any proxy, consent, authorization, power of attorney,
ratification, instrument of deposit, or instrument of dissent in respect thereto, if or to the extent
that such documents shall not already have been filed with the Commission.

(b) No plan for the reorganization of a registered investment company shall be carried out
without the prior approval of the Commission.

Sec. 26. Periodic payment plan. — (a) It shall be unlawful for any registered investment
company issuing periodic payment plan certificates, or for any underwriter for such company, to
sell any such certificates, if —

(1) the sales load on such certificates exceeds eight per centum of the total payments to be
made thereon;

(2) more than one-half of any of the first twelve monthly payments thereon, or their equivalent,
is deducted for sales load;

(3) the amount of sales load deducted from any one of such first payments exceeds
proportionately the amount deducted from any other such payment, or the amount deducted from
any subsequent payment exceeds proportionately the amount deducted from any other
subsequent payment;

(4) the first payment on such certificate is less than ten pesos or any subsequent payment is less
than ten pesos.

Sec. 27. Reports and financial statements of investment companies and affiliated persons. —
(a) Every registered investment company shall file with the Commission —

(1) such information and documents including financial statements as the Commission may
require, on a semiannual or quarterly basis, to keep reasonably current the information and
documents contained in the registration statement of such company filed under this Act; and

(2) copies of every periodic or interim report or similar communication containing financial
statements and transmitted to any class of such company's security holders, such copies to be
filed not later than ten days after transmission.

Any information or documents contained in a report or other communication to security holders

filed pursuant to paragraph (2) may be incorporated by reference in any report subsequently or
concurrently filed pursuant to paragraph (1).

(b) The Commission shall issue rules and regulations permitting the filing with the
Commission or copies of periodic reports, or of extracts therefrom, filed by any registered
investment company pursuant to subsection (a).

(c) Every registered investment company shall transmit to its stockholders, at least
semiannually, reports containing such of the following information and financial statements or
their equivalent, as of a reasonably current date, as the Commission may prescribe by rules, and

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regulations for the protection of investors, which reports shall not be misleading in any material
respect in the light of the reports required to be filed pursuant to subsection (a):

(1) a balance sheet accompanied by a statement of the aggregate value of investments on the
date of such balance sheet;

(2) a list showing the amounts and values of securities owned on the date of such balance
sheet;

(3) a statement of income, for the period covered by the report, which shall be itemized at least
with respect to each category of income and expense representing more than five per centum of
total income or expense;

(4) a statement of surplus, which shall be itemized at least with respect to each charge or credit
to the surplus account which represents more than five per centum of the total charges or credit
during the report covered by the report;

(5) a statement of the aggregate remuneration paid by the company during the period covered
by the report (A) to all directors and to all members of any advisory board for regular
compensation; (B) to each director and to each member of an advisory board for special
compensation; (C) to all officers; and (D) to each person of whom any officer or director of the
company is an affiliated person; and

(6) a statement of the aggregate peso amounts of purchases and sales of investment securities,
other than Government securities, made during the period covered by the report; Provided, That
if in the judgment of the Commission any item required under this subsection is inapplicable or
inappropriate to any specified type or types of investment company, the Commission may by
rules and regulations permit in lieu thereof the inclusion of such item of a comparable character
as it may deem applicable or appropriate to such type or types of investment company.

(d) Financial statements contained in annual reports required pursuant to subsections (a) and
(c), if required by the rules and regulations of the Commission, shall be accompanied by a
certificate of independent public accountants. The certificate of such independent public
accountants shall be based upon an audit not less in scope or procedures followed than that
which independent public accountants would ordinarily make for the purpose of presenting
comprehensive and dependable financial statements, and shall contain such information as the
Commission may prescribe, by rules and regulations in the public interest or for the protection of
investors, as to the nature and scope of the audit and the findings and opinion of the accountants.
Each such report shall state that such independent public accountants have verified securities
owned, either by actual examination, or by receipt of a certificate from the custodian, as the
Commission may prescribe by rules and regulations.

(e) Every person who is directly or indirectly the beneficial owner of more than ten per centum
of any class of outstanding securities (other than short-term paper) of which a registered closed-
end company is the issuer or who is an officer, director, member of an advisory board,
investment advisor, or affiliated person of an investment adviser of such a company shall in
respect of his transactions in any securities of such company (other than short term paper) be
subject to the same duties and liabilities as those imposed by section twenty-six (a) of the
Securities Act upon certain beneficial owners, directors, and officers in respect of their
transactions in certain equity securities.

Sec. 28. Accounts and records. — (a) Every registered investment company, and every
underwriter, broker, dealer, or investment adviser which is a majority-owned subsidiary of such a
company, shall maintain and preserve for such period or periods as the Commission may
prescribe by rules and regulations, such accounts, books, and other documents as constituting the
record forming the basis for financial statements required to be filed pursuant to section twenty-
seven of this Act, and of the auditor's certificates relating thereto. Every investment adviser not a

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majority-owned subsidiary of, and every depositor of any registered investment company, and
every principal underwriter for any registered investment company other than a closed-end
company, shall maintain and preserve for such period or periods as the Commission shall
prescribe by rules and regulations, such accounts, books, and other documents as are necessary
or appropriate to record such person's transactions with such registered company.

(b) All accounts, books, and other records, required to be maintained and preserved by any
person pursuant to subsection (a), shall be subject at any time and from time to time to such
reasonable periodic, special and other examinations by the Commission, or any member or
representative thereof, as the Commission may prescribe. Any such person shall furnish to the
Commission, within such reasonable time as the Commission may prescribe, copies of or
extracts from such records which may be prepared without undue effort, expense, or delay, as the
Commission may by order require.

(c) The Commission may, in the public interest or for the protection of investors, issue rules
and regulations providing for a reasonable degree of uniformity in the accounting policies and
principles to be followed by registered investment companies in maintaining their accounting
records and in preparing financial statements required pursuant to this Act.

(d) The Commission, upon application made by any registered investment company, may be
order exempt a specific transaction or transactions from the provisions of any rule or regulation
made pursuant to subsection (c), if the Commission finds that such rule or regulation should not
reasonably be applied to such transaction.

Sec. 29. Accountants and auditors. — (a) After one year from the effective date of this Act, it
shall be unlawful for any registered investment company to file with the Commission any
financial statement signed or certified by an independent certified public accountant, unless —

(1) such accountant shall have been selected at a meeting held within thirty days before or after
the beginning of the fiscal year or before the annual meeting of stockholders in that year by a
majority of those members of the board of directors who are not investment advisers of, or
affiliated persons of an investment adviser of, or officer or employees of such, registered
company;

(2) such selection shall have been submitted for ratification or rejection at the next succeeding
annual meeting of stockholders if such meeting be held, except that any vacancy occurring
between annual meetings, due to the death or resignation of the accountant, may be filled by the
board of directors;

(3) the employment of such accountant shall have been conditioned upon the right of the
company by vote of a majority of the outstanding voting securities at any meeting called for the
purpose to terminate such employment forthwith without any penalty; and

(4) such certificate or report of such accountant shall be addressed both to the board of
directors of such registered company and to the security holders thereof:

Provided, That if the selection of an accountant has been rejected pursuant to paragraph (2) or his
employment terminated pursuant to paragraph (3) the vacancy so occurring may be filed by a
vote of a majority of the outstanding voting securities either at the meeting at which the rejection
or termination occurred or if not so filled then at a subsequent meeting which shall be called for
the purpose.

(b) No registered investment company shall file with the Commission any financial statement
in the preparation of which the controller or other principal accounting officer or employee of
such company participated, unless such controller, officer or employee was selected, either by
vote of the holders of such company's voting securities at the last annual meeting of such
security holders, or by the board of directors of such company.

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(c) The Commission is authorized, by rules and regulations or order in the public interest or for
the protection of investors, to require accountants and auditors to keep reports, work sheets, and
other documents and papers relating to registered investment companies for such period or
periods as the Commission may prescribe, and the make the same available for inspection by the
Commission or any member or representative thereof.

Sec. 30. Report of settlement of civil actions. — (a) Every registered investment company
which is a party and every affiliated person of such company who is a party defendant to any
action or claim by a registered investment company or a security holder thereof in a derivative
capacity against an officer, director, investment adviser, trustee, or depositor of such company
for an alleged breach of official duty, which such action or claim is commerced or asserted after
the effective date of this Act, shall transmit; unless already transmitted to the Commission, the
documents specified in subsection (b) if —

(1) such action has been compromised or settled and such settlement or compromise has had
the approval of a court having jurisdiction to approve such settlement or compromise; or

(2) a final judgment has been entered on the merits in such action.

(b) Within thirty days after such settlement or compromise or final judgment, copies of all
pleadings and any written record made in such action, together with a statement of the terms of
settlement or compromise, if such terms be not included in the record, shall be transmitted to the
Commission; and any information contained in any such documents may be used by the
Commission in connection with any report or study which may be made by the Commission of
lawsuits whether of investment companies or companies generally: Provided, That the names of
persons involved shall not be disclosed.

Sec. 31. Destruction and falsification of reports and records. — (a) It shall be unlawful for any
person, except as permitted by rule, regulation, or order of the Commission, wilfully to destroy,
mutilate, or alter any account, book, or other document the preservation of which has been
required pursuant to section twenty-eight (a) or twenty-nine (c).

(b) It shall unlawful for any person to make any untrue statement of a material fact in any
registration statement, application, report, account, record, or other document filed or transmitted
pursuant to this Act or the keeping of which is required pursuant to section twenty-eight (a). It
shall be unlawful for any person so filing, transmitting, or keeping any such document to omit to
state therein any fact necessary in order to prevent the statements made therein, in the light of the
circumstances under which they were made, from being materially misleading. For the purposes
of this subsection, any part of any such document which is signed or certified by an accountant
or auditor in his capacity as such shall be deemed to be made, filed, transmitted, or kept by such
accountant or auditor, as well as by the person filing, transmitting or keeping the complete
document.

Sec. 32. Unlawful representations and names. — (a) It shall be unlawful for any person, in
issuing or selling any security of which a registered investment company is the issuer, to
represent or imply in any manner whatsoever that such security or company has been guaranteed,
sponsored, recommended, or approved by the Republic of the Philippines or any agency or
officer thereof.

(b) It shall be unlawful for any person registered under any section of this Act to represent or
imply in any manner whatsoever that such person has been sponsored recommended, or
approved, or that his abilities or qualifications have in any respect been passed upon by the
Republic of the Philippines or any agency or officer thereof.

(c) No provision of subsection (a) or (b) shall be construed to prohibit a statement that a person
or security is registered under this Act or the Securities Act if such statement is true in fact and if

247 | P a g e
the effect of such registration is not misrepresented.

(d) It shall be unlawful for any registered investment company hereafter to adopt as a part of
the name or title of such company, or of any security of which it is the issuer, any word or words
which the Commission finds and by order declares to be deceptive or misleading. The
Commission is authorized to deny the registration of an investment company using such name or
title.

Sec. 33. Injunctions against gross misconduct and abuse of trust. — The Commission is
authorized to require a registered investment company to remove or suspend a person serving or
acting in one or more of the following capacities who has been found guilty, after proper
investigation and hearing by said Commission, of gross misconduct or gross abuse of trust in
respect of any such investment company for which such person so serves or acts:

(1) as officer, director, member of an advisory board, investment adviser, or depositor; or

(2) as principal underwriter, if such registered company is an open-end company.

The suspension shall be for such period of time as the Commission in its discretion, shall deem
appropriate.

Sec. 34. Theft and estafa. — Whoever steals, unlawfully abstracts, unlawfully and wilfully
converts to his own use or to the use of another, or embezzles any of the moneys, funds
securities, credits, property, or assets of any registered investment company shall be deemed
guilty of a crime, and upon conviction thereof shall be subject to the penalties provided in
section forty of the Securities Act.

Sec. 35. Rules, regulations, and orders; general powers of Commission. — (a) The
Commission shall have authority from time to time to make, issue, amend, and rescind such rules
and regulations and such orders as are necessary or appropriate to the exercise of the powers
conferred upon the Commission elsewhere in this Act, including rules and regulations defining
accounting, technical, and trade terms used in this Act, and prescribing the form or forms in
which information required in registration statements, applicants, and reports to the Commission
shall be set forth. For the purposes of its rules or regulations the Commission may classify,
persons, securities, and other matters within its jurisdiction and prescribe different requirements
for different classes of persons, securities, or matters.

(b) The Commission, by such rules and regulations or order as it deems necessary or
appropriate in the public interest or for the protection of investors, may suspend the operation of
the stocks of companies registered in the stock exchange the quotations for which are greatly in
excess of the book value of the shares of stocks and may authorize the filing of any information
or documents required to be filed with the Commission under this Act by incorporating by
reference any information or documents heretofore or concurrently filed with the Commission
under this Act.

(c) No provision of this Act imposing any liability shall apply to any act done or omitted in
good faith in conformity with any rule, regulation, or order of the Commission, notwithstanding
that such rule, regulation, or order may, after such act or omission, be amended or rescinded or
be determined by judicial or other authority to be invalid for any reason.

Sec. 36. Rules and regulations; procedure for issuance. — The rules and regulations of the
Commission under this Act, and amendments thereof, shall be effective upon publication in the
manner which the Commission shall prescribe, or upon such later date as may be provided in
such rules and regulations.

Sec. 37. Orders; procedure for issuance. — (a) Orders of the Commission under this Act shall
be issued only after appropriate notice and opportunity for hearing. Notice to the parties on a

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proceeding before the Commission shall be given by personal service upon each party or by
registered mail or confirmed telegraphic notice to the party's last known business address. Notice
to interested persons, if any, other than parties may be given in the same manner.

(b) The Commission may provide, by appropriate rules or regulations, that an application
verified under oath may be admissible in evidence in a proceeding before the Commission and
that the record in such a proceeding may consist, in whole or in part, of such application.

(c) In any proceeding before the Commission, the Commission, in accordance with such rules
and regulations as it may prescribe, shall admit as a party any interested Government agency,
and may admit as a party any representative of interest security holders, or any other person
whose participation in the proceeding may be in the public interest or for the protection of
investors.

Sec. 38. Hearings by Commission. — Hearing may be public and may be held before the
Commission or any officer or officers of the Commission designated by it, and appropriate
records thereof shall be kept.

Sec. 39. Enforcement of this Act. — (a) The Commission may make such, investigations as it
deems necessary to determine whether any person has violation or is about to violate any
provision of this Act or of any rule, regulation, or order thereunder, or to determine whether any
action or any court or any proceeding before the Commission shall be instituted under this Act
against a particular person or persons, or with respect to a particular transaction or transactions.
The Commission shall permit any person to file with it a statement in writing, under oath or
otherwise as the Commission shall determine, as to all the facts and circumstances concerning
the matter to be investigated.

(b) For the purpose of any investigation or any other proceeding under this Act, the
Commission, or any officer thereof designated by it, empowered to administer oaths and
affirmations, subpoena witnesses, compel their attendance, take evidence, and require the
production of any books, papers, correspondence, memoranda, contracts, agreements, or other
records which are relevant or material to the inquiry.

(c) In case of contumacy by, or refusal to obey a subpoena issued to, any person, the
Commission may avail itself of its powers under republic Act Numbered Eleven hundred forty-
three or, if the same is ineffective, may invoke thed of any Court of First Instance within the
jurisdiction of which such investigation or proceeding is carried on, or where such person resides
or carries on business, in requiring the attendance and testimony of witnesses and the production
of books, papers, correspondence, memoranda, contracts, agreements, and other records. And
such court may issue an order requiring such person to appear before the Commission or officer
designated by the Commission, there to produce records if so ordered, to give testimony touching
the matter under investigation or in question; any failure to obey such order of the court may be
punished by such court as a contempt thereof. Any person who without just cause shall fail or
refuse to attend and testify or to answer any lawful inquiry or to produce books, papers,
correspondence, memoranda, contracts, agreements, or other records, if in his or its power so to
do, in obedience to the subpoena of the Commission, shall upon convictions, be subject to a fine
of not more than two thousand pesos or to imprisonment for a term of not more than one year, or
both.

(d) No person shall be excused from attending and testifying or from producing books, papers,
correspondence, memoranda, contracts, agreements, or other records and documents before the
Commission, or in obedience to the subpoena of the Commission or any officer designated by it,
or in any cause or proceeding instituted by the Commission, on the ground that the testimony or
evidence, documentary or otherwise, required of him may tend to incriminate him or subject him
to a penalty or forfeiture; but no individual shall be prosecuted or subject to any penalty or
forfeiture for or on account of any transaction, matter, or thing concerning which he is compelled
to testify or produce evidence, documentary or otherwise, after having claimed his privilege

249 | P a g e
against self-incrimination, except that such individual so testifying shall not be exempt from
prosecution and punishment for perjury committed in so testifying.

(e) Whenever it shall appear to the Commission that any person has engaged or is about to
engage in any act or practice constituting a violation of any provision of this Act or of any rule,
regulation, or order thereunder it may, after proper investigation and hearing, order such person
to desist from committing such act or practice and enforce the same in accordance with its
powers under Republic Act Numbered Eleven hundred forty-three. The Commission, in its
discretion, may also bring an action in the Court of First Instance of Manila to enjoin such acts or
practices and to enforce compliance with this Act or any rule, regulation, or order thereunder.
Upon a showing that such person has engaged or is about to engage in any such act or practice, a
permanent or temporary injunction or decree or restraining order shall be granted without bond:
Provided, however, That no such certificate of authority shall be issued by the Securities and
Exchange Commissioner unless the applicant for agent, sub-agent or investment solicitor shall
have passed a written examination given for the purpose by the Securities and Exchange
Commission or the said applicant possesses a college degree. In any proceeding under this
subsection to enforce compliance with section seven, the court as a court of equity may, to the
extent it deems necessary or appropriate, take exclusive jurisdiction and possession of the
investment company or companies involved and the books, records, and assets thereof, wherever
located; and the court shall have jurisdiction to appoint a trustee, who with the approval of the
court shall have power to dispose of any or all of such assets, subject to such terms and
conditions as the court may prescribe. The Commission may transmit such evidence as may be
available concerning any violation of the provisions of this Act or of any rule, regulation, or
order thereunder to the Secretary of Justice, who, in his discretion, may institute the appropriate
criminal proceedings under this Act.

Sec. 40. Agents and Investment Solicitors. — No investment company doing business within
the Philippines or agent thereof shall pay any commission or other compensation to any person
for services in obtaining investments in an investment company unless such person, after passing
mental and moral test, holds a certificate of authority issued by the Securities and Exchange
Commissioner to act as an agent or investment solicitor of such company as hereafter provided.
No person shall act as an agent, sub-agent, or investment solicitor in the solicitation or
procurement of investment or application for investment in an investment company or receive
for services for obtaining such investments any commission or other compensation from any
investment company doing business in the Philippines or from the agent or underwriter thereof,
without first getting a certificate of authority so to act from the Securities and Exchange
Commissioner, which must be renewed annually in the first day of January and not later than the
fifteenth day of March. Such certificate shall be issued by the Securities and Exchange
Commissioner only upon the written applicant of the person desiring such authority, such
application being approved and countersigned by the investment company or its agent or
underwriter, and shall be upon a form approved by the Securities and Exchange Commissioner.
The Securities and Exchange Commissioner shall have the right to refuse to issue or renew and
to revoke any such certificate in his discretion. No such certificate shall be valid, however, in any
event after the fifteenth day of March of the year following the issuance of said certificate. A
renewal certificate may be issued upon application of the company, its agent or underwriter
represented by such agent or investment solicitor.

Any person who for compensation solicits or obtains investments on behalf of any investment
company or its agent or underwriter or transmits for a person other than himself an investment or
application for investment in an investment company or offers or assumes to act as an agent or
investment solicitor of an investment company, shall be an investment agent or investment
solicitor within the intent of this section and shall thereby become liable to all the duties,
requirements, liabilities, and penalties to which such a person is subject.

Any person or company violating the provisions of this section shall upon conviction, be subject
to a fine of five hundred pesos. Upon the conviction of any person acting as agent, sub-agent,
investment solicitor, or broker for the commission of any offense connected with the business of

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an investment company, the Securities and Exchange Commissioner shall immediately revoke
the certificate of authority issued to him and no such certificates shall thereafter be issued to such
convicted person.

The Securities and Exchange Commissioner shall issue such rules and regulations as he may
deem necessary for the enforcement and implementation of the provisions of this section.

Sec. 41. Court review of orders. — Any person or party aggrieved by an order issued by the
Commission under this Act may obtain a review of such order in accordance with the provisions
of section thirty-five of the Securities Act, as amended.

Sec. 42. Disclosure of information filed with Commission; copies. — (a) The information
contained in any registration statement, application, report, or other document filed with the
Commission pursuant to any provision of this Act or of any rule or regulation thereunder as
distinguished from any information or document transmitted to the Commission) shall be made
available to the public, unless and except insofar as the Commission, by rules and regulations
upon its own motion, or by order upon application, finds that public disclosure is neither
necessary nor appropriate in the public interest or for the protection of investors. It shall be
unlawful for any officer or employee of the Commission to use for personal benefit, or to
disclose to any person other than an official or employee of the Philippine Government, for
official use, or for any such official or employee to use for personal benefit, any information
contained in any document so filed or transmitted, if such information is not available to the
public.

(b) Photostatic or other copies of information contained in documents filed with the
Commission under this Act and made available to the public shall be furnished any person at
such reasonable charge and under such reasonable limitation as the Commission shall prescribe.

Sec. 43. Reports by Commission. — The Commission shall submit from time to time, a report
to the Congress covering the work of the Commission under this Act, with such information,
data, and recommendations for further legislation in connection therewith as it may find
advisable.

Sec. 44. Fees; additional personnel; Commissioner's Compensation. — (a) The Commission is
authorized to charge and collect the following fees:

(1) For registering an investment company — One hundred pesos. If the securities of the
company are likewise registered, the schedule of fees prescribed in the Securities Act shall
instead be applied.

(2) For every examination of the financial condition of an investment company — One
hundred pesos. The Commission is authorized to conduct such examination as often as may be
necessary in the public interest or for the protection of investors.

(3) For each exemption — Thirty pesos.

(4) For every determination granting a right or privilege — thirty pesos.

(5) For each certificate of authority issued to an agent or investment solicitor — Ten pesos.

(6) For each instrument, document, or paper not required to be filed but which an interested
party desires to be attached to the records of an investment company — Five pesos.

Every right, privilege, exemption or registration under this Act shall be sought from the
Commission in the form of a petition for which the corresponding fee herein authorized to be
collected shall be paid before any action is taken thereon. The grant or denial of the petition shall
be in the form an order issued by the Commission. No denial, withdrawal or abandonment of the

251 | P a g e
petition shall be a ground for the refund of the fee paid therefor.

(b) For the effective implementation and enforcement of this Act, the following additional
positions in the Securities and Exchange Commission are hereby authorized to be created by the
Commission:

One Legal Officer at six thousand five hundred fifty-two pesos per annum.

Three Legal Officers at five thousand three hundred seventy-six pesos each per annum.

Five Examiners at five thousand three hundred seventy-six pesos each per annum.

One Stenographer at three thousand one hundred eight pesos per annum; and

Two Clerks at two thousand four hundred fifty-four pesos each per annum.

Any person entering the government service who may be appointed to any of said positions shall
start at the initial rate of the salary corresponding to his position, as provided under the pertinent
laws, rules and regulations.

The Commission shall take charge of the enforcement and implementation of the provisions of
this Act. The Securities and Exchange Commissioner shall receive the compensation and enjoy
all the privileges of Judges of the Court of First Instance.

Sec. 45. Appropriation: assessment. — To carry out the purposes of this Act, the Commission
is hereby authorized to spend its income under this Act. Should the Commission's total income
under this Act in any year be less than its total expenditures as certified by the Securities and
Exchange Commissioner, the different shall be pro-rated among all investment companies in
business, and the Commission is authorized to assess and collect from each of them its
corresponding share which shall not exceed one-half of one per centum of its net asset value.

Sec. 46. Validity of contracts. — (a) Any condition, stipulation, or provision binding any
person to waive compliance with any provision of this Act or with any rule, regulation or order
thereunder shall be void.

(b) Every contract made in violation of any provision of this Act or of any rule, regulation, or
order thereunder, and every contract heretofore or hereafter made, the performance of which
involves the violation of, or the continuance of any relationship or practice in violation of, any
provision of this Act or any rule, regulation, or order thereunder, shall be void (1) as regards the
rights of any person who, in violation of any such provision, rule, regulation, or order, shall have
made or engaged in the performance of any such contract, and (2) as regards the rights of any
person who, not being a party to such contract, shall have acquired any right thereunder with
actual knowledge of the facts by reason of which the making or performance of such contract
was in violation of any such provision, rule, regulation, or order.

Sec. 47. Procuring violation of Act; obstructing compliance. — (a) It shall be unlawful for any
person, directly or indirectly, to cause to be done any act or thing through or by means of any
other person which it would be unlawful for such person to do under the provisions of this Act or
any rule, regulation, or order thereunder.

(b) It shall be unlawful for any person without just cause to hinder, delay, or obstruct the
making, filing, or keeping of any information, document, report, record, or account required to
be made, filed, or kept under any provision of this Act or any rule, regulation, or order
thereunder.

Sec. 48. Penalties. — Unless otherwise specifically provided elsewhere in this Act, any person
who violates any provision of this Act or of any rule, regulation, or order thereunder, or any

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person who in any registration statement, application, report, account, record, or other document
filed or transmitted pursuant to this Act or the keeping of which is required pursuant to section
twenty-eight (a) of this Act makes any untrue statement of fact or omits to state any fact
necessary in order to prevent the statements made therein from being materially misleading in
the light of the circumstances under which they were made, shall upon conviction be fined not
more than fifty thousand pesos or imprisoned for not more than five years or both.

Sec. 49. Effect on existing law and repealing clause. — The rights and remedies provided by
this Act shall be in addition to any and all other rights and remedies that may now exist, but no
person permitted to maintain a suit for damages under the provisions of this Act shall recover,
through satisfaction of judgment in one or more actions, a total amount in excess of his actual
damages on account of the act complained of.

Paragraph (r) of section one hundred ninety-four of Commonwealth Act Numbered Four hundred
sixty-six, as amended by section three of Republic Act Numbered Forty-two, is further amended
to read as follows:

"Stockbroker" includes all persons whose business it is, for themselves as such brokers or for
other brokers, to negotiate purchases or sales of stock, bonds, exchange, bullion, coined money,
bank notes, promissory notes, or other securities; but does not include underwriters for one or
more investment companies as defined in the Investment Company Act; "dealer in securities"
includes all persons who for their own account are engaged in the sale of stock, bonds, exchange,
bullion, coined money, bank notes, promissory notes or other securities."

All laws, Acts, parts of Acts, Rules of Court, executive orders, and administrative regulations
which are inconsistent with this Act are hereby repealed.

Sec. 50. Separability of provisions. — If any provision of this Act shall be held invalid, the
remainder of the Act shall not be affected thereby.

Sec. 51. Effective date. — This Act shall take effect upon its approval.

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 SECOND DIVISION

[G.R. No. 128703. October 18, 2000]

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

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

DECISION

BELLOSILLO, J.:

C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for review seek
the reversal of the 24 July 1996 Decision of the Court of Appeals dismissing their appeal for lack
of merit and affirming in toto the decision of the trial court holding them liable to Asia Pacific
Finance Corporation in the amount of P87,637.50 at 14% interest per annum in addition
to attorney's fees and costs of suit, as well as its 21 March 1997 Resolution denying
reconsideration thereof.[2]

On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for short) filed a
complaint for a sum of money with prayer for a writ of replevin against Teodoro Baas, C. G.
Dizon Construction and Cenen Dizon. Sometime in August 1980 Teodoro Baas executed
a Promissory Note in favor of C. G. Dizon Construction whereby for value received he promised
to pay to the order of C. G. Dizon Construction the sum of P390,000.00 in installments of
"P32,500.00 every 25th day of the month starting from September 25, 1980 up to August 25,
1981."[3]

Later, C. G. Dizon Construction endorsed with recourse the Promissory Note to ASIA
PACIFIC, and to secure payment thereof, C. G. Dizon Construction, through its corporate
officers, Cenen Dizon, President, and Juliette B. Dizon, Vice President and Treasurer, executed
a Deed of Chattel Mortgage covering three (3) heavy equipment units of Caterpillar Bulldozer
Crawler Tractors with Model Nos. D8-14A, D8-2U and D8H in favor of ASIA
PACIFIC.[4] Moreover, Cenen Dizon executed on 25 August 1980 a Continuing
Undertaking wherein he bound himself to pay the obligation jointly and severally with C. G.
Dizon Construction.[5]

In compliance with the provisions of the Promissory Note, C. G. Dizon Construction made
the following installment payments to ASIA PACIFIC: P32,500.00 on 25 September
1980, P32,500.00 on 27 October 1980 and P65,000.00 on 27 February 1981, or a total
of P130,000.00. Thereafter, however, C. G. Dizon Construction defaulted in the payment of the
remaining installments, prompting ASIA PACIFIC to send a Statement of Account to Cenen
Dizon for the unpaid balance of P267,737.50 inclusive of interests and charges, and P66,909.38
representing attorney's fees. As the demand was unheeded, ASIA PACIFIC sued Teodoro Baas,
C. G. Dizon Construction and Cenen Dizon.

While defendants (herein petitioners) admitted the genuineness and due execution of
the Promissory Note, the Deed of Chattel Mortgage and the Continuing Undertaking, they
nevertheless maintained that these documents were never intended by the parties to be legal,
valid and binding but a mere subterfuge to conceal the loan of P390,000.00 with usurious
interests.

Defendants claimed that since ASIA PACIFIC could not directly engage in banking
business, it proposed to them a scheme wherein plaintiff ASIA PACIFIC could extend a loan to
them without violating banking laws: first, Cenen Dizon would secure a promissory note from
Teodoro Baas with a face value of P390,000.00 payable in installments; second, ASIA PACIFIC
would then make it appear that the promissory note was sold to it by Cenen Dizon with the 14%
usurious interest on the loan or P54,000.00 discounted and collected in advance by ASIA

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PACIFIC; and, lastly, Cenen Dizon would provide sufficient collateral to answer for the loan in
case of default in payment and execute a continuing guaranty to assure continuous and prompt
payment of the loan. Defendants also alleged that out of the loan of P390,000.00 defendants
actually received only P329,185.00 after ASIA PACIFIC deducted the discounted interest,
service handling charges, insurance premium, registration and notarial fees.

Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he would be delayed
in meeting his monthly amortization on account of business reverses and promised to pay instead
in February 1981. Cenen Dizon made good his promise and tendered payment to ASIA PACIFIC
in an amount equivalent to two (2) monthly amortizations. But ASIA PACIFIC attempted to
impose a 3% interest for every month of delay, which he flatly refused to pay for being usurious.

Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen Dizon to surrender
to it the ownership of the two (2) bulldozer crawler tractors and, in turn, the latter would treat the
former's account as closed and the loan fully paid. Cenen Dizon supposedly agreed and accepted
the offer. Defendants averred that the value of the bulldozer crawler tractors was more than
adequate to cover their obligation to ASIA PACIFIC.

Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against defendant C. G.
Dizon Construction for the surrender of the bulldozer crawler tractors subject of the Deed of
Chattel Mortgage. Of the three (3) bulldozer crawler tractors, only two (2) were actually turned
over by defendants - D8-14A and D8-2U - which units were subsequently foreclosed by ASIA
PACIFIC to satisfy the obligation. D8-14A was sold for P120,000.00 and D8-2U for P60,000.00
both to ASIA PACIFIC as the highest bidder.

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

On 25 September 1992 the Regional Trial Court ruled in favor of ASIA PACIFIC holding
the defendants jointly and severally liable for the unpaid balance of the obligation under
the Promissory Note in the amount of P87,637.50 at 14% interest per annum, and attorney's fees
equivalent to 25% of the monetary award.[7]

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

Defendant-appellants' contention that the instruments were executed merely as a subterfuge to

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

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

The pivotal issues raised are: (a) Whether the disputed transaction between petitioners and
ASIA PACIFIC violated banking laws, hence, null and void; and (b) Whether the surrender of

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the bulldozer crawler tractors to respondent resulted in the extinguishment of petitioners'
obligation.

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

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

Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in
the lending of funds obtained from the public through the receipt of deposits of any kind, and all
entities regularly conducting such operations shall be considered as banking institutions and shall
be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws
(underscoring supplied).

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

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

FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G. Dizon
Construction, Inc. the sum of THREE HUNDRED NINETY THOUSAND ONLY
(P390,000.00), Philippine Currency in the following manner:

P32,500.00 due every 25th of the month starting from September 25, 1980 up to August 25,
1981.

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

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

Makati, Metro Manila, August 25, 1980.

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(Sgd) Teodoro Baas

ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH RECOURSE, C.G.

DIZON CONSTRUCTION, INC.

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

President VP/Treasurer

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

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

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

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

Petitioners contend that the parties already had a verbal understanding wherein ASIA
PACIFIC actually agreed to consider petitioners' account closed and the principal obligation
fully paid in exchange for the ownership of the two (2) bulldozer crawler tractors.

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

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

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

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

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 A: He was the former legal counsel of APCOR. They were handling cases. In fact, I talked
with Atty. Carag, we have a verbal agreement if I surrender the equipment it might
suffice to pay off the debt so I did just that (underscoring ours).[13]

In other words, there was no binding and perfected contract between petitioners and
respondent regarding the settlement of the obligation, but only a conditional one, a mere
conjecture in fact, depending on whether the value of the tractors to be surrendered would equal
the balance of the loan plus interests. And since the bulldozer crawler tractors were sold at the
foreclosure sale for only P180,000.00,[14]which was not enough to cover the unpaid balance
of P267,637.50, petitioners are still liable for the deficiency.

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

With regard to the computation of petitioners' liability, the records show that petitioners
actually paid to respondent a total sum of P130,000.00 in addition to the P180,000.00 proceeds
realized from the sale of the bulldozer crawler tractors at public auction. Deducting these
amounts from the principal obligation of P390,000.00 leaves a balance of P80,000.00, to which
must be added P7,637.50 accrued interests and charges as of 20 March 1981, or a total unpaid
balance of P87,637.50 for which petitioners are jointly and severally liable. Furthermore, the
unpaid balance should earn 14% interest per annum as stipulated in the Promissory Note,
computed from 20 March 1981 until fully paid.

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

Nevertheless, it appears that petitioners' failure to fully comply with their part of the bargain
was not motivated by ill will or malice, but due to financial distress occasioned by legitimate
business reverses.Petitioners in fact paid a total of P130,000.00 in three (3) installments, and
even went to the extent of voluntarily turning over to respondent their heavy equipment
consisting of two (2) bulldozer crawler tractors, all in a bona fide effort to settle their
indebtedness in full. Article 1229 of the New Civil Code specifically empowers the judge to
equitably reduce the civil penalty when the principal obligation has
been partly or irregularly complied with. Upon the foregoing premise, we hold that the reduction
of the attorney's fees from 25% to 15% of the unpaid principal plus interests is in order.

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

WHEREFORE, no reversible error having been committed by the Court of Appeals, its
assailed Decision of 24 July 1996 and its Resolution of 21 March 1997 are
AFFIRMED. Accordingly, petitioners C.G. Construction Inc. and Cenen Dizon are ordered
jointly and severally to pay respondent Asia Pacific Finance Corporation, substituted by
International Corporate Bank (now known as Union Bank of the Philippines), P87,637.50
representing the unpaid balance on the Promissory Note, with interest at fourteen percent (14%)
per annum computed from 20 March 1981 until fully paid, and fifteen percent (15%) of the
principal obligation and interests due by way of attorney's fees. Costs against petitioners.

SO ORDERED.

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