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G.R. No.

32576

November 6, 1930

FULTRON IRON WORKS CO., plaintiff-appellee, vs. CHINA BANKING CORPORATION, ET AL., defendants. CHINA BANKING CORPORATION, appellant. Feria and La O, and Gibbs and McDonough for appellant. Claro M. Recto and DeWitt, Perkins and Brady for appellee.

STREET, J.: This action was instituted on June 23, 1926, in the Court of First Instance of the City of Manila by the Fulton Iron Works Co., a Delaware corporation having its principal place of business in St. Louis, Missouri, and duly authorized under the laws of the Philippine Islands to engage in business in this country. The defendants named in the complaint are the China Banking Corporation, a domestic corporation having its principal place of business in the City of Manila, and one S. C. Schwarzkopf. In the petitory part of the complaint judgment is sought against the two defendants jointly and severally for the sum of P131,197.10, with interest. As a ground of action against the two defendants it is asserted in the complaint that the amount claimed by the plaintiff is part of a larger sum of money (P176, 197.10) belonging to the plaintiff which had been deposited in the defendant bank by Schwarzkopf during the year 1922, and which had been misappropriated and embezzled by him, with the full knowledge and consent of the defendant bank. The idea underlying the action, as against the bank, is that it has been guilty of what may perhaps be styled a civil complicity in the misappropriation of the money for which recovery is sought. Upon hearing the cause, upon the separate answers of the two defendants, the trial court absolved Schwarckopf from the complaint, for the reason that in two prior criminal proceedings he had been convicted of the offense of estafa, based upon his misappropriated of the same money, and in said proceedings the obligation to indemnify the plaintiff had been imposed upon him in the amount of P146,197.40. His Honor, however, gave judgment in favor of the plaintiff, the Fulton Iron Works Co., to recover of the defendant bank the sum of P127,200.36, with lawful interest from June 23, 1926, the date of the filing of the complaint, and with costs. From this judgment the defendant bank appealed. It appears that in the month of March, 1921, the plaintiff the Fulton Iron Works Co., of St. Louis, Missouri, sold to the Binalbagan Estate, Inc., a Philippine corporation, machinery for a sugar mill, for which the purchaser executed three notes amounting to about $80,000. The first of these notes became due October 1, 1921, and the other two on April 1, 1922. Neither of the three notes was paid at maturity, owing to the fact that, before the notes fell due, the Binalbagan Estate, Inc. suspended payments and passed into the hands of the Philippine National Bank, its principal creditor, for administration.

The consequently delay in the payments of the notes caused the plaintiff to employ a firm of lawyers in Manila, of which S. C. Schwarzkopf was then a member, to represent the plaintiff in an effort to obtain security for the indebtedness, with a view to its later collection. At the time this retainer was effect, Schwarzkopf was in St. Louis, on a visit to the United States, and in order that the plaintiff might comply with the laws of the Philippine Islands in the matter of obtaining a license to transact business here, the plaintiff executed a formal power of attorney authorizing the members of Schwarzkopf's firm jointly and severally to accept service in actions and to do other things necessary to enable the plaintiff to secure the contemplated license. It is noteworthy that the authority of Schwarzkopf's firm to represent the plaintiff in the collection of the claims above mentioned did not proceed from this power, but had its origin in the employment of said firm as attorneys in the matter. Schwarzkopf returned to Manila in the early part of November, 1921, and the law firm to which he pertained was dissolved on November 15, 1921. Under the dissolution agreement the matter of handling this collection devolved upon Schwarzkopf, and he alone was thereafter concerned in the matter. On December 13, 1921, Schwarzkopf opened a personal account, as a depositor, in the China Banking Corporation by making a deposit, on that date, of the sum of P578. This account was at all times modest in sized, and on January 1, 1922, the credit balance therein was P543.35. This account has little or no significance in the case, and it became defunct by September 1, 1922. It may be observed, however, that a few of the deposits in this account appear to have been taken from account No. 2 to which reference will presently be made. In the early part of the year 1922, the financial condition of the Binalbagan Estate, Inc. began to improve; and on January 13, 1922, D. M. Semple, manager of the Philippine Sugar Centrals Agency, a department of the Philippine National Bank, drew check No. 574 for the sum of P10,000, payable to the order of Sydney C. Schwarzkopf, and delivered the same to him in part payment of the indebtedness owing to the plaintiff from the Binalbagan Estate, Inc. Upon receiving this check Schwarzkopf signed a receipt as "attorney-in-fact of Fulton Iron Works Co." The character of attorney-in-fact, thus assumed by Schwarzkopf, was of course a mere fiction, as the power of attorney which he really possessed was limited to other matters. The point, however, is really of no moment. The check for P10,000 above mentioned was duly indorsed by Schwarzkopf and deposited by him in a new account with the defendant bank, known as "No. 2 account." This money was thereafter withdrawn from the bank from time to time by Schwarzkopf, upon his personal checks, and used for his individual purposes. In the appealed judgment the defendant is held liable for this money, a mere oversight resulting apparently, from a confusion of this matter with the more important issues involved in other parts of the case. There is no proof that the defendant bank had any knowledge, or was chargeable with notice, that the P10,000 thus deposited and drawn out belonged to any person other than Schwarzkopf himself; and, as depositor, Schwarzkopf of course had absolute control of the account. A depositor is presumed to be the owner of funds standing in his name in a bank deposit; and where a bank is not chargeable with notice that the money deposited in such account is the property of some other person than the depositor, the bank is justified in paying out the money to the depositor or upon his order, and

cannot be liable to any other person as the true owner. It is hardly necessary to cite authority upon a proposition so manifestly in accord with the usage and the common sense of the commercial community. The proposition stated is implicit in all the cases concerned with the question of the liability of a bank to its depositors and other persons claiming an interest in the deposits. Proceeding to the next collection effected by Schwarzkopf upon account of the plaintiff's claim against the Binalbagan Estate, Inc., we find that on April 11, 1922, Schwarkopf received, from the manager of the Philippine Sugar Centrals Agency, a check for the sum of P61,237.50. This check was made payable on its face to "S. C. Schwarkopf Attorney-in-Fact, Fulton Iron Works Co., or order." After indorsing this check in the form in which it was drawn, Schwarzkopf opened a new account with the defendant bank, entitled "S. C. Schwarzkopf, Attorney- in-Fact, Fulton Iron Works Co.," and deposited said check therein. This account remained undisputed on the books of the bank for some two months, during which period it had an accretion of about P130. Meanwhile, the No. 2 account which had been established back in January, became depleted, but the manager of the bank, in view, no doubt, of the funds to Schwarzkopf's credit in the third account conceded to him a credit in No. 2 account of P25,000. By June 15, 1922, said account became overdrawn to the extend of P22, 144.39, and it was obvious that the limit of the conceded credit would soon be reached. The manager of the bank then intervened and requested Schwarzkopf to settle the overdraft. To accomplish this Schwarkopf merely transferred, by check, the money to his credit in his special account as plaintiff's attorney-in-fact to the No. 2 account. The amount thus transferred was P61,360.81, and the effect of the transfer was to absorb the overdraft and place a credit balance of nearly P40,000 in No. 2 account. Schwarzkopf then purchased a draft on New York in the amount of $15,000, and after some delay transmitted the same by mail to the plaintiff. This draft cost Schwarzkopf the sum of P30,375.02, and it was the only remittance ever made by him to his client. The principal question that arises upon the facts above stated is, whether the defendant bank is liable to the plaintiff for the sum of P22, 144.39 which was thus applied to the payment of Schwarzkopf's personal indebtedness resulting from his overdraft in the No. 2 account. Upon this point the first thing to be noted is that the very form in which the third account was carried on the books of the defendant bank was sufficient to charge the bank with notice of the fact that the money deposited in said account belonged to the Fulton Iron Works Co. and not to Schwarzkopf. It is commonly said, and truly said in a legal sense, that money has no earmarks. But bank accounts and commercial paper can have earmarks, and these earmarks consist of the word or words which infallibly convey to the mind notice that the money or credit represented by the account with which they are associated or the instrument upon which they are written rightfully belongs to some other person than the one having control thereof. A bank cannot permit, much less require, a depositor who is in control of a trust fund to apply any part of the same to his individual indebtedness to the bank. The decisions to this effect are uniformly accordant and it is believed no creditable authority to the contrary can be produced from any source. The expression "trust fund," in this connection, is not a technical term, and is applied in a loose sense to indicate the situation where a bank account or negotiable securities of any sort are under the control of a person other than the true owner. The following decisions are instructive

as illustrating different phases of the rule above stated, the selection having been made with a view to the fact that the cases cited are for the most part accessible in one or more series of annotated reports; Central Nat. Bank of Baltimore vs. Conn. Mut. Life Ins. Co., 104 U. S., 54; 26 Law. ed., 693; Union Stock Yards Nat. Bank vs. Moore, 25 C. C. A., 150; 79 Fed., 705 Sayre vs. Weil, 94 Ala., 466; 15 L. R. A., 544; Am. Trust & Banking Co. vs. Boone, 102 Ga., 202; 40 L. R. A., 250; 66 Am. St. Rep., 167; First Denton Nat. Bank vs. Kenney, 116 Md., 24; Ann. Cas. 19193B, 1337; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518 (and note); Emerado Farmers' El. Co. vs. Farmers' Bank, 20 N. D., 270; 29 L. R. A. (N. S.), 567; Baird vs. Lorenz (N. D.), 61 L. R. A., 1385, 1389 (note); Walters Nat. Bank vs. Bantock, 41 Okla.,, 153; L. R. A. 1915C, 531; Interstate Nat. Bank vs. Claxton 97 Tex., 569; 65 L. R. A., 820; 104 Am. St. Rep., 885; Boyle vs. Northwestern Nat. Bank of Superior, 125 Wis., 498; 1 L. R. A. (N. S.) 1110 Am. St. Rep., 851; United States Fidelity & Gy. Co. vs. Adoue, 104 Tex., 379; 37 L. R. A. (N. S.), 409; Ann. Cas. 1914B, 667; Underwood Ltd. vs. Bank of Liverpool (1924), 1 K. B., 755. Upon the facts before us it is evident that when credit to the extent of P25,000 was conceded to Schwarzkopf in his personal account No. 2, the eye of the banker was fixed upon the large amount then upon deposit to Schwarkopf's credit in his account as attorney-in-fact; but of course, if a bank cannot apply the money in such an account, or even permit it to be applied, to the personal indebtedness of the fiduciary depositor, it is not permissible for the bank to extend personal credit to such depositor upon the faith of the trust account. From any point that the matter be viewed, the liability of the bank is clear to the extent of P22144.39 this being the amount derived from Schwarkopf's account as attorney-in-fact which was absorbed by his overdraft in account No. 2 when the transfer of the balance in the former account to the latter account was effected, in the manner already stated. We next proceed to consider the disposition made of the proceeds of the third check collected by Schwarzkopf upon account of plaintiff's claim against the Binalbagan Estate, Inc., from the Philippine National Bank. The amount of this collection was P104, 959.60, and it was paid, on October 11, 1922, by a cashier's check on the Philippine National Bank, payable "to the order of S. C. Schwarzkopf, attorney-in-fact, Fulton Iron Works Co." Upon receiving this check, Schwarzkopf indorsed it in proper form, by writing thereon the words "S. C. Schwarzkopf, attorney-in-fact, Fulton Iron Works Co.," to which he added another indorsement consisting of his own name alone, and deposited the check in his personal account No. 2 with the defendant bank. The check thus delivered to the bank was collected by it from the Philippine National Bank in ordinary course. Thereafter, in the course of the next few months, Schwarzkopf withdrew, upon checks written by himself, the entire amount of the money to his credit in account No. 2, thus misappropriating the money in said account to his own use. It will be noted that the money thus squandered comprised not only the proceeds of the check last mentioned but the residue, consisting of a few thousand pesos, which had been left in No. 2 account after the overdraft had been paid and Schwarzkopf had remitted the draft of $15,000 to his principal in the United States. We consider that, from a legal point of view, the situation with respect to this money is precisely the same as that presented with respect to the money which came into the account later by deposit of the check for P104,959.60 above mentioned, because as to both funds, liability is sought to be fixed upon the bank by reason of its knowledge of the source from which said funds were derived; and in this connection it should be

noted that there is no proof showing that the defendant bank had any knowledge of the misappropriation of this money by Schwarzkopf other than such as might have been derived from an inspection of its own books and the checks by which the money was paid in and paid out. The feature of the case now under consideration brings us, it must be admitted, into debatable territory, but a discriminating analysis of the legal principles involved leads to the conclusion that the defendant cannot be held liable for money paid out by it in ordinary course on checks, in regular form, drawn by Schwarzkopf on the No. 2 account. The specialized function of bank is to serve as a place of deposit for money, to keep it safely while on deposit, and to pay it out, upon demand to the person who effected the deposit or upon his order. A bank is not a guardian of trust funds deposited with it in the sense that it must see to their proper application nor is it its business to pry into the uses to which moneys on deposit in its vault are being put; and so long as it serves its function and pays the money out in good faith to the person who deposited it, or upon his order, without knowledge or notice that it is in fact assisting in the misappropriation of the fund, the bank will be protected. As is well said by the author of the monographic article on Banks and Banking in Ruling Case Law, It would seriously interfere with commercial transactions to charge banks with the duty of supervising the administration of trust funds, when, in due course of business, they receive checks and drafts in proper form drawn upon such funds in their custody. The law imposes no such duty upon them (3 R. C. L., 549; see also cases cited in 7 C. J., 644, 645, note 25). There are, it is true, decisions from a few courts, deservedly held in high esteem, to the effect that a bank makes itself an effective accomplice in the conversion of a trust fund when, with notice of the character of such fund, it permits the person in control thereof to deposit it in his personal account. But the decided weight of judicial authority is to the contrary; and it is generally held that the mere act of a bank in entering a trust fund to the personal account of the fiduciary, knowing it to be a trust fund, will not make the bank liable in case of the subsequent misappropriation of the money by the fiduciary. (United States Fidelity & Gy. Co. vs. First Nat. Bank, 18 Cal. App., 437: Goodwin vs. Am. Nat. Bank, 48 Conn., 550; Batchelder vs. Cen. Nat. Bank of Boston, 188 Mass., 25; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518; Gate City Bldg. & Loan Assoc. vs. National Bank of Commerce, 126 Mo., 82; 27 L. R. A., 401; 47 Am. St. Rep., 630; Bischoff vs. Yorkville Bank, 218 N. Y., 106; Havana C. R. Co. vs. Knickerbocker Trust Co., 198 N. Y., 422; L. R. A. 1915B, 720). The bank has the right to presume that the fiduciary will apply a trust fund to its proper purpose, and at any rate the bank is not required to send a courier with the money to see that it reaches a proper destination. In the case before us an intimate study of the checks which came into the defendant bank against account No. 2 over a series of months, would have led a discerning person to the conclusion that the plaintiff's money was being squandered, but such an inference could not legitimately have been drawn from the first few checks which were drawn upon the fund, and it would be hard to say just where the bank, supposing its suspicions to have been aroused, should have intervened. No such a duty is imposed. Of course, when the bank became a party to the application of part of the plaintiff's money to the satisfaction of the overdraft in No. 2 account, it was directly chargeable with knowledge of the misappropriation of the fund to the extent of the

overdraft and that fact, as we have already said, made the bank liable. But this rule cannot be extented to subsequent acts of malversation and misappropriation committed by the fiduciary against the real owner of the fund. Furthermore, it is undeniable that a bank may incur liability by assisting the fiduciary to accomplish a misappropriation, although the bank does not actually profit by the misappropriation. A decision illustrating this aspect of the law is found in Washborn vs. Linscott State Bank (87 Kan., 698), where a bank, to help the treasurer of a lodge to conceal his defalcations, permitted him to overdraw, and when his account were to be audited, issued to him a deposit certificate for the shortage, payable to the lodge. After the audit was made, the certificate was returned and cancelled, and the shortage reappeared. The court held that a loan had been made to the treasurer personally, and that the bank became liable to the lodge upon cancelling the deposit certificate.lawphil.net Our discussion of this phase of the case should not be concluded without reference to Bischoff vs. Yorville Bank (218 N. Y., 106), which undoubtedly affords some support to the contention of the appellee that the defendant bank is liable not only for the proceeds of the last check collected by Schwarzkopf, but for all of the money which was transferred to account No. 2 from the account of Schawarzkopf as attorney-in-fact. This decision comes, it must be admitted, from a court of high repute. But we are unable to accept the court's conclusions, as applicable to the facts before us. In the case mentioned it appeared that an executor, named Poggenburg, having money on deposit in a certain bank to his credit as executor, gradually withdrew about $13,000 from said deposit by checks drawn by him, over a long period of time, in the character of executor. These checks were indorsed by Poggenburg in his own name simply and deposited in the defendant Yorkville Bank to his personal credit. At the inception of this series of transactions Poggenburg was indebted by note to the defendant and payments were made on this note and other notes thereafter executed in favor of the bank, out of the funds transferred as above stated. The court held, upon the facts before, it that the defendant knew at all times that the credits created by the various deposits through checks of the executor were assets pertaining to the estate of which Poggenburg was executor; and from this fact, in connection with the misapplication of part of the money to the payment of the personal notes of Poggenburg, the court held that the defendant bank was liable to the extent of the whole amount misappropriated by means of the personal account. It will be noted that this decision was made in third instance, after a trial in first instance possibly before a jury and after the judgment against the bank been affirmed upon appeal in the appellate division of the Supreme Court. The prior history of the case was therefore such as to entitle the findings of fact of the two prior courts of great weight, and these courts had found in effect that the defendant bank had acted in bad faith. If not explicable upon this ground, the decision in the Court of Appeals must be considered a unique variant from accepted doctrine in this that while repudiating the idea, favored by a few courts that the act of depositing a trust fund in the personal accounts of the fiduciary is an effective act of conversion on the part both of bank and fiduciary, the court nevertheless held that the act of the bank in permitting the application of part of the money to the personal indebtedness of the fiduciary afforded a sufficient basis for finding the bank to have been an accomplice in the subsequent misapplication, by the fiduciary, of other portions of the deposit. We can accede to the first of these propositions but not to the

second. In this connection we refer to the Annotation appended to Allen vs. Puritan Trust Co. (L. R. A. 1915C, 518, 529), where the pertinent cases are analyzed and the conclusion stated 1 that, by the weight of authority, the placing of a trust fund in the personal account of the fiduciary does not make the bank liable for a subsequent misappropriation of the money by the former. For the rest it is enough to say that there is no proof in this case that the defendant bank had any guilty connection in fact with the dishonest acts of Schwarzkopf, in squandering the contents of the No. 2 account after he had made his remittance of $15,000 to his principal. In conclusion we ought to add that the legal principles involved in this decision are not directly deducible from the provisions of the Negotiable Instruments Law, which is in force in this jurisdiction (Act No. 2031); and there is no provision of the Civil Code or Code of Commerce directly bearing upon the point under consideration. The liability of the defendant bank, to the extent recognized in this decision proceeds upon the fundamental idea that a creditor cannot apply to the obligation of his debtor money which as he knows belongs to another, without the consent of the latter, a principle implicit in all law. We note that the attorneys for the appellant bank have suggested in their brief that, supposing the bank to have been an accomplice of Schwarzkopf in the misappropriation of the plaintiff's money, its subsidiary liability was extinguished as a result of the criminal proceedings against Schwarzkopf. This suggestion is clearly untenable, with respect to the liability which is fixed upon the bank by this decision. From what has been said it follows that the appealed judgment must be modified and the same is hereby modified by reducing the amount of the judgment against the bank to the sum of P22,144.39 with lawful interest from June 23, 1926 until date of payment, 2without pronouncement as to costs. So ordered. CARMEN LL. INTENGAN, ROSARIO LL. NERI, and RITA P. BRAWNER, petitioners, vs. COURT OF APPEALS, DEPARTMENT OF JUSTICE, AZIZ RAJKOTWALA, WILLIAM FERGUSON, JOVEN REYES, and VIC LIM, respondents. DECISION DE LEON, JR., J.: Before us is a petition for review on certiorari, seeking the reversal of the Decisioni[1] dated July 8, 1996 of the former Fifteenth Divisionii[2] of the Court of Appeals in CA-G.R. SP No. 37577 as well as its Resolutioniii[3] dated April 16, 1997 denying petitioners motion for reconsideration. The appellate court, in its Decision, sustained a resolution of the Department of Justice ordering the withdrawal of informations for violation of Republic Act No. 1405 against private respondents. The facts are: On September 21, 1993, Citibank filed a complaint for violation of section 31,iv[4] in relation to section 144v[5] of the Corporation Code against two (2) of its officers, Dante L. Santos and

Marilou Genuino. Attached to the complaint was an affidavitvi[6] executed by private respondent Vic Lim, a vice-president of Citibank. Pertinent portions of his affidavit are quoted hereunder: 2.1 Sometime this year, the higher management of Citibank, N.A. assigned me to assist in the investigation of certain anomalous/highly irregular activities of the Treasurer of the Global Consumer Group of the bank, namely, Dante L. Santos and the Asst. Vice President in the office of Mr. Dante L. Santos, namely Ms. Marilou (also called Malou) Genuino. Ms. Marilou Genuino apart from being an Assistant Vice President in the office of Mr. Dante L. Santos also performed the duties of an Account Officer. An Account Officer in the office of Mr. Dante L. Santos personally attends to clients of the bank in the effort to persuade clients to place and keep their monies in the products of Citibank, NA., such as peso and dollar deposits, mortgage backed securities and money placements, among others. xxx xxx xxx

4.1 The investigation in which I was asked to participate was undertaken because the bank had found records/evidence showing that Mr. Dante L. Santos and Ms. Malou Genuino, contrary to their disclosures and the aforementioned bank policy, appeared to have been actively engaged in business endeavors that were in conflict with the business of the bank. It was found that with the use of two (2) companies in which they have personal financial interest, namely Torrance Development Corporation and Global Pacific Corporation, they managed or caused existing bank clients/depositors to divert their money from Citibank, N.A., such as those placed in peso and dollar deposits and money placements, to products offered by other companies that were commanding higher rate of yields. This was done by first transferring bank clients monies to Torrance and Global which in turn placed the monies of the bank clients in securities, shares of stock and other certificates of third parties. It also appeared that out of these transactions, Mr. Dante L. Santos and Ms. Marilou Genuino derived substantial financial gains. 5.1 In the course of the investigation, I was able to determine that the bank clients which Mr. Santos and Ms. Genuino helped/caused to divert their deposits/money placements with Citibank, NA. to Torrance and Global (their family corporations) for subsequent investment in securities, shares of stocks and debt papers in other companies were as follows: xxx b) xxx d) xxx i) Rita Brawner Rosario Neri Carmen Intengan

All the above persons/parties have long standing accounts with Citibank, N.A. in savings/dollar deposits and/or in trust accounts and/or money placements. As evidence, Lim annexed bank records purporting to establish the deception practiced by Santos and Genuino. Some of the documents pertained to the dollar deposits of petitioners Carmen Ll. Intengan, Rosario Ll. Neri, and Rita P. Brawner, as follows: a) Annex A-6vii[7] - an Application for Money Transfer in the amount of US $140,000.00, executed by Intengan in favor of Citibank $ S/A No. 24367796, to be debited from her Account No. 22543341; b) Annex A-7viii[8] - a Money Transfer Slip in the amount of US $45,996.30, executed by Brawner in favor of Citibank $ S/A No. 24367796, to be debited from her Account No. 22543236; and c) Annex A-9ix[9] - an Application for Money Transfer in the amount of US $100,000.00, executed by Neri in favor of Citibank $ S/A No. 24367796, to be debited from her Account No. 24501018. In turn, private respondent Joven Reyes, vice-president/business manager of the Global Consumer Banking Group of Citibank, admits to having authorized Lim to state the names of the clients involved and to attach the pertinent bank records, including those of petitioners.x[10] He states that private respondents Aziz Rajkotwala and William Ferguson, Citibank, N.A. Global Consumer Banking Country Business Manager and Country Corporate Officer, respectively, had no hand in the disclosure, and that he did so upon the advice of counsel. In his memorandum, the Solicitor General described the scheme as having been conducted in this manner: First step: Santos and/or Genuino would tell the bank client that they knew of financial products of other companies that were yielding higher rates of interests in which the bank client can place his money. Acting on this information, the bank client would then authorize the transfer of his funds from his Citibank account to the Citibank account of either Torrance or Global. The transfer of the Citibank clients deposits was done through the accomplishment of either an Application For Managers Checks or a Term Investment Application in favor of Global or Torrance that was prepared/filed by Genuino herself. Upon approval of the Application for Managers Checks or Term Investment Application, the funds of the bank client covered thereof were then deposited in the Citibank accounts of Torrance and/or Global. Second step: Once the said fund transfers had been effected, Global and/or Torrance would then issue its/ their checks drawn against its/their Citibank accounts in favor of the other companies

whose financial products, such as securities, shares of stocks and other certificates, were offering higher yields. Third step: On maturity date(s) of the placements made by Torrance and/or Global in the other companies, using the monies of the Citibank client, the other companies would then. return the placements to Global and/or Torrance with the corresponding interests earned. Fourth step: Upon receipt by Global and/or Torrance of the remittances from the other companies, Global and/or Torrance would then issue its/their own checks drawn against their Citibank accounts in favor of Santos and Genuino. The amounts covered by the checks represent the shares of Santos and Genuino in the margins Global and/or Torrance had realized out of the placements [using the diverted monies of the Citibank clients] made with the other companies. Fifth step: At the same time, Global and/or Torrance would also issue its/their check(s) drawn against its/their Citibank accounts in favor of the bank client. The check(s) cover the principal amount (or parts thereof) which the Citibank client had previously transferred, with the help of Santos and/or Genuino, from his Citibank account to the Citibank account(s) of Global and/or Torrance for placement in the other companies, plus the interests or earnings his placements in other companies had made less the spreads made by Global, Torrance, Santos and Genuino. The complaints which were docketed as I.S. Nos. 93-9969, 93-10058 and 94-1215 were subsequently amended to include a charge of estafa under Article 315, paragraph 1(b)xi[11] of the Revised Penal Code. As an incident to the foregoing, petitioners filed respective motions for the exclusion and physical withdrawal of their bank records that were attached to Lims affidavit. In due time, Lim and Reyes filed their respective counter-affidavits.xii[12] In separate Memoranda dated March 8, 1994 and March 15, 1994 2nd Assistant Provincial Prosecutor Hermino T. Ubana, Sr. recommended the dismissal of petitioners complaints. The recommendation was overruled by Provincial Prosecutor Mauro M. Castro who, in a Resolution dated August 18, 1994,xiii[13] directed the filing of informations against private respondents for alleged violation of Republic Act No. 1405, otherwise known as the Bank Secrecy Law. Private respondents counsel then filed an appeal before the Department of Justice (DOJ). On November 17, 1994, then DOJ Secretary Franklin M. Drilon issued a Resolutionxiv[14] ordering, inter alia, the withdrawal of the aforesaid informations against private respondents. Petitioners motion for reconsiderationxv[15] was denied by DOJ Acting Secretary Demetrio G. Demetria in a Resolution dated March 6, 1995.xvi[16] Initially, petitioners sought the reversal of the DOJ resolutions via a petition for certiorari and mandamus filed with this Court, docketed as G.R. No. 119999-120001. However, the former

First Division of this Court, in a Resolution dated June 5, 1995,xvii[17] referred the matter to the Court of the Appeals, on the basis of the latter tribunals concurrent jurisdiction to issue the extraordinary writs therein prayed for. The petition was docketed as CA-G.R. SP No. 37577 in the Court of Appeals. On July 8, 1996, the Court of Appeals rendered judgment dismissing the petition in CA-G.R. SP No. 37577 and declared therein, as follows: Clearly, the disclosure of petitioners deposits was necessary to establish the allegation that Santos and Genuino had violated Section 31 of the Corporation Code in acquiring any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence. To substantiate the alleged scheme of Santos and Genuino, private respondents had to present the records of the monies which were manipulated by the two officers which included the bank records of herein petitioners. Although petitioners were not the parties involved in IS. No. 93-8469, their accounts were relevant to the complete prosecution of the case against Santos and Genuino and the respondent DOJ properly ruled that the disclosure of the same falls under the last exception of R.A. No. 1405. That ruling is consistent with the principle laid down in the case of Mellon Bank, N.A. vs. Magsino (190 SCRA 633) where the Supreme Court allowed the testimonies on the bank deposits of someone not a party to the case as it found that said bank deposits were material or relevant to the allegations in the complaint. Significantly, therefore, as long as the bank deposits are material to the case, although not necessarily the direct subject matter thereof, a disclosure of the same is proper and falls within the scope of the exceptions provided for by R.A. No. 1405. xxx xxx xxx

Moreover, the language of the law itself is clear and cannot be subject to different interpretations. A reading of the provision itself would readily reveal that the exception or in cases where the money deposited or invested is the subject matter of the litigation is not qualified by the phrase upon order of competent Court which refers only to cases of bribery or dereliction of duty of public officials. Petitioners motion for reconsideration was similarly denied in a Resolution dated April 16, 1997. Appeal was made in due time to this Court. The instant petition was actually denied by the former Third Division of this Court in a Resolutionxviii[18] dated July 16, 1997, on the ground that petitioners had failed to show that a reversible error had been committed. On motion, however, the petition was reinstatedxix[19] and eventually given due course.xx[20] In assailing the appellate courts findings, petitioners assert that the disclosure of their bank records was unwarranted and illegal for the following reasons: I.

IN BLATANT VIOLATION OF R.A. NO. 1405, PRIVATE RESPONDENTS ILLEGALLY MADE DISCLOSURES OF PETITIONERS CONFIDENTIAL BANK DEPOSITS FOR THEIR SELFISH ENDS IN PROSECUTING THEIR COMPLAINT IN IS. NO. 93-8469 THAT DID NOT INVOLVE PETITIONERS. II. PRIVATE RESPONDENTS DISCLOSURES DO NOT FALL UNDER THE FOURTH EXCEPTION OF R.A. NO. 1405 (i.e., in cases where the money deposited or invested is the subject matter of the litigation), NOR UNDER ANY OTHER EXCEPTION: (1) PETITIONERS DEPOSITS ARE NOT INVOLVED IN ANY LITIGATION BETWEEN PETITIONERS AND RESPONDENTS. THERE IS NO LITIGATION BETWEEN THE PARTIES, MUCH LESS ONE INVOLVING PETITIONERS DEPOSITS AS THE SUBJECT MATTER THEREOF. (2) EVEN ASSUMING ARGUENDO THAT THERE IS A LITIGATION INVOLVING PETITIONERS DEPOSITS AS THE SUBJECT MATTER THEREOF, PRIVATE RESPONDENTS DISCLOSURES OF PETITIONERS DEPOSITS ARE NEVERTHELESS ILLEGAL FOR WANT OF THE REQUISITE COURT ORDER, IN VIOLATION OF R.A. NO. 1405. III. THEREFORE, PETITIONERS ARE ENTITLED TO PROSECUTE PRIVATE RESPONDENTS FOR VIOLATIONS OF R.A. NO. 1405 FOR HAVING ILLEGALLY DISCLOSED PETITIONERS CONFIDENTIAL BANK DEPOSITS AND RECORDS IN IS. NO. 93-8469. Apart from the reversal of the decision and resolution of the appellate court as well as the resolutions of the Department of Justice, petitioners pray that the latter agency be directed to issue a resolution ordering the Provincial Prosecutor of Rizal to file the corresponding informations for violation of Republic Act No. 1405 against private respondents. The petition is not meritorious. Actually, this case should have been studied more carefully by all concerned. The finest legal minds in the country - from the parties respective counsel, the Provincial Prosecutor, the Department of Justice, the Solicitor General, and the Court of Appeals - all appear to have overlooked a single fact which dictates the outcome of the entire controversy. A circumspect review of the record shows us the reason. The accounts in question are U.S. dollar deposits;

consequently, the applicable law is not Republic Act No. 1405 but Republic Act (RA) No. 6426, known as the Foreign Currency Deposit Act of the Philippines, section 8 of which provides: Sec. 8. Secrecy of Foreign Currency Deposits.- All foreign currency deposits authorized under this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall such foreign currency deposits be examined, inquired or looked into by any person, government official bureau or office whether judicial or administrative or legislative or any other entity whether public or private: Provided, however, that said foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever.xxi[21] (italics supplied) Thus, under R.A. No. 6426 there is only a single exception to the secrecy of foreign currency deposits, that is, disclosure is allowed only upon the written permission of the depositor. Incidentally, the acts of private respondents complained of happened before the enactment on September 29, 2001 of R.A. No. 9160 otherwise known as the Anti-Money Laundering Act of 2001. A case for violation of Republic Act No. 6426 should have been the proper case brought against private respondents. Private respondents Lim and Reyes admitted that they had disclosed details of petitioners dollar deposits without the latters written permission. It does not matter if that such disclosure was necessary to establish Citibanks case against Dante L. Santos and Marilou Genuino. Lims act of disclosing details of petitioners bank records regarding their foreign currency deposits, with the authority of Reyes, would appear to belong to that species of criminal acts punishable by special laws, called malum prohibitum. In this regard, it has been held that: While it is true that, as a rule and on principles of abstract justice, men are not and should not be held criminally responsible for acts committed by them without guilty knowledge and criminal or at least evil intent xxx, the courts have always recognized the power of the legislature, on grounds of public policy and compelled by necessity, the great master of things, to forbid in a limited class of cases the doing of certain acts, and to make their commission criminal without regard to the intent of the doer. xxx In such cases no judicial authority has the power to require, in the enforcement of the law, such knowledge or motive to be shown. As was said in the case of State vs. McBrayer xxx: It is a mistaken notion that positive, willful intent, as distinguished from a mere intent, to violate the criminal law, is an essential ingredient in every criminal offense, and that where there is the absence of such intent there is no offense; this is especially so as to statutory offenses. When the statute plainly forbids an act to be done, and it is done by some person, the law implies conclusively the guilty intent, although the offender was honestly mistaken as to the meaning of the law he violates. When the language is plain and positive, and the offense is not made to depend upon the positive, willful intent and purpose, nothing is left to interpretation.xxii[22]

Ordinarily, the dismissal of the instant petition would have been without prejudice to the filing of the proper charges against private respondents. The matter would have ended here were it not for the intervention of time, specifically the lapse thereof. So as not to unduly prolong the settlement of the case, we are constrained to rule on a material issue even though it was not raised by the parties. We refer to the issue of prescription. Republic Act No. 6426 being a special law, the provisions of Act No. 3326,xxiii[23] as amended by Act No. 3763, are applicable: SECTION 1. Violations penalized by special acts shall, unless otherwise provided in such acts, prescribe in accordance with the following rules: (a) after a year for offences punished only by a fine or by imprisonment for not more than one month, or both: (b) after four years for those punished by imprisonment for more than one month, but less than two years; (c) after eight years for those punished by imprisonment for two years or more, but less than six years; and (d) after twelve years for any other offence punished by imprisonment for six years or more, except the crime of treason, which shall prescribe after twenty years: Provided, however, That all offences against any law or part of law administered by the Bureau of Internal Revenue shall prescribe after five years. Violations penalized by municipal ordinances shall prescribe after two months. Violations of the regulations or conditions of certificates of public convenience issued by the Public Service Commission shall prescribe after two months. SEC. 2. Prescription shall begin to run from the day of the commission of the violation of the law, and if the same be not known at the time, from the discovery thereof and the institution of judicial proceedings for its investigation and punishment. The prescription shall be interrupted when proceedings are instituted against the guilty person, and shall begin to run again if the proceedings are dismissed for reasons not constituting jeopardy. A violation of Republic Act No. 6426 shall subject the offender to imprisonment of not less than one year nor more than five years, or by a fine of not less than five thousand pesos nor more than twenty-five thousand pesos, or both.xxiv[24] Applying Act No. 3326, the offense prescribes in eight years.xxv[25] Per available records, private respondents may no longer be haled before the courts for violation of Republic Act No. 6426. Private respondent Vic Lim made the disclosure in September of 1993 in his affidavit submitted before the Provincial Fiscal.xxvi[26] In her complaint-affidavit,xxvii[27] Intengan stated that she learned of the revelation of the details of her foreign currency bank account on October 14, 1993. On the other hand, Neri asserts that she discovered the disclosure on October 24, 1993.xxviii[28] As to Brawner, the material date is January 5, 1994.xxix[29] Based on any of these dates, prescription has set in.xxx[30] The filing of the complaint or information in the case at bar for alleged violation of Republic Act No. 1405 did not have the effect of tolling the prescriptive period. For it is the filing of the complaint or information corresponding to the correct offense which produces that effect.xxxi[31]

It may well be argued that the foregoing disquisition would leave petitioners with no remedy in law. We point out, however, that the confidentiality of foreign currency deposits mandated by Republic Act No. 6426, as amended by Presidential Decree No. 1246, came into effect as far back as 1977. Hence, ignorance thereof cannot be pretended. On one hand, the existence of laws is a matter of mandatory judicial notice;xxxii[32] on the other, ignorantia legis non excusat.xxxiii[33] Even during the pendency of this appeal, nothing prevented the petitioners from filing a complaint charging the correct offense against private respondents. This was not done, as everyone involved was content to submit the case on the basis of an alleged violation of Republic Act No. 1405 (Bank Secrecy Law), however, incorrectly invoked.xxxiv[34] WHEREFORE, the petition is hereby DENIED. No pronouncement as to costs.

G.R. No. 97218 May 17, 1993 PROVIDENT SAVINGS BANK, petitioner, vs. COURT OF APPEALS, Former SPECIAL EIGHTH DIVISION and WILSON CHUA, respondents. Gonzales, Batiller, Bilog & Associates for petitioner. Resty R. Villanueva for private respondent.

MELO, J.: The error, if error it be, of respondent Court of Appeals which petitioner seeks to rectify via the petitioner for certiorari before us refers to respondent court's major conclusion arrived at in CA-G.R. CV No. 21312 (Javellana (P), Kalalo, Dayrit, JJ) barring petitioner from foreclosing the subject realty on account of prescription. Petitioner begs to differ, insisting that the period during which it was placed under receivership by the Central Bank is akin to a caso fortuito and should not thus be reckoned against it. Both petitioner and private respondent accepted the synthesized factual backdrop formulated by respondent court, to wit: This an appeal by both plaintiff and defendant from the decision of the Regional Trial Court of the National Capital Judicial 29 September 1988, in Civil Case No. 977-NW, which directed plaintiff-appellant to pay defendant-appellant the personal obligation of the spouses Guarin to defendant-appellant in the amount of P62,500.00, together with the interest, penalties, and bank charges due thereon, and

ordering defendant-appellant thereafter to: (1) release the real estate mortgage executed by the spouses Lorenzo K. Guarin and Liwayway J. Guarin in favor of defendant bank on 16 February 1967; (2) return to surrender to plaintiff-appellant, as successor-in-interest of the spouses Guarin, the latter's Owner's Duplicate of Title No. 177014; (3) pay plaintiff-appellant P20,000.00 as and for attorney's fees; and, (4) pay the costs of suit. The established fact are: On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J. Guarin (Guarins) obtained a loan from defendant-appellant in the amount of P62,500.00 payable on or before 20 June 1967. As security for the loan, they executed a real estate mortgage in favor of defendant-appellant over a parcel of land covered by TCT No. 177014. (Exhs. C and D). In September, 1972, defendant-appellant was placed under receivership by the Central Bank of the Philippines until 27 July 1981 when the receivership was set aside by the Honorable Supreme Court. On 11 December 1984, Lorenzo K. Guarin, in reply to the letter of latter's counsel informing that the mortgaged property would be sold at public auction on 27 December 1984, assured he and his wife had every intention of paying their obligation and requesting for a recomputation of their account and a postponement of the foreclosure sale. (Exh. 1). On 10 February 1986, the Guarins received a Statement of Account from defendant-appellant showing two outstanding accounts as of 15 February 1986. One was account of Lorenzo K. Guarin in the amount of P591,088.80, and the other was the account of L.K. Guarin Manufacturing Co., Inc. in the amount of P6,287,380.27 (Attachment to Exh. 2) On 26 February 1986, Lorenzo K. Guarin wrote defendant-appellant stating that he was ready and willing to pay his obligation in the total amount of P591,088.80 as recomputed by defendant-appellant whenever defendant-appellant was already to receive the payment and inquiring as to when his mortgaged title would be available for him to pick up. (Exh. 2) Defendant-appellant replied on 27 February 1986 that Lorenzo K. Guarin may make payment at its office in Makati, Metro Manila, but that the mortgaged title could not be released to him even after the payment of the obligation of P591,088.80 as it also served as security for the indebtedness of L.Y. Guarin Manufacturing Co., Inc., to defendant-appellant which was undertaken by Lorenzo K. Guarin in his personal capacity and as president of the corporation. (Exh. 3) On 20 May 1986, plaintiff-appellant wrote defendant-appellant saying that the mortgaged property of the Guarins had been offered to him as payment of the judgment he obtained against the Guarins in Civil Case No. Q-47465 entitled, "Wilson Chua vs. Lorenzo K. Guarin", and requesting for defendantappellant's conformity to the assignment and expressing his willingness to pay for the obligation of Mr. Guarin so that the title could be released by defendant-appellant. (Exh. 4)

On 10 July 1986, the Guarins and plaintiff-appellant executed a Deed of Absolute Sale With Assumption of Mortgaged whereby the Guarins sold the mortgaged property to Guarins sold the appellant for the sum of P250,000.00 and plaintiff-appellant undertook to assume the mortgaged obligation of the Guarins with defendant-appellant which as of 15 February 1985 amounted to P591,088.80.(Exh. B). On 5 August 1986, plaintiff-appellant informed defendant-appellant that as a result of the judgment in Civil Case No. Q-47645, the mortgaged property had been sold to him by the Guarins, as evidenced by the Deed of Sale enclosed for guidance and information of defendant-appellant. He requested that he be allowed to pay the loan secured by the mortgaged, otherwise, he would be constrained to bring the matter to court. (Exh. 5) In reply, defendant-appellant, on 11 August 1986, informed plaintiff-appellant that his request could be granted if he would settle the obligation of L.K. Guarin Manufacturing Co., Inc., as well and defendant-appellant's letter to Mr. Guarin dated 27 February 1986. (Exh. 6) On 3 August 1987, counsel for plaintiff-appellant addressed a letter to defendant-appellant informing that plaintiff-appellant had purchased the mortgaged property from the Guarin's and requesting that the owner's copy of TCT No. 177014 in the possession of defendant-appellant be released to him so that he can register the sale and have the title to the property transferred in his name. He likewise, informed defendant-appellant that it had lost whatever right or action had against the Guarins because of prescription. (Exh. E) Defendant-appellant replied on 10 August 1987 stating the reasons why they could not comply with plaintiff-appellant's demands. (Exh. F) On 21 August 1986, plaintiff-appellant filed a complaint against defendant-appellant to compel the latter to: (1) release the real estate mortgaged executed by the Guarins in favor of defendant-appellant on 16 February 1967; (2) return or surrender to plaintiff-appellant, as successor-in-interest of the Guarins, the latter's owner's duplicate of TCT No. 177014; and (3) pay plaintiff-appellant P2,750,000.00 as actual and/or consequential damages, moral damages as may be proved during the trial, exemplary damages as may be reasonably assessed by the court, and attorney's fees of P50,00.00. Defendantappellant answered the complaint thereof and setting up special and affirmative defenses. After trial, judgment was rendered as stated in the opening paragraph hereof from which both parties appealed . . . . (pp. 35-37, Rollo.) Concerning the challenge posed by Provident Saving Bank against the personality of Wilson Chua to initiate the action to compel the release of the real estate mortgage and the delivery of the owner's duplicate copy of the certificate of title, respondent court noted that Wilson Chua can be considered a real-property-in-interest because he is the successor-in-interest of the Guarins who is naturally entitled to the realty as against the so-called right of Provident Savings Bank, as mortgagee, to foreclose the mortgage which had become stale through sheer lapse of time. The matter of novation in the form of substitution of the debtor without corresponding acquiesence of the mortgagee was viewed by respondent court to be legally inconsequential due to the demeanor of the mortgagee-bank in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin, posterior to the change of obligors, which act was construed as equivalent to consent.

To the question of whether petitioner can still foreclose the subject realty, respondent court gave a negative response on account of the absence of proof to indicate that the bank was precluded from collecting indebtedness while it was under receivership from September, 1972 until July 20,1981. Thus, there was no legal interruption of the pres-criptive period to speak of, said respondent court, which intervened between June 20, 1967, the date the mortgage matured, and June 20, 1977 the last day within which petitioner could have foreclosed the mortgage. Respondent court did not also heed the suggestion of the petitioner bank to interpret Wilson Chua's assumption of the mortgage on July 10, 1986 as tantamount to an explicit acknowledgement that the obligation was outstanding and had not yet prescribed. As a result of these observations, respondent court reversed the decision of the trial court insofar as it ordered Wilson Chua to pay the sum of P591,088.80 to the bank and affirmed the other dispositions made the court of origin (p. 42, Rollo). Following the unfavorable judgment, the bank filed a motion for reconsideration and a motion for new trial premised on newly discovered evidence relative to a statement of account unearthed by the bank's liaison officer from the loose folders on October 18, 1990 which it believed to be of legal significance to the case. But respondent court was unperturbed, observing that the vital piece of document could have been located in the course of trial had the slightest degree of prudence been exercised, considering that the statement of account sprouted the same day the liaison officer was advised to take an inventory of the records ( p. 45, Rollo). Hence, the petitioner at bar. Consistent with its theory premised on fuerza major, petitioner insists that it can not be blamed for not lifting a finger, so speak, during the period when it was enjoined by the Central Bank on September 15, 1972 from transacting business until this Court affirmed on July 27,1981 the decision of the Court of Appeals annulling the proscription against petitioner in Central Bank vs. Court of Appeals (106 SCRA 143 [1981]. We are not unaware of the rule laid down in Teal Motor Co. vs. Court of First Instance of Manila (51 Phil. 549 [1928]; Martin, Commentaries and Jurisprudence on the Philippine Commercial Laws, 1986 Revised ed., p.125) that the appointment of a receiver does not dissolve the corporation nor does it interfere with the exercise of its corporate rights. But this principles is, of course, applicable to a situation where there is no restraint imposed on the corporation, unlike in the case at bar where petitioner Provident Savings Bank was specifically forbidden and immobilized from doing business in the Philippines on September 15, 1972 through Monetary Board Resolution No. 1766 until 1981 when the decision in Central Bank vs. Court of Appeals (supra, at p. 150) was rendered. The question which immediately crops up is whether a foreclose proceeding falls within the purview of the phrase "doing business". In Mentholatum Co., Inc., et al. vs. Mangaliman, et al. (72 Phil. 524 [1941]; Moreno, Philippine Law Dictionary, Second ed., 1972, p. 186), the term was construed by Justice Laurel to refer to:

. . . a continuity of commercial dealings and arrangements, and contemplates to that extent, the exercise of some of the words or the normally incident to, and in progressive prosecution of, the purpose ands object of its organizations. (p. 528; emphasis supplied.) Withal, we believe that a foreclose is deemed embraced by the phrase "doing business" as a preparatory measure to acquiring or holding property for petitioner as a saving bank under Section 34 of the General Banking Act. Like any other banking institution, petitioner is vested with the usual attributes and powers of a corporation under Section 36 of the Corporation Code (Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 475). The prerogative of a bank to foreclose is implicit from and is even necessary to enforce collection of secured debts under Section 36(11) and 45 of the Corporation Code, in conjunction with Section 29 of the General Banking Act (6 Fletcher, 206; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1990 ed., p. 325). When a bank is prohibited to do business by the Central Bank and a receiver is appointed for such bank, that bank would not be able to do new business, i.e., to grant new loans or to accept new deposits. However, the receiver of the bank is obliged to collect debts owing to the bank, which debts form part of the assets of the bank. The receiver must assemble the assets and pay the obligation of the bank under receivership, and take steps to prevent dissipation of such assets. Accordingly, the the receiver of the bank is obliged to collect pre-existing debts due to the bank, and in connection therewith, to foreclose mortgages securing debts. This is not to ignore The Philippine Trust Co. vs. HSBC (67 Phil. 204 [1939], for in that case, the Court simply rejected the objections of certain creditors to the report of a receiver, that is, objections that the receiver did not report the collection made before the beginning of his receivership. It would follow that the bank is bound by the acts, or failure to act, of the receiver. At the same time, the receiver is liable to the bank for culpable or negligent failure to collect the assets of such bank and to safeguard said assets. Having arrived at the conclusion that the foreclosure is part of bank's business activity which could not have been pursued by the receiver then because of the circumstances discussed in the Central Bank case, we are thus convinced that the prescriptive period was legally interrupted by fuerza mayor in 1972 on account on the prohibition imposed by the Monetary Board against petitioner from transacting business, until the directive of the board was nullified in 1981. Indeed, the period during which the obligee was prevented by a caso fortuito from enforcing his right is not reckoned against him (Article 1154, New Civil Code). When prescription is interrupted, all the benefits acquired so far from the possession cease and when prescription starts anew, it will be entirely a new one. This concept should not be equated with suspension where the past period is included in the computation being added to the period after prescription is resumed (4 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., pp. 18-19). Consequently, when the closure of was set aside in 1981, the period of ten years within which to foreclose under Article 1142 of the New Civil Code began to run again and, therefore, the action filed on August 21, 1986 to compel petitioner to release the mortgage carried with it the mistaken notion that petitioner's own suit foreclosure had prescribed. What exacerbates the situation is the letter of private respondent requesting petitioner on August 6, 1986 that private respondent be allowed to pay the loan secured by the mortgage as the result of the Deed of

Sale executed by the Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo). In point of law, this written communication is synonymous to an express acknowledgment of the obligation and had the effect of interrupting the prescription for the second time (Article 1155, New Civil Code; Osmea vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino, supra at p. 50). And this piece of document necessarily estops private respondent from setting up prescription vis-a-vis his unfounded supposition that acknowledgment of the debt is of no moment because the right of the petitioner to foreclose had long prescribed in 1977 (p. 13, Petition; p. 7, Comment; pp. 19 and 58, Rollo). Contrary to respondent court's prescription of the existence of novation, the evidence at hand does not buttress a finding along this line from the mere fact that petitioner supposedly did not question the substitution when the bank reacted to private respondent's offer to pay the loan (p. 39, Rollo). What seems to have escaped respondent court's attention was the condition imposed by the petitioner that it will grant private respondent's request if the latter will also shoulder the obligation incurred by Lorenzo Guarin in his capacity as president of the corporation (p.37, Rollo). The consent of the petitioner to the substitution, as creditor, was thus erroneously appreciated. With the conclusions reached, we need not discuss the other issues raised in the petition. WHEREFORE, the petition is hereby GRANTED. The decision dated August 31, 1990, including the resolution dated February 6, 1991 of respondent court are hereby set aside and another one entered dismissing Wilson Chua's complaint. No special pronouncement is made to costs.

G.R. No. 169617

April 4, 2007

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners, vs. SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by ZOILO LANDRITO, as their Attorneyin-Fact, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals,1 dated 31 August 2005, reversing the Decision rendered by the trial court on 13 December 1995. The Court of Appeals, in its assailed Decision, fixed the interest rate of the loan between the parties at 12% per annum, and ordered the Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan.

Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and Primitiva Espiritu, who both died during the pendency of the case before the Honorable Court of Appeals.2

Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by their son and attorney-in-fact, Zoilo Landrito.3

On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of P350,000.00 payable in three months. To secure the loan, the Spouses Landrito executed a real estate mortgage over a five hundred forty (540) square meter lot located in Alabang, Muntinlupa, covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From the P350,000.00 that the Landritos were supposed to receive, P17,500.00 was deducted as interest for the first month which was equivalent to five percent of the principal debt, and P7,500.00 was further deducted as service fee. Thus, they actually received a net amount of P325,000.00. The agreement, however, provided that the principal indebtedness earns "interest at the legal rate."4

After three months, when the debt became due and demandable, the Spouses Landrito were unable to pay the principal, and had not been able to make any interest payments other than the amount initially deducted from the proceeds of the loan. On 29 December 1986, the loan agreement was extended to 4 January 1987 through an Amendment of Real Estate Mortgage. The loan was restructured in such a way that the unpaid interest became part of the principal, thus increasing the principal to P385,000. The new loan agreement adopted all other terms and conditions contained in first agreement.5

Due to the continued inability of the Spouses Landritos to settle their obligations with the Spouses Espiritu, the loan agreement was renewed three more times. In all these subsequent renewals, the same terms and conditions found in the first agreement were retained. On 29 July 1987, the principal was

increased to P507,000.00 inclusive of running interest. On 11 March 1988, it was increased to P647,000.00. And on 21 October 1988, the principal was increased to P874,125.00.6 At the hearing before the trial court, Zoilo Espiritu testified that the increase in the principal in each amendment of the loan agreement did not correspond to the amount delivered to the Spouses Landrito. Rather, the increase in the principal had been due to unpaid interest and other charges.7

The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the mortgaged property on 31 October 1990. During the auction sale, the property was sold to the Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriffs Certificate of Sale was annotated on the title of the mortgaged property, giving the Spouses Landrito until 8 January 1992 to redeem the property. 8

The Spouses Landrito failed to redeem the subject property although they alleged that they negotiated for the redemption of the property as early as 30 October 1991. While the negotiated price for the land started at P1,595,392.79, it was allegedly increased by the Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two managers checks and some cash, totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter refused to accept the same. They also alleged that the Spouses Espiritu increased the amount demanded to P2.5 Million and gave them until July 1992 to pay the said amount. However, upon inquiry, they found out that on 24 June 1992, the Spouses Espiritu had already executed an Affidavit of Consolidation of Ownership and registered the mortgaged property in their name, and that the Register of Deeds of Makati had already issued Transfer Certificate of Title No. 179802 in the name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with damages against the Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati.9 Among the allegations in their Complaint, they stated that the Spouses Espiritu, as creditors and mortgagees, "imposed interest rates that are shocking to ones moral senses."10

The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The trial court ordered in its Decision, dated 13 December 1995:11

WHEREFORE, all the foregoing premises considered, the herein complaint is hereby dismissed forthwith.

Without pronouncements to costs.

The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997 Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals reversed the trial courts decision, decreeing that the five percent (5%) interest imposed by the Spouses Espiritu on the first month and the varying interest rates imposed for the succeeding months contravened the provisions of the Real Estate Mortgage contract which provided that interest at the legal rate, i.e., 12% per annum, would be imposed. It also ruled that although the Usury Law had been rendered ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling rates prescribed for interests, thus, allowing parties to freely stipulate thereon, the courts may render void any stipulation of interest rates which are found iniquitous or unconscionable. As a result, the Court of Appeals set the interest rate of the loan at the legal rate, or 12% per annum.12

Furthermore, the Court of Appeals held that the action for reconveyance, filed by the Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to redeem the property within the one-year redemption period provided by law, the action for reconveyance remained as a remedy available to a landowner whose property was wrongfully registered in anothers name since the subject property has not yet passed to an innocent purchaser for value.13

In the decretal portion of its Decision, the Court of Appeals ruled14:

WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision dated December 13, 1995 of the Regional Trial Court of Makati, Branch 146 in Civil Case No. 92-2920 is hereby REVERSED and SET ASIDE, and a new one is hereby entered as follows: (1) The legal rate of 12% per annum is hereby FIXED to be applied as the interest of the loan; and (2) Conditioned upon the payment of the loan, defendantsappellees spouses Zoilo and Primitiva Espiritu are hereby ordered to reconvey Transfer Certificate of Title No. S-48948 to appellant spouses Maximo and Paz Landrito.

The case is REMANDED to the Trial Court for the above determination.

Hence, the present petition. The following issues were raised:15

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING ASIDE THE DECISION OF THE TRIAL COURT AND ORDERING HEREIN PETITIONERS TO RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN RESPONDENTS, WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR.

II

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONERS UNILATERALLY IMPOSED ON HEREIN RESPONDENTS THE ALLEGEDLY UNREASONABLE INTERESTS ON THE MORTGAGE LOANS.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT HEREIN RESPONDENTS ATTORNEY-IN-FACT IS NOT ARMED WITH AUTHORITY TO FILE AND PROSECUTE THIS CASE.

The petition is without merit.

The Real Estate Mortgage executed between the parties specified that "the principal indebtedness shall earn interest at the legal rate." The agreement contained no other provision on interest or any fees or charges incident to the debt. In at least three contracts, all designated as Amendment of Real Estate Mortgage, the interest rate imposed was, likewise, unspecified. During his testimony, Zoilo Espiritu admitted that the increase in the principal in each of the Amendments of the Real Estate Mortgage consists of interest and charges. The Spouses Espiritu alleged that the parties had agreed on the interest and charges imposed in connection with the loan, hereunder enumerated:

1. P17,500.00 was the interest charged for the first month and P7,500.00 was imposed as service fee.

2. P35,000.00 interest and charges, or the difference between the P350,000.00 principal in the Real Estate Mortgage dated 5 September 1986 and the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 December 1986.

3. P132,000.00 interest and charges, or the difference between the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 December 1986 and the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July 1987.

4. P140,000.00 interest and charges, or the difference between the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July 1987 and the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11 March 1988.

5. P227,125.00 interest and charges, or the difference between the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11 March 1988 and the P874,125 principal in the Amendment of the Real Estate Mortgage dated 21 October 1988.

The total interest and charges amounting to P559,125.00 on the original principal of P350,000 was accumulated over only two years and one month. These charges are not found in any written agreement between the parties. The records fail to show any computation on how much interest was charged and what other fees were imposed. Not only did lack of transparency characterize the aforementioned agreements, the interest rates and the service charge imposed, at an average of 6.39% per month, are excessive.

In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to protect its citizens from a lack of awareness of the true cost of credit by assuring the full disclosure of such costs. Section 4, in connection with Section 3(3)16 of the said 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. Section 617 of the same law imposes on anyone who willfully violates these provisions, sanctions which include civil liability, and a fine and/or imprisonment.

Although any action seeking to impose either civil or criminal liability had already prescribed, this Court frowns upon the underhanded manner in which the Spouses Espiritu imposed interest and charges, in connection with the loan. This is aggravated by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead ignorance of the requirements of the law in connection with the transparency of credit transactions. In addition, the Civil Code clearly provides that:

Article 1956. No interest shall be due unless it has been stipulated in writing.

The omission of the Spouses Espiritu in specifying in the contract the interest rate which was actually imposed, in contravention of the law, manifested bad faith.

In several cases, this Court has been known to declare null and void stipulations on interest and charges that were found excessive, iniquitous, and unconscionable. In the case of Medel v. Court of Appeals,18 the Court declared an interest rate of 5.5% per month on a P500,000.00 loan to be excessive, iniquitous, unconscionable and exorbitant. Even if the parties themselves agreed on the interest rate and stipulated the same in a written agreement, it nevertheless declared such stipulation as void and ordered the imposition of a 12% yearly interest rate. In Spouses Solangon v. Salazar,19 6% monthly interest on a P60,000.00 loan was likewise equitably reduced to a 1% monthly interest or 12% per annum. In Ruiz v. Court of Appeals,20 the Court found a 3% monthly interest imposed on four separate loans with a total of P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or 12% per annum.

In declaring void the stipulations authorizing excessive interest and charges, the Court declared that although the Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and consequently parties are given a wide latitude to agree on any interest rate, 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.21

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived.22 The nullity of the stipulation on the usurious interest does not, however, affect the lenders right to recover the principal of the loan.23 Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed.

While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings held on 31 Ocotber 1990 cannot be given effect. In the Notice of Sheriffs Sale24 dated 5 October 1990, and in the Certificate of Sale25 dated 31 October 1990, the amount designated as mortgage indebtedness amounted to P874,125.00. Likewise, in the demand letter26 dated 12 December 1989, Zoilo Espiritu

demanded from the Spouses Landrito the amount of P874,125.00 for the unpaid loan. Since the debt due is limited to the principal of P350,000.00 with 12% per annum as legal interest, the previous demand for payment of the amount of P874,125.00 cannot be considered as a valid demand for payment. For an obligation to become due, there must be a valid demand.27 Nor can the foreclosure proceedings be considered valid since the total amount of the indebtedness during the foreclosure proceedings was pegged at P874,125.00 which included interest and which this Court now nullifies for being excessive, iniquitous and exorbitant. If the foreclosure proceedings were considered valid, this would result in an inequitable situation wherein the Spouses Landrito will have their land foreclosed for failure to pay an over-inflated loan only a small part of which they were obligated to pay.

Moreover, it is evident from the facts of the case that despite considerable effort on their part, the Spouses Landrito failed to redeem the mortgaged property because they were unable to raise the total amount, which was grossly inflated by the excessive interest imposed. Their attempt to redeem the mortgaged property at the inflated amount of P1,595,392.79, as early as 30 October 1991, is reflected in a letter, which creditor-mortgagee Zoilo Landrito acknowledged to have received by affixing his signature herein.28 They also attached in their Complaint copies of two checks in the amounts of P770,000.00 and P995,087.00, both dated 13 January 1992, which were allegedly refused by the Spouses Espiritu.29 Lastly, the Spouses Espiritu even attached in their exhibits a copy of a handwritten letter, dated 27 January 1994, written by Paz Landrito, addressed to the Spouses Espiritu, wherein the former offered to pay the latter the sum of P2,000,000.00.30 In all these instances, the Spouses Landrito had tried, but failed, to pay an amount way over the indebtedness they were supposed to pay i.e., P350,000.00 and 12% interest per annum. Thus, it is only proper that the Spouses Landrito be given the opportunity to repay the real amount of their indebtedness.

Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned upon a finding on the correct amount of the unpaid obligation and the failure of the debtor to pay the said amount.31 In this case, it has not yet been shown that the Spouses Landrito had already failed to pay the correct amount of the debt and, therefore, a foreclosure sale cannot be conducted in order to answer for the unpaid debt. The foreclosure sale conducted upon their failure to pay P874,125 in 1990 should be nullified since the amount demanded as the outstanding loan was overstated; consequently it has not been shown that the mortgagors the Spouses Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of the sale together with its reasonable rates of interest were applied to the obligation, only a small part of its original loans would actually remain outstanding, but because of the unconscionable interest rates, the larger part corresponded to said excessive and iniquitous interest.

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale, herein declared invalid, cannot vest title over the mortgaged property. The Torrens system does not create or vest title where one does not have a rightful claim over a real property. It only confirms and records title already existing and vested. It does not permit one to enrich oneself at the expense of another.32 Thus, the decree of registration, even after the lapse of one (1) year, cannot attain the status of indefeasibility.

Significantly, the records show that the property mortgaged was purchased by the Spouses Espiritu and had not been transferred to an innocent purchaser for value. This means that an action for reconveyance may still be availed of in this case.33

Registration of property by one person in his or her name, whether by mistake or fraud, the real owner being another person, impresses upon the title so acquired the character of a constructive trust for the real owner, which would justify an action for reconveyance.34 This is based on Article 1465 of the Civil Code which states that:

Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for benefit of the person from whom the property comes.

The action for reconveyance does not prescribe until after a period of ten years from the date of the registration of the certificate of sale since the action would be based on implied trust.35 Thus, the action for reconveyance filed on 31 October 1992, more than one year after the Sheriffs Certificate of Sale was registered on 9 January 1991, was filed within the prescription period.

It should, however, be reiterated that the provisions of the Real Estate Mortgage are not annulled and the principal obligation stands. In addition, the interest is not completely removed; rather, it is set by this Court at 12% per annum. Should the Spouses Landrito fail to pay the principal, with its recomputed interest which runs from the time the loan agreement was entered into on 5 September 1986 until the present, there is nothing in this Decision which prevents the Spouses Espiritu from foreclosing the mortgaged property.

The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to file the action for reconveyance filed before the trial court or even to file the appeal from the judgment of the trial

court, by virtue of the Special Power of Attorney dated 30 September 1992. They further noted that the trial court and the Court of Appeals failed to rule on this issue.36

The Special Power of Attorney37 dated 30 September 1992 was executed by Maximo Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged property. It authorized Zoilo Landrito:

2. To make, sign, execute and deliver corresponding pertinent contracts, documents, agreements and other writings of whatever nature or kind and to sue or file legal action in any court of the Philippines, to collect, ask demands, encash checks, and recover any and all sum of monies, proceeds, interest and other due accruing, owning, payable or belonging to me as such owner of the afore-mentioned property. (Emphasis provided.)

Zoilo Landritos authority to file the case is clearly set forth in the Special Power of Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landrito filed the reconveyance case with the full authority of his mother, Paz Landrito, who attended the hearings of the case, filed in her behalf, without making any protest.38 She even testified in the same case on 30 August 1995. From the acts of Paz Landrito, there is no doubt that she had authorized her son to file the action for reconveyance, in her behalf, before the trial court.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS the assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing the interest rate of the loan between the parties at 12% per annum, and ordering the Spouses Espiritu to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan together with herein fixed rate of interest. Costs against the petitioners.

SO ORDERED.

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