[G.R. No. 43682. March 31, 1938.

] legislation upon the subject, unless the interpretation above

stated is accepted.
In re Liquidation of Mercantile Bank of China. TAN TIONG
TICK, claimants-appellant, v. AMERICAN APOTHECARIES 5. ID.; ID.; SET OFF OF CREDITS. — The Bank Commissioner
CO., ET AL., Claimants-Appellees. set off the claims of the appellant against what the bank had
against him. The court approved this set off over the objection
Cirilo Lim and Antonio Gonzalez for Appellant. of the appellant. The appellees contend that the set off does not
lie in this case because otherwise it would prejudice them and
Eusebio Orense and Carmelino G. Alvendia for appellees the other creditors in the liquidation. Held: That the court’s ruling
Chinese Grocers Asso. Et. Al. is not error. "It may be stated as a general rule that when a
depositor is indebted to a bank, and the debts are mutual — that
Marcelo Nubla for appellees Ang Cheng Lian Et. Al. is, between the same parties and in the same right — the bank
may apply the deposit, or such portion thereof as may be
SYLLABUS necessary, to the payment of the debt due it by the depositor,
provided there is no express agreement to the contrary and the
1. BANKS; CHARACTER OF CURRENT ACCOUNT AND deposit is not specifically applicable to some other particular
SAVINGS DEPOSITS, APPLICABLE LAW. — Current account purpose." (7 Am. Jur., par. 629, p. 455.) The situation referred
and savings deposits are not preferred credits in the cases, like to by the appellees is inevitable because section 1639 of the
the present, involving the insolvency and liquidation of a bank, Revised Administrative Code, as amended by Act No. 3519,
where there are various creditors and it becomes necessary to provides that the Bank Commissioner shall reduce the assets of
ascertain the preference of various credits. These deposits are the bank into cash and this cannot be done without first
essentially mercantile contracts and should, therefore, be liquidating individually the accounts of the debtors of said bank,
governed by the provisions of the Code of Commerce, pursuant and in making this individual liquidation the debtors are entitled
to its article 2. to set off, by way of compensation, their claims against the bank.

2. ID.; ID.; COMMERCIAL LOANS. — In accordance with article 6. ID.; ID.; INTEREST. — Under articles 1101 and 1108 of the
309 of the Code of Commerce, the so-called current account Civil Code, interest is allowed by way of indemnity for damages
and savings deposits have lost the character of deposits suffered, in the cases wherein the obligation consists in the
properly so called, and are converted into simple commercial payment of money. In view thereof, Held: That in the absence of
loans, because the bank disposed of the funds deposited by the any express law or of any applicable provision of the Code of
claimant for its ordinary transactions and for the banking Commerce, it is not proper to pay this last kind of interest to the
business in which it was engaged. That the bank had the appellant upon his deposits in the bank, for this would be
authority of the claimant to make use of the money deposited on anomalous and unjustified in a liquidation or insolvency of a
current and savings accounts is deducible from the fact that the bank. This rule should be strictly observed in the instant case
bank has been paying interest on both deposits, and the because it is understood that the assets should be prorated
claimant himself asks that he be allowed interest up to the time among all the creditors as they are insufficient to pay all the
when the bank ceased its operations. Moreover, according to obligations of the bank.
sections 125 of the Corporation Law and 9 of Act No. 3154, said
bank is authorized to make use of the current account, savings,
and fixed deposits provided it retains in its treasury a certain DECISION
percentage of the amounts of said deposits.

3. ID.; PREFERENCE OF CREDITS IN CASES OF IMPERIAL, J.:

INSOLVENCY AND LIQUIDATION OF A BANK. — Even after
the enactment of the Insolvency Law there was no law in this
jurisdiction governing the order or preference of credits in cases In the proceedings for the liquidation of the Mercantile Bank of
of insolvency and liquidation of a bank. But the Philippine China, the appellant presented a written claim alleging: that
Legislature subsequently enacted Act No. 3519, amending when this bank ceased to operate on September 19, 1931, his
various sections of the Revised Administrative Code, which took current account in said bank showed a balance of P9,657.50 in
effect on February 20, 1929, and section 1641 of this latter his favor; that on the same date his savings account in the said
Code, as amended by said Act, provides that "In the case of the bank also showed a balance in his favor of P20,000 plus interest
liquidation of a bank or banking institution, after payment of the then due amounting to P194.78; that, on the other hand, he
costs of the proceedings, including reasonable expenses, owed the bank in the amount of P13,262.58, the amount of the
commissions and fees of the Bank Commissioner, to be allowed trust receipts which he signed because of his withdrawal from
by the court, the Bank Commissioner shall pay the debts of the the bank of certain merchandise consigned to him without
institution, under decree of the court in the order of their legal paying the drafts drawn upon him by the remittors thereof; that
priority."cralaw virtua1aw library the credits thus described should be set off against each other
according to law, and on such set off being made it appeared
4. ID.; ID.; LEGISLATIVE INTENTION. — From this section that he was still the creditor of the bank in the sum of
1641 it is inferred that the intention of the Philippine Legislature, P16,589.70. And he asked that the court order the Bank
in providing that the Bank Commissioner shall pay the debts of Commissioner to pay him the aforesaid balance and that the
the company by virtue of an order of the court in the order of same be declared as a preferred credit. The claim was referred
their legal priority, was to enforce the provisions of sections 48, to the commissioner appointed by the court, who at the same
49 and 50 of the Insolvency Law in the sense that they are made time acted as referee, and this officer recommended that the
applicable to cases of insolvency or bankruptcy and liquidation balance claimed be paid without interest and as an ordinary
of banks. No other deduction can be made from the phrase "in credit. The court approved the recommendation and entered
the order of their legal priority" employed by the law, for there judgment in accordance therewith. The claimant took an appeal.
being no law establishing any priority in the order of payment of
credits, the legislature could not reasonably refer to any
In his report the commissioner classified the claims presented deposit of P7,390.11, be considered as ordinary credits subject
under the following six groups:" (First) Current accounts, to the equal division of the funds of the said bank.
savings and fixed deposits. (Second) Checks or drafts sold by
the Mercantile Bank of China and not paid by the "As to the interest on said deposits also claimed by Mr. Tan
correspondents or banks against which they were drawn. (Third) Tiong Tick, the rejection thereof is recommended in view of the
Checks or drafts issued by the Mercantile Bank of China in fact that the Bank Commissioner has not credited any interest to
payment or reimbursement of drafts or goods sent to it for the current and savings accounts of the Mercantile Bank of
collection by banks and foreign commercial houses against China, and it would be unfair that interest, not credited to the
merchants or commercial entities of Manila. (Fourth) Drafts for others, be allowed to this claimant."cralaw virtua1aw library
collection received by the Mercantile Bank of China to be
collected from merchants and commercial entities in Manila, and It will be noted that in the report of the commissioner the credit
which were pending collection on the date of the suspension of of the claimant for the balance of his deposit on current account
payments. (Fifth) Claims of depositors who are at the same time has been reduced to P7,390.11, instead of P9,657.50 alleged in
debtors of the Mercantile Bank of China. (Sixth) Various claims." his claim, the total balance recommended in favor of the
And referring to the claim of the appellant, he appellant being P13,611.21, without including interest, instead
states:jgc:chanrobles.com.ph of P16,589.70. In his brief the appellant admits the figures
appearing in the report, with the exception of the interest on
"Mr. Tan Tiong Tick claims from the Mercantile Bank of China which we shall presently dwell.
the amount of P27,597.80, the total amount of the following
sums which he has in his favor in said bank including the 1. Revolving the claims under the first group of the report of the
corresponding interests:chanrob1es virtual 1aw library commissioner, the court rejected the recommendation of this
official to the effect that they be declared ordinary credits only,
Balance on current account P7,390.11 and approved them as preferred credits. However, in
considering the other claims, among them that of the appellant,
Balance of savings account No. 2266 20,000.00 classified under the fifth group, the court approved the
recommendation of the commissioner that they be declared
_________ ordinary credits; in other words, the court considered and
declared the claim of the appellant as an ordinary credit just
Total 27,890.11. because the latter is at the same time a debtor of the bank,
notwithstanding the fact that his claim is of the same kind as
"Adding to this total the interest also claimed by Mr. Tan Tiong those classified under the first group, inasmuch as they are also
Tick, that is, P194.78 on the savings account and P12.91 on the current account and savings deposits. To this part of the
current account, the amount claimed makes a total of decision is addressed the appellant’s first assignment of error.
P27,597.80.
In truth, if the current account, savings, and fixed deposits are
"Notwithstanding the fact that the Bank Commissioner found the preferred credits for the reasons stated by the court in its
claim in accordance with the books of the Mercantile Bank of decision, we see no reason why the preference should
China, he declined to issue the corresponding certificate of proof disappear when the depositors are at the same time debtors of
of claim because the said claimant has pending in the said bank the bank for amounts less than their credits. If the ground to
obligations for accepting drafts amounting to a total of declare them preferred credits is sound, the balances resulting
$6,631.29. after the set off should likewise be preferred, unless there be a
law providing that a set off, when it takes place, produces such
"At the hearing of this claim, the claimant admitted such pending an effect, a law which does not exist as far as we know.
obligations, alleging at the same time that to guarantee the
payment of drafts accepted by him, he pledged his bank book But we are of the opinion, for the reason presently to be stated,
No. 2266, which also answered for the payment of any credit that current account and savings deposits are not preferred
which the said bank may extend to him. credits in the cases, like the present, involving the insolvency
and liquidation of a bank, where there are various creditors and
"In Exhibit A presented by the claimant as evidence, consisting it becomes necessary to ascertain the preference of various
of a letter dated November 4, 1931, addressed by Mr. H. J. credits.
Belden to the then Bank Commissioner, Mr. Leo. H. Martin, it
appears that the said savings account was constituted for the The court held that these deposits should be governed by the
sole purpose of securing the payment of drafts against the Civil Code, and applying articles 1758 and 1768 of the said
claimant, the bill of ladings of which were delivered to him upon Code, ruled that the so-called irregular deposits being still in
trust-receipts, and that, according to the records of the bank, Mr. vogue, as Manresa, the commentator, maintains, and as held by
Tan Tiong Tick did not obtain any other accommodation from the this court in the case of Rogers v. Smith, Bell & Co. (10 Phil.,
bank except the trust-receipts. 319), the former are preferred credits because partaking of the
nature of the irregular deposits.
"RECOMMENDATION
In our opinion, these deposits are essentially mercantile
"Having established the existence of such deposits in the name contracts and should, therefore, be governed by the provisions
of Tan Tiong Tick and the latter having recognized the obligation of the Code of Commerce, pursuant to its article 2
in favor of the bank alleged by the Bank Commissioner, for the reading:red:chanrobles.com.ph
security of which he constituted the savings deposit in the
amount of P20,000, it is recommended that from this amount "ART. 2. Commercial transactions, be they performed by
there be deducted the amount of the obligation of P13,778.90 merchants or not, whether they are specified in this Code or not,
which the claimant acknowledges in favor of the Mercantile Bank shall be governed by the provisions contained in the same; in
of China, and that the difference, plus the other current account the absence of such provisions, by the commercial customs
generally observed in each place; and in the absence of both, centum of the aggregate amount of its deposits in current
by those of the common law. accounts which are payable on demand and of its fixed deposits
coming due within thirty days. Such commercial banking
"Commercial transactions shall be considered those corporation shall also at all times maintain reserve equal in
enumerated in this Code and any others of a similar amount to at least five per centum of its total savings deposits.
character."cralaw virtua1aw library The said reserve may be maintained in the form of lawful money
of the Philippine Islands or of the United States, or in bonds
There is cited in support of the application of the Civil Code to issued or guaranteed by the Government of the Philippine
these deposits article 310 of the Code of Commerce Islands or of the United States. . . .
providing:jgc:chanrobles.com.ph
"The percentage of reserve to deposits in the case of the
"ART. 310. Notwithstanding the provisions of the foregoing Philippine National Bank and the Bank of the Philippine Islands
articles, deposits made with banks, with general warehouses, is hereby fixed at eighteen per centum of demand deposits and
with loan or any other associations, shall be governed in the first fixed deposits payable within thirty days and five per centum of
place by the by-laws of the same, in the second by the provisions savings deposits, in the same manner as is prescribed in this
of this Code, and finally by the rules of common law, which are section for commercial banking corporations in general, which
applicable to all deposits."cralaw virtua1aw library reserve against savings deposits may consist of Philippine
Government or United States Government bonds."cralaw
But apparently there was a failure to consider that, according to virtua1aw library
the order established by the article, the Civil Code or the
common law is mentioned after the Code of Commerce, which "SEC. 9. Every bank organized under this Act shall at all times
means that the provisions of the latter Code should first be have on hand, in lawful money of the Philippine Islands or of the
applied before resorting to those of the Civil Code which are United States, an amount equal to at least twenty per centum of
supplementary in character. the aggregate amount of its deposits. The term lawful money of
the Philippine Islands’ shall include the Treasury certificates
The Code of Commerce contains express provisions regulating authorized by Act Numbered Three thousand and fifty-eight, and
deposits of the nature under consideration, and they are articles the term ’lawful money of the United States shall include gold
303 to 310. The first and the second to the last of the said articles and silver certificates of the United States and bank notes issued
are as follows:jgc:chanrobles.com.ph by the Federal Reserve Banks."cralaw virtua1aw library

"ART. 303. In order that a deposit may be considered Therefore, the bank, without the necessity of the claimant’s
commercial, it is necessary — consent, was by law authorized to dispose of the deposits,
subject to the limitation indicated.
"1. That the depositary, at least, be a merchant.
We, therefore, conclude that the law applicable to the appellant’s
"2. That the things deposited be commercial objects. claims is the Code of Commerce and that his current and
savings accounts have been converted into simple commercial
"3. That the deposit constitute in itself a commercial transaction, loans.
or be made by reason or as a consequence of commercial
transactions."cralaw virtua1aw library 2. The next point to decide is the applicable law, if any, to
determine the preference of the appellant’s credits, considering
"ART. 309. Whenever, with the consent of the depositor, the that there happens to be other creditors. Section V of Title I of
depositary disposes of the articles on deposit either for himself Book IV of the Code of Commerce contains provisions relative
or for his business, or for transactions intrusted to him by the to the rights of creditors in case of bankruptcy and to their
former, the rights and obligations of the depositary and of the respective gradation, but these provisions have been repealed
depositor shall cease, and the rules and provisions applicable to by section 524 of the Code of Civil Procedure reading as
the commercial loans, commission, or contract which took the follows:jgc:chanrobles.com.ph
place of the deposit shall be observed."cralaw virtua1aw library
"SEC. 524. No new proceedings to be instituted. — No new
In accordance with article 309, the so-called current account and bankruptcy proceedings shall be instituted until a new
savings deposits have lost the character of deposits properly so- bankruptcy law shall come into force in the Islands. All existing
called, and are converted into simple commercial loans, laws and orders relating to bankruptcy and proceedings therein
because the bank disposed of the funds deposited by the are hereby repealed: Provided, That nothing in this section shall
claimant for its ordinary transactions and for the banking be deemed in any manner to affect pending litigation in
business in which it was engaged. That the bank had the bankruptcy proceedings."cralaw virtua1aw library
authority of the claimant to make use of the money deposited on
current and savings accounts is deducible from the fact that the The Philippine Legislature subsequently enacted Act No. 1956,
bank has been paying interest on both deposits, and the also known as the Insolvency Law, which took effect on May 20,
claimant himself asks that he be allowed interest up to the time 1909, containing provisions regarding preference of credits; but
when the bank ceased its operations. Moreover, according to its section 52 provides that all the provisions of the law shall not
sections 126 of the Corporation Law and 9 of Act No. 3154, said apply to corporations engaged principally in the banking
bank is authorized to make use of the current account, savings, business, and among them should be understood included the
and fixed deposits provided it retains in its treasury a certain Mercantile Bank of China. Said sections
percentage of the amounts of said deposits. Said sections provide:jgc:chanrobles.com.ph
read:jgc:chanrobles.com.ph
"SEC. 48. Merchandise, effects, and any other kind of property
"SEC. 125. Every such commercial banking corporation shall at found among the property of the insolvent, the ownership of
all times have on hand in lawful money of the Philippine Islands which has not been conveyed to him by a legal and irrevocable
or of the United State, an amount equal to at least eighteen per title, shall be considered to be the property of other persons and
shall be placed at the disposal of its lawful owners on order of "9. Goods or chattels wrongfully taken, converted, or withheld by
the court made at the hearing mentioned in section forty-three the insolvent if still existing in his possession or the amount of
or at any ordinary hearing, is the assignee or any creditor whose the value thereof.
right in the estate of the insolvent has been established shall
petition in writing for such hearing and the court in its discretion "SEC. 49. All creditors, except those whose claims are
shall to order, the creditors, however, retaining such rights in mentioned in the next following section, whose debts are duly
said property as belong to the insolvent, and subrogating him proved and allowed shall be entitled to share in the property and
whenever they shall have complied with all obligations estate pro rata, after the property belonging to other persons
concerning said property. referred to in the last preceding section has been deducted
therefrom, without priority or preference whatever: Provided,
"The following shall be included in this That any debt proved by any person liable as bail, surety,
section:jgc:chanrobles.com.ph guarantor, or otherwise, for the debtor, shall not be paid to the
person so proving the same until satisfactory evidence shall be
"1. Dowry property inestimado and such property estimado produced of the payment of such debt by such person so liable,
which may remain in the possession of the husband where the and the share to which such debt would be entitled may be paid
receipt thereof is a matter of record in a public instrument into court, or otherwise held, for the benefit of the party entitled
registered under the provisions of sections twenty-one and thereto, as the court may direct.
twenty-seven of the Code of Commerce in force.
"SEC. 50. The following are the preferred claims which shall be
"2. Paraphernal property which the wife may have acquired by paid in the order named:jgc:chanrobles.com.ph
inheritance, legacy, or donation whether remaining in the form
in which it was received or subrogated or invested in other "(a) Necessary funeral expenses of the debtor, or of his
property, provided that such investment or subrogation has been wife, or children who are under their parental authority and have
registered in the registro mercantile in accordance with the no property of their own, when approved by the court;
provisions of the sections of the Code of Commerce mentioned
in the next preceding paragraph. "(b) Debts due for personal services rendered the insolvent
by employees, laborers, or domestic servants immediately
"3. Property and effects deposited with the bankrupt, or preceding the commencement of proceedings in insolvency;
administered, leased, rented, or held in usufruct by him.
"(c) Compensation due the laborers or their dependents
"4. Merchandise in the possession of the bankrupt, on under the provisions of Act Numbered Thirty-four hundred and
commission, for purchase, sale, forwarding, or delivery. twenty-eight, known as the Workmen’s Compensation Act, as
amended by Act Numbered Thirty-eight hundred and twelve,
"5. Bills of exchange or promissory notes without indorsement and under the provisions of Act Numbered Eighteen hundred
or other expression transferring ownership remitted to the and seventy-four, known as the Employers’ Liability Act, and of
insolvent for collection and all others acquired by him for the other laws providing for payment of indemnity for damages in
account of another person, drawn or indorsed to the remitter cases of labor accidents;
direct.
"(d) Legal expenses, and expenses incurred in the
"6. Money remitted to the insolvent, otherwise than on current administration of the insolvent’s estate for the common interest
account, and which is in his possession for delivery to a definite of the creditors, when properly authorized and approved by the
person in the name and for the account of the remitter or for the court;
settlement of claims which are to be met at the insolvent’s
domicile. "(e) Debts, taxes, and assessments due the Insular
Government;
"7. Amounts due the insolvent for sales of merchandise on
commission, and bills of exchange and promissory notes "(f) Debts, taxes, and assessments due to any province or
derived therefrom in his possession, even when the same are provinces of the Philippine Islands;
not made payable to the owner of the merchandise sold,
provided it is proven that the obligation to the insolvent is derived "(g) Debts, taxes, and assessments due to any municipally
therefrom and that said bills of exchange and promissory notes or municipalities of the Philippine Islands;
were in the possession of the insolvent for account of the owner
of the merchandise to be cashed and remitted, in due time, to "All other creditors shall be paid pro rata." (As amended by Act
the said owner; all of which shall be a legal presumption when No. 3962.)
the amount involved in any such sale shall not have been
credited on the books of both the owner of the merchandise and "ART. 52. . . . The provisions of this Act shall not apply to
of the insolvent. corporations engaged principally in the banking business, or to
any other corporation as to which there is any special provision
"8. Merchandise bought on credit by the insolvent so long as the of law for its liquidation in case of insolvency."cralaw virtua1aw
actual delivery thereof has not been made to him at his store or library
at any other place stipulated for such delivery, and merchandise
the bills of lading or shipping receipts of which have been sent It appears that even after the enactment of the Insolvency Law
him after the same has been loaded by order of the purchaser there was no law in this jurisdiction governing the order or
and for his account and risk. preference of credits in cases of insolvency and liquidation of a
bank. But the Philippine Legislature subsequently enacted Act
"In all cases arising under this paragraph assignees may retain No. 3519, amending various sections of the Revised
the merchandise so purchased or claim it for the creditors by Administrative Code, which took effect on February 20, 1929,
paying the price thereof to the vendor. and section 1641 of this latter Code, as amended by said Act,
provides:jgc:chanrobles.com.ph
 business and other operations, it may be presumed that it bound
"SEC. 1641. Distribution of assets. — In the case of the itself to pay interest to the deposits as in fact it paid interest prior
liquidation of a bank or banking institution, after payment of the to the dates of the said claims. As to the interest which may be
costs of the proceedings, including reasonable expenses, charged from the date the bank ceased to do business because
commissions and fees of the Bank Commissioner, to be allowed it was declared in a state of liquidation, we held that the said
by the court, the Bank Commissioner shall pay the debts of the interest should not be paid. Under articles 1101 and 1108 of the
institution, under decree of the court in the order of their legal Civil Code, interest is allowed by way of indemnity for damages
priority."cralaw virtua1aw library suffered, in the cases wherein the obligation consists in the
payment of money. In view of this, we hold that in the absence
From this section 1641 we deduce that the intention of the of any express law or of any applicable provision of the Code of
Philippine Legislature, in providing that the Bank Commissioner Commerce, it is not proper to pay this last kind of interest to the
shall pay the debts of the company by virtue of an order of the appellant upon his deposits in the bank, for this would be
court in the order of their legal priority, was to enforce the anomalous and unjustified in a liquidation or insolvency of a
provisions of sections 48, 49 and 50 of the Insolvency Law in the bank. This rule should be strictly observed in the instant case
sense that they are made applicable to cases of insolvency or because it is understood that the assets should be prorated
bankruptcy and liquidation of banks. No other deduction can be among all the creditors as they are insufficient to pay all the
made from the phrase "in the order of their legal priority" obligations of the bank.
employed by the law, for there being no law establishing any
priority in the order of payment of credits, the legislature could 5. The last assignment of error has to do with the denial by the
not reasonably refer to any legislation upon the subject, unless court of the claimant’s motion for new trial. No new arguments
the interpretation above stated is accepted. have been made in its support and it appears that the assigned
error was inserted as a mere corollary of the preceding ones.
Examining now the claims of the appellant, it appears that none
of them falls under any of the cases specified by sections 48, 49 In view of all the foregoing considerations, we affirm the part of
and 50 of the Insolvency Law; wherefore, we conclude that the the appealed decision for the reason stated herein, and it is
appellant’s claims, consisting of his current and savings ordered that the net claim of the appellant, amounting to
accounts, are not preferred credits. P13,611.21, is an ordinary and not a preferred credit, and that
he is entitled to charge interest on the said amount up to
3. The commissioner set off the claims of the appellant against September 19, 1931, without special pronouncement as to the
what the bank had against him. The court approved this set off costs. So ordered.
over the objection of the appellant. The appellees contend that
the set of does not lie in this case because otherwise it would
prejudice them and the other creditors in the liquidation. We hold
that the court’s ruling is not error. "It may be stated as a general
rule that when a depositor is indebted to a bank, and the debts
are mutual — that is, between the same parties and in the same
right — the bank may apply the deposit, or such portion thereof
as may be necessary, to the payment of the debt due it by the
depositor, provided there is no express agreement to the
contrary and the deposit is not specifically applicable to some
other particular purpose." (7 Am. Jur., par. 629, p. 455; United
States v. Butterworth-Judson Corp., 267 U. S., 387; National
Bank v. Morgan, 207 Ala., 65; Bank of Guntersville v. Crayter,
199 Ala., 599; Tatum v. Commercial Bank & T. Co., 193 Ala.,
120; Desha Bank & T. Co. v. Quilling, 118 Ark., 114; Holloway
v. First Nat. Bank, 45 Idaho, 746; Wyman v. Ft. Dearborn Nat.
Bank, 181 Ill., 279; Niblack v. Park Nat. Bank, 169 Ill., 517; First
Nat. Bank v. Stapf., 165 Ind., 162; Bedford Bank v. Acoam, 125
Ind., 584.) The situation referred to by the appellees is inevitable
because section 1639 of the ’Revised Administrative Code, as
amended by Act No. 3519, provides that the Bank
Commissioner shall reduce the assets of the bank into cash and
this cannot be done without first liquidating individually the
accounts of the debtors of said bank, and in making this
individual liquidation the debtors are entitled to set off, by way of
compensation, their claims against the bank.

4. The court held that the appellant is not entitled to charge

interest on the amounts of his claims, and this is the object of
the second assignment of error. Upon this point a distinction
must be made between the interest which the deposits should
earn from their existence until the bank ceased to operate, and
that which they may earn from the time the bank’s operations
were stopped until the date of payment of the deposits. As to the
first class, we hold that it should be paid because such interest
has been earned in the ordinary course of the bank’s business
and before the latter has been declared in a state of liquidation.
Moreover, the bank being authorized by law to make use of the
deposits, with the limitation stated, to invest the same in its
G.R. No. 89252 May 24, 1993 SERIAL MAT. FACE ISSUED REGISTERED
AMOUNT
RAUL SESBREÑO, petitioner, NUMBER DATE VALUE BY HOLDER PAYEE
vs.
HON. COURT OF APPEALS, DELTA MOTORS 2731 4-6-81 2,300,833.34 DMC PHIL.
CORPORATION AND PILIPINAS BANK, respondents. 307,933.33
UNDERWRITERS
Salva, Villanueva & Associates for Delta Motors Corporation. FINANCE CORP.

Reyes, Salazar & Associates for Pilipinas Bank. We further certify that these securities may be inspected by you
or your duly authorized representative at any time during regular
banking hours.
FELICIANO, J.:
Upon your written instructions we shall undertake physical
On 9 February 1981, petitioner Raul Sesbreño made a money delivery of the above securities fully assigned to you should this
market placement in the amount of P300,000.00 with the Denominated Custodianship Receipt remain outstanding in your
Philippine Underwriters Finance Corporation ("Philfinance"), favor thirty (30) days after its maturity.
Cebu Branch; the placement, with a term of thirty-two (32) days,
would mature on 13 March 1981, Philfinance, also on 9 February PILIPINAS BANK
1981, issued the following documents to petitioner: (By Elizabeth De Villa
Illegible Signature)1
(a) the Certificate of Confirmation of Sale, "without
recourse," No. 20496 of one (1) Delta Motors Corporation On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of
Promissory Note ("DMC PN") No. 2731 for a term of 32 days at private respondent Pilipinas, Makati Branch, and handed her a
17.0% per annum; demand letter informing the bank that his placement with
Philfinance in the amount reflected in the DCR No. 10805 had
(b) the Certificate of securities Delivery Receipt No. 16587 remained unpaid and outstanding, and that he in effect was
indicating the sale of DMC PN No. 2731 to petitioner, with the asking for the physical delivery of the underlying promissory
notation that the said security was in custodianship of Pilipinas note. Petitioner then examined the original of the DMC PN No.
Bank, as per Denominated Custodian Receipt ("DCR") No. 2731 and found: that the security had been issued on 10 April
10805 dated 9 February 1981; and 1980; that it would mature on 6 April 1981; that it had a face
value of P2,300,833.33, with the Philfinance as "payee" and
(c) post-dated checks payable on 13 March 1981 (i.e., the private respondent Delta Motors Corporation ("Delta") as
maturity date of petitioner's investment), with petitioner as "maker;" and that on face of the promissory note was stamped
payee, Philfinance as drawer, and Insular Bank of Asia and "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any
America as drawee, in the total amount of P304,533.33. certificate of participation in respect thereof, to petitioner.

On 13 March 1981, petitioner sought to encash the postdated Petitioner later made similar demand letters, dated 3 July 1981
checks issued by Philfinance. However, the checks were and 3 August 1981,2 again asking private respondent Pilipinas
dishonored for having been drawn against insufficient funds. for physical delivery of the original of DMC PN No. 2731.
Pilipinas allegedly referred all of petitioner's demand letters to
On 26 March 1981, Philfinance delivered to petitioner the DCR Philfinance for written instructions, as has been supposedly
No. 10805 issued by private respondent Pilipinas Bank agreed upon in "Securities Custodianship Agreement" between
("Pilipinas"). It reads as follows: Pilipinas and Philfinance. Philfinance did not provide the
appropriate instructions; Pilipinas never released DMC PN No.
PILIPINAS BANK 2731, nor any other instrument in respect thereof, to petitioner.
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati, Petitioner also made a written demand on 14 July 19813 upon
Metro Manila private respondent Delta for the partial satisfaction of DMC PN
No. 2731, explaining that Philfinance, as payee thereof, had
February 9, 1981 assigned to him said Note to the extent of P307,933.33. Delta,
——————— however, denied any liability to petitioner on the promissory
VALUE DATE note, and explained in turn that it had previously agreed with
Philfinance to offset its DMC PN No. 2731 (along with DMC PN
TO Raul Sesbreño No. 2730) against Philfinance PN No. 143-A issued in favor of
Delta.
April 6, 1981
———————— In the meantime, Philfinance, on 18 June 1981, was placed
MATURITY DATE under the joint management of the Securities and exchange
commission ("SEC") and the Central Bank. Pilipinas delivered to
NO. 10805 the SEC DMC PN No. 2731, which to date apparently remains
in the custody of the SEC.4
DENOMINATED CUSTODIAN RECEIPT
As petitioner had failed to collect his investment and interest
This confirms that as a duly Custodian Bank, and upon thereon, he filed on 28 September 1982 an action for damages
instruction of PHILIPPINE UNDERWRITES FINANCE with the Regional Trial Court ("RTC") of Cebu City, Branch 21,
CORPORATION, we have in our custody the following securities against private respondents Delta and Pilipinas.5 The trial court,
to you [sic] the extent herein indicated. in a decision dated 5 August 1987, dismissed the complaint and
counterclaims for lack of merit and for lack of cause of action, to petitioner, to the extent of P304,533.33. The Court of Appeals
with costs against petitioner. said on this point:

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. Nor could plaintiff-appellant have acquired any right over DMC
CV No. 15195. In a Decision dated 21 March 1989, the Court of PN No. 2731 as the same is "non-negotiable" as stamped on its
Appeals denied the appeal and held:6 face (Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the
Be that as it may, from the evidence on record, if there is anyone transferee the holder of the instrument (Sec. 30, Negotiable
that appears liable for the travails of plaintiff-appellant, it is Instruments Law). A person not a holder cannot sue on the
Philfinance. As correctly observed by the trial court: instrument in his own name and cannot demand or receive
payment (Section 51, id.)9
This act of Philfinance in accepting the investment of plaintiff and
charging it against DMC PN No. 2731 when its entire face value Petitioner admits that DMC PN No. 2731 was non-negotiable but
was already obligated or earmarked for set-off or compensation contends that the Note had been validly transferred, in part to
is difficult to comprehend and may have been motivated with him by assignment and that as a result of such transfer, Delta
bad faith. Philfinance, therefore, is solely and legally obligated as debtor-maker of the Note, was obligated to pay petitioner the
to return the investment of plaintiff, together with its earnings, portion of that Note assigned to him by the payee Philfinance.
and to answer all the damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff, Philfinance was not Delta, however, disputes petitioner's contention and argues:
impleaded as one of the defendants in this case at bar; hence,
this Court is without jurisdiction to pronounce judgement against (1) that DMC PN No. 2731 was not intended to be
it. (p. 11, Decision) negotiated or otherwise transferred by Philfinance as manifested
by the word "non-negotiable" stamp across the face of the
WHEREFORE, finding no reversible error in the decision Note10 and because maker Delta and payee Philfinance
appealed from, the same is hereby affirmed in toto. Cost against intended that this Note would be offset against the outstanding
plaintiff-appellant. obligation of Philfinance represented by Philfinance PN No. 143-
A issued to Delta as payee;
Petitioner moved for reconsideration of the above Decision,
without success. (2) that the assignment of DMC PN No. 2731 by
Philfinance was without Delta's consent, if not against its
Hence, this Petition for Review on Certiorari. instructions; and

After consideration of the allegations contained and issues (3) assuming (arguendo only) that the partial assignment
raised in the pleadings, the Court resolved to give due course to in favor of petitioner was valid, petitioner took the Note subject
the petition and required the parties to file their respective to the defenses available to Delta, in particular, the offsetting of
memoranda.7 DMC PN No. 2731 against Philfinance PN No. 143-A.11

Petitioner reiterates the assignment of errors he directed at the We consider Delta's arguments seriatim.
trial court decision, and contends that respondent court of
Appeals gravely erred: (i) in concluding that he cannot recover Firstly, it is important to bear in mind that the negotiation of a
from private respondent Delta his assigned portion of DMC PN negotiable instrument must be distinguished from the
No. 2731; (ii) in failing to hold private respondent Pilipinas assignment or transfer of an instrument whether that be
solidarily liable on the DMC PN No. 2731 in view of the negotiable or non-negotiable. Only an instrument qualifying as a
provisions stipulated in DCR No. 10805 issued in favor r of negotiable instrument under the relevant statute may be
petitioner, and (iii) in refusing to pierce the veil of corporate entity negotiated either by indorsement thereof coupled with delivery,
between Philfinance, and private respondents Delta and or by delivery alone where the negotiable instrument is in bearer
Pilipinas, considering that the three (3) entities belong to the form. A negotiable instrument may, however, instead of being
"Silverio Group of Companies" under the leadership of Mr. negotiated, also be assigned or transferred. The legal
Ricardo Silverio, Sr.8 consequences of negotiation as distinguished from assignment
of a negotiable instrument are, of course, different. A non-
There are at least two (2) sets of relationships which we need to negotiable instrument may, obviously, not be negotiated; but it
address: firstly, the relationship of petitioner vis-a-vis Delta; may be assigned or transferred, absent an express prohibition
secondly, the relationship of petitioner in respect of Pilipinas. against assignment or transfer written in the face of the
Actually, of course, there is a third relationship that is of critical instrument:
importance: the relationship of petitioner and Philfinance.
However, since Philfinance has not been impleaded in this case, The words "not negotiable," stamped on the face of the bill of
neither the trial court nor the Court of Appeals acquired lading, did not destroy its assignability, but the sole effect was to
jurisdiction over the person of Philfinance. It is, consequently, exempt the bill from the statutory provisions relative thereto, and
not necessary for present purposes to deal with this third a bill, though not negotiable, may be transferred by assignment;
relationship, except to the extent it necessarily impinges upon or the assignee taking subject to the equities between the original
intersects the first and second relationships. parties.12 (Emphasis added)

I. DMC PN No. 2731, while marked "non-negotiable," was not at

the same time stamped "non-transferable" or "non-assignable."
We consider first the relationship between petitioner and Delta. It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.
The Court of appeals in effect held that petitioner acquired no
rights vis-a-vis Delta in respect of the Delta promissory note Delta adduced the "Letter of Agreement" which it had entered
(DMC PN No. 2731) which Philfinance sold "without recourse" into with Philfinance and which should be quoted in full:
 speaking through Mme. Justice Herrera, made the following
April 10, 1980 important statement:

Philippine Underwriters Finance Corp. There is another aspect to this case. What is involved here is a
Benavidez St., Makati, money market transaction. As defined by Lawrence Smith "the
Metro Manila. money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and
Attention: Mr. Alfredo O. Banaria borrowers do not deal directly with each other but through a
SVP-Treasurer middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing
GENTLEMEN: indebtness of any person or entity. . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to
This refers to our outstanding placement of P4,601,666.67 as another person or entity, with or without recourse". The
evidenced by your Promissory Note No. 143-A, dated April 10, fundamental function of the money market device in its operation
1980, to mature on April 6, 1981. is to match and bring together in a most impersonal manner both
the "fund users" and the "fund suppliers." The money market is
As agreed upon, we enclose our non-negotiable Promissory an "impersonal market", free from personal considerations. "The
Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, market mechanism is intended to provide quick mobility of
1980, to be offsetted [sic] against your PN No. 143-A upon co- money and securities."
terminal maturity.
The impersonal character of the money market device overlooks
Please deliver the proceeds of our PNs to our representative, the individuals or entities concerned. The issuer of a commercial
Mr. Eric Castillo. paper in the money market necessarily knows in advance that it
would be expenditiously transacted and transferred to any
Very Truly Yours, investor/lender without need of notice to said issuer. In practice,
no notification is given to the borrower or issuer of commercial
(Sgd.) paper of the sale or transfer to the investor.
Florencio B. Biagan
Senior Vice President13 xxx xxx xxx

We find nothing in his "Letter of Agreement" which can be There is need to individuate a money market transaction, a
reasonably construed as a prohibition upon Philfinance relatively novel institution in the Philippine commercial scene. It
assigning or transferring all or part of DMC PN No. 2731, before has been intended to facilitate the flow and acquisition of capital
the maturity thereof. It is scarcely necessary to add that, even on an impersonal basis. And as specifically required by
had this "Letter of Agreement" set forth an explicit prohibition of Presidential Decree No. 678, the investing public must be given
transfer upon Philfinance, such a prohibition cannot be invoked adequate and effective protection in availing of the credit of a
against an assignee or transferee of the Note who parted with borrower in the commercial paper market.18 (Citations omitted;
valuable consideration in good faith and without notice of such emphasis supplied)
prohibition. It is not disputed that petitioner was such an
assignee or transferee. Our conclusion on this point is reinforced We turn to Delta's arguments concerning alleged compensation
by the fact that what Philfinance and Delta were doing by their or offsetting between DMC PN No. 2731 and Philfinance PN No.
exchange of their promissory notes was this: Delta invested, by 143-A. It is important to note that at the time Philfinance sold part
making a money market placement with Philfinance, of its rights under DMC PN No. 2731 to petitioner on 9 February
approximately P4,600,000.00 on 10 April 1980; but promptly, on 1981, no compensation had as yet taken place and indeed none
the same day, borrowed back the bulk of that placement, i.e., could have taken place. The essential requirements of
P4,000,000.00, by issuing its two (2) promissory notes: DMC PN compensation are listed in the Civil Code as follows:
No. 2730 and DMC PN No. 2731, both also dated 10 April 1980.
Thus, Philfinance was left with not P4,600,000.00 but only Art. 1279. In order that compensation may be proper, it is
P600,000.00 in cash and the two (2) Delta promissory notes. necessary:

Apropos Delta's complaint that the partial assignment by (1) That each one of the obligors be bound principally, and
Philfinance of DMC PN No. 2731 had been effected without the that he be at the same time a principal creditor of the other;
consent of Delta, we note that such consent was not necessary
for the validity and enforceability of the assignment in favor of (2) That both debts consists in a sum of money, or if the
petitioner.14 Delta's argument that Philfinance's sale or things due are consumable, they be of the same kind, and also
assignment of part of its rights to DMC PN No. 2731 constituted of the same quality if the latter has been stated;
conventional subrogation, which required its (Delta's) consent,
is quite mistaken. Conventional subrogation, which in the first (3) That the two debts are due;
place is never lightly inferred,15 must be clearly established by
the unequivocal terms of the substituting obligation or by the (4) That they be liquidated and demandable;
evident incompatibility of the new and old obligations on every
point.16 Nothing of the sort is present in the instant case. (5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
It is in fact difficult to be impressed with Delta's complaint, since due time to the debtor. (Emphasis supplied)
it released its DMC PN No. 2731 to Philfinance, an entity
engaged in the business of buying and selling debt instruments On 9 February 1981, neither DMC PN No. 2731 nor Philfinance
and other securities, and more generally, in money market PN No. 143-A was due. This was explicitly recognized by Delta
transactions. In Perez v. Court of Appeals,17 the Court, in its 10 April 1980 "Letter of Agreement" with Philfinance, where
Delta acknowledged that the relevant promissory notes were "to
be offsetted (sic) against [Philfinance] PN No. 143-A upon co- It bears some emphasis that petitioner could have notified Delta
terminal maturity." of the assignment or sale was effected on 9 February 1981. He
could have notified Delta as soon as his money market
As noted, the assignment to petitioner was made on 9 February placement matured on 13 March 1981 without payment thereof
1981 or from forty-nine (49) days before the "co-terminal being made by Philfinance; at that time, compensation had yet
maturity" date, that is to say, before any compensation had to set in and discharge DMC PN No. 2731. Again petitioner could
taken place. Further, the assignment to petitioner would have have notified Delta on 26 March 1981 when petitioner received
prevented compensation had taken place between Philfinance from Philfinance the Denominated Custodianship Receipt
and Delta, to the extent of P304,533.33, because upon ("DCR") No. 10805 issued by private respondent Pilipinas in
execution of the assignment in favor of petitioner, Philfinance favor of petitioner. Petitioner could, in fine, have notified Delta at
and Delta would have ceased to be creditors and debtors of any time before the maturity date of DMC PN No. 2731. Because
each other in their own right to the extent of the amount assigned petitioner failed to do so, and because the record is bare of any
by Philfinance to petitioner. Thus, we conclude that the indication that Philfinance had itself notified Delta of the
assignment effected by Philfinance in favor of petitioner was a assignment to petitioner, the Court is compelled to uphold the
valid one and that petitioner accordingly became owner of DMC defense of compensation raised by private respondent Delta. Of
PN No. 2731 to the extent of the portion thereof assigned to him. course, Philfinance remains liable to petitioner under the terms
of the assignment made by Philfinance to petitioner.
The record shows, however, that petitioner notified Delta of the
fact of the assignment to him only on 14 July 1981, 19 that is, II.
after the maturity not only of the money market placement made
by petitioner but also of both DMC PN No. 2731 and Philfinance We turn now to the relationship between petitioner and private
PN No. 143-A. In other words, petitioner notified Delta of his respondent Pilipinas. Petitioner contends that Pilipinas became
rights as assignee after compensation had taken place by solidarily liable with Philfinance and Delta when Pilipinas issued
operation of law because the offsetting instruments had both DCR No. 10805 with the following words:
reached maturity. It is a firmly settled doctrine that the rights of
an assignee are not any greater that the rights of the assignor, Upon your written instruction, we [Pilipinas] shall undertake
since the assignee is merely substituted in the place of the physical delivery of the above securities fully assigned to you —
assignor 20 and that the assignee acquires his rights subject to .23
the equities — i.e., the defenses — which the debtor could have
set up against the original assignor before notice of the The Court is not persuaded. We find nothing in the DCR that
assignment was given to the debtor. Article 1285 of the Civil establishes an obligation on the part of Pilipinas to pay petitioner
Code provides that: the amount of P307,933.33 nor any assumption of liability in
solidum with Philfinance and Delta under DMC PN No. 2731.
Art. 1285. The debtor who has consented to the We read the DCR as a confirmation on the part of Pilipinas that:
assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which (1) it has in its custody, as duly constituted custodian bank,
would pertain to him against the assignor, unless the assignor DMC PN No. 2731 of a certain face value, to mature on 6 April
was notified by the debtor at the time he gave his consent, that 1981 and payable to the order of Philfinance;
he reserved his right to the compensation.
(2) Pilipinas was, from and after said date of the
If the creditor communicated the cession to him but the debtor assignment by Philfinance to petitioner (9 February 1981),
did not consent thereto, the latter may set up the compensation holding that Note on behalf and for the benefit of petitioner, at
of debts previous to the cession, but not of subsequent ones. least to the extent it had been assigned to petitioner by payee
Philfinance;24
If the assignment is made without the knowledge of the debtor,
he may set up the compensation of all credits prior to the same (3) petitioner may inspect the Note either "personally or by
and also later ones until he had knowledge of the assignment. authorized representative", at any time during regular bank
(Emphasis supplied) hours; and

Article 1626 of the same code states that: "the debtor who, (4) upon written instructions of petitioner, Pilipinas would
before having knowledge of the assignment, pays his creditor physically deliver the DMC PN No. 2731 (or a participation
shall be released from the obligation." In Sison v. Yap-Tico,21 therein to the extent of P307,933.33) "should this Denominated
the Court explained that: Custodianship receipt remain outstanding in [petitioner's] favor
thirty (30) days after its maturity."
[n]o man is bound to remain a debtor; he may pay to him with
whom he contacted to pay; and if he pay before notice that his Thus, we find nothing written in printers ink on the DCR which
debt has been assigned, the law holds him exonerated, for the could reasonably be read as converting Pilipinas into an obligor
reason that it is the duty of the person who has acquired a title under the terms of DMC PN No. 2731 assigned to petitioner,
by transfer to demand payment of the debt, to give his debt or either upon maturity thereof or any other time. We note that both
notice.22 in his complaint and in his testimony before the trial court,
petitioner referred merely to the obligation of private respondent
At the time that Delta was first put to notice of the assignment in Pilipinas to effect the physical delivery to him of DMC PN No.
petitioner's favor on 14 July 1981, DMC PN No. 2731 had 2731.25 Accordingly, petitioner's theory that Pilipinas had
already been discharged by compensation. Since the assignor assumed a solidary obligation to pay the amount represented by
Philfinance could not have then compelled payment anew by a portion of the Note assigned to him by Philfinance, appears to
Delta of DMC PN No. 2731, petitioner, as assignee of be a new theory constructed only after the trial court had ruled
Philfinance, is similarly disabled from collecting from Delta the against him. The solidary liability that petitioner seeks to impute
portion of the Note assigned to him. Pilipinas cannot, however, be lightly inferred. Under article 1207
of the Civil Code, "there is a solidary liability only when the law
or the nature of the obligation requires solidarity," The record PN No. 2731 had not yet matured and therefore, compensation
here exhibits no express assumption of solidary liability vis-a-vis or offsetting against Philfinance PN No. 143-A had not yet taken
petitioner, on the part of Pilipinas. Petitioner has not pointed to place. Instead of complying with the demand of the petitioner,
us to any law which imposed such liability upon Pilipinas nor has Pilipinas purported to require and await the instructions of
petitioner argued that the very nature of the custodianship Philfinance, in obvious contravention of its undertaking under
assumed by private respondent Pilipinas necessarily implies the DCR to effect physical delivery of the Note upon receipt of
solidary liability under the securities, custody of which was taken "written instructions" from petitioner Sesbreño. The ostensible
by Pilipinas. Accordingly, we are unable to hold Pilipinas term written into the DCR (i.e., "should this [DCR] remain
solidarily liable with Philfinance and private respondent Delta outstanding in your favor thirty [30] days after its maturity") was
under DMC PN No. 2731. not a defense against petitioner's demand for physical surrender
of the Note on at least three grounds: firstly, such term was
We do not, however, mean to suggest that Pilipinas has no never brought to the attention of petitioner Sesbreño at the time
responsibility and liability in respect of petitioner under the terms the money market placement with Philfinance was made;
of the DCR. To the contrary, we find, after prolonged analysis secondly, such term runs counter to the very purpose of the
and deliberation, that private respondent Pilipinas had breached custodianship or depositary agreement as an integral part of a
its undertaking under the DCR to petitioner Sesbreño. money market transaction; and thirdly, it is inconsistent with the
provisions of Article 1988 of the Civil Code noted above. Indeed,
We believe and so hold that a contract of deposit was constituted in principle, petitioner became entitled to demand physical
by the act of Philfinance in designating Pilipinas as custodian or delivery of the Note held by Pilipinas as soon as petitioner's
depositary bank. The depositor was initially Philfinance; the money market placement matured on 13 March 1981 without
obligation of the depository was owed, however, to petitioner payment from Philfinance.
Sesbreño as beneficiary of the custodianship or depository
agreement. We do not consider that this is a simple case of a We conclude, therefore, that private respondent Pilipinas must
stipulation pour autri. The custodianship or depositary respond to petitioner for damages sustained by arising out of its
agreement was established as an integral part of the money breach of duty. By failing to deliver the Note to the petitioner as
market transaction entered into by petitioner with Philfinance. depositor-beneficiary of the thing deposited, Pilipinas effectively
Petitioner bought a portion of DMC PN No. 2731; Philfinance as and unlawfully deprived petitioner of the Note deposited with it.
assignor-vendor deposited that Note with Pilipinas in order that Whether or not Pilipinas itself benefitted from such conversion
the thing sold would be placed outside the control of the vendor. or unlawful deprivation inflicted upon petitioner, is of no moment
Indeed, the constituting of the depositary or custodianship for present purposes. Prima facie, the damages suffered by
agreement was equivalent to constructive delivery of the Note petitioner consisted of P304,533.33, the portion of the DMC PN
(to the extent it had been sold or assigned to petitioner) to No. 2731 assigned to petitioner but lost by him by reason of
petitioner. It will be seen that custodianship agreements are discharge of the Note by compensation, plus legal interest of six
designed to facilitate transactions in the money market by percent (6%) per annum containing from 14 March 1981.
providing a basis for confidence on the part of the investors or
placers that the instruments bought by them are effectively taken The conclusion we have reached is, of course, without prejudice
out of the pocket, as it were, of the vendors and placed safely to such right of reimbursement as Pilipinas may have vis-a-vis
beyond their reach, that those instruments will be there available Philfinance.
to the placers of funds should they have need of them. The
depositary in a contract of deposit is obliged to return the III.
security or the thing deposited upon demand of the depositor
(or, in the presented case, of the beneficiary) of the contract, The third principal contention of petitioner — that Philfinance
even though a term for such return may have been established and private respondents Delta and Pilipinas should be treated
in the said contract.26 Accordingly, any stipulation in the as one corporate entity — need not detain us for long.
contract of deposit or custodianship that runs counter to the
fundamental purpose of that agreement or which was not In the first place, as already noted, jurisdiction over the person
brought to the notice of and accepted by the placer-beneficiary, of Philfinance was never acquired either by the trial court nor by
cannot be enforced as against such beneficiary-placer. the respondent Court of Appeals. Petitioner similarly did not
seek to implead Philfinance in the Petition before us.
We believe that the position taken above is supported by
considerations of public policy. If there is any party that needs Secondly, it is not disputed that Philfinance and private
the equalizing protection of the law in money market respondents Delta and Pilipinas have been organized as
transactions, it is the members of the general public whom place separate corporate entities. Petitioner asks us to pierce their
their savings in such market for the purpose of generating separate corporate entities, but has been able only to cite the
interest revenues.27 The custodian bank, if it is not related either presence of a common Director — Mr. Ricardo Silverio, Sr.,
in terms of equity ownership or management control to the sitting on the Board of Directors of all three (3) companies.
borrower of the funds, or the commercial paper dealer, is Petitioner has neither alleged nor proved that one or another of
normally a preferred or traditional banker of such borrower or the three (3) concededly related companies used the other two
dealer (here, Philfinance). The custodian bank would have every (2) as mere alter egos or that the corporate affairs of the other
incentive to protect the interest of its client the borrower or dealer two (2) were administered and managed for the benefit of one.
as against the placer of funds. The providers of such funds must There is simply not enough evidence of record to justify
be safeguarded from the impact of stipulations privately made disregarding the separate corporate personalities of delta and
between the borrowers or dealers and the custodian banks, and Pilipinas and to hold them liable for any assumed or
disclosed to fund-providers only after trouble has erupted. undetermined liability of Philfinance to petitioner.28

In the case at bar, the custodian-depositary bank Pilipinas WHEREFORE, for all the foregoing, the Decision and
refused to deliver the security deposited with it when petitioner Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195
first demanded physical delivery thereof on 2 April 1981. We dated 21 march 1989 and 17 July 1989, respectively, are hereby
must again note, in this connection, that on 2 April 1981, DMC MODIFIED and SET ASIDE, to the extent that such Decision
and Resolution had dismissed petitioner's complaint against
Pilipinas Bank. Private respondent Pilipinas bank is hereby
ORDERED to indemnify petitioner for damages in the amount of
P304,533.33, plus legal interest thereon at the rate of six percent
(6%) per annum counted from 2 April 1981. As so modified, the
Decision and Resolution of the Court of Appeals are hereby
AFFIRMED. No pronouncement as to costs.

SO ORDERED.