HAHN VS CA, G.R. NO. 113074, JANUARY 22, 1997Facts: Petitioner Alfred Hahn is a Filipino citizen doing business under the name and style "Hahn-Manila." On the other hand, private respondent Bayerische Motoren Werke Aktiengesellschaft (BMW) is a nonresident foreign corporation existing under the laws of the former Federal Republic of Germany, with principal office at Munich, Germany.

Petitioner executed in favor of private respondent a "Deed of Assignment with Special Power of Attorney,” which reads in full as follows:

WHEREAS, the ASSIGNOR is the present owner and holder of the BMW trademark and device in the Philippines which ASSIGNOR uses and has been using on the products manufactured by ASSIGNEE, and for which ASSIGNOR is the authorized exclusive Dealer of the ASSIGNEE in the Philippines, the same being evidenced by certificate of registration issued by the Director of Patents on 12 December 1963 and is referred to as Trademark No. 10625;

WHEREAS, the ASSIGNOR has agreed to transfer and consequently record said transfer of the said BMW trademark and device in favor of the ASSIGNEE herein with the Philippines Patent Office; xx

Per the agreement, the parties "continue[d] business relations as has been usual in the past without a formal contract." But on February 16, 1993, in a meeting with a BMW representative and the president of Columbia Motors Corporation (CMC), Jose Alvarez, petitioner was informed that BMW was arranging to grant the exclusive dealership of BMW cars and products to CMC, which had expressed interest in acquiring the same. On February 24, 1993, petitioner received confirmation of the information from BMW which, in a letter, expressed dissatisfaction with various aspects of petitioner's business, mentioning among other things, decline in sales, deteriorating services, and inadequate showroom and warehouse facilities, and petitioner's alleged failure to comply with the standards for an exclusive BMW dealer. Nonetheless, BMW expressed willingness to continue business relations with the petitioner on the basis of a "standard BMW importer" contract, otherwise, it said, if this was not acceptable to petitioner, BMW would have no alternative but to terminate petitioner's exclusive dealership effective June 30, 1993.

Petitioner protested, claiming that the termination of his exclusive dealership would be a breach of the Deed of Assignment. Hahn insisted that as long as the assignment of its trademark and device subsisted, he remained BMW's exclusive dealer in the Philippines because the assignment was made in consideration of the exclusive dealership. In the same letter petitioner explained that the decline in sales was due to lower prices offered for BMW cars in the United States and the fact that few customers returned for repairs and servicing because of the durability of BMW parts and the efficiency of petitioner's service.

Because of Hahn's insistence on the former business relation, BMW withdrew on March 26, 1993 its offer of a "standard importer contract" and terminated the exclusive dealer relationship effective June 30, 1993. At a conference of BMW Regional Importers held on April 26, 1993 in Singapore, Hahn was surprised to find Alvarez among those invited from the Asian region. On April 29, 1993, BMW proposed that Hahn and CMC jointly import and distribute BMW cars and parts.

Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for specific performance and damages against BMW to compel it to continue the exclusive dealership. Later he filed an amended complaint to include an application for temporary restraining order and for writs of preliminary, mandatory and prohibitory injunction to enjoin BMW from terminating his exclusive dealership. Hahn's amended complaint alleged in pertinent parts:xx

Without proof of service on BMW, the hearing on application for writ of preliminary injunction proceeded ex parte. The trial court issued an order granting the writ of preliminary injunction upon the filing of the bond. BWM moved to dismiss the case, contending that the trial court did not acquire jurisdiction over it through the service of summons on the DTI, because BWM was a foreign corporation and it was not

doing business in the Philippines. It contended that the execution of the Deed of Assignment was an isolated transaction; that Hahn was not its agent because the latter undertook to assemble and sell BMW cars and products without the participation of BMW and sold other products; and that Hahn was an indentor or middleman transacting business in his own name and for his own account.

Petitioner Alfred Hahn opposed the motion. He argued that BMW was doing business in the Philippines through him as its agent, as shown by the fact that BMW invoices and order forms were used to document his transactions; that he gave warranties as exclusive BMW dealer; that BMW officials periodically inspected standards of service rendered by him; and that he was described in service booklets and international publications of BMW as a "BMW Importer" or "BMW Trading Company" in the Philippines.

The CA found the trial court guilty of grave abuse of discretion in deferring resolution of the motion to dismiss filed by BMW. It ruled that BMW was not doing business in the country, and, therefore, jurisdiction over it could not be acquired through the service of summons in the DTI pursuant to Rule 14 section 14; that Hahn acted in his own name and for his own account independently of BMW, based on Alfred Hahn's allegations that he had invested his own money and resources in establishing BMW's goodwill in the Philippines and on BMW's claim that Hahn sold products other than those of BMW. It held that petitioner was a mere indentor or broker and not an agent through whom private respondent BMW transacted business in the Philippines. Consequently, the Court of Appeals dismissed petitioner's complaint against BMW.

Issue: WON BMW is not doing business in the Philippines — No, they are

Held: Petitioner's appeal is well taken. Rule 14, §14 provides: §14. Service upon private foreign corporations. — If the defendant is a foreign corporation, or a nonresident joint stock company or association, doing business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines. (Emphasis added).

What acts are considered "doing business in the Philippines" are enumerated in §3(d) of the Foreign Investments Act of 1991 (R.A. No. 7042) as follows: d) the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. (Emphasis supplied)

Thus, the phrase includes "appointing representatives or distributors in the Philippines " but not when the representative or distributor " transacts business in its name and for its own account ." In addition, §1(f)(1) of the Rules and Regulations implementing (IRR) the Omnibus Investment Code of 1987 (E.O. No. 226) provided:

(f) "Doing business" shall be any act or combination of acts, enumerated in Article 44 of the Code. In particular, "doing business" includes: (1) . . . A foreign firm which does business through middlemen acting in their own names, such as indentors, commercial brokers or commission merchants, shall not be deemed doing business in the Philippines. But such indentors, commercial brokers or

commission merchants shall be the ones deemed to be doing business in the Philippines.

The question is whether petitioner Alfred Hahn is the agent or distributor in the Philippines of private respondent BMW. If he is, BMW may be considered doing business in the Philippines and the trial court acquired jurisdiction over it (BMW) by virtue of the service of summons on the Department of Trade and Industry. Otherwise, if Hahn is not the agent of BMW but an independent dealer, albeit of BMW cars and products, BMW, a foreign corporation, is not considered doing business in the Philippines within the meaning of the Foreign Investments Act of 1991 and the IRR, and the trial court did not acquire jurisdiction over it (BMW).

The Court of Appeals held that petitioner Alfred Hahn acted in his own name and for his own account and not as agent or distributor in the Philippines of BMW on the ground that "he alone had contacts with individuals or entities interested in acquiring BMW vehicles. Independence characterizes Hahn's undertakings, for which reason he is to be considered, under governing statutes, as doing business."

As the above quoted allegations of the amended complaint show, however, there is nothing to support the appellate court's finding that Hahn solicited orders alone and for his own account and without "interference from, let alone direction of, BMW." (p. 13) To the contrary, Hahn claimed he took orders for BMW cars and transmitted them to BMW. Upon receipt of the orders, BMW fixed the downpayment and pricing charges, notified Hahn of the scheduled production month for the orders, and reconfirmed the orders by signing and returning to Hahn the acceptance sheets. Payment was made by the buyer directly to BMW. Title to cars purchased passed directly to the buyer and Hahn never paid for the purchase price of BMW cars sold in the Philippines. Hahn was credited with a commission equal to 14% of the purchase price upon the invoicing of a vehicle order by BMW. Upon confirmation in writing that the vehicles had been registered in the Philippines and serviced by him, Hahn received an additional 3% of the full purchase price. Hahn performed after-sale services, including warranty services, for which he received reimbursement from BMW. All orders were on invoices and forms of BMW.

These allegations were substantially admitted by BMW which, in its petition for certiorari before the Court of Appeals, stated.

Contrary to the appellate court's conclusion, this arrangement shows an agency. An agent receives a commission upon the successful conclusion of a sale. On the other hand, a broker earns his pay merely by bringing the buyer and the seller together, even if no sale is eventually made.

As to the service centers and showrooms which he said he had put up at his own expense, Hahn said that he had to follow BMW specifications as exclusive dealer of BMW in the Philippines. According to Hahn, BMW periodically inspected the service centers to see to it that BMW standards were maintained. Indeed, it would seem from BMW's letter to Hahn that it was for Hahn's alleged failure to maintain BMW standards that BMW was terminating Hahn's dealership.

The fact that Hahn invested his own money to put up these service centers and showrooms does not necessarily prove that he is not an agent of BMW. For as already noted, there are facts in the record which suggest that BMW exercised control over Hahn's activities as a dealer and made regular inspections of Hahn's premises to enforce compliance with BMW standards and specifications. For example, in its letter to Hahn dated February 23, 1996, BMW stated: In the last years we have pointed out to you in several discussions and letters that we have to tackle the Philippine market more professionally and that we are through your present activities not adequately prepared to cope with the forthcoming challenges.

In effect, BMW was holding Hahn accountable to it under the 1967 Agreement.

This case fits into the mould of Communications Materials, Inc. v. Court of Appeals, in which the foreign

corporation entered into a "Representative Agreement" and a "Licensing Agreement" with a domestic corporation, by virtue of which the latter was appointed "exclusive representative" in the Philippines for a stipulated commission. Pursuant to these contracts, the domestic corporation sold products exported by the foreign corporation and put up a service center for the products sold locally. This Court held that these acts constituted doing business in the Philippines. The arrangement showed that the foreign corporation's purpose was to penetrate the Philippine market and establish its presence in the Philippines.

In addition, BMW held out private respondent Hahn as its exclusive distributor in the Philippines, even as it announced in the Asian region that Hahn was the "official BMW agent" in the Philippines.

The Court of Appeals also found that petitioner Alfred Hahn dealt in other products, and not exclusively in BMW products, and, on this basis, ruled that Hahn was not an agent of BMW. (p. 14 ) This finding is based entirely on allegations of BMW in its motion to dismiss filed in the trial court and in its petition for certiorari before the Court of Appeals. But this allegation was denied by Hahn and therefore the Court of Appeals should not have cited it as if it were the fact.

Anyway, private respondent need not apprehend that by responding to the summons it would be waiving its objection to the trial court's jurisdiction. It is now settled that, for purposes of having summons served on a foreign corporation in accordance with Rule 14, §14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines . The court need not go beyond the allegations of the complaint in order to determine whether it has Jurisdiction. A determination that the foreign corporation is doing business is only tentative and is made only for the purpose of enabling the local court to acquire jurisdiction over the foreign corporation through service of summons pursuant to Rule 14, §14. Such determination does not foreclose a contrary finding should evidence later show that it is not transacting business in the country.

WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is REMANDED to the trial court for further proceedings.

GAMBOA VS TEVES G.R. 176579, JUNE 28, 2011Facts: The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone Company (PLDT), are as follows: On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise and the right to engage in telecommunications business. In 1969, General Telephone and Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold 26% of the outstanding common shares of PLDT to PTIC (Philippine Telecommunications Investment Corporation).

In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent about 46.125 % of the outstanding capital stock of PTIC, were later declared by this Court to be owned by the Republic of the Philippines.

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54% of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the 111,415 PTIC shares, or 46.125% of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won with a bid of P 25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125 % of the outstanding capital stock of PTIC, with the Philippine Government for the price of P 25,217,556,000 or US$510,580,189 . The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125% of PTIC shares is actually an indirect sale of 12 million shares or about 6.3% of the outstanding common shares of PLDT . With the sale, First Pacific’s common shareholdings in PLDT increased from 30.7% to 37%, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47 %. This violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40 %.

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts: (same) xxx On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who attended the public hearing. The HR Committee Report No. 2270 concluded that: (a) the auction of the governments 111,415 PTIC shares bore due diligence, transparency and conformity with existing legal procedures; and (b) First Pacific’s intended acquisition of the governments 111,415 PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate the 40% constitutional limit on foreign ownership of a public utility since PTIC holds only 13.847% of the total outstanding common shares of PLDT. On 28 February 2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.Petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacifics common shareholdings in PLDT from 30.7% to 37%, and this, combined with Japanese NTT DoCoMos common shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56 % which is over the 40 % constitutional limit.

Issue: Whether the term capital in Section 11 of Article XII of the constitution refers to the total commons shares only or to the outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility

Held: The petition is partly meritorious.

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of public utilities, to wit: Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.

The crux of the controversy is the definition of the term capital. Does the term capital in Section 11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined

total of common and non-voting preferred shares)?

Petitioner submits that the 40% foreign equity limitation in domestic public utilities refers only to common shares because such shares are entitled to vote and it is through voting that control over a corporation is exercised. Petitioner posits that the term capital in Section 11, Article XII of the Constitution refers to the ownership of common capital stock subscribed and outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and elect members of the board of directors. It is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino citizens . This arose from Presidential Decree No. 217, issued on 16 June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to pay for the investment cost of installing the telephone line.

Petitioners-in-intervention basically reiterate petitioners arguments and adopt petitioners definition of the term capital. Petitioners-in-intervention allege that the approximate foreign ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the total outstanding common stock, which means that foreigners exercise significant control over PLDT, patently violating the 40 % foreign equity limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term capital in Section 11, Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40 % of the common shares of PLDT are held by foreigners.

We agree with petitioner and petitioners-in-intervention. The term capital in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors , and thus in the present case only to common shares , and not to the total outstanding capital stock comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines classifies shares as common or preferred, thus: Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as common shares. However, preferred shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner as bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.

Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the term capital shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term capital in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional Commission, capital refers to the voting stock or controlling interest of a corporation , to wit:

Thus, 60% of the capital assumes, or should result in, controlling interest in the corporation. Reinforcing this interpretation of the term capital, as referring to controlling interest or shares entitled to vote, is the definition of a Philippine national in the Foreign Investments Act of 1991, to wit:SEC. 3. Definitions. - As used in this Act:

a. The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty % (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred % (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee

of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty % (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty % (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be considered a Philippine national. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing Rules and Regulations of the Foreign Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty % [60%] of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty % [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC] registered enterprise, at least sixty % [60%] of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty % [60%] of the members of the Board of Directors of each of both corporation must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals. Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60% Filipino-owned capital required in the Constitution. Full beneficial ownership of 60 % of the outstanding capital stock, coupled with 60% of the voting rights, is required. The legal and beneficial ownership of 60% of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher %age as Congress may prescribe, certain areas of investments. Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty % of the capital of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section 11, Article XII of the Constitution is also used in the same context in numerous laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term capital as the total outstanding capital stock, including both common and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the State shall develop a self-reliant and independent national economy effectively controlled by Filipinos. A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad definition of the term capital, such corporation would be considered compliant with the 40% constitutional limit on foreign equity of public utilities since the overwhelming majority, or more than 99.999%, of the total outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001%, exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999% of the equity, cannot vote in the election of directors and hence, have no control over the public utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language of the Constitution, to place the control of public utilities in the hands of Filipinos. It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors . PLDTs Articles of Incorporation expressly state that the holders of Serial Preferred Stock shall not be entitled to vote at any meeting of the stockholders for the election of directors or for any other purpose or otherwise participate in any action taken by the corporation or its stockholders, or to receive notice of any meeting of stockholders.

On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors. PLDTs Articles of Incorporation state that each holder of Common Capital Stock shall have one vote in respect of each share of such stock held by him on all matters voted upon by the stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors and for all other purposes.

In short, only holders of common shares can vote in the election of directors, meaning only common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting rights in the election of directors, do not have any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders of preferred shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute , that foreigners hold a majority of the common shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDTs common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 % limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009, as submitted to the SEC, shows that per share the SIP preferred shares earn a pittance in dividends compared to the common shares. PLDT declared

dividends for the common shares at P70.00 per share, while the declared dividends for the preferred shares amounted to a measly P1.00 per share. So the preferred shares not only cannot vote in the election of directors, they also have very little and obviously negligible dividend earning capacity compared to common shares.

As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 % Filipino control and Filipino beneficial ownership in a public utility. —> what they’re doing in this case is, as long as 60% of the voting/controlling interest + outstanding capital stock lies with Filipinos, it does not violate the constitution. Never mind if the Filipinos don’t own 60% of the non-voting shares. But later on, in the case, 60% of BOTH voting and non-voting should be owned by Filipinos

The legal and beneficial ownership of 60% of the outstanding capital stock must rest in the hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60% of the outstanding capital stock, coupled with 60% of the voting rights, is constitutionally required for the States grant of authority to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional requirement of 60 % Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 % of the voting stock, and earn less than 60% of the dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that [n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to x x x corporations x x x organized under the laws of the Philippines, at least 60% of whose capital is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn; (5) preferred shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of P 5.00 have a current stock market value of P 2,328.00 per share, while PLDT preferred shares with a par value of P 10.00 per share have a current stock market value ranging from only P 10.92 to P 11.06 per share, is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares.

Indisputably, construing the term capital in Section 11, Article XII of the Constitution to include both voting and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners, amounting to a clear abdication of the States constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas of investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of land, educational institutions and advertising businesses. The Court should never

open to foreign control what the Constitution has expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national interest. The Court must perform its solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, a self-reliant and independent national economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to Filipinos specific areas of investment, such as the development of natural resources and ownership of land, educational institutions and advertising business, is self-executing. There is no need for legislation to implement these self-executing provisions of the Constitution.

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly reserving specific areas of investments to corporations, at least 60 % of the capital of which is owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment, like the operation by corporations of public utilities, the exploitation by corporations of mineral resources, the ownership by corporations of real estate, and the ownership of educational institutions. All the legislatures that convened since 1935 also miserably failed to enact legislations to implement these vital constitutional provisions that determine who will effectively control the national economy, Filipinos or foreigners. This Court cannot allow such an absurd interpretation of the Constitution.

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the term capital in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.◆In this case, they’re saying that capital under the constitution should refer to capital which has voting rights or controlling interest. It touched the “beneficial ownership test” but did not really emphasize it as a test as to whether you are a philippine national

◆But in this case, the court here emphasized that to be a Philippine national, you must apply the VOTING CONTROL TEST AND THE BENEFICIAL OWNERSHIP TEST— Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential.”—> 60% of outstanding capital (meaning all shares) + 60% voting rights GAMBOA VS TEVES G.R. 176579, OCTOBER 9, 2012Motion for recon was denied.

Held: Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled and defined to refer to the total outstanding shares of stock, whether voting or non-voting. In fact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has consistently adopted this particular definition in its numerous opinions. Movants point out that with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream redefinition” of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term "capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside the purported long-standing definition of the

term "capital," which supposedly refers to the total outstanding shares of stock, whether voting or non-voting. To repeat, until the present case there has never been a Court ruling categorically defining the term "capital" found in the various economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term "capital" as referring to both voting and non-voting shares (combined total of common and preferred shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital" contrary to the definition that this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985, dated 7 October 1985, the scope of the term "capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term "capital" includes "both preferred and common stocks." The issue was raised in relation to a stock-swap transaction between a Filipino and a Japanese corporation, both stockholders of a domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the corporation would be unconstitutional because 60% of the voting stock would be owned by Japanese while Filipinos would own only 40% of the voting stock, although when the non-voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock. This ownership structure is remarkably similar to the current ownership structure of PLDT.

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the same class of shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless the corporation "satisfies the criterion of beneficial ownership" and that in applying the same "the primordial consideration is situs of control.”

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine national.

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic provisions of the Constitution.

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of SEC rules or regulations is ultra vires . Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or staff the power to adopt rules or regulations. In short, any opinion of individual Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC.

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in

favor of Filipino citizens in the Constitution to engage in certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation. Thus, in our 28 June 2011 Decision we stated: Mere legal title is insufficient to meet the 60% Filipino-owned "capital" required in the Constitution. Full beneficial ownership of 60% of the outstanding capital stock, coupled with 60% of the voting rights, is required. The legal and beneficial ownership of 60 % of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a "Philippine national.”

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which respondents relied upon, is merely preliminary and an opinion only of such officers. To repeat, any such opinion does not constitute an SEC rule or regulation. In fact, many of these opinions contain a disclaimer which expressly states: "x x x the foregoing opinion is based solely on facts disclosed in your query and relevant only to the particular issue raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar circumstances.” Thus, the opinions clearly make a caveat that they do not constitute binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc , as well as of the DOJ, interpreting the law are neither conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that any interpretation of the law that administrative or quasi-judicial agencies make is only preliminary, never conclusive on the Court. The power to make a final interpretation of the law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications Commission v. Court of Appeals and Philippine Long Distance Telephone Company v. National Telecommunications Commission in arguing that the Court has already defined the term "capital" in Section 11, Article XII of the 1987 Constitution.

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of Appeals and Philippine Long Distance Telephone Company v. National Telecommunications Commission, the Court did not define the term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11, Article XII of the Constitution or any of its economic provisions, and thus cannot serve as precedent in the interpretation of Section 11, Article XII of the Constitution. These two cases dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act.

III. Filipinization of Public Utilities. Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the development of a national economy "effectively controlled" by Filipinos: Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees: Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher %age as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in

accordance with its national goals and priorities.

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher %age as Congress may prescribe, certain areas of investments." Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least 60% of the "capital" of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains: Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of authorization for the operation of public utilities shall be granted only to "citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens." "The provision is [an express] recognition of the sensitive and vital position of public utilities both in the national economy and for national security.”

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60 % of whose "capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a public utility. In the case of corporations or associations, at least 60 % of their "capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987 Constitution, to own and operate a public utility a corporation’s capital must at least be 60 % owned by Philippine nationals.

IV. Definition of "Philippine National” — Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which defined a "Philippine national" as follows: SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines ; or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred % (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty % (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty % (60%) of the members of the

Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be considered a "Philippine national." (Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a domestic corporation at least "60% of the capital stock outstanding and entitled to vote " is owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987, which was issued by then President Corazon C. Aquino. Article 15 of this Code states: Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines ; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)

Under Article 48(3)of the Omnibus Investments Code of 1987, "no corporation x x x which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines."Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like a public utility . This means, of course, that only a "Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code of 1981, to wit: Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing a written certificate from the Board of Investments to the effect that such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines."Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like a public utility. Again, this means that only a "Philippine national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186 or the Investment Incentives Act, which took effect on 16 September 1967, contained a similar definition of a "Philippine national," to wit: (f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine National and at least sixty per cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent of the capital stock outstanding and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty per cent of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine National. (Boldfacing, italicization and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on 30 September 1968, if the investment in a domestic enterprise by non-Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise must obtain prior approval from the Board of Investments before accepting such investment. Such approval shall not be granted if the investment "would conflict with existing constitutional provisions and laws regulating the degree of required ownership by Philippine nationals in the enterprise.” A "non-Philippine national" cannot own and operate a reserved economic activity like a public utility. Again, this means that only a "Philippine national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or a

domestic corporation "at least sixty% (60%) of the capital stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60% of its voting stock is owned by Filipino citizens. This definition of a "Philippine national" is crucial in the present case because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation of public utilities to Filipino citizens or to corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of business and area of investment. The FIA spells out the procedures by which non-Philippine nationals can invest in the Philippines. Among the key features of this law is the concept of a negative list or the Foreign Investments Negative List. Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List]. - The Foreign Investment Negative List shall have two component lists: A and B:a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the

Constitution and specific laws.b. List B shall contain the areas of activities and enterprises regulated pursuant to law:1. which are defense-related activities, requiring prior clearance and authorization from the

Department of National Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign Investment Negative List A consists of " areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws ," where foreign equity participation in any enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution and other specific laws. In short, to own and operate a public utility in the Philippines one must be a "Philippine national" as defined in the FIA. The FIA is abundant notice to foreign investors to what extent they can invest in public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the ownership and operation of public utilities, which the Constitution expressly reserves to Filipino citizens and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of the FIA reserves the ownership and operation of public utilities only to "Philippine nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under the laws of the Philippines of which at least sixty % (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred % (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the passage of the present Foreign Investments Act of 1991, or for more than four decades, the statutory definition of the term "Philippine national" has been uniform and consistent: it means a Filipino citizen, or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these same statutes have uniformly and consistently required that only "Philippine nationals" could own and operate public utilities in the Philippines.

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which categorically prescribe that certain economic activities, like the ownership and operation of public utilities, are reserved to corporations "at least (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of the Constitution and specific laws." The FIA is the basic statute regulating foreign investments in the Philippines. Government agencies tasked with regulating or monitoring foreign investments, as well as counsels of foreign investors, should start with the FIA in determining to what extent a particular foreign investment is allowed in the Philippines. Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red flag. There are already numerous opinions of SEC legal officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation is qualified to own and operate a nationalized or partially nationalized business in the Philippines. This shows that SEC legal officers are not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining the eligibility of a corporation to engage in partially nationalized industries.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited and interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to "companies which have not registered and obtained special incentives under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise. Tax and fiscal incentives to investments are granted separately under the Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles previously regulated foreign investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments Code of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA and its predecessor statutes apply to investments in all domestic enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its predecessor statutes . The reason is quite obvious – mere non-availment of tax and fiscal incentives by a non-Philippine national cannot exempt it from Section 11, Article XII of the Constitution regulating foreign investments in public utilities.

V. Right to elect directors, coupled with beneficial ownership, translates to effective control. — The 28 June 2011 Decision declares that the 60% Filipino ownership required by the Constitution to engage in certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation . To repeat, we held: Mere legal title is insufficient to meet the 60% Filipino-owned "capital" required in the Constitution. Full beneficial ownership of 60% of the outstanding capital stock, coupled with 60% of the voting rights, is required . The legal and beneficial ownership of 60 % of the outstanding capital stock must rest in the hands of Filipino nationals in

accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential."

Since the constitutional requirement of at least 60% Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows denial of the right to vote in specific corporate matters. Thus, common shares have the right to vote in the election of directors, while preferred shares may be denied such right. Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are entitled to vote on the following corporate matters: (1) amendment of articles of incorporation; (2) increase and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other disposition of substantially all corporate assets; (5) investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 % of the common shares and at least 60 % of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 % of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60% of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry that foreigners, owning most of the non-voting shares, will exercise greater control over fundamental corporate matters requiring two-thirds or majority vote of all shareholders.

Final Word The Constitution expressly declares as State policy the development of an economy "effectively controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves

the ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60% of whose capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is precisely because the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the letter and intent of the Constitution. Any other meaning of the term "capital" openly invites alien domination of economic activities reserved exclusively to Philippine nationals. Therefore, respondents’ interpretation will ultimately result in handing over effective control of our national economy to foreigners in patent violation of the Constitution, making Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural resources, and in the ownership and control of public utilities, in the Philippines. To do this the 1935 Constitution, which contained the same 60 % Filipino ownership and control requirement as the present 1987 Constitution, had to be amended to give Americans parity rights with Filipinos. There was bitter opposition to the Parity Amendment and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one of the American-controlled public utilities that became Filipino-controlled when the controlling American stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July 1974. No economic suicide happened when control of public utilities and mining corporations passed to Filipinos’ hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the Parity Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without any amendment to the present Constitution. Worse, movants’ interpretation opens up our national economy to effective control not only by Americans but also by all foreigners, be they Indonesians, Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same rights as Americans to exploit natural resources, and to own and control public utilities, in the United States of America. Here, movants’ interpretation would effectively mean a unilateral opening up of our national economy to all foreigners, without any reciprocal arrangements. That would mean that Indonesians, Malaysians and Chinese nationals could effectively control our mining companies and public utilities while Filipinos, even if they have the capital, could not control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60% Filipino ownership and control requirement for public utilities like PLOT. Any deviation from this requirement necessitates an amendment to the Constitution as exemplified by the Parity Amendment. This Court has no power to amend the Constitution for its power and duty is only to faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.

◆ This case talks about the Grandfather ruleNARRA NICKEL MINING AND DEVELOPMENT CORP VS REDMONT CONSOLIDATED MINES, G.R NO. 195580, 21 APRIL 2014 Facts: Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a

domestic corporation organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI) filed an application for an MPSA and Exploration permit with the Mines and Geo-Sciences Bureau (MGB). SMMI was issued the permits applies for. The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur. Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Another MPSA application of SMMI was filed with the DENR. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of petitioners’ applications for MPSA. In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows that it can only participate in mining activities through corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.

Petitioners averred that they were qualified persons under the Philippine Mining Act. Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or Technical Assistance Agreements (FTAA) which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of Narra),40% of the shares of MMC (which owns 5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro), the shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool used in determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue them because it has no pending claim or application over the areas applied for by petitioners.

POA issued a resolution disqualifying petitioners from gaining MSPAs. The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an Order denying the Motion for Reconsideration filed by petitioners.

The CA found that there was doubt as to the nationality of petitioners when it realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians . Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the exploitation of natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of

Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens. (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of petitioners through joint venture agreements. The CA found that through a "web of corporate layering, it is clear that one common controlling investor in all mining corporations involved x x x is MBMI." Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI. Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious in nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by the Secretary of the DENR.

Issue: WON the CA erred in applying the Grandfather test in determining the nationality of the petitioners

Held: Grandfather test — The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted their Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate ownership to reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA) , rather than using the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides: SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by the citizens of the Philippines; a corporation organized under the laws

of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty % (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty % (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty % (60%) of the members of the Board of Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)

*The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule "has been abandoned and is no longer the applicable rule.” They also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear and unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of discretion in applying the law. They said that the plain, literal meaning of the statute meant the application of the control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule has already been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides: Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. x x x x The President may enter into agreements with Foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60 % ownership of capital is pertinent to this case, since the issues are centered on the utilization of our country’s natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution so provides, such agreements are only allowed corporations or associations "at least 60% of such capital is owned by such citizens."

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides: The above-quoted SEC Rules provide

for the manner of calculating the Filipino interest in a corporation for purposes, among others, of determining compliance with nationality requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the determination of nationality depending on the ownership of the Investee Corporation and, in certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.x x x x

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather rule since , as ruled by the POA and affirmed by the OP, d oubt prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI, funded them. However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%.

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where "doubt" as to the ownership of the corporation exists. It would be ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value. It would be senseless for these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc. — To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, they have to be “grandfathered." As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the following: xx. Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor and “controls" MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the number of shares it subscribed to. It states that Olympic entered into joint venture agreements with several Philippine companies, wherein it holds directly and indirectly a 60% effective equity interest in the Olympic Properties.

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc. — Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below: xx Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same.

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and development of our natural resources.

Narra Nickel Mining and Development Corporation— Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate structure.

Patricia Louise Mining & Development Corporation — Using the grandfather method, we further look and examine PLMDC’s corporate structure: Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the intricate corporate layering that MBMI immersed itself in: xx

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, namely: MMC, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture" agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority control over the corporations mentioned. In effect, whether looking at the capital structure or the underlying relationships between and among the corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.

NARRA NICKEL MINING AND DEVELOPMENT CORP VS REDMONT CONSOLIDATED MINES, G.R NO. 195580, 28 JANUARY 2015Facts: Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the Petition for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court’s ruling that petitioners, being foreign corporations,are not entitled to Mineral Production Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with approval the appellate court’s finding that there was doubt as to petitioners’ nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns 60% of the common stocks of the petitioners by owning equity interest of petitioners’ other majority corporate shareholders.

Held: The application of the Grandfather Rule is justified by the circumstances of the case to determine the nationality of petitioners. — To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is erroneous and allegedly without basis in the Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995, and the Rules issued by the Securities and Exchange Commission (SEC). These laws and rules supposedly espouse the application of the Control Test in verifying the Philippine nationality of corporate entities for purposes of determining compliance with Sec. 2, Art. XII of the Constitution that only “corporations or associations at least sixty per centum of whose capital is owned by such [Filipino] citizens” may enjoy certain rights and privileges, like the exploration and development of natural resources.

The application of the Grandfather Rule in the present case does not eschew the Control Test. — Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21, 2014 Decision. Nowhere in that disposition did the Court foreclose the application of the Control Test in determining which corporations may be considered as Philippine nationals. Instead, to borrow Justice Leonen’s term, the Court used the Grandfather Rule as a “ supplement ” to the Control Test so that the intent underlying the averted Sec.2, Art. XII of the Constitution be given effect . The following excerpts of the April 21, 2014 Decision cannot be clearer: In ending, the “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino equity ownership in the corporation, then it may apply the “grandfather rule.”(emphasis supplied)

With that, the use of the Grandfather Rule as a “supplement” to the Control Test is not proscribed by the Constitution or the Philippine Mining Act of 1995.

The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution. — To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of natural resources to Filipino citizens and “corporations or associations at least sixty per centum of whose capital is owned by such citizens.” Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers a “corporation xxx registered in accordance with law at least sixty per cent of the capital of which is owned by citizens of the Philippines” as a person qualified to undertake a mining operation. Consistent with this objective, the Grandfather Rule was originally conceived to look into the citizenship of the individuals who ultimately own and control the shares of stock of a corporation for purposes of determining compliance with the constitutional requirement of Filipino ownership. It cannot, therefore, be denied that the framers of the Constitution have not foreclosed the Grandfather Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their right to participate in nationalized or partly nationalized activities.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is “the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.” Thus, to arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are determined.

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31),the SEC applied the Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement of the Control Test, viz:

You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40% equity in MEDC, while the 60% is ostensibly owned by Philippine individual citizens who are actually MML’s controlled nominees; (2) MEDC, in turn,owns 60% equity in MOHC, while MML owns the remaining 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You provide the following figure to illustrate this structure:x x x x

We note that the Constitution and the statute use the concept “Philippine citizens.” Article III, Section 1 of the Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. In other words, there can be no other Philippine citizens other than those falling within the enumeration provided by the Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for purposes of the Constitutional and statutory restrictions on foreign participation in the exploitation of mineral resources, a corporation investing in a mining joint venture can never be considered as a Philippine citizen.

The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The Court held that a corporation investing in another corporation engaged in a nationalized activity cannot beconsidered as a citizen for purposes of the Constitutional provision restricting foreign exploitation of natural resources:

x x x

Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural persons, of that investor-corporation in order to determine if the Constitutional and statutory restrictions are complied with. If the shares of stock of the immediate investor corporation

is in turn held and controlled by another corporation, then we must look into the citizenship of the individual stockholders of the latter corporation. In other words, if there are layers of intervening corporations investing in a mining joint venture, we must delve into the citizenship of the individual stockholders of each corporation. This is the strict application of the grandfather rule, which the Commission has been consistently applying prior to the 1990s.

Indeed, the framers of the Constitution intended for the “grandfather rule” to apply in case a 60%-40% Filipino-Foreign equity corporation invests in another corporation engaging in an activity where the Constitution restricts foreign participation.

x x x x

Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned, while it is only 12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60% ownership by Philippine citizens is violated. (emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al., the SEC en banc applied the Grandfather Rule despite the fact that the subject corporations ostensibly have satisfied the 60-40 Filipino equity requirement. The SEC en banc held that to attain the Constitutional objective of reserving to Filipinos the utilization of natural resources, one should not stop where the percentage of the capital stock is 60%. Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all the funds of the remaining appellee-corporations. The records disclose that: (1) Olympic Mines and Development Corporation (“OMDC”), a domestic corporation, and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital stock of Madridejos; however, OMDC paid nothing for this subscription while MBMI paid P2,803,900.00 out of its total subscription cost of P3,331,000.00; (2) Palawan Alpha South Resource Development Corp. (“Palawan Alpha”), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996 shares, respectively, out of the authorized capital stock of Patricia Louise; however, Palawan Alpha paid nothing for this subscription while MBMI paid P2,796,000.00 out of its total subscription cost of P3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital stock of Sara Marie; however, OMDC paid nothing for this subscription while MBMI paid P2,794,000.00 out of its total subscription cost of P3,331,000.00; and (4) Falcon Ridge Resources Management Corp. (“Falcon Ridge”), another domestic corporation, and MBMI subscribed to 5,997 and 3,998 shares, respectively, out of the authorized capital stock of San Juanico; however, Falcon Ridge paid nothing for this subscription while MBMI paid P2,500,000.00 out of its total subscription cost of P3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.

x x x x

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.

The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate shareholder to the second or even the subsequent tier of ownership hews with the rule that the “beneficial ownership” of corporations engaged in nationalized activities must reside in the hands of Filipino citizens. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied, the

Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may distort the actual economic or beneficial ownership of a mining corporation may be struck down as violative of the constitutional requirement, viz:xxx

Application of the Grandfather Rule with the Control Test. — Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion springs from the erroneous assumption that the use of one method forecloses the use of the other.

As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the Control Test can be, as it has been, applied jointly with the Grandfather Rule to determine the observance of foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather Rule are not, as it were, incompatible ownership-determinant methods that can only be applied alternative to each other. Rather, these methods can, if appropriate, be used cumulatively in the determination of the ownership and control of corporations engaged in fully or partly nationalized activities, as the mining operation involved in this case or the operation of public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. In that instance, there is no need for a dissection or further inquiry on the ownership of the corporate shareholders in both the investing and investee corporation or the application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control.” In this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary.

As explained in the April 21, 2012 Decision, the “doubt” that demands the application of the Grandfather Rule in addition to or in tandem with the Control Test is not confined to, or more bluntly, does not refer to the fact that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold. Rather, “doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent provisions of the Anti-Dummy Law in relation to the minimum Filipino equity requirement in the Constitution, “significant indicators of the dummy status” have been recognized in view of reports “that some Filipino investors or businessmen are being utilized or [are] allowing themselves to be used as dummies by foreign investors” specifically in joint ventures for national resource exploitation. These indicators are:1. That the foreign investors provide practically all the funds for the joint investment undertaken by

these Filipino businessmen and their foreign partner;cha2. That the foreign investors undertake to provide practically all the technological support for the joint

venture;3. That the foreign investors, while being minority stockholders, manage the company and prepare all

economic viability studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works Realty Development Corporation, the SEC held that when foreigners contribute more capital to an enterprise, doubt exists as to the actual control and ownership of the subject corporation even if the 60% Filipino equity threshold is met.

As will be discussed, even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite number of control and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent of the ownership of the corporate shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the shareholdings to the point when natural persons hold rights to the stocks may very well lead to an investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was originally intended to trace the shareholdings to the point where natural persons hold the shares, the SEC had already set up a limit as to the number of corporate layers the attribution of the nationality of the corporate shareholders may be applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of corporate relations for publicly-held corporations or where the shares are traded in the stock exchanges, and to three (3) levels for closely held corporations or the shares of which are not traded in the stock exchanges. These limits comply with the requirement in Palting v. San Jose Petroleum , Inc. that the application of the Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and their investing corporate stockholders. — In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the matter of true ownership and control over the petitioners as doubt exists as to the actual extent of the participation of MBMI in the equity of the petitioners and their investing corporations.

The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious doubt as to the true extent of its (MBMI) control and ownership over both Sara Marie and Tesoro since, as observed by the SEC, “a reasonable investor would expect to have greater control and economic rights than other investors who invested less capital than him.” The application of the Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control and economic benefits in petitioner Tesoro (through Sara Marie) fall below the threshold 60%, viz.

McArthur — Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI. Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates serious doubt as to the true extent of its control and ownership of MBMI over both Madridejos and McArthur. The application of the Grandfather Rule is clearly called for, and as will be shown below, MBMI,along with the other foreign shareholders, breached the maximum limit of 40% ownership in petitioner McArthur, rendering the petitioner disqualified to an MPSA.

As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to 59.99% foreign ownership of its shares, it is clear that petitioner McArthur does not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.

Narra — As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares. Yet again, PASRDC did not pay for

any of its subscribed shares, while MBMI contributed 99.75% of PLMDC’s paid-up capital. This fact creates serious doubt as to the true extent of MBMI’s control and ownership over both PLMDC and Narra since “a reasonable investor would expect to have greater control and economic rights than other investors who invested less capital than him.” Thus, the application of the Grandfather Rule is justified. And as will be shown, it is clear that the Filipino ownership in petitioner Narrafalls below the limit prescribed in both the Constitution and the Philippine Mining Act of 1995. With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of its shares, it is clear that petitioner Narra does not comply with the minimum Filipino equity requirement imposed in Section 2, Article XII of the Constitution. Hence, the appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners’ Filipino equity composition was based on their common shareholdings, not preferred or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly provides that “no share may be deprived of voting rights except those classified as ‘preferred’ or ‘redeemable’ shares.” Further, as Justice Leonen puts it, there is “no indication that any of the shares x x x do not have voting rights, [thus] it must be assumed that all such shares have voting rights.” It cannot therefore be gainsaid that the foregoing computation hewed with the pronouncements of Gamboa, as implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8) Section 2 of which states: Section 2. All covered corporations shall, at all times, observe the constitutional or statutory requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

In fact, there is no indication that herein petitioners issued any other class of shares besides the 10,000 common shares. Neither is it suggested that the common shares were further divided into voting or non-voting common shares. Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer to the 10,000 common shares of each of the petitioners, and there is no need to separately apply the 60-40 ratio to any segment or part of the said common shares.

WESTMONT BANK, NOW UNITED OVERSEAS BANK PHILIPPINES VS MYRNA DELA ROSA-RAMOS, DOMINGO TAN AND WILLIAM CO, G.R. NO 160260Facts: From 1986, respondent Myrna Dela Rosa-Ramos (Dela Rosa-Ramos) maintained a checking/current account with the United Overseas Bank Philippines (Bank) at the latter's Sto. Cristo Branch, Binondo, Manila. In her several transactions with the Bank, Dela Rosa-Ramos got acquainted with its Signature Verifier, respondent Domingo Tan.

In the course of their acquaintance, Tan offered Dela Rosa-Ramos a "special arrangement" wherein he would finance or place sufficient funds in her checking/current account whenever there would be an overdraft or when the amount of said checks would exceed the balance of her current account. It was their arrangement to make sure that the checks she would issue would not be dishonored. Tan offered the service for a fee of P50.00 a day for every P40,000.00 he would finance. This financier-debtor relationship started in 1987 and lasted until 1998.

In order to guarantee payment for such funding, Dela Rosa-Ramos issued postdated checks covering the principal amount plus interest as computed by Tan on specified date. There were also times when she just paid in cash. 7 Relative to their said agreement, Dela Rosa-Ramos issued and delivered to Tan the following Associated Bank checks 8 drawn against her current account and payable to "cash," to wit:

According to Dela Rosa-Ramos, Check No. 467322 for P200,000.00 was a "stale" guarantee check. The check was originally dated August 28, 1987 but was altered to make it appear that it was dated May 8, 1988. Tan then deposited the check in the account of the other respondent, William Co (Co), despite the

obvious superimposed date. As a result, the amount of P200,000.00 or the value indicated in the check was eventually charged against her checking account.

Check No. 510290 for P232,500.00, dated June 10, 1988, was issued in payment of cigarettes that Dela Rosa-Ramos bought from Co. This check allegedly "bounced" so she replaced it with her "good customer's check and cash" and gave it to Tan. The latter, however, did not return the bounced check to her. Instead, he "redeposited" it in Co's account.

Check No. 613307 for P200,000.00, was another guarantee check that was also "undated." Dela Rosa-Ramos claimed that it was Tan who placed the date "June 14, 1988." For this check, an order to stop payment was issued because of insufficient funds. Expectedly, the words "PAYMENT STOPPED" were stamped on both sides of the check. This check was not returned to her either and, instead, it was "redeposited" in Co's account.

Check Nos. 510290 and 613307 were both dishonored for insufficient funds. When Dela Rosa-Ramos got the opportunity to confront Co regarding their deposit of the two checks, the latter disclosed that her two checks were deposited in his account to cover for his P432,500.00 cash which was taken by Tan. Then, with a threat to expose her relationship with a married man, Tan and Co were able to coerce her to replace the two above-mentioned checks with Check No. 598648 in the amount of P432,500.00 which was equivalent to the total amount of the two dishonored checks.

Check No. 613306 for P290,595.00, was also undated when delivered to Tan who later placed the date, July 4, 1988. Dela Rosa-Ramos pointed out that as of July 5, 1988, her checking account had P121,989.66 which was insufficient to answer for the value of said check. A check of a certain Lee See Bin in the amount of P170,000.00 was, however, deposited in her checking account. As a result, Tan was able to encash Check No. 613306 and withdrew her P121,989.66 balance. Later, Dela Rosa-Ramos found out that the Lee See Bin Check was not funded because the Bank's bookkeeper demanded from her the return of the deficiency. —not proved that there amount deposited in her account was simulated (she said that there was no money deposited so what was withdrawn was her own money and not the one deposited because of check from Lee See Bin)

Claiming that the four checks mentioned were deposited by Tan without her consent, Dela Rosa-Ramos instituted a complaint against Tan and the Bank before the RTC seeking, among other things, to recover from the Bank the sum of P754,689.66 representing the total amount charged or withdrawn from her current account. Dela Rosa-Ramos subsequently amended her complaint to include Co.

The RTC sentenced Associated bank, now Westmont bank and defendants - Domingo tan and William Co, to pay Dela Rosa-Ramos. The CA affirmed this ruling.

Held: It must be remembered that public interest is intimately carved into the banking industry because the primordial concern here is the trust and confidence of the public. This fiduciary nature of every bank's relationship with its clients/depositors impels it to exercise the highest degree of care, definitely more than that of a reasonable man or a good father of a family. It is, therefore, required to treat the accounts and deposits of these individuals with meticulous care. The rationale behind this is well-expressed in Sandejas v. Ignacio,

The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society — banks have attained a ubiquitous presence among the people, who have come to regard them with respect and even gratitude and most of all, confidence, and it is for this reason, banks should guard against injury attributable to negligence or bad faith on its part.

Considering that banks can only act through their officers and employees, the fiduciary obligation laid down for these institutions necessarily extends to their employees . Thus,

banks must ensure that their employees observe the same high level of integrity and performance for it is only through this that banks may meet and comply with their own fiduciary duty. It has been repeatedly held that "a bank's liability as an obligor is not merely vicarious, but primary" since they are expected to observe an equally high degree of diligence, not only in the selection, but also in the supervision of its employees. Thus, even if it is their employees who are negligent, the bank's responsibility to its client remains paramount making its liability to the same to be a direct one.

Guided by the following standard, the Bank, given the fiduciary nature of its relationship with Dela Rosa-Ramos, should have exerted every effort to safeguard and protect her money which was deposited and entrusted with it. As found by both the RTC and the CA, Ramos was defrauded and she lost her money because of the negligence attributable to the Bank and its employees. Indeed, it was the employees who directly dealt with Dela Rosa-Ramos, but the Bank cannot distance itself from them. That they were the ones who gained at the expense of Dela Rosa-Ramos will not excuse it of its fundamental responsibility to her. As stated by the RTC,

The factual circumstances attending the repeated irregular entries and transactions involving the current account of the plaintiff-appellee is evidently due to, if not connivance, gross negligence of other bank officers since the repeated assailed transactions could not possibly be committed by defendant Tan alone considering the fact that the processing of the questioned checks would pass the hands of various bank officers who positively identified their initials therein. Having a number of employees commit mistake or gross negligence at the same situation is so puzzling and obviates the appellant bank's laxity in hiring and supervising its employees. Hence, this Court is of the opinion that the appellant bank should be held liable for the damages suffered by the plaintiff-appellee in the case at bench.

That matter being settled, the next matter to be determined is the amount of liability of the Bank.

*As regards Cheek No. 467322, the Bank avers that Dela Rosa-Ramos' acquiesced to the change of the date in the said check. It argues that her continued acts of dealing and transacting with the Bank like subsequently issuing checks despite her experience with this check only shows her acquiescence which is tantamount to giving her consent. Obviously, the Bank has not taken to heart its fiduciary responsibility to its clients. Rather than ask and wonder why there were indeed subsequent transactions, the more paramount issue is why the Bank through its several competent employees and officers, did not stop, double check and ascertain the genuineness of the date of the check which displayed an obvious alteration. This failure on the part of the Bank makes it liable for that loss. As the RTC held:

. . defendant-bank is not faultless in the irregularities of its signature-verifier. In the first place, it should have readily rejected the obviously altered plaintiff's P200,000.00-check, thus, avoid its unwarranted deposit in defendant-Co's account and its corollary loss from plaintiff's deposit, had its other employees, even excepting TAN, performed their duties efficiently and well…

The glaring error did not escape the observation of the CA either. On matter, it hastened to add:A careful scrutiny of the evidence shows that indeed the date of Check No. 467322 had been materially altered from August 1987 to May 8, 1988 in accordance with Section 125 of the Negotiable Instruments Law. It is worthy to take note of the fact that such alteration was not countersigned by the drawer to make it a valid correction of its date as consented by its drawer as the standard operating procedure of the appellant bank in such situation as admitted by its Sto. Cristo Branch manager, Mabini Z. Mil(l)an…

On Check No. 613307, the Bank argues that the CA erred in considering that the said check was debited against the account of Dela Rosa-Ramos when the fact was that it was dishonored for having been drawn against insufficient funds. This means that the check was not charged against her account.

In this regard, the Court agrees with the Bank. Indeed, the admission made by Dela Rosa-Ramos that she had to issue a replacement check for Check No. 613307 as well as for Check No. 510290 only proves that these checks were never paid and charged or debited against her account. The replacement check is, of course, a totally different matter and is not covered as an issue in this case.

Lastly, with respect to Check No. 613306, the Court agrees with the CA when it found:. . . that no manifest irregularity exist as shown from the Statement of Accounts for the month of July 1988 that as of July 4, 1988, the plaintiff-appellee had an outstanding deposit of P121,989.66. It was also cleared therein that, on July 5, 1988, P170,000.00, through the check of Lee See Bin with the same UNITED OVERSEAS BANK-Sto. Cristo Branch, was deposited on the account of the plaintiff-appellee and on the very same day Check No. 613306 in the amount of P290,595.00 was approved and processed and its equivalent was debited from the account of the plaintiff-appellee since the check is an 'on-us' check which is deposited to an account of another with the same branch as that of the drawer of the said check, and is considered as good as cash if funded, hence, may be withdrawn on the very same day it was deposited.

The Court has reviewed the findings of the RTC on the matter and agrees with the CA that there was no irregularity. The burden of proof was on Dela Rosa-Ramos to establish that Lee See Bin was fictitious and that the money which purportedly came from him was merely simulated. She unfortunately failed to discharge this burden.

Withal, the Bank should only be made to answer the value of Check No. 467322 in the amount of P200,000.00 plus the legal rate of interest. This must be further tempered down for there is no denying that it was Dela Rosa-Ramos who exposed herself to risk when she entered into that "special arrangement" with Tan. While the Bank reneged on its responsibility to Dela Rosa-Ramos, she is nevertheless equally guilty of contributory negligence. It has been held that where the bank and a depositor are equally negligent, they should equally suffer the loss. The two must both bear the consequences of their mistakes. Thus, the Bank should only pay 50% of the actual damages awarded while Dela Rosa-Ramos should have to shoulder the remaining 50%. Considering that Tan was primarily responsible for the damages caused to Dela Rosa-Ramos, the Bank can seek compensation from his estate, subject to the applicable laws and rules.

EQUITABLE PCI BANK VS ARCELITO TAN, G.R. 165339, AUGUST 23, 2010Facts: Respondent Arcelito B. Tan maintained a current and savings account with Philippine Commercial International Bank (PCIB), now petitioner Equitable PCI Bank. On May 13, 1992, respondent issued PCIB Check No. 275100 postdated May 30, 1992 in the amount of P34,588.72 in favor of Sulpicio Lines, Inc. As of May 14, 1992, respondent's balance with petitioner was P35,147.59. On May 14, 1992, Sulpicio Lines, Inc. deposited the aforesaid check to its account with Solid Bank, Carbon Branch, Cebu City. After clearing, the amount of the check was immediately debited by petitioner from respondent's account thereby leaving him with a balance of only P558.8.

Meanwhile, respondent issued three checks from May 9 to May 16, 1992, specifically, PCIB Check No. 275080 dated May 9, 1992, payable to Agusan del Sur Electric Cooperative, Inc. (ASELCO) for the amount of P6,427.68; PCIB Check No. 275097 dated May 10, 1992 payable to Agusan del Norte Electric Cooperative, Inc., (ANECO) for the amount of P6,472.01; and PCIB Check No. 314104 dated May 16, 1992 payable in cash for the amount of P10,000.00. When presented for payment, PCIB Check Nos. 275080, 275097 and 314014 were dishonored for being drawn against insufficient funds.

As a result of the dishonor of Check Nos. 275080 and 275097 which were payable to ASELCO and ANECO, respectively, the electric power supply for the two mini-sawmills owned and operated by respondent, located in Talacogon, Agusan del Sur; and in Golden Ribbon, Butuan City, was cut off on June 1, 1992 and

May 28, 1992, respectively, and it was restored only on July 20 and August 24, 1992, respectively.

Due to the foregoing, respondent filed with the Regional Trial Court (RTC) of Cebu City a complaint against petitioner, praying for payment of losses consisting of unrealized income in the amount of P1,864,500.00. He also prayed for payment of moral damages, exemplary damages, attorney's fees and litigation expenses.

Respondent claimed that Check No. 275100 was a postdated check in payment of Bills of Lading Nos. 15, 16 and 17, and that his account with petitioner would have had sufficient funds to cover payment of the three other checks were it not for the negligence of petitioner in immediately debiting from his account Check No. 275100, in the amount of P34,588.72, even as the said check was postdated to May 30, 1992. As a consequence of petitioner's error, which brought about the dishonor of the two checks paid to ASELCO and ANECO, the electric supply to his two mini-sawmills was cut off, the business operations thereof were stopped, and purchase orders were not duly served causing tremendous losses to him.

In its defense, petitioner denied that the questioned check was postdated May 30, 1992 and claimed that it was a current check dated May 3, 1992. It alleged further that the disconnection of the electric supply to respondent's sawmills was not due to the dishonor of the checks, but for other reasons not attributable to the bank.

The CA reversed the decision and directed Equitable to pay Arcelito Tan.

Issue: Held: As to the second issue, petitioner maintains that the CA erred in reversing the finding of the RTC that Check No. 275100 was dated May 3, 1992. Petitioner argued that in arriving at the conclusion that Check No. 275100 was postdated May 30, 1992, the CA just made a visual examination of the check, unlike the RTC which verified the truth of respondent's testimony relative to the issuance of Check No. 275100. Respondent argued that the check was carefully examined by the CA which correctly found that Check No. 275100 was postdated to May 30, 1992 and not May 3, 1992.

Due to the divergence of the findings of the CA and the RTC, We shall re-examine the facts and evidence presented before the lower courts.

The RTC ruled that:xxx xxx xxxThe issue to be resolved in this case is whether or not the date of PCIB Check No. 275100 is May 3, 1992 as contended by the defendant, or May 30, 1992 as claimed by the plaintiff. The date of the check is written as follows — 5/3/0/92. From the manner by which the date of the check is written, the Court cannot really make a pronouncement as to whether the true date of the check is May 3 or May 30, 1992, without inquiring into the background facts leading to the issuance of said check.

According to the plaintiff, the check was issued to Sulpicio Lines in payment of bill of lading nos. 15, 16 and 17. An examination of bill of lading no. 15, however, shows that the same was issued, not in favor of plaintiff but in favor of Coca Cola Bottlers Philippines, Inc. Bill of Lading No. 16 is issued in favor of Suson Lumber and not to plaintiff. Likewise, Bill of Lading No. 17 shows that it was issued to Jazz Cola and not to plaintiff. Furthermore, the receipt for the payment of the freight for the shipments reflected in these three bills of lading shows that the freight was paid by Coca Cola Bottlers Philippines, Inc. and not by plaintiff.

Moreover, the said receipt shows that it was paid in cash and not by check. From the foregoing, the evidence on record does not support the claim of the plaintiff that Check No. 275100 was issued in payment of bills of lading nos. 15, 16 and 17.

Hence, the conclusion of the Court is that the date of the check was May 3, 1992 and not May 30, 1992.xxx xxx xxx

In fine, the RTC concluded that the check was dated May 3, 1992 and not May 30, 1992, because the same check was not issued to pay for Bills of Lading Nos. 15, 16 and 17, as respondent claims. The trial court's conclusion is preposterous and illogical. The purpose for the issuance of the check has no logical connection with the date of the check. Besides, the trial court need not look into the purpose for which the check was issued. A reading of Check No. 275100 would readily show that it was dated May 30, 1992. As correctly observed by the CA:

On the first issue, we agree with appellant that appellee Bank apparently erred in misappreciating the date of Check No. 275100. We have carefully examined the check in question (Exh. DDDD) and we are convinced that it was indeed postdated to May 30, 1992 and not May 3, 1992 as urged by appellee. The date written on the check clearly appears as "5/30/1992" (Exh. DDDD-4). The first bar (/) which separates the numbers "5" and "30" and the second bar (/) which further separates the number "30" from the year 1992 appear to have been done in heavy, well-defined and bold strokes, clearly indicating the date of the check as "5/30/1992" which obviously means May 30, 1992. On the other hand, the alleged bar (/) which appellee points out as allegedly separating the numbers "3" and "0," thereby leading it to read the date as May 3, 1992, is not actually a bar or a slant but appears to be more of an unintentional marking or line done with a very light stroke. The presence of the figure "0" after the number "3" is quite significant. In fact, a close examination thereof would unerringly show that the said number zero or "0" is connected to the preceding number "3." In other words, the drawer of the check wrote the figures "30" in one continuous stroke, thereby contradicting appellee's theory that the number "3" is separated from the figure "0" by a bar. Besides, appellee's theory that the date of the check is May 3, 1992 is clearly untenable considering the presence of the figure "0" after "3" and another bar before the year 1992. And if we were to accept appellee's theory that what we find to be an unintentional mark or line between the figures "3" and "0" is a bar separating the two numbers, the date of the check would then appear as "5/3/0/1992", which is simply absurd. Hence, we cannot go along with appellee's theory which will lead us to an absurd result. It is therefore our conclusion that the check was postdated to May 30, 1992 and appellee Bank or its personnel erred in debiting the amount of the check from appellant's account even before the check's due date. Undoubtedly, had not appellee bank prematurely debited the amount of the check from appellant's account before its due date, the two other checks (Exhs. LLLL and GGGG) successively dated May 9, 1992 and May 16, 1992 which were paid by appellant to ASELCO and ANECO, respectively, would not have been dishonored and the said payees would not have disconnected their supply of electric power to appellant's sawmills, and the latter would not have suffered losses.

The law imposes on banks high standards in view of the fiduciary nature of banking . Section 2 of R.A. 8791 decrees:

Declaration of Policy. — The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance . In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.

Although R.A. 8791 took effect only in the year 2000 , the Court had already imposed on banks the same high standard of diligence required under R.A. 8791 at the time of the untimely debiting of respondent's account by petitioner in May 1992. In Simex International (Manila), Inc. v. Court of Appeals, which was

decided in 1990, the Court held that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.

The diligence required of banks, therefore, is more than that of a good father of a family . In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. From the foregoing, it is clear that petitioner bank did not exercise the degree of diligence that it ought to have exercised in dealing with its client.

With respect to the third issue, petitioner submits that respondent's way of writing the date on Check No. 275100 was the proximate cause of the dishonor of his three other checks. Contrary to petitioner's view, the Court finds that its negligence is the proximate cause of respondent's loss.

Proximate cause is that cause which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. The proximate cause of the loss is not respondent's manner of writing the date of the check, as it was very clear that he intended Check No. 275100 to be dated May 30, 1992 and not May 3, 1992. The proximate cause is petitioner's own negligence in debiting the account of the respondent prior to the date as appearing in the check, which resulted in the subsequent dishonor of several checks issued by the respondent and the disconnection by ASELCO and ANECO of his electric supply.

The bank on which the check is drawn, known as the drawee bank, is under strict liability to pay to the order of the payee in accordance with the drawer's instructions as reflected on the face and by the terms of the check. Thus, payment made before the date specified by the drawer is clearly against the drawee bank's duty to its client.

In its memorandum filed before the RTC, petitioner submits that respondent caused confusion on the true date of the check by writing the date of the check as 5/3/0/92. If, indeed, petitioner was confused on whether the check was dated May 3 or May 30 because of the "/" which allegedly separated the number "3" from the "0," petitioner should have required respondent drawer to countersign the said "/" in order to ascertain the true intent of the drawer before honoring the check. As a matter of practice, bank tellers would not receive nor honor such checks which they believe to be unclear, without the counter-signature of its drawer. Petitioner should have exercised the highest degree of diligence required of it by ascertaining from the respondent the accuracy of the entries therein, in order to settle the confusion, instead of proceeding to honor and receive the check.

Further, petitioner's branch manager, Pedro D. Tradio, in a letter addressed to ANECO, explained the circumstances surrounding the dishonor of PCIB Check No. 275097. Thus: xx

Although petitioner failed to specify in the letter the other details of this "postdated check," which passed undetected from the eyes of the payee down to the petitioner drawee bank, the Court finds that petitioner was evidently referring to no other than Check No. 275100 which was deposited to Solidbank, and was postdated May 30, 1992. As correctly found by the CA:

In the aforequoted letter of its Manager, appellee Bank expressly acknowledged that Check No. 275097 (Exh. GGGG) which appellant paid to ANECO "was sufficiently funded at the time it was negotiated," but it was dishonored as a "result of an earlier negotiation to PCIB-Mandaue Branch through a deposit made on May 14, 1992 with SOLIDBANK . . . of a postdated check which . . . passed undetected." He further admitted that "Mr. Arcelito B. Tan was in no way responsible for the dishonor of said PCIB Check No. 275097." Needless to state, since appellee's Manager has cleared appellant of any fault in the dishonor of the ANECO

check, it [necessarily] follows that responsibility therefor or fault for the dishonor of the check should fall on appellee bank. Appellee's attempt to extricate itself from its inadvertence must therefore fail in the face of its Manager's explicit acknowledgment of responsibility for the inadvertent dishonor of the ANECO check.

Evidently, the bank's negligence was the result of lack of due care required of its managers and employees in handling the accounts of its clients. Petitioner was negligent in the selection and supervision of its employees. In Citibank, N.A. v. Cabamongan, the Court ruled:

. . . Banks handle daily transactions involving millions of pesos. By the very nature of their works the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.

CENTRAL BANK OF THE PHILIPPINES VS CITY TRSUT BANKING CORPORATION, G.R. NO. 141835, FEBRUARY 4, 2009Facts: Pursuant to Republic Act No. 625, the old Central Bank Law, respondent Citytrust Banking Corporation (Citytrust), formerly Feati Bank, maintained a demand deposit account with petitioner Central Bank of the Philippines, now Bangko Sentral ng Pilipinas.

As required, Citytrust furnished petitioner with the names and corresponding signatures of five of its officers authorized to sign checks and serve as drawers and indorsers for its account. And it provided petitioner with the list and corresponding signatures of its roving tellers authorized to withdraw, sign receipts and perform other transactions on its behalf. Petitioner later issued security identification cards to the roving tellers one of whom was "Rounceval Flores" (Flores).

On July 15, 1977, Flores presented for payment to petitioner's Senior Teller Iluminada dela Cruz (Iluminada) two Citytrust checks of even date, payable to Citytrust, one in the amount of P850,000 and the other in the amount of P900,000, both of which were signed and indorsed by Citytrust's authorized signatory-drawers.

After the checks were certified by petitioner's Accounting Department, Iluminada verified them, prepared the cash transfer slip on which she affixed her signature, stamped the checks with the notation "Received Payment" and asked Flores to, as he did, sign on the space above such notation. Instead of signing his name, however, Flores signed as "Rosauro C. Cayabyab" — a fact Iluminada failed to notice.

Iluminada thereupon sent the cash transfer slip and checks to petitioner's Cash Department where an officer verified and compared the drawers' signatures on the checks against their specimen signatures provided by Citytrust, and finding the same in order, approved the cash transfer slip and paid the corresponding amounts to Flores. Petitioner then debited the amount of the checks totaling P1,750,000 from Citytrust's demand deposit account.

More than a year and nine months later, Citytrust, by letter dated April 23, 1979, alleging that the checks were already cancelled because they were stolen, demanded petitioner to restore the amounts covered thereby to its demand deposit account. Petitioner did not heed the demand, however.

Citytrust later filed a complaint for estafa, with reservation on the filing of a separate civil action, against Flores. Flores was convicted. Citytrust thereafter filed before the Regional Trial Court (RTC) of Manila a complaint for recovery of sum of money with damages against petitioner which it alleged erred in encashing the checks and in charging the proceeds thereof to its account, despite the lack of authority of "Rosauro C. Cayabyab”.

The RTC found both Citytrust and petitioner negligent and accordingly held the equally liable for the loss. The CA affirmed the court’s decision, it holding that both parties contributed equally to the fraudulent encashment of the checks, hence, they should equally share the loss in consonance with article 2179 vis a vis article 1172 of the civil code.

In arriving at its Decision, the appellate court noted that while "Citytrust failed to take adequate precautionary measures to prevent the fraudulent encashment of its checks", petitioner was not entirely blame-free in light of its failure to verify the signature of Citytrust's agent authorized to receive payment.

Petitioner maintaining that Flores having been an authorized roving teller, Citytrust is bound by his acts. Also maintaining that it was not negligent in releasing the proceeds of the checks to Flores, the failure of its teller to properly verify his signature notwithstanding, petitioner contends that verification could be dispensed with, Flores having been known to be an authorized roving teller of Citytrust who had had numerous transactions with it (petitioner) on its (Citytrust's) behalf for five years prior to the questioned transaction.

Attributing negligence solely to Citytrust, petitioner harps on Citytrust's allowing Flores to steal the checks and failing to timely cancel them; allowing Flores to wear the issued identification card issued by it (petitioner); failing to report Flores' absence from work on the day of the incident; and failing to explain the circumstances surrounding the supposed theft and cancellation of the checks.

Drawing attention to Citytrust's considerable delay in demanding the restoration of the proceeds of the checks, petitioners argue that, assuming arguendo that its teller was negligent, Citytrust's negligence, which preceded that committed by the teller, was the proximate cause of the loss or fraud.

Held: The petition is bereft of merit.

Petitioner's teller Iluminada did not verify Flores' signature on the flimsy excuse that Flores had had previous transactions with it for a number of years. That circumstance did not excuse the teller from focusing attention to or at least glancing at Flores as he was signing, and to satisfy herself that the signature he had just affixed matched that of his specimen signature. Had she done that, she would have readily been put on notice that Flores was affixing, not his but a fictitious signature.

Given that petitioner is the government body mandated to supervise and regulate banking and other financial institutions, this Court's ruling in Consolidated Bank and Trust Corporation v. Court of Appeals illumines:

The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. Article 1980 of the Civil Code expressly provides that ". . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking . Section 2 of Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000, declares that the State recognizes the "fiduciary nature of banking that requires high standards of integrity and performance." This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, holding that "the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.”

This fiduciary relationship means that the bank's obligation to observe "high standards of integrity and performance" is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family. Section 2 of RA 8791 prescribes the statutory diligence required from banks — that banks must observe "high standards of integrity and performance" in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diaz's savings account, jurisprudence at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791. (Emphasis supplied)

Citytrust’s failure to timely examine its account, cancel the checks and notify petitioner of their alleged loss/theft should mitigate petitioner's liability, in accordance with Article 2179 of the Civil Code which provides that if the plaintiff's negligence was only contributory, the immediate and proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. For had Citytrust timely discovered the loss/theft and/or subsequent encashment, their proceeds or part thereof could have been recovered.

RAMON TAN VS THE HONORABLE CA AND RIZAL COMMERCIAL BANKING CORPROATION, G.R. NO. 108555, DECEMBER 20, 1994Facts: Petitioner Ramon Tan, a trader-businessman and community leader in Puerto Princesa, had maintained since 1976 Current Account No. 109058068 with respondent bank's Binondo branch. On March 11, 1988, to avoid carrying cash while enroute to Manila, he secured a Cashier's Check No. L 406000126 from the Philippine Commercial Industrial Bank (PCIB), Puerto Princesa branch, in the amount of Thirty Thousand (P30,000.00) Pesos, payable to his order. He deposited the check in his account with RCBC Binondo on March 15. On the same day, RCBC erroneously sent the same cashier's check for clearing to the Central Bank which was returned for having been "missent" or "misrouted."The next day, March 16, RCBC debited the amount covered by the same cashier's check from the account of the petitioner. Respondent bank at this time had not informed the petitioner of its action which the latter claims he learned of only 42 days after, specifically on March 16, when he received the bank's debit memo. Relying on the common knowledge that a cashier's check was as good as cash, that the usual banking practice that local checks are cleared within three (3) working days and regional checks within seven (7) working days, and the fact that the cashier's check was accepted, petitioner issued two (2) personal checks both dated March 18. Check No. 040719 in the name of Go Lac for Five Thousand Five Hundred (P5,5000.00) Pesos was presented on April 25, more than 30 days from petitioner's deposit date of the cashier's check. Check No. 040718 in the name of MS Development Trading Corporation for Six Thousand Fifty-Three Pesos and Seventy Centavos (P6,053.70) was returned twice on March 24, nine (9) days from his deposits date and again on April 26, twenty-two days after the day the cashier's check was deposited for insufficiency of funds.

Petitioner, alleging to have suffered humiliation and loss of face in the business sector due to the bounced checks, filed a complaint against RCBC for damages. RCBC, disowning any negligence, put the blame for the “misrouting’ on the petitioner for using the wrong check deposit slip. It insisted that the misuse of a local check deposit slip, instead of a regional check deposit slip, triggered the "misrouting" by RCBC of the cashier's check to the Central Bank and it was petitioner's negligent "misuse" of a local deposit slip which was the proximate cause of the "misrouting", thus he should bear the consequence.

RCBC alleged that it complied strictly with accepted banking practice when it debited the amount of P30,000.00 against petitioner's account since under Resolution No. 2202 dated December 21, 1979 of the Monetary Board, it is a matter of policy to prohibit the drawing against uncollected deposits (DAUDS) except when the drawings are made against uncollected deposits representing bank

manager's/cashier's/treasurer's checks, treasury warrants, postal money orders and duly funded "on us" checks which may be permitted at the discretion of each bank. 13 Without crediting the P30,000.00 deposit, petitioner's balance before and after was Two Thousand Seven Hundred Ninety-Two Pesos and the (P2,792.88) Eighty-Eight Centavos. Thus, it dishonored the two (2) checks amounting to P11,553.70 since they were drawn against insufficient funds. RCBC added that petitioner had no bills purchase (BP) line which allows a depositor to receive or draw from proceeds of a check without waiting it to be cleared. Besides, RCBC maintained, had it forwarded the Cashier's Check to PCIB Puerto Princesa, Palawan, it would take at least twenty (20) working days for the cashier's check to be cleared and it would take the same length of time to clear the two (2) personal checks of Tan.

RCBC further asseverated it was merely acting as petitioner's collecting agent and it assumed no responsibility beyond care in selecting correspondents under the theory that where a check is deposited with a collecting bank the relationship created is that of agency and not creditor-debtor, thus it cannot be liable.

The Trial court ordered defendant bank to pay Ramon tan damages but the CA reversed the ruling.

Held: We do not subscribe to RCBC's assertion that petitioner's use of the wrong deposit slip was the proximate cause of the clearing fiasco and so, petitioner must bear the consequence. In Pilipinas Bank, v. CA, this Court said:

The bank is not expected to be infallible but, as correctly observed by respondent Appellate Court, in this instance, it must bear the blame for not discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass through a battery of bank personnel whose duty it is to check and countercheck them for possible errors. Apparently, the officials and employees tasked to do that did not perform their duties with due care, . . .

So it is in the instance case, where the conclusion is inevitable that respondent RCBC had been remiss in the performance of its duty and obligation to its client, as well as to itself. We draw attention to the fact that the two dishonored checks issued by petitioner, Check No. 040719 and Check No. 040718 were presented for payment more than 45 days from the day the cashier's check was deposited. This gave RCBC more than ample time to have cleared the cashier's check had it corrected its "missending" the same upon return from Central Bank using the correct slip this time so it can be cleared properly. Instead, RCBC promptly debited the amount of P30,000.00 against petitioner's account and left it at that.

We observe, likewise, that RCBC inquired about an Evelyn Tan but no Evelyn Tan-Banzon as specifically instructed in the same signature card.

RCBC insists that immediate payment without awaiting clearance of a cashier's check is discretionary with the bank to whom the check is presented and such being the case, its refusal to immediately pay the cashier's check in this case is not to be equated with negligence on its part. We find this disturbing and unfortunate.

An ordinary check is not a mere undertaking to pay an amount of money. There is an element of certainty or assurance that it will be paid upon presentation that is why it is perceived as a convenient substitute for currency in commercial and financial transactions. The basis of the perception being confidence. Any practice that destroys that confidence will impair the usefulness of the check as a currency substitute and create havoc in trade circles and the banking community.

Now, what was presented for deposit in the instant cases was not just an ordinary check but a cashier's check payable to the account of the depositor himself. A cashier's check is a primary obligation of the issuing bank and accepted in advance by its mere issuance. By its very nature, a cashier's check is the bank's order to pay drawn upon itself, committing in effect its total resources, integrity and honor behind

the check. A cashier's check by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents. In this case, therefore, PCIB by issuing the check created an unconditional credit in favor of any collecting bank.

All these considered, petitioner's reliance on the layman's perception that a cashier's check is as good as cash is not entirely misplaced, as it is rooted in practice, tradition, and principle. We see no reason thus why this so-called discretion was not exercised in favor of petitioner, specially since PCIB and RCBC are members of the same clearing house group relying on each other's solvency. RCBC could surely rely on the solvency of PCIB when the latter issued its cashier's check.

CONSOLIDATED BANK AND TRUST CORPORATION VS CA AND LC DIAZ AND COMPANY CPA’SFacts: Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private respondent L.C. Diaz and Company, CPA's ("L.C. Diaz"), is a professional partnership engaged in the practice of accounting. Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya ("Macaraya"), filled up a savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre ("Calapre"), to deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips with the words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE." Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that "somebody got the passbook. Calapre went back to L.C. Diaz and reported the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller stamped the words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE" on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya.

Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000 drawn on Philippine Banking Corporation ("PBC"). This PBC check of L.C. Diaz was a check that it had "long closed." PBC subsequently dishonored the check because of insufficient funds and because the signature in the check differed from PBC's specimen signature. Failing to get back the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz ("Diaz"), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account. On the same day, Diaz formally wrote Solidbank to make the same request. It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000.

LC Diaz charged its messenger, Emerson Ilagan and one Roscoe Verdazola with Estafa through falsification of commercial document. The RTC dismissed the criminal case.

LC diaz demanded the return of its money but Solidbank refused so Diaz filed a case against Solidbank which the tc absolved Solidbank. The CA reversed the decision.

Held: Solidbank's Fiduciary Duty under the Law — The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no pre-existing contractual relationship between the parties.

We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual . The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. Article 1980 of the Civil Code expressly provides that ". . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000, declares that the State recognizes the "fiduciary nature of banking that requires high standards of integrity and performance." This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, holding that "the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.

This fiduciary relationship means that the bank's obligation to observe "high standards of integrity and performance" is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family. Section 2 of RA 8791 prescribes the statutory diligence required from banks — that banks must observe "high standards of integrity and performance" in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diaz's savings account, jurisprudence at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors

who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.

Solidbank's Breach of its Contractual Obligation - Article 1172 of the Civil Code provides that "responsibility arising from negligence in the performance of every kind of obligation is demandable." For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to its depositor.

Calapre left the passbook with Solidbank because the "transaction took time" and he had to go to Allied Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left Solidbank. Solidbank's rules on savings account require that the "deposit book should be carefully guarded by the depositor and kept under lock and key, if possible." When the passbook is in the possession of Solidbank's tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook.

Likewise, Solidbank's tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same.

In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its employees.

Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case.

Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.

The bank must not only exercise "high standards of integrity and performance," it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the "high standards of integrity and performance" required of Solidbank's employees.

Proximate Cause of the Unauthorized Withdrawal — Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal. The trial court believed that L.C. Diaz's negligence in not securing its passbook under lock and key was the proximate cause that

allowed the impostor to withdraw the P300,000. For the appellate court, the proximate cause was the teller's negligence in processing the withdrawal without first verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury and without which the result would not have occurred. Proximate cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy and precedent.

L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person.Solidbank's failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took possession of the passbook. Under Solidbank's rules on savings account, mere possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbank's Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbank's negligence in not returning the passbook to Calapre.

We do not subscribe to the appellate court's theory that the proximate cause of the unauthorized withdrawal was the teller's failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz.

There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so.

Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check, which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the teller had no reason to be suspicious of the transaction.

Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal.

L.C. Diaz refutes Solidbank's contention by pointing out that the person who withdrew the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbank's claim that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by

Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance — The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable with the loss. Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the impending harm by the exercise of due diligence.

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from liability. Such contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the defendant from his breach of contract.

TEOFISTO GUINGNA, ANTONIO MARTIN AND TERESITA SANTOS VS THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA AND CLEMENT DAVID, G.R. 60033, APRIL 4, 1984Facts: Clement David and his sister Denise Kuhne during the period from March 20, 1979 to March, 1981 made placements with the Nation Savings and Loan Association, Inc. in the total sum of P1,145,546.20 as evidenced by seven bankers acceptances and five certificates of time deposits.

He and his sister Denise also had savings deposits in the Nation Savings in the sum of P13,531.94 as shown in Passbooks Nos. 6-632 and 29-740. They also invested in Nation Savings US$75,000 in 1980 as evidenced by receipts, of which $50,000 was deposited in the account of Teofisto Guingona, Jr. with the Security Bank and Trust Company. Aggregate investments of David and Kuhne in Nation Savings: P1,159,078.14 in local currency and 75,000 in U.S. dollars. Nation Savings allegedly paid David from 1979 to the early part of 1981 interests of P240,000 a year (p. 193, Rollo).

At the time the deposits were made, Antonio I. Martin was the president of Nation Savings, Teresita G. Santos was its general manager, and Guingona was a director.

On March 21, 1981, Nation Savings was placed under receivership by the Central Bank because of serious fraud and irregularities committed by its key officers. On June 17, 1981, Guingona and Martin executed a promissory note acknowledging a debt of P1,336,614.02 and $75,000 to be paid in installments within 180 days from said date with interest at 16% per annum from July 1, 1981 until fully paid. The promissory note was novated by another note, antedated June 17, 1981, whereby Guingona acknowledged one-half of the obligation as his debt or the sums of P668,307.01 and $37,500 and secured the same by second mortgages on his Quezon City properties (Annex D). Guingona paid P200,000 on that note. Martin assumed the other half of the total debt. He secured it with the pledge of a ring valued according to him at P560,000 but appraised by a jewel appraiser at P280,000. Martin is also indebted to David in the sum of P60,000 which David paid to Monte de Piedad to redeem the ring.

On July 22, 1981, David received a report from the Central Bank that only P305,821.92 of the placements made by him and his sister were entered in the NSLA records (Annex 4, p. 218, Rollo). The director of the CB Department of Rural Banks and Savings and Loan Associations in a report dated June 23, 1981 recommended that the irregularities be brought to the attention of the CB consultant on criminal cases for appropriate investigation of Nation Savings' officials

In view of the promissory note and the mortgages, David, on July 22, 1981, executed an affidavit wherein

he bound himself to desist from any prosecution of Guingona without prejudice to the balance of his claim against Nation Savings (Annex M, p. 46, Rollo).

On November 19, 1981, Guingona filed against David Civil Case No. Q-33865 in the Quezon City Court of First Instance. He prayed for damages of P785,000 against David for his failure to accept payment of a cashier's check for P300,000 (in addition to the P200,000) and to release one of the mortgaged properties (Annex K, p. 37, Rollo). David filed a complaint for estafa and violation of CB Circular No. 364 and related regulations. He claimed that the difference between his placements of P1,159,078.14 and $75,000, on one hand, and the sum of P305,821.92, the amount entered in Nation Savings' books, on the other hand, constitutes the defraudation against him.

David sought to foreclose extrajudicially the two mortgages (p. 58, Rollo). The foreclosure was restrained by the Quezon City Court of First Instance. On March 15, 1982, the Solicitor General, in behalf of the Central Bank, filed a petition in the Court of First Instance of Manila for assistance in the liquidation of Nation Savings as an insolvent firm (Spec. Proc. No. 82-7552, p. 111, Rollo). The receivership was challenged by Nation Savings stockholders in Special Proceedings No. 82-1655 (p. 125, Rollo). The Solicitor General answered that petition by alleging that Nation Savings was plagued with irregularities (p. 225, Rollo).

Issue: Whether public respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S. No. 81-31938.

Held: There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit-complaint filed in the Office of the City Fiscal of Manila by private respondent David against petitioners Teofisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, rec.). It appears further that private respondent David, together with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of P1,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David before this Court

indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association.

It must be pointed out that when private respondent David invested his money on time and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:

"Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.”

In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114, 119 [1975], We said:"It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are considered simple loans and, as such, are not preferred credits.

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 96, 102 [1980]) that:

"Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980, Civil Code; Gullas vs. Phil. National Bank, 62 Phil. 519). Current and savings deposits are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depository's failure to return the subject matter of the deposit" (emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. 1(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no jurisdiction.

WE have already laid down the rule that:"In order that a person can be convicted under the above-quoted provision, it must be proven that he has the obligation to deliver or return the same money, goods or personal property that he received. Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans.

"The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code."'Art. 1933. — By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

"'Art. 1953. — A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.’

"It can be readily noted from the above quoted provisions that in simple loan (mutuum), as contrasted to commodatum, the borrower acquires ownership of the money, goods or personal property borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof" (Yam vs. Malik, 94 SCRA 30, 34 [1979]; emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor.

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

ASSOCIATED BANK (NOW WESTMONT BANK) VS VICENTE HENRY TAN, G.R. 156940, DECEMBER 14, 2004Facts: Vicente Henry Tan is a businessman and a regular depositor-creditor of the associated bank. He deposited a postdated UCPB check with the said bank in the amount of 101,000 issued to him by Willy Cheng from Tarlac. The check was duly entered in his bank record thereby making his balance in the amount of P297,000.00, as of October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon advice and instruction of the BANK that the P101,000.00 check was already cleared and backed up by sufficient funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing balance in the amount of P107,793.45, because he has issued several checks to his business partners.

However, his suppliers and business partners went back to him alleging that the checks he issued bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take positive steps regarding the matter for he has adequate and sufficient funds to pay the amount of the subject checks. Nonetheless, the BANK did not bother nor offer any apology regarding the incident. Tan filed a complaint for damages.

The bank filed a motion to dismiss alleging that no banking institution would give an assurance to any of its client/depositor that the check deposited by him had already been cleared and backed up by sufficient funds but it could only presume that the same has been honored by the drawee bank in view of the lapse of time that ordinarily takes for a check to be cleared. For its part, [petitioner] alleged that on October 2, 1990, it gave notice to the [respondent] as to the return of his UCPB check deposit in the amount of

P101,000.00, hence, on even date, [respondent] deposited the amount of P50,000.00 to cover the returned check.

The court rendered in favor of Tan. The CA affirmed and ruled that the bank should not have authorized the withdrawal of the value of the deposited check prior to its clearing.

Issue: WON petitioner, which is acting as collecting agent, has the right to debit the amount of its client for a check deposit which was dishonoured by the drawee bank

Held: Petitioner-bank contends that its rights and obligations under the present set of facts were misappreciated by the CA. It insists that its right to debit the amount of the dishonored check from the account of respondent is clear and unmistakable. Even assuming that it did not give him notice that the check had been dishonored, such right remains immediately enforceable.

In particular, petitioner argues that the check deposit slip accomplished by respondent on September 17, 1990, expressly stipulated that the bank was obligating itself merely as the depositor's collecting agent and — until such time as actual payment would be made to it — it was reserving the right to charge against the depositor's account any amount previously credited. Respondent was allowed to withdraw the amount of the check prior to clearing, merely as an act of accommodation, it added.

Right of Set-off - A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.”

Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present," as follows:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;(3) That the two debts be due;(4) That they be liquidated and demandable;(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.”

Nonetheless, the real issue here is not so much the right of petitioner to debit respondent's account but, rather, the manner in which it exercised such right. The Court has held that even while the right of setoff is conceded, separate is the question of whether that remedy has properly been exercised.

The liability of petitioner in this case ultimately revolves around the issue of whether it properly exercised its right of setoff. The determination thereof hinges, in turn, on the bank's role and obligations, first, as respondent's depositary bank; and second, as collecting agent for the check in question.

Did petitioner treat respondent's account with the highest degree of care? From all indications, it did not.It is undisputed — nay, even admitted — that purportedly as an act of accommodation to a valued client, petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. That act certainly disregarded the clearance requirement of the banking system. Such a practice is unusual, because a check is not legal tender or money; and its value can properly be transferred to a depositor's account only after the check has been cleared by the drawee bank.

Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the amount to a depositor's account; or infuse value to that account only after the drawee bank shall have paid such amount. Before the check shall have been cleared for deposit, the collecting bank can only "assume" at its own risk — as herein petitioner did — that the check would be cleared and paid out.

Reasonable business practice and prudence, moreover, dictated that petitioner should not have authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over and above his outstanding cleared balance of P196,793.45. Hence, the lower courts correctly appreciated the evidence in his favor.

Obligation as Collecting Agent - Indeed, the bank deposit slip expressed this reservation:"In receiving items on deposit, this Bank obligates itself only as the Depositor's Collecting agent, assuming no responsibility beyond carefulness in selecting correspondents, and until such time as actual payments shall have come to its possession, this Bank reserves the right to charge back to the Depositor's account any amounts previously credited whether or not the deposited item is returned. . . .”

However, this reservation is not enough to insulate the bank from any liability. In the past, we have expressed doubt about the binding force of such conditions unilaterally imposed by a bank without the consent of the depositor. It is indeed arguable that "in signing the deposit slip, the depositor does so only to identify himself and not to agree to the conditions set forth at the back of the deposit slip.”

Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as respondent's agent, consonant with the well-settled rule that the relationship between the payee or holder of a commercial paper and the collecting bank is that of principal and agent. Under Article 1909 of the Civil Code, such bank could be held liable not only for fraud, but also for negligence.

As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. Due to the very nature of their business, banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. Jurisprudence has established that the lack of diligence of a servant is imputed to the negligence of the employer, when the negligent or wrongful act of the former proximately results in an injury to a third person; in this case, the depositor.

The manager of the bank's Cabanatuan branch, Consorcia Santiago, categorically admitted that she and the employees under her control had breached bank policies. They admittedly breached those policies when, without clearance from the drawee bank in Baguio, they allowed respondent to withdraw on October 1, 1990, the amount of the check deposited. Santiago testified that respondent "was not officially informed about the debiting of the P101,000 from his existing balance of P170,000 on October 2, 1990 . . . “

Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing the withdrawal and the subsequent debiting without notice. Accordingly, what remains to be determined is whether her actions proximately caused respondent's injury. Proximate cause is that which — in a natural and continuous sequence, unbroken by any efficient intervening cause — produces the injury, and without which the result would not have occurred.

Let us go back to the facts as they unfolded. It is undeniable that the bank's premature authorization of the withdrawal by respondent on October 1, 1990, triggered — in rapid succession and in a natural sequence — the debiting of his account, the fall of his account balance to insufficient levels, and the subsequent dishonor of his own checks for lack of funds. Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of

the debiting of his account. Nonetheless, it argues that the giving of notice was discernible from his act of depositing P50,000 on October 2, 1990, to augment his account and allow the debiting. This argument deserves short shrift.

CENTRAL BANK VS MORFE, G.R. NO. L-38427, MARCH 12, 1975Facts: On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board directed the Superintendent of Banks to take charge of its assets, forbade it to do business, and instructed the Central Bank Legal Counsel to take appropriate legal actions.

The resolution, since the board sought the court’s assistance and supervision in the liquidation of the bank, was implemented upon such filing.

Prior to the institution of the liquidation proceeding but after the declaration of insolvency, the spouses Job elites and Marcel elites filed a complaint against Fidelity savings bank for the recovery of the balance of their time deposits. The court ordered Fidelity to pay the Elizes.

In another case, the spouses Agusto and Adelaida Padilla secret a judgment against Fidelity for the balance of their time deposits.

The lower court, upon motions of the Elizes and Padilla spouses and over the opposition of the Central Bank, directed the latter, as liquidator, to pay their time deposits as preferred credits, evidenced by final judgments, withint the meaning of article 2244(14)(b) of the civil code, if there are enough funds in the liquidator's custody in excess of the credits more preferred under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil Code.

Central bank appealed contending that the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a) they were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of the Central Bank and the General Banking Law, no final judgment can be validly obtained against an insolvent bank.

Issue: WON payment of a time deposit in a savings bank, which judgment was obtained after the bank was declared insolvent, is a preferred claim against the bank?

Held: The trial court or, to be exact, the liquidation court noted that there is no provision in the charter of the Central Bank and in the General Banking Law (Republic Acts Nos. 265 and 337, respectively) which suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation court. It reasoned out that, because such actions are not suspended, judgments against insolvent banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code. It further noted that, in contrast with the Central Bank Act, section 18 of the Insolvency Law provides that upon the issuance by the court of an order declaring a person insolvent, "all civil proceedings against the said insolvent shall be stayed”.

On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets "for the equal benefit of all the creditors, including the depositors". The Central Bank cites the ruling that "the assets of an insolvent banking institution are held in trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248, 245 Pac. 947).

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are considered simple loans and, as such, are not preferred credits.

The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is found to be insolvent, the Monetary Board shall forbid it to do business and shall take charge of its assets. The Board in its Resolution No. 350 dated February 18, 1969 banned the Fidelity Savings Bank from doing business. It took charge of the bank's assets. Evidently, one purpose in prohibiting the insolvent bank from doing business is to prevent some depositors from having an undue or fraudulent preference over other creditors and depositors.

That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some depositors could be maintained and judgments would be rendered for the payment of their deposits and then such judgments would be considered preferred credits under article 2244(14)(b) of the Civil Code.

We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings bank which were obtained after the declaration of insolvency.

A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as entitled to priority would mean that depositors in insolvent banks, after learning that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from doing business, would rush to the courts to secure judgments for the payment of their deposits.

In such an eventuality, the courts would be swamped with suits of that character. Some of the judgments would be default judgments. Depositors armed with such judgments would pester the liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable situation could not have been contemplated by the framers of section 29.

The Rohr case (supra) supplies some illumination on the disposition of the instant case. It appears in that case that the Stanton Trust & Savings Bank of Great Falls closed its doors to business on July 9, 1923. On November 7, 1924 the bank (then already under liquidation) issued to William Rohr a certificate stating that he was entitled to claim from the bank $1,191.72 and that he was entitled to dividends thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred to the complaint. The trial court sustained the demurrer. Rohr appealed. In affirming the order sustaining the demurrer, the Supreme Court of Montana said:

"The general principle of equity that the assets of an insolvent are to be distributed ratably among general creditors applies with full force to the distribution of the assets of a bank. A general depositor of a bank is merely a general creditor, and, as such, is not entitled to any preference or priority over other general creditors."The assets of a bank in process of liquidation are held in trust for the equal benefit of all creditors. and one cannot be permitted to obtain an advantage or preference over another by an attachment, execution or otherwise. A disputed claim of a creditor may be adjudicated, but those whose claims are recognized and admitted may not successfully maintain action thereon. So to permit would defeat the very purpose of the liquidation of a bank whether being voluntarily accomplished or through the intervention of a receiver.xxx xxx xxx"The available assets of such a bank are held in trust, and so conserved that each depositor or other creditor shall receive payment or dividend according to the amount of his debt, and that none of equal class shall receive any advantage or preference over another."

And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that the assets of such a bank "become a trust fund, to be administered for the benefit of all creditors pro rata, and, while the bank retains its corporate existence, and may be sued, the effect of a judgment obtained against it by a creditor is only to fix the amount of debt. He can acquire no lien which will give him any preference or advantage over other general creditors." (245 Pac. 249)

Considering that the deposits in question, in their inception, were not preferred credits, it does not seem logical and just that they should be raised to the category of preferred credits simply because the depositors, taking advantage of the long interval between the declaration of insolvency and the filing of the petition for judicial assistance and supervision, were able to secure judgments for the payment of their time deposits.

The judicial declaration that the said deposits were payable to the depositors, as indisputably they were due, could not have given the Elizes and Padilla spouses a priority over the other depositors whose deposits were likewise indisputably due and owing from the insolvent bank but who did not want to incur litigation expenses in securing a judgment for the payment of the deposits.

The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969, was forbidden to do business (and that ban would include the payment of time deposits) implies that suits for the payment of such deposits were prohibited. What was directly prohibited should not be encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of Paterson, 176 Atl. 391, 114 N.J.L. 167).

PNB VS GANCAYAO, G.R. L-18343, SEPTEMBER 30, 1965Facts: Defendants Emilio Gancayco and Floretino Flor, as special prosecutors of the DOJ, required the plaintiff PNB to produce at hearing at 10 am on 2/20/1961 the records of the bank deposits of Ernesto T. Jimenez, former administrator of the Agricultural Credit and Cooperative Administration, who was then under investigation for unexplained wealth. In declining to reveal its records, the plaintiff bank invoked republic Act No. 1405. The plaintiff bank invoked Republic Act No. 1405 which provides:

SEC. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

The plaintiff bank also called attention to the penal provision of the law which reads:SEC. 5. Any violation of this law will subject the offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

On the other hand, the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No. 3019) in support of their claim of authority and demanded anew that plaintiff Eduardo Z. Romualdez, as bank president, produce the records or he would be prosecuted for contempt. The law invoked by the defendant states:

SEC. 8. Dismissal due to unexplained wealth. — If in accordance with the provisions of Republic Act Numbered One thousand three hundred seventy-nine, a public official has been found to have acquired during his incumbency, whether in his name or in the name of other persons, an amount of property and/or money manifestly out of proportion to his salary and to his other lawful income, that fact shall be a ground for dismissal or removal. Properties in the name of the spouse and unmarried children of such public official may be taken into consideration, when their acquisition through legitimate means cannot be satisfactorily shown. Bank deposits shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.

On the other hand, the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No. 3019)

in support of their claim of authority and demanded anew that plaintiff Eduardo Z. Romualdez, as bank president, produce the records or he would be prosecuted for contempt.

Plaintiffs filed an action for declaratory judgment because of the threat of prosecution. The court rendered judgment sutaining the power of defendants to compel the disclosure of bank accounts of ACCFA administrator. The court said that, by enacting section 8 of the Anti-Graft and Corrupt Practices Act, Congress clearly intended to provide an additional ground for the examination of bank deposits. Without such provision, the court added, prosecutors would be hampered if not altogether frustrated in the prosecution of those charged with having acquired unexplained wealth while in public office.

PNB appealed to this court.

Issue: WON a bank can be compelled to disclose the records of accounts of a depositor who is under investigation for unexplained wealth?

Held: The truth is that these laws are so repugnant to each other that no reconciliation is possible. Thus, while Republic Act No. 1405 provides that bank deposits are "absolutely confidential . . . and [therefore] may not be examined, inquired or looked into," except in those cases enumerated therein, the Anti-Graft Law directs in mandatory terms that bank deposits "shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary." The only conclusion possible is that section 8 of the Anti-Graft Law is intended to amend section 2 of Republic Act No. 1405 by providing an additional exception to the rule against the disclosure of bank deposits.

Indeed, it is said that if the new law is inconsistent with or repugnant to the old law, the presumption against the intent to repeal by implication is overthrown because the inconsistency or repugnancy reveals an intent to repeal the existing law. And whether a statute, either in its entirety or in part, has been repealed by implication is ultimately a matter of legislative intent.

The recent case of People v. De Venecia, G. R. No. L-20808, July 31, 1965 invites comparison with this case. There it was held:

"The result is that although Sec. 54 [Rev. Election Code] prohibits a classified civil service employee from aiding any candidate, Sec 29 [Civil Service Act of 1959] allows such classified employee to express his views on current political problems or issues, or to mention the name of his candidate for public office, even if such expression of views or mention of names may result in aiding one particular candidate. In other words, the last paragraph of Sec. 29 is an exception to Sec. 54; at most, an amendment to Sec. 54.”

With regard to the claim that disclosure would be contrary to the policy making bank deposits confidential, it is enough to point out that while section 2 of Republic Act No. 1405 declares bank deposits to be "absolutely confidential" it nevertheless allows such disclosure in the following instances: (1) Upon written permission of the depositor; (2) In cases of impeachment; (2) Upon order of a competent court in cases of bribery or dereliction of duty of public officials; (4) In cases where the money deposited is the subject of the litigation. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential. The policy as to one cannot be different from the policy as to the other. This policy expresses the notion that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny.