FEATI BANK & TRUST COMPANY, PETITIONER, VS. COURT OF APPEALS AND QUALITY TOBACCO CORPORATION, RESPONDENTS.

On June 13, 1973,
the Court of First Instance of Manila, Branch XVI, rendered a decision in Civil
Case No. 84509, brought by Quality Tobacco Corporation (formerly U.S. Tobacco
Corporation) against Feati Bank and Trust Co., with the following dispositive
portion:

“IN VIEW OF THE FOREGOING, the Court renders judgment as
follows:

1)      Plaintiff’s claim for
the amount of P30,312.29 is hereby denied;

2)      Defendant is entitled
to the return of $110,000.00 and plaintiff is ordered to return the same to
defendant upon reimbursement of the amount of P471,600.00
paid by plaintiff to the defendant.  No
cost or attorney’s fees.”

On appeal by Quality Tobacco Corporation to the Court of Appeals
(CA-G.R. No. 53640-R), the decision of the trial court was reversed; the
counter-claim was dismissed; and the appellee was ordered to pay the appellant
the sum of P30,312.29, and the costs.

Its motion for reconsideration of the judgment having been
denied, Feati Bank elevated the case to Us for review.

The antecedents are the following:

On December 7, 1967, U.S. Tobacco Corporation (predecessor of
Quality Tobacco Corporation) opened with Feati Bank and Trust Co. a letter of
credit No. 67-571 for US $120,000.00 in favor of Tatran Corporation, in the
principality of Liechtenstein to cover the freight charges in its exportation
of 1,980,194 kilos of local Virginia leaf tobacco, to be shipped “C &
F” to Tatran Corporation.  (Shipment
under “C & F” basis, symbol for “cost” and
“freight, means that the seller or shipper pays for freight charges from
the point of origin to the point of destination, as the price quoted to the
buyer includes the cost and freight.)

U.S. Tobacco Corporation paid P471,600.00
at P3.939 for every dollar for the letter of credit.  Of the amount covered by the letter of credit,
Feati Bank (through the National Bank of North America), remitted to Tatran
Corporation US $110,000.00, leaving an unremitted amount of US $10,000.00.  After the remittance to
Tatran, Feati Bank’s account with the National Bank of North America was debited in
the amount of $110,221.00 including charges.

On January 18, 1968,
U.S. Tobacco Corporation shipped the tobacco to Switzerland
and as a result letter of credit No. 20678 was issued by Swiss Credit Bank in
its favor upon application of Tatran Corporation.  The said letter of credit showed that the
tobacco shipment was made on “FOB, Manila”
basis.  (“FOB” stands for
“free on board, “ wherein the seller shall
deliver and load the goods at seller’s point at his expense or free of charge
to the buyer but the duty to pay freight charges from seller’s point to the
point of destination is on the buyer.)

The discrepancy was discovered by the auditors of the Central
Bank and both the Feati Bank and U.S. Tobacco were asked to explain.  Whereupon, in a letter to Feati Bank, U.S.
Tobacco explained that a mistake was made when Swiss Credit Bank, on order of
Tatran Corporation, issued Letter of Credit No. 20678 in that it appeared that
the shipment of tobacco was made on “FOB, Manila” basis, instead of
“C & F” basis.

The foregoing explanation did not satisfy the Central Bank which
accordingly issued Monetary Board Resolution No. 1054, dated July 1, 1969, directing the Feati Bank
to advise U.S. Tobacco to have the amount of $110,000.00 remitted back to the Philippines
under pain of having its foreign exchange privileges suspended.

In compliance with the resolution, U.S. Tobacco repatriated on April 7, 1971, the $110,000.00 through
Commercial Bank and Trust Co. which paid it P6.402 for every dollar.

On April 14, 1971,
Quality Tobacco Corporation (successor to U.S. Tobacco) requested Feati Bank to
pay back the amount of P30,312.29 corresponding to
$10,000.00 which was not remitted to Tatran. 
Feati Bank replied thus:

“This is to acknowledge receipt of your letter dated April 14, 1971, requesting that we
refund to you the excess payment of P30,312.29.

“However, before we make any refund and/or reimbursement to
you, we request that the dollar proceeds of our LC No. 67-511 in the amount of
$110,000.00 which was debited from our account when said LC was negotiated, be
remitted to us in accordance with the Central Bank Monetary Board Resolution
No. 1054 and not to the Commercial Bank and Trust Company.  Please note that the P110,000.00 had been
debited from Feati Bank and Trust Company’s dollar account with the negotiating
bank abroad and in compliance with the Monetary Board Resolution No. 1054, and
the letter of the Director, Foreign Exchange Department dated December 6, 1968,
the same should be remitted to Feati Bank and Trust Company.

“We, therefore, suggest that you request Commercial Bank and
Trust Company to credit the account of Feati Bank and Trust Company for
$110,000.00 with Chase Manhattan and we shall in turn reimburse you for the
full peso value of the aforementioned dollar amount (US $110,000.00) computed
at the rate of P3.93 together with the unutilized portion of LC No. 67-511,
computed at the same rate.”  (Record on Appeal, pp. 20-21.)

Quality Tobacco rejected Feati Bank’s suggestion and insisted on
the payment of P30,312.29.  Since the parties could not agree, Quality
Tobacco filed suit on September 14,
1971, in the Court of First Instance of Manila against Feati Bank
praying for the return of P30,312.29, with interest in
addition to damages, attorney’s fees and costs.

In its answer, Feati Bank denied any liability or obligation for
the return of P30,312.29.  As a counter-claim, it demanded the return of
$110,000.00 in the same foreign exchange for which it was willing to return the
purchase price thereof in Philippine currency. 
It contended that the use of letter of credit No. 67-571 was nullified
by the Central Bank without its fault; and that since the amount was debited
from its account with National Bank of North America, it
was deprived of the use of its dollar reserves. 
Feati Bank also asked for damages in the form of unrealized profits as a
result of the denial of its use of $110,000.00 from December 7, 1967.

Quality Tobacco Corporation replied that upon payment of the
letter of credit, it became the owner of US $120,000.00 and Feati Bank had,
thereby, lost any right thereto.

Based on the parties’ stipulations of facts, the Court of First
Instance of Manila rendered the judgment above-quoted but which was reversed by
the Court of Appeals as aforesaid without stating the law upon which it based
its decision.

The resolution of the petition hinges on how We
view the contract between Feati Bank and U.S. Tobacco.  The petitioner invokes Articles 1409, 1411
and 1412 of the Civil Code and argues that since the ground on which the
Central Bank nullified the purchase by private respondent from petitioner of
the dollars in question was the illegal object or purpose behind the purchase,
i.e., the illegal exportation of the dollars, the transaction was, therefore,
inexistent and void from the beginning; consequently, no valid transmission of
the ownership of the dollars from petitioner to private respondent ever took
place; since the illegality is imputable alone to private respondent, petitioner
as the innocent party is entitled to recover back the dollars.  The petitioner prays that judgment be
rendered setting aside that of the Court of Appeals and reinstating and
affirming that of the trial court denying plaintiff’s claim for the amount of
P30,312.29 and ordering plaintiff to return
$110,000.00 to defendant upon the reimbursement of P471,600.00 paid by
plaintiff to the defendant, with costs in this instance against private
respondents.  Upon the other hand,
Quality Tobacco rejects these arguments and prays that the petitioner be
ordered to pay the private respondent the amount of P30,312.29
with interest at the legal rate from December
7, 1967 until fully paid, and the costs.

Treating the contract between the parties in the most favorable light
by ascribing the existence of good faith on both sides since the Central Bank
took no action on the contract except simply to order the repatriation of the
dollars, We hold that it is not illegal or void ab initio but
merely voidable because of the statement of a false cause.  (Art. 1353, Civil Code;
Concepcion vs. Sta. Ana, 87 Phil. 787 [1950].) The result will be that
the parties will have to be restored to their previous situations by making
mutual restitution. (Art. 1398, Civil Code.)

WHEREFORE, the petition is granted; the judgment of the
Court of Appeals is reversed; the petitioner shall return to the private
respondent the cost of the US $120,000.00 in the amount of P471,600.00 and reciprocally the private respondent shall
restore the petitioner’s U.S. dollar account with the National Bank of North
America or any other bank which petitioner may designate in the amount of
$110,000.00.  No costs.

SO ORDERED.

Barredo, (Chairman), Concepcion, Jr., and Fernandez, JJ., concur.

Aquino, J., concurring opinion.