BANK OF THE PHILIPPINE ISLANDS (SUCCESSOR-IN­INTEREST OF COMMERCIAL BANK AND TRUST CO.), PETITIONER, VS. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. AND BENIGNO D. LIM, RESPOND…

The petitioner urges us to review and set aside the amended
Decision^[1]
of 6 March 1992 of respondent Court of Appeals in CA­-G.R. CV No. 25739 which
modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial
Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands
(successor-in-interest of Commercial Bank and Trust Company) versus Eastern
Plywood Corporation and Benigno D. Lim. The Court of Appeals
had affirmed the dismissal of the complaint but had granted the defendants’
counterclaim for P331,261.44 which represents the outstanding balance of their
account with the plaintiff.

As culled from the records and the pleadings of the parties, the
following facts were duly established:

Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one
joint bank account (“and/or” account) with the Commercial Bank and
Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the
Philippine Islands (BPI). Sometime in
March 1975, a joint checking account (“and” account) with Lim in the
amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from
the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account
of Velasco and Lim. The money therein
was placed in the money market.

Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood
at P662,522.87. On 5 May 1977, by
virtue of an Indemnity Undertaking executed by Lim for himself and as President
and General Manager of Eastern,^[2]
one-half of this amount was provisionally released and transferred to one of
the bank accounts of Eastern with CBTC.^[3]

Thereafter, on 18 August 1978, Eastern obtained a loan of
P73,000.00 from CBTC as “Additional Working Capital,” evidenced by
the “Disclosure Statement on Loan/Credit Transaction” (Disclosure
Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and
Eastern, through Lim, as its President and General Manager.^[4] The
loan was payable on demand with interest at 14% per annum.

For this loan, Eastern issued on the same day a negotiable
promissory note for P73,000.00 payable on demand to the order of CBTC with
interest at 14% per annum.^[5] The
note was signed by Lim both in his own capacity and as President and General
Manager of Eastern. No reference to any
security for the loan appears on the note. In the Disclosure Statement, the box with the printed word
“UNSECURED” was marked with “X” — meaning unsecured, while
the line with the words “this loan is wholly/partly secured by” is
followed by the typewritten words “Hold-Out on a 1:1 on C/A No.
2310-001-42,” which refers to the joint account of Velasco and Lim with a
balance of P331,261.44.

In addition, Eastern and Lim, and CBTC signed another document
entitled “Holdout Agreement,” also dated 18 August 1978,^[6]
wherein it was stated that “as security for the Loan [Lim and Eastern]
have offered [CBTC] and the latter accepts a holdout on said [Current Account
No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of
their alleged interests therein as these may appear as a result of final and
definitive judicial action or a settlement between and among the contesting
parties thereto.”^[7]
Paragraph 02 of the Agreement provides as follows:

“Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust
[CBTC], when and if their alleged interests in the Account Balance shall have
been established with finality, ample and sufficient power as shall be
necessary to retain said Account Balance and enable Comtrust to apply the
Account Balance for the purpose of liquidating the Loan in respect of principal
and/or accrued interest.”

And paragraph 05 thereof reads:

“The acceptance of this holdout shall not impair the right of
Comtrust to declare the loan payable on demand at any time, nor shall the
existence hereof and the non-resolution of the dispute between the contending
parties in respect of entitlement to the Account Balance, preclude Comtrust
from instituting an action for recovery against Eastply and/or Mr. Lim in the
event the Loan is declared due
and payable and Eastply and/or Mr. Lim shall default in payment of all
obligations and liabilities thereunder.”

In the meantime, a case for the settlement of Velasco’s estate
was filed with Branch 152 of the RTC of Pasig, entitled “In re
Intestate Estate of Mariano Velasco,” and docketed as Sp. Proc. No.
8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint
account of Velasco and Lim was being claimed as part of Velasco’s estate. On 9 September 1986, the intestate court
granted the urgent motion of the heirs of Velasco to withdraw the deposit under
the joint account of Lim and Velasco and authorized the heirs to divide among
themselves the amount withdrawn.^[8]

Sometime in 1980, CBTC was merged with BPI.^[9] On 2
December 1987, BPI filed with the RTC of Manila a complaint against Lim and
Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil Case No.
87-42967 and was raffled to Branch 19 of the said court, then presided over by
Judge Wenceslao M. Polo. Defendants Lim
and Eastern, in turn, filed a counterclaim against BPI for the return of the
balance in the disputed account subject of the Holdout Agreement and the
interests thereon after deducting the amount due on the promissory note.

After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI failed to make out its
case. Furthermore, it ruled that
“the promissory note in question is subject to the ‘hold-out’
agreement,”^[10]
and that based on this agreement, “it was the duty of plaintiff Bank [BPI]
to debit the account of the defendants under the promissory note to set off the
loan even though the same has no fixed maturity.^[11] As
to the defendants’ counterclaim, the trial court, recognizing the fact that the
entire amount in question had been withdrawn by Velasco’s heirs pursuant to the
order of the intestate court in Sp. Proc. No. 8959, denied it because the
“said claim cannot be awarded without disturbing the resolution” of
the intestate court.^[12]

Both parties appealed from the said decision to the Court of
Appeals. Their appeal was docketed as
CA-G.R. CV No. 25739.

On 23 January 1991, the Court of Appeals rendered a decision
affirming the decision of the trial court. It, however, failed to rule on the defendants’ (private respondents’)
partial appeal from the trial court’s denial of their counterclaim. Upon their motion for reconsideration, the
Court of Appeals promulgated on 6 March 1992 an Amended Decision^[13]
wherein it ruled that the settlement of Velasco’s estate had nothing to do with
the claim of the defendants for the
return of the balance of their account with CBTC/BPI as they were not
privy to that case, and that the defendants, as depositors of CBTC/BPI, are the
latter’s creditors; hence, CBTC/BPI should
have protected the defendants’ interest in Sp. Proc. No. 8959 when the said
account was claimed by Velasco’s
estate. It then ordered BPI “to pay defendants the amount
of P331,261.44 representing the outstanding balance in the bank account of
defendants.”^[14]

On 22 April 1992, BPI filed the instant petition alleging therein
that the Holdout Agreement in question was subject to a suspensive condition
stated therein, viz., that the “P331,261.44 shall become a security
for respondent Lim’s promissory note only if respondents’ Lim and Eastern
Plywood Corporation’s interests to that amount are established as a result of a
final and definitive judicial action or a settlement between and among the
contesting parties thereto.”^[15]
Hence, BPI asserts, the Court of Appeals erred in affirming the trial court’s
decision dismissing the complaint on the ground that it was the duty of CBTC to
debit the account of the defendants to set off the amount of P73,000.00 covered
by the promissory note.

Private respondents Eastern and Lim dispute the “suspensive
condition” argument of the petitioner. They interpret the findings of both the trial and appellate courts that
the money deposited in the joint account of Velasco and Lim came from Eastern
and Lim’s own account as a finding that the money deposited in the joint
account of Lim and Velasco “rightfully belong[ed] to Eastern Plywood
Corporation and/or Benigno Lim.” And because the latter are the rightful
owners of the money in question, the suspensive condition does not find any
application in this case and the bank had the duty to set off this deposit with
the loan. They add that the ruling of
the lower court that they own the disputed amount is the final and definitive
judicial action required by the Holdout Agreement; hence, the petitioner can only
hold the amount of P73,000.00 representing the security required for the note
and must return the rest.^[16]

The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder
thereto.

We gave due course to the petition and required the parties to
submit simultaneously their memoranda.

The key issues in this case are whether BPI can demand payment of
the loan of P73,000.00 despite the existence of the Holdout Agreement and
whether BPI is still liable to the private respondents on the account subject
of the Holdout Agreement after its withdrawal by the heirs of Velasco.

The collection suit of BPI is based on the promissory note for
P73,000.00. On its face, the note is an
unconditional promise to pay the said amount, and as stated by the respondent
Court of Appeals, “[t]here is no question that the promissory note is a
negotiable instrument.”^[17] It
further correctly ruled that BPI was not a holder in due course because the
note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid
transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between
the two banks. BPI, therefore, took the
note subject to the Holdout Agreement.

We disagree, however, with the Court of Appeals in its
interpretation of the Holdout Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its
successor-in-­interest, had every right to demand that Eastern and Lim settle
their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and
Velasco’s joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a
duty. Generally, a bank is under no
duty or obligation to make the application.^[18] To
apply the deposit to the payment of a loan is a privilege, a right of set-off
which the bank has the option to exercise.^[19]

Also, paragraph 05 of the Holdout Agreement itself states that
notwithstanding the agreement, CBTC was not in any way precluded from demanding
payment from Eastern and from instituting an action to recover payment of the
loan. What it provides is an
alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly
from Eastern and Lim, BPI had opted not to exercise its right to apply part of
the deposit subject of the Holdout Agreement to the payment of the promissory
note for P73,000.00. Its suit for the
enforcement of the note was then in order and it was error for the trial court
to dismiss it on the theory that it was set off by an equivalent portion in C/A
No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal.

The “suspensive condition” theory of the petitioner is,
therefore, untenable.

The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the
return of the P331,261.44^[20] was
equivalent to a demand that they be allowed to withdraw their deposit with the
bank. Article 1980 of the Civil Code
expressly provides that “[f]ixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the provisions
concerning simple loan.” In Serrano vs. Central Bank of the
Philippines,^[21]
we held that bank deposits are in the nature of irregular deposits; they
are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor
and debtor. The deposit under the
questioned account was an ordinary bank deposit; hence, it was payable on
demand of the depositor.^[22]

The account was proved and established to belong to Eastern even
if it was deposited in the names of Lim and
Velasco. As the real creditor of
the bank, Eastern has the right to withdraw it or to demand payment
thereof. BPI cannot be relieved of its
duty to pay Eastern simply because it already allowed the heirs of Velasco to
withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had
admitted in the Holdout Agreement the questioned ownership of the money
deposited in the account. As early as
12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the
deposit in the joint account of Velasco and Lim was being claimed by them and
that one-half was being claimed by the heirs of Velasco.^[23]

Moreover, the order of the court in Sp. Proc. No. 8959 merely
authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release
the account to the said heirs; hence, it was under no judicial compulsion to do
so. The authorization given to the
heirs of Velasco cannot be construed as a final determination or adjudication
that the account belonged to Velasco. We
have ruled that when the ownership of a particular property is disputed, the determination
by a probate court of whether that property is included in the estate of a
deceased is merely provisional in character and cannot be the subject of
execution.^[24]

Because the ownership of the deposit remained undetermined, BPI,
as the debtor with respect thereto, had no right to pay to persons other than
those in whose favor the obligation was constituted
or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI
that will extinguish its obligation to the creditor-depositor is payment to the
person of the creditor or to one authorized by him or by the law to receive it.^[25] Payment made by the debtor to the wrong
party does not extinguish the obligation as to the creditor who is without
fault or negligence, even if the debtor acted in utmost good faith and by
mistake as to the person of the creditor, or through error induced by fraud of
a third person.^[26] The payment then by BPI to the heirs of
Velasco, even if done in good faith, did not extinguish its obligation to the
true depositor, Eastern.

In the light of the above
findings, the dismissal of the petitioner’s complaint is reversed and set
aside. The award on the counterclaim is
sustained subject to a modification of the interest.

WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified:

(1)    Private respondents are ordered to pay the
petitioner the promissory note for P73,000.00 with interest at:

(a) 14% per annum on the principal, computed
from 18 August 1978 until payment;

(b) 12% per annum on the interest which had
accrued up to the date of the filing of the complaint, computed from that date
until payment pursuant to Article 2212 of the Civil Code.

(2)    The award of P331,264.44 in favor of the
private respondents shall bear interest at the rate of 12% per annum computed
from the filing of the counterclaim.

No pronouncement as to costs.

SO ORDERED.

Cruz, (Chairman),
Bellosillo, Quiason, and Kapunan, JJ., concur.

^[1]
Annex “A” of Petition; Rollo, 18-24. Per Associate Justice Jose C. Campos, Jr., concurred in by
Associate Justices Alicia V. Sempio-Diy and Filemon H. Mendoza.

^[2]
Annex “2” of Answer; Original Records (OR), 23-26.

^[3]
Exhibits “31” and “32”; Id., 124 and 125, respectively.

^[4]
Exhibit “A-6”; Id., 5.

^[5]
Exhibit “A”; OR, 4.

^[6]
Exhibit “C”; Id., 155-157.

^[7]
Holdout Agreement, 1-2.

^[8]
Annex “A” of Answer to Counterclaim; OR, 31-32.

^[9]
Per testimony of Ceferino Jimenez; TSN, 4 July 1988, 11.

^[10]
OR, 200.

^[11]
Id., 201.

^[12]
Id., 202.

^[13]
Annex “A” of Petition; Rollo, 19-23.

^[14]
Rollo, 22-23.

^[15]
Id., 13-14.

^[16]Rollo,
33-35.

^[17]
Id., 20.

^[18]
9 C.J.S. Banks and Banking § 301 (1938). See Bank of California vs. Starrett, 188 p. 410 (Wash. 1920);
Bryant vs. Williams, 16 F.2d 159 (D.C.N.C. 1926).

^[19]
Id., § 296. See Lowden vs.
Iowa-Des Moines Nat. Bank and Trust Co., 10
F. Supp. 430 (D.C. Iowa 1935); Meredith vs. First National Bank
of Central City, 271 S.W.2d 274 (Ky. Ct. App. 1954).

^[20]
OR, 17.

^[21]
96 SCRA 96 [1980]. See also, Guingona vs.
City Fiscal of Manila, 128 SCRA 577 [1984]; People vs. Ong, 204 SCRA 942
[1991].

^[22]
10 Am Jur 2d, Banks, § 356.

^[23]
Annex “1” of Answer; OR, 20-21.

^[24]
Valera vs. Inserto, 149 SCRA 533 [1987].

^[25]
See Article 1240, New Civil Code.

^[26]
IV ARTURO TOLENTINO, CIVIL CODE OF THE PHILIPPINES
285 (1991 ed.).