REPUBLIC OF THE PHILIPPINES, PETITIONER, VS. SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, …

Republic versus Security Credit and Acceptance Corporation

The Case

This is an original quo warranto proceeding — an action by the State to test whether a corporation is unlawfully exercising a franchise or privilege — brought by the Republic of the Philippines, through the Solicitor General, against Security Credit and Acceptance Corporation and the members of its board of directors and executive officers. The Republic asks that the corporation be dissolved because it has been performing banking operations without the certificate of authority required by the General Banking Act, Republic Act Number 337. The case matters because it fixes the statutory test for what makes an entity a banking institution: the regular lending of funds obtained from the public through the receipt of deposits or the sale of securities. It also teaches when the Supreme Court will keep a quo warranto case for itself rather than send it down to a trial court.

Procedural History

This case began in the Supreme Court itself. The Solicitor General commenced the quo warranto proceedings for dissolution on December sixth, nineteen hundred sixty two, praying at the same time for a preliminary injunction and for the appointment of a receiver pending litigation. Upon the joint motion of both parties, the Superintendent of Banks of the Central Bank was appointed receiver pending litigation, and he assumed his functions after filing the requisite bond. The defendants answered, admitting practically all the allegations of fact but denying that their transactions partook of the nature of banking. They also asked that the case be remanded to the Court of First Instance of Manila, where a separate action for declaratory relief and injunction was pending, invoking the earlier case of Veraguth versus Isabela Sugar Company. The Supreme Court kept the case and decided it in the first instance, because its jurisdiction over quo warranto cases is original and concurrent with the courts of first instance, and because the principal facts were undisputed.

Facts

The corporation's articles of incorporation were registered with the Securities and Exchange Commission on March twenty seventh, nineteen hundred sixty one, and its by-laws were filed shortly after. Its charter authorized it to extend credit facilities for home building and agricultural, commercial and industrial projects, and to lend, borrow, discount and deal in securities. It was not authorized to accept deposits from the public.

In a letter dated January fifteenth, nineteen hundred sixty two, the corporation through its president sought reconsideration of the opinion of the legal counsel of the Central Bank that it was a banking institution. Reconsideration was denied. On May eighteenth, nineteen hundred sixty two, the Municipal Court of Manila issued a search warrant upon the application of members of the Manila Police Department and an agent of the Central Bank. Documents and records of the corporation were seized and placed in the custody of the Central Bank. Examination of those records showed that the corporation was receiving deposits from the public regularly, treating them as conditional subscriptions to capital stock, and lending out the funds so obtained to any person. The Monetary Board, in its Resolution Number 1095 of September fourteenth, nineteen hundred sixty two, declared that the corporation was performing banking operations without having complied with Sections 2 and 6 of the General Banking Act.

The corporation nevertheless continued its operations. In less than one year it established seventy four branches throughout the Philippines and induced the public to open fifty nine thousand four hundred sixty three savings deposit accounts, with an aggregate deposit of one million six hundred eighty nine thousand one hundred thirty six pesos and seventy four centavos. Its original capital stock of five hundred thousand pesos was increased to three million pesos. The defendants admitted these figures but denied that the transactions were banking operations.

Issues

• Whether or not the corporation, by regularly receiving deposits from the public and lending out the funds so obtained, was performing banking operations within the meaning of Section 2 of the General Banking Act.
• Whether or not the corporation, having engaged in banking without the authority required by law, may be dissolved by quo warranto.
• Whether or not the case should be remanded to the Court of First Instance of Manila, in view of the pendency there of a separate action for declaratory relief and injunction.

Applicable Provisions

Section 2 of the General Banking Act, Republic Act Number 337, provides:

Only duly authorized persons and entities may engage in the lending of funds obtained from the public through the receipt of deposits or the sale of bonds, securities, or obligations of any kind, and all entities regularly conducting such operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of the General Bank Act, and of other pertinent laws.

This is the definition the Court applies: the test is the regular lending of funds obtained from the public through deposits or the sale of securities.

Section 6 of the same Act provides:

No person, association or corporation not conducting the business of a commercial banking corporation, trust corporation, savings and mortgage banks, or building and loan association, as defined in this Act, shall advertise or hold itself out as being engaged in the business of such bank, corporation or association, or use in connection with its business title the word or words bank, banking, banker, building and loan association, trust corporation, trust company, or words of similar import, or solicit or receive deposits of money for deposit, disbursement, safekeeping, or otherwise, or transact in any manner the business of any such bank, corporation or association, without having first complied with the provisions of this Act in so far as it relates to commercial banking corporations, trust corporations, savings and mortgage banks, or building and loan associations, as the case may be.

This is the prohibition the corporation violated by soliciting and receiving deposits without first complying with the Act.

Ruling

On the first issue, the Court held that the corporation's transactions partake of the nature of banking as that term is used in Section 2 of the General Banking Act. It was conceded that fifty nine thousand four hundred sixty three savings deposits had been made with the corporation and its seventy four branches, aggregating one million six hundred eighty nine thousand one hundred thirty six pesos and seventy four centavos, and that these funds had been lent out to such persons as the corporation deemed suitable. The Court defined a bank as a moneyed institute founded to facilitate the borrowing, lending and safe-keeping of money and to deal in notes, bills of exchange and credits. It also adopted the rule that an investment company which loans out the money of its customers, collects the interest, and charges a commission to both lender and borrower is a bank, and that any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised. Accordingly, the corporation violated the law by engaging in banking without securing the administrative authority required by Republic Act Number 337.

On the second issue, the Court held that the illegal transactions warranted dissolution. The misuser of the corporate funds and franchise affects the essence of its business, it is willful, it has been repeated many times, and its continuance inflicts injury upon the public owing to the number of persons affected.

On the third issue, the Court declined to remand the case. Its jurisdiction over quo warranto cases is original and concurrent with the courts of first instance, so it is discretionary whether to entertain the case or require the issues to be taken up in the pending civil case. The Veraguth case was not in point because there the issues of fact required the presentation of evidence, and courts of first instance are generally better equipped to take testimony. Here there was no dispute as to the principal facts, and the main issue was one of law, namely, the legal nature of those facts. Public interest demanded an early disposition.

Doctrine

First, the statutory test of a banking institution is functional, not formal. Under Section 2 of the General Banking Act, an entity is a banking institution if it regularly lends funds obtained from the public through the receipt of deposits or the sale of bonds, securities, or obligations of any kind. The label in the articles of incorporation does not control; the actual operations do.

Second, receiving deposits from the public and lending out the funds so received is banking even if only one banking function is exercised. An investment company that loans out the money of its customers, collects the interest, and charges a commission to both lender and borrower is a bank.

Third, engaging in banking without the required authority is a misuser of the corporate franchise that warrants dissolution by quo warranto where the misuser affects the essence of the business, is willful and repeated, and injures the public.

Fourth, the Supreme Court may retain an original quo warranto case instead of remanding it where the facts are undisputed and the issue is purely legal, especially where public interest demands early disposition.

Disposition

The Court granted the writ, ordered the dissolution of Security Credit and Acceptance Corporation, made the appointment of the receiver permanent, and directed the receiver to administer the properties, deposits and other assets of the corporation and wind up its affairs conformably to Rules 59 and 66 of the Rules of Court.

Remember This

Memorize the rule: an entity that regularly lends funds obtained from the public through the receipt of deposits or the sale of securities is a banking institution under Section 2 of the General Banking Act, and engaging in banking without authority is a ground for dissolution by quo warranto. Examiners use this case to test the functional definition of banking and the requisites for dissolution of a corporation for misuser of its franchise.