Bank of the Philippine Islands vs. Intermediate Appellate Court and Zshornack

A contract for the safekeeping of foreign currency cash (depositum) entered into by a bank and a depositor is void ab initio when it violates mandatory foreign exchange regulations requiring immediate sale of foreign exchange to the Central Bank; under the principle of in pari delicto, neither party may maintain an action against the other for recovery, though banks remain strictly liable for unauthorized withdrawals from deposit accounts.

The case arose from transactions between Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines (COMTRUST), Quezon City Branch, during a period when the Philippines maintained strict foreign exchange controls. In 1980, the Bank of the Philippine Islands (BPI) absorbed COMTRUST through a corporate merger and was substituted as party to the litigation. The dispute centers on banking practices regarding dollar accounts and the legal consequences of receiving foreign currency cash for safekeeping contrary to Central Bank regulations.

• Rizaldy T. Zshornack and his wife, Shirley Gorospe, maintained Dollar Savings Account No. 25-4109 and Peso Current Account No. 210465-29 with COMTRUST, Quezon City Branch.
• On October 27, 1975, Virgilio V. Garcia, Assistant Branch Manager of COMTRUST, accomplished an application for a dollar draft payable to Leovigilda D. Dizon in the amount of US$1,000.00, charging it to Zshornack's dollar savings account without the latter's authorization.
• On the same date, COMTRUST issued a check payable to Dizon drawn on Chase Manhattan Bank, New York, indicating it was to be charged to Zshornack's dollar account.
• When Zshornack discovered the unauthorized withdrawal, the bank claimed the peso equivalent was given to Ernesto Zshornack, Jr. (Rizaldy's brother) when he encashed a Manila Banking Corporation cashier's check, or alternatively claimed the withdrawal was pursuant to an agreement to fund the peso current account.
• On December 8, 1975, Zshornack delivered US$3,000.00 cash (greenbacks) to Garcia for safekeeping, evidenced by a written acknowledgment signed by Garcia stating: "We acknowledged having received from you today the sum of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping."
• On May 10, 1976, Zshornack demanded the return of the US$3,000.00, but the bank refused, claiming the amount had been sold on December 29, 1975 (US$2,000) and February 3, 1976 (US$1,000) and the peso proceeds credited to Zshornack's current account without his authorization.
• COMTRUST did not file a specific denial under oath regarding the authenticity and due execution of the safekeeping document, despite its being an actionable document attached to the complaint.

• Regarding the US$1,000.00 withdrawal: The peso value was given to Ernesto Zshornack, Jr. when he encashed a cashier's check; alternatively, the withdrawal was made pursuant to an agreement where Zshornack authorized the bank to withdraw from his dollar account to fund his peso current account.
• Regarding the US$3,000.00 safekeeping: The contract was a contract of depositum (irregular deposit) which banks do not enter into; Garcia exceeded his powers in entering into the transaction; the bank cannot be held liable and the obligation is purely personal to Garcia; alternatively, the amount was properly credited to Zshornack's current account at prevailing conversion rates.

• The US$1,000.00 was withdrawn without authorization; the bank's explanations are inconsistent and unsupported by evidence; payment to Ernesto Zshornack cannot be considered payment to Rizaldy Zshornack as they have distinct personalities.
• The US$3,000.00 was received for safekeeping as evidenced by the written acknowledgment; Garcia had ostensible authority to bind the bank; the bank is deemed to have admitted the execution of the document and Garcia's authority by failing to specifically deny under oath as required by the Rules of Court.

• Procedural Issues: Whether the bank is deemed to have admitted the due execution of the safekeeping document and Garcia's authority to bind the corporation by failing to file a specific denial under oath as required by Rule 8, Section 8 of the Rules of Court.
• Substantive Issues:
  • Whether the bank is liable for the unauthorized withdrawal of US$1,000.00 from Zshornack's dollar savings account.
  • Whether the contract for safekeeping of US$3,000.00 cash constitutes a valid and enforceable contract of depositum, or whether it is void for violating foreign exchange regulations.
  • Whether the bank is liable for damages in the concept of litigation expenses and attorney's fees.

• Procedural: The bank is deemed to have admitted the due execution of the safekeeping document and Garcia's authority to bind the corporation. Under Rule 8, Section 8 of the Rules of Court, an actionable document must be specifically denied under oath if the defendant desires to question the authority of the officer to bind the corporation or deny the corporation's capacity to enter into such contract. The bank's failure to file a sworn answer denying due execution or questioning Garcia's authority constitutes an admission of both the document's authenticity and the officer's authority to enter into the contract.
• Substantive:
  • The bank is liable for the unauthorized withdrawal of US$1,000.00. The bank's theories are inconsistent and unavailing; there is no proof that the peso current account was credited with the peso equivalent of the withdrawn amount, and payment to Ernesto Zshornack cannot be considered payment to Rizaldy Zshornack. The bank must restore the amount to the dollar savings account as of October 27, 1975, with interest at the rate fixed by the bank for dollar savings deposits.
  • The contract for safekeeping of US$3,000.00 constitutes a contract of depositum under Article 1962 of the Civil Code, as the bank received the foreign currency with the obligation of safely keeping it and returning the same. However, the contract is void under Article 5 of the Civil Code because the mere safekeeping of foreign exchange without selling it to the Central Bank within one business day violates the mandatory provisions of Central Bank Circular No. 20 (as modified by Circular No. 281). Being void for illegality and the parties being in pari delicto under Article 1411 of the Civil Code, neither party has a cause of action against the other; the only remedy is prosecution by the State for violation of the law.
  • The award of P8,000.00 as damages in the concept of litigation expenses and attorney's fees is reasonable and sustained.

• Contract of Depositum (Article 1962, Civil Code) — Defined as a contract where a person receives a thing belonging to another with the obligation of safely keeping it and returning the same. The Court applied this definition to characterize the safekeeping of the US$3,000.00 cash, distinguishing it from a loan or mutuum where safekeeping is not the principal purpose.
• In Pari Delicto (Article 1411, Civil Code) — The principle that when the nullity of a contract proceeds from the illegality of the cause or object constituting a criminal offense, both parties being equally guilty shall have no cause of action against each other. Applied to bar Zshornack's recovery of the US$3,000.00 since both parties knowingly violated foreign exchange regulations.
• Specific Denial Under Oath for Actionable Documents (Rule 8, Section 8, Rules of Court) — Requires that the execution of an actionable document be denied specifically and under oath; failure to do so constitutes an admission of due execution. Applied to bind the bank to the safekeeping contract despite its claim that Garcia exceeded his authority.
• Ostensible Authority of Corporate Officers — A corporation is bound by the acts of its officers performed with external indicia of authority. The rationale is that the public relies on outward appearances of authority, and the corporation must specifically deny such authority in its pleadings if it wishes to contest the officer's power to bind the corporation.

• "The practical effect of absolving a corporation from liability every time an officer enters into a contract which is beyond corporate powers, even without the proper allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and wrongs by such artificial beings become impossible."
• "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other..."
• "A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same."
• "Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers."

• E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906) — Cited for the rule that to question the authority of an officer to bind a corporation or deny the corporation's capacity to contract regarding an actionable document, a specific denial under oath is required.
• Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634 (1918) — Cited for the rationale behind requiring specific denial of an officer's authority: the public relies on external indicia of authority, and the plaintiff must be given opportunity to prove authority or ratification.
• Bissell v. Michigan Southern and N.I.R. Cos., 22 N.Y. 258 (1860) — Cited for the distinction between the power and the right of a corporation to act; corporations have the capacity to err and do unauthorized acts, and should not be absolved from liability merely because an act was beyond corporate powers without proper pleading.

• Article 1962, New Civil Code — Defines deposit/contract of depositum as constituted from the moment a person receives a thing belonging to another with the obligation of safely keeping it and returning the same.
• Article 5, New Civil Code — Provides that acts executed against mandatory or prohibitory laws are void.
• Article 1411, New Civil Code — In pari delicto rule regarding void contracts with illegal cause or object constituting criminal offenses.
• Rule 8, Section 8, Rules of Court — Requires specific denial under oath of the execution of actionable documents; failure constitutes admission.
• Central Bank Circular No. 20 (December 9, 1949) — Restrictions on Gold and Foreign Exchange Transactions; prohibits holding foreign exchange without selling to Central Bank within one business day (as modified by Circular No. 281).
• Central Bank Circular No. 281, Section 6 (November 26, 1969) — Modified Circular No. 20, limiting the requirement to sell foreign exchange to Philippine residents.

• Feliciano, J. — Concurred in the result only.