Central Bank of the Philippines vs. Judge Morfe

A final judgment for the payment of a time deposit in a savings bank, obtained after the bank was declared insolvent, is not a preferred claim against the bank under Article 2244(14)(b) of the Civil Code. The prohibition against the insolvent bank doing business, which includes 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.

The case involves the liquidation of the Fidelity Savings Bank, which the Monetary Board found to be insolvent on February 18, 1969, pursuant to Resolution No. 350. The Board directed the Superintendent of Banks to take charge of the bank's assets, forbade it to do business, and instructed the Central Bank Legal Counsel to take legal actions. The Central Bank of the Philippines, as liquidator, was tasked with administering the bank's assets for the equal benefit of all creditors, including depositors. The statutory framework governing the liquidation was Section 29 of Republic Act No. 265 (Central Bank Act), which provides for the Monetary Board's authority upon a finding of bank insolvency, and Section 30 of the same Act, which governs the distribution of assets in accordance with legal priority.

The Fidelity Savings Bank was found to be insolvent by the Monetary Board on February 18, 1969, which 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 legal actions (Resolution No. 350). The Board's resolution was implemented only on January 25, 1972, when the Central Bank of the Philippines filed a petition for assistance and supervision in the liquidation of the bank in the Court of First Instance of Manila (Civil Case No. 86005, assigned to Branch XIII).

Prior to the institution of the liquidation proceeding but after the declaration of insolvency, sometime in March 1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against the Fidelity Savings Bank for the recovery of the sum of P50,584 as the balance of their time deposits (Civil Case No. 82520, assigned to Branch I). In the judgment rendered in that case on December 13, 1972, the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum of P50,584 plus accumulated interest. In another case assigned to Branch XXX of the Court of First Instance of Manila, the spouses Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance of their time deposits, plus interests, P70,000 as moral and exemplary damages, and P9,600 as attorney's fees (Civil Case No. 84200, where the action was filed on September 6, 1971).

In its orders of August 20, 1973 and February 25, 1974, the liquidation 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 judgments, evidenced by final judgments, within 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. The liquidation court noted that there is no provision in the charter of the Central Bank or in the General Banking Law which suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation court, and reasoned that because such actions are not suspended, judgments against insolvent banks could be considered as preferred credits under Article 2244(14)(b). 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.

The liquidation court directed the Central Bank to honor the writs of execution issued by Branches I and XXX for the enforcement of the judgments obtained by the Elizes and Padilla spouses, and suggested that after satisfaction of the judgment, the Central Bank as liquidator should include said judgments in the list of preferred credits contained in the "Project of Distribution" with the notation "already paid." The Central Bank appealed to the Supreme Court by certiorari, contending that the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because they were rendered after the Fidelity Savings Bank was declared insolvent, and under the charter of the Central Bank and the General Banking Law, no final judgment can be validly obtained against an insolvent bank.

• Preference of Judgments Obtained After Insolvency: The Central Bank contended 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.

• Trust Fund Theory: The Central Bank argued 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, citing 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.

• Exclusive Jurisdiction of the Liquidation Court: The Central Bank maintained that all depositors and creditors of the insolvent bank should file their actions with the liquidation court, citing the provision that the Insolvency Law does not apply to banks.

• Statutory Prohibition Against Disbursement: The Central Bank invoked Section 85 of the General Banking Act, which penalizes a director or officer of a bank who disburses, or allows disbursement, of the funds of the bank after it becomes insolvent, and cited the ruling that a creditor of an insolvent state bank in the hands of a liquidator who recovered a judgment against it is not entitled to a preference by the mere fact that he is a judgment creditor.

• No Suspension of Civil Actions: The respondents, through the liquidation court's reasoning, argued that there is no provision in the charter of the Central Bank or in the General Banking Law which suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation court, and 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.

• Contrast with the Insolvency Law: The respondents 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, implying that the absence of such a stay provision in the Central Bank Act permits such actions to proceed.

• Preference of Post-Insolvency Judgments: Whether a final judgment for the payment of a time deposit in a savings bank, obtained after the bank was declared insolvent, is a preferred claim against the bank under Article 2244(14)(b) of the Civil Code.

• Preference of Post-Insolvency Judgments: No. Such judgments cannot be considered preferred, and Article 2244(14)(b) of the Civil Code does not apply to judgments for the payment of the deposits in an insolvent savings bank which were obtained after the declaration of insolvency. The deposits in question, in their inception, were not preferred credits, and it does not seem logical and just that they should be raised to the category of preferred credits simply because the depositors were able to secure judgments for the payment of their time deposits.

• Preference of Post-Insolvency Judgments: The Court reasoned 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. 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. 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, 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. A contrary rule or practice would be productive of injustice, mischief, and confusion, as depositors in insolvent banks would rush to the courts to secure judgments for the payment of their deposits, swamping the courts with suits of that character, some of which would be default judgments, and less alert depositors would be prejudiced. The Court cited the Rohr case, which held that 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. The Court further reasoned that 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. The Court also noted that the liquidation court's own order of October 3, 1972, which contains the Bank Liquidation Rules and Regulations, indicated in Step IV that the Central Bank, as liquidator, should submit a Project of Distribution which should include a list of the preferred credits to be paid in full in the order of priorities established in Articles 2241, 2242, 2243, 2246, and 2247 of the Civil Code, notably without mentioning Article 2244, and there was no cogent reason why the Elizes and Padilla spouses should not adhere to the procedure outlined in the said rules and regulations.

• Trust Fund Doctrine in Bank Liquidation — 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. The Court applied this doctrine to hold that the Elizes and Padilla spouses could not secure a preference over other depositors merely by obtaining judgments for the payment of their time deposits after the declaration of insolvency.

• Nature of Bank Deposits as Simple Loans — 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 Court applied this principle to conclude that since the deposits in question were not preferred credits in their inception, they should not be raised to the category of preferred credits simply because the depositors secured judgments for their payment.

• Prohibition of Indirect Preference — What is directly prohibited should not be encompassed indirectly. The Court applied this principle to hold that since the Fidelity Savings Bank was forbidden to do business, which ban would include the payment of time deposits, suits for the payment of such deposits were impliedly prohibited.

• "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." — This passage states the ratio decidendi of the case, articulating the core holding that post-insolvency judgments for deposit payments do not enjoy preference under the Civil Code.

• "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." — This quotation from the Rohr case, adopted by the Court, defines the controlling trust fund doctrine in bank liquidation and explains why the judgments obtained by the spouses could not confer preference.

• "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." — This passage explains the Court's reasoning that the timing of the judgments, obtained during the interval between insolvency declaration and liquidation proceedings, should not elevate the depositors' status.

• Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248, 245 Pac. 947 — Controlling precedent cited by the Central Bank and adopted by the Court for the principle that the assets of an insolvent bank are held in trust for the equal benefit of all creditors, and that a general depositor is merely a general creditor not entitled to any preference or priority over other general creditors.

• Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838 — Cited by the Central Bank for the ruling that a creditor of an insolvent state bank in the hands of a liquidator who recovered a judgment against it is not entitled to a preference by the mere fact that he is a judgment creditor.

• In re Liquidation of Mercantile Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil. 414 — Cited for the principle that fixed, savings, and current deposits of money in banks are considered simple loans and are not preferred credits.

• Pacific Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375 — Cited for the same principle that bank deposits are simple loans and not preferred credits.

• Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385 — Cited for the principle that bank deposits are simple loans and not preferred credits.

• Pacific Commercial Co. vs. American Apothecaries Co., 65 Phil. 429 — Cited for the principle that bank deposits are simple loans and not preferred credits.

• Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil. 443 — Cited for the principle that bank deposits are simple loans and not preferred credits.

• Maurello vs. Broadway Bank & Trust Co. of Paterson, 176 Atl. 391, 114 N.J.L. 167 — Cited for the principle that what is directly prohibited should not be encompassed indirectly.

• Section 29, Republic Act No. 265 (Central Bank Act) — Provides for the proceedings upon insolvency of a banking institution, including the Monetary Board's duty to forbid the institution to do business and to take charge of its assets. The Court applied this provision to hold that the prohibition against doing business, which includes the payment of time deposits, implies that suits for the payment of such deposits were prohibited.

• Section 30, Republic Act No. 265 (Central Bank Act) — Provides that in case of liquidation of a banking institution, after payment of the costs of the proceedings, the Central Bank shall pay the debts of such institution under the order of the court in accordance with their legal priority. The Court applied this provision in relation to Articles 2244 and 2251 of the Civil Code.

• Section 85, Republic Act No. 337 (General Banking Act) — Penalizes any director or officer of a banking institution who receives or permits or causes to be received in said bank any deposit, or who pays out or permits or causes to be paid out any funds of said bank, after said bank becomes insolvent. The Central Bank invoked this provision to support its argument against recognizing the judgments as preferred credits.

• Article 1980, Civil Code — Provides that fixed, savings, and current deposits of money in banks and similar institutions are considered simple loans. The Court applied this provision to conclude that the deposits in question were not preferred credits in their inception.

• Article 2237, Civil Code — Provides that insolvency shall be governed by special laws insofar as they are not inconsistent with the Civil Code. The Court implicitly applied this provision in determining that the Central Bank Act and General Banking Act govern the liquidation of banks.

• Article 2244(14)(b), Civil Code — Provides that credits which, without special privilege, appear in a final judgment, if they have been the subject of litigation, are preferred. The Court held that this provision does not apply to judgments for the payment of deposits in an insolvent savings bank obtained after the declaration of insolvency.

• Article 2251, Civil Code — Provides that credits which do not enjoy any preference with respect to specific property shall be satisfied according to the order established in Article 2244, and common credits shall be paid pro rata regardless of dates. The Court applied this provision in the context of the distribution of the insolvent bank's assets.

• Section 18, Insolvency Law (Act No. 1956) — 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. The liquidation court noted this provision in contrast with the Central Bank Act, which contains no similar stay provision.

• Section 52, Act No. 1956 (Insolvency Law) — Provides that the Insolvency Law does not apply to banks. The Central Bank cited this provision in support of its view that all depositors and creditors of the insolvent bank should file their actions with the liquidation court.

Chief Justice Makalintal, and Justices Fernando, Barredo, and Fernandez concurred. Justice Antonio took no part.