Republic of the Philippines vs. Security Credit and Acceptance Corporation

A corporation that regularly solicits and accepts deposits from the public and lends out the funds so received is performing banking functions within the meaning of Section 2 of the General Banking Act, and its failure to secure the requisite authority from the Monetary Board warrants dissolution in quo warranto proceedings.

The Security Credit and Acceptance Corporation was incorporated on March 27, 1961, with articles of incorporation authorizing it to extend credit facilities for home building and agricultural, commercial, and industrial projects; to give loans, mortgages, and pledges; to purchase and discount negotiable instruments; and to issue bonds, debentures, and other securities. The General Banking Act (Republic Act No. 337) requires that 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 that all entities regularly conducting such operations shall be considered banking institutions subject to the Act and to the supervision of the Monetary Board of the Central Bank. The Central Bank, through its legal counsel, intelligence division, and Superintendent of Banks, examined the corporation's operations and concluded it was performing banking functions without the requisite authority, leading the Monetary Board to issue Resolution No. 1095 on September 14, 1962, declaring the corporation in violation of Sections 2 and 6 of the Act.

The Security Credit and Acceptance Corporation was registered with the Securities and Exchange Commission on March 27, 1961. Its articles of incorporation, as amended on May 8, 1961, authorized it to extend credit facilities for home building and agricultural, commercial, and industrial projects; to give loans, mortgages, and pledges as principal, agent, broker, or attorney-in-fact; to draw, accept, endorse, purchase, sell, and discount negotiable instruments and other evidence of indebtedness; to issue bonds, debentures, and securities; and to undertake management, promotion, financing, and collection services. The next day, the Board of Directors adopted a set of by-laws, which were filed with the SEC on April 5, 1961. The by-laws empowered the Board, among other things, to lend or borrow money for the corporation and to accept or create mortgages, bonds, and negotiable instruments secured by corporate property.

On September 19, 1961, the Superintendent of Banks of the Central Bank requested an opinion from the Central Bank's legal counsel on whether the corporation was a banking institution under Republic Act No. 337. On October 11, 1961, the legal counsel rendered an opinion answering in the affirmative. The corporation, through its president Rosendo T. Resuello, sought reconsideration in a letter dated January 15, 1962, but the reconsideration was denied on March 16, 1962. Separately, the corporation had applied with the SEC on March 9, 1961, for registration and licensing of its securities under the Securities Act; the SEC referred the application to the Central Bank, which furnished the SEC with the legal counsel's opinion, and on December 5, 1961, the SEC advised the corporation to comply with the requirements of the General Banking Act.

On May 18, 1962, upon application of members of the Manila Police Department and an agent of the Central Bank, the Municipal Court of Manila issued Search Warrant No. A-1019. Members of the Central Bank intelligence division and the Manila Police searched the corporation's premises and seized documents and records relative to its business operations; the seized materials were placed under Central Bank custody with the court's authority. Examination of these records by the Central Bank intelligence division yielded a memorandum dated September 10, 1962, finding that the corporation was performing banking functions without the requisite certificate of authority from the Monetary Board—specifically, soliciting and accepting deposits from the public and lending out the funds so received; soliciting savings deposits beyond the scope of its charter; soliciting subscriptions to corporate shares and accepting deposits thereon without prior registration under the Securities Act; and that, as a private credit and financial institution, it should come under Monetary Board supervision. The Superintendent of Banks separately submitted a memorandum dated August 28, 1962, confirming that the corporation received deposits from the public regularly, treated such deposits in its financial statements as conditional subscriptions to capital stock, offered shares of stock to the public as part of its regular operations, and made loans regularly from funds obtained through the receipt of deposits and the sale of securities.

Acting upon the Superintendent of Banks' memorandum, the Monetary Board promulgated Resolution No. 1095 on September 14, 1962, declaring that the corporation was performing banking operations without complying with Sections 2 and 6 of Republic Act No. 337. The corporation was advised of this resolution on September 25, 1962, but continued performing the functions and activities declared to constitute illegal banking operations. During the period from March 27, 1961 to May 18, 1962, the corporation had established 74 branches throughout the Philippines and, through a systematic and vigorous campaign, induced the public to open 59,463 savings deposit accounts with an aggregate deposit of ₱1,689,136.74. Its original capital stock of ₱500,000, divided into 20,000 founders' shares and 80,000 preferred shares at a par value of ₱5.00 each, was increased in less than one year to ₱3,000,000, divided into 130,000 founders' shares and 470,000 preferred shares. According to its statement of assets and liabilities as of December 31, 1961, the corporation had a capital stock aggregating ₱1,273,265.98 and suffered a loss of ₱96,685.29 during 1961.

On December 6, 1962, the Solicitor General commenced the present quo warranto proceedings for the dissolution of the corporation, praying for a preliminary injunction enjoining the corporation and its branches, officers, and agents from performing the banking operations complained of, and for the appointment of a receiver pendente lite. Upon joint motion of both parties, the Superintendent of Banks was appointed receiver pendente lite on August 20, 1963, and assumed his functions on September 16, 1963. In their answer, defendants admitted practically all allegations of fact but denied that the corporation's transactions partook of banking operations and denied that certain named individuals were directors. Defendants also invoked a pending declaratory relief case (Civil Case No. 52342) before the Court of First Instance of Manila and argued for remand based on Veraguth vs. Isabela Sugar Co. (57 Phil. 266). The corporation conceded that 59,463 savings account deposits had been made by the public with an aggregate of ₱1,689,136.74, which had been lent out to borrowers selected by the corporation.

• Unauthorized Banking: The Republic, through the Solicitor General, maintained that the corporation was performing banking functions—soliciting and accepting deposits from the public and lending out the funds so received—without having secured the requisite certificate of authority from the Monetary Board, in violation of Sections 2 and 6 of Republic Act No. 337.
• Dissolution Warranted: The Republic argued that the willful and repeated misuse of the corporate franchise, affecting 59,463 depositors, inflicted injury upon the public and warranted dissolution of the corporation.
• Improper Declaratory Relief: The Republic contended that the corporation's pending petition for declaratory relief in Civil Case No. 52342 was highly improper, the corporation having already committed infractions and violations of law justifying dissolution.
• Direct Supreme Court Jurisdiction: The Republic invoked the Supreme Court's original jurisdiction over quo warranto proceedings, concurrently with courts of first instance, and urged that public interest demanded early disposition.

• Not Banking Operations: Defendants denied that the corporation's transactions partake of the nature of banking operations, notwithstanding the concession that 59,463 savings deposits aggregating ₱1,689,136.74 had been received and lent out.
• Denial of Directorships: Defendants denied that Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran, Zapa, Balatbat, and Sebastian were directors of the corporation, asserting that they had been proposed directors in a pending application for conversion into a Security Savings and Mortgage Bank but had never assumed office.
• Remand to Court of First Instance: Defendants urged that the case be remanded to the Court of First Instance of Manila, citing Veraguth vs. Isabela Sugar Co. (57 Phil. 266), arguing that factual issues required the taking of evidence better suited to a trial court.
• Justification for Non-Payment: Defendants attributed the corporation's failure to honor withdrawal demands not to mismanagement or misappropriation but to an abnormal situation created by mass withdrawal demands, attachment by creditors, suspension of debtors' payments, and an SEC order to stop soliciting deposits.
• Conditional Withdrawals: Defendants averred that withdrawal of deposits by members of the corporation's savings plan was understood to be subject, as to time and amounts, to the financial condition of the corporation as an investment firm.

• Nature of Transactions: Whether the corporation's transactions—soliciting and accepting savings deposits from the public and lending out the funds so received—constitute banking operations within the meaning of Section 2 of the General Banking Act (Republic Act No. 337).
• Dissolution: Whether the corporation's unauthorized banking operations warrant its dissolution through quo warranto proceedings.
• Remand: Whether the case should be remanded to the Court of First Instance of Manila pursuant to Veraguth vs. Isabela Sugar Co.

• Nature of Transactions: Yes. The corporation's transactions partake of the nature of banking as defined in Section 2 of the General Banking Act, because the corporation regularly solicited and accepted deposits from the public and lent out the funds so received.
• Dissolution: Yes. The willful and repeated misuse of the corporate franchise—violating the law 59,463 times and inflicting injury upon the public—warrants dissolution of the corporation.
• Remand: No. The Supreme Court retained jurisdiction because the principal facts were undisputed and the sole issue was one of law; Veraguth was distinguished as involving disputed factual issues requiring the taking of evidence.

• Nature of Transactions: The corporation conceded that it had solicited 59,463 savings account deposits from the public through 74 branches, aggregating ₱1,689,136.74, and had lent out those funds to persons it deemed suitable. Section 2 of the General Banking Act defines banking institutions as entities regularly engaged in "the lending of funds obtained from the public through the receipts of deposits or the sale of bonds, securities, or obligations of any kind." The Court relied on established definitions of a bank as a moneyed institution founded to facilitate the borrowing, lending, and safekeeping of money, and on jurisprudence holding that an investment company which loans out the money of its customers, collects interest, and charges commissions to both lender and borrower is a bank. The Court further cited authority that any person engaged in the business carried on by banks of deposit or discount is doing a banking business, even if only one of these functions is exercised. The corporation's characterization of deposits as "conditional subscriptions to capital stock" did not alter the substance of the transactions, which fell squarely within the statutory definition.

• Dissolution: The misuse of the corporate franchise affected the essence of the corporation's business. The violations were willful and repeated 59,463 times—once for each depositor induced to open an account. The continuance of these illegal operations inflicted injury upon the public owing to the number of persons affected. These circumstances—willfulness, repetition, and public injury—collectively justified the extraordinary remedy of dissolution. The Court noted that the corporation had increased its capital stock from ₱500,000 to ₱3,000,000 in less than a year through these illegal operations, while simultaneously suffering a loss of ₱96,685.29, underscoring the risk to depositors.

• Remand: The Supreme Court possesses original jurisdiction over quo warranto proceedings, concurrently with courts of first instance, and it is discretionary whether to entertain the case or require that the issues be litigated elsewhere. Defendants relied on Veraguth vs. Isabela Sugar Co. (57 Phil. 266), but that case was distinguished: in Veraguth, there were disputed issues of fact requiring the presentation of evidence, and courts of first instance are generally better equipped for taking testimony and resolving factual questions. In the present case, defendants admitted practically all allegations of fact; the sole issue was the legal nature of the corporation's admitted acts. Because public interest demanded an early disposition and no factual disputes remained, the Court retained and decided the case on the merits.

• Definition of Banking Institution — Under Section 2 of the General Banking Act (Republic Act No. 337), an entity regularly engaged 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 is a banking institution, regardless of how it labels its transactions. The corporation's treatment of deposits as "conditional subscriptions to capital stock" did not exempt it from the Act, because the substance—not the form—of the transactions controls.
• Grounds for Corporate Dissolution in Quo Warranto — A corporation may be dissolved when its misuse of the corporate franchise affects the essence of its business, is willful and repeated, and its continuance inflicts injury upon the public. The Court applied this standard by noting that the violations were committed 59,463 times (once per depositor), were deliberate, and affected a large segment of the public.
• Discretionary Exercise of Supreme Court's Original Quo Warranto Jurisdiction — The Supreme Court's original jurisdiction over quo warranto is concurrent with courts of first instance, and the Court may exercise its discretion to retain a case when the facts are undisputed and the sole issue is one of law, particularly when public interest demands early resolution. The Court distinguished Veraguth vs. Isabela Sugar Co. on the ground that Veraguth involved disputed factual issues, whereas here the facts were admitted.

• "It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act." — This sentence states the ratio decidendi: the corporation's admitted acts of receiving deposits and lending out the proceeds fell within the statutory definition of banking, regardless of the corporation's labeling of those transactions.

• "That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby." — This passage articulates the three-part standard for dissolution: the misuse affects the essence of the business, is willful and repeated, and its continuance inflicts public injury.

• "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." — Quoted from MacLaren vs. State, this authority supports the proposition that the performance of even a single banking function—here, receiving deposits and lending—suffices to classify an entity as a banking institution.

• Veraguth vs. Isabela Sugar Co., 57 Phil. 266 — Distinguished. Defendants cited this case to support remand to the Court of First Instance, but the Court held it inapplicable because Veraguth involved disputed factual issues requiring the presentation of evidence, whereas in the present case the principal facts were admitted and the sole issue was one of law.
• Talmage vs. Pell, 7 N.Y. (3 Seld.) 328 — Cited as authority for the definition of a bank as a moneyed institution founded to facilitate the borrowing, lending, and safekeeping of money.
• Smith vs. Kansas City Title & Trust Co., 255 U.S. 180 — Cited for the same definitional proposition regarding the nature of banking.
• Western Investment Banking Co. vs. Murray, 56 P. 728, 6 Ariz. 215 — Cited for the proposition that an investment company which loans out the money of its customers, collects interest, and charges commissions to both lender and borrower is a bank.
• MacLaren vs. State, 124 N.W. 667, 141 Wis. 577 — Cited for the principle that any person engaged in the business carried on by banks of deposit, discount, or circulation is doing a banking business, even if only one of these functions is exercised.

• Section 2, Republic Act No. 337 (General Banking Act) — Defines "banking institution" as any entity regularly engaged 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. Applied to hold that the corporation's operations constituted banking within the statutory meaning.
• Section 6, Republic Act No. 337 (General Banking Act) — Prohibits any person, association, or corporation not duly authorized from soliciting or receiving deposits or transacting banking business without first complying with the Act; imposes joint and several liability on officers and directors for violations. Applied to establish the illegality of the corporation's operations and the basis for dissolution.
• Sections 139 and 140, Republic Act No. 265 (Central Bank Act) and Sections 88 and 89, Republic Act No. 337 — Cited for the transfer of supervisory authority over banking institutions from the Secretary of Finance, the Bank Commissioner, and the defunct Bureau of Banking to the Monetary Board of the Central Bank.
• Rules 59 and 66, Rules of Court — Cited in the dispositive portion directing the receiver to administer the corporation's properties, deposits, and assets and wind up its affairs.

Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, and Castro, JJ., concurred.