Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43689 March 31, 1938
In re Liquidation of Mercantile Bank of China.
PACIFIC COMMERCIAL COMPANY, FISHER FLOURING MILLS CO., INC. and CARNATION COMPANY, claimants-appellants,
vs.
AMERICAN APOTHECARIES CO., ET AL., claimants-appellees.
E. P. Revilla for appellants.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. et al.
Felipe Lim Reyes for entity Co Ban Ling and Co Ban Kiat.
Ross, Lawrence and Selph for appellees Pacific Coast Biscuit Co. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.
IMPERIAL, J.:
In the case of the Liquidation of the Mercantile Bank of China, instituted in the Court of First Instance of Manila, Pacific Commercial Co., Fisher Flouring Mills Co., Inc., and Carnation Company filed claims asking that the Bank Commissioner pay them the amount of the various drafts which they forwarded the said bank for collection from various persons and entitled. The said drafts represented the values of the merchandise which the creditors had remitted to the drawees, and were forwarded to the Mercantile Bank of China with instructions that the latter collect their amounts and send the same to them, and not to deliver either the merchandise or the bills of lading and other documents accompanying the same until the said drafts have been paid. Oversteeping its powers, the Mercantile Bank of China delivered the merchandise and the bills of lading and other documents without collecting the amount of the drafts, and with the exception of certain amount which it paid on account, it did not turn over to the claimants the amount thereof. Passing upon the claims, the commissioner appointed by the court approved them and recommended their payment, or the payment of their balances, and in general recommended that the credits be considered preferred.
In connection with these claims, it happened that some of the drawees who had accepted the drafts, named Tan Tiong Tick, Cheng Bang Yek (Chung Lin), Go Poco Grocery Co., Ban Ling & Co Ban Kiat, Victoriano Tan Layco and Sy Guan Juat & Co., were at the same time creditors of the Mercantile Bank of China because they had in their favor balances in their current account and savings deposits with said bank. The commissioner set off these balances against the credits which the bank had against the aforesaid depositors and the recommendation thus made was approved by the court.
Pacific Commercial Co., Fisher Flouring Mills Company Inc., and Carnation Company appealed from that part of the decision of the court which declares the claims filed by the said depositors as preferred credits, consisting of the balance in their favor in their current account and saving deposits in the Mercantile bank of China. The first two corporations likewise appealed from the other portions of the decision holding that the credits of the aforesaid depositors should be set off against their indebtedness for the amount of the drafts drawn upon them and sent to the bank for collection, or, in other words, against the claims of the herein appellants; and, finally, they also appealed because the court did not order the payment to the appellants of the amounts to be deducted from the dividends of the aforesaid depositors in payment of the drafts drawn upon them and forwarded to the bank for collection.
1. The court approved the recommendation of the commissioner to the effect that the balances in favor of the claimants-depositors, coming from their current account and savings deposits, be set off against their indebtedness to the bank for the amount of the drafts which were drawn upon the, by the herein appellants and forwarded to the aforesaid bank for collection. To this part of the decision is addressed the first assignment of error of the appellants.
We hold that the appellants' contention is not well founded. In the case entitled, Liquidation of the Mercantile Bank of China, Tan Tiong Tick vs. American Apothecaries Co. (G.R. No. 43682), recently decided, we held that the credits against the bank for current account and savings deposits should be set off against those which the bank may have against the depositors. We then said:
3. The commissioner set off the claims of the appellant against what the bank had against him. The court approved this set off over the objection of the appellant. The appellees contend that the set off does not lie in this case because otherwise it would prejudice them and the other creditors in the liquidations. We hold that the court's ruling is not error. "It may be stated as a general rule that when a depositor is indebted to a bank, and the debts are mutual — that is, between the same parties and in the same right — the bank may apply the depositor, or such portion thereof as may be necessary, to the payment of the debt due it by the depositor, provided there is no express agreement to the contrary and the deposit is not specifically applicable to some other particular purposes." (7 Am. Jur., par. 629, p. 455; United States vs. Butterworth-Judson Corp., 267 U.S., 387; National Bank vs. Morgan, 207 Ala., 65; Bank of Guntersville vs. Crayter, 199 Ala., 599; Tatum vs. Commercial Bank & T. Co., 193 Ala., 120; Desha Bank & T. Co., vs. Quilling, 118 Ark., 114; Holloway vs. First Nat Bank, 45 Idaho 746; Wyman vs. Ft. Dearborn Nat. Bank, 181 Ill., 279; Niblack vs. Park Nat. Bank, 169 Ill., 517; First Nat. Bank, vs. Stapf., 165 Ind., 162; Bedford bank vs. Acoam, 125 Ind., 584.) The situation referred to by the appellees is inevitable because section 1639 of the Revised Administrative Code, as amended by Act No. 3519, provides that the Bank Commissioner shall reduce the assets of the bank into cash and this cannot be done without first liquidating the accounts of the debtors of said bank, and in making liquidation the debtors are entitled to set off, by way of compensation, their claims against the bank.
2. Tan Tiong Tick, Chung Lin (Cheng Bang Yek), Go Poco Grocery and Co Ban Lin & Co Ban Kiat are the drawees who accepted for payment the drawn by the Pacific Commercial Co., and Sy Guan Juat & Co. is likewise the drawee who accepted for payment the draft drawn by Fisher Flouring Mills Co., Inc., the respective amount of which are $6,353.75, $2,112.85, $1,016.83, $2,101.47 and $525, in United States currency, plus their corresponding interest due. These drawees refused to pay the amounts of the drafts drawn and accepted by them because they are, in turn, the creditors of the as a result of their current account and savings deposits. The court did not in its decision that the aforesaid sums of money, plus interest, be deducted from the dividends which the said depositors may earn, and that they be turned over to the appellants. This omission is the basis of the second and third assignments of error. We hold that the appellants' contention is meritorious. The appellants being the owners of the amounts of the drafts, inasmuch as the Mercantile Bank of China merely acted as their representative or agent and the title to said drafts did not pass to it, it is obvious that any amount which may be collected on account of said drafts and their interest should be turned over to the appellants in satisfaction of their credits. "As a general rule, checks and other papers deposited in a bank for collection remain the property of the depositor, and the bank performs the service of collection as his agent, even though it is authorized to apply the proceeds on a debt of the owner." (7 C.J., sec. 245, pp. 597, 598; Richardson vs. New Orleans Coffee Co., 102 Fed., 785; Philadelphia vs. Eckels, 98 Fed., 485; Commercial Nat. Bank vs. Armstrong, 148 U.S., 50; St. Louis, etc. R. Co. vs. Johnston, 133 U.S., 566; Ward vs. Smith 19 Law. ed., 207; Carpenter vs. National Shawmut Bank, 187 Fed., 1.) "In collecting drafts and other instruments deposited with specific instructions to collect and remit the proceed to the depositor, the bank acts as agent throughout the undertaking; and such instructions bind those to whom they are addressed or who know of them, but no other parties." (7 C.J., sec. 256, p. 605; Boone County Nat. Bank vs. Latimer, 67 Fed., 27; Crown Point First Nat. Bank vs. Richmond First Nat. Bank, 76 Ind., 561; 40 Am. Rep., 261.) As to the interest, the rate should be the legal one, that is, six per cent per annum, in American money as the principal is of this currency, and should be paid from the time the drawees were in default until the principal has been totally paid.
3. Contrary to the recommendation of the commissioner that the credits of the depositors-claimants Tan Tiong Tick, Chung Lin (Cheng Bang Yek), Go Poco Grocery, Co Ban Ling & Co Ban Kiat and Sy Guan Juat & Co be considered as ordinary credits, the court declared them preferred in connection with the other credits approved. The appellants excepted to this portion of the decision and assign it as the fourth error committed.
In the case of the Liquidation of the Mercantile Bank of China , Tan Tiong Tick vs. American Apothecaries Co. (G.R. No. 43682), recently decided, we held that the current account and savings deposits are not preferred credit under the existing and applicable law. On this point we then said:
The Code of Commerce contains express provisions regulating deposits of the nature under consideration, and they are articles 303 to 310. The first and the second to the last of the said articles are as follows:
"ART. 303. In order that a deposit may be considered commercial, it is necessary —
"1. That the depositary, at least, be a merchant.
"2. That the things deposited be commercial objects.
"3. That the deposit constitute in itself a commercial transaction, or be made by reason or a consequence of commercial transactions.
"ART. 309. Whenever, with the consent of the depository disposes of the articles on deposit either for himself or for his business, or for transactions instructed to him by the former, the rights and obligations of the depository and of the depositor shall ceased, and the rules and provisions applicable to the commercial loans, commission, or contract which took the place of the deposit shall observed."
In accordance with article 309, the so-called current account and savings deposits have lost the character of deposits properly so-called, and are converted into simple commercial loans, because the bank disposed of the funds deposited by the claimants for its ordinary transaction and for the banking business in which was engaged. That the bank had the authority of the claimant to make use of the money deposited on current and savings account is deducible from the fact that the bank has been paying interest on both deposits, and the claimant himself asks that he be allowed interest up to the time when the bank ceased its operations. Moreover, according to section 125 of the Corporation Law and 9 of Act No. 3154, said bank is authorized to make use of the current account, savings, and fixed deposits provided it retains in its treasury a certain percentage of the amount said deposits. Said section read:
"SEC. 125. Every such commercial banking corporation shall at all times have on hand in lawful money of the Philippine Islands or of the United States, an amount equal to at least eighteen per centum of the aggregate amount of its deposits in current accounts which are payable on demand and of its fixed deposits coming due within thirty days. Such commercial banking corporation shall also at all times maintain reserve equal in amount to at least five per centum of its total savings deposits. The said reserve may be maintained in the form of lawful money of the Philippine Island or of the United States, or in bond issued or guaranteed by the Government of the Philippine Island or of the United States. . . .
"The percentage of reserve to deposits in the case of the Philippine National Bank and the Bank of the Philippine Islands is hereby fixed at eighteen per centum of demands deposits and fixed deposits payable within thirty days and five per centum of savings deposits, in the same manner as is prescribed in this section for commercial banking corporations in general which reserve against savings deposits may consist of Philippine Government or United States Government bonds.
"SEC. 9. Every bank organized under this Act shall at all times have on hand, in lawful money of the Philippine Island or of the United States, an amount equal to at least twenty per centum of the aggregate amount of its deposits. The term "lawful money of the Philippine Islands" shall include the Treasury certificate authorized by Act Numbered Three thousand and fifty-eight, and the term "lawful money of the United States" shall include gold and silver certificate of the United States and bank notes issued by the Federal Reserve Banks.
"Therefore the bank, without the necessity of the claimant's consent, was by law authorized to dispose of the deposits, subject to the limitation indicated.
We, therefore, conclude that the law applicable to the appellant's claims is the Code of Commerce and that his current and savings accounts have been converted into simple commercial loans.
2. The next point to decide is the applicable law, if any, to determine the preference of the appellants credits, considering that there happens to be other creditors. Section V of Title I of Book IV of the Code of Commerce contains provisions relative to the right of creditors in case of bankruptcy and their respective gradation, but these provisions have been repealed by section 524 of the Code of Civil Procedure reading as follows:
"SEC. 524. No new proceedings to be instituted. — No new bankruptcy proceedings shall be instituted until a new bankruptcy law shall come into force in the Islands. All existing laws and orders relating to bankruptcy and proceedings therein are hereby repealed: Provided, That nothing in this section shall be deemed in any manner to affect pending litigation in bankruptcy proceedings.
The Philippine Legislature subsequently enacted Act No. 1956, also know as the Insolvency Law, which took effect on may 20, 1909, containing provisions regarding preference of credits; but its section 52 provides that all the provisions of the law shall not apply to corporations engaged principally in the banking business, and among them should be understood included the Mercantile Bank of China. Said section provide:
"SEC. 48. Merchandise, effects, and any other kind of property found among the property of the insolvent, the ownership of which has not been conveyed to him by a legal and irrevocable title, shall be considered to be the property of other persons and shall be place at the disposal of its lawful owners an order of the court made at the hearing mentioned in section forty-three or at any ordinary hearing, if the assignee or any creditor whose right in the estate of the insolvent has been established shall petition in writing for such hearing and the court in its discretion shall so order, the creditos, however, retaining such rights in said property as belong to the insolvent, and subrogating him whenever they shall have complied with all obligations concerning said property.
"The following shall be included in this section:
"1. Dowry property inestimado and such property estimado which may remain in the possession of the husband where the receipt thereof is a matter of record in a public instrument registered under the provisions of sections twenty-one and twenty-seven of the Code of Commerce in force.
"2. Paraphernal property which the wife may have acquired by inheritance, legacy, or donation whether remaining in the form in which it was received or subrogated or invested in other property, provided that such investment or subrogation has been registered in the registro mercantil in accordance with the provision of the sections of the Code of Commerce mentioned in the next preceding paragraph.
"3. Property and effects deposited with the bankrupt, or administered, leased, rented, or held in usufruct by him.
"4. Merchandise in the possession of the bankrupt, on commission, for purchase, sale, forwarding, or delivery.
"5. Bills of exchange or promissory notes without indorsement or other expression transferring ownership remitted to the insolvent for collection and all others acquired by him for the account of another person, drawn or indorsed to the remitted direct.
"6. Money remitted to the insolvent, otherwise than on current account, and which is in his possession for delivery to a definite person in the name and for the account of the remitter or for the settlement of claims which are to be met at the insolvent's domicile.
"7. Amounts due the insolvent for sales of merchandise on commission, and bills of exchange and promissory notes derived therefrom in his possession, even when the same are not made payable to the owner of the merchandise sold, provided it is proven that the obligation to the insolvent is derived therefrom and that said bill of exchange and promissory notes were in the possession of the insolvent for account of the owner of the merchandise to be cashed and remitted, in due time, to the said owner; all of which shall be a legal presumption when the amount involved in any such sale shall not have been credited by on the books of both the owner of the merchandise and of the insolvent.
"8. Merchandise bought on credit by the insolvent so long as the actual delivery thereof has not been made to him at his store or at any other place stipulated for such delivery, and merchandise the bills of lading or shipping receipts of which have been sent him after the same has been loaded by order of the purchaser and for his account and risk.
"In all cases arising under this paragraph assignees may retain the merchandise so purchased or claim it for the creditors by paying the price thereof to the vendor.
"9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if still existing in his possession or the amount of the value thereof.
SEC. 49. All creditors, except those whose claims are mentioned in the next following section, whose debts are duly proved and allowed shall be entitled to share in the property and estate pro rata, after the property or preference whatever: Provided, That any debt proved by any person liable as bail, surety, guarantor, or otherwise, for the debtor, shall not be paid to the person so proving the same until satisfactory evidence shall be produced of the payment of such debt by such person so liable, and the share to which otherwise held for the benefit of the party entitled thereto, as the court may direct.
"SEC. 50. The following are the preferred claims which shall be paid in the order named:
"(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under their parental authority and have no property of their own, when approved by the court;
"(b) Debts due for personal services rendered the insolvent by employees, laborers, or domestic servant immediately preceding the commencement of proceeding in insolvency;
"(c) Compensation due the laborers or their dependents under the provisions of Act Numbered Thirty-four hundred and twenty-eight, know as the Workmen's Compensation Act, as amended by Act Numbered Thirty-eight hundred and twelve, and under the provisions of Act Numbered Eighteen hundred and seventy-four, known as the Employers' Liability Act, and other laws providing for payment of indemnity for damages in cases of labor accidents;
"(d) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors, when properly authorized and approved by the court;
"(e) Debt, taxes, and assessments due the Insular Government;
"(f) Debts, taxes and assessments due to any province or provinces of the Philippines Islands;
"(g) Debts, taxes and assessments due to any municipality or municipalities of the Philippines Islands;
"All other creditors shall be paid pro rata." (As amended by Act No. 3962.)
"ART. 52. . . . The provisions of this Act shall not apply to corporations engaged principally in the banking business, or to any other corporation as to which there is any special provision of law for its liquidation in case of insolvency."
It appears that even after the enactment of the Insolvency Law was no law in this jurisdiction governing the order or preference of credits in cases of insolvency and liquidation of a bank. But the Philippines Legislature subsequently enacted Act No. 3519, amending various sections of the Revised Administrative Code, which took effect on February 20, 1929, and section 1641 of this latter Code, as amended by said Act, provides:
"SEC. 1641. Distribution of assets. — In the case of the liquidation of a bank or banking institution, after payment of the costs of the proceedings, including reasonable expenses, commissions and fees of the Bank Commissioner, to be allowed by the court, the Bank Commissioner shall pay the debt of the institution, under decree of the court in the order of their legal priority."
From this section 1641 we deduce that the intention of the Philippines Legislature, in providing that the Bank Commissioner shall pay the debts of the company by virtue of an order of the court in the order of their legal priority, was to enforce the provisions of sections 48, 49 and 50 of the Insolvency Law in the sense that they are made applicable to cases of insolvency or bankruptcy and liquidation of banks. No other deduction can be made from the phrase 'in the order of their legal priority' employed by the law, for there being no legal establishing any priority in the order of payment of credits, the legislature could not reasonably refer to any legislation upon the subject, unless the interpretation above stated is accepted.
Examining now the claims for the appellant, it appears that none of them falls under any of the cases specified by sections 48, 49 and 50 of the Insolvency Law; wherefore, we conclude that the appellant's claims, consisting of his current and savings accounts, are not preferred credits.
For the same reason we hold that the credits of the aforesaid depositor are ordinary and not preferred.
The last assigned error is a sequel to the preceding ones, and it being unsupported by any argument, we refrain from elaborating thereon.
In view of all the foregoing, the portions of the decision which are the subject matter of this appeal are modified and it held and decreed: (1) that the credits of Tan Tiong Tick, Chung Lin (Cheng Bang Yek), Go Poco Grocery, Co Ban Ling & Co Ban Kiat and Sy Guan Juat & Co., consisting of their current account and savings deposits in the Mercantile Bank of China, should be set off against the credits of the appellants, consisting of the amounts of the drafts upon the former, which amounts are those set out in subdivision 2 of this decision; (2) that from the dividends to be paid to said depositors, whose names have just been mentioned, there be deducted the credits or claims of the appellants, plus interest thereon at the rate fixed by this decision, and that they be delivered to the latter; and (3) that the credits of the said depositors, consisting of current account and savings deposits are ordinary and should be paid by the Bank Commissioner pro rata with the other of the same class, with the costs of this instance to the named depositors-appellees and the appellees who have appeared and filed their briefs, namely, Chinese Grocers Association, Manila Lumbers Merchants Association, Benito Gonzales and Marcos G. Y. Chiam. So ordered.
Avanceña, C.J., Villa-Real, Abad Santos, Diaz and Horrilleno, JJ., concur.
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