Banking Banco Filipino Full Case

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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 70054 December 11, 1991

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner,vs.THE MONETARY BOARD, CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, CARLOTA P.VALENZUELA, ARNULFO B. AURELLANO and RAMON V. TIAOQUI, respondents.

G.R. No. 68878 December 11, 1991

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner,vs.HON. INTERMEDIATE APPELLATE COURT and CELESTINA S. PAHIMUNTUNG, assisted by herhusband,respondents.

G.R. No. 77255-58 December 11, 1991

TOP MANAGEMENT PROGRAMS CORPORATION AND PILAR DEVELOPMENTCORPORATION, petitioners,vs.THE COURT OF APPEALS, The Executive Judge of the Regional Trial Court of Cavite, Ex-Officio SheriffREGALADO E. EUSEBIO, BANCO FILIPINO SAVINGS AND MORTGAGE BANK, CARLOTA P.VALENZUELA AND SYCIP, SALAZAR, HERNANDEZ AND GATMAITAN, respondents.

G.R. No. 78766 December 11, 1991

EL GRANDE CORPORATION, petitioner,

vs.THE COURT OF APPEALS, THE EXECUTIVE JUDGE of The Regional Trial Court and Ex-Officio SheriffREGALADO E. EUSEBIO, BANCO FILIPINO SAVINGS AND MORTGAGE BANK, CARLOTA P.VALENZUELA AND SYCIP, SALAZAR, FELICIANO AND HERNANDEZ, respondents.

G.R. No. 78767 December 11, 1991

METROPOLIS DEVELOPMENT CORPORATION, petitioner,vs.COURT OF APPEALS, CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, JR., CARLOTA P.VALENZUELA, ARNULFO AURELLANO AND RAMON TIAOQUI, respondents.

G.R. No. 78894 December 11, 1991

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitionervs.COURT OF APPEALS, THE CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, JR.,CARLOTA P. VALENZUELA, ARNULFO B. AURELLANO AND RAMON TIAOQUI, respondents.

G.R. No. 81303 December 11, 1991

PILAR DEVELOPMENT CORPORATION, petitionervs.



COURT OF APPEALS, HON. MANUEL M. COSICO, in his capacity as Presiding Judge of Branch 136 ofthe Regional Trial Court of Makati, CENTRAL BANK OF THE PHILIPPINES AND CARLOTA P.VALENZUELA,respondents.

G.R. No. 81304 December 11, 1991

BF HOMES DEVELOPMENT CORPORATION, petitioner,vs.THE COURT OF APPEALS, CENTRAL BANK AND CARLOTA P. VALENZUELA, respondents.

G.R. No. 90473 December 11, 1991

EL GRANDE DEVELOPMENT CORPORATION, petitioner,vs.THE COURT OF APPEALS, THE EXECUTIVE JUDGE of the Regional Trial Court of Cavite, CLERK OFCOURT and Ex-Officio Sheriff ADORACION VICTA, BANCO FILIPINO SAVINGS AND MORTGAGEBANK, CARLOTA P. VALENZUELA AND SYCIP, SALAZAR, HERNANDEZ ANDGATMAITAN, respondents.

Panganiban, Benitez, Barinaga & Bautista Law Offices collaborating counsel for petitioner.

Florencio T. Domingo, Jr. and Crisanto S. Cornejo for intervenors.

MEDIALDEA, J.: p

This refers to nine (9) consolidated cases concerning the legality of the closure and receivership of petitionerBanco Filipino Savings and Mortgage Bank (Banco Filipino for brevity) pursuant to the order of respondentMonetary Board. Six (6) of these cases, namely, G.R. Nos. 68878, 77255-68, 78766, 81303, 81304 and 90473involve the common issue of whether or not the liquidator appointed by the respondent Central Bank (CB forbrevity) has the authority to prosecute as well as to defend suits, and to foreclose mortgages for and in behalf

of the bank while the issue on the validity of the receivership and liquidation of the latter is pending resolution inG.R. No. 7004. Corollary to this issue is whether the CB can be sued to fulfill financial commitments of a closedbank pursuant to Section 29 of the Central Bank Act. On the other hand, the other three (3) cases, namely,G.R. Nos. 70054, which is the main case, 78767 and 78894 all seek to annul and set aside M.B. ResolutionNo. 75 issued by respondents Monetary Board and Central Bank on January 25, 1985.

The antecedent facts of each of the nine (9) cases are as follows:

G.R No. 68878

This is a motion for reconsideration, filed by respondent Celestina Pahimuntung, of the decision promulgated

by thisCourt on April 8, 1986, granting the petition for review on certiorari and reversing the questioned decisionof respondent appellate court, which annulled the writ of possession issued by the trial court in favor ofpetitioner.

The respondent-movant contends that the petitioner has no more personality to continue prosecuting theinstant case considering that petitioner bank was placed under receivership since January 25, 1985 by theCentral Bank pursuant to the resolution of the Monetary Board.

G.R. Nos. 77255-58



Petitioners Top Management Programs Corporation (Top Management for brevity) and Pilar DevelopmentCorporation (Pilar Development for brevity) are corporations engaged in the business of developing residentialsubdivisions.

Top Management obtained a loan of P4,836,000 from Banco Filipino as evidenced by a promissory note datedJanuary 7, 1982 payable in three years from date. The loan was secured by real estate mortgage in its variousproperties in Cavite. Likewise, Pilar Development obtained loans from Banco Filipino between 1982 and 1983in the principal amounts of P6,000,000, P7,370,000 and P5,300,000 with maturity dates on December 28,1984, January 5, 1985 and February 16, 1984, respectively. To secure the loan, Pilar Development mortgagedto Banco Filipino various properties in Dasmariñas, Cavite.

On January 25, 1985, the Monetary Board issued a resolution finding Banco Filipino insolvent and unable to dobusiness without loss to its creditors and depositors. It placed Banco Filipino under receivership of CarlotaValenzuela, Deputy Governor of the Central Bank.

On March 22, 1985, the Monetary Board issued another resolution placing the bank under liquidation anddesignating Valenzuela as liquidator. By virtue of her authority as liquidator, Valenzuela appointed the law firmof Sycip, Salazar, et al. to represent Banco Filipino in all litigations.

On March 26, 1985, Banco Filipino filed the petition for certiorari in G.R. No. 70054 questioning the validity of

the resolutions issued by the Monetary Board authorizing the receivership and liquidation of Banco Filipino.

In a resolution dated August 29, 1985, this Court in G.R. No. 70054 resolved to issue a temporary restrainingorder, effective during the same period of 30 days, enjoining the respondents from executing further acts ofliquidation of the bank; that acts such as receiving collectibles and receivables or paying off creditors' claimsand other transactions pertaining to normal operations of a bank are not enjoined. The Central Bank is orderedto designate a comptroller for Banco Filipino.

Subsequently, Top Management failed to pay its loan on the due date. Hence, the law firm of Sycip, Salazar, etal. acting as counsel for Banco Filipino under authority of Valenzuela as liquidator, applied for extra-judicialforeclosure of the mortgage over Top Management's properties. Thus, the Ex-Officio Sheriff of the RegionalTrial Court of Cavite issued a notice of extra-judicial foreclosure sale of the properties on December 16, 1985.

On December 9, 1985, Top Management filed a petition for injunction and prohibition with the respondentappellate court docketed as CA-G.R. SP No. 07892 seeking to enjoin the Regional Trial Court of Cavite, the ex-officio sheriff of said court and Sycip, Salazar, et al. from proceeding with foreclosure sale.

Similarly, Pilar Development defaulted in the payment of its loans. The law firm of Sycip, Salazar, et al. filedseparate applications with the ex-officio sheriff of the Regional Trial Court of Cavite for the extra-judicialforeclosure of mortgage over its properties.

Hence, Pilar Development filed with the respondent appellate court a petition for prohibition with prayer for theissuance of a writ of preliminary injunction docketed as CA-G.R SP Nos. 08962-64 seeking to enjoin the samerespondents from enforcing the foreclosure sale of its properties. CA-G.R. SP Nos. 07892 and 08962-64 wereconsolidated and jointly decided.

On October 30, 1986, the respondent appellate court rendered a decision dismissing the aforementionedpetitions.

Hence, this petition was filed by the petitioners Top Management and Pilar Development alleging that CarlotaValenzuela, who was appointed by the Monetary Board as liquidator of Banco Filipino, has no authority toproceed with the foreclosure sale of petitioners' properties on the ground that the resolution of the issue on thevalidity of the closure and liquidation of Banco Filipino is still pending with this Court in G.R. 70054.

G.R. No. 78766



Petitioner El Grande Development Corporation (El Grande for brevity) is engaged in the business of developingresidential subdivisions. It was extended by respondent Banco Filipino a credit accommodation to finance itshousing program. Hence, petitioner was granted a loan in the amount of P8,034,130.00 secured by real estatemortgages on its various estates located in Cavite.

On January 15, 1985, the Monetary Board forbade Banco Filipino to do business, placed it under receivershipand designated Deputy Governor Carlota Valenzuela as receiver. On March 22, 1985, the Monetary Boardconfirmed Banco Filipino's insolvency and designated the receiver Carlota Valenzuela as liquidator.

When petitioner El Grande failed to pay its indebtedness to Banco Filipino, the latter thru its liquidator, CarlotaValenzuela, initiated the foreclosure with the Clerk of Court and Ex-officio sheriff of RTC Cavite. Subsequently,on March 31, 1986, the ex-officio sheriff issued the notice of extra-judicial sale of the mortgaged properties ofEl Grande scheduled on April 30, 1986.

In order to stop the public auction sale, petitioner El Grande filed a petition for prohibition with the Court ofAppeals alleging that respondent Carlota Valenzuela could not proceed with the foreclosure of its mortgagedproperties on the ground that this Court in G.R. No. 70054 issued a resolution dated August 29, 1985, whichrestrained Carlota Valenzuela from acting as liquidator and allowed Banco Filipino to resume bankingoperations only under a Central Bank comptroller.

On March 2, 1987, the Court of Appeals rendered a decision dismissing the petition.

Hence this petition for review on certiorari was filed alleging that the respondent court erred when it held in itsdecision that although Carlota P. Valenzuela was restrained by this Honorable Court from exercising acts inliquidation of Banco Filipino Savings & Mortgage Bank, she was not legally precluded from foreclosing themortgage over the properties of the petitioner through counsel retained by her for the purpose.

G.R. No. 81303

On November 8, 1985, petitioner Pilar Development Corporation (Pilar Development for brevity) filed an actionagainst Banco Filipino, the Central Bank and Carlota Valenzuela for specific performance, docketed as CivilCase No. 12191. It appears that the former management of Banco Filipino appointed Quisumbing & Associatesas counsel for Banco Filipino. On June 12, 1986 the said law firm filed an answer for Banco Filipino which

confessed judgment against Banco Filipino.

On June 17, 1986, petitioner filed a second amended complaint. The Central Bank and Carlota Valenzuela,thru the law firm Sycip, Salazar, Hernandez and Gatmaitan filed an answer to the complaint.

On June 23, 1986, Sycip, et al., acting for all the defendants including Banco Filipino moved that the answerfiled by Quisumbing & Associates for defendant Banco Filipino be expunged from the records. Despiteopposition from Quisumbing & Associates, the trial court granted the motion to expunge in an order datedMarch 17, 1987. Petitioner Pilar Development moved to reconsider the order but the motion was denied.

Petitioner Pilar Development filed with the respondent appellate court a petition for certiorari and mandamus toannul the order of the trial court. The Court of Appeals rendered a decision dismissing the petition. A petitionwas filed with this Court but was denied in a resolution dated March 22, 1988. Hence, this instant motion for

reconsideration.

G.R. No. 81304

On July 9, 1985, petitioner BF Homes Incorporated (BF Homes for brevity) filed an action with the trial court tocompel the Central Bank to restore petitioner's; financing facility with Banco Filipino.

The Central Bank filed a motion to dismiss the action. Petitioner BF Homes in a supplemental complaintimpleaded as defendant Carlota Valenzuela as receiver of Banco Filipino Savings and Mortgage Bank.



On April 8, 1985, petitioner filed a second supplemental complaint to which respondents filed a motion todismiss.

On July 9, 1985, the trial court granted the motion to dismiss the supplemental complaint on the grounds (1)that plaintiff has no contractual relation with the defendants, and (2) that the Intermediate Appellate Court in aprevious decision in AC-G.R. SP. No. 04609 had stated that Banco Filipino has been ordered closed andplaced under receivership pending liquidation, and thus, the continuation of the facility sued for by the plaintiffhas become legally impossible and the suit has become moot.

The order of dismissal was appealed by the petitioner to the Court of Appeals. On November 4, 1987, therespondent appellate court dismissed the appeal and affirmed the order of the trial court.

Hence, this petition for review on certiorari was filed, alleging that the respondent court erred when it found thatthe private respondents should not be the ones to respond to the cause of action asserted by the petitioner andthe petitioner did not have any cause of action against the respondents Central Bank and Carlota Valenzuela.

G.R. No. 90473

Petitioner El Grande Development Corporation (El Grande for brevity) obtained a loan from Banco Filipino in

the amount of P8,034,130.00, secured by a mortgage over its five parcels of land located in Cavite which werecovered by Transfer Certificate of Title Nos. T-82187, T-109027, T-132897, T-148377, and T-79371 of theRegistry of Deeds of Cavite.

When Banco Filipino was ordered closed and placed under receivership in 1985, the appointed liquidator of BF,thru its counsel Sycip, Salazar, et al. applied with the ex-officio sheriff of the Regional Trial Court of Cavite forthe extrajudicial foreclosure of the mortgage constituted over petitioner's properties. On March 24, 1986, theex-officio sheriff issued a notice of extrajudicial foreclosure sale of the properties of petitioner.

Thus, petitioner filed with the Court of Appeals a petition for prohibition with prayer for writ of preliminaryinjunction to enjoin the respondents from foreclosing the mortgage and to nullify the notice of foreclosure.

On June 16, 1989, respondent Court of Appeals rendered a decision dismissing the petition.

Not satisfied with the decision, petitioner filed the instant petition for review on certiorari .

G.R. No. 70054

Banco Filipino Savings and Mortgage Bank was authorized to operate as such under M.B. Resolution No. 223dated February 14, 1963. It commenced operations on July 9, 1964. It has eighty-nine (89) operating branches,forty-six (46) of which are in Manila, with more than three (3) million depositors.

As of July 31, 1984, the list of stockholders showed the major stockholders to be: Metropolis DevelopmentCorporation, Apex Mortgage and Loans Corporation, Filipino Business Consultants, Tiu Family Group, LBH Inc.and Anthony Aguirre.

Petitioner Bank had an approved emergency advance of P119.7 million under M.B. Resolution No. 839 datedJune 29, 1984. This was augmented with a P3 billion credit line under M.B. Resolution No. 934 dated July 27,1984.

On the same date, respondent Board issued M.B. Resolution No. 955 placing petitioner bank underconservatorship of Basilio Estanislao. He was later replaced by Gilberto Teodoro as conservator on August 10,1984. The latter submitted a report dated January 8, 1985 to respondent Board on the conservatorship ofpetitioner bank, which report shall hereinafter be referred to as the Teodoro report.



Subsequently, another report dated January 23, 1985 was submitted to the Monetary Board by Ramon Tiaoqui,Special Assistant to the Governor and Head, SES Department II of the Central Bank, regarding the majorfindings of examination on the financial condition of petitioner BF as of July 31, 1984. The report, which shall bereferred to herein as the Tiaoqui Report contained the following conclusion and recommendation:

The examination findings as of July 31, 1984, as shown earlier, indicate one of insolvency andilliquidity and further confirms the above conclusion of the Conservator.

All the foregoing provides sufficient justification for forbidding the bank from engaging inbanking.

Foregoing considered, the following are recommended:

1. Forbid the Banco Filipino Savings & Mortgage Bank to do business in thePhilippines effective the beginning of office January 1985, pursuant to Sec.29 of R.A No. 265, as amended;

2. Designate the Head of the Conservator Team at the bank, as Receiver ofBanco Filipino Savings & Mortgage Bank, to immediately take charge of the

assets and liabilities, as expeditiously as possible collect and gather all theassets and administer the same for the benefit of all the creditors, andexercise all the powers necessary for these purposes including but notlimited to bringing suits and foreclosing mortgages in the name of the bank.

3. The Board of Directors and the principal officers from Senior VicePresidents, as listed in the attached Annex "A" be included in the watchlist ofthe Supervision and Examination Sector until such time that they shall havecleared themselves.

4. Refer to the Central Bank's Legal Department and Office of SpecialInvestigation the report on the f indings on Banco Filipino for investigationand possible prosecution of directors, officers, and employees for activitieswhich led to its insolvent position. (pp- 61-62, Rollo)

On January 25, 1985, the Monetary Board issued the assailed MB Resolution No. 75 which ordered the closureof BF and which further provides:

After considering the report dated January 8, 1985 of the Conservator for Banco FilipinoSavings and Mortgage Bank that the continuance in business of the bank would involveprobable loss to its depositors and creditors, and after discussing and finding to be true thestatements of the Special Assistant to the Governor and Head, Supervision and ExaminationSector (SES) Department II as recited in his memorandum dated January 23, 1985, that theBanco Filipino Savings & Mortgage Bank is insolvent and that its continuance in businesswould involve probable loss to its depositors and creditors, and in pursuance of Sec. 29 of RA265, as amended, the Board decided:

1. To forbid Banco Filipino Savings and Mortgage Bank and all its branchesto do business in the Philippines;

2. To designate Mrs. Carlota P. Valenzuela, Deputy Governor as Receiverwho is hereby directly vested with jurisdiction and authority to immediatelytake charge of the bank's assets and liabilities, and as expeditiously aspossible collect and gather all the assets and administer the same for thebenefit of its creditors, exercising all the powers necessary for thesepurposes including but not limited to, bringing suits and foreclosingmortgages in the name of the bank;



3. To designate Mr. Arnulfo B. Aurellano, Special Assistant to the Governor,and Mr. Ramon V. Tiaoqui, Special Assistant to the Governor and Head,Supervision and Examination Sector Department II, as Deputy Receiverswho are likewise hereby directly vested with jurisdiction and authority to doall things necessary or proper to carry out the functions entrusted to them bythe Receiver and otherwise to assist the Receiver in carrying out thefunctions vested in the Receiver by law or Monetary Board Resolutions;

4. To direct and authorize Management to do all other things and carry outall other measures necessary or proper to implement this Resolution and tosafeguard the interests of depositors, creditors and the general public; and

5. In consequence of the foregoing, to terminate the conservatorship overBanco Filipino Savings and Mortgage Bank. (pp. 10-11, Rollo , Vol. I)

On February 2, 1985, petitioner BF filed a complaint docketed as Civil Case No. 9675 with the Regional TrialCourt of Makati to set aside the action of the Monetary Board placing BF under receivership.

On February 28, 1985, petitioner filed with this Court the instant petition for certiorari and mandamus underRule 65 of the Rules of Court seeking to annul the resolution of January 25, 1985 as made without or in excess

of jurisdiction or with grave abuse of discretion, to order respondents to furnish petitioner with the reports ofexamination which led to its closure and to afford petitioner BF a hearing prior to any resolution that may beissued under Section 29 of R.A. 265, also known as Central Bank Act.

On March 19, 1985, Carlota Valenzuela, as Receiver and Arnulfo Aurellano and Ramon Tiaoqui as DeputyReceivers of Banco Filipino submitted their report on the receivership of BF to the Monetary Board, incompliance with the mandate of Sec. 29 of R.A. 265 which provides that the Monetary Board shall determinewithin sixty (60) days from date of receivership of a bank whether such bank may be reorganized/permitted toresume business or ordered to be liquidated. The report contained the following recommendation:

In view of the foregoing and considering that the condition of the banking institution continuesto be one of insolvency, i.e., its realizable assets are insufficient to meet all its liabilities andthat the bank cannot resume business with safety to its depositors, other creditors and the

general public, it is recommended that:

1. Banco Filipino Savings & Mortgage Bank be liquidated pursuant to paragraph 3, Sec. 29 of RA No. 265, asamended;

2. The Legal Department, through the Solicitor General, be authorized to file in the proper court a petition forassistance in th liquidation of the Bank;

3. The Statutory Receiver be designated as the Liquidator of said bank; and

4. Management be instructed to inform the stockholders of Banco Filipino Savings & Mortgage Bank of theMonetary Board's decision liquidate the Bank. (p. 167, Rollo , Vol. I)

On July 23, 1985, petitioner filed a motion before this Court praying that a restraining order or a writ ofpreliminary injunction be issued to enjoin respondents from causing the dismantling of BF signs in its mainoffice and 89 branches. This Court issued a resolution on August 8, 1985 ordering the issuance of theaforesaid temporary restraining order.

On August 20, 1985, the case was submitted for resolution.

In a resolution dated August 29, 1985, this Court Resolved direct the respondents Monetary Board and CentralBank hold hearings at which the petitioner should be heard, and terminate such hearings and submit its



resolution within thirty (30) days. This Court further resolved to issue a temporary restraining order enjoiningthe respondents from executing further acts of liquidation of a bank. Acts such as receiving collectibles andreceivables or paying off creditors' claims and other transactions pertaining to normal operations of a bankwere no enjoined. The Central Bank was also ordered to designate comptroller for the petitioner BF. This Courtalso ordered th consolidation of Civil Cases Nos. 8108, 9676 and 10183 in Branch 136 of the Regional TrialCourt of Makati.

However, on September 12, 1985, this Court in the meantime suspended the hearing it ordered in its resolutionof August 29, 1985.

On October 8, 1985, this Court submitted a resolution order ing Branch 136 of the Regional Trial Court ofMakati the presided over by Judge Ricardo Francisco to conduct the hear ing contemplated in the resolution ofAugust 29, 1985 in the most expeditious manner and to submit its resolution to this Court.

In the Court's resolution of February 19, 1987, the Court stated that the hearing contemplated in the resolutionof August 29, 1985, which is to ascertain whether substantial administrative due process had been observed bythe respondent Monetary Board, may be expedited by Judge Manuel Cosico who now presides the courtvacated by Judge Ricardo Francisco, who was elevated to the Court of Appeals, there being no legalimpediment or justifiable reason to bar the former from conducting such hearing. Hence, this Court directedJudge Manuel Cosico to expedite the hearing and submit his report to this Court.

On February 20, 1988, Judge Manuel Cosico submitted his report to this Court with the recommendation thatthe resolutions of respondents Monetary Board and Central Bank authorizing the closure and liquidation ofpetitioner BP be upheld.

On October 21, 1988, petitioner BF filed an urgent motion to reopen hearing to which respondents filed theircomment on December 16, 1988. Petitioner filed their reply to respondent's comment of January 11, 1989.After having deliberated on the grounds raised in the pleadings, this Court in its resolution dated August 3,1989 declared that its intention as expressed in its resolution of August 29, 1985 had not been faithfullyadhered to by the herein petitioner and respondents. The aforementioned resolution had ordered a healing onthe reports that led respondents to order petitioner's closure and its alleged pre-planned liquidation. This Courtnoted that during the referral hearing however, a different scheme was followed. Respondents merelysubmitted to the commissioner their findings on the examinations conducted on petitioner, affidavits of the

private respondents relative to the findings, their reports to the Monetary Board and several other documents insupport of their position while petitioner had merely submitted objections to the findings of respondents,counter-affidavits of its officers and also documents to prove its claims. Although the records disclose that bothparties had not waived cross-examination of their deponents, no such cross-examination has been conducted.The reception of evidence in the form of affidavits was followed throughout, until the commissioner submittedhis report and recommendations to the Court. This Court also held that the documents pertinent to theresolution of the instant petition are the Teodoro Report, Tiaoqui Report, Valenzuela, Aurellano and TiaoquiReport and the supporting documents which were made as the bases by the reporters of their conclusionscontained in their respective reports. This Court also Resolved in its resolution to re-open the referral hearingthat was terminated after Judge Cosico had submitted his report and recommendation with the end in view ofallowing petitioner to complete its presentation of evidence and also for respondents to adduce additionalevidence, if so minded, and for both parties to conduct the required cross-examination of witnesses/deponents,to be done within a period of three months. To obviate all doubts on Judge Cosico's impartiality, this Courtdesignated a new hearing commissioner in the person of former Judge Consuelo Santiago of the Regional Trial

Court, Makati, Branch 149 (now Associate Justice of the Court of Appeals).

Three motions for intervention were filed in this case as follows: First, in G.R. No. 70054 filed by EduardoRodriguez and Fortunate M. Dizon, stockholders of petitioner bank for and on behalf of other stockholders ofpetitioner; second, in G.R. No. 78894, filed by the same stockholders, and, third, again in G.R. No. 70054 byBF Depositors' Association and others similarly situated. This Court, on March 1, 1990, denied the aforesaidmotions for intervention.



On January 28, 1991, the hearing commissioner, Justice Consuelo Santiago of the Court of Appeals submittedher report and recommendation (to be hereinafter called, "Santiago Report") on the following issues statedtherein as follows:

l) Had the Monetary Board observed the procedural requirements laid downin Sec. 29 of R.A. 265, as amended to justify th closure of the Banco FilipinoSavings and Mortgage Bank?

2) On the date of BF's closure (January 25, 1985) was its condition one ofinsolvency or would its continuance in business involve probable loss to itsdepositors or creditors?

The commissioner after evaluation of the evidence presented found and recommended the following:

1. That the TEODORO and TIAOQUI reports did not establish in accordancewith See. 29 of the R.A. 265, as amended, BF's insolvency as of July 31,1984 or that its continuance in business thereafter would involve probableloss to its depositors or creditors. On the contrary, the evidence indicatesthat BF was solvent on July 31, 1984 and that on January 25, 1985, the dayit was closed, its insolvency was not clearly established;

2. That consequently, BF's closure on January 25, 1985, not having satisfiedthe requirements prescribed under Sec. 29 of RA 265, as amended, was nulland void.

3. That accordingly, by way of correction, BF should be allowed to re-opensubject to such laws, rules and regulations that apply to its situation.

Respondents thereafter filed a motion for leave to file objections to the Santiago Report. In the same motion,respondents requested that the report and recommendation be set for oral argument before the Court. OnFebruary 7, 1991, this Court denied the request for oral argument of the parties.

On February 25, 1991, respondents filed their objections to the Santiago Report. On March 5, 1991,respondents submitted a motion for oral argument alleging that this Court is confronted with two conflictingreports on the same subject, one upholding on all points the Monetary Board's closure of petitioner, (CosicoReport dated February 19, 1988) and the other (Santiago Report dated January 25, 1991) holding thatpetitioner's closure was null and void because petitioner's insolvency was not clearly established before itsclosure; and that such a hearing on oral argrument will therefore allow the parties to directly confront the issuesbefore this Court.

On March 12, 1991 petitioner filed its opposition to the motion for oral argument. On March 20, 1991, it filed itsreply to respondents' objections to the Santiago Report.

On June 18, 1991, a hearing was held where both parties were heard on oral argument before this Court. Theparties, having submitted their respective memoranda, the case is now submitted for decision.

G.R. No. 78767

On February 2, 1985, Banco Filipino filed a complaint with the trial court docketed as Civil Case No. 9675 toannul the resolution of the Monetary Board dated January 25, 1985, which ordered the closure of the bank andplaced it under receivership.

On February 14, 1985, the Central Bank and the receivers filed a motion to dismiss the complaint on theground that the receivers had not authorized anyone to file the action. In a supplemental motion to dismiss, theCentral Bank cited the resolution of this Court dated October 15, 1985 in G.R. No. 65723 entitled, "Central



Bank et al. v. Intermediate Appellate Court" whereby We held that a complaint questioning the validity of thereceivership established by the Central Bank becomes moot and academic upon the initiation of liquidationproceedings.

While the motion to dismiss was pending resolution, petitioner herein Metropolis Development Corporation(Metropolis for brevity) filed a motion to intervene in the aforestated civil case on the ground that as astockholder and creditor of Banco Filipino, it has an interest in the subject of the action.

On July 19, 1985, the trial court denied the motion to dismiss and also denied the motion for reconsideration ofthe order later filed by Central Bank. On June 5, 1985, the trial court allowed the motion for intervention.

Hence, the Central Bank and the receivers of Banco Filipino filed a petition for certiorari with the respondentappellate court alleging that the trial court committed grave abuse of discretion in not dismissing Civil Case No.9675.

On March 17, 1986, the respondent appellate court rendered a decision annulling and setting aside thequestioned orders of the trial court, and ordering the dismissal of the complaint filed by Banco Filipino with thetrial court as well as the complaint in intervention of petitioner Metropolis Development Corporation.

Hence this petition was filed by Metropolis Development Corporation questioning the decision of therespondent appellate court.

G.R. No. 78894

On February 2, 1985, a complaint was filed with the trial court in the name of Banco Filipino to annul theresolution o the Monetary Board dated January 25, 1985 which ordered the closure of Banco Filipino andplaced it under receivership. The receivers appointed by the Monetary Board were Carlota Valenzuela, ArnulfoAurellano and Ramon Tiaoqui.

On February 14, 1985, the Central Bank and the receiver filed a motion to dismiss the complaint on the groundthat the receiver had not authorized anyone to file the action.

On March 22, 1985, the Monetary Board placed the bank under liquidation and designated Valenzuela asliquidator and Aurellano and Tiaoqui as deputy liquidators.

The Central Bank filed a supplemental motion to dismiss which was denied. Hence, the latter filed a petitionforcertiorari with the respondent appellate court to set aside the order of the trial court denying the motion todismiss. On March 17, 1986, the respondent appellate court granted the petition and dismissed the complaintof Banco Filipino with the trial court.

Thus, this petition for certiorari was filed with the petitioner contending that a bank which has been closed andplaced under receivership by the Central Bank under Section 29 of RA 265 could file suit in court in its name tocontest such acts of the Central Bank, without the authorization of the CB-appointed receiver.

After deliberating on the pleadings in the following cases:

1. In G.R. No. 68878, the respondent's motion for reconsideration;

2. In G.R. Nos. 77255-58, the petition, comment, reply, rejoinder and sur-rejoinder;

2. In G.R. No. 78766, the petition, comment, reply and rejoinder;

3. In G.R. No. 81303, the petitioner's motion for reconsideration;



4. In G.R.No. 81304, the petition, comment and reply;

5. Finally, in G.R. No. 90473, the petition comment and reply.

We find the motions for reconsideration in G.R. Nos. 68878 and 81303 and the petitions in G.R. Nos. 77255-58, 78766, 81304 and 90473 devoid of merit.

Section 29 of the Republic Act No. 265, as amended known as the Central Bank Act, provides that when a bank is forbidden to do business in the Philippines and placed under receivership, the person designated as receiver shall immediately take charge of the bank's assets and liabilities, as expeditiously as possible, collect and gather all the assets and administer the same for the benefit of its creditors, and represent the bank personally or through counsel as he may retain in all actions or proceedings for or against the institution, exercising all the powers necessary for these purposes including, but not limited to, bringing and foreclosing mortgages in the name of the bank . If the Monetary Board shall later determine and confirm thatbanking institution is insolvent or cannot resume business safety to depositors, creditors and the general public,it shall, public interest requires, order its liquidation and appoint a liquidator who shall take over and continue the functions of receiver previously appointed by Monetary Board. The liquid for may, in the name of the bankand with the assistance counsel as he may retain, institute such actions as may necessary in the appropriatecourt to collect and recover a counts and assets of such institution or defend any action ft against theinstitution.

When the issue on the validity of the closure and receivership of Banco Filipino bank was raised in G.R. No.70054, pendency of the case did not diminish the powers and authority of the designated liquidator toeffectuate and carry on the a ministration of the bank. In fact when We adopted a resolute on August 25, 1985and issued a restraining order to respondents Monetary Board and Central Bank, We enjoined me further actsof liquidation. Such acts of liquidation, as explained in Sec. 29 of the Central Bank Act are those whichconstitute the conversion of the assets of the banking institution to money or the sale, assignment or dispositionof the s to creditors and other parties for the purpose of paying debts of such institution. We did not prohibithowever acts a as receiving collectibles and receivables or paying off credits claims and other transactions pertaining to normal operate of a bank . There is no doubt that the prosecution of suits collection and theforeclosure of mortgages against debtors the bank by the liquidator are among the usual and ordinarytransactions pertaining to the administration of a bank. their did Our order in the same resolution dated August25, 1985 for the designation by the Central Bank of a comptroller Banco Filipino alter the powers and functions;of the liquid insofar as the management of the assets of the bank is concerned. The mere duty of the

comptroller is to supervise counts and finances undertaken by the liquidator and to d mine the propriety of thelatter's expenditures incurred behalf of the bank. Notwithstanding this, the liquidator is empowered under thelaw to continue the functions of receiver is preserving and keeping intact the assets of the bank in substitutionof its former management, and to prevent the dissipation of its assets to the detriment of the creditors of thebank. These powers and functions of the liquidator in directing the operations of the bank in place of the formermanagement or former officials of the bank include the retaining of counsel of his choice in actions andproceedings for purposes of administration.

Clearly, in G.R. Nos. 68878, 77255-58, 78766 and 90473, the liquidator by himself or through counsel has theauthority to bring actions for foreclosure of mortgages executed by debtors in favor of the bank. In G.R. No.81303, the liquidator is likewise authorized to resist or defend suits instituted against the bank by debtors andcreditors of the bank and by other private persons. Similarly, in G.R. No. 81304, due to the aforestatedreasons, the Central Bank cannot be compelled to fulfill financial transactions entered into by Banco Filipino

when the operations of the latter were suspended by reason of its closure. The Central Bank possesses thosepowers and functions only as provided for in Sec. 29 of the Central Bank Act.

While We recognize the actual closure of Banco Filipino and the consequent legal effects thereof on i tsoperations, We cannot uphold the legality of its closure and thus, find the petitions in G.R. Nos. 70054, 78767and 78894 impressed with merit. We hold that the closure and receivership of petitioner bank, which wasordered by respondent Monetary Board on January 25, 1985, is null and void.

It is a well-recognized principle that administrative and discretionary functions may not be interfered with by thecourts. In general, courts have no supervising power over the proceedings and actions of the administrative



departments of the government. This is generally true with respect to acts involving the exercise of judgment ordiscretion, and findings of fact. But when there is a grave abuse of discretion which is equivalent to a capriciousand whimsical exercise of judgment or where the power is exercised in an arbitrary or despotic manner, thenthere is a justification for the courts to set aside the administrative determination reached (Lim, Sr. v. Secretaryof Agriculture and Natural Resources, L-26990, August 31, 1970, 34 SCRA 751)

The jurisdiction of this Court is called upon, once again, through these petitions, to undertake the delicate taskof ascertaining whether or not an administrative agency of the government, like the Central Bank of thePhilippines and the Monetary Board, has committed grave abuse of discretion or has acted without or in excessof jurisdiction in issuing the assailed order. Coupled with this task is the duty of this Court not only to strikedown acts which violate constitutional protections or to nullify administrative decisions contrary to legalmandates but also to prevent acts in excess of authority or jurisdiction, as well as to correct manifest abuses ofdiscretion committed by the officer or tribunal involved.

The law applicable in the determination of these issues is Section 29 of Republic Act No. 265, as amended,also known as the Central Bank Act, which provides:

SEC. 29. Proceedings upon insolvency .—Whenever, upon examination by the head of theappropriate supervising or examining department or his examiners or agents into the conditionof any bank or non-bank financial intermediary performing quasi-banking functions, it shall be

disclosed that the condition of the same is one of insolvency, or that its continuance inbusiness would involve probable loss to its depositors or creditors, it shall be the duty of thedepartment head concerned forthwith, in writing, to inform the Monetary Board of the facts.The Board may, upon finding the statements of the department head to be true, forbid theinstitution to do business in the Philippines and designate an official of the Central Bank or aperson of recognized competence in banking or finance, as receiver to immediately takecharge of its assets and liabilities, as expeditiously as possible collect and gather all theassets and administer the same for the benefit's of its creditors, and represent the bankpersonally or through counsel as he may retain in all actions or proceedings for or against theinstitution, exercising all the powers necessary for these purposes including, but not limited to,bringing and foreclosing mortgages in the name of the bank or non-bank financialintermediary performing quasi-banking functions.

The Monetary Board shall thereupon determine within sixty days whether the institution may

be reorganized or otherwise placed in such a condition so that it may be permitted to resumebusiness with safety to its depositors and creditors and the general public and shall prescribethe conditions under which such resumption of business shall take place as well as the timefor fulfillment of such conditions. In such case, the expenses and fees in the collection andadministration of the assets of the institution shall be determined by the Board and shall bepaid to the Central Bank out of the assets of such institution.

If the Monetary Board shall determine and confirm within the said period that the bank or non-bank financial intermediary performing quasi-banking functions is insolvent or cannot resumebusiness with safety to its depositors, creditors, and the general public, it shall, if the publicinterest requires, order its liquidation, indicate the manner of its liquidation and approve aliquidation plan which may, when warranted, involve disposition of any or all assets inconsideration for the assumption of equivalent liabilities. The liquidator designated as

hereunder provided shall, by the Solicitor General, file a petition in the regional trial courtreciting the proceedings which have been taken and praying the assistance of the court in theliquidation of such institutions. The court shall have jurisdiction in the same proceedings toassist in the adjudication of the disputed claims against the bank or non-bank financialintermediary performing quasi-banking functions and in the enforcement of individual liabilitiesof the stockholders and do all that is necessary to preserve the assets of such institutions andto implement the liquidation plan approved by the Monetary Board. The Monetary Board shalldesignate an official of the Central bank or a person of recognized competence in banking orfinance, as liquidator who shall take over and continue the functions of the receiver previouslyappointed by the Monetary Board under this Section. The liquidator shall, with all convenient



speed, convert the assets of the banking institutions or non-bank financial intermediaryperforming quasi-banking function to money or sell, assign or otherwise dispose of the sameto creditors and other parties for the purpose of paying the debts of such institution and hemay, in the name of the bank or non-bank financial intermediary performing quasi-bankingfunctions and with the assistance of counsel as he may retain, institute such actions as maybe necessary in the appropriate court to collect and recover accounts and assets of suchinstitution or defend any action f iled against the institution: Provided, However, That after

having reasonably established all claims against the institution, the liquidator may, with theapproval of the court, effect partial payments of such claims for assets of the institution inaccordance with their legal priority.

The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver or liquidator and shall from the moment of such receivershipor liquidation, be exempt from any order of garnishment, levy, attachment, orexecution.

The provisions of any law to the contrary notwithstanding, the actions of the Monetary Boardunder this Section, Section 28-A, an the second paragraph of Section 34 of this Act shall befinal an executory, and can be set aside by a court only if there is convince proof, afterhearing, that the action is plainly arbitrary and made in bad faith: Provided, That the same israised in an appropriate pleading filed by the stockholders of record representing the majority

of th capital stock within ten (10) days from the date the receiver take charge of the assetsand liabilities of the bank or non-bank financial intermediary performing quasi-bankingfunctions or, in case of conservatorship or liquidation, within ten (10) days from receipt ofnotice by the said majority stockholders of said bank or non-bank f inancial intermediary of theorder of its placement under conservatorship o liquidation. No restraining order or injunctionshall be issued by an court enjoining the Central Bank from implementing its actions underthis Section and the second paragraph of Section 34 of this Act in th absence of anyconvincing proof that the action of the Monetary Board is plainly arbitrary and made in badfaith and the petitioner or plaintiff files a bond, executed in favor of the Central Bank, in anamount be fixed by the court. The restraining order or injunction shall be refused or, if granted,shall be dissolved upon filing by the Central Bank of a bond, which shall be in the form of cashor Central Bank cashier's check, in an amount twice the amount of the bond of th petitioner orplaintiff conditioned that it will pay the damages which the petitioner or plaintiff may suffer bythe refusal or the dissolution of the injunction. The provisions of Rule 58 of the New Rules of

Court insofar as they are applicable and not inconsistent with the provision of this Sectionshall govern the issuance and dissolution of the re straining order or injunction contemplatedin this Section.

xxx xxx xxx

Based on the aforequoted provision, the Monetary Board may order the cessation of operations of a bank in thePhilippine and place it under receivership upon a finding of insolvency or when its continuance in businesswould involve probable loss its depositors or creditors. If the Monetary Board shall determine and confirm withinsixty (60) days that the bank is insolvent or can no longer resume business with safety to its depositors,creditors and the general public, it shall, if public interest will be served, order its liquidation.

Specifically, the basic question to be resolved in G.R. Nos. 70054, 78767 and 78894 is whether or not the

Central Bank and the Monetary Board acted arbitrarily and in bad faith in finding and thereafter concluding thatpetitioner bank is insolvent, and in ordering its closure on January 25, 1985.

As We have stated in Our resolution dated August 3, 1989, the documents pertinent to the resolution of thesepetitions are the Teodoro Report, Tiaoqui Report, and the Valenzuela, Aurellano and Tiaoqui Report and thesupporting documents made as bases by the supporters of their conclusions contained in their respectivereports. We will focus Our study and discussion however on the Tiaoqui Report and the Valenzuela, Aurellanoand Tiaoqui Report. The former recommended the closure and receivership of petitioner bank while the latterreport made the recommendation to eventually place the petitioner bank under liquidation. This Court shalllikewise take into consideration the findings contained in the reports of the two commissioners who were



appointed by this Court to hold the referral hearings, namely the report by Judge Manuel Cosico submittedFebruary 20, 1988 and the report submitted by Justice Consuelo Santiago on January 28, 1991.

There is no question that under Section 29 of the Central Bank Act, the following are the mandatoryrequirements to be complied with before a bank found to be insolvent is ordered closed and forbidden to dobusiness in the Philippines: Firstly, an examination shall be conducted by the head of the appropriatesupervising or examining department or his examiners or agents into the condition of the bank; secondly, i tshall be disclosed in the examination that the condition of the bank is one of insolvency, or that its continuancein business would involve probable loss to its depositors or creditors; thirdly, the department head concernedshall inform the Monetary Board in writing, of the facts; and lastly, the Monetary Board shall find the statementsof the department head to be true.

Anent the first requirement, the Tiaoqui report, submitted on January 23, 1985, revealed that the finding ofinsolvency of petitioner was based on the partial list of exceptions and findings on the regular examination ofthe bank as of July 31, 1984 conducted by the Supervision and Examination Sector II of the Central Bank of thePhilippinesCentral Bank (p. 1, Tiaoqui Report).

On December 17, 1984, this list of exceptions and finding was submitted to the petitioner bank (p. 6, TiaoquiReport) This was attached to the letter dated December 17, 1984, of examiner-in-charge Dionisio Domingo ofSES Department II of the Central Bank to Teodoro Arcenas, president of petitione bank, which disclosed that

the examination of the petitioner bank as to its financial condition as of July 31, 1984 was not yet completed orfinished on December 17, 1984 when the Central Bank submitted the partial list of findings of examination to thpetitioner bank. The letter reads:

In connection with the regular examination of your institution a of July 31, 1984, weare submitting herewith a partial list of our exceptions/findings for your comments.

Please be informed that we have not yet officially terminated our examination ( tentativelyscheduled last December 7, 1984) and that we are still awaiting for the unsubmitted replies to our previous letters requests. Moreover, other findings/ observations are still being summarized including the classification of loans and other risk assets . These shall besubmitted to you in due time (p. 810, Rollo, Vol. III; emphasis ours).

It is worthy to note that a conference was held on January 21, 1985 at the Central Bank between the off icials ofthe latter an of petitioner bank. What transpired and what was agreed upon during the conference wasexplained in the Tiaoqui report.

... The discussion centered on the substantial exposure of the bank to the various entitieswhich would have a relationship with the bank; the manner by which some bank funds weremade indirectly available to several entities within the group; and the unhealth financial statusof these firms in which the bank was additionally exposed through new funds or refinancingaccommodation including accrued interest.

Queried in the impact of these clean loans, on the bank solvency Mr. Dizon (BF ExecutiveVice President) intimated that, collectively these corporations have large undeveloped realestate properties in the suburbs which can be made answerable for the unsecured loans awell as the Central Bank's credit accommodations. A formal reply of the bank would still be forthcoming. (pp. 58-59, Rollo , Vol. I; emphasis ours)

Clearly, Tiaoqui based his report on an incomplete examination of petitioner bank and outrightly concludedtherein that the latter's financial status was one of insolvency or illiquidity. He arrived at the said conclusionfrom the following facts: that as of July 31, 1984, total capital accounts consisting of paid-in capital and othercapital accounts such as surplus, surplus reserves and undivided profits aggregated P351.8 million; that capitaladjustments, however, wiped out the capital accounts and placed the bank with a capital deficiency amountingto P334.956 million; that the biggest adjustment which contributed to the deficit is the provision for estimatedlosses on accounts classified as doubtful and loss which was computed at P600.4 million pursuant to the



examination. This provision is also known as valuation reserves which was set up or deducted against thecapital accounts of the bank in arriving at the latter's financial condition.

Tiaoqui however admits the insufficiency and unreliability of the findings of the examiner as to the setting up ofrecommended valuation reserves from the assets of petitioner bank. He stated:

The recommended valuation reserves as bases for determining the financial status of the bank would need to be discussed with the bank, consistent with standard examination procedure, for which the bank would in turn reply. Also, the examination has not been officially terminated. (p. 7. Tiaoqui report; p. 59, Rollo , Vol. I)

In his testimony in the second referral hearing before Justice Santiago, Tiaoqui testified that on January 21,1985, he met with officers of petitioner bank to discuss the advanced findings and exceptions made by Mr.Dionisio Domingo which covered 70%-80% of the bank's loan portfolio; that at that meeting, Fortunato Dizon(BF's Executive Vice President) said that as regards the unsecured loans granted to various corporations, saidcorporations had large undeveloped real estate properties which could be answerable for the said unsecuredloans and that a reply from BF was forthcoming, that he (Tiaoqui) however prepared his report despite theabsence of such reply; that he believed, as in fact it is stated in his report, that despite the meeting on January21, 1985, there was still a need to discuss the recommended valuation reserves of petitioner bank and; that hehowever, did not wait anymore for a discussion of the recommended valuation reserves and instead prepared

his report two days after January 21, 1985 (pp. 3313-3314, Rollo ).

Records further show that the examination of petitioner bank was officially terminated only when Central BankExamination-charge Dionisio Domingo submitted his final report of examination on March 4,1985.

It is evident from the foregoing circumstances that the examination contemplated in Sec. 29 of the CB Act as amandatory requirement was not completely and fully complied with. Despite the existence of the partial list offindings in the examination of the bank, there were still highly significant items to be weighed and determinedsuch as the matter of valuation reserves, before these can be considered in the financial condition of the bank.It would be a drastic move to conclude prematurely that a bank is insolvent if the basis for such conclusion islacking and insufficient, especially if doubt exists as to whether such bases or findings faithfully represent thereal financial status of the bank.

The actuation of the Monetary Board in closing petitioner bank on January 25, 1985 barely four days after aconference with the latter on the examiners' partial findings on its financial position is also violative of what wasprovided in the CB Manual of Examination Procedures. Said manual provides that only after the examination isconcluded, should a pre-closing conference led by the examiner-in-charge be held with theofficers/representatives of the institution on the findings/exception, and a copy of the summary of thefindings/violations should be furnished the institution examined so that corrective action may be taken by themas soon as possible (Manual of Examination Procedures, General Instruction, p. 14). It is hard to understandhow a period of four days after the conference could be a reasonable opportunity for a bank to undertake aresponsive and corrective action on the partial list of findings of the examiner-in-charge.

We recognize the fact that it is the responsibility of the Central Bank of the Philippines to administer themonetary, banking and credit system of the country and that its powers and functions shall be exercised by theMonetary Board pursuant to Rep. Act No. 265, known as the Central Bank Act. Consequently, the power andauthority of the Monetary Board to close banks and liquidate them thereafter when public interest so requires is

an exercise of the police power of the state. Police power, however, may not be done arbitratrily orunreasonably and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust or istantamount to a denial of due process and equal protection clauses of the Constitution (Central Bank v. Courtof Appeals, Nos. L-50031-32, July 27, 1981, 106 SCRA 143).

In the instant case, the basic standards of substantial due process were not observed. Time and again, Wehave held in several cases, that the procedure of administrative tribunals must satisfy the fundamentals of fairplay and that their judgment should express a well-supported conclusion.



In the celebrated case of Ang Tibay v. Court of Industrial Relations , 69 Phil. 635, this Court laid down severalcardinal primary rights which must be respected in a proceeding before an administrative body.

However, as to the requirement of notice and hearing, Sec. 29 of RA 265 does not require a previous hearingbefore the Monetary Board implements the closure of a bank, since its action is subject to judicial scrutiny asprovided for under the same law (Rural Bank of Bato v. IAC, G.R. No. 65642, October 15, 1984, Rural Bank v.Court of Appeals, G.R. 61689, June 20, 1988,162 SCRA 288).

Notwithstanding the foregoing, administrative due process does not mean that the other important pr inciplesmay be dispensed with, namely: the decision of the administrative body must have something to support itselfand the evidence must be substantial. Substantial evidence is more than a mere scintilla. It means suchrelevant evidence as a reasonable mind might accept as adequate to support a conclusion (Ang Tibay vs.CIR, supra ). Hence, where the decision is merely based upon pieces of documentary evidence that are notsufficiently substantial and probative for the purpose and conclusion they are presented, the standard offairness mandated in the due process clause is not met. In the case at bar, the conclusion arrived at by therespondent Board that the petitioner bank is in an illiquid financial position on January 23, 1985, as to justify itsclosure on January 25, 1985 cannot be given weight and finality as the report itself admits the inadequacy of itsbasis to support its conclusion.

The second requirement provided in Section 29, R.A. 265 before a bank may be closed is that the examination

should disclose that the condition of the bank is one of insolvency.

As to the concept of whether the bank is solvent or not, the respondents contend that under the Central BankManual of Examination Procedures, Central Bank examiners must recommend valuation reserves, whenwarranted, to be set up or deducted against the corresponding asset account to determine the bank's truecondition or net worth. In the case of loan accounts, to which practically all the questioned valuation reservesrefer, the manual provides that:

1. For doubtful loans, or loans the ultimate collection of which is doubtful and in which a substantial loss isprobable but not yet definitely ascertainable as to extent, valuation reserves of fifty per cent (50%) of theaccounts should be recommended to be set up.

2. For loans classified as loss, or loans regarded by the examiner as absolutely uncollectible or worthless,

valuation reserves of one hundred percent (100%) of the accounts should be recommended to be set up (p. 8,Objections to Santiago report).

The foregoing criteria used by respondents in determining the financial condition of the bank is based onSection 5 of RA 337, known as the General Banking Act which states:

Sec. 5. The following terms shall be held to be synonymous and interchangeable:

... f. Unimpaired Capital and Surplus, "Combined capital accounts," and "Net worth," whichterms shall mean for the purposes of this Act, the total of the "unimpaired paid-in capital,surplus, and undivided profits net of such valuation reserves as may be required by theCentral Bank."

There is no doubt that the Central Bank Act vests authority upon the Central Bank and Monetary Board to takecharge and administer the monetary and banking system of the country and this authority includes the power toexamine and determine the financial condition of banks for purposes provided for by law, such as for thepurpose of closure on the ground of insolvency stated in Section 29 of the Central Bank Act. But express grantsof power to public officers should be subjected to a strict interpretation, and will be construed as conferringthose powers which are expressly imposed or necessarily implied (Floyd Mechem, Treatise on the Law ofPublic Offices and Officers, p. 335).

In this case, there can be no clearer explanation of the concept of insolvency than what the law itself states.Sec. 29 of the Central Bank Act provides that insolvency under the Act, shall be understood to mean that "the



realizable assets of a bank or a non-bank financial intermediary performing quasi-banking functions asdetermined by the Central Bank are insufficient to meet its liabilities ."

Hence, the contention of the Central Bank that a bank's true financial condition is synonymous with the terms"unimpaired capital and surplus," "combined capital accounts" and net worth after deducting valuation reservesfrom the capital, surplus and unretained earnings, citing Sec. 5 of RA 337 is misplaced.

Firstly, it is clear from the law that a solvent bank is one in which its assets exceed its liabilities. It is a basicaccounting principle that assets are composed of liabilities and capital. The term "assets" includes capital andsurplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan., 302). On the other hand, the term "capital" includescommon and preferred stock, surplus reserves, surplus and undivided profits. (Manual of ExaminationProcedures, Report of Examination on Department of Commercial and Savings Banks, p. 3-C). If valuationreserves would be deducted from these items, the result would merely be the networth or the unimpairedcapital and surplus of the bank applying Sec. 5 of RA 337 but not the total financial condition of the bank.

Secondly, the statement of assets and liabilities is used in balance sheets. Banks use statements of conditionto reflect the amounts, nature and changes in the assets and liabilities. The Central Bank Manual ofExamination Procedures provides a format or checklist of a statement of condition to be used by examiners asguide in the examination of banks. The format enumerates the items which will compose the assets andliabilities of a bank. Assets include cash and those due from banks, loans, discounts and advances, fixed

assets and other property owned or acquired and other miscellaneous assets. The amount of loans, discountsand advances to be stated in the statement of condition as provided for in the manual is computed afterdeducting valuation reserves when deemed necessary. On the other hand, liabilities are composed of demanddeposits, time and savings deposits, cashier's, manager's and certified checks, borrowings, due to head office,branches; and agencies, other liabilities and deferred credits (Manual of Examination Procedure, p. 9). Theamounts stated in the balance sheets or statements of condition including the computation of valuationreserves when justified, are based however, on the assumption that the bank or company will continue inbusiness indefinitely, and therefore, the networth shown in the statement is in no sense an indication of theamount that might be realized if the bank or company were to be liquidated immediately (Prentice HallEncyclopedic Dictionary of Business Finance, p. 48). Further, based on respondents' submissions, theallowance for probable losses on loans and discounts represents the amount set up against current operations to provide for possible losses arising from non-collection of loans and advances, and this account isalso referred to as valuation reserve (p. 9, Objections to Santiago report). Clearly, the statement of conditionwhich contains a provision for recommended valuation reserves should not be used as the ultimate basis to

determine the solvency of an institution for the purpose of termination of its operations.

Respondents acknowledge that under the said CB manual, CB examiners must recommend valuationreserves,when warranted , to be set up against the corresponding asset account (p. 8, Objections to Santiagoreport). Tiaoqui himself, as author of the report recommending the closure of petitioner bank admits that thevaluation reserves should still be discussed with the petitioner bank in compliance with standard examinationprocedure. Hence, for the Monetary Board to unilaterally deduct an uncertain amount as valuation reservesfrom the assets of a bank and to conclude therefrom without sufficient basis that the bank is insolvent, would betotally unjust and unfair.

The test of insolvency laid down in Section 29 of the Central Bank Act is measured by determining whether therealizable assets of a bank are leas than i ts liabilities. Hence, a bank is solvent if the fair cash value of all itsassets, realizable within a reasonable time by a reasonable prudent person, would equal or exceed its total

liabilities exclusive of stock liability; but if such fair cash value so realizable is not sufficient to pay such liabilitieswithin a reasonable time, the bank is insolvent. (Gillian v. State, 194 N.E. 360, 363, 207 Ind. 661). Stated inother words, the insolvency of a bank occurs when the actual cash market value of its assets is insufficient topay its liabilities, not considering capital stock and surplus which are not liabilities for such purpose (Exley v.Harris, 267 p. 970, 973,126 Kan. 302; Alexander v. Llewellyn, Mo. App., 70 S.W. 2n 115,117).

In arriving at the computation of realizable assets of petitioner bank, respondents used its books whichundoubtedly are not reflective of the actual cash or fair market value of its assets. This is not the properprocedure contemplated in Sec. 29 of the Central Bank Act. Even the CB Manual of Examination Proceduresdoes not confine examination of a bank solely with the determination of the books of the bank. The latter is part



of auditing which should not be confused with examination. Examination appraises the soundness of the institution's assets, the quality and character of management and determines the institution's compliance with laws, rules and regulations. Audit is a detailed inspection of the institution's books, accounts, vouchers,ledgers, etc. to determine the recording of all assets and liabilities. Hence, examination concerns itself withreview and appraisal, while audit concerns itself with verification (CB Manual of Examination Procedures,General Instructions, p. 5). This Court however, is not in the position to determine how much cash or marketvalue shall be assigned to each of the assets and liabilities of the bank to determine their total realizable value.

The proper determination of these matters by using the actual cash value criteria belongs to the field of fact-finding expertise of the Central Bank and the Monetary Board. Notwithstanding the fact that the figures arrivedat by the respondent Board as to assets and liabilities do not truly indicate their realizable value as they weremerely based on book value, We will however, take a look at the figures presented by the Tiaoqui Report inconcluding insolvency as of July 31, 1984 and at the figures presented by the CB authorized deputy receiverand by the Valenzuela, Aurellano and Tiaoqui Report which recommended the liquidation of the bank byreason of insolvency as o January 25,1985.

The Tiaoqui report dated January 23, 1985, which was based on partial examination findings on the bank'scondition as of July 31, 1984, states that total liabilities of P5,282.1 million exceeds total assets of P4,947.2million after deducting from the assets valuation reserves of P612.2 million. Since, as We have explained in ourprevious discussion that valuation reserves can not be legally deducted as there was no truthful and completeevaluation thereof as admitted by the Tiaoqui report itself, then an adjustment of the figures win show that theliabilities of P5,282.1 million will not exceed the total assets which will amount to P5,559.4 if the 612.2 millionallotted to valuation reserves will not be deducted from the assets. There can be no basis therefore for both theconclusion of insolvency and for the decision of the respondent Board to close petitioner bank and place itunder receivership.

Concerning the financial position of the bank as of January 25, 1985, the date of the closure of the bank, theconsolidated statement of condition thereof as of the aforesaid date shown in the Valenzuela, Aurellano andTiaoqui report on the receivership of petitioner bank, dated March 19, 1985, indicates that total liabilities of4,540.84 million does not exceed the total assets of 4,981.53 million. Likewise, the consolidated statement ofcondition of petitioner bank as of January 25, 1985 prepared by the Central Bank Authorized Deputy ReceiverArtemio Cruz shows that total assets amounting to P4,981,522,996.22 even exceeds total liabilities amountingto P4,540,836,834.15. Based on the foregoing, there was no valid reason for the Valenzuela, Aurellano andTiaoqui report to finally recommend the liquidation of petitioner bank instead of its rehabilitation.

We take note of the exhaustive study and findings of the Cosico report on the petitioner bank's having engagedin unsafe, unsound and fraudulent banking practices by the granting of huge unsecured loans to severalsubsidiaries and related companies. We do not see, however, that this has any material bearing on the validityof the closure. Section 34 of the RA 265, Central Bank Act empowers the Monetary Board to take action underSection 29 of the Central Bank Act when a bank "persists in carrying on its business in an unlawful or unsafemanner." There was no showing whatsoever that the bank had persisted in committing unlawful bankingpractices and that the respondent Board had attempted to take effective action on the bank's alleged activities.During the period from July 27, 1984 up to January 25, 1985, when petitioner bank was under conservatorshipno official of the bank was ever prosecuted, suspended or removed for any participation in unsafe and unsoundbanking practices, and neither was the entire management of the bank replaced or substituted. In fact, in hertestimony during the second referral hearing, Carlota Valenzuela, CB Deputy Governor, testified that thereason for petitioner bank's closure was not unsound, unsafe and fraudulent banking practices but the allegedinsolvency position of the bank (TSN, August 3, 1990, p. 3316, Rollo, Vol. VIII).

Finally, another circumstance which point to the solvency of petitioner bank is the granting by the MonetaryBoard in favor of the former a credit line in the amount of P3 billion along with the placing of petitioner bankunder conservatorship by virtue of M.B. Resolution No. 955 dated July 27, 1984. This paved the way for thereopening of the bank on August 1, 1984 after a self-imposed bank holiday on July 23, 1984.

On emergency loans and advances, Section 90 of RA 265 provides two types of emergency loans that can begranted by the Central Bank to a financially distressed bank:



Sec. 90. ... In periods of emergency or of imminent financial panic which directly threatenmonetary and banking stability, the Central Bank may grant banking institutions extraordinaryadvances secured by any assets which are defined as acceptable by by a concurrent vote ofat least five members of the Monetary Board. While such advances are outstanding, thedebtor institution may not expand the total volume of its loans or investments without the priorauthorization of the Monetary Board.

The Central Bank may, at its discretion, likewise grant advances to banking institutions, evenduring normal periods, for the purpose of assisting a bank in a precarious financial conditionor under serious financial pressures brought about by unforeseen events, or events which,though foreseeable, could not be prevented by the bank concerned. Provided, however, Thatthe Monetary Board has ascertained that the bank is not insolvent and has clearly realizableassets to secure the advances. Provided, further, That a concurrent vote of at least f ivemembers of the Monetary Board is obtained. (Emphasis ours)

The first paragraph of the aforequoted provision contemplates a situation where the whole banking communityis confronted with financial and economic crisis giving rise to serious and widespread confusion among thepublic, which may eventually threaten and gravely prejudice the stability of the banking system. Here, theemergency or financial confusion involves the whole banking community and not one bank or institution only.The second situation on the other hand, provides for a situation where the Central Bank grants a loan to a bank

with uncertain financial condition but not insolvent.

As alleged by the respondents, the following are the reasons of the Central Bank in approving the resolutiongranting the P3 billion loan to petitioner bank and the latter's reopening after a brief self-imposed bankingholiday:

WHEREAS, the closure by Banco Filipino Savings and Mortgage Bank of its Banking officeson its own initiative has worked serious hardships on its depositors and has affectedconfidence levels in the banking system resulting in a feeling of apprehension amongdepositors and unnecessary deposit withdrawals;

WHEREAS, the Central Bank is charged with the function of administering the bankingsystem;

WHEREAS, the reopening of Banco Filipino would require additional credit resources from theCentral Bank as well as an independent management acceptable to the Central Bank;

WHEREAS, it is the desire of the Central Bank to rapidly diffuse the uncertainty that presentlyexists;

... (M.B. Min. No. 35 dated July 27, 1984 cited in Respondents' Objections to Santiago Report,p. 26; p. 3387, Rollo , Vol. IX; Emphasis ours).

A perusal of the foregoing "Whereas" clauses unmistakably show that the clear reason for the decision to grantthe emergency loan to petitioner bank was that the latter was suffering from financial distress and severe bank"run" as a result of which it closed on July 23, 1984 and that the release of the said amount is in accordance

with the Central Bank's full support to meet Banco Filipino's depositors' withdrawal requirements (Excerpts ofminutes of meeting on MB Min. No. 35, p. 25, Rollo , Vol. IX). Nothing therein shows that an extraordinaryemergency situation exists affecting most banks, not only as regards petitioner bank. This Court thereby findsthat the grant of the said emergency loan was intended from the beginning to fall under the second paragraphof Section 90 of the Central Bank Act, which could not have occurred if the petitioner bank was not solvent.Where notwithstanding knowledge of the irregularities and unsafe banking practices allegedly committed by thepetitioner bank, the Central Bank even granted financial support to the latter and placed it underconservatorship, such actuation means that petitioner bank could still be saved from its financial distress byadequate aid and management reform, which was required by Central Bank's duty to maintain the stability of



the banking system and the preservation of public confidence in it (Ramos v. Central Bank, No. L-29352,October 4, 1971, 41 SCRA 565).

In view of the foregoing premises, We believe that the closure of the petitioner bank was arbitrary andcommitted with grave abuse of discretion. Granting in gratia argumenti that the closure was based on justifiedgrounds to protect the public, the fact that petitioner bank was suffering from serious financial problems shouldnot automatically lead to its liquidation. Section 29 of the Central Bank provides that a closed bank may bereorganized or otherwise placed in such a condition that it may be permitted to resume business with safety toits depositors, creditors and the general public.

We are aware of the Central Bank's concern for the safety of Banco Filipino's depositors as well as its creditorsincluding itself which had granted substantial financial assistance up to the time of the latter's closure. But thereare alternatives to permanent closure and liquidation to safeguard those interests as well as those of thegeneral public for the failure of Banco Filipino or any bank for that matter may be viewed as an irreversibledecline of the country's entire banking system and ultimately, it may reflect on the Central Bank's own viability.For one thing, the Central Bank and the Monetary Board should exercise strict supervision over Banco Filipino.They should take all the necessary steps not violative of the laws that will fully secure the repayment of the totalfinancial assistance that the Central Bank had already granted or would grant in the future.

ACCORDINGLY, decision is hereby rendered as follows:

1. The motion for reconsideration in G.R. Nos. 68878 and 81303, and the petitions in G.R. Nos. 77255-58,78766, 81304 and 90473 are DENIED;

2. The petitions in G.R. No. 70054, 78767 and 78894 are GRANTED and the assailed order of the CentralBank and the Monetary Board dated January 25, 1985 is hereby ANNULLED AND SET ASIDE. The CentralBank and the Monetary Board are ordered to reorganize petitioner Banco Filipino Savings and Mortgage Bankand allow the latter to resume business in the Philippines under the comptrollership of both the Central Bankand the Monetary Board and under such conditions as may be prescribed by the latter in connection with itsreorganization until such time that petitioner bank can continue in business with safety to its creditors,depositors and the general public.

SO ORDERED.

Narvasa, C.J., Gutierrez, Jr., Cruz, Bidin and Regalado, JJ., concur.

Paras, Feliciano, Padilla, Davide, Jr. and Nocon, JJ., took no part.

Separate Opinions

MELENCIO-HERRERA, J., dissenting:

I join Mme. Justice Carolina G. Aquino in her dissent and vote to deny the prayer, in G.R. No. 70054, to annulMonetary Board Resolution No. 75 placing Banco Filipino (BF) under receivership.

Even assuming that the BF was not, as alleged, in a literal state of insolvency at the time of the passage of saidResolution, there was a finding in the Teodoro report that, based on that Bank's illiquidity, to have allowed it tocontinue in operation would have meant probable loss to depositors and creditors. That is also a ground forplacing the bank under receivership, as a first step, pursuant to Section 29 of the Central Bank Act (Rep. Act



No. 265, as amended). The closure of BF, therefore, can not be said to have been arbitrary or made in badfaith. There was sufficient justification, considering its inability to meet the heavy withdrawals by its depositorsand to pay its liabilities as they fell due, to forbid the bank from further engaging in banking.

The matter of reopening, reorganization or rehabilitation of BF is not within the competence of this Court toordain but is better addressed to the Monetary Board and the Central Bank considering the latter's enormousinfusion of capital into BF to the tune of approximately P3.5 Billion in total accommodations, after a thoroughassessment of whether or not BF is, indeed, possessed, as it stoutly contends, of sufficient assets andcapabilities with which to repay such huge indebtedness, and can operate without loss to its many depositorsand creditors.

GRIÑO-AQUINO, J., dissenting:

Although these nine (9) Banco Filipino (BF) cases have been consolidated under one ponencia, all of themexcept one, raise issues unrelated to the receivership and liquidation of said bank. In fact, two of these cases(G.R. No. 68878 and 81303) have already been decided by this Court and are only awaiting the resolution ofthe motions for reconsideration filed therein. Only G.R. No. 70054 "Banco Filipino Savings and Mortgage Bank(BF) vs. the Monetary Board (MB), Central Bank of the Philippines (CB), et al.," is an original action for

mandamus andcertiorari filed in this Court by former officials of BF to annul the Monetary Board Resolution No.75 dated January 25, 1985 (ordering the closure of Banco Filipino [BF] and appointing Carlota Valenzuela asreceiver of the bank) on the ground that the resolution was issued "without affording BF a hearing on thereports" on which the Monetary Board based its decision to close the bank, hence, without "administrative dueprocess.", The prayer of the petition reads:

WHEREFORE, petitioner respectfully prays that a writ of mandamus be issued commandingrespondents immediately to furnish it copies of the reports of examination of BF employed byrespondent Monetary Board to support its Resolution of January 25, 1985 and thereafter toafford it a hearing prior to any resolution that may be issued under Section 29 of R.A. 265,meanwhile annulling said Resolution of January 25, 1985 by writ of certiorari as made withoutor in excess ofjurisdiction or with grave abuse of discretion.

So as to expedite proceedings, petitioner prays that the assessment of the damagesrespondents should pay it be deferred and referred to commissioners.

Petitioner prays for such other remedy as the Court may deem just and equitable in thepremises.

Quezon City for Manila, February 28, 1985. (p. 8, Rollo I-)

and the prayer of the Supplement to Petition reads:

WHEREFORE, in addition to its prayer for mandamus and certiorari contained in its originalpetition, petitioner respectfully prays that Sections 28-A and 29 of the Central Bank charter(R.A. 265) including its amendatory Presidential Decrees Nos. 72, 1771, 1827 and 1937 be

annulled as unconstitutional.

Quezon City for Manila, March 4, 1985. (p. 11-G, Rollo I.)

The other eight (8) cases merely involve transactions of BF with third persons and certain "related"corporations which had defaulted on their loans and sought to prohibit the extrajudicial foreclosure of themortgages on their properties by the receiver of BF. These eight (8) cases are:



1. G.R. No. 68878 "BF vs. Intermediate Appellate Court and Celestina Pahimutang" involves the repossessionby BF of a house and lot which the buyer (Pahimutang) claimed to have completely paid for on the installmentplan. The appellate court's judgment for the buyer was reversed by this Court. The buyer's motion forreconsideration is awaiting resolution by this Court;

2. G.R. Nos. 77255-58, "Top Management Programs Corporation and Pilar Development Corporation vs. Court of appeals, et al." (CA-G.R. SP No. 07892) and "Pilar Development Corporation vs. Executive Judge, RTC,Cavite" (CA-G.R. SP Nos. 0896264) is a consolidated petition for review of the Court of Appeals' joint decisiondismissing the petitions for prohibition in which the petitioners seek to prevent the receiver/liquidator of BF fromextrajudicially foreclosing the P4.8 million mortgage on Top Management's properties and the P18-67 millionmortgage on Pilar Development properties. The Court of Appeals dismissed the petitions on October 30, 1986on the ground that "the functions of the liquidator, as receiver under Section 29 (R.A. 265), include takingcharge of the insolvent's assets and administering the same for the benefit of its creditors and of bringing suitsand foreclosing mortgages in the name of the bank;"

3. G.R. No. 78766, "El Grande Corporation vs. Court of Appeals, et al.," is an appeal from the Court of Appeals'decision in CA-G.R. SP No. 08809 dismissing El Grande's petition for prohibition to prevent the foreclosure ofBF's P8 million mortgage on El Grande's properties;

4. G.R. No. 78894, "Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, et al." is an appeal of

BFs old management (using the name of BF) from the decision of the Court of Appeals in CA-G.R. SP No.07503 entitled, "Central Bank, et al. vs. Judge Zoilo Aguinaldo, et al" dismissing the complaint of "BF" to annulthe receivership, for no suit may be brought or defended in the name of the bank except by its receiver;

5. G.R. No. 87867, "Metropolis Development Corporation vs. Court of Appeals" (formerly AC-G.R. No. 07503,"Central Bank, et al. vs. Honorable Zoilo Aguinaldo, et al.') is an appeal of the intervenor (Metropolis) from thesame Court of Appeals' decision subject of G.R. No. 78894, which also dismissed Metropolis' complaint inintervention on the ground that a stockholder (Metropolis) may not bring suit in the name of BF while the latteris under receivership, without the authority of the receiver;

6. G.R. No. 81303, "Pilar Development Corporation vs. Court of Appeals, et al." is an appeal from the decisiondated October 22, 1987 of the Court of Appeals in CA-G.R. SP No. 12368, "Pilar Development Corporation, etal. vs. Honorable Manuel Cosico, et al.," dismissing the petition for certiorari against Judge Manuel Cosico, Br.

136, RTC, Makati, who dismissed the complaint filed by Pilar Development Corporation against BF, for specificperformance of certain developer contracts. An answer filed by Norberto Quisumbing and Associates, as BF'ssupposed counsel, virtually confessed judgment in favor of Pilar Development. On motion of the receiver, theanswer was expunged and the complaint was dismissed. On a petition for certiorari in this Court, we held that:"As liquidator of BF by virtue of a valid appointment from the Central Bank, private respondent CarlotaValenzuela has the authority to direct the operation of the bank in substitution of the former management,which authority includes the retainer of counsel to represent it in bringing or resisting suits in connection withsuch liquidation and, in the case at bar, to take the proper steps to prevent collusion, to the prejudice of thelegitimate creditors, between BF and the petitioners herein which appear to be owned and controlled by thesame interest controlling BF" (p. 49, Rollo). The petitioners' motion for reconsideration of that decision ispending resolution.

7. G.R. No. 81304, "BF Homes Development Corporation vs. Court of Appeals, et al." is an appeal from thedecision dated November 4, 1987 of the Court of Appeals in CA-G.R. CV No. 08565 affirming the trial court's

order dismissing BF Homes' action to compel the Central Bank to restore the financing facilities of BF, becausethe plaintiff (BF Homes) has no cause of action against the CB.

8. G.R. No. 90473, "El Grande Development Corporation vs. Court of Appeals, et al.," is a petition to review thedecision dated June 6, 1989 in CA-G.R. SP No. 08676 dismissing El Grande's petition for prohibition to stopforeclosure proceedings against it by the receiver of BF.

As previously stated, G.R. No. 70054 "BF vs. Monetary Board, et al.," is an original special civil actionfor certiorari and mandamus filed in this Court by the old management of BF, through their counsel, N.J.Quisumbing & Associates, using the name of the bank and praying for the annulment of MB Resolution No. 75



which ordered the closure of BF and placed it under receivership. It is a "forum-shopping" case because it wasfiled here on February 28, 1985 three weeks after they had filed on February 2, 1985 Civil Case No. 9675"Banco Filipino vs. Monetary Board, et al." in the Regional Trial Court of Makati, Br. 143 (presided over byJudge Zoilo Aguinaldo) for the same purpose of securing a declaration of the nullity of MB Resolution No. 75dated January 25, 1985.

On August 25, 1985, this Court ordered the transfer and consolidation of Civil Case No. 9676 (to annul thereceivership) from Br. 143 to Br. 136 (Judge Manuel Cosico) of the Makati Regional Trial Court where CivilCase No. 8108 (to annul the conservatorship) and Civil Case No. 10183 (to annul the liquidation) of BF wereand are still pending. All these three (3) cases were archived on June 30, 1988 by Judge Cosico pending theresolution of G.R. No. 70054 by this Court.

Because of my previous participation, as a former member of the Court of Appeals, in the disposition of AC-G.R. No. 02617 (now G.R. No. 68878) and AC-G.R. SP No. 07503 (now G.R. Nos. 78767 and 78894), I amtaking no part in G.R. Nos. 68878, 78767 and 78894. It may be mentioned in this connection that neither in AC-G.R. SP No. 02617, nor in AC-G.R. SP No. 07503, did the Court of Appeals rule on the constitutionality ofSections 28-A and 29 of Republic Act 265 (Central Bank Act), as amended, and the validity of MB ResolutionNo. 75, for those issues were not raised in the Court of Appeals.

I concur with the ponencia insofar as it denies the motion for reconsideration in G.R. No. 81303, and dismisses

the petitions for review in G.R. Nos. 77255-58, 78766, 81304, and 90473.

I respectfully dissent from the majority opinion in G.R. No. 70054 annulling and setting aside MB ResolutionNo. 75 and ordering the respondents, Central Bank of the Philippines and the Monetary Board—

to reorganize petitioner Banco Filipino Savings and Mortgage Bank, and allow the latter toresume business in the Philippines under the comptrollership of both the Central Bank and theMonetary Board and under such conditions as may be prescribed by the latter until such timethat petitioner bank can continue in business with safety to its creditors, depositors and thegeneral public.

for I believe that this Court has neither the authority nor the competence to determine whether or not, andunder what conditions, BF should be reorganized and reopened. That decision should be made by the Central

Bank and the Monetary Board, not by this Court.

All that we may determine in this case is whether the actions of the Central Bank and the Monetary Board inclosing BF and placing it under receivership were "plainly arbitrary and made in bad faith.

Section 29 of Republic Act No. 265 provides:

Section 29. Proceedings upon insolvency. —Whenever, upon examination by the head of the appropriate supervising and examining department or his examiners or agents into the condition of any banking institution, it shall be disclosed that the condition of the same is one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the department head concerned forthwith, in writing, toinform the Monetary Board of the facts, and the Board may, upon finding the statements of the

department head to be true, forbid the institution to do business in the Philippines and shalldesignate an official of the Central Bank as receiver to immediately take charge of its assetsand liabilities, as expeditiously as possible collect and gather all the assets and administer thesame for the benefit of its creditors, exercising all the powers necessary for these purposesincluding, but not limited to, bringing suits and foreclosing mortgages in the name of thebanking institution.

The Monetary Board shall thereupon determine within sixty days whether the institution maybe reorganized or otherwise placed in such a condition so that it may be permitted to resumebusiness with safety to its depositors and creditors and the general public and shall prescribe



the conditions under which such resumption of business shall take place as well as the timefor fulfillment of such conditions. In such case, the expenses and fees in the collection andadministration of the assets of the institution shall be determined by the Board and shall bepaid to the Central Bank out of the assets of such banking institution.

If the Monetary Board shall determine and confirm within the said period that the bankinginstitution is insolvent or cannot resume business with safety to its depositors, creditors andthe general public, it shall, if the public interest requires, order its liquidation, indicate themanner of its liquidation and approve a liquidation plan. The Central Bank shall, by theSolicitor General, file a petition in the Court of First Instance, reciting the proceedings whichhave been taken and praying the assistance of the court in the liquidation of the bankinginstitutions. The court shall have jurisdiction in the same proceedings to adjudicate disputedclaims against the bank and enforce individual liabilities of the stockholders and do all that isnecessary to preserve the assets of the banking institution and to implement the liquidationplan approved by the Monetary Board. The Monetary Board shall designate an official of theCentral Bank as liquidator who shall take over the functions of the receiver previouslyappointed by the Monetary Board under this section. The liquidator shall, with all convenientspeed, convert the assets of the banking institution to money or sell, assign or otherwisedispose of the same to creditors and other parties for the purpose of paying the debts of suchbank and he may, in the name of the banking institution, institute such actions as may benecessary in the appropriate court to collect and recover accounts and assets of the bankinginstitution.

The provisions of any law to the contrary notwithstanding, the actions of the Monetary Board under this section and the second paragraph of Section 34 of this Act shall be final and executory, and can be set aside by the court only if there is convincing proof that theaction is plainly arbitrary and made in bad faith. No restraining order or injunction shall be issued by thecourt enjoining the Central Bank from implementing its actions under this section and thesecond paragraph of Section 34 of this Act, unless there is convincing proof that the action ofthe Monetary Board is plainly arbitrary and made in bad faith and the petitioner or plaintiff fileswith the clerk or judge of the court in which the action is pending a bond executed in favor ofthe Central Bank, in an amount to be fixed by the court. The restraining order or injunctionshall be refused or, if granted, shall be dissolved upon filing by the Central Bank of a bond,which shall be in the form of cash or Central Bank cashier's check, in an amount twice the

amount of the bond of the petitioner or plaintiff, conditioned that it will paythe which thepetitioner or plaintiff may suffer by the refusalor the dissolution of the injunction. Theprovisions of Rule 58 of the new Rules of Court insofar as they are applicable and notinconsistent with the provisions of this section shall govern the issuance and dissolution of therestraining order or injunction contemplated in this section.

Insolvency, under this Act, shall be understood to mean the inability of a banking institution to pay its liabilities as they fall due in the usual and ordinary course of business, provided,however, that this shall not include the inability to pay of an otherwise non-insolvent bankcaused by extra-ordinary demands induced by financial panic commonly evidenced by a runon the banks in the banking community.

The determinative factor in the closure, receivership, and liquidation of a bank is the finding, upon examinationby the SES of the Central Bank, that its condition "is one of insolvency, or that its continuance in business

would involve probable loss to its depositors and creditors." (Sec. 29, R.A. 265.) It should be pointed out thatinsolvency is not the only statutory ground for the closure of a bank. The other ground is when "its continuancein business would involve probable loss to its depositors and creditors.

Was BF insolvent i.e., unable to pay its liabilities as they fell due in the usual and ordinary course of business,on and for some time before January 25, 1985 when the Monetary Board issued Resolution No. 75 closing thebank and placing it under receivership? Would its continued operation involve probable loss to its depositorsand creditors?



The answer to both questions is yes. Both the conservator Gilberts Teodoro and the head of the SES(Supervision and Examination Sector) Ramon V. Tiaoqui opined that BF's continuance in business wouldcause probable loss to depositors and creditors. Tiaoqui further categorically found that BF was insolvent. Whywas this so?

The Teodoro and Tiaoqui reports as well as the report of the receivers, Carlota Valenzuela, Arnulfo B.Aurellano and Ramon V. Tiaoqui, showed that since the end of November 1983 BF had already been incurring"chronic reserve deficiencies' and experiencing severe liquidity problems. So much so, that it had become "asubstantial borrower in the call loans market" and in June 1984 it obtained a P30 million emergency loan fromthe Central Bank. (p. 2, Receiver's Report.) Additional emergencyt loans (a total of P119.7 millions) wereextended by the Central Bank to BF that month (MB Res. No. 839 dated June 29,1984). On July 12, 1984, BFschairman, Anthony Aguirre, offered to "turn over the administration of the affairs of the bank" to the CentralBank (Aguirre's letter to Governor Jose Fernandez, Annex 7 of Manifestation dated May 3,1991). On July23,1984, unable to meet heavy deposit withdrawals, BF's management motu proprio, without obtaining theconformity of the Central Bank, closed the bank and declared a bank holiday. On July 27, 1984, the CB,responding to BFs pleas for additional financial assistance, granted BF a P3 billion credit line (MB Res. No. 934of July 27, 1984) to enable it to reopen and resume business on August 1, 1984. P2.3601 billions of the creditline were availed of by the end of 1984 exclusive of an overdraft of P932.4 millions (p. 2, Tiaoqui Report). Totalaccommodations granted to BF amounted to P3.4122 billions (p. 19, Cosico Report).

Presumably to assure that the financial assistance would be properly used, the MB appointed BasilioEstanislao as conservator of the bank. A conservatorship team of 78 examiners and accountants was assignedat the bank to keep track of its activities and ascertain its financial condition (p. 8, Tiaoqui Report).

Estanislao resigned after two weeks for health reasons. He was succeeded by Gilberto Teodoro as conservatorin August, 1984 up to January 8, 1985.

Besides the conservatorship team, Teodoro hired financial consultants Messrs. Tirso G. Santillan, Jr. andPlorido P. Casuela to make an analysis of BF's financial condition. Teodoro also engaged the accounting firmof Sycip, Gorres, Velayo and Company to make an asset evaluation. The Philippine Appraisal Company (PAC)appraised BFs real estate properties, acquired assets, and collaterals held. On January 9, 1985, Teodorosubmitted his Report. Three weeks later, on January 23, 1985, Tiaoqui also submitted his Report. Both reportsshowedthat, in violation of Section 37 of the General Banking Act (R.A.337): 2

1. BF had been continually deficient in liquidity reserves (Teodoro Report).The bank had been experiencing a severe drop in liquidity levels. The ratio of liquid assets to deposits and borrowings plunged from about 20% at end- 1983, to about 8.6% by end-May 1984, much below the statutoryrequirements of 24% for demand deposits/deposit substitutes and 14% forsavings and time deposits. (p. 2, Tiaoqui Report.)

2. Deficiencies in average daily legal reserves rose from P63.0 million duringthe week of November 21-25, 1983 to a high of P435.9 million during theweek of June 11-15, 1984 (pp. 2-3, Tiaoqui Report). Accumulated penaltieson reserve deficiencies amounted to P37.4 million by July 31, and rose toP48 million by the end of 1984. (Tiaoqui Report.)

3. Deposit levels, which were at P3,845 million at end-May l984 (its last"normal" month), dropped to P935 million at the end of November 1984 or aloss of P2,910 million. This represented an average monthly loss of P485million vs. an average monthly gain of P26 million during the first 5 months of1984. (pp. 2-3, Tiaoqui Report.)

4. Deposits had declined at the rate of P20 million during the month ofDecember 1984, but expenses of about P17 million per month were requiredto maintain the bank's operation. (p. 6, Teodoro Report.)



5. Based on the projected outlook, the Bank's average yield on assets of16.3% p.a., was insufficient to meet the average cost of funds of 19.5% p.a.and operating expenses of 4.8% p.a. (p. 5 Teodoro Report.)

6. An imprudently large proportion of assets were locked into long-termapplications. (Teodoro Report.)

7. BF overextended itself in lending to the real estate industry,committing as much as 52% of its peso deposits to its affiliates or"related accounts" to which it continued lending even when it was alreadysuffering from liquidity stresses. (Teodoro Report.) This was done inviolation of Section 38 of the General Banking Act (R.A. 337). 3

8. During the period of marked decline in liquidity levels the loanportfolio grew by P417.3 million in the first five months of 1984— and byanother P105.l million in the next two months. (pp. 2-3, Tiaoqui Report.)

9. The loan portfolio stood at P3.679 billion at the end of July 1984,56.2% of it channeled to companies whose stockholders, directors and

officers were related to the officers, directors, and some stockholders ofBF. (p. 8, Tiaoqui Report.) Here again BF violated the General BankingAct (R.A. 337). 4

10. Some of the loans were used to acquire preferred stocks of BF. BetweenSeptember 17, 1983 and February 10, 1984, P49.9 million of preferred non-convertible stocks were issued. About 85% or P42.4 million was paid out ofthe proceeds of loans to stockholders/ borrowers with relationship to thebank (Annex D). Around P18.8 million were issued in the name of an entityother than the purchaser of the stocks. (Tiaoqui Report.)

11. Loans amounting to some P69.3 million were granted simply to pay-offold loans including accrued interest, as an accommodation for the directmaturing loans of some firms and as a way of paying-off loans of otherborrower firms which have their own credit lines with the bank. These helpedto make otherwise delinquent loans appear "current" and deceptively"improved" the quality of the loan portfolio. (Tiaoqui Report.)

12. Examination of the collaterals for the loan accounts of 63 majorborrowers and 32 other selected borrowers as of July 31, 1984, showed that:

(a) 2,658 TCT's which BF evaluated to be worth P1,487million were appraised by PAC to be worth only P1,196million, hence, deficient by P291 million.

(b) Other properties (collaterals) supposedly worth P711million could not be evaluated by PAC because the details

submitted by the bank were insufficient;

(c) While P674 million in loans were supposedly guaranteedby the Home Financing Corporation (HFIC), the latterconfirmed only P427 million. P247 million in loans were notguaranteed by HFC. (Teodoro Report.)

(d) Per SGV's report, loans totalling P1.882 million includingaccrued interest, were secured by collateral worth only



Pl.54 billion. Hence, BFs unsecured exposure amounted toP586.2 million. BF Homes, Inc., a related company whichhas filed with the SEC a petition for suspension ofpayments, owes P502 million to BF.

13. BF had been suffering heavy losses. —

a) For the eleven (11) months ended November 30, 1984,the estimated net loss was P372.6 Million ;

b) For the twelve (12) months from November 1984, theprojected net loss would be P390.7 Million and wouldcontinue unabated; (p. 2, Teodoro Report)

c) Around 71.7% of the total accommodations of P2.0677billions to the related/linked entities were adverselyclassified. Close to 33.7% or P697.1 millions were cleanloans or against PNs (promissory notes) of these entities.Of the latter, 52.6% were classified as loss." (P. 5, TiaoquiReport.)

d) The bank's financial condition as of date of examination, after setting up the additional valuationreserves of P612.2 millions and accumulated net loss ofP48.2 millions, indicates one of insolvency. Total liabilitiesof P5,282.1 million exceeds total assets of P4,947.2 millionby 6.8%. Total capital account of P334.9 million) is deficientby P322.7 million against the minimum capital required ofP657.6 million (Annex F). Capital to risk assets ratio isnegative 10.38%.

e) Total loans and investment portfolio amounted toP3,914.3 millions (gross), of which P194.0 millions or 5.0%

were past due and P1,657.1 millions or 42.3% wereadversely classified (Substandard— P1,011.4 millions;Doubtful— P274.6 millions and Loss — P371.1 millions).Accounts adversely classified included unmatured loan ofPl,482.0 million to entities related with each other and to thebank, several of which showed distressed conditions. (p. 7,Tiaoqui Report.)

Teodoro's conclusion was that "the continuance of the bank in business would involve probable loss to itsdepositors and creditors." He recommended "that the Monetary Board take a more effective and responsibleaction to protect the depositors and creditors ... in the light of the bank's worsening condition." (p. 5, TeodoroReport.)

On January 23, 1985, Tiaoqui submitted his report to the Monetary Board, Like Teodoro, Tiaoqui believed thatthe principal cause of the bank's failure was that in violation of the General Banking Law and CB rules andregulations, BF's major stockholders, directors and officers, through their "related" companies: (i.e. companiesowned or controlled by them of their relatives) had been "borrowing" huge chunks of the money of thedepositors. His Conclusion and Recommendations were:

The Conservator, in his report to the Monetary Board dated January 8, 1985, has stated thatthecontinuance of the bank in business would involve probable loss to its depositors and creditors . It has recommended that a more effective action be taken to protect depositors andcreditors.



The examination findings as of July 31, 1984 as shown earlier, indicate one of insolvency andilliquidity and further confirms the above conclusion of the Conservator.

All the foregoing provides sufficient justification for forbidding the bank from further engaging in banking .


1. Forbid the Banco Filipino Savings & Mortgage Bank to dobusiness in the Philippines effective the beginning of officeon January, 1985, pursuant to Sec. 29 of R.A. No. 265, asamended;

2. Designate the Head of the Conservator Team at thebank, as Receiver of Banco Filipino Savings & MortgageBank, to immediately take charge of the assets andliabilities, as expeditiously as possible collect and gather allthe assets and administer the same for the benefit of all thecreditors, and exercise all the powers necessary for thesepurposes including but not limited to bringing suits and

foreclosing mortgages in the name of the bank.

3. The Board of directors and the principal officers fromSenior Vice President, as listed in the attached Annex "A"be included in the watchlist of the Supervision andExamination Sector until such time that they shall havecleared themselves.

4. Refer to the Central Banles Legal Department and Officeof Special Investigation the report on the findings on BancoFilipino for investigation and possible prosecution ofdirectors, officers and employees for activities which led toits insolvent position." (pp. 9-10, Tiaoqui Report.)

On January 25, 1985 or two days after the submission of Tiaoqui's Report, and three weeks after it receivedTeodoro's Report, the Monetary Board, then composed of:

Chairman: Jose B. Fernandez, Jr.CB Governor

Members:

1. Cesar E.A. Virata, Prime Minister & Concurrently Minister of Finance

2. Roberto V. Ongpin, Minister of Trade & Industry & Chairman of Board ofInvestment

3. Vicente B. Valdepeñas, Jr., Minister of Economic Planning & DirectorGeneral of NEDA

4. Cesar A. Buenaventura, President of Filipinas Shell Petroleum Corp. (p.37, Annual Report 1985)

issued Resolution No. 75 closing BF and placing it under receivership. The MB Resolution reads as follows:



After considering the report dated January 8, 1985 of the Conservator for Banco FilipinoSavings and Mortgage Bank that the continuance in business of the bank would involveprobable loss to its depositors and creditors, and after discussing and finding to be true thestatements of the Special Assistant to the Governor and Head, Supervision and ExaminationSector (SES) Department II, as recited in his memorandum dated January 23, 1985. that theBanco Filipino Savings and Mortgage Bank is insolvent and that its continuance in businesswould involve probable loss to its depositors and creditors, and in pursuance of Section 29 of

R.A. No. 265, as amended, the Board decided:

1. To forbid Banco Filipino Savings and Mortgage Bank andall its branches to do business in the Philippines;

2. To designate Mrs. Carlota P. Valenzuela, DeputyGovernor, as Receiver who is hereby directly vested with

jurisdiction and authority to immediately take charge of thebank's assets and liabilities, and as expeditiously aspossible collect and gather all the assets and administer thesame for the benefit of its creditors, exercising all the-powers necessary for these purposes including, but notlimited to, bringing suits and foreclosing mortgages in the

name of the bank;

3. To designate Mr. Arnulfo B. Aurellano, Special Assistantto the Governor, and Mr. Ramon V. Tiaoqui, SpecialAssistant to the Governor and Head, Supervision andExamination Sector Department II. as Deputy Receiverswho are likewise hereby directly vested with jurisdiction andauthority to do all things necessary or proper to carry outthe functions entrusted to them by the Receiver andotherwise to assist the Receiver in carrying out thefunctions vested in the Receiver by law or Monetary Boardresolutions;

4. To direct and authorize Management to do all other

things and carry out all other measures necessary or properto implement this Resolution and to safeguard the interestsof depositors/credition and the general public; and

5. In consequence of the foregoing, to terminate theconservatorship over Banco Filipino Savings and MortgageBank. (pp. 126-127, Rollo I.)

On March 19,1985, the receiver, Carlota Valenzuela, and the deputy receivers, Arnulfo B. Aurellano andRamon V. Tiaoqui, submitted a report to the Monetary Board as required in Section 29, 2nd paragraph of R.A.265 which provides that within sixty (60) days from date of the receivership, the Monetary Board shalldetermine whether the bank may be reorganized and permitted to resume business, or be liquidated. Thereceivers recommended that BF be placed under litigation. For, among other things, they found that:

1. BF had been suffering a capital deficiency of P336.5 million as of July 31, 1984 (pp. 2 and 4, Receivers'Report).

2. The bank's weekly reserve deficiencies averaged P146.67 million from November 25, 1983 up to March 16,1984, rising to a peak of P338.09 million until July 27, 1984. Its reserve deficiencies against deposits anddeposit substitutes began on the week ending June 15, 1984 up to December 7, 1984, with average dailyreserve deficiencies of P2.98 million.



3. Estimated losses or "unhooked valuation reserves" for loans to entities with relationships to certainstockholder/directors and officers of the bank amounted to P600.5 million. Combined with other adjustments inthe amount of P73.2 million, they will entirely wipe out the bank's entire capital account and leave a capitaldeficiency of P336.5 million. The bank was already insolvent on July 31, 1984. The capital deficiency increasedto P908.4 million as of January 26, 1985 on account of unhooked penalties for deficiencies in legal reserves(P49.07 million), unhooked interest on overdrawings, emergency advance of P569.49 million from CentralBank, and additional valuation reserves of P124.5 million. (pp. 3-4, Receivers' Report.)

The Receivers further noted that —

After BF was closed as of January 25, 1985, there were no collections from loans granted tofirms related to each other and to BF classified as "doubtful" or "loss," there were nosubstantial improvements on other loans classified "doubtful"or "loss;" there was no furtherincrease in the value of assets owned/acquired supported by new appraisals and there wasno infusion of additional capital such that the estimated realizable assets of BF remained atP3,909.23, (millions) while the total liabilities amounted to P5,159.44 (millions). Thus, BFremains insolvent with estimated deficiency to creditors of Pl,250.21 (millions).

Moreover, there were no efforts on the part of the stockholders of the bank to improve itsfinancial condition and the possibility of rehabilitation has become more remote. (P. 8,

Receivers' Report.)

In the light of the results of the examination of BF by the Teodoro and Tiaoqui teams, I do not find that the CB'sResolution No. 75 ordering BF to cease banking operations and placing it under receivership was "plainlyarbitrary and made in bad faith." The receivership was justified because BF was insolvent and its continuancein business would cause loss to its depositors and creditors. Insolvency, as defined in Rep. Act 265, means 'theinability of a banking institution to pay its liabilities as they fall due in the usual and ordinary course of business.Since June 1984, BF had been unable to meet the heavy cash withdrawals of its depositors and pay itsliabilities to its creditors, the biggest of them being the Central Bank, hence, the Monetary Board correctly foundits condition to be one of insolvency.

All the discussion in the Santiago Report concerning the bank's assets and liabilities as determinants of BF'ssolvency or insolvency is irrelevant and inconsequential, for under Section 29 of Rep. Act. 265, a bank's

insolvency is not determined by its excess of liabilities over assets, but by its "inability to pay its liabilities asthey fall due in the ordinary course of business" and it was abundantly shown that BF was unable to pay itsliabilities to depositors for over a six-month-period before it was placed under receivership.

Even if assets and liabilities were to be factored into a formula for determining whether or not BF was alreadyinsolvent on or before January 25, 1985, the result would be no different. The bank's assets as of the end of1984 amounted to P4.891 billions (not P6 billions) according to the Report signed and submitted to the CB byBF's own president, and its total liabilities were P4.478 billions (p. 58, Cosico Report). While Aguirre's Reportshowed BF ahead with a net worth of P412.961 millions, said report did not make any provision for estimatedvaluation reserves amounting to P600.5 millions, (50% of face value of doubtful loans and 100% of face valueof loss accounts) which BF had granted to its related/linked companies. The estimated valuation reserves ofP600.5 millions plus BF's admitted liabilities of P4.478 billions, put together, would wipe out BFs realizableassets of P4.891 billions and confirm its insolvent condition to the tune of P187.538 millions.

BF's and Judge (now CA Justice) Consuelo Y. Santiago's argument that valuation reserves should not beconsidered because the matter was not discussed by Tiaoqui with BF officials is not well taken for:

(1) The records of the defaulting debtors were in the possession of BF.

(2) The "adversely classified" loans were in fact included in the List of Exceptions and Findings (of irregularitiesand violations of laws and CB rules and regulations) prepared by the SES, a copy of which was furnished BFon December 1 7, 1984;



(3) A conference on the matter washeld on January 2l, 1985 with senior officials of BF headed by EVP F.Dizon,. (pp. 14-15, Cosico Report.) BF did not formally protest against the CBs estimate of valuation reserves.The CB could not wait forever for BF to respond for the CB had to act with reasonable promptness to protectthe depositors and creditors of BF because the bank continued to operate.

(4) Subsequent events proved correct the SES classification of the loan accounts as "doubtful" or "loss'because as of January 25, 1985 none of the loans, except three, had been paid either partially or in full, even ifthey had already matured (p. 53, Cosico Report).

The recommended provision for valuation reserves of P600.5 millions for "doubtful" and "loss" accounts was aproper factor to consider in the capital adjustments of BF and was in accordance with accounting rules. For, ifthe uncollectible loan accounts would be entered in the assets column as "receivables," without acorresponding entry in the liabilities column for estimated losses or valuation reserves arising from theiruncollectability, the result would be a gravely distorted picture of the financial condition of BF.

BF's strange argument that it was not insolvent for otherwise the CB would not have given it financialassistance does not merit serious consideration for precisely BF needed financial assistance because it wasinsolvent.

Tiaoqui's admission that the examination of BF had "not yet been officially terminated" when he submitted his

report on January 23, 1985 did not make the action of the Monetary Board of closing the bank and appointingreceivers for it, 'plainly arbitrary and in bad faith." For what had been examined by the SES was more thanenough to warrant a finding that the bank was "insolvent and could not continue in business without probableloss to its depositors or creditors," and what had not been examined was negligible and would not havematerially altered the result. In any event, the official termination of the examination with the submission by theChief Examiner of his report to the Monetary Board in March 1985, did not contradict, but in fact confirmed, thefindings in the Tiaoqui Report.

The responsibility of administering the Philippine monetary and banking systems is vested by law in the CentralBank whose duty it is to use the powers granted to it under the law to achieve the objective, among others, ofmaintaining monetary stability in the country (Sec. 2, Rep. Act 265). I do not think it would be proper andadvisable for this Court to interfere with the CB's exercise of its prerogative and duty to discipline banks whichhave persistently engaged in illegal, unsafe, unsound and fraudulent banking practices causing tremendous

losses and unimaginable anxiety and prejudice to depositors and creditors and generating widespread distrustand loss of confidence in the banking system. The damage to the banking system and to the depositing publicis bigger when the bank, like Banco Filipino, is big. With 89 branches nationwide, 46 of them in Metro Manilaalone, pumping the hard-earned savings of 3 million depositors into the bank, BF had no reason to go bankruptif it were properly managed. The Central Bank had to infuse almost P3.5 billions into the bank in its endeavor tosave it. But even this financial assistance was misused, for instead of satisfying the depositors' demands forthe withdrawal of their money, BF channeled and diverted a substantial portion of the finds into the coffers of itsrelated/linked companies. Up to this time, its officers, directors and major stockholders have neither repaid theCentral Bank's P3.6 billion financial assistance, nor put up adequate collaterals therefor, nor submitted acredible plan for the rehabilitation of the bank. What authority has this Court to require the Central Bank toreopen and rehabilitate the bank, and in effect risk more of the Government's money in the moribund bank? Irespectfully submit that decision is for the Central Bank, not for this Court, to make.

WHEREFORE, I vote to dismiss the petition for certiorari and mandamus in G.R. No. 70054 for lack of merit.

Romero, J., concurs.

# Separate Opinions



MELENCIO-HERRERA, J., dissenting:

I join Mme. Justice Carolina G. Aquino in her dissent and vote to deny the prayer, in G.R. No. 70054, to annulMonetary Board Resolution No. 75 placing Banco Filipino (BF) under receivership.

Even assuming that the BF was not, as alleged, in a literal state of insolvency at the time of the passage of said

Resolution, there was a finding in the Teodoro report that, based on that Bank's illiquidity, to have allowed it tocontinue in operation would have meant probable loss to depositors and creditors. That is also a ground forplacing the bank under receivership, as a first step, pursuant to Section 29 of the Central Bank Act (Rep. ActNo. 265, as amended). The closure of BF, therefore, can not be said to have been arbitrary or made in badfaith. There was sufficient justification, considering its inability to meet the heavy withdrawals by its depositorsand to pay its liabilities as they fell due, to forbid the bank from further engaging in banking.

The matter of reopening, reorganization or rehabilitation of BF is not within the competence of this Court toordain but is better addressed to the Monetary Board and the Central Bank considering the latter's enormousinfusion of capital into BF to the tune of approximately P3.5 Billion in total accommodations, after a thoroughassessment of whether or not BF is, indeed, possessed, as it stoutly contends, of sufficient assets andcapabilities with which to repay such huge indebtedness, and can operate without loss to its many depositorsand creditors.

GRIÑO-AQUINO, J., dissenting:

Although these nine (9) Banco Filipino (BF) cases have been consolidated under one ponencia, all of themexcept one, raise issues unrelated to the receivership and liquidation of said bank. In fact, two of these cases(G.R. No. 68878 and 81303) have already been decided by this Court and are only awaiting the resolution ofthe motions for reconsideration filed therein. Only G.R. No. 70054 "Banco Filipino Savings and Mortgage Bank(BF) vs. the Monetary Board (MB), Central Bank of the Philippines (CB), et al.," is an original action formandamus andcertiorari filed in this Court by former officials of BF to annul the Monetary Board Resolution No.75 dated January 25, 1985 (ordering the closure of Banco Filipino [BF] and appointing Carlota Valenzuela asreceiver of the bank) on the ground that the resolution was issued "without affording BF a hearing on thereports" on which the Monetary Board based its decision to close the bank, hence, without "administrative due

process.", The prayer of the petition reads:

WHEREFORE, petitioner respectfully prays that a writ of mandamus be issued commandingrespondents immediately to furnish it copies of the reports of examination of BF employed byrespondent Monetary Board to support its Resolution of January 25, 1985 and thereafter toafford it a hearing prior to any resolution that may be issued under Section 29 of R.A. 265,meanwhile annulling said Resolution of January 25, 1985 by writ of certiorari as made withoutor in excess ofjurisdiction or with grave abuse of discretion.

So as to expedite proceedings, petitioner prays that the assessment of the damagesrespondents should pay it be deferred and referred to commissioners.

Petitioner prays for such other remedy as the Court may deem just and equitable in the

premises.

Quezon City for Manila, February 28, 1985. (p. 8, Rollo I-)

and the prayer of the Supplement to Petition reads:

WHEREFORE, in addition to its prayer for mandamus and certiorari contained in its originalpetition, petitioner respectfully prays that Sections 28-A and 29 of the Central Bank charter



(R.A. 265) including its amendatory Presidential Decrees Nos. 72, 1771, 1827 and 1937 beannulled as unconstitutional.

Quezon City for Manila, March 4, 1985. (p. 11-G, Rollo I.)

The other eight (8) cases merely involve transactions of BF with third persons and certain "related"

corporations which had defaulted on their loans and sought to prohibit the extrajudicial foreclosure of themortgages on their properties by the receiver of BF. These eight (8) cases are:

1. G.R. No. 68878 "BF vs. Intermediate Appellate Court and Celestina Pahimutang" involves the repossessionby BF of a house and lot which the buyer (Pahimutang) claimed to have completely paid for on the installmentplan. The appellate court's judgment for the buyer was reversed by this Court. The buyer's motion forreconsideration is awaiting resolution by this Court;

2. G.R. Nos. 77255-58, "Top Management Programs Corporation and Pilar Development Corporation vs. Court of appeals, et al." (CA-G.R. SP No. 07892) and "Pilar Development Corporation vs. Executive Judge, RTC,Cavite" (CA-G.R. SP Nos. 0896264) is a consolidated petition for review of the Court of Appeals' joint decisiondismissing the petitions for prohibition in which the petitioners seek to prevent the receiver/liquidator of BF fromextrajudicially foreclosing the P4.8 million mortgage on Top Management's properties and the P18-67 millionmortgage on Pilar Development properties. The Court of Appeals dismissed the petitions on October 30, 1986

on the ground that "the functions of the liquidator, as receiver under Section 29 (R.A. 265), include takingcharge of the insolvent's assets and administering the same for the benefit of its creditors and of bringing suitsand foreclosing mortgages in the name of the bank;"

3. G.R. No. 78766, "El Grande Corporation vs. Court of Appeals, et al.," is an appeal from the Court of Appeals'decision in CA-G.R. SP No. 08809 dismissing El Grande's petition for prohibition to prevent the foreclosure ofBF's P8 million mortgage on El Grande's properties;

4. G.R. No. 78894, "Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, et al." is an appeal ofBFs old management (using the name of BF) from the decision of the Court of Appeals in CA-G.R. SP No.07503 entitled, "Central Bank, et al. vs. Judge Zoilo Aguinaldo, et al" dismissing the complaint of "BF" to annulthe receivership, for no suit may be brought or defended in the name of the bank except by its receiver;

5. G.R. No. 87867, "Metropolis Development Corporation vs. Court of Appeals" (formerly AC-G.R. No. 07503,"Central Bank, et al. vs. Honorable Zoilo Aguinaldo, et al.') is an appeal of the intervenor (Metropolis) from thesame Court of Appeals' decision subject of G.R. No. 78894, which also dismissed Metropolis' complaint inintervention on the ground that a stockholder (Metropolis) may not bring suit in the name of BF while the latteris under receivership, without the authority of the receiver;

6. G.R. No. 81303, "Pilar Development Corporation vs. Court of Appeals, et al." is an appeal from the decisiondated October 22, 1987 of the Court of Appeals in CA-G.R. SP No. 12368, "Pilar Development Corporation, etal. vs. Honorable Manuel Cosico, et al.," dismissing the petition for certiorari against Judge Manuel Cosico, Br.136, RTC, Makati, who dismissed the complaint filed by Pilar Development Corporation against BF, for specificperformance of certain developer contracts. An answer filed by Norberto Quisumbing and Associates, as BF'ssupposed counsel, virtually confessed judgment in favor of Pilar Development. On motion of the receiver, theanswer was expunged and the complaint was dismissed. On a petition for certiorari in this Court, we held that:"As liquidator of BF by virtue of a valid appointment from the Central Bank, private respondent CarlotaValenzuela has the authority to direct the operation of the bank in substitution of the former management,which authority includes the retainer of counsel to represent it in bringing or resisting suits in connection withsuch liquidation and, in the case at bar, to take the proper steps to prevent collusion, to the prejudice of thelegitimate creditors, between BF and the petitioners herein which appear to be owned and controlled by thesame interest controlling BF" (p. 49, Rollo). The petitioners' motion for reconsideration of that decision ispending resolution.

7. G.R. No. 81304, "BF Homes Development Corporation vs. Court of Appeals, et al." is an appeal from thedecision dated November 4, 1987 of the Court of Appeals in CA-G.R. CV No. 08565 affirming the trial court's



order dismissing BF Homes' action to compel the Central Bank to restore the financing facilities of BF, becausethe plaintiff (BF Homes) has no cause of action against the CB.

8. G.R. No. 90473, "El Grande Development Corporation vs. Court of Appeals, et al.," is a petition to review thedecision dated June 6, 1989 in CA-G.R. SP No. 08676 dismissing El Grande's petition for prohibition to stopforeclosure proceedings against it by the receiver of BF.

As previously stated, G.R. No. 70054 "BF vs. Monetary Board, et al.," is an original special civil actionfor certiorari and mandamus filed in this Court by the old management of BF, through their counsel, N.J.Quisumbing & Associates, using the name of the bank and praying for the annulment of MB Resolution No. 75which ordered the closure of BF and placed it under receivership. It is a "forum-shopping" case because it wasfiled here on February 28, 1985 three weeks after they had filed on February 2, 1985 Civil Case No. 9675"Banco Filipino vs. Monetary Board, et al." in the Regional Trial Court of Makati, Br. 143 (presided over byJudge Zoilo Aguinaldo) for the same purpose of securing a declaration of the nullity of MB Resolution No. 75dated January 25, 1985.

On August 25, 1985, this Court ordered the transfer and consolidation of Civil Case No. 9676 (to annul thereceivership) from Br. 143 to Br. 136 (Judge Manuel Cosico) of the Makati Regional Trial Court where CivilCase No. 8108 (to annul the conservatorship) and Civil Case No. 10183 (to annul the liquidation) of BF wereand are still pending. All these three (3) cases were archived on June 30, 1988 by Judge Cosico pending the

resolution of G.R. No. 70054 by this Court.

Because of my previous participation, as a former member of the Court of Appeals, in the disposition of AC-G.R. No. 02617 (now G.R. No. 68878) and AC-G.R. SP No. 07503 (now G.R. Nos. 78767 and 78894), I amtaking no part in G.R. Nos. 68878, 78767 and 78894. It may be mentioned in this connection that neither in AC-G.R. SP No. 02617, nor in AC-G.R. SP No. 07503, did the Court of Appeals rule on the constitutionality ofSections 28-A and 29 of Republic Act 265 (Central Bank Act), as amended, and the validity of MB ResolutionNo. 75, for those issues were not raised in the Court of Appeals.

I concur with the ponencia insofar as it denies the motion for reconsideration in G.R. No. 81303, and dismissesthe petitions for review in G.R. Nos. 77255-58, 78766, 81304, and 90473.

I respectfully dissent from the majority opinion in G.R. No. 70054 annulling and setting aside MB Resolution

No. 75 and ordering the respondents, Central Bank of the Philippines and the Monetary Board—

to reorganize petitioner Banco Filipino Savings and Mortgage Bank, and allow the latter toresume business in the Philippines under the comptrollership of both the Central Bank and theMonetary Board and under such conditions as may be prescribed by the latter until such timethat petitioner bank can continue in business with safety to its creditors, depositors and thegeneral public.

for I believe that this Court has neither the authority nor the competence to determine whether or not, andunder what conditions, BF should be reorganized and reopened. That decision should be made by the CentralBank and the Monetary Board, not by this Court.

All that we may determine in this case is whether the actions of the Central Bank and the Monetary Board in

closing BF and placing it under receivership were "plainly arbitrary and made in bad faith.

Section 29 of Republic Act No. 265 provides:

Section 29. Proceedings upon insolvency. —Whenever, upon examination by the head of the appropriate supervising and examining department or his examiners or agents into the condition of any banking institution, it shall be disclosed that the condition of the same is one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the department head concerned forthwith, in writing, toinform the Monetary Board of the facts, and the Board may, upon finding the statements of the



department head to be true, forbid the institution to do business in the Philippines and shalldesignate an official of the Central Bank as receiver to immediately take charge of its assetsand liabilities, as expeditiously as possible collect and gather all the assets and administer thesame for the benefit of its creditors, exercising all the powers necessary for these purposesincluding, but not limited to, bringing suits and foreclosing mortgages in the name of thebanking institution.

The Monetary Board shall thereupon determine within sixty days whether the institution maybe reorganized or otherwise placed in such a condition so that it may be permitted to resumebusiness with safety to its depositors and creditors and the general public and shall prescribethe conditions under which such resumption of business shall take place as well as the timefor fulfillment of such conditions. In such case, the expenses and fees in the collection andadministration of the assets of the institution shall be determined by the Board and shall bepaid to the Central Bank out of the assets of such banking institution.

If the Monetary Board shall determine and confirm within the said period that the bankinginstitution is insolvent or cannot resume business with safety to its depositors, creditors andthe general public, it shall, if the public interest requires, order its liquidation, indicate themanner of its liquidation and approve a liquidation plan. The Central Bank shall, by theSolicitor General, file a petition in the Court of First Instance, reciting the proceedings which

have been taken and praying the assistance of the court in the liquidation of the bankinginstitutions. The court shall have jurisdiction in the same proceedings to adjudicate disputedclaims against the bank and enforce individual liabilities of the stockholders and do all that isnecessary to preserve the assets of the banking institution and to implement the liquidationplan approved by the Monetary Board. The Monetary Board shall designate an official of theCentral Bank as liquidator who shall take over the functions of the receiver previouslyappointed by the Monetary Board under this section. The liquidator shall, with all convenientspeed, convert the assets of the banking institution to money or sell, assign or otherwisedispose of the same to creditors and other parties for the purpose of paying the debts of suchbank and he may, in the name of the banking institution, institute such actions as may benecessary in the appropriate court to collect and recover accounts and assets of the bankinginstitution.

The provisions of any law to the contrary notwithstanding, the actions of the Monetary

Board under this section and the second paragraph of Section 34 of this Act shall be final and executory, and can be set aside by the court only if there is convincing proof that theaction is plainly arbitrary and made in bad faith. No restraining order or injunction shall be issued by thecourt enjoining the Central Bank from implementing its actions under this section and thesecond paragraph of Section 34 of this Act, unless there is convincing proof that the action ofthe Monetary Board is plainly arbitrary and made in bad faith and the petitioner or plaintiff fileswith the clerk or judge of the court in which the action is pending a bond executed in favor ofthe Central Bank, in an amount to be fixed by the court. The restraining order or injunctionshall be refused or, if granted, shall be dissolved upon filing by the Central Bank of a bond,which shall be in the form of cash or Central Bank cashier's check, in an amount twice theamount of the bond of the petitioner or plaintiff, conditioned that it will paythe which thepetitioner or plaintiff may suffer by the refusalor the dissolution of the injunction. Theprovisions of Rule 58 of the new Rules of Court insofar as they are applicable and notinconsistent with the provisions of this section shall govern the issuance and dissolution of the

restraining order or injunction contemplated in this section.

Insolvency, under this Act, shall be understood to mean the inability of a banking institution to pay its liabilities as they fall due in the usual and ordinary course of business, provided,however, that this shall not include the inability to pay of an otherwise non-insolvent bankcaused by extra-ordinary demands induced by financial panic commonly evidenced by a runon the banks in the banking community.



The determinative factor in the closure, receivership, and liquidation of a bank is the finding, upon examinationby the SES of the Central Bank, that its condition "is one of insolvency, or that its continuance in businesswould involve probable loss to its depositors and creditors." (Sec. 29, R.A. 265.) It should be pointed out thatinsolvency is not the only statutory ground for the closure of a bank. The other ground is when "its continuancein business would involve probable loss to its depositors and creditors.

Was BF insolvent i.e., unable to pay its liabilities as they fell due in the usual and ordinary course of business,on and for some time before January 25, 1985 when the Monetary Board issued Resolution No. 75 closing thebank and placing it under receivership? Would its continued operation involve probable loss to its depositorsand creditors?

The answer to both questions is yes. Both the conservator Gilberts Teodoro and the head of the SES(Supervision and Examination Sector) Ramon V. Tiaoqui opined that BF's continuance in business wouldcause probable loss to depositors and creditors. Tiaoqui further categorically found that BF was insolvent. Whywas this so?

The Teodoro and Tiaoqui reports as well as the report of the receivers, Carlota Valenzuela, Arnulfo B.Aurellano and Ramon V. Tiaoqui, showed that since the end of November 1983 BF had already been incurring"chronic reserve deficiencies' and experiencing severe liquidity problems. So much so, that it had become "asubstantial borrower in the call loans market" and in June 1984 it obtained a P30 million emergency loan from

the Central Bank. (p. 2, Receiver's Report.) Additional emergencyt loans (a total of P119.7 millions) wereextended by the Central Bank to BF that month (MB Res. No. 839 dated June 29,1984). On July 12, 1984, BFschairman, Anthony Aguirre, offered to "turn over the administration of the affairs of the bank" to the CentralBank (Aguirre's letter to Governor Jose Fernandez, Annex 7 of Manifestation dated May 3,1991). On July23,1984, unable to meet heavy deposit withdrawals, BF's management motu proprio, without obtaining theconformity of the Central Bank, closed the bank and declared a bank holiday. On July 27, 1984, the CB,responding to BFs pleas for additional financial assistance, granted BF a P3 billion credit line (MB Res. No. 934of July 27, 1984) to enable it to reopen and resume business on August 1, 1984. P2.3601 billions of the creditline were availed of by the end of 1984 exclusive of an overdraft of P932.4 millions (p. 2, Tiaoqui Report). Totalaccommodations granted to BF amounted to P3.4122 billions (p. 19, Cosico Report).

Presumably to assure that the financial assistance would be properly used, the MB appointed BasilioEstanislao as conservator of the bank. A conservatorship team of 78 examiners and accountants was assignedat the bank to keep track of its activities and ascertain its financial condition (p. 8, Tiaoqui Report).

Estanislao resigned after two weeks for health reasons. He was succeeded by Gilberto Teodoro as conservatorin August, 1984 up to January 8, 1985.

Besides the conservatorship team, Teodoro hired financial consultants Messrs. Tirso G. Santillan, Jr. andPlorido P. Casuela to make an analysis of BF's financial condition. Teodoro also engaged the accounting firmof Sycip, Gorres, Velayo and Company to make an asset evaluation. The Philippine Appraisal Company (PAC)appraised BFs real estate properties, acquired assets, and collaterals held. On January 9, 1985, Teodorosubmitted his Report. Three weeks later, on January 23, 1985, Tiaoqui also submitted his Report. Both reportsshowedthat, in violation of Section 37 of the General Banking Act (R.A.337): 2

1. BF had been continually deficient in liquidity reserves (Teodoro Report).The bank had been experiencing a severe drop in liquidity levels. The ratio of

liquid assets to deposits and borrowings plunged from about 20% at end- 1983, to about 8.6% by end-May 1984, much below the statutoryrequirements of 24% for demand deposits/deposit substitutes and 14% forsavings and time deposits. (p. 2, Tiaoqui Report.)

2. Deficiencies in average daily legal reserves rose from P63.0 million duringthe week of November 21-25, 1983 to a high of P435.9 million during theweek of June 11-15, 1984 (pp. 2-3, Tiaoqui Report). Accumulated penaltieson reserve deficiencies amounted to P37.4 million by July 31, and rose toP48 million by the end of 1984. (Tiaoqui Report.)



3. Deposit levels, which were at P3,845 million at end-May l984 (its last"normal" month), dropped to P935 million at the end of November 1984 or aloss of P2,910 million. This represented an average monthly loss of P485million vs. an average monthly gain of P26 million during the first 5 months of1984. (pp. 2-3, Tiaoqui Report.)

4. Deposits had declined at the rate of P20 million during the month ofDecember 1984, but expenses of about P17 million per month were requiredto maintain the bank's operation. (p. 6, Teodoro Report.)

5. Based on the projected outlook, the Bank's average yield on assets of16.3% p.a., was insufficient to meet the average cost of funds of 19.5% p.a.and operating expenses of 4.8% p.a. (p. 5 Teodoro Report.)

6. An imprudently large proportion of assets were locked into long-termapplications. (Teodoro Report.)

7. BF overextended itself in lending to the real estate industry,committing as much as 52% of its peso deposits to its affiliates or"related accounts" to which it continued lending even when it was alreadysuffering from liquidity stresses. (Teodoro Report.) This was done inviolation of Section 38 of the General Banking Act (R.A. 337). 3

8. During the period of marked decline in liquidity levels the loanportfolio grew by P417.3 million in the first five months of 1984— and byanother P105.l million in the next two months. (pp. 2-3, Tiaoqui Report.)

9. The loan portfolio stood at P3.679 billion at the end of July 1984,56.2% of it channeled to companies whose stockholders, directors andofficers were related to the officers, directors, and some stockholders ofBF. (p. 8, Tiaoqui Report.) Here again BF violated the General BankingAct (R.A. 337). 4

10. Some of the loans were used to acquire preferred stocks of BF. BetweenSeptember 17, 1983 and February 10, 1984, P49.9 million of preferred non-convertible stocks were issued. About 85% or P42.4 million was paid out ofthe proceeds of loans to stockholders/ borrowers with relationship to thebank (Annex D). Around P18.8 million were issued in the name of an entityother than the purchaser of the stocks. (Tiaoqui Report.)

11. Loans amounting to some P69.3 million were granted simply to pay-offold loans including accrued interest, as an accommodation for the directmaturing loans of some firms and as a way of paying-off loans of otherborrower firms which have their own credit lines with the bank. These helpedto make otherwise delinquent loans appear "current" and deceptively"improved" the quality of the loan portfolio. (Tiaoqui Report.)

12. Examination of the collaterals for the loan accounts of 63 majorborrowers and 32 other selected borrowers as of July 31, 1984, showed that:

(a) 2,658 TCT's which BF evaluated to be worth P1,487million were appraised by PAC to be worth only P1,196million, hence, deficient by P291 million.



(b) Other properties (collaterals) supposedly worth P711million could not be evaluated by PAC because the detailssubmitted by the bank were insufficient;

(c) While P674 million in loans were supposedly guaranteedby the Home Financing Corporation (HFIC), the latterconfirmed only P427 million. P247 million in loans were notguaranteed by HFC. (Teodoro Report.)

(d) Per SGV's report, loans totalling P1.882 million includingaccrued interest, were secured by collateral worth onlyPl.54 billion. Hence, BFs unsecured exposure amounted toP586.2 million. BF Homes, Inc., a related company whichhas filed with the SEC a petition for suspension ofpayments, owes P502 million to BF.

13. BF had been suffering heavy losses. —

a) For the eleven (11) months ended November 30, 1984,the estimated net loss was P372.6 Million ;

b) For the twelve (12) months from November 1984, theprojected net loss would be P390.7 Million and wouldcontinue unabated; (p. 2, Teodoro Report)

c) Around 71.7% of the total accommodations of P2.0677billions to the related/linked entities were adverselyclassified. Close to 33.7% or P697.1 millions were cleanloans or against PNs (promissory notes) of these entities.Of the latter, 52.6% were classified as loss." (P. 5, TiaoquiReport.)

d) The bank's financial condition as of date of

examination, after setting up the additional valuationreserves of P612.2 millions and accumulated net loss ofP48.2 millions, indicates one of insolvency. Total liabilitiesof P5,282.1 million exceeds total assets of P4,947.2 millionby 6.8%. Total capital account of P334.9 million) is deficientby P322.7 million against the minimum capital required ofP657.6 million (Annex F). Capital to risk assets ratio isnegative 10.38%.

e) Total loans and investment portfolio amounted toP3,914.3 millions (gross), of which P194.0 millions or 5.0%were past due and P1,657.1 millions or 42.3% wereadversely classified (Substandard— P1,011.4 millions;Doubtful— P274.6 millions and Loss — P371.1 millions).Accounts adversely classified included unmatured loan ofPl,482.0 million to entities related with each other and to thebank, several of which showed distressed conditions. (p. 7,Tiaoqui Report.)

Teodoro's conclusion was that "the continuance of the bank in business would involve probable loss to itsdepositors and creditors." He recommended "that the Monetary Board take a more effective and responsibleaction to protect the depositors and creditors ... in the light of the bank's worsening condition." (p. 5, TeodoroReport.)



On January 23, 1985, Tiaoqui submitted his report to the Monetary Board, Like Teodoro, Tiaoqui believed thatthe principal cause of the bank's failure was that in violation of the General Banking Law and CB rules andregulations, BF's major stockholders, directors and officers, through their "related" companies: (i.e. companiesowned or controlled by them of their relatives) had been "borrowing" huge chunks of the money of thedepositors. His Conclusion and Recommendations were:

The Conservator, in his report to the Monetary Board dated January 8, 1985, has stated thatthecontinuance of the bank in business would involve probable loss to its depositors and creditors . It has recommended that a more effective action be taken to protect depositors andcreditors.

The examination findings as of July 31, 1984 as shown earlier, indicate one of insolvency andilliquidity and further confirms the above conclusion of the Conservator.

All the foregoing provides sufficient justification for forbidding the bank from further engaging in banking .


1. Forbid the Banco Filipino Savings & Mortgage Bank to dobusiness in the Philippines effective the beginning of officeon January, 1985, pursuant to Sec. 29 of R.A. No. 265, asamended;

2. Designate the Head of the Conservator Team at thebank, as Receiver of Banco Filipino Savings & MortgageBank, to immediately take charge of the assets andliabilities, as expeditiously as possible collect and gather allthe assets and administer the same for the benefit of all thecreditors, and exercise all the powers necessary for thesepurposes including but not limited to bringing suits andforeclosing mortgages in the name of the bank.

3. The Board of directors and the principal officers fromSenior Vice President, as listed in the attached Annex "A"be included in the watchlist of the Supervision andExamination Sector until such time that they shall havecleared themselves.

4. Refer to the Central Banles Legal Department and Officeof Special Investigation the report on the findings on BancoFilipino for investigation and possible prosecution ofdirectors, officers and employees for activities which led toits insolvent position." (pp. 9-10, Tiaoqui Report.)

On January 25, 1985 or two days after the submission of Tiaoqui's Report, and three weeks after it received

Teodoro's Report, the Monetary Board, then composed of:

Chairman: Jose B. Fernandez, Jr.CB Governor

Members:

1. Cesar E.A. Virata, Prime Minister & Concurrently Minister of Finance



2. Roberto V. Ongpin, Minister of Trade & Industry & Chairman of Board ofInvestment

3. Vicente B. Valdepeñas, Jr., Minister of Economic Planning & DirectorGeneral of NEDA

4. Cesar A. Buenaventura, President of Filipinas Shell Petroleum Corp. (p.37, Annual Report 1985)

issued Resolution No. 75 closing BF and placing it under receivership. The MB Resolution reads as follows:

After considering the report dated January 8, 1985 of the Conservator for Banco FilipinoSavings and Mortgage Bank that the continuance in business of the bank would involveprobable loss to its depositors and creditors, and after discussing and finding to be true thestatements of the Special Assistant to the Governor and Head, Supervision and ExaminationSector (SES) Department II, as recited in his memorandum dated January 23, 1985. that theBanco Filipino Savings and Mortgage Bank is insolvent and that its continuance in businesswould involve probable loss to its depositors and creditors, and in pursuance of Section 29 ofR.A. No. 265, as amended, the Board decided:

1. To forbid Banco Filipino Savings and Mortgage Bank andall its branches to do business in the Philippines;

2. To designate Mrs. Carlota P. Valenzuela, DeputyGovernor, as Receiver who is hereby directly vested with

jurisdiction and authority to immediately take charge of thebank's assets and liabilities, and as expeditiously aspossible collect and gather all the assets and administer thesame for the benefit of its creditors, exercising all the-powers necessary for these purposes including, but notlimited to, bringing suits and foreclosing mortgages in thename of the bank;

3. To designate Mr. Arnulfo B. Aurellano, Special Assistantto the Governor, and Mr. Ramon V. Tiaoqui, SpecialAssistant to the Governor and Head, Supervision andExamination Sector Department II. as Deputy Receiverswho are likewise hereby directly vested with jurisdiction andauthority to do all things necessary or proper to carry outthe functions entrusted to them by the Receiver andotherwise to assist the Receiver in carrying out thefunctions vested in the Receiver by law or Monetary Boardresolutions;

4. To direct and authorize Management to do all otherthings and carry out all other measures necessary or properto implement this Resolution and to safeguard the interestsof depositors/credition and the general public; and

5. In consequence of the foregoing, to terminate theconservatorship over Banco Filipino Savings and MortgageBank. (pp. 126-127, Rollo I.)

On March 19,1985, the receiver, Carlota Valenzuela, and the deputy receivers, Arnulfo B. Aurellano andRamon V. Tiaoqui, submitted a report to the Monetary Board as required in Section 29, 2nd paragraph of R.A.265 which provides that within sixty (60) days from date of the receivership, the Monetary Board shall



determine whether the bank may be reorganized and permitted to resume business, or be liquidated. Thereceivers recommended that BF be placed under litigation. For, among other things, they found that:

1. BF had been suffering a capital deficiency of P336.5 million as of July 31, 1984 (pp. 2 and 4, Receivers'Report).

2. The bank's weekly reserve deficiencies averaged P146.67 million from November 25, 1983 up to March 16,1984, rising to a peak of P338.09 million until July 27, 1984. Its reserve deficiencies against deposits anddeposit substitutes began on the week ending June 15, 1984 up to December 7, 1984, with average dailyreserve deficiencies of P2.98 million.

3. Estimated losses or "unhooked valuation reserves" for loans to entities with relationships to certainstockholder/directors and officers of the bank amounted to P600.5 million. Combined with other adjustments inthe amount of P73.2 million, they will entirely wipe out the bank's entire capital account and leave a capitaldeficiency of P336.5 million. The bank was already insolvent on July 31, 1984. The capital deficiency increasedto P908.4 million as of January 26, 1985 on account of unhooked penalties for deficiencies in legal reserves(P49.07 million), unhooked interest on overdrawings, emergency advance of P569.49 million from CentralBank, and additional valuation reserves of P124.5 million. (pp. 3-4, Receivers' Report.)

The Receivers further noted that —

After BF was closed as of January 25, 1985, there were no collections from loans granted tofirms related to each other and to BF classified as "doubtful" or "loss," there were nosubstantial improvements on other loans classified "doubtful"or "loss;" there was no furtherincrease in the value of assets owned/acquired supported by new appraisals and there wasno infusion of additional capital such that the estimated realizable assets of BF remained atP3,909.23, (millions) while the total liabilities amounted to P5,159.44 (millions). Thus, BFremains insolvent with estimated deficiency to creditors of Pl,250.21 (millions).

Moreover, there were no efforts on the part of the stockholders of the bank to improve itsfinancial condition and the possibility of rehabilitation has become more remote. (P. 8,Receivers' Report.)

In the light of the results of the examination of BF by the Teodoro and Tiaoqui teams, I do not find that the CB'sResolution No. 75 ordering BF to cease banking operations and placing it under receivership was "plainlyarbitrary and made in bad faith." The receivership was justified because BF was insolvent and its continuancein business would cause loss to its depositors and creditors. Insolvency, as defined in Rep. Act 265, means 'theinability of a banking institution to pay its liabilities as they fall due in the usual and ordinary course of business.Since June 1984, BF had been unable to meet the heavy cash withdrawals of its depositors and pay itsliabilities to its creditors, the biggest of them being the Central Bank, hence, the Monetary Board correctly foundits condition to be one of insolvency.

All the discussion in the Santiago Report concerning the bank's assets and liabilities as determinants of BF'ssolvency or insolvency is irrelevant and inconsequential, for under Section 29 of Rep. Act. 265, a bank'sinsolvency is not determined by its excess of liabilities over assets, but by its "inability to pay its liabilities asthey fall due in the ordinary course of business" and it was abundantly shown that BF was unable to pay itsliabilities to depositors for over a six-month-period before it was placed under receivership.

Even if assets and liabilities were to be factored into a formula for determining whether or not BF was alreadyinsolvent on or before January 25, 1985, the result would be no different. The bank's assets as of the end of1984 amounted to P4.891 billions (not P6 billions) according to the Report signed and submitted to the CB byBF's own president, and its total liabilities were P4.478 billions (p. 58, Cosico Report). While Aguirre's Reportshowed BF ahead with a net worth of P412.961 millions, said report did not make any provision for estimatedvaluation reserves amounting to P600.5 millions, (50% of face value of doubtful loans and 100% of face valueof loss accounts) which BF had granted to its related/linked companies. The estimated valuation reserves of



P600.5 millions plus BF's admitted liabilities of P4.478 billions, put together, would wipe out BFs realizableassets of P4.891 billions and confirm its insolvent condition to the tune of P187.538 millions.

BF's and Judge (now CA Justice) Consuelo Y. Santiago's argument that valuation reserves should not beconsidered because the matter was not discussed by Tiaoqui with BF officials is not well taken for:

(1) The records of the defaulting debtors were in the possession of BF.

(2) The "adversely classified" loans were in fact included in the List of Exceptions and Findings (of irregularitiesand violations of laws and CB rules and regulations) prepared by the SES, a copy of which was furnished BFon December 1 7, 1984;

(3) A conference on the matter washeld on January 2l, 1985 with senior officials of BF headed by EVP F.Dizon,. (pp. 14-15, Cosico Report.) BF did not formally protest against the CBs estimate of valuation reserves.The CB could not wait forever for BF to respond for the CB had to act with reasonable promptness to protectthe depositors and creditors of BF because the bank continued to operate.

(4) Subsequent events proved correct the SES classification of the loan accounts as "doubtful" or "loss'because as of January 25, 1985 none of the loans, except three, had been paid either partially or in full, even if

they had already matured (p. 53, Cosico Report).

The recommended provision for valuation reserves of P600.5 millions for "doubtful" and "loss" accounts was aproper factor to consider in the capital adjustments of BF and was in accordance with accounting rules. For, ifthe uncollectible loan accounts would be entered in the assets column as "receivables," without acorresponding entry in the liabilities column for estimated losses or valuation reserves arising from theiruncollectability, the result would be a gravely distorted picture of the financial condition of BF.

BF's strange argument that it was not insolvent for otherwise the CB would not have given it financialassistance does not merit serious consideration for precisely BF needed financial assistance because it wasinsolvent.

Tiaoqui's admission that the examination of BF had "not yet been officially terminated" when he submitted hisreport on January 23, 1985 did not make the action of the Monetary Board of closing the bank and appointingreceivers for it, 'plainly arbitrary and in bad faith." For what had been examined by the SES was more thanenough to warrant a finding that the bank was "insolvent and could not continue in business without probableloss to its depositors or creditors," and what had not been examined was negligible and would not havematerially altered the result. In any event, the official termination of the examination with the submission by theChief Examiner of his report to the Monetary Board in March 1985, did not contradict, but in fact confirmed, thefindings in the Tiaoqui Report.

The responsibility of administering the Philippine monetary and banking systems is vested by law in the CentralBank whose duty it is to use the powers granted to it under the law to achieve the objective, among others, ofmaintaining monetary stability in the country (Sec. 2, Rep. Act 265). I do not think it would be proper andadvisable for this Court to interfere with the CB's exercise of its prerogative and duty to discipline banks whichhave persistently engaged in illegal, unsafe, unsound and fraudulent banking practices causing tremendouslosses and unimaginable anxiety and prejudice to depositors and creditors and generating widespread distrust

and loss of confidence in the banking system. The damage to the banking system and to the depositing publicis bigger when the bank, like Banco Filipino, is big. With 89 branches nationwide, 46 of them in Metro Manilaalone, pumping the hard-earned savings of 3 million depositors into the bank, BF had no reason to go bankruptif it were properly managed. The Central Bank had to infuse almost P3.5 billions into the bank in its endeavor tosave it. But even this financial assistance was misused, for instead of satisfying the depositors' demands forthe withdrawal of their money, BF channeled and diverted a substantial portion of the finds into the coffers of itsrelated/linked companies. Up to this time, its officers, directors and major stockholders have neither repaid theCentral Bank's P3.6 billion financial assistance, nor put up adequate collaterals therefor, nor submitted acredible plan for the rehabilitation of the bank. What authority has this Court to require the Central Bank to



reopen and rehabilitate the bank, and in effect risk more of the Government's money in the moribund bank? Irespectfully submit that decision is for the Central Bank, not for this Court, to make.

WHEREFORE, I vote to dismiss the petition for certiorari and mandamus in G.R. No. 70054 for lack of merit.

Romero, J., concurs.

# Footnotes

Griño-Aquino, dissenting :

1 P. 3, Petition.

2 Sec. 37. All savings and mortgage banks shall maintain on deposit with the Central Bank ofthe Philippines such reserves against their deposit liabilities as the Monetary Board shalldetermine in accordance with the pertinent provisions of the Central Bank Act.

3 Sec. 38. Whenever there is a call by depositors of a saving bank for repayment of theirdeposits and the call so made shall result in reducing its legal reserves below the amount

required by the Monetary Board, such bank shall not make any new loans or investment 0 thefunds of depositors or earnings of such funds until the call of the depositors has been satisfiedand its legal reserves have been restored to the required minimum.

4 Sec- 83. No director or officer of any banking institution shall, either directly or indirectly, forhimself or as the representative or agent of others, borrow any of the deposits of funds ofsuch bank ...

Documents

Banking Banco Filipino Full Case