THIRD DIVISION

[G.R. No. 66826. August 19, 1988.]

BANK OF THE PHILIPPINE ISLANDS , petitioner, vs. THE

INTERMEDIATE APPELLATE COURT and RIZALDY T. ZSHORNAC K
respondents.

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

SYLLABUS

1. CIVIL LAW; DEPOSIT; NATURE; CASE AT BAR. — The Commercial Bank and
Trust Co. (subsequently absorbed by petitioner Bank of the Philippine Islands) through
its assistant branch manager for Quezon City acknowledged receipt from the private
respondent of US$3,000.00 for safekeeping . The subsequent acts of the parties also
show that the intent of the parties was really for the bank to safely keep the dollars and
to return it to Zshornack at a later time. Thus, Zshornack demanded the return of the
money on May 10, 1976, or over ve months later. The above arrangement is that
contract de ned under Article 1962, New Civil Code, which reads: Art. 1962. A deposit
is constituted from the moment a person receives a thing belonging to another, with
the obligation of safely keeping it and of returning the same. If the safekeeping of the
thing delivered is not the principal purpose of the contract, there is no deposit but
some other contract.
2. REMEDIAL LAW; ALLEGATIONS IN PLEADINGS; EFFECT OF FAILURE TO
SPECIFICALLY DENY THEREIN THE DUE EXECUTION OF DOCUMENTS. — The
respondent's second cause of action was based on an actionable document. It was
therefore incumbent upon the bank to speci cally deny under oath the due execution of
the document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into
such contract. No sworn answer denying the due execution of the document in
question, or questioning the authority of Garcia to bind the bank, or denying the bank's
capacity to enter into the contract, was ever led. Hence, the bank is deemed to have
admitted not only Garcia's authority, but also the bank's power, to enter into the
contract in question.
3. ID.; VOID CONTRACTS; CONTRACTS EXECUTED AGAINST A
MANDATORY/PROHIBITORY LAW. — The mere safekeeping of the greenbacks, without
selling them to the Central Bank within one business day from receipt, is a transaction
which is not authorized by CB Circular No. 20, it must be considered as one which falls
under the general class of prohibited transactions. Hence, pursuant to Article 5 of the
Civil Code, it is void, having been executed against the provisions of a
mandatory/prohibitory law.
4. ID.; ID.; ID.; EFFECT. — It affords neither of the parties a cause of action
against the other. "When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no cause of action against each other . . . " [Art. 1411, New Civil
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 Code.] The only remedy is one on behalf of the State to prosecute the parties for
violating the law.

DECISION

CORTES , J : p

The original parties to this case were Rizaldy T. Zshornack and the Commercial
Bank and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In
1980, the Bank of the Philippine Islands (hereafter referred to as "BPI") absorbed
COMTRUST through a corporate merger, and was substituted as party to the case. prLL

Rizaldy Zshornack initiated proceedings on June 28, 1976 by ling in the Court of
First Instance of Rizal — Caloocan City a complaint against COMTRUST alleging four
causes of action. Except for the third cause of action, the CFI ruled in favor of
Zshornack. The bank appealed to the Intermediate Appellate Court which modi ed the
CFI decision absolving the bank from liability on the fourth cause of action. The
pertinent portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings
account of plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27,
1975 to earn interest together with the remaining balance of the said account at
the rate fixed by the bank for dollar deposits under Central Bank Circular 343;

2. Ordering defendant COMTRUST to return to the plaintiff the amount

of U.S. $3,000.00 immediately upon the nality of this decision, without interest
for the reason that the said amount was merely held in custody for safekeeping,
but was not actually deposited with the defendant COMTRUST because being
cash currency, it cannot by law be deposited with plaintiff's dollar account and
defendant's only obligation is to return the same to plaintiff upon demand;
xxx xxx xxx

5. Ordering defendant COMTRUST to pay plaintiff in the amount of

P8,000.00 as damages in the concept of litigation expenses and attorney's fees
suffered by plaintiff as a result of the failure of the defendant bank to restore to
his (plaintiff's) account the amount of U.S. $1,000.00 and to return to him
(plaintiff) the U.S. $3,000.00 cash left for safekeeping.

Costs against defendant COMTRUST.

SO ORDERED. [Rollo, pp. 47-48.]

Undaunted, the bank comes to this Court praying that it be totally absolved from
any liability to Zshornack. The latter not having appealed the Court of Appeals decision,
the issues facing this Court are limited to the bank's liability with regard to the rst and
second causes of action and its liability for damages.
1. We first consider the first cause of action.
On the dates material to this case, Rizaldy Zshornack and his wife, Shirley
Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a
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 peso current account.
On October 27, 1975, an application for a dollar draft was accomplished by
Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a
certain Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia
indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the
savings account of the Zshornacks; the charges for commission, documentary stamp
tax and others totalling P17.46 were to be charged to Current Acct. No. 210-465-29,
again, the current account of the Zshornacks. There was no indication of the name of
the purchaser of the dollar draft.
On the same date, October 27, 1975, COMTRUST, under the signature of Virgilio
V. Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of
US$1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it was
to be charged to Dollar Savings Acct. No. 25-4109. prcd

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he

demanded an explanation from the bank. In answer, COMTRUST claimed that the peso
value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on
October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for
P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court nds no reason to disturb
the ruling of both the trial court and the Appellate Court on the rst cause of action.
Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from
private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's
savings account, the bank has adopted inconsistent theories. First, it still maintains that
the peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when
the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims
that the withdrawal was made pursuant to an agreement where Zshornack allegedly
authorized the bank to withdraw from his dollar savings account such amount which,
when converted to pesos, would be needed to fund his peso current account. If indeed
the peso equivalent of the amount withdrawn from the dollar account was credited to
the peso current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the rst explanation,
petitioner bank has not shown how the transaction involving the cashier's check is
related to the transaction involving the dollar draft in favor of Dizon nanced by the
withdrawal from Rizaldy's dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be
considered payment to Rizaldy. prcd

As to the second explanation, even if we assume that there was such an

agreement, the evidence do not show that the withdrawal was made pursuant to it.
Instead, the record reveals that the amount withdrawn was used to nance a dollar
draft in favor of Leovigilda D. Dizon, and not to fund the current account of the
Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29
was ever credited with the peso equivalent of the US$1,000.00 withdrawn on October
27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint led with the trial court
alleged that on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia,
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 US$3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the
agreement was embodied in a document, a copy of which was attached to and made
part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975

MR. RIZALDY T. ZSHORNACK

&/OR MRS. SHIRLEY E. ZSHORNACK
Sir/Madam:

We acknowledged (sic) having received from you today the sum of US

DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping.

Received by:(Sgd.)
VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to
return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's
peso current account at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny speci cally under oath the
authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed
delivered to the bank US$3,000 for safekeeping. When he requested the return of the
money on May 10, 1976, COMTRUST explained that the sum was disposed of in this
manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds
amounting to P14,920.00 were deposited to Zshornack's current account per deposit
slip accomplished by Garcia; the remaining US$1,000. 00 was sold on February 3, 1976
and the peso proceeds amounting to P8,350.00 were deposited to his current account
per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's
current account at prevailing conversion rates, BPI now posits another ground to defeat
private respondent's claim. It now argues that the contract embodied in the document
is the contract of depositum (as de ned in Article 1962, New Civil Code), which banks
do not enter into. The bank alleges that Garcia exceeded his powers when he entered
into the transaction. Hence, it is claimed, the bank cannot be liable under the contract,
and the obligation is purely personal to Garcia. LexLib

Before we go into the nature of the contract entered into, an important point
which arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by
COMTRUST, a copy of which document was attached to the complaint. In short, the
second cause of action was based on an actionable document. It was therefore
incumbent upon the bank to speci cally deny under oath the due execution of the
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 document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into
such contract. [See, E.B. Merchant v. International Banking Corporation , 6 Phil. 314
(1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to
enter into the contract, was ever led. Hence, the bank is deemed to have admitted not
only Garcia's authority, but also the bank's power, to enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural
requirement.
The reason for the rule enunciated in the foregoing authorities will, we
think, be readily appreciated. In dealing with corporations the public at large is
bound to rely to a large extent upon outward appearances. If a man is found
acting for a corporation with the external indicia of authority, any person, not
having notice of want of authority, may usually rely upon those appearances; and
if it be found that the directors had permitted the agent to exercise that authority
and thereby held him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the bene t supposed to have been
conferred by it, the corporation will be bound notwithstanding the actual authority
may never have been granted . . . Whether a particular o cer actually possesses
the authority which he assumes to exercise is frequently known to very few, and
the proof of it usually is not readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority exercised by some of the
corporate o cers. It is therefore reasonable in a case where an o cer of a
corporation has made a contract in its name, that the corporation should be
required, if it denies his authority, to state such defense in its answer. By this
means the plaintiffs apprised of the fact that the agent's authority is contested;
and he is given an opportunity to adduce evidence showing either that the
authority existed or that the contract was rati ed and approved [Ramirez v.
Orientalist Co. and Fernandez, 38 Phil. 634, 645-646 (1918).]

Petitioner's argument must also be rejected for another reason. The practical
effect of absolving a corporation from liability every time an o cer enters into a
contract which is beyond corporate powers, even without the proper allegation or proof
that the corporation has not authorized nor rati ed the o cer's act, is to cast
corporations in so perfect a mold that transgressions and wrongs by such arti cial
beings become impossible [Bissell v. Michigan Southern and N.I.R Cos, 22 N.Y 258
(1860).] "To say that a corporation has no right to do unauthorized acts is only to put
forth a very plain truism; but to say that such bodies have no power or capacity to err is
to impute to them an excellence which does not belong to any created existence with
which we are acquainted. The distinction between power and right is no more to be lost
sight of in respect to artificial than in respect to natural persons." [ Ibid.]
Having determined that Garcia's act of entering into the contract binds the
corporation, we now determine the correct nature of the contract, and its legal
consequences, including its enforceability. LibLex

The document which embodies the contract states that the US$3,000.00 was
received by the bank for safekeeping. The subsequent acts of the parties also show
that the intent of the parties was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time. Thus, Zshornack demanded the return of the
money on May 10, 1976, or over five months later.
The above arrangement is that contract de ned under Article 1962, New Civil
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 Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives
a thing belonging to another, with the obligation of safely keeping it and of
returning the same. If the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other contract.

Note that the object of the contract between Zshornack and COMTRUST was
foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9,
1949, which was in force at the time the parties entered into the transaction involved in
this case. The circular provides:
xxx xxx xxx

2. Transactions in the assets described below and all dealings in them

of whatever nature, including, where applicable their exportation and importation,
shall NOT be effected, except with respect to deposit accounts included in sub-
paragraphs (b) and (c) of this paragraph, when such deposit accounts are owned
by and in the name of banks.
(a) Any and all assets, provided they are held through, in, or with
banks or banking institutions located in the Philippines, including money,
checks, drafts, bullions, bank drafts deposit accounts (demand, time and
savings), all debts, indebtedness or obligations, nancial brokers and
investment houses notes, debentures, stocks, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person,
rm, partnership, association, branch o ce, agency, company or other
unincorporated body or corporation residing or located within the
Philippines;
(b) Any and all assets of the kinds included and or described in
subparagraph (a) above, whether or not held through, in, or with banks or
banking institutions, and existent within the Philippines, which belong to
any person, lm, partnership, association, branch o ce, agency, company
or other unincorporated body or corporation not residing or located within
the Philippines;
(c) Any and all assets existent within the Philippines including
money, checks, drafts, bullions, bank drafts, all debts, indebtedness or
obligations, nancial securities commonly dealt in by bankers, brokers and
investment houses, notes, debentures, stock, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in the nature of
security expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person,
rm, partnership, association, branch o ce, agency, company or other
unincorporated body or corporation residing or located within the
Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central
Bank by those authorized to deal in foreign exchange. All receipts of foreign
exchange by any person, rm, partnership, association, branch o ce, agency,
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 company or other unincorporated body or corporation shall be sold to the
authorized agents of the Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any person, rm, partnership,
association, branch o ce, agency, company or other unincorporated body or
corporation, residing or located within the Philippines, who acquires on and after
the date of this Circular foreign exchange shall not unless licensed by the Central
Bank, dispose of such foreign exchange in whole or in part, nor receive less than
its full value, nor delay taking ownership thereof except as such delay is
customary; Provided, further, That within one day upon taking ownership, or
receiving payment, of foreign exchange the aforementioned persons and entities
shall sell such foreign exchange to designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and
any person, rm or corporation, foreign or domestic, who being bound to the
observance thereof, or of such other rules, regulations or directives as may
hereafter be issued in implementation of this Circular, shall fail or refuse to
comply with, or abide by, or shall violate the same, shall be subject to the penal
sanctions provided in the Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modi ed by Section 6 of Central Bank Circular No.
281, Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting
its coverage to Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, rm,
company or corporation shall be sold to authorized agents of the Central Bank by
the recipients within one business day following the receipt of such foreign
exchange. Any resident person, rm, company or corporation residing or located
within the Philippines, who acquires foreign exchange shall not, unless authorized
by the Central Bank, dispose of such foreign exchange in whole or in part, nor
receive less than its full value, nor delay taking ownership thereof except as such
delay is customary; Provided, That, within one business day upon taking
ownership or receiving payment of foreign exchange the aforementioned persons
and entities shall sell such foreign exchange to the authorized agents of the
Central Bank.

As earlier stated, the document and the subsequent acts of the parties show that
they intended the bank to safekeep the foreign exchange, and return it later to
Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did
not intended to sell the US dollars to the Central Bank within one business day from
receipt. Otherwise, the contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the
Central Bank within one business day from receipt, is a transaction which is not
authorized by CB Circular No. 20, it must be considered as one which falls under the
general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code,
it is void, having been executed against the provisions of a mandatory/prohibitory law.
More importantly, it affords neither of the parties a cause of action against the other.
"When the nullity proceeds from the illegality of the cause or object of the contract, and
the act constitutes a criminal offense, both parties being in pari delicto, they shall have
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 no cause of action against each other . . . " [Art. 1411, New Civil Code.] The only remedy
is one on behalf of the State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we nd the P8,000.00 awarded by the courts a quo as damages in
the concept of litigation expenses and attorney's fees to be reasonable. The award is
sustained. LLpr

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is

ordered to restore to the dollar savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at the rate xed by the bank for
dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent
are ordered dismissed.
SO ORDERED.
Gutierrez, Jr. and Bidin, JJ., concur.
Fernan, C.J., took no part — was counsel for Bank of P.I. (Cebu).
Feliciano, J., concurs in the result.

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