TOPIC: Deposits are not preferred credits

CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY SAVINGS BANK vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding Judge of Branch XIII, Court of First
Instance of Manila, Spouses AUGUSTO and ADELAIDA PADILLA and Spouses MARCELA and
JOB ELIZES
G.R. No. L-38427 March 12, 1975

PRINCIPLE:
BANKS: CLAIMS AND CREDITS AGAINST AN INSOLVENT BANK; JUDGMENT
OBTAINED AFTER DECLARATION OF INSOLVENCY NOT A PREFERRED CLAIM. —
Article 2244 (14)(b) of the Civil Code on preferred credits does not apply to judgments for
the payment of the deposits in an insolvent savings bank which obtained after the
declaration of insolvency.
 ID.; ID.; ID.; RATIONALE. — A contrary rule on practice would be productive of
injustice, mischief and confusion. To recognize such judgments as entitled to priority would
mean that depositors in insolvent banks, after learning that the bank is insolvent as shown
by the fact that it can no longer pay withdrawals or that it has closed its doors or has been
enjoined by the Monetary Board from doing business, would rush to the courts to secure
judgments for the payment of their deposits. In such eventuality, the courts would be
swamped with suits of that character. Some of the judgments would be default judgment.
Depositors armed with such judgments would pester the liquidation court with claims for
preference on the basis of Article 2244 (14)(b) of the Civil Code. Less alert depositors would
be prejudiced. That inequitable situation could not have been contemplated by the framers
of section 29 of the General Banking Law on the proceedings upon insolvency.

FACTS:
the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board
directed the Superintendent of Banks to take charge of its assets, forbade it to do business,
and instructed the Central Bank Legal Counsel to take appropriate legal actions (Resolution
No. 350).
The Board resolved to seek the court's assistance and supervision in the liquidation
of the bank. The resolution was implemented only on January 25, 1972 when the Central
Bank of the Philippines filed the corresponding petition for assistance and supervision in the
Court of First Instance of Manila
Prior to the institution of the liquidation proceeding but after the declaration of
insolvency, or, specifically, the spouses Job Elizes and Marcela P. Elizes filed a complaint in
the Court of First Instance of Manila against the Fidelity Savings Bank for the recovery of the
sum of P50,584 as the balance of their time deposits (Civil Case No. 82520 assigned to
Branch I).
In the judgment rendered in that case the Fidelity Savings Bank was ordered to pay
the Elizes spouses the sum of P50,584 plus accumulated interest.
In another case, assigned to Branch of the Court of First Instance of Manila, the
spouses Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment
 against the Fidelity Savings Bank for the sums of P80,000 as the balance of their time
deposits, plus interests, P70,000 as moral and exemplary damages and P9,600 as
attorney's fees.
The lower court (Branch XIII having cognizance of the liquidation proceeding), upon
motions of the Elizes and Padilla spouses and over the opposition of the Central Bank,
directed the latter, as liquidator, to pay their time deposits as preferred credits, evidenced by
final judgments, within the meaning of article 2244(14)(b) of the Civil Code, if there are
enough funds in the liquidator's custody in excess of the credits more preferred under
section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil Code.
From the said order, the Central Bank appealed to this Court by certiorari. It contends that the
final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because
(a) they were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the
charter of the Central Bank and the General Banking Law, no final judgment can be validly
obtained against an insolvent bank.||| 
The trial court or, to be exact, the liquidation court noted that there is no provision in
the charter of the Central Bank and in the General Banking Law (Republic Acts Nos. 265
and 337, respectively) which suspends or abates civil actions against an insolvent bank
pending in courts other than the liquidation court. It reasoned out that, because such actions
are not suspended, judgments against insolvent banks could be considered as preferred
credits under article 2244(14)(b) of the Civil Code. It further noted that, in contrast with the
Central Bank Act, section 18 of the Insolvency Law provides that upon the issuance by the
court of an order declaring a person insolvent, "all civil proceedings against the said
insolvent shall be stayed".
The liquidation court directed the Central Bank to honor the writs of execution issued
by Branches I and XXX for the enforcement of the judgments obtained by the Elizes and
Padilla spouses. It suggested that, after satisfaction of the judgments, the Central Bank, as
liquidator, should include said judgments in the list of preferred credits contained in the
"Project of Distribution" "with the notation 'already paid'".
On the other hand, the Central Bank argues that after the Monetary Board has
declared that a bank is insolvent and has ordered it to cease operations, the Board becomes
the trustee of its assets "for the equal benefit of all the creditors, including the depositors".
The Central Bank cites the ruling that "the assets of an insolvent banking institution are held
in trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an
advantage or a preference over another by an attachment, execution or otherwise" (Rohr vs.
Stanton Trust & Savings Bank, 76 Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors of the insolvent
bank should file their actions with the liquidation court. In support of that view it cites the
provision that the Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No.
1956).
It also invokes the provision penalizing a director or officer of a hank who disburses,
or allows disbursement, of the funds of the bank after it becomes insolvent (Sec.
85, General Banking Act, Republic Act No. 337). It cites the ruling that "a creditor of an
insolvent state bank in the hands of a liquidator who recovered a judgment against it is not
entitled to a preference for (by) the mere fact that he is a judgment creditor" (Thomas H.
Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver, Liquidation of
Financial Institutions, p. 922)
ISSUE:
Whether or not a final judgment for the payment of a time deposit in a savings bank, which
judgment was obtained after the bank was declared insolvent, is a preferred claim against the
bank.

RULING:

It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are not true deposits. They are considered simple loans and, as such, are not
preferred credits (Art. 1980, Civil Code)
The aforequoted section 29 of the Central Bank's charter explicitly provides that
when a bank is found to be insolvent, the Monetary Board shall forbid it to do business and
shall take charge of its assets. The Board in its Resolution No. 350 dated February 18, 1969
banned the Fidelity Savings Bank from doing business. It took charge of the bank's assets.
Evidently, one purpose in prohibiting the insolvent bank from doing business is to prevent
some depositors from having an undue or fraudulent preference over other creditors and
depositors.
That purpose would be nullified if, as in this case, after the bank is declared
insolvent, suits by some depositors could be maintained and judgments would be rendered
for the payment of their deposits and then such judgments would be considered preferred
credits under article 2244(14)(b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred and that
article 2244(14)(b) does not apply to judgments for the payment of the deposits in an
insolvent savings bank which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion.
To recognize such judgments as entitled to priority would mean that depositors in insolvent
banks, after learning that the bank is insolvent as shown by the fact that it can no longer pay
withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from
doing business, would rush to the courts to secure judgments for the payment of their
deposits.
In such an eventuality, the courts would be swamped with suits of that character.
Some of the judgments would be default judgments. Depositors armed with such judgments
would pester the liquidation court with claims for preference on the basis of article 2244(14)
(b). Less alert depositors would be prejudiced. That inequitable situation could not have
been contemplated by the framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant
case. It appears in that case that the Stanton Trust & Savings Bank of Great Falls closed its
doors to business on July 9, 1923. On November 7, 1924 the bank (then already under
liquidation) issued to William Rohr a certificate stating that he was entitled to claim from the
bank $1,191.72 and that he was entitled to dividends thereon. Later, Rohr sued the bank for
the payment of his claim. The bank demurred to the complaint. The trial court sustained the
demurrer. Rohr appealed. In affirming the order sustaining the demurrer, the Supreme Court
of Montana said:
 "The general principle of equity that the assets of an insolvent are to be
distributed ratably among general creditors applies with full force to the
distribution of the assets of a bank. A general depositor of a bank is merely a
general creditor, and, as such, is not entitled to any preference or priority over
other general creditors.
"The assets of a bank in process of liquidation are held in trust for the
equal benefit of all creditors. and one cannot be permitted to obtain an
advantage or preference over another by an attachment, execution or
otherwise. A disputed claim of a creditor may be adjudicated, but those whose
claims are recognized and admitted may not successfully maintain action
thereon. So to permit would defeat the very purpose of the liquidation of a bank
whether being voluntarily accomplished or through the intervention of a
receiver.
xxx xxx xxx
"The available assets of such a bank are held in trust, and so conserved
that each depositor or other creditor shall receive payment or dividend
according to the amount of his debt, and that none of equal class shall receive
any advantage or preference over another."
And with respect to a national bank under voluntary liquidation, the court noted in
the Rohr case that the assets of such a bank "become a trust fund, to be administered for
the benefit of all creditors pro rata, and, while the bank retains its corporate existence, and
may be sued, the effect of a judgment obtained against it by a creditor is only to fix the
amount of debt. He can acquire no lien which will give him any preference or advantage
over other general creditors." (245 Pac. 249) **
Considering that the deposits in question, in their inception, were not preferred
credits, it does not seem logical and just that they should be raised to the category of
preferred credits simply because the depositors, taking advantage of the long interval
between the declaration of insolvency and the filing of the petition for judicial assistance and
supervision, were able to secure judgments for the payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as
indisputably they were due, could not have given the Elizes and Padilla spouses a priority
over the other depositors whose deposits were likewise indisputably due and owing from the
insolvent bank but who did not want to incur litigation expenses in securing a judgment for
the payment of the deposits.