When the deposit insurer should resist paying all claims

Can the Philippine Deposit Insurance Corporation (PDIC) resist paying on deposit insurance? In particular, would the PDIC have a legal basis not to pay the claim of a depositor who participated in a Ponzi scheme run by a bank where an essential part of the scheme is to let the bank fail? If the PDIC has already paid on an insurance claim, can the PDIC recover the payment if there was legal ground for not paying on the claim?

It is submitted that the answer to these questions is in the affirmative. The reasoning is based on the nature of the deposit contract entered into between the parties in bad faith (the bank and the bad-faith depositor) and of the insurance contract undertaken by the PDIC.

Consider the following “Double your money” scheme. A party deposits P250,000 (the maximum coverage under deposit insurance rules), but does so knowing that the bank will fail because the depositor will get back (before the bank fails) an “interest” payment of P250,000. Such a depositor doubles his money by collecting the original amount twice – as “interest” and as a claim against PDIC when the bank fails. This is a variant of a possible Ponzi scheme that could be behind the recent failures of certain rural banks (see my earlier post). We refer to such a depositor as a bad-faith depositor.

The arguments for the PDIC to resist paying on the bad-faith depositor’s claim are as follows.

One, the deposit contract is void because it is contrary to law, morals, public interest or public policy, the contract having been part of a design to defraud “later” and/or “innocent” depositors as well as the PDIC. Art. 1306, Civil Code. A void contract is legally nonexistent, and here there is no obligation on the part of the PDIC to pay on the deposit insurance on such a void deposit.

Two, it can be argued that the PDIC’s consent to insure the deposit was secured through fraud, and the PDIC insurance contract is voidable. Art. 1330. The fraud contemplated here is “causal fraud,” one that was present at the birth or perfection of the obligation. Fraud is defined to include a knowing concealment of a material fact to induce another to act to his detriment. The bad-faith depositor is thereby guilty of fraud, and his claim against the PDIC is voidable.

Three, assuming that the deposit contract is valid, the PDIC insurance contract is nonetheless rescissible because of damage to a third party or third parties. In such a contract, there is damage to depositors who made deposits without knowledge of the Ponzi scheme. The PDIC can avoid such damage by choosing rescission. Art. 1191, Civil Code.

Four, the deposit contract is also one in fraud of creditors, and is thereby rescissible. Art. 1381 (3).

The bad-faith depositor may argue that there was no fraud perpetrated on the PDIC or other depositors when he made the deposit because the PDIC willingly consented to insure the deposit against bank failure, and the other depositors voluntarily made the deposit. This position is not tenable because what is necessary for rescission is damage to a creditor, and an innocent depositor is a creditor. So are the other claimants against a failed bank. It has been held that where there is a fraud that does not vitiate consent but does damage to a creditor, the contract is rescissible. Goquiolay v Sycip.

Finally, even if the PDIC has already paid a bad-faith depositor, it is submitted that such a depositor is bound to return the insurance payment. An over-arching principle of law is that a person who commits an illegality or injustice cannot profit from it. This is embedded in Art. 22 of the Civil Code which provides: “Every person who through an act of performance by another, or any other means (emphasis added), acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.”

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