FACTS:

On December 5, 1961, Transocean Transport Corporation purchased a vessel from the Reparations Commission (REPACOM). The vessel was insured by Rizal Surety & Insurance Company for US$3,500,000.00. In February 1975, the vessel was lost, and the insured filed claims for the insurance proceeds. A partial compromise agreement was entered into between REPACOM and Transocean regarding the insurance proceeds. Transocean requested the Central Bank (CB) to allow it to retain the expected dollar insurance proceeds for three months. CB granted the request but required the proceeds to be deposited with a local commercial bank. Transocean and REPACOM requested Rizal Surety to pay the insurance proceeds in their joint names. CB authorized Rizal Surety to receive and deposit the insurance proceeds in a non-interest bearing account. Transocean and REPACOM entered into a partial compromise agreement, dividing and distributing the insurance proceeds. Prudential Guarantee and Assurance, Inc. (Prudential) received a letter from the Acting Solicitor General demanding payment of interest on a dollar deposit made by REPACOM. Prudential argued that there was no trust relationship involved in the transaction and that it was not obligated to transfer the deposit into an interest-bearing account. Prudential later received a duly executed Loss and Subrogation Receipt. A final compromise agreement was entered into between REPACOM and Transocean, whereby REPACOM transferred its rights to the insurance proceeds to Transocean. The private respondent then filed a complaint seeking payment of unearned interest on the dollar balance. The trial court ordered Prudential to pay interest on the balance of the dollar deposit until the date the Loss and Subrogation Receipt was signed. Both Prudential and the private respondent appealed the decision. The Court of Appeals upheld the trial court's judgment and modified it by ordering Prudential to pay interest on the dollar balance until the actual transfer of the deposit was made to the bank chosen by the private respondent. Prudential filed a petition for review before the Supreme Court.

The petitioner filed a motion for reconsideration after the Court of Appeals denied its previous petition. The petitioner alleged four errors committed by the Court of Appeals, which mainly revolved around the issue of whether the petitioner is liable for accrued interest on the insurance proceeds and the validity of the Loss and Subrogation Receipt signed by the insureds.

The key issues in this case are:

1. The existence of a trust relationship.

2. The significance of the Loss and Subrogation Receipt.

3. Petitioner's liability for accrued interest on the insurance proceeds.

4. Correctness of the award of attorney's fees.

The Court of Appeals determined that the petitioner acted as a trustee for the private respondent and REPACOM, based on evidence presented. The Court of Appeals held that the parties intended for the insurance proceeds to be held in trust by the petitioner for the benefit of the two corporations.

ISSUES:

1. Whether petitioner acted merely as an insurer or also as a trustee of the private respondent and REPACOM.

2. Whether there was a trust relationship created between petitioner and the private respondent and REPACOM.

3. Whether a trust relationship existed between the petitioner and private respondent and REPACOM.

4. Whether the Loss and Subrogation Receipt is significant in determining the existence of a trust relationship.

5. Whether the Loss and Subrogation Receipt absolved the petitioner from liability for the accrued interest.

6. Whether the petitioner is liable for the accrued interest on the insurance claim.

7. Whether the petitioner acted in bad faith by failing to inform the insured of its refusal to comply with their instructions.

8. Whether or not petitioner Prudential Bank breached its duty as trustee by converting the dollar deposit into a peso account.

9. Whether or not petitioner is liable to pay interest on the dollar deposit.

10. Whether or not the award of moral damages is proper.

11. Whether or not the award of attorney's fees is proper.

RULING:

1. The Court held that petitioner acted not only as an insurer but also as a trustee of the private respondent and REPACOM. The intention to create a trust relationship can be inferred from the surrounding factual circumstances, as evidenced by the letters between petitioner and the Central Bank, as well as the Partial Compromise Agreement entered into by the insured parties. The Court found that there was clear, satisfactory, and convincing evidence to support the existence of a trust relationship.

2. The courts below were correct in concluding that a trust relationship existed between the petitioner and private respondent and REPACOM. A trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another. It is a fiduciary relationship wherein the trustee is obligated to deal with the property for the benefit of the beneficiary. The evidence on record shows that the petitioner held on to the insurance proceeds as requested by the private respondent and REPACOM and recognized its fiduciary relationship with them. The intention to create a trust is evident from the actions and communications of the parties. Therefore, a trust relationship existed.

3. The Loss and Subrogation Receipt is significant in determining the existence of a trust relationship. The receipt indicates that the private respondent and REPACOM unconditionally accepted full payment from the petitioner and assigned, ceded, and transferred their rights to the insurer. This demonstrates that the private respondent and REPACOM recognized the petitioner as their trustee. The receipt further supports the existence of a trust relationship.

4. The execution of the Loss and Subrogation Receipt did not absolve the petitioner from liability for the accrued interest. The receipt only released the petitioner from liability arising from the insurance policies it issued.

5. The petitioner is liable for the accrued interest on the insurance claim. The petitioner, as a trustee, violated its duty by refusing to deposit the disputed dollar portion into an interest-bearing account as instructed by the insured.

6. The petitioner acted in bad faith by remaining silent and failing to inform the insured of its refusal to comply with their instructions. This led to the insured's prejudice and loss of interest income on the deposited amount.

7. Yes, petitioner Prudential Bank breached its duty as trustee by converting the dollar deposit into a peso account.

8. Yes, petitioner is liable to pay interest on the dollar deposit.

9. Yes, the award of moral damages is proper.

10. No, the award of attorney's fees is not proper.

PRINCIPLES:

• The intention to create a trust relationship can be inferred from the surrounding factual circumstances, so long as the proof thereof is clear, satisfactory, and convincing, and does not rest on loose, equivocal, or indefinite declarations.

• An insurer may also act as a trustee, depending on the nature of the arrangement and the intention of the parties involved.

• Trusts can be express or implied. Express trusts are created by the intention of the trustor or parties. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.

• The elements of an express trust include a competent trustor and trustee, an ascertainable trust res, and sufficiently certain beneficiaries. There must be a present and complete disposition of the trust property, an active purpose not in contravention of statute or public policy, and some power of administration other than a mere duty to perform a contract.

• The existence of a trust relationship is not dependent on the adversarial positions of the parties. The trust remains regardless of the parties' positions with respect to the subject matter.

• The execution of a Loss and Subrogation Receipt does not preclude the insured from claiming the accrued interest.

• A trustee has a duty to act in the best interest of the trustor-beneficiaries and must comply with their instructions.

• Silence and inaction by a trustee in the face of specific written instructions from the trustor-beneficiaries could mislead the latter and result in prejudice.

• A trustee's refusal or inability to comply with instructions must be clearly communicated to the trustor-beneficiaries to avoid misleading them.

• The duty of a trustee is to administer the trust fund in accordance with the instrument creating it and the law (CODIFIED TRUSTS ACT, Section 4).

• When a bank converts a foreign currency deposit into another currency without the depositor's consent, it violates its contractual obligation and may be held liable (Prudential Bank vs. Intermediate Appellate Court, G.R. No. 84305, September 11, 1992).

• A trustee who violates its duty and benefits from the breach shall be held accountable to the beneficiary and may be required to account for the profits or losses resulting from the unauthorized transaction (Prudential Bank vs. Intermediate Appellate Court, G.R. No. 84305, September 11, 1992).

• Attorney's fees should not be awarded in the absence of stipulation except under the instances enumerated in Article 2208 of the New Civil Code (Solid Homes, Inc. vs. Court of Appeals, G.R. No. 146622, January 21, 2003).

• The award of attorney's fees must be supported by factual, legal, or equitable justification (Stronghold Insurance Company, Inc. vs. Court of Appeals, G.R. No. 104167, November 14, 1996).