You are on page 1of 36

2007 PRE-WEEK MATERIAL ON COMMERCIAL LAWS by TRISTAN A. CATINDIG, A.B., LL.B., LL.M.

TABLE OF CONTENTS Bangko Sentral ng Pilipinas Law General Banking Law of 2000 Philippine Deposit Insurance Corporation Truth In Lending Act Letters of Credit Trust Receipts Chattel Mortgage Law Extrajudicial Foreclosure of Mortgage Law SC Interim Rules of Procedure on Corporate Rehabilitation SC Interim Rules of Procedure for Intra-Corporate Controversies Securities Regulation Code Intellectual Property Code Anti-Money Laundering Act BANGKO SENTRAL NG PILIPINAS LAW On account of the issuance by the BSP of new coins in higher denominations after the affectivity of the BSP Law in 1993, the BSP, pursuant to Section 52 of the BSP Law and Monetary Board Resolution No. 862, dated July 6, 2006, issued Circular No. 537, dated July 18, 2006, which adjusted the maximum amount of coins to be considered as legal tender as follows: 1. One Thousand Pesos (P1,000) for denominations of 1-Piso, 5-Piso and 10Piso coins; and 2. One Hundred Pesos (P100) for denominations of 1-sentimo, 5-sentimo, 10sentimo, and 25-sentimo coins. GENERAL BANKING LAW OF 2000 Under BSP Circular No. 488, dated June 21, 2005, and BSP Circular No. 493, dated September 16, 2005, the BSP added the following functions, services or activities that banks could outsource subject to prior approval of the Monetary Board: 1. Internal audit (subject to a number of conditions); 2. Marketing loans, deposits and other bank products and services, provided it does not involve the actual opening of deposit accounts; 3. General bookkeeping and accounting services, provided that these activities do not include servicing bank deposits or other inherent banking functions; 4. Offsite record storage services; 5. Back-up and data recovery operations. 1

Without need of prior Monetary Board approval, banks may outsource the following functions, services or activities: 1. Printing of bank loan statements and other non-deposit records, bank forms and promotional materials; 2. Transfer agent services for debt and equity securities; 3. Messenger, courier and postal services; 4. Security guard services; 5. Vehicle service contracts; 6. Janitorial services; 7. Public relations services, procurement services, and temporary staffing, provided that these activities do not include servicing bank deposits or other inherent banking functions; 8. Sorting and bagging of notes and coins; 9. Maintenance of computer hardware; 10. Payroll of banking employees; 11. Telephone operator/receptionist services; 12. Sales/disposal of acquired assets; 13. Personnel training and development; 14. Building, ground and other facilities maintenance; 15. legal services from local legal counsel; and 16. compliance risk assessment and testing. Supreme Court Case Banks are required to assume a degree of diligence higher than that of a good father of a family (Philippine Banking Corporation vs. CA, G.R. No. 127469, January 15, 2004) The Court held that Section 2 of the General Banking Law of 2000 expressly imposes a fiduciary duty on banks when it declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. For this reason, the fiduciary nature of banking requires a bank to assume a degree of diligence higher than that of a good father of a family. Thus, the Court ruled: The BANK is liable to Marcos for offsetting his time deposits with a fictitious promissory note. The existence of Promissory Note No. 20-979-83 could have been easily proven had the BANK presented the original copies of the promissory note and its supporting evidence. In lieu of the original copies, the BANK presented the machine copies of the duplicate of the documents. These substitute documents have no evidentiary value. The Banks failure to explain the absence of the original documents and to maintain a record of the offsetting of this loan with the time deposits bring to fore the Banks dismal failure to fulfill its fiduciary duty to Marcos. PHILIPPINE DEPOSIT INSURANCE CORPORATION 1. What is the purpose of the law? (Sec. 1) The purpose of the law is to create a government-owned and controlled entity, the Philippine Deposit Insurance Corporation, which shall insure the deposit liabilities of all banks entitled to the benefits of insurance under the Act. Such insurance is intended to protect depositors from situations that 2

prevent banks from paying out deposits, as in bank failures or closures, and to encourage people to deposit in banks. 2. What are the main functions of the PDIC? (a) Insurance of banks (Sec. 5, et seq.) The PDIC insures the deposit liabilities of banks. For this purpose, it assesses and collects insurance assessments from member-banks. Whenever an insured bank is closed, the PDIC processes and services claims of insured deposits. (b) Examination of banks (Secs. 8 and 9) The PDIC may examine a bank with the prior approval of the Monetary Board of the Bangko Sentral ng Pilipinas. Such examination may extend to all the affairs of the bank and includes the authority to investigate frauds, irregularities and anomalies committed in the bank. (c) Rehabilitation of banks (Sec. 17) Upon determination by the PDIC that (i) a bank is in danger of closing, (ii) the continued operation of such bank is essential to provide adequate banking service in the community or maintain financial stability in the economy, and (iii) the actual liquidation and payoff of the bank will be more expensive than the extension of financial assistance to the bank, the PDIC may make loans to, purchase the assets or assume the liabilities of, or make deposits in, the said bank in order to prevent its closing. The foregoing authority may also be exercised by the PDIC in respect of a closed bank. (d) Receivership of closed banks (Secs. 8 and 10; see also Sec. 30, RA 7653) As receiver, the PDIC shall control, manage and administer the affairs of the closed bank for the purpose of preserving its assets for the benefit of the creditors of the bank. (e) Liquidation of closed banks (Sec. 30, RA 7653) If the closed bank cannot be rehabilitated, the PDIC would proceed with its liquidation. This would involve the conversion of the assets of the bank into cash for distribution to the creditors in accordance with the provisions of the Civil Code on concurrence and preference of credits. Insurance Coverage 3. Whose deposit liabilities are required to be insured with the PDIC? (Sec. 5) The deposit liabilities of any bank, including the branches in the Philippines of foreign banks, engaged in the business of receiving deposits are required to be insured with the PDIC. 4. Is PDIC insurance coverage required of foreign currency deposits maintained in Philippine banks? Yes. Section 9 of the Foreign Currency Deposit Act (RA 6426, as amended) and Section 79 of CB Circular No. 1389, dated August 13, 1993, require foreign currency deposits to be insured under the PDIC Law. Foreign currency depositors are entitled to receive payment in the same currency in which the insured deposit is denominated. 5. Are the deposit liabilities of a local bank payable in its branch located abroad covered by PDIC insurance? (Sec. 4[f]) No, they would not be covered by PDIC insurance. However, subject to PDIC approval, a local bank that maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch. 3

6. When does the PDIC become liable to pay the insured deposits? (Sec. 14) The PDIC becomes liable to pay the insured deposits in a bank when the bank is closed by the Monetary Board of the Bangko Sentral ng Pilipinas, that is, prohibited from doing further business in the Philippines, on account of insolvency and other grounds under the law (see Paragraph 1.10). 7. Does PDIC insurance cover risks other than bank closure? No, PDIC insurance covers only the risk of bank closure ordered by the Monetary Board. Losses that a bank may suffer due to natural calamities, theft, war, strike, etc. would not be covered by PDIC insurance. 8. What is the extent of the PDICs liability to a bank depositor? (Sec. 4[g]) The PDICs liability is up to P250,000 per depositor per capacity. 9. What is an insured deposit? (Sec. 4[g]; see also PDIC Bulletin No. 2004-04, August 12, 2004) An insured deposit is the amount due any depositor for deposits in an insured bank net of any matured or unmatured obligation of the depositor to the insured bank as of the date of closure but not to exceed P250,000. In determining s depositors insured deposit, the PDIC shall add together all deposits in the bank maintained by the depositor in the same right and capacity for his benefit either in his own name or in the name of others. The outstanding balance of each account would also be adjusted to take into account any interest earned by the account as of the date of closure of the bank less any withholding tax due on such interest. 10. How would joint accounts be insured and what rules would apply in the payment of PDIC insurance to such accounts? (Sec. 4[g]; see also PDIC Bulletin No. 2004-04, August 12, 2004) (a) A joint account, regardless of whether the conjunction and, or, or and/or is used, shall be insured separately from any individually-owned deposit account. The maximum insured deposit of P250,000 shall be divided into as many equal shares as there are depositors unless a different sharing is stipulated in the document of deposit. Example: Pedro and Mario have P400,000 in a joint savings account with ABC Bank. Pedro also has P300,000 in another savings account that he maintains with the same bank solely in his name. Marios total deposit is P200,000 while that of Pedro is P500,000. If ABC Bank were closed, Mario could claim P125,000 from PDIC (representing his 50% share of the maximum insured deposit of the joint account with Pedro) while Pedro could claim a total of P250,000 (P125,000, representing his 50% share of the maximum insured deposit of the joint account with Mario), plus P125,000 out of the savings account solely in his name. (b) If the account were held by a juridical person jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity. Example: XYZ Corporation and Pedro have P250,000 in a joint savings account with ABC Bank. Pedro also has P250,000 in another savings account that he maintains with the same bank solely in his name. If ABC Bank were closed, XYZ Corporation could claim P250,000 from PDIC. The P250,000 in the joint account would be presumed to belong entirely to XYZ Corporation.

(c) In case one of the co-depositors in a joint and/or or or account has an obligation to the closed bank covered by a hold-out agreement (i.e., a security arrangement whereby the obligation is secured by the account), the obligation secured by the said agreement shall be deducted from the balance of the joint account regardless of the fact that only one of the codepositors is indebted to the closed bank. Example: Pedro and Mario have P200,000 in a joint and/or savings account with ABC Bank. Pedro borrowed P50,000 from the bank and secured it with a hold-out on the joint and/or savings account. If ABC Bank were closed, Pedro and Mario could each claim only P75,000 from the PDIC. (d) In case the deposit is a joint and account, the obligation shall be deducted only from the share of the indebted co-depositor unless the other co-depositor is himself a co-signatory to the hold-out agreement. Example: If the account in the immediately preceding problem were a joint and account, Pedro could claim only P50,000 from the PDIC. Mario could claim P100,000. (e) Where the deposit is not covered by a hold-out agreement, the obligation shall be deducted only from the share of the indebted co-depositor regardless of whether the deposit is a joint and, or, or and/or account. Payment of Insured Deposits 11. Is the PDIC required to notify the depositors of a closed bank of the fact of such closure and the need to file their claims? (Sec. 16) Yes, The PDIC shall publish the notice to depositors once a week for three (3) consecutive weeks in a newspaper of general circulation or, when appropriate, in a newspaper circulated in the community or communities where the closed bank or its branches are located. 12. Is there a prescriptive period for the filing of claims with the PDIC by the depositors of a closed bank? (Sec. 16[e]) Yes. A depositor of a closed bank must file his claim with the PDIC within 2 years from actual takeover of the closed bank by PDIC. If he does not, all his rights against the PDIC in respect of the insured deposits shall be barred. However, all the rights of the depositor against the closed bank and its shareholders or the receivership estate to which PDIC may have become subrogated shall thereupon revert to the depositor. 13. When is the PDIC required to settle a claim for an insured deposit? (Sec. 14) The PDIC is required to settle the claim within 6 months from the date of filing thereof provided that the claim was filed within 2 years from actual takeover of the closed bank by PDIC. The 6-month period shall not apply if the documents of the claimant are incomplete or the validity of the claim requires the resolution of issues of facts or law by another office, body or agency, independently or in coordination with the PDIC. 14. When an insured bank is closed, how will payment of the insured deposits in such bank be made by the PDIC? (Sec. 14) The PDIC shall pay either (i) in cash or (ii) by making available to each depositor a transferred deposit in another insured bank in an amount equal to the insured deposit of such depositor. 15. What is a transferred deposit? (Sec. 4[h]) It is a deposit in an insured bank made available to a depositor by the PDIC as payment of the insured deposit of such depositor in a closed bank and 5

assumed by another insured bank. By paying its liabilities to depositors in this manner, the PDIC hopes to persuade these depositors to keep their savings in banks where such funds could be lent out, rather than hoarded and kept out of the banking system. 16. What is the effect of payment to the depositor of his insured deposit? (Sec. 16[b]) It (i) discharges the PDIC from any further liability to the depositor, and (ii) subrogates the PDIC to all the rights of the depositor against the closed bank to the extent of such payment. 17. What is the nature of the payments of insured deposits made by the PDIC and do they enjoy any preference under Article 2244 of the Civil Code? (Sec. 15) All payments by the PDIC of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code. 18. If the deposit account in a closed bank were more than P250,000, would it still be possible for the depositor to recover the excess? Yes. Assuming that the bank is not rehabilitated or taken over by another bank, the depositor could claim the excess amount from the liquidator of the closed bank. However, the liquidator might not be able to pay the claim if the final liquidation of the remaining assets of the closed bank does not generate enough cash to pay such claim. Such claim would also be subject to the provisions of the Civil Code on concurrence and preference of credits. If the bank is rehabilitated or taken over by another bank, the rehabilitator or the bank taking over the closed bank would usually assume the liability for the payment of the excess deposits. Powers of the PDIC 19. What is the extent of the power of the PDIC to examine banks? (Sec. 8) The PDIC may examine a bank with the prior approval of the Monetary Board. However, no examination can be conducted within 12 months from the last examination date. 20. Could the PDIC provide legal assistance to its directors, officers, employees or agents? (Sec. 9[f]) Yes. The PDIC shall underwrite or advance the litigation expenses of, including legal fees and other expenses of external counsel, or provide legal assistance to, its directors, officers, employees or agents in connection with any civil, criminal, administrative or any other action or proceeding to which such directors, officers, employees or agents are made a party by reason of, or in connection with, their exercise of authority or performance of functions and duties under the PDIC Law. 21. As receiver, does the PDIC take over the powers, functions and duties of the directors, officers and stockholders of the closed bank? (Sec. 10[b], 1st paragraph) Yes. The PDIC as receiver shall control, manage and administer the affairs of the closed bank. Effective immediately upon its takeover as receiver of such bank, the powers, functions and duties, as well as all allowances, 6

remunerations and perquisites of the directors, officers, and stockholders of such bank are suspended, and the relevant provisions of the Articles of Incorporation and By-laws of the closed bank are likewise deemed suspended. 22. What is the status of the assets of the closed bank under receivership? (Sec. 10[b], 2nd paragraph) The assets of the closed bank under receivership shall be deemed in custodia legis in the hands of the receiver. From the time the closed bank is placed under such receivership, its assets shall not be subject to attachment, garnishment, execution, levy or any other court processes. 23. What are some of the additional powers of the PDIC as a receiver? (Sec. 10[c]) (a) suspend or terminate the employment of officers and employees of the closed bank; provided, that payment of separation pay or benefits shall be made only after the closed bank has been placed under liquidation pursuant to the order of the Monetary Board under Section 30 of R.A. 7653, and that such payment shall be made from available funds of the bank after deducting reasonable expenses for receivership and liquidation; (b) hire or retain private counsels as may be necessary; (c) if the stipulated interest on deposits is unusually high compared with the prevailing applicable interest rate, the PDIC as receiver may exercise such powers that may include a reduction of the interest rate to a reasonable rate; provided, that any modification or reduction shall apply only to unpaid interest. 24. Is the PDIC required to pay docket and other court fees in the cases it might file as receiver for the recovery, or involving any asset, of the closed bank? (Sec. 11) Yes. However, payment of docket and other court fees shall be deferred until the action is terminated with finality. Any such fees shall be a first lien on any judgment in favor of the closed bank or, in case of unfavorable judgment, such fees shall be paid as administrative expenses during the distribution of the assets of the closed bank. TRUTH IN LENDING ACT Supreme Court Cases 1. Excessive interests, penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending Act (New Sampaguita Builders Construction, Inc., et al. vs. Philippine National Bank, G.R. No. 148753, July 30, 2004) The Court ruled in this case that excessive interests, penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending Act. The Court further said: No penalty charges or increases thereof appear either in the Disclosure Statements or in any of the clauses in the second and the third Credit Agreements earlier discussed. While a standard penalty charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory Notes still remaining unpaid or unrenewed when they fell due, there is no stipulation therein that would justify any increase in that charges. The effect, therefore, when the borrower is not clearly informed of the Disclosure 7

Statements -- prior to the consummation of the availment or drawdown -- is that the lender will have no right to collect upon such charge or increases thereof, even if stipulated in the Notes. The time is now ripe to give teeth to the often ignored forty-one-year old Truth in Lending Act and thus transform it from a sniveling paper tiger to a growling financial watchdog of hapless borrowers. 2. Failure to disclose required information in disclosure statement cured by disclosure thereof in loan transaction documents (DBP vs. Arcilla, G.R. No. 161397, June 30, 2005) The Court ruled that the failure of the DBP to disclose the required information in the disclosure statement form authorized by the BSP was cured by the DBPs disclosure of such information in the loan transaction documents (i.e., the deed of conditional sale and the supplement thereto, the promissory notes, and the release sheet) between the DBP and Arcilla. LETTERS OF CREDIT Supreme Court Cases 1. Possible parties to a letter of credit transaction; nature of letter of credittrust receipt arrangement (Lee, et al. vs. CA and Philippine Bank of Communications, G.R. No. 117913, February 1, 2002) The pertinent parts of the Courts decision are set out below: Modern letters of credit are usually not made between natural persons. They involve bank to bank transactions. Historically, the letter of credit was developed to facilitate the sale of goods between, distant and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was acceptable to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller, provided that certain documents are presented such as bills of lading accompanied the corresponding drafts. Expansion in the use of letters of credit was a natural development in commercial banking. Parties to a commercial letter of credit include (a) the buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the opening bank which is usually the buyers bank which actually issues the letter of credit, (d) the notifying bank which is the correspondent bank of the opening bank through which it advises the beneficiary of the letter of credit, (e) negotiating bank which is usually any bank in the city of the beneficiary. The services of the notifying bank must always be utilized if the letter of credit is to be advised to the beneficiary through cable, (f) the paying bank which buys or discounts the drafts contemplated by the letter of credit, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary. As a rule, whenever the facilities of the opening bank are used, the beneficiary is supposed to present his drafts to the notifying bank for negotiation and (g) the confirming bank which, upon the request of the beneficiary, confirms the letter of credit issued by the opening bank. From the foregoing, it is clear that letters of credit, being usually bank to bank transactions, involve more than just one bank. Consequently, there is nothing unusual in the fact that the drafts presented in evidence by respondent bank were not made payable to PBCom. As explained by respondent bank, a draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented the bank draft for reimbursement by PBComs correspondent bank in Taiwan, the Irving Trust Company which explains the reason why on its face, the 8

draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft to PBCom. The draft was later transmitted to PBCom to support the latters claim for payment from MICO. MICO accepted the draft upon presentment and negotiated it to PBCom. -oA trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported or purchased. A trust receipt, therefor, is a document of security pursuant to which a bank acquires a security interest in the goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a security for the loan. The transaction involves a loan feature represented by a letter of credit, and a security feature which is in the covering trust receipt which secures an indebtedness. 2. Commercial and standby letters of credit; independence principle; fraud exception rule (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717, November 22, 2004) The relevant parts of the Courts decision are set out below: At the core of the present controversy is the applicability of the independence principle and fraud exception rule in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as credits, would provide a better perspective of the case. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits. There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable 9

upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. [Underscoring supplied] By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto. Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP. First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993. In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc. this Court ruled that the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals, this Court ruled that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank. Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever. 10

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. Can the beneficiary invoke the independence principle? Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle. As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with. Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principles nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke the independence principle on letters of credit does not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called beneficiary. Petitioners argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, 11

there would be no practical and beneficial use for letters of credit in commercial transactions. Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue: The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination of documents. Because parties and courts should not confuse the different functions of the surety contract on the one hand and the standby credit on the other, the distinction between surety contracts and credits merits some reflection. The two commercial devices share a common purpose. Both ensure against the obligors nonperformance. They function, however, in distinctly different ways. Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance, usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the suretys performance takes time. The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicants performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation. In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligors performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance. In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiarys presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary. While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him to draw 12

thereon. The situation itself emasculates petitioners posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself. Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was ministerial for them to honor the call for payment. -oNext, petitioner invokes the fraud exception principle. It avers that LHCs call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the fraud exception exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. [Underscoring supplied] Citing Dolans treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principles purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the common law principles of contract should apply. It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of defaultsuch issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement. Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities? Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment. The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged. -oThe pendency of the arbitration proceedings would not per se make LHCs draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would 13

be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. What petitioner did assert before the courts below was the fact that LHCs draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. -oWith respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHCs certification that default has occurred Neither were they bound by petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent banks undertaking was simply to pay once the required documents are presented by the beneficiary. At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law. TRUST RECEIPTS Supreme Court Cases 1. An entrustee does not have authority to mortgage goods covered by trust receipts (DBP vs. Prudential Bank, G.R. No. 143772, November 22, 2005) In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with Prudential Bank (Prudential) for the importation of 5,000 spindles and various accessories and spare parts (the Articles) for use with spinning machinery. These Articles were released to Litex under covering trust receipts it executed in favor of Prudential. Litex installed and used the Articles in its textile mill located in Montalban, Rizal. In 1980, DBP granted a foreign currency loan to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries and equipments there. Among the machineries and equipments mortgaged in favor of DBP were the Articles. In 1982, Prudential informed DBP that it was the absolute and juridical owner of the Articles and they were thus not part of the mortgaged assets that could be legally ceded to DBP. In 1983, DBP extra-judicially foreclosed on the real estate and chattel mortgages, including the Articles, and acquired the foreclosed properties as the highest bidder. In 1987, over the objections of Prudential, DBP sold the Litex properties it acquired at the foreclosure sale, including the Articles. to Lyon Textile Mills, Inc. (Lyon).

14

In 1988, Prudential filed a complaint for a sum of money with damages against DBP. The trial court decided in favor of Prudential and its decision was affirmed in toto by the Court of Appeals to which DBP appealed. DBP thereafter filed a petition for review on certiorari with the Supreme Court. The Court held that the Articles were owned by Prudential and Litex only held them in trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means. Thus, Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. DBP merely stepped into the shoes of Litex as trustee of the Articles with an obligation to pay their value or to return them on Prudentials demand. By its failure to pay or return them despite Prudentials repeated demands and by selling them to Lyon without Prudentials knowledge and conformity, DBP became a trustee ex maleficio [i.e., one who acquires title to property through actual fraud]. 2. Acquittal in criminal case for estafa under Section 13 of the Trust Receipts Law does not extinguish civil liability arising from breach of trust receipt contract (Tupaz IV, et al. vs. CA and BPI, G.R. No. 145578, November 18, 2005 The relevant portion of the Courts decision is as follows: The rule is that where the civil action is impliedly instituted with the criminal action, the civil liability is not extinguished by acquittal [w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence is required in civil cases; where the court expressly declares that the liability of the accused is not criminal but only civil in nature xxx as, for instance, in the felonies of estafa, theft, and malicious mischief committed by certain relatives who thereby incur only civil liability (See Art. 332, Revised Penal Code); and, where the civil liability does not arise from or is not based upon the criminal act of which the accused was acquitted xxx. (Emphasis supplied) Here, respondent bank chose not to file a separate civil action to recover payment under the trust receipts. Instead, respondent bank sought to recover payment in Criminal Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not extinguish his civil liability. As the Court of Appeals correctly held, his liability arose not from the criminal act of which he was acquitted (ex delito) but from the trust receipt contract (ex contractu) of 30 September 1981. Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his personal capacity. CHATTEL MORTGAGE LAW Supreme Court Cases 1. Loss of vessel before foreclosure borne by mortgagors (Allied Banking Corporation vs. Cheng Yong, et al., G.R. N0. 154109, October 6, 2005) The loss of the mortgaged chattel brought about by its sinking must be borne not by Allied Bank but by the spouses Cheng. As owners of the fishing vessel, it was incumbent upon the spouses to insure it against loss. Thus, when the vessel sank before the chattel mortgage could be foreclosed, uninsured as it is, its loss must be borne by the spouses Cheng. 15

2. Creditor not obliged to foreclose chattel mortgage constituted to secure credit (Spouses Rosario vs. PCI Leasing and Finance, Inc., G.R., No. 139233, November 11, 2005) Instead of foreclosing on the chattel mortgage on a motor vehicle constituted by the spouses Rosario to secure the loan obtained by them from PCI Leasing, the latter filed a case for Sum of Money with Damages with a Prayer for a Writ of Replevin. The Court ruled that even if Article 1484 of the New Civil Code were to be applied, the chattel mortgage had not been foreclosed; hence, PCI Leasing was not precluded from collecting the balance of the account of the spouses Rosario. It held that the remedy of the unpaid seller under Article 1484 of the New Civil Code is alternative and not cumulative. A creditor is not obliged to foreclose a chattel mortgage even if there is one. 3. Entrustee, not being owner of articles covered by trust receipts and without authority from owner, cannot mortgage said articles (DBP vs. Prudential Bank, G.R. No. 143772, November 22, 2005) Citing Article 2085 of the Civil Code (which requires that, in a contract of pledge or mortgage, the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged), the Court ruled that Lirag Textile Mills, Inc. as the entrustee of the 5,000 spindles and related accessories in question, had neither absolute ownership, free disposal nor the authority to freely dispose of the said articles and could not have subjected them to a chattel mortgage inasmuch as the title to the said articles belongs to the entruster, Prudential Bank. The inclusion of the articles in the real estate and chattel mortgages constituted by Lirag Textile on its plant site in Montalban, Rizal to secure the foreign currency loan it obtained from the DBP was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale of such articles. 4. Invalidity of loan invalidates mortgage intended to secure it (Spouses Saguid vs. Security Finance, Inc., G.R. No. 159467, December 9, 2005) The Court ruled that since it has been sufficiently established that there was no cause or consideration for the promissory note, it follows that the chattel mortgage constituted on the subject vehicle to secure the said promissory note cannot have any legal effect on the spouses Saguid. It stated that a mortgage is a mere accessory contract and its validity would depend on the validity of the loan secured by it. The chattel mortgage constituted over the subject vehicle is an accessory contract to the loan obligation as embodied in the promissory note. It cannot exist as an independent contract since its consideration is the same as that of the principal contract. A principal obligation is an indispensable condition for the existence of an accessory contract. 5. Suing for collection of unpaid amortizations and at the same time suing for replevin not allowed under Art. 1484, Civil Code (Magna Financial Services Group, Inc. vs. Colarina, G.R. No. 168736, December 9, 2005) Colarina bought on installment from Magna Financial Services a Suzuki Multicab and constituted a chattel mortgage thereon to secure the unpaid balance of the purchase price thereof. On account of Colarinas failure to pay the requisite installments, Magna filed against Colarina a Complaint for Foreclosure of Chattel Mortgage with Replevin. In its Complaint, Magna made the following prayer: WHEREFORE, it is respectfully prayed that judgment render ordering defendant: 16

1. To pay the principal sum of P131,607.00 with penalty charges at 4.5% per month from January 1999 until paid plus liquidated damages. 2. Ordering defendant to reimburse the plaintiff for attorneys fee at 25% of the amount due plus expenses of litigation at not less than P10,000.00. 3. Ordering defendant to surrender to the plaintiff the possession of the Multicab described in paragraph 2 of the complaint. 4. Plaintiff prays for other reliefs just and equitable in the premises. It is further prayed that pendent lite, an Order of Replevin issue commanding the Provincial Sheriff at Legazpi City or any of his deputies to take such multicab into his custody and, after judgment, upon default in the payment of the amount adjudged due to the plaintiff, to sell said chattel at public auction in accordance with the chattel mortgage law. The Court ruled that it is unmistakable from the Complaint that Magna preferred to avail itself of the first and third remedies under Article 1484, at the same time suing for replevin. Perusing the Complaint, Magna, under its prayer number 1, sought for the payment of the unpaid amortizations which is a remedy that is provided under Article 1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment of the obligation. At the same time, Magna prayed that Colarina be ordered to surrender possession of the vehicle so that it may ultimately be sold at public auction, which remedy is contained under Article 1484(3). Such a scheme is not only irregular but is a flagrant circumvention of the prohibition of the law. By praying for the foreclosure of the chattel, Magna renounced whatever claim it may have under the promissory note. Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, he shall have no further action against the purchaser to recover any unpaid balance of the purchase price. Any agreement to the contrary shall be void. In other words, in all proceedings for the foreclosure of chattel mortgages executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property included in the mortgage. The Court also ruled that it is the actual sale of the mortgaged chattel in accordance with Sec. 14 of the Chattel Mortgage Law (Act No. 1508) that would bar the creditor who chooses to foreclose from recovering any unpaid balance. There has been foreclosure of the mortgage when all the proceedings of the foreclosure, including the sale of the property at public auction, have been accomplished. In the case at bar, there is no dispute that the subject vehicle is already in the possession of Magna Financial Services. However, actual foreclosure has not been pursued, commenced or concluded by it. As it has persistently and consistently avowed that it elects the remedy of foreclosure, the Court ruled directed Magna Financial Services to proceed with the foreclosure of the said vehicle without more.

17

EXTRAJUDICIAL FORECLOSURE OF MORTGAGE LAW Supreme Court Cases 1. Redemption price to be paid by accommodation mortgagors (Belo vs. PNB, et al., G.R. No. 134330, March 1, 2001) The Court ruled that Section 78 of the General Banking Act is inapplicable to accommodation mortgagors in the redemption of their mortgaged properties. They may redeem their property by paying only the winning bid price thereof at the public auction sale plus interest, not the entire liability of the accommodated party, i.e., the borrower. 2. Preserving right of redemption beyond redemption period (HiYield Realty vs. CA, et al., G.R. No. 138978, September 12, 2002) A borrower may preserve his right of redemption through judicial action that must be filed within the one-year period of redemption. The filing of the court action to enforce redemption, being equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights and freezing the expiration of the one-year period. The action must be filed in good faith (meaning that the filing of the action must be for the sole purpose of determining the redemption price and not to stretch the redemptive period indefinitely) and the redemptive price, once finally determined, must be paid within a reasonable time. 3. Republication of notice of sale (DBP vs. CA and Emerald Resorts Hotel, G.R. No. 125838, June 10, 2003) The rule enunciated by the Supreme Court in previous cases is that the publication of the notice of extrajudicial sale is indispensable to the validity of an extrajudicial foreclosure sale of real property under Act 3135. If the sale could not be held on the scheduled date, then a republication of the notice of extrajudicial sale would be necessary. This is true even if the mortgagor and the mortgagee should agree to the rescheduling of the date of sale. Failure to publish the notice of auction sale on the new date would constitute a jurisdictional defect which would invalidate the sale (Ouano vs. CA, G.R. 129279, March 4, 2003; DBP vs. Aguirre, et al., G.R. No. 144877, September 7, 2001; Masantol Rural Bank vs. CA (204 SCRA 752 [1991]). In this case, the public auction sale of the real properties originally scheduled on August 12, 1986 was postponed to September 11, 1986 upon the request of the mortgagor with the agreement of DBP, the mortgagee. Neither the DBP nor the mortgagor republished the notice of the rescheduled auction sale and, thus, the Supreme Court ruled that the extrajudicial foreclosure of the real estate mortgage by DBP was not valid. Obviously, republication of the notice would increase the expenses of the mortgagee. It would also encourage the practice of some mortgagors in requesting postponement of the auction sale and then later attacking the validity of the sale for lack of republication. These circumstances have not escaped the attention of the Supreme Court and a remedy was provided in provided in the form of the Notice of ExtraJudicial Sale now prescribed in Circular No. 7-2002 issued by the Office of the Court Administrator on January 22, 2002. Section 4(a) of Circular No. 7-2002 provides that: 18

Sec. 4. The Sheriff to whom the application for extra-judicial foreclosure of mortgage was raffled shall do the following: a. Prepare a Notice of Extra-Judicial Sale using the following form: NOTICE OF EXTRA-JUDICIAL SALE Upon extra-judicial petition for sale under Act 3135/1508 filed __________ against (name and address of Mortgagor/s) to satisfy the mortgage indebtedness which as of ___________ amounts to P ________ excluding penalties, charges, attorney's fees and expenses of foreclosure, the undersigned or his duly authorized deputy will sell at public auction on (date of sale) _________ at 10:00 A.M. or soon thereafter at the main entrance of the ___________________ (place of sale) to the highest bidder, for cash or manager's check and in Philippine Currency, the following property with all its improvements, to wit: (Description of Property) All sealed bids must be submitted to the undersigned on the above stated time and date. In the event the public auction should not take place on the said date, it shall be held on _______________ without further notice. _____________(date) SHERIFF The last paragraph of the prescribed Notice of Extra-Judicial Sale allows the holding of a rescheduled auction sale without reposting or republication of the notice. However, the rescheduled auction sale will only be valid if the rescheduled date of auction is clearly specified in the prior notice of sale. The absence of this information in the prior notice of sale will render the rescheduled auction sale void for lack of reposting or republication. If the notice of auction sale contains this particular information, whether or not the parties agreed to such rescheduled date, there is no more need for the reposting or republication of the notice of the rescheduled auction sale. 4. Issuance of writ of possession (Samson, et al. vs. Rivera, et al., G.R. No. 154355, May 20, 2004) The Court made several important rulings in this case: Not automatic - The purchaser of foreclosed property is not entitled automatically to the possession of the said property during the redemption period. He must petition the Regional Trial Court of the province or city where the property is situated to give him possession thereof during the redemption period. He must also put up a bond equivalent in value to the use of the property for a period of 12 months to indemnify the debtor/mortgagor in case it is shown that the sale was made without complying with the requirements of Act No. 3135 or that there was no violation of the mortgage deed. Grant of writ ministerial duty of court - The duty of the trial court to grant a writ of possession is ministerial upon the filing by the purchaser of the proper motion and the approval of the corresponding bond. In the words of the Court, [no] discretion is left to the trial court. Any question regarding the regularity and validity of the sale, as well as the consequent cancellation of the writ, is to be determined in a subsequent proceeding as outlined in Section 8 of Act 3135. Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte. 19

Remedy of debtor -What is the remedy of a debtor who believes that the mortgage was not violated and, therefore, the mortgaged property should not have been foreclosed or that the foreclosure sale was not made in accordance with the provisions of Act 3135? In this case, the Court ruled that Section 8 of Act 3135 provides the plain, speedy and adequate remedy in opposing the issuance of a writ of possession. Under Section 8, the debtor may, in the proceedings in which possession was requested by the purchaser but not later than 30 days after the purchaser was given possession, petition that the sale be set aside and the writ of possession be cancelled. He should also specify the damages suffered by him. If the court finds the complaint of the debtor justified, it shall dispose of all or part of the bond in favor of the debtor. Issuance of writ not stayed by action for annulment - To make things doubly clear, the Court emphasized that a pending action for annulment of mortgage or foreclosure does not stay the issuance of a writ of possession. Until the matter is finally resolved, the purchaser shall be entitled to the continued possession of the foreclosed property. 5. Newspaper of general circulation (Perez, et al. vs. Perez, et al., G.R. No. 143768, March 28, 2005) To be a newspaper of general circulation, it is enough that it is published for the dissemination of local news and general information, that it has a bona fide subscription list of paying subscribers; and that it is published at regular intervals. The newspaper must not also be devoted to the interests or published for the entertainment of a particular class, profession, trade, calling, race or religious denomination. The newspaper need not have the largest circulation so long as it is of general circulation. 6. Nature of redemption period (Spouses Landrito, Jr., et al. vs. Court of Appeals, et al., G.R. No. 133079, August 9, 2005) The period of redemption is not a prescriptive period but a condition precedent provided by law to restrict the right of the person exercising redemption. Correspondingly, if a person exercising the right of redemption has offered to redeem the property within the period fixed, he is considered to have complied with the condition precedent prescribed by law and may thereafter bring an action to enforce redemption. If, on the other hand, the period is allowed to lapse before the right of redemption is exercised, then the action to enforce redemption will not prosper, even if the action is brought within the ordinary prescriptive period. Moreover, the period within which to redeem the property sold at a sheriffs sale is not suspended by the institution of an action to annul the foreclosure sale. 7. Dragnet clause (Spouses Cuyco vs. Spouses Cuyco, G.R. No. 168736, April 19, 2006) Set out below is a portion of the decision of the Court: As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract. However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is valid and binding between the parties and is known in American Jurisprudence as the blanket mortgage clause, also known as a dragnet clause. A dragnet clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to 20

execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. The pertinent provisions of the November 26, 1991 real estate mortgage reads: That the MORTGAGOR is indebted unto the MORTGAGEE in the sum of ONE MILLION FIVE THOUSAND PESOS (sic) (1,500,000.00) Philippine Currency, receipt whereof is hereby acknowledged and confessed, payable within a period of one year, with interest at the rate of eighteen percent (18%) per annum; That for and in consideration of said indebtedness, the MORTGAGOR does hereby convey and deliver by way of MORTGAGE unto said MORTGAGEE, the latters heirs and assigns, the following realty together with all the improvements thereon and situated at Cubao, Quezon City, and described as follows: xxxx PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be subject to foreclosure in the manner and form provided by law. It is clear from a perusal of the aforequoted real estate mortgage that there is no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule above stated. Even if the parties intended the additional loans of P150,000.00 obtained on May 30, 1992, P150,000.00 obtained on July 1, 1992, and P500,00.00 obtained on September 5, 1992 to be secured by the same real estate mortgage, as shown in the acknowledgement receipts, it is not sufficient in law to bind the realty for it was not made substantially in the form prescribed by law. In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry. A mortgage in legal form is not constituted by a private document, even if such mortgage be accompanied with delivery of possession of the mortgage property. Besides, by express provisions of Section 127 of Act No. 496, a mortgage affecting land, whether registered under said Act or not registered at all, is not deemed to be sufficient in law nor may it be effective to encumber or bind the land unless made substantially in the form therein prescribed. It is required, among other things, that the document be signed by the mortgagor executing the same, in the presence of two witnesses, and acknowledged as his free act and deed before a notary public. A mortgage constituted by means of a private document obviously does not comply with such legal requirements. What the parties could have done in order to bind the realty for the additional loans was to execute a new real estate mortgage or to amend the 21

old mortgage conformably with the form prescribed by the law. Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the respondents in an ordinary action for collection of sums of money. 8. Debtors default; liquidated debt (Selegna Management and Development Corporation, et al. vs. UCPB, G.R. No. 165662, May 3, 2006) A portion of the decision of the Court is set out below: It is a settled rule of law that foreclosure is proper when the debtors are in default of the payment of their obligation. In fact, the parties stipulated in their credit agreements, mortgage contracts and promissory notes that respondent was authorized to foreclose on the mortgages, in case of a default by petitioners. That this authority was granted is not disputed. Mora solvendi, or debtors default, is defined as a delay in the fulfillment of an obligation, by reason of a cause imputable to the debtor. There are three requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the debtor delays performance; third, the creditor judicially or extrajudicially requires the debtors performance. -o A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of the relevant promissory notes and related documentation. Failure to furnish a debtor a detailed statement of account does not ipso facto result in an unliquidated obligation. 9. Remedies of mortgage creditor alternative, not cumulative (Suico Rattan & Buri Interiors, Inc., et al. vs. CA, et al., G.R. No. 138145, June 15, 2006) Set out hereunder is part of the decision of the Court: The rule is settled that a mortgage creditor may, in the recovery of a debt secured by a real estate mortgage, institute against the mortgage debtor either a personal action for debt or a real action to foreclose the mortgage. These remedies available to the mortgage creditor are deemed alternative and not cumulative. An election of one remedy operates as a waiver of the other. In sustaining the rule that prohibits mortgage creditors from pursuing both the remedies of a personal action for debt or a real action to foreclose the mortgage, the Court held in the case of Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a rule which would authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action against the mortgaged property, would result not only in multiplicity of suits so offensive to justice and obnoxious to law and equity, but also in subjecting the defendant to the vexation of being sued in the place of his residence or of the residence of the plaintiff, and then again in the place where the property lies. Hence, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of mortgage, pursuant to the provisions of Rule 68 of the Rules of Court. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any court of justice but with the office of the sheriff of the province where the sale is to be made, in accordance with the provisions of Act No. 3135, as amended by Act No. 4118. 10. Doctrine of mortgagee in good faith (Erea vs. Querrer-Kaufman, G.R. No. 165853, June 22, 2006) The decision of the Court stated in part: 22

In Cavite Development Bank v. Lim, 381 Phil. 355 (2000), the Court explained the doctrine of mortgagee in good faith, thus: There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This is the doctrine of mortgagee in good faith based on the rule that all persons dealing with the property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The public interest in upholding the indefeasibility of a certificate of title, as evidence of lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title. Indeed, a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of, or does not have a valid title to, the mortgaged property, the mortgagee in good faith is nonetheless entitled to protection. This doctrine presupposes, however, that the mortgagor, who is not the rightful owner of the property, has already succeeded in obtaining a Torrens title over the property in his name and that, after obtaining the said title, he succeeds in mortgaging the property to another who relies on what appears on the said title. The innocent purchaser (mortgagee in this case) for value protected by law is one who purchases a titled land by virtue of a deed executed by the registered owner himself, not by a forged deed, as the law expressly states. Such is not the situation of petitioner, who has been the victim of impostors pretending to be the registered owners but who are not said owners. The doctrine of mortgagee in good faith does not apply to a situation where the title is still in the name of the rightful owner and the mortgagor is a different person pretending to be the owner. In such a case, the mortgagee is not an innocent mortgagee for value and the registered owner will generally not lose his title. We thus agree with the following discussion of the CA: The trial court wrongly applied in this case the doctrine of mortgagee in good faith which has been allowed in many instances but in a milieu dissimilar from this case. This doctrine is based on the rule that persons dealing with properties covered by a Torrens certificate of title are not required to go beyond what appears on the face of the title. But this is only in a situation where the mortgagor has a fraudulent or otherwise defective title, but not when the mortgagor is an impostor and a forger. In a forged mortgage, as in this case, the doctrine of mortgagee in good faith cannot be applied and will not benefit a mortgagee no matter how large is his or her reservoir of good faith and diligence. Such mortgage is void and cannot prejudice the registered owner whose signature to the deed is falsified. When the instrument presented is forged, even if accompanied by the owners duplicate certificate of title, the registered owner does not lose his title, and neither does the assignee in the forged deed acquire any right or title to the property. An innocent purchaser for value is one who purchases a titled land by virtue of a deed executed by the registered owner himself not a forged deed.

23

SUPREME COURT INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION Supreme Court Cases 1. Claim for missing luggage is a money claim and is suspended pending rehabilitation proceedings (Philippine Airlines vs. Spouses Kurangking, et al., G.R. No. 146698, September 24, 2002) This case involved the interpretation of Section 6 of Rule 4 of the SC Interim Rules of Procedure on Corporate Rehabilitation. The said provision requires the trial court, if it finds the petition for corporate rehabilitation to be sufficient in form and substance, to issue, among other things, an Order staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor. The stay order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. According to the Court, the interim rules must be read and applied along with Section 6(c) of P.D. 902-A, as amended, directing that upon the appointment of a management committee, rehabilitation receiver, board or body pursuant to the decree, all actions for claims against the distressed corporation pending before any court, tribunal, board or body shall be suspended accordingly. The Court pointed out that a claim is a right to payment, whether or not it is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured. The claim of private respondents against petitioner PAL for their missing luggage is a money claim or financial demand that the law requires to be suspended pending the rehabilitation proceedings. Quoting its earlier decision in the case of B.F. Homes, Inc. vs. Court of Appeals, the Court stated that -. ...(T)he reason for suspending actions for claims against the corporation should not be difficult to discover. It is not really to enable the management committee or the rehabilitation receiver to substitute the defendant in any pending action against it before any court, tribunal, board or body. Obviously, the real justification is to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra judicial interference that might unduly hinder or prevent the rescue of the debtor company. To allow such other action to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation.

24

2. Non-suspension of claims against guarantors and sureties solidarily liable with debtor (Metropolitan Waterworks and Sewerage System vs. Hon. Renaldo B. Daway, et al., G.R. No. 160732, June 21, 2004) In 1997, MWSS granted Maynilad Water Services, Inc. under a Concession Agreement a 20-year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon. The fees, among other things, are intended to pay off MWSSs mostly foreign loans absorbed by Maynilad. To secure the performance of its obligations under the Concession Agreement, Maynilad arranged for the issuance of an Irrevocable Standby Letter of Credit (ISLC) in the amount of US$120 million in favor of MWSS. Maynilad subsequently defaulted in the payment of its concession fees. On November 24, 2003, MWSS gave notice to the consortium of foreign banks that it was drawing on the ISLC and demanded payment in the amount of US$98,923,640.15. Earlier, however, specifically on November 13, 2003, Maynilad had filed a petition for rehabilitation and the court (the Regional Trial Court of Quezon City, Branch 90) issued the requisite Stay Order on November 17, 2003. It also issued an order, dated November 27, 2003, declaring the attempt of MWSS to draw on the ISLC as violative of the courts stay order and ordering MWSS to withdraw its demand to the consortium for payment under the ISLC. The main issue, according to the Supreme Court, is whether or not the rehabilitation court acted in excess of its authority or jurisdiction when it enjoined MWSS from seeking the payment of the concession fees. (a) The rehabilitation court relied on Section 1 of Rule 3 of the Interim Rules on Corporate Rehabilitation (IRCR) to support its jurisdiction over the ISLC and the banks that issued it. The said Section reads in part that jurisdiction over those affected by the proceedings is considered acquired upon the publication of the notice of commencement of proceedings in a newspaper of general circulation. According to the Court, the reference to those affected by the proceedings covers creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation that should be reflected in the audited financial statements. The Court, however, held that the banks do not hold any assets of Maynilad that would be material to the rehabilitation proceedings. Maynilads financial statements do not show the ISLC as part of its assets or liabilities and Maynilad has admitted it is not. In enjoining MWSS from claiming an asset that did not belong to Maynilad and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction. (b) Maynilad alleged, however, that it is Section 6(b) of Rule 4 of the IRCR that support its claim that the commencement of the process to draw on the ISLC is an enforcement of claim prohibited by the IRCR and the order of the rehabilitation court. In other words, Maynilad is claiming that MWSSs action constitutes a claim against the debtor, its guarantors and sureties not solidarily liable with the debtor. According to the Court, Section 6(b), Rule 4 of the IRCR does not enjoin the enforcement of all claims against guarantors and sureties but only those claims against guarantors and sureties who are not solidarily liable with the debtor. The Court concluded that the banks are solidarily liable with Maynilad because the undertaking of the banks under 25

the ISLC is a primary, direct, definite and absolute undertaking to pay and is not conditioned on the prior exhaustion of Maynilads assets. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case. 3. Purpose of suspension of actions for claims against the corporation (Spouses Sobrejuanite, et al. vs. ASB Development Corporation, G.R. No. 165675, September 30, 2005) The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an advantage or preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors. Such suspension is intended to give enough breathing space for the management committee or rehabilitation receiver to make the business viable again, without having to divert attention and resources to litigations in various fora. The suspension would enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the rescue of the debtor company. To allow such other action to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. SUPREME COURT INTERIM RULES OF PROCEDURE FOR INTRA-CORPORATE CONTROVERSIES Supreme Court Cases 1. Appointment of Interim Management Committee justified; Section 6(d) of PD 902-A interpreted (Jacinto, et al. vs. First Womens Credit Corporation, G.R. No. 154049, August 28, 2003) Petitioners, in the main, argue that the drastic relief of appointing an interim management committee must be granted only after much serious thought; in other words, they posit that the creation of a management committee for a solvent and going corporation should be a last-resort remedy considering that it would deprive the Board of Directors of its power over the corporation. Further, petitioners aver that the IMC was created on the unfounded allegation that they diverted corporate funds to RJ Group of Companies. They deny the charge and assert that RJ Group of Companies had settled its obligations with FWCC through an off-setting agreement which was consented to by Katayama himself. Besides, petitioner Jacintos financial exposure as surety to FWCCs creditor-banks far exceeds the amounts loaned to RJ Group of Companies. Jacinto claims that he acted as surety for FWCC in the latters obligations with Land Bank and PNB amounting to almost a billion pesos. If on this account alone, the IMC should be dissolved and management of FWCC should be given back to the Board of Directors headed by petitioner Jacinto. In exercising the discretion to appoint a management committee, the officer or tribunal before whom the application was made must take into account all the circumstances and facts of the case, the presence of conditions and grounds justifying the relief, the ends of justice, the rights of all the parties interested in the controversy and the adequacy and effectiveness of other available remedies. The discretion must be exercised with great caution and circumspection and only for a reason strongly appealing to the tribunal or officer exercising jurisdiction. At any rate, once the discretion has been 26

exercised, the presumption to be considered is that the officer or tribunal has fairly weighed and appraised the evidence submitted by the parties. In determining whether Hearing Officer Palmares correctly exercised his judgment when he ordered the creation of the IMC, it is necessary to refer to Sec. 6, par. (d), of PD 902-A Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: x x x x (d) To create and appoint a management committee, board, or body upon petition or motu propio when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties or paralization of business operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public (emphasis supplied). A reading of the aforecited legal provision reveals that for a minority stockholder to obtain the appointment of an interim management committee, he must do more than merely make a prima facie showing of a denial of his right to share in the concerns of the corporation; he must show that the corporate property is in danger of being wasted and destroyed; that the business of the corporation is being diverted from the purpose for which it has been organized; and that there is serious paralization of operations all to his detriment. It is only in a strong case where there is a showing that the majority are clearly violating the chartered rights of the minority and putting their interests in imminent danger that a management committee may be created. In this regard, mere disagreement among stockholders as to the affairs of the corporation would not in itself suffice as a ground for the appointment of a management committee. At least where there is no imminent danger of loss of corporate property or of any other injury to stockholders, management of corporate business should not be wrested away from duly elected officers, who are prima facie entitled to administer the affairs of the corporation, and placed in the hands of the management committee. However, where the dissension among stockholders is such that the corporation cannot successfully carry on its corporate functions the appointment of a management committee becomes imperative. After a review of the records, we are convinced that the appointment of the Interim Management Committee is fully warranted by the circumstances. The findings of Hearing Officer Palmares relative to the transfer of funds from FWCC to RJ Group of Companies without the corresponding Board resolutions, the drastic reduction of the number of FWCC branch offices all over the country, the suspension of lending operations, the limitation of FWCCs operations to mere collection of receivables as well as the inability of FWCC to pay its pressing obligations amply support the conclusion that there is imminent danger of dissipation, loss, wastage or destruction of corporate assets. The word imminent has been defined as impending or on the point of happening; while danger means peril or exposure to loss or injury. The findings of FWCCs external auditor, which were embodied in an audit report the accuracy of which was not questioned by petitioners, support the conclusion that petitioners unrestricted and continuous management of FWCC poses an impending peril to corporate assets. For one, petitioners allowed the release of loans to companies associated with petitioner Jacinto without the corresponding Board resolutions. Petitioners argument that Katayama knew of the practice does not justify the impropriety of their 27

dealings inasmuch as a corporate act inherently illegal does not cease to be illegal simply because the questioning stockholder is aware of the illegal practice and hence cannot claim that he was deceived. Also, petitioners contention that there is no need for the IMC to oversee corporate operations since FWCC had collected on the obligations of RJ Group of Companies through the 30 July 1997 Deed of Assignment is flawed. Petitioners need to be reminded that FWCC has not consummated the contract, that is, collect the assigned receivables, and there is still the danger that these receivables may turn out to be bad loans much to the detriment of FWCC as assignee. Additionally, as admitted by the parties and borne out by the evidence on record, the prevailing internal dispute and feud between petitioners and Katayama have resulted in the total paralization of FWCCs business operations and adversely affected its collection efforts. In view of these facts, Hearing Officer Palmares was clearly justified in ordering the appointment of the IMC to oversee the operation of FWCC and preserve its assets pending resolution of the parties dispute. With regard to petitioners argument that the appointment of the IMC caused them injuries which far outweigh the benefits granted to Katayama, suffice it to state that a management committee is not the representative or agent of the stockholder upon whose instance the committee has been appointed; rather, it is for the time being a ministerial officer and representative of the court hearing the derivative suit. Since its appointment is for the benefit of all interested parties, it holds and manages the property for the benefit of those ultimately entitled to, and not primarily for the benefit of the party at whose instance the appointment has been made. 2. Purpose and nature of derivative suit (Chua vs. Court of Appeals, et al., G.R. No. 150793, November 19, 2004) Under Section 36 of the Corporation Code, read in relation to Section 23, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief that is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation. 3. Not all stockholders/members are indispensable parties in derivative suit (R.N. Symaco Trading Corporation vs. Santos, et al., G.R. No. 142474, August 18, 2005) The Court ruled that, in a derivative suit, it is enough that a stockholder/member or a minority of the stockholders/members files the derivative suit for and in behalf of the corporation. After all, the stockholders/members who file a derivative suit are merely nominal parties, the real party-in-interest being the corporation itself for and in whose behalf the suit is filed. Any monetary benefits under the decision of the court shall pertain to the corporation. 28

4. Appointment of management committee not valid (Ao-As, et al. vs. CA, et al., G.R. No. 128464, June 20, 2006) The relevant portion of the Courts decision is as follows: Refusal to allow stockholders (or members of a non-stock corporation) to examine books of the company is not a ground for appointing a receiver (or creating a management committee) since there are other adequate remedies, such as a writ of mandamus. Misconduct of corporate directors or other officers is not a ground for the appointment of a receiver where there are one or more adequate legal action against the officers, where they are solvent, or other remedies. The appointment of a receiver for a going corporation is a last resort remedy, and should not be employed when another remedy is available. Relief by receivership is an extraordinary remedy and is never exercised if there is an adequate remedy at law or if the harm can be prevented by an injunction or a restraining order. Bad judgment by directors, or even unauthorized use and misapplication of the companys funds, will not justify the appointment of a receiver for the corporation if appropriate relief can otherwise be had. The fact that the President of the LCP needs the concurrence of only two other directors to authorize the release of surplus funds plainly contradicts the conclusion of conspiracy among the presently 11-man board. Neither does the fact that the Board of Directors of the LCP prepares the annual budget and the annual auditing of properties of the LCP justify the conclusion that the alleged acts of respondent Batong was done in concert with the other directors. There should have been evidence that such dissipation took place with the knowledge and express or implied consent of most or the entire board. Good faith is always presumed. As it is the obligation of one who alleges bad faith to prove it, so should he prove that such bad faith was shared by all persons to whom he attributes the same. The last resort remedy of replacing the entire board, therefore, with a management committee, is uncalled for. [See also Sy Chim, et al. vs. Sy Siy Ho & Sons, Inc., G.R. No. 164958, January 27, 2006 5. Power to create management committee includes power to reorganize the same (Punongbayan vs. Punongbayan, et al., G.R. No. 157671, June 20, 2006) The decision of the Court stated in part: Having the power to create a management committee, it follows that the RTC can order the reorganization of the existing management committee. Here, knowing that the deadlock among the members of the committee (appointed by the SEC) may lead to the paralyzation of the schools business operations, the RTC removed the said members and appointed new members. This is pursuant to Section 11, Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate Controversies which provides: A member of the management committee is deemed removed upon appointment by the court of his replacement chosen in accordance with Section 4 of this Rule. Such appointment of new members does not mean the creation of a new management committee. The existing management committee was not abolished. The RTC merely reorganized it by appointing new members. The management committee created by the SEC continues to exist. However, when it failed to function due to the division among the members, the RTC replaced them. Clearly, there was no revocation of the final Order of the SEC. 29

Significantly, in appointing new members of the management committee, chosen from the lists of nominees submitted by both petitioner and respondents, the RTC did not deprive respondents herein of their representation in the committee. SECURITIES REGULATION CODE tender offers 1. Under what circumstances is a tender offer mandatory? (Sec. 19; SRC Rule 19, paragraph 2) Except when the mandatory tender offer requirement does not apply pursuant to SRC Rule 19, paragraph 3 (a) Any person or group of persons acting in concert who intends to acquire thirty-five percent (35%) or more of equity shares in a public company shall disclose such intention and contemporaneously make a tender offer for the percent sought to all holders of such class, subject to paragraph (9)(E) of Rule 19, i.e., if the tender offer shall be for less than the total outstanding securities of a class but a greater number of securities is tendered pursuant thereto, the bidder shall be bound to take up and pay for the securities on a pro rata basis, disregarding fractions, according to the number of securities tendered by each security holder during the period such offer remains open. In the event that the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close of such tender offer shall be proportionately distributed across both selling shareholder with whom the acquirer may have been in private negotiations and minority shareholders. (b) Any person or group of persons acting in concert who intends to acquire thirty-five percent (35%) or more of equity shares in a public company in one or more transactions within a period of twelve (12) months shall be required to make a tender offer to all holders of such class for the number of shares so acquired within the said period. This is somet6imes referred to as a creeping tender offer. (c) If any acquisition of even less than thirty-five percent (35%) would result in ownership of over fifty-one percent (51%) of the total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under Rule 19 for all the outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such a tender offer shall be required to accept any and all securities thus tendered. A public company is any corporation with a class of equity securities listed on an exchange or with assets in excess of Fifty Million Pesos (P50,000,000) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities. (SRC Rule 3, paragraph 2.B) 2. What transactions are exempt from the mandatory tender offer requirement? (Sec. 19; SRC Rule 19, paragraph 3) The mandatory tender offer requirement shall not apply to the following: (a) any purchase of shares from the unissued capital stock, provided that the acquisition will not result to a fifty percent (50%) or more ownership of shares by the purchaser; (b) any purchase of shares from an increase in authorized capital stock; 30

(c) any purchase of shares in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor; (d) any purchase of shares in connection with privatization undertaken by the government of the Philippines; (e) any purchase of shares in connection with corporate rehabilitation under court supervision; (f) any purchase of shares through an open market at the prevailing market price; (g) merger or consolidation. Supreme Court Case Where both parties are equally at fault, neither one could have recourse against the other (Abacus Securities Corporation vs. Ampil, G.R. No. 160016, February 27, 2006) In the present controversy, the following pertinent facts are undisputed: (1) on April 8, 1997, respondent opened a cash account with petitioner for his transactions in securities; (2) respondents purchases were consistently unpaid from April 10 to 30, 1997; (3) respondent failed to pay in full, or even just his deficiency, for the transactions on April 10 and 11, 1997; (4) despite respondents failure to cover his initial deficiency, petitioner subsequently purchased and sold securities for respondents account on April 25 and 29; (5) petitioner did not cancel or liquidate a substantial amount of respondents stock transactions until May 6, 1997. Stock market transactions affect the general public and the national economy. The rise and fall of stock market indices reflect to a considerable degree the state of the economy. Trends in stock prices tend to herald changes in business conditions. Consequently, securities transactions are impressed with public interest, and are thus subject to public regulation. In particular, the laws and regulations requiring payment of traded shares within specified periods are meant to protect the economy from excessive stock market speculations, and are thus mandatory. In the present case, respondent cannot escape payment of stocks validly traded by petitioner on his behalf (i.e., the transactions on April 10 and 11, 1997). These transactions took place before both parties violated the trading law and rules. Hence, they fall outside the purview of the pari delicto rule. The pari delicto rule applies only to transactions entered into after the initial trades made on April 10 and 11, 1997 (i.e., the transactions on April 25 and 29). INTELLECTUAL PROPERTY CODE Supreme Court Cases 1. Copyright: Name and container of beauty cream product not proper subjects of copyright and patent (Kho vs. CA, G. R. No. 115758, March 19, 2002) In the case at bar, the petitioner applied for the issuance of a preliminary injunctive order on the ground that she is entitled to the use of the trademark on Chin Chun Su and its container based on her copyright and patent over the same. We first find it appropriate to rule on whether the copyright and patent over the name and container of a beauty cream product would entitle the registrant to the use and ownership over the same to the exclusion of others. 31

Trademark, copyright and patents are different intellectual property rights that cannot be interchanged with one another. A trademark is any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. In relation thereto, a trade name means the name or designation identifying or distinguishing an enterprise. Meanwhile, the scope of a copyright is confined to literary and artistic works that are original intellectual creations in the literary and artistic domain protected from the moment of their creation. Patentable inventions, on the other hand, refer to any technical solution of a problem in any field of human activity that is new, involves an inventive step and is industrially applicable. Petitioner has no right to support her claim for the exclusive use of the subject trade name and its container. The name and container of a beauty cream product are proper subjects of a trademark inasmuch as the same falls squarely within its definition. In order to be entitled to exclusively use the same in the sale of the beauty cream product, the user must sufficiently prove that she registered or used it before anybody else did. The petitioners copyright and patent registration of the name and container would not guarantee her the right to the exclusive use of the same for the reason that they are not appropriate subjects of the said intellectual rights. Consequently, a preliminary injunction order cannot be issued for the reason that the petitioner has not proven that she has a clear right over the said name and container to the exclusion of others, not having proven that she has registered a trademark thereto or used the same before anyone did. 2. Trademarks: Action for infringement or unfair competition could proceed independently or simultaneously with administrative action for cancellation of registered trademark (Levi Strauss [Phils.], Inc. vs. Vogue Traders Clothing Company, G.R. No. 132993, June 29, 2005) An action for infringement or unfair competition, including the available remedies of injunction and damages, can proceed independently or simultaneously with an action for the administrative cancellation of a registered trademark. 3. Copyright: Proof of ownership of copyrighted material; proof of copying; no copyright protection for works of applied art or industrial design (Ching vs. Salinas, Sr., et al., G.R. No. 161295, June 29, 2005) An applicant for a search warrant for infringement under R.A. No. 8293 must demonstrate the existence and the validity of his copyright. Ownership of copyrighted material is shown by proof of originality and copyrightability. By originality is meant that the material was not copied, and evidences at least minimal creativity, that it was independently created by the author, and that it possesses at least some minimal degree of creativity. Copying is shown by proof of access to copyrighted material and substantial similarity between the two works. -oTo discharge his burden, the applicant may present the certificate of registration covering the work or, in its absence, other evidence. A copyright certificate provides prima facie evidence of originality that is one element of copyright validity. It constitutes prima facie evidence of both validity and ownership and the validity of the facts stated in the certificate. -o32

There is no copyright protection for works of applied art or industrial design that have aesthetic or artistic features that cannot be identified separately from the utilitarian aspects of the article. Functional components of useful articles, no matter how artistically designed, have generally been denied copyright protection unless they are separable from the useful article. ANTI-MONEY LAUNDERING ACT RA 9160 (2001), as amended by RA 9194 (2003) 1. What is money laundering? Money laundering, according to the definition adopted by the International Criminal Police Organization or Interpol, denotes any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.[1] The purpose of laundering is to disguise illegal profits without compromising the criminals who wish to benefit from the proceeds of their activities. Section 4 of Republic Act No. 9160, otherwise known as the Anti-Money Laundering Act (AMLA), defines money laundering as a crime whereby the proceeds of an unlawful activity are transacted thereby making them appear to have originated from legitimate sources. In plain language, money laundering is the conversion of dirty money into clean money. 2. How is money laundered? There are 3 common stages of money laundering, namely, placement or the physical disposal of the criminal proceeds, layering or the separation of the criminal proceeds from their source by creating layers of financial transactions to disguise the audit trail, and integration or the provision of apparent legitimacy to the criminal proceeds. The placement stage is intended to sever any direct association between the money and the crime generating it. At this stage, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums. These sums may then be deposited directly into one or more bank accounts, or used to purchase monetary instruments, such as checks, money orders, securities, etc., that are afterwards deposited into other accounts at other places. After the funds have entered the financial system, the layering stage takes place. The object here is to obscure the money trail to foil pursuit. At this stage, the launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be used to purchase investment instruments that are subsequently sold, or they might simply be wired to accounts in other banks in other countries. Sometimes, the transfers might be disguised as payments for goods or services, thus giving them a legitimate appearance. Once the manner of its acquisition and its source can no longer be traced, the money may now be available to the criminal again. This is the integration stage when the funds re-enter the legitimate economy. The launderer could then invest the laundered funds into any asset or business venture.[2] 3. What are covered institutions? These are the persons, corporations and other entities subject to the provisions of the AMLA. Specifically, the term refers to (a) banks, non-banks, quasi-banks, trust entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP); 33

(b) insurance companies and all other institutions supervised or regulated by the Insurance Commission; and (c) (i) securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant, (ii) mutual funds, close-end investment companies, common trust funds, pre-need companies and other similar entities, (iii) foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities, and (iv) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by Securities and Exchange Commission and Exchange Commission. (Sec. 3[a], AMLA) 4. What is a covered transaction? It is a transaction with a covered institution in cash or other equivalent monetary instrument involving a total amount in excess of P500,000 within one banking day (Sec. 3[b], AMLA). This means that if the amount involved is less than P500,000 then the covered institution need not make a report to the AMLA unless the transaction is a suspicious transaction. 5. What is a suspicious transaction? It is a transaction with a covered institution, regardless of the amount involved, where any of the following circumstances exist: (a) there is no underlying legal or trade obligation, purpose or economic justification; (b) the client is not properly identified; (c) the amount involved is not commensurate with the business or financial capacity of the client; (d) taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid being the subject of reporting requirements under the Act; (e) any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the client's past transactions with the covered institution; (f) the transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or (g) any transaction that is similar or analogous to any of the foregoing. (Sec. 3[b-1], AMLA). A transaction may be both a covered and suspicious transaction. 6. What is an unlawful activity? It is any act or omission or series or combination of acts or omissions involving or having relation to any of the crimes and offenses enumerated in Section 3(i) of the AMLA such as kidnapping for ransom, plunder, robbery and extortion, jueteng and masiao, piracy on the high seas, qualified theft, swindling, smuggling, hijacking, destructive arson, murder, and violations of certain provisions of the Anti-Graft and Corrupt Practices Act, Comprehensive Dangerous Drugs Act of 2002, Electronic Commerce Act of 2000, and Securities Regulation Code of 2000. Tax evasion and other violations of the National Internal Revenue Code are not included in the list of unlawful activities. In other countries, the term predicate crime is used instead of unlawful activity. 34

7. What are the money laundering offenses penalized under the AMLA? (a) The transaction of any monetary instrument or property, or the attempt to transact the same, by any person knowing that such monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity; (b) The performance of, or failure to perform, any act by any person, knowing that any monetary instrument or property involves the proceeds of any unlawful activity, as a result of which performance or failure to perform he facilitates the offense of money laundering referred to in paragraph (a) above; (c) The failure by any person, knowing that any monetary instrument or property is required under the AMLA to be disclosed and filed with the AMLC, to make such disclosure and filing. (Sec. 4, AMLA) 8. What is the Anti-Money Laundering Council? The Anti-Money Laundering Council is the government entity that administers the AMLA. It is composed of the Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner of the Insurance Commission and the Chairman of the Securities and Exchange Commission as members. The AMLC shall act unanimously in the discharge of its functions. 9. What are the covered institutions required to do to under the AMLA to prevent money laundering? There are three basic activities covered institutions are required to do to prevent money laundering (Sec. 9, AMLA): (a) Identify customers A covered institution shall establish and record the true identity of its clients based on official documents. It shall maintain a system of verifying the true identity of its clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf. Anonymous accounts, accounts under fictitious names, and all other similar account are prohibited by the AMLA. However, Peso and foreign currency non-checking numbered accounts are allowed. (b) Keep records Covered institutions are required to maintain and safely store all records of all transactions for a period of five years from the dates of the transactions. With respect to closed accounts, the records on customer identification, account files and business correspondence are required to be preserved and safely stored for at least five years from the dates when they were closed. (c) Report covered and suspicious transactions - Covered institutions shall report to the AMLC all covered and suspicious transactions within five working days from occurrence thereof, unless the Supervising Authority concerned (i.e., the BSP, SEC or OIC) prescribes a longer period not exceeding 10 working days. 10. What is a freeze order? It is the order that the Court of Appeals may issue, upon application ex parte by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity, to block, suspend or otherwise place under the control of the covered institution concerned the monetary instrument or property subject thereof. A freeze order takes effect immediately and lasts for a period of 20 days unless extended by the Court of Appeals, 35

- end [1] Introduction to the Model Legislation on Laundering, Confiscation and International Cooperation in Relation to the Proceeds of Crime prepared by the United Nations Office for Drug Control and Crime Prevention (1999). [2] See Basic Facts About Money Laundering, gafi.org/Mlaundering_en.htm, as of August 14, 2002. http://www.fatf-

36