From Sir Catindig Revised 2007 NOSCL Supplement 7-7-08

2007 Supplement to the Notes on Selected Commercial Laws
by Atty. Tristan A. Catindig June 12, 2007 All rights reserved.
CHAPTER I: BANGKO SENTRAL NG PILIPINAS LAW

SUPPLEMENTTOPARAGRAPH1.17(A),PP.1213
OnaccountoftheissuancebytheBSPofnewcoinsinhigherdenominationsaftertheaffectivity
oftheBSPLawin1993,theBSP,pursuanttoSection52oftheBSPLawandMonetaryBoard
ResolutionNo.862,datedJuly6,2006,issuedCircularNo.537,datedJuly18,2006,which
adjustedthemaximumamountofcoinstobeconsideredaslegaltenderasfollows:
1.
2.
and
OneThousandPesos(P1,000)fordenominationsof1Piso,5Pisoand10Pisocoins;
OneHundredPesos(P100)fordenominationsof1sentimo,5sentimo,10sentimo,
and25sentimocoins.
CHAPTER II: GENERAL BANKING LAW OF 2000

SUPPLEMENTTOPARAGRAPH2.31,PP.3233
UnderBSPCircularNo.488,datedJune21,2005,andBSPCircularNo.493,datedSeptember16,
2005,theBSPaddedthefollowingfunctions,servicesoractivitiesthatbankscouldoutsource
subjecttopriorapprovaloftheMonetaryBoard:
1.
Internalaudit(subjecttoanumberofconditions);
2.
Marketingloans,depositsandotherbankproductsandservices,provideditdoesnot
involvetheactualopeningofdepositaccounts;
3.
Generalbookkeepingandaccountingservices,providedthattheseactivitiesdonot
includeservicingbankdepositsorotherinherentbankingfunctions;
4.
Offsiterecordstorageservices;
5.
Backupanddatarecoveryoperations.
WithoutneedofpriorMonetaryBoardapproval, banksmayoutsourcethefollowingfunctions,
servicesoractivities:
1.
Printing of bank loan statements and other nondeposit records, bank forms and
promotionalmaterials;
2.
Transferagentservicesfordebtandequitysecurities;
3.
Messenger,courierandpostalservices;
4.
Securityguardservices;
5.
Vehicleservicecontracts;
6.
Janitorialservices;
7.
Public relations services, procurement services, and temporary staffing, provided that
theseactivitiesdonotincludeservicingbankdepositsorotherinherentbankingfunctions;
8.
Sortingandbaggingofnotesandcoins;
9.
Maintenanceofcomputerhardware;
10.
Payrollofbankingemployees;
11.
Telephoneoperator/receptionistservices;
12.
Sales/disposalofacquiredassets;
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13.
Personneltraininganddevelopment;
14.
Building,groundandotherfacilitiesmaintenance;
15.
legalservicesfromlocallegalcounsel;and
16.
complianceriskassessmentandtesting.
ADDITIONALSUPREMECOURTCASE
Banksarerequiredtoassumeadegreeofdiligencehigherthanthatofagoodfatherofafamily
(PhilippineBankingCorporationvs.CA,G.R.No.127469,January15,2004)
TheCourtheldthatSection2oftheGeneralBankingLawof2000expresslyimposesafiduciary
dutyonbankswhenitdeclaresthattheStaterecognizesthefiduciarynatureofbankingthat
requireshighstandardsofintegrityandperformance.Forthisreason,thefiduciarynatureof
bankingrequiresabanktoassumeadegreeofdiligencehigherthanthatofagoodfatherofa
family.Thus,theCourtruled:
TheBANKisliabletoMarcosforoffsettinghistimedepositswithafictitious
promissory note.The existence of Promissory Note No. 2097983 could have
beeneasilyprovenhadtheBANKpresentedtheoriginalcopiesofthepromissory
note and its supporting evidence. In lieu of the original copies, the BANK
presented the machine copies of the duplicate of the documents.These
substitutedocumentshavenoevidentiaryvalue.TheBanksfailuretoexplainthe
absenceoftheoriginaldocumentsandtomaintainarecordoftheoffsettingofthis
loanwiththetimedepositsbringtoforetheBanksdismalfailuretofulfillits
fiduciarydutytoMarcos.
CHAPTER IV: PHILIPPINE DEPOSIT INSURANCE CORPORATION

REVISEDCHAPTERIV,PP.5356
4.1
Whatisthepurposeofthelaw?(Sec.1)
Thepurposeofthelawistocreateagovernmentownedandcontrolledentity,thePhilippine
DepositInsuranceCorporation,whichshallinsurethedepositliabilitiesofallbanksentitledtothe
benefits of insurance under the Act. Such insurance is intended to protect depositors from
situationsthatpreventbanksfrompayingoutdeposits,asinbankfailuresorclosures,andto
encouragepeopletodepositinbanks.
4.2
WhatarethemainfunctionsofthePDIC?
(a)
Insuranceofbanks(Sec.5,etseq.)ThePDICinsuresthedepositliabilitiesof
banks. For this purpose, it assesses and collects insurance assessments from memberbanks.
Wheneveraninsuredbankisclosed,thePDICprocessesandservicesclaimsofinsureddeposits.
(b)
Examinationofbanks(Secs.8and9)ThePDICmayexamineabankwiththe
priorapprovaloftheMonetaryBoardoftheBangkoSentralngPilipinas.Suchexaminationmay
extendtoalltheaffairsofthebankandincludestheauthoritytoinvestigatefrauds,irregularities
andanomaliescommittedinthebank.
(c)
Rehabilitationofbanks (Sec.17)UpondeterminationbythePDICthat(i)a
bankisindangerofclosing,(ii)thecontinuedoperationofsuchbankisessentialtoprovide
adequatebankingserviceinthecommunityormaintainfinancialstabilityintheeconomy,and(iii)
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theactualliquidationandpayoffofthebankwillbemoreexpensivethantheextensionoffinancial
assistancetothebank,thePDICmaymakeloansto,purchasetheassetsorassumetheliabilities
of,ormakedepositsin,thesaidbankinordertopreventitsclosing.Theforegoingauthoritymay
alsobeexercisedbythePDICinrespectofaclosedbank.
(d)
Receivershipofclosedbanks (Secs.8and10;seealsoSec.30,RA7653)As
receiver,thePDICshallcontrol,manageandadministertheaffairsoftheclosedbankforthe
purposeofpreservingitsassetsforthebenefitofthecreditorsofthebank.
(e)
Liquidationofclosedbanks (Sec.30,RA7653)Iftheclosedbankcannotbe
rehabilitated,thePDICwouldproceedwithitsliquidation.Thiswouldinvolvetheconversionof
theassetsofthebankintocashfordistributiontothecreditorsinaccordancewiththeprovisionsof
theCivilCodeonconcurrenceandpreferenceofcredits.
InsuranceCoverage
4.3
WhosedepositliabilitiesarerequiredtobeinsuredwiththePDIC?(Sec.5)
Thedepositliabilitiesofanybank,includingthebranchesinthePhilippinesofforeignbanks,
engagedinthebusinessofreceivingdepositsarerequiredtobeinsuredwiththePDIC.
4.4
Is PDIC insurance coverage required of foreign currency deposits maintained in

Philippinebanks?
Yes.Section9oftheForeignCurrencyDepositAct(RA6426,asamended)andSection79ofCB
CircularNo.1389,datedAugust13,1993,requireforeigncurrencydepositstobeinsuredunder
thePDICLaw.Foreigncurrencydepositorsareentitledtoreceivepaymentinthesamecurrencyin
whichtheinsureddepositisdenominated.
4.5
Are the deposit liabilities of a local bank payable in its branch located abroad
coveredbyPDICinsurance?(Sec.4[f])
No,theywouldnotbecoveredbyPDICinsurance.However,subjecttoPDICapproval,alocal
bankthatmaintainsabranchoutsidethePhilippinesmayelecttoincludeforinsuranceitsdeposit
obligationspayableonlyatsuchbranch.
4.6
WhendoesthePDICbecomeliabletopaytheinsureddeposits?(Sec.14)
ThePDICbecomesliabletopaytheinsureddepositsinabankwhenthebankisclosedbythe
MonetaryBoardoftheBangkoSentralngPilipinas,thatis,prohibitedfromdoingfurtherbusiness
inthePhilippines,onaccountofinsolvencyandothergroundsunderthelaw(seeParagraph1.10).
4.7
DoesPDICinsurancecoverrisksotherthanbankclosure?
No,PDICinsurancecoversonlytheriskofbankclosureorderedbytheMonetaryBoard.Losses
thatabankmaysufferduetonaturalcalamities,theft,war,strike,etc.wouldnotbecoveredby
PDICinsurance.
4.8
WhatistheextentofthePDICsliabilitytoabankdepositor?(Sec.4[g])
ThePDICsliabilityisuptoP250,000perdepositorpercapacity.
4.9
Whatisaninsureddeposit?(Sec.4[g];seealsoPDICBulletinNo.200404,August12,
2004)
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Aninsureddepositistheamountdueanydepositorfordepositsinaninsuredbanknetofany
maturedorunmaturedobligationofthedepositortotheinsuredbankasofthedateofclosurebut
nottoexceedP250,000.Indeterminingsdepositorsinsureddeposit,thePDICshalladdtogether
alldepositsinthebankmaintainedbythedepositorinthesamerightandcapacityforhisbenefit
eitherinhisownnameorinthenameofothers.Theoutstandingbalanceofeachaccountwould
alsobeadjustedtotakeintoaccountanyinterestearnedbytheaccountasofthedateofclosureof
thebanklessanywithholdingtaxdueonsuchinterest.
4.10
Howwouldjointaccountsbeinsuredandwhatruleswouldapplyinthepaymentof
PDIC insuranceto such accounts? (Sec. 4[g]; see alsoPDIC BulletinNo. 200404,
August12,2004)
(a)
Ajointaccount,regardlessofwhethertheconjunctionand,or,orand/orisused,
shallbeinsuredseparatelyfromanyindividuallyowneddepositaccount.Themaximuminsured
depositofP250,000shallbedividedintoasmanyequalsharesastherearedepositorsunlessa
differentsharingisstipulatedinthedocumentofdeposit.
Example:PedroandMariohaveP400,000inajointsavingsaccountwithABC
Bank.PedroalsohasP300,000inanothersavingsaccountthathemaintainswith
thesamebanksolelyinhisname.MariostotaldepositisP200,000whilethatof
PedroisP500,000.IfABCBankwereclosed,MariocouldclaimP125,000from
PDIC(representinghis50%shareofthemaximuminsureddepositofthejoint
account with Pedro) while Pedro could claim a total of P250,000 (P125,000,
representinghis50%shareofthemaximuminsureddepositofthejointaccount
withMario),plusP125,000outofthesavingsaccountsolelyinhisname.
(b)
Iftheaccountwereheldbyajuridicalpersonjointlywithoneormorenaturalpersons,the
maximuminsureddepositshallbepresumedtobelongentirelytosuchjuridicalpersonorentity.
Example:XYZCorporationandPedrohaveP250,000inajointsavingsaccount
with ABC Bank. Pedro also has P250,000 in another savings account that he
maintainswiththesamebanksolelyinhisname.IfABCBankwereclosed,XYZ
CorporationcouldclaimP250,000fromPDIC.TheP250,000inthejointaccount
wouldbepresumedtobelongentirelytoXYZCorporation.
(c)
Incaseoneofthecodepositorsinajointand/orororaccounthasanobligationtothe
closedbankcoveredbyaholdoutagreement(i.e.,asecurityarrangementwherebytheobligation
issecuredbytheaccount),theobligationsecuredbythesaidagreementshallbedeductedfromthe
balanceofthejointaccountregardlessofthefactthatonlyoneofthecodepositorsisindebtedto
theclosedbank.
Example: PedroandMariohaveP200,000inajointand/orsavingsaccount
withABCBank.PedroborrowedP50,000fromthebankandsecureditwitha
holdoutonthejointand/orsavingsaccount.IfABCBankwereclosed,Pedro
andMariocouldeachclaimonlyP75,000fromthePDIC.
(d)
Incasethedepositisajointandaccount,theobligationshallbedeductedonlyfromthe
shareoftheindebtedcodepositorunlesstheothercodepositorishimselfacosignatorytothe
holdoutagreement.
Example:Iftheaccountintheimmediatelyprecedingproblemwereajointand
account, Pedro could claim only P50,000 from the PDIC. Mario could claim
P100,000.
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(e)
Wherethedepositisnotcoveredbyaholdoutagreement,theobligationshallbededucted
onlyfromtheshareoftheindebtedcodepositorregardlessofwhetherthedepositisajointand,
or,orand/oraccount.
PaymentofInsuredDeposits
4.11
IsthePDICrequiredtonotifythedepositorsofaclosedbankofthefactofsuch
closureandtheneedtofiletheirclaims?(Sec.16)
Yes,ThePDICshallpublishthenoticetodepositorsonceaweekforthree(3)consecutiveweeks
in a newspaper of general circulation or, when appropriate, in a newspaper circulated in the
communityorcommunitieswheretheclosedbankoritsbranchesarelocated.
4.12
IsthereaprescriptiveperiodforthefilingofclaimswiththePDICbythedepositors
ofaclosedbank?(Sec.16[e])
Yes.AdepositorofaclosedbankmustfilehisclaimwiththePDICwithin2yearsfromactual
takeoveroftheclosedbankbyPDIC.Ifhedoesnot,allhisrightsagainstthePDICinrespectof
theinsureddepositsshallbebarred.However,alltherightsofthedepositoragainsttheclosed
bankanditsshareholdersorthereceivershipestatetowhichPDICmayhavebecomesubrogated
shallthereuponreverttothedepositor.
4.13
WhenisthePDICrequiredtosettleaclaimforaninsureddeposit?(Sec.14)
ThePDICisrequiredtosettletheclaimwithin6monthsfromthedateoffilingthereofprovided
thattheclaimwasfiledwithin2yearsfromactualtakeoveroftheclosedbankbyPDIC.The6
monthperiodshallnotapplyifthedocumentsoftheclaimantareincompleteorthevalidityofthe
claim requires the resolution of issues of facts or law by another office, body or agency,
independentlyorincoordinationwiththePDIC.
4.14
Whenaninsuredbankisclosed,howwillpaymentoftheinsureddepositsinsuch
bankbemadebythePDIC?(Sec.14)
ThePDICshallpayeither(i)incashor(ii)bymakingavailabletoeachdepositoratransferred
depositinanotherinsuredbankinanamountequaltotheinsureddepositofsuchdepositor.
4.15
Whatisatransferreddeposit?(Sec.4[h])
ItisadepositinaninsuredbankmadeavailabletoadepositorbythePDICaspaymentofthe
insureddepositofsuchdepositorinaclosedbankandassumedbyanotherinsuredbank.By
payingitsliabilitiestodepositorsinthismanner,thePDIChopestopersuadethesedepositorsto
keeptheirsavingsinbankswheresuchfundscouldbelentout,ratherthanhoardedandkeptoutof
thebankingsystem.
4.16
Whatistheeffectofpaymenttothedepositorofhisinsureddeposit?
(Sec.16[b])
It(i)dischargesthePDICfromanyfurtherliabilitytothedepositor,and(ii)subrogatesthePDIC
toalltherightsofthedepositoragainsttheclosedbanktotheextentofsuchpayment.
4.17
WhatisthenatureofthepaymentsofinsureddepositsmadebythePDICanddo
theyenjoyanypreferenceunderArticle2244oftheCivilCode?(Sec.15)
AllpaymentsbythePDICofinsureddepositsinclosedbankspartakeofthenatureofpublic
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funds,andassuch,mustbeconsideredapreferredcreditsimilartotaxesduetotheNational
GovernmentintheorderofpreferenceunderArticle2244oftheNewCivilCode.
4.18
IfthedepositaccountinaclosedbankweremorethanP250,000,woulditstillbe
possibleforthedepositortorecovertheexcess?
Yes.Assumingthatthebankisnotrehabilitatedortakenoverbyanotherbank,thedepositorcould
claimtheexcessamountfromtheliquidatoroftheclosedbank.However,theliquidatormightnot
beabletopaytheclaimifthefinalliquidationoftheremainingassetsoftheclosedbankdoesnot
generateenoughcashtopaysuchclaim.Suchclaimwouldalsobesubjecttotheprovisionsofthe
CivilCodeonconcurrenceandpreferenceofcredits.Ifthebankisrehabilitatedortakenoverby
anotherbank,therehabilitatororthebanktakingovertheclosedbankwouldusuallyassumethe
liabilityforthepaymentoftheexcessdeposits.
PowersofthePDIC
4.19
WhatistheextentofthepowerofthePDICtoexaminebanks?(Sec.8)
ThePDICmayexamineabankwiththepriorapprovaloftheMonetaryBoard.However,no
examinationcanbeconductedwithin12monthsfromthelastexaminationdate.
4.20
CouldthePDICprovidelegalassistancetoitsdirectors,officers,employeesor
agents?(Sec.9[f])
Yes.ThePDICshallunderwriteoradvancethelitigationexpensesof,includinglegalfeesand
otherexpensesofexternalcounsel,orprovidelegalassistanceto,itsdirectors,officers,employees
oragentsinconnectionwithanycivil,criminal,administrativeoranyotheractionorproceedingto
whichsuchdirectors,officers,employeesoragentsaremadeapartybyreasonof,orinconnection
with,theirexerciseofauthorityorperformanceoffunctionsanddutiesunderthePDICLaw.
4.21
Asreceiver,doesthePDICtakeoverthepowers,functionsanddutiesofthe
directors,officersandstockholdersoftheclosedbank?(Sec.10[b],1stparagraph)
Yes.ThePDICasreceivershallcontrol,manageandadministertheaffairsoftheclosedbank.
Effectiveimmediatelyuponitstakeoverasreceiverofsuchbank,thepowers,functionsandduties,
aswellasallallowances,remunerationsandperquisitesofthedirectors,officers,andstockholders
ofsuchbankaresuspended,andtherelevantprovisionsoftheArticlesofIncorporationandBy
lawsoftheclosedbankarelikewisedeemedsuspended.
4.22
Whatisthestatusoftheassetsoftheclosedbankunderreceivership?(Sec.10[b],2nd
paragraph)
Theassetsoftheclosedbankunderreceivershipshallbedeemedincustodialegisinthehandsof
thereceiver.Fromthetimetheclosedbankisplacedundersuchreceivership,itsassetsshallnot
besubjecttoattachment,garnishment,execution,levyoranyothercourtprocesses.
4.23
WhataresomeoftheadditionalpowersofthePDICasareceiver?(Sec.10[c])
(a)
suspend or terminate the employment of officers and employees of the closed bank;
provided,thatpaymentofseparationpayorbenefitsshallbemadeonlyaftertheclosedbankhas
beenplacedunderliquidationpursuanttotheorderoftheMonetaryBoardunderSection30of
R.A.7653,andthatsuchpaymentshallbemadefromavailablefundsofthebankafterdeducting
reasonableexpensesforreceivershipandliquidation;
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(b)
hireorretainprivatecounselsasmaybenecessary;
(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
reductionoftheinterestratetoareasonablerate;provided,thatanymodificationorreductionshall
applyonlytounpaidinterest.
4.24
IsthePDICrequiredtopaydocketandothercourtfeesinthecasesitmightfileas
receiverfortherecovery,orinvolvinganyasset,oftheclosedbank?(Sec.11)
Yes. However, payment of docket and other court fees shall be deferred until the action is
terminatedwithfinality.Anysuchfeesshallbeafirstlienonanyjudgmentinfavoroftheclosed
bankor,incaseofunfavorablejudgment,suchfeesshallbepaidasadministrativeexpensesduring
thedistributionoftheassetsoftheclosedbank.
CHAPTER V: TRUTH IN LENDING ACT

ADDITIONALSUPREMECOURTCASES
1.
Excessive interests, penalties and other charges not revealed in disclosure statements
issuedbybanks,evenifstipulatedinthepromissorynotes,cannotbegiveneffectunder
the Truth in Lending Act (New Sampaguita Builders Construction, Inc., et al. vs.
PhilippineNationalBank,G.R.No.148753,July30,2004)
TheCourtruledinthiscasethatexcessiveinterests,penaltiesandotherchargesnotrevealedin
disclosurestatementsissuedbybanks,evenifstipulatedinthepromissorynotes,cannotbegiven
effectundertheTruthinLendingAct.TheCourtfurthersaid:
NopenaltychargesorincreasesthereofappeareitherintheDisclosureStatementsor
inanyoftheclausesinthesecondandthethirdCreditAgreementsearlierdiscussed.
Whileastandardpenaltychargeof6percentperannumhasbeenimposedonthe
amounts stated inall threePromissoryNotes still remainingunpaidor unrenewed
whentheyfelldue,thereisnostipulationthereinthatwouldjustifyanyincreasein
thatcharges.Theeffect,therefore,whentheborrowerisnotclearlyinformedofthe
DisclosureStatementspriortotheconsummationoftheavailmentordrawdownis
thatthelenderwillhavenorighttocollectuponsuchchargeorincreasesthereof,even
ifstipulatedintheNotes.Thetimeisnowripetogiveteethtotheoftenignoredforty
oneyearoldTruthinLendingActandthustransformitfromasnivelingpapertigerto
agrowlingfinancialwatchdogofhaplessborrowers.
2.
Failuretodiscloserequiredinformationindisclosurestatementcuredbydisclosure
thereofinloantransactiondocuments (DBPvs.Arcilla,G.R.No.161397,June30,
2005)
TheCourtruledthatthefailureoftheDBPtodisclosetherequiredinformationinthedisclosure
statementformauthorizedbytheBSPwascuredbytheDBPsdisclosureofsuchinformationin
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theloantransactiondocuments(i.e.,thedeedofconditionalsaleandthesupplementthereto,the
promissorynotes,andthereleasesheet)betweentheDBPandArcilla.
CHAPTER VI: LETTERS OF CREDIT

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,February1,2002)
ThepertinentpartsoftheCourtsdecisionaresetoutbelow:
Modernlettersofcreditareusuallynotmadebetweennaturalpersons.Theyinvolvebanktobank
transactions.Historically,theletterofcreditwasdevelopedtofacilitatethesaleofgoodsbetween,
distantandunfamiliarbuyersandsellers.Itwasanarrangementunderwhichabank,whosecredit
wasacceptabletotheseller,wouldattheinstanceofthebuyeragreetopaydraftsdrawnonitby
theseller,providedthatcertaindocumentsarepresentedsuchasbillsofladingaccompaniedthe
corresponding drafts. Expansion in the use of letters of credit was a natural development in
commercialbanking.Partiestoacommercialletterofcreditinclude(a)thebuyerortheimporter,
(b)theseller,alsoreferredtoasbeneficiary,(c)the openingbankwhichisusuallythebuyers
bankwhichactuallyissuestheletterofcredit,(d)thenotifyingbankwhichisthecorrespondent
bank of the opening bank through whichit advises the beneficiaryof the letter of credit, (e)
negotiatingbank whichisusuallyanybankinthecityofthebeneficiary.Theservicesofthe
notifyingbankmustalwaysbeutilizediftheletterofcreditistobeadvisedtothebeneficiary
throughcable,(f)thepayingbankwhichbuysordiscountsthedraftscontemplatedbytheletterof
credit,ifsuchdraftistobedrawnontheopeningbankoronanotherdesignatedbanknotinthe
city of the beneficiary. As a rule, whenever the facilities of the opening bank are used, the
beneficiaryissupposedtopresent hisdraftstothenotifyingbankfornegotiationand(g)the
confirmingbankwhich,upontherequestofthebeneficiary,confirmstheletterofcreditissuedby
theopeningbank.
From the foregoing, it is clear that letters of credit, being usually bank to bank transactions,
involvemorethanjustonebank.Consequently,thereisnothingunusualinthefactthatthedrafts
presentedinevidencebyrespondentbankwerenotmadepayabletoPBCom.Asexplainedby
respondentbank,adraftwasdrawnontheBankofTaiwanbyTaJihEnterprisesCo.,Ltd.of
Taiwan,supplierofthegoodscoveredbytheforeignletterofcredit.Havingpaidthesupplier,the
BankofTaiwanthenpresentedthebankdraftforreimbursementbyPBComscorrespondentbank
inTaiwan,theIrvingTrustCompanywhichexplainsthereasonwhyonitsface,thedraftwas
madepayabletotheBankofTaiwan.IrvingTrustCompanyacceptedandendorsedthedraftto
PBCom.ThedraftwaslatertransmittedtoPBComtosupportthelattersclaimforpaymentfrom
MICO.MICOacceptedthedraftuponpresentmentandnegotiatedittoPBCom.
o
Atrustreceiptisconsideredasasecuritytransactionintendedtoaidinfinancingimportersand
retaildealerswhodonothavesufficientfundsorresourcestofinancetheimportationorpurchase
ofmerchandise,andwhomaynotbeabletoacquirecreditexceptthroughutilization,ascollateral
ofthemerchandiseimportedorpurchased.Atrustreceipt,therefor,isadocumentofsecurity
pursuanttowhichabankacquiresasecurityinterestinthegoodsundertrustreceipt.Undera
letterofcredittrustreceiptarrangement,abankextendsaloancoveredbyaletterofcredit,with
thetrustreceiptasasecurityfortheloan.Thetransactioninvolvesaloanfeaturerepresentedbya
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letterofcredit,andasecurityfeaturewhichisinthecoveringtrustreceiptwhichsecuresan
indebtedness.
2.
Commercialandstandbylettersofcredit;independenceprinciple;fraudexceptionrule
(Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717,
November22,2004)
TherelevantpartsoftheCourtsdecisionaresetoutbelow:
Atthecoreofthepresentcontroversyistheapplicabilityoftheindependenceprincipleand
fraudexceptionruleinlettersofcredit.Thus,adiscussionofthenatureanduseoflettersof
credit,alsoreferredtosimplyascredits,wouldprovideabetterperspectiveofthecase.
Theletterofcreditevolvedasamercantilespecialty,andtheonlywaytounderstandallitsfacets
istorecognizethatitisanentityuntoitself.Therelationshipbetweenthebeneficiaryandthe
issuerofaletterofcreditisnotstrictlycontractual,becausebothprivityandameetingofthe
mindsarelacking,yetstrictcompliancewithitstermsisanenforceableright.Norisitathird
partybeneficiarycontract,becausetheissuermusthonordraftsdrawnagainstaletterregardlessof
problemssubsequentlyarisingintheunderlyingcontract.Sincethebankscustomercannotdraw
ontheletter,itdoesnotfunctionasanassignmentbythecustomertothebeneficiary. Nor,if
properlyused,isitacontractofsuretyshiporguarantee,becauseitentailsaprimaryliability
followingadefault.Finally,itisnotinitselfanegotiableinstrument,becauseitisnotpayableto
orderorbearerandisgenerallyconditional,yetthedraftpresentedunderitisoftennegotiable.
Incommercialtransactions,aletterofcreditisafinancialdevicedevelopedbymerchantsasa
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilableinterestsofaseller,whorefusestopartwithhisgoodsbeforeheispaid,anda
buyer,whowantstohavecontrolofthegoodsbeforepaying.Theuseofcreditsincommercial
transactionsservestoreducetheriskofnonpaymentofthepurchasepriceunderthecontractfor
thesaleofgoods.However,creditsarealsousedinnonsalesettingswheretheyservetoreduce
theriskofnonperformance.Generally,creditsinthenonsalesettingshavecometobeknownas
standbycredits.
Therearethreesignificantdifferencesbetweencommercialandstandbycredits.First,commercial
creditsinvolvethepaymentofmoneyunderacontractofsale.Suchcreditsbecomepayableupon
thepresentationbythesellerbeneficiaryofdocumentsthatshowhehastakenaffirmativestepsto
complywiththesalesagreement.Inthestandbytype,thecreditispayableuponcertificationofa
party'snonperformanceoftheagreement.Thedocumentsthataccompanythebeneficiary'sdraft
tendtoshowthattheapplicanthasnotperformed.Thebeneficiaryofacommercialcreditmust
demonstratebydocumentsthathehasperformedhiscontract.Thebeneficiaryofthestandby
creditmustcertifythathisobligorhasnotperformedthecontract.[Underscoringsupplied]
Bydefinition,aletterofcreditisawritteninstrumentwherebythewriterrequestsorauthorizesthe
addresseetopaymoneyordelivergoodstoathirdpersonandassumesresponsibilityforpayment
of debt therefor to the addressee. A letter of credit, however, changes its nature as different
transactionsoccurandifcarriedthroughtocompletionendsupasabindingcontractbetweenthe
issuingandhonoringbankswithoutanyregardorrelationtotheunderlyingcontractordisputes
betweenthepartiesthereto.
Sincelettersofcredithavegainedgeneralacceptabilityininternationaltradetransactions,theICC
has published from time to time updates on the Uniform Customs and Practice (UCP) for
DocumentaryCreditstostandardizepracticesintheletterofcreditarea.Thevastmajorityof
lettersofcreditincorporatetheUCP.Firstpublishedin1933,theUCPforDocumentaryCredits
hasundergoneseveralrevisions,thelatestofwhichwasin1993.
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In BankofthePhilippineIslandsv.DeRenyFabricIndustries,Inc.thisCourtruledthatthe
observanceoftheUCPisjustifiedbyArticle2oftheCodeofCommercewhichprovidesthatin
theabsenceofanyparticularprovisionintheCodeofCommerce,commercialtransactionsshallbe
governedbyusagesandcustomsgenerallyobserved.Morerecently,inBankofAmerica,NT&
SAv.CourtofAppeals,thisCourtruledthattherebeingnospecificprovisionswhichgovernthe
legalcomplexitiesarisingfromtransactionsinvolvinglettersofcredit,notonlybetweenoramong
banksthemselvesbutalsobetweenbanksandthesellerorthebuyer,asthecasemaybe,the
applicabilityoftheUCPisundeniable.
Article3oftheUCPprovidesthatcredits,bytheirnature,areseparatetransactionsfromthesales
orothercontract(s)onwhichtheymaybebasedandbanksareinnowayconcernedwithorbound
bysuchcontract(s),evenifanyreferencewhatsoevertosuchcontract(s)isincludedinthecredit.
Consequently,theundertakingofabanktopay,acceptandpaydraft(s)ornegotiateand/orfulfill
anyotherobligationunderthecreditisnotsubjecttoclaimsordefensesbytheapplicantresulting
fromhisrelationshipswiththeissuingbankorthebeneficiary.Abeneficiarycaninnocaseavail
himselfofthecontractualrelationshipsexistingbetweenthebanksorbetweentheapplicantand
theissuingbank.
Thus,theengagementoftheissuingbankistopaythesellerorbeneficiaryofthecreditoncethe
draft and the required documents are presented to it. The socalled independence principle
assuresthesellerorthebeneficiaryofpromptpaymentindependentofanybreachofthemain
contractandprecludestheissuingbankfromdeterminingwhetherthemaincontractisactually
accomplishedornot.Underthisprinciple,banksassumenoliabilityorresponsibilityfortheform,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the
generaland/orparticularconditionsstipulatedinthedocumentsorsuperimposedthereon,nordo
theyassumeanyliabilityorresponsibilityforthedescription,quantity,weight,quality,condition,
packing,delivery,valueorexistenceofthegoodsrepresentedbyanydocuments,orforthegood
faithoractsand/oromissions,solvency,performanceorstandingoftheconsignor,thecarriers,or
theinsurersofthegoods,oranyotherpersonwhomsoever.
Theindependentnatureoftheletterofcreditmaybe:(a)independenceintotowherethecreditis
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
justificationaspectlikeinacommercialletterofcreditorrepaymentstandby,whichisidentical
withthesameobligationsundertheunderlyingagreement. Inbothcasesthepaymentmaybe
enjoinedifinthelightofthepurposeofthecreditthepaymentofthecreditwouldconstitute
fraudulentabuseofthecredit.
Canthebeneficiaryinvoketheindependenceprinciple?
Petitionerinsiststhattheindependenceprincipledoesnotapplytotheinstantcaseandassumingit
isso,itisadefenseavailableonlytorespondentbanks.LHC,ontheotherhand,contendsthatit
wouldbecontrarytocommonsensetodenythebenefitofanindependentcontracttothevery
partyforwhomthebenefitisintended.Asbeneficiaryoftheletterofcredit,LHCassertsitis
entitledtoinvoketheprinciple.
As discussed above, in aletter of credit transaction, such as in this case, where the credit is
stipulatedasirrevocable,thereisadefiniteundertakingbytheissuingbanktopaythebeneficiary
providedthatthestipulateddocumentsarepresentedandtheconditionsofthecreditarecomplied
with.Precisely,theindependenceprincipleliberatestheissuingbankfromthedutyofascertaining
compliancebythepartiesinthemaincontract.Astheprinciplesnomenclatureclearlysuggests,
theobligationundertheletterofcreditisindependentoftherelatedandoriginatingcontract.In
brief,theletterofcreditisseparateanddistinctfromtheunderlyingtransaction.
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Giventhenatureoflettersofcredit,petitionersargumentthatitisonlytheissuingbankthat
mayinvoketheindependenceprincipleonlettersofcreditdoesnotimpressthisCourt.Tosay
thattheindependenceprinciplemayonlybeinvokedbytheissuingbankswouldrendernugatory
the purpose for which the letters of credit are used in commercial transactions. As it is, the
independencedoctrineworkstothebenefitofboththeissuingbankandthebeneficiary.
Lettersofcreditareemployedbythepartiesdesiringtoenterintocommercialtransactions,notfor
thebenefitoftheissuingbankbutmainlyforthebenefitofthepartiestotheoriginaltransactions.
Withtheletterofcreditfromtheissuingbank,thepartywhoappliedforandobtaineditmay
confidentlypresenttheletterofcredittothebeneficiaryasasecuritytoconvincethebeneficiaryto
enterintothebusinesstransaction.Ontheotherhand,theotherpartytothebusinesstransaction,
i.e.,thebeneficiaryoftheletterofcredit,canberestassuredofbeingempoweredtocallonthe
letterofcreditasasecurityincasethecommercialtransactiondoesnotpushthrough,orthe
applicantfailstoperformhispartofthetransaction.Itisforthisreasonthatthepartywhois
entitledtotheproceedsoftheletterofcreditisappropriatelycalledbeneficiary.
Petitioners argument that any dispute must first be resolved by the parties, whether through
negotiationsorarbitration,beforethebeneficiaryisentitledtocallontheletterofcreditinessence
wouldconvert the letter of credit intoa mere guarantee. Jurisprudence has laiddown a clear
distinctionbetweenaletterofcreditandaguaranteeinthatthesettlementofadisputebetweenthe
partiesisnotaprerequisiteforthereleaseoffundsunderaletterofcredit.Inotherwords,the
argumentisincompatiblewiththeverynatureoftheletterofcredit.Ifaletterofcreditisdrawable
only after settlement of the dispute on the contract entered into by the applicant and the
beneficiary,therewouldbenopracticalandbeneficialuseforlettersofcreditincommercial
transactions.
ProfessorJohnF.Dolan,thenotedauthorityonlettersofcredit,shedsmorelightontheissue:
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
determinationratherthanbytheexaminationofdocuments.
Becausepartiesandcourtsshouldnotconfusethedifferentfunctionsofthesurety
contract on the one hand and the standby credit on the other, the distinction
betweensuretycontractsandcreditsmeritssomereflection.Thetwocommercial
devices share a common purpose. Both ensure against the obligors
nonperformance.Theyfunction,however,indistinctlydifferentways.
Traditionally,upontheobligorsdefault,thesuretyundertakestocompletethe
obligorsperformance,usuallybyhiringsomeonetocompletethatperformance.
Surety contracts, then, often involve costs of determining whether the obligor
defaulted(amatteroverwhichthesuretyandthebeneficiaryoftenlitigate)plus
thecostofperformance.Thebenefitofthesuretycontracttothebeneficiaryis
obvious. He knows that the surety, often an insurance company, is a strong
financialinstitutionthatwillperformiftheobligordoesnot.Thebeneficiaryalso
shouldunderstandthatsuchperformancemustawaitthesometimeslengthyand
costly determination that the obligor has defaulted. In addition, the suretys
performancetakestime.
Thestandbycredithasdifferentexpectations.Hereasonablyexpectsthathewill
receivecashintheeventofnonperformance,thathewillreceiveitpromptly,and
thathewillreceiveitbeforeanylitigationwiththeobligor(theapplicant)overthe
nature of the applicants performance takes place. The standby credit has this
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oppositeeffectofthesuretycontract:itreversesthefinancialburdenofparties
duringlitigation.
Inthesuretycontractsetting,thereisnodutytoindemnifythebeneficiaryuntil
thebeneficiaryestablishesthefactoftheobligorsperformance.Thebeneficiary
mayhavetoestablishthatfactinlitigation.Duringthelitigation,thesuretyholds
themoneyandthebeneficiarybearsmostofthecostofdelayinperformance.
Inthestandbycreditcase,however,thebeneficiaryavoidsthatlitigationburden
andreceiveshismoneypromptlyuponpresentationoftherequireddocuments.It
may be that the applicant has, in fact, performed and that the beneficiarys
presentationofthosedocumentsisnotrightful.Inthatcase,theapplicantmaysue
the beneficiary in tort, in contract, or in breach of warranty; but, during the
litigationtodeterminewhethertheapplicanthasinfactbreachedtheobligationto
perform,thebeneficiary,nottheapplicant,holdsthemoney. Partiesthatusea
standby credit and courts construing such a credit should understand this
allocation of burdens. There is a tendency in some quarters to overlook this
distinctionbetweensuretycontractsandstandbycreditsandtoreallocateburdens
bypermittingtheobligorortheissuertolitigatetheperformancequestionbefore
paymenttothebeneficiary.
Whileitisthebankwhichisboundtohonorthecredit,itisthebeneficiarywhohastherightto
askthebanktohonorthecreditbyallowinghimtodrawthereon.Thesituationitselfemasculates
petitionersposturethatLHCcannotinvoketheindependenceprincipleandhighlightsitspuerility,
moresointhiscasewherethebanksconcernedwereimpleadedaspartiesbypetitioneritself.
Respondentbankshadsquarelyraisedtheindependenceprincipletojustifytheirreleasesofthe
amountsdueundertheSecurities.Owingtothenatureandpurposeofthestandbylettersofcredit,
thisCourtrulesthattherespondentbankswereleftwithlittleornoalternativebuttohonorthe
creditandbothoftheminfactsubmittedthatitwasministerialforthemtohonorthecallfor
payment.
o
Next,petitionerinvokesthefraudexceptionprinciple.ItaversthatLHCscallontheSecurities
iswrongfulbecauseitfraudulentlymisrepresentedtoANZBankandSBCthatthereisalreadya
breachintheTurnkeyContractknowingfullywellthatthisisyettobedeterminedbythearbitral
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,
expresslyorbyimplication,materialrepresentationsoffactthattohisknowledgeareuntrue.In
such a situation, petitioner insists, injunction is recognized as a remedy available to it.
[Underscoringsupplied]
CitingDolanstreatiseonlettersofcredit,petitionerarguesthattheindependenceprincipleisnot
withoutlimitsanditisimportanttofashionthoselimitsinlightoftheprinciplespurpose,which
istoservethecommercialfunctionofthecredit.Ifitdoesnotservethosefunctions,applicationof
theprincipleisnotwarranted,andthecommonlawprinciplesofcontractshouldapply.
ItisworthyofnotethattheproprietyofLHCscallontheSecuritiesislargelyintertwinedwith
thefactofdefaultwhichistheselfsameissuependingresolutionbeforethearbitraltribunals.To
beabletodeclarethecallontheSecuritieswrongfulorfraudulent,itisimperativetoresolve,
amongothers,whetherpetitionerwasinfactguiltyofdelayintheperformanceofitsobligation.
Unfortunatelyforpetitioner,thisCourtisnotcalledupontoruleupontheissueofdefaultsuch
issuehavingbeensubmittedbythepartiestothejurisdictionofthearbitraltribunalspursuantto
thetermsembodiedintheiragreement.
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Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?
Most writers agreethat fraudis anexceptionto the independence principle. Professor Dolan
opinesthattheuntruthfulnessofacertificateaccompanyingademandforpaymentunderastandby
creditmayqualifyasfraudsufficienttosupportaninjunctionagainstpayment.Theremedyfor
fraudulentabuseisaninjunction.However,injunctionshouldnotbegrantedunless:(a)thereis
clearproofoffraud;(b)thefraudconstitutesfraudulentabuseoftheindependentpurposeofthe
letterofcreditandnotonlyfraudunderthemainagreement;and(c)irreparableinjurymight
followifinjunctionisnotgrantedortherecoveryofdamageswouldbeseriouslydamaged.
o
ThependencyofthearbitrationproceedingswouldnotpersemakeLHCsdrawsontheSecurities
wrongfulorfraudulentfortherewasnothingintheContractwhichwouldindicatethattheparties
intendedthatalldisputesregardingdelayshouldfirstbesettledthrougharbitrationbeforeLHC
wouldbeallowedtocallupontheSecurities.Itisthereforeprematureandabsurdtoconcludethat
thedrawsontheSecuritieswereoutrightfraudulentgiventhefactthattheICCandCIAChavenot
ruledwithfinalityontheexistenceofdefault.
Nowhereinitscomplaintbeforethetrialcourtorinitspleadingsfiledbeforetheappellatecourt,
didpetitionerinvokethefraudexceptionruleasagroundtojustifytheissuanceofaninjunction.
WhatpetitionerdidassertbeforethecourtsbelowwasthefactthatLHCsdrawsontheSecurities
wouldbeprematureandwithoutbasisinviewofthependingdisputesbetweenthem.Petitioner
shouldnotbeallowedinthisinstancetobringintoplaythefraudexceptionruletosustainits
claimfortheissuanceofaninjunctiverelief.
o
Withrespecttotheissueofwhethertherespondentbankswerejustifiedinreleasingtheamounts
dueundertheSecurities,thisCourtreiteratesthatpursuanttotheindependenceprinciplethebanks
wereundernoobligationtodeterminetheveracityofLHCscertificationthatdefaulthasoccurred
NeitherweretheyboundbypetitionersdeclarationthatLHCscallthereonwaswrongful.To
repeat, respondent banks undertaking was simply to pay once the required documents are
presentedbythebeneficiary.
Atanyrate,shouldpetitionerfinallyproveinthependingarbitrationproceedingsthatLHCs
drawsupontheSecuritieswerewrongfulduetothenonexistenceofthefactofdefault,itsrightto
seekindemnificationfordamagesitsufferedwouldnotnormallybeforeclosedpursuanttogeneral
principlesoflaw.
CHAPTER VII: TRUST RECEIPTS

1.
Anentrusteedoesnothaveauthoritytomortgagegoodscoveredbytrustreceipts(DBPvs.
PrudentialBank,G.R.No.143772,November22,2005)
In1973,LiragTextileMills,Inc.(Litex)openedanirrevocablecommercialletterofcreditwith
PrudentialBank(Prudential)fortheimportationof5,000spindlesandvariousaccessoriesand
spareparts(theArticles)forusewithspinningmachinery.TheseArticleswerereleasedtoLitex
under covering trust receipts it executed in favor of Prudential. Litex installed and used the
ArticlesinitstextilemilllocatedinMontalban,Rizal.
In1980,DBPgrantedaforeigncurrencyloantoLitex.Tosecuretheloan,Litexexecutedreal
estateandchattelmortgagesonitsplantsiteinMontalban,Rizal,includingthebuildingsandother
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improvements, machineries and equipments there. Among the machineries and equipments
mortgagedinfavorofDBPweretheArticles.
In1982,PrudentialinformedDBPthatitwastheabsoluteandjuridicalowneroftheArticlesand
theywerethusnotpartofthemortgagedassetsthatcouldbelegallycededtoDBP.
In1983,DBPextrajudiciallyforeclosedontherealestateandchattelmortgages,includingthe
Articles,andacquiredtheforeclosedpropertiesasthehighestbidder.
In 1987, over the objections of Prudential, DBP sold the Litex properties it acquired at the
foreclosuresale,includingtheArticles.toLyonTextileMills,Inc.(Lyon).
In1988,PrudentialfiledacomplaintforasumofmoneywithdamagesagainstDBP.Thetrial
courtdecidedinfavorofPrudentialanditsdecisionwasaffirmedintotobytheCourtofAppeals
towhichDBPappealed.DBPthereafterfiledapetitionforreviewoncertiorariwiththeSupreme
Court.
TheCourtheldthattheArticleswereownedbyPrudentialandLitexonlyheldthemintrust.
Whileitwasallowedtoselltheitems,Litexhadnoauthoritytodisposeofthemoranypartthereof
ortheirproceedsthroughconditionalsale,pledgeoranyothermeans.Thus,Litexcouldnothave
subjectedthemtoachattelmortgage.Theirinclusioninthemortgagewasvoidandhadnolegal
effect.Therebeingnovalidmortgage,therecouldalsobenovalidforeclosureorvalidauction
sale.Thus,DBPcouldnotbeconsideredeitherasamortgageeorasapurchaseringoodfaith.
DBPmerelysteppedintotheshoesofLitexastrusteeoftheArticleswithanobligationtopay
theirvalueortoreturnthemonPrudentialsdemand.Byitsfailuretopayorreturnthemdespite
PrudentialsrepeateddemandsandbysellingthemtoLyonwithoutPrudentialsknowledgeand
conformity,DBPbecameatrustee exmaleficio [i.e.,onewhoacquirestitletopropertythrough
actualfraud].
2.
AcquittalincriminalcaseforestafaunderSection13oftheTrustReceiptsLawdoesnot
extinguishcivilliabilityarisingfrombreachoftrustreceiptcontract(TupazIV,etal.vs.
CAandBPI,G.R.No.145578,November18,2005
TherelevantportionoftheCourtsdecisionisasfollows:
Theruleisthatwherethecivilactionisimpliedlyinstitutedwiththecriminalaction,thecivil
liabilityisnotextinguishedbyacquittal
[w]heretheacquittalisbasedonreasonabledoubtxxxasonlypreponderanceof
evidenceisrequiredincivilcases;wherethecourtexpresslydeclaresthatthe
liabilityoftheaccusedisnotcriminalbutonlycivilinnaturexxxas,forinstance,
in the felonies of estafa, theft, and malicious mischief committed by certain
relativeswhotherebyincuronlycivilliability(SeeArt.332,RevisedPenalCode);
and,wherethecivilliabilitydoesnotarisefromorisnotbaseduponthecriminal
actofwhichtheaccusedwasacquittedxxx.(Emphasissupplied)
Here,respondentbankchosenottofileaseparatecivilactiontorecoverpaymentunderthetrust
receipts.Instead,respondentbanksoughttorecoverpaymentinCriminalCaseNos.8848and
8849.AlthoughthetrialcourtacquittedpetitionerJoseTupaz,hisacquittaldidnotextinguishhis
civilliability.AstheCourtofAppealscorrectlyheld,hisliabilityarosenotfromthecriminalact
ofwhichhewas acquitted(exdelito)but from the trust receipt contract (excontractu)of 30
September 1981. Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his
personalcapacity.
CHAPTER XI: CHATTEL MORTGAGE LAW

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1.
Lossofvesselbeforeforeclosurebornebymortgagors (AlliedBankingCorporationvs.
ChengYong,etal.,G.R.N0.154109,October6,2005)
ThelossofthemortgagedchattelbroughtaboutbyitssinkingmustbebornenotbyAlliedBank
butbythespousesCheng.Asownersofthefishingvessel,itwasincumbentuponthespousesto
insureitagainstloss.Thus,whenthevesselsankbeforethechattelmortgagecouldbeforeclosed,
uninsuredasitis,itslossmustbebornebythespousesCheng.
2.
Creditornotobligedtoforeclosechattelmortgageconstitutedtosecurecredit (Spouses
Rosariovs.PCILeasingandFinance,Inc.,G.R.,No.139233,November11,2005)
Instead of foreclosing on the chattel mortgage on a motor vehicle constituted by the spouses
RosariotosecuretheloanobtainedbythemfromPCILeasing,thelatterfiledacaseforSumof
MoneywithDamageswithaPrayerforaWritofReplevin.
TheCourtruledthatevenifArticle1484oftheNewCivilCodeweretobeapplied,thechattel
mortgagehadnotbeenforeclosed;hence,PCILeasingwasnotprecludedfromcollectingthe
balanceoftheaccountofthespousesRosario.Itheldthattheremedyoftheunpaidsellerunder
Article1484oftheNewCivilCodeisalternativeandnotcumulative.Acreditorisnotobligedto
forecloseachattelmortgageevenifthereisone.
3.
Entrustee,notbeingownerofarticlescoveredbytrustreceiptsandwithoutauthorityfrom
owner, cannot mortgage said articles (DBP vs. Prudential Bank, G.R. No. 143772,
November22,2005)
CitingArticle2085oftheCivilCode(whichrequiresthat,inacontractofpledgeormortgage,the
pledgorormortgagorshouldbetheabsoluteownerofthethingpledgedormortgaged),theCourt
ruledthatLiragTextileMills,Inc.astheentrusteeofthe5,000spindlesandrelatedaccessoriesin
question,hadneitherabsoluteownership,freedisposalnortheauthoritytofreelydisposeofthe
saidarticlesandcouldnothavesubjectedthemtoachattelmortgageinasmuchasthetitletothe
saidarticlesbelongstotheentruster,PrudentialBank.Theinclusionofthearticlesinthereal
estateandchattelmortgagesconstitutedbyLiragTextileonitsplantsiteinMontalban,Rizalto
securetheforeigncurrencyloanitobtainedfromtheDBPwasvoidandhadnolegaleffect.There
beingnovalidmortgage,therecouldalsobenovalidforeclosureorvalidauctionsaleofsuch
articles.
4.
Invalidityofloaninvalidatesmortgageintendedtosecureit(SpousesSaguidvs.Security
Finance,Inc.,G.R.No.159467,December9,2005)
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
subjectvehicletosecurethesaidpromissorynotecannothaveanylegaleffectonthespouses
Saguid.Itstatedthatamortgageisamereaccessorycontractanditsvaliditywoulddependonthe
validityoftheloansecuredbyit.Thechattelmortgageconstitutedoverthesubjectvehicleisan
accessorycontracttotheloanobligationasembodiedinthepromissorynote.Itcannotexistasan
independent contract since its consideration is the same as that of the principal contract. A
principalobligationisanindispensableconditionfortheexistenceofanaccessorycontract.
5.
Suingforcollectionofunpaidamortizationsandatthesametimesuingforreplevinnot
allowedunderArt.1484,CivilCode(MagnaFinancialServicesGroup,Inc.vs.Colarina,
G.R.No.158635,December9,2005)
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ColarinaboughtoninstallmentfromMagnaFinancialServicesaSuzukiMulticabandconstituted
achattelmortgagethereontosecuretheunpaidbalanceofthepurchasepricethereof.Onaccount
ofColarinasfailuretopaytherequisiteinstallments,MagnafiledagainstColarinaaComplaint
forForeclosureofChattelMortgagewithReplevin beforetheMunicipalTrialCourtinCities
(MTCC).InitsComplaint,Magnamadethefollowingprayer:
WHEREFORE,itisrespectfullyprayedthatjudgmentrenderorderingdefendant:
1. TopaytheprincipalsumofP131,607.00withpenaltychargesat4.5%per
monthfromJanuary1999untilpaidplusliquidateddamages.
2. Orderingdefendanttoreimbursetheplaintiffforattorneysfeeat25%ofthe
amountdueplusexpensesoflitigationatnotlessthanP10,000.00.
3. OrderingdefendanttosurrendertotheplaintiffthepossessionoftheMulticab
describedinparagraph2ofthecomplaint.
4. Plaintiffpraysforotherreliefsjustandequitableinthepremises.
Itisfurtherprayedthatpendentlite,anOrderofReplevinissuecommandingthe
ProvincialSheriffatLegazpiCityoranyofhisdeputiestotakesuchmulticabinto
his custody and, after judgment, upon default in the payment of the amount
adjudgedduetotheplaintiff,tosellsaidchattelatpublicauctioninaccordance
withthechattelmortgagelaw.
TheMTCCdecidedinfavorofMagnaasfollows:
WHEREFORE,judgmentisherebyrenderedinfavorofplaintiffMagnaFinancial
ServicesGroup,Inc.andagainstthedefendantEliasColarina,orderingthelatter:
(a) to pay plaintiff the principal sum of one hundred thirty one thousand six
hundredseven(P131,607.00)pesospluspenaltychargesat4.5%permonth
computedfromJanuary,1999untilfullypaid;
(b) topayplaintiffP10,000.00forattorneysfees;and
(c) topaythecosts.
Theforegoingmoneyjudgmentshallbepaidwithinninety(90)daysfromtheentry
of judgment. In case of default in such payment, the one (1) unit of Suzuki
Multicab,subject of thewritof replevinandchattel mortgage,shallbe soldat
publicauctiontosatisfythesaidjudgment
ColarinaappealedtotheRegionalTrialCourtbutthelatteraffirmedtheMTCCdecision.Colarina
thenfiledapetitionforreviewwiththeCourtofAppeals.TheCAruledasfollows:
WefindmeritinpetitionersassertionthattheMTCandtheRTCerredinordering
thedefendanttopaytheunpaidbalanceofthepurchasepriceofthesubjectvehicle
irrespectiveofthefactthat the instant complaintwas for theforeclosure of its
chattel mortgage. The principal error committed by the said courts was their
immediategrant,howevererroneous,ofreliefinfavoroftherespondentforthe
paymentoftheunpaidbalancewithoutconsideringthefactthattheveryprayerit
hadsoughtwasinconsistentwithitsallegationinthecomplaint.
Verily,itisbeyondcavilthatthecomplaintseeksthejudicialforeclosureofthe
chattel mortgage. The fact that the respondent had unconscionably sought the
paymentoftheunpaidbalanceregardlessofitscomplaintfortheforeclosureofthe
saidmortgageisglaringproofthatitintentionallydevisedthesametodeprivethe
defendantofhisrights.Ajudgmentinitsfavorwillineffectallowittoretainthe
possessionandownershipofthesubjectvehicleandatthesametimeclaimagainst
thedefendantfortheunpaidbalanceofitspurchaseprice. Insuchacase,the
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respondent would luckily have its cake and eat it too. Unfortunately for the
defendant,thelowercourtshadreadily,probablyunwittingly,madethemselves
abettorstorespondentsdevisetothedetrimentofthedefendant.
WHEREFORE,findingerrorintheassaileddecision,theinstantpetitionishereby
GRANTEDandtheassaileddecisionisherebyREVERSEDANDSETASIDE.
Lettherecordsberemandedtothecourtoforigin.Accordingly,theforeclosureof
thechattelmortgageoverthesubjectvehicleasprayedforbytherespondentinits
complaint without any right to seek the payment of the unpaid balance of the
purchase price or any deficiency judgment against the petitioners pursuant to
Article1484oftheCivilCodeofthePhilippines,isherebyORDERED
HavinglostintheCA,MagnathenfiledapetitionforreviewoncertiorariwiththeSupremeCourt
basedonthesoleissue:Whatisthetruenatureofaforeclosureofchattelmortgage,extrajudicial
orjudicial,asanexerciseofthe3rdoptionunderArticle1484,paragraph3oftheCivilCode?
InitsMemorandum,petitioner assailsthedecisionoftheCourtofAppealsand
assertsthatamortgageisonlyanaccessoryobligation,theprincipalonebeingthe
undertakingtopaytheamountsscheduledinthepromissorynote. Tosecurethe
paymentofthenote,achattelmortgageisconstitutedonthethingsold.Itargues
thatanactionforforeclosureofmortgageisactuallyinthenatureofanactionfor
sum of money instituted to enforce the payment of the promissorynote, with
execution of the security. In case of an extrajudicial foreclosure of chattel
mortgage,thepetitionmuststatetheamountdueontheobligationandthesheriff,
after the sale, shall apply the proceeds to the unpaid debt. This, according to
petitioner,isthetruenatureofaforeclosureproceedingasprovidedunderRule68,
Section2oftheRulesofCourt.[13]
Ontheotherhand,respondentcounteredthattheCourtofAppealscorrectly
setasidethetrialcourtsdecisionduetotheinconsistencyoftheremediesorreliefs
soughtbythepetitionerinitsComplaintwhereitprayedforthecustodyofthe
chattelmortgageandatthesametimeaskedforthepaymentoftheunpaidbalance
onthemotorvehicle.[14]
Article1484oftheCivilCodeexplicitlyprovides:
ART.1484.Inacontractofsaleofpersonalpropertythepriceofwhichis
payableininstallments,thevendormayexerciseanyofthefollowingremedies:
(1)Exactfulfillmentoftheobligation,shouldthevendeefailtopay;
(2) Cancelthesale,shouldthevendeesfailuretopaycovertwoor
moreinstallments;
(3) Foreclosethechattelmortgageorthethingsold,ifonehasbeen
constituted,shouldthevendeesfailuretopaycovertwoormoreinstallments.In
this case, he shall have no further action against the purchaser to recover any
unpaidbalanceoftheprice.Anyagreementtothecontraryshallbevoid.
Our Supreme Court in Bachrach Motor Co., Inc. v. Millan[15] held:

Undoubtedlytheprincipalobjectoftheaboveamendment(referringtoAct4122
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amendingArt.1454,CivilCodeof1889)wastoremedytheabusescommittedin
connectionwiththeforeclosureofchattelmortgages. Thisamendmentprevents
mortgageesfromseizingthemortgagedproperty,buyingitatforeclosuresalefora
low price and then bringing the suit against the mortgagor for a deficiency
judgment. Thealmostinvariableresultofthisprocedurewasthatthemortgagor
foundhimselfminusthepropertyandstillowingpracticallythefullamountofhis
originalindebtedness.
xxx
InitsMemorandumbeforeus,petitionerresolutelydeclaredthatithasoptedforthe
remedyprovidedunderArticle1484(3)oftheCivilCode,[17]thatis,toforeclose
thechattelmortgage.
Itis,however,unmistakablefromtheComplaintthatpetitionerpreferredto
availitselfofthefirstandthirdremediesunderArticle1484,atthesametimesuing
forreplevin.Forthisreason,theCourtofAppealsjustifiablysetasidethedecision
oftheRTC. PerusingtheComplaint,thepetitioner,underitsprayernumber1,
sought for the payment of the unpaid amortizations which is a remedy that is
providedunderArticle1484(1)oftheCivilCode,allowinganunpaidvendeeto
exact fulfillment of the obligation. At the same time, petitioner prayed that
Colarinabeorderedtosurrenderpossessionofthevehiclesothatitmayultimately
besoldatpublicauction,whichremedyiscontainedunderArticle1484(3).Sucha
schemeisnotonlyirregularbutisaflagrantcircumventionoftheprohibitionofthe
law. By praying for the foreclosure of the chattel, Magna Financial Services
Group,Inc.renouncedwhateverclaimitmayhaveunderthepromissorynote.[18]
Article1484,paragraph3,providesthatifthevendorhasavailedhimselfof
therighttoforeclosethechattelmortgage,heshallhavenofurtheractionagainst
thepurchasertorecoveranyunpaidbalanceofthepurchaseprice.Anyagreement
tothecontraryshallbevoid.Inotherwords,inallproceedingsfortheforeclosure
ofchattelmortgagesexecutedonchattelswhichhavebeensoldontheinstallment
plan,themortgageeislimitedtothepropertyincludedinthemortgage.[19]
Contrarytopetitionersclaim,acontractofchattelmortgage,whichisthe
transactioninvolvedinthepresentcase,isinthenatureofaconditionalsaleof
personalpropertygivenasasecurityforthepaymentofadebt,ortheperformance
ofsomeotherobligationspecifiedtherein,theconditionbeingthatthesaleshallbe
voiduponthesellerpayingtothepurchaserasumofmoneyordoingsomeother
actnamed.[20]Iftheconditionisperformedaccordingtoitsterms,themortgage
andsaleimmediatelybecomevoid,andthemortgageeistherebydivestedofhis
title.[21] Ontheotherhand,incaseofnonpayment,foreclosureisoneofthe
remediesavailabletoamortgageebywhichhesubjectsthemortgagedpropertyto
thesatisfactionoftheobligationtosecurethatforwhichthemortgagewasgiven.
Foreclosuremaybeeffectedeitherjudiciallyorextrajudicially,thatis,byordinary
actionorbyforeclosureunderpowerofsalecontainedinthemortgage.Itmaybe
effected by the usual methods, including sale of goods at public auction.[22]
Extrajudicialforeclosure,aschosenbythepetitioner,isattainedbycausingthe
mortgagedpropertytobeseizedbythesheriff,asagentofthemortgagee,andhave
itsoldatpublicauctioninthemannerprescribedbySection14ofActNo.1508,or
the Chattel Mortgage Law.[23] This rule governs extrajudicial foreclosure of
chattelmortgage.
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Insum,sincethepetitionerhasundeniablyelectedaremedyofforeclosure
underArticle1484(3)oftheCivilCode,itisboundbyitselectionandthusmay
notbeallowedtochangewhatithasoptedfornortoaskformore.Onthispoint,
the Court of Appeals correctly set aside the trial courts decision and instead
renderedajudgmentofforeclosureasprayedforbythepetitioner.
Thenextissueofconsequenceiswhetherornottherehasbeenanactual
foreclosureofthesubjectvehicle.
Inthecaseatbar,thereisnodisputethatthesubjectvehicleisalreadyinthe
possession of the petitioner, Magna Financial Services Group, Inc. However,
actualforeclosurehasnotbeenpursued,commencedorconcludedbyit.
Wherethemortgageeelectsaremedyofforeclosure,thelawrequiresthe
actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.
Fernandez,[24] our Supreme Court said that it is actual sale of the mortgaged
chattelinaccordancewithSec.14ofActNo.1508thatwouldbarthecreditor(who
choosestoforeclose)fromrecoveringanyunpaidbalance.[25] Anditisdeemed
thattherehasbeenforeclosureofthemortgagewhenalltheproceedingsofthe
foreclosure, including the sale of the property at public auction, have been
accomplished.[26]
That there should be actual foreclosure of the mortgaged vehicle was

reiteratedinthecaseof DelaCruzv.AsianConsumerandIndustrialFinance
Corporation:[27]
ItisthusclearthatwhileASIANeventuallysucceededintakingpossession
of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage as
shownbythefactthatnoauctionsaleofthevehiclewaseverconducted.Aswe
ruledinFilinvestCreditCorp.v.Phil.AcetyleneCo.,Inc.(G.R.No.50449,30
January1982,111SCRA421)
Underthelaw,thedeliveryofpossessionofthemortgagedpropertytothe
mortgagee,thehereinappellee,canonlyoperatetoextinguishappellantsliability
iftheappelleehadactuallycausedtheforeclosuresaleofthemortgagedproperty
whenitrecoveredpossessionthereof(NorthernMotors,Inc.v.Sapinoso,33SCRA
356[1970];UniversalMotorsCorp.v.DyHianTat,28SCRA161[1969];Manila
MotorsCo.,Inc.v.Fernandez,99Phil.782[1956]).
Bethatasitmay,althoughnoactualforeclosureascontemplatedunderthe
lawhastakenplaceinthiscase,sincethevehicleisalreadyinthepossessionof
Magna Financial Services Group, Inc. and it has persistently and consistently
avowedthatitelectstheremedyofforeclosure,theCourtofAppeals,thus,ruled
correctlyindirectingtheforeclosureofthesaidvehiclewithoutmore.
WHEREFORE,premisesconsidered,theinstantpetitionisDENIEDforlack
ofmeritandthedecisionoftheCourtofAppealsdated21January2003is
AFFIRMED.Costsagainstpetitioner.
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TheCourtruledthatitisunmistakablefromtheComplaintthatMagnapreferredtoavailitselfof
thefirstandthirdremediesunderArticle1484,atthesametimesuingforreplevin.Perusingthe
Complaint,Magna,underitsprayernumber1,soughtforthepaymentoftheunpaidamortizations
whichisaremedythatisprovidedunderArticle1484(1)oftheCivilCode,allowinganunpaid
vendeetoexactfulfillmentoftheobligation.Atthesametime,MagnaprayedthatColarinabe
orderedtosurrenderpossessionofthevehiclesothatitmayultimatelybesoldatpublicauction,
whichremedyiscontainedunderArticle1484(3). Suchaschemeisnotonlyirregularbutisa
flagrantcircumventionoftheprohibitionofthelaw.Byprayingfortheforeclosureofthechattel,
Magnarenouncedwhateverclaimitmayhaveunderthepromissorynote.Article1484,paragraph
3,providesthatifthevendorhasavailedhimselfoftherighttoforeclosethechattelmortgage,he
shallhavenofurtheractionagainstthepurchasertorecoveranyunpaidbalanceofthepurchase
price. Anyagreementtothecontraryshallbevoid. Inotherwords,inallproceedingsforthe
foreclosureofchattelmortgagesexecutedonchattelswhichhavebeensoldontheinstallment
plan,themortgageeislimitedtothepropertyincludedinthemortgage.
TheCourtalsoruledthatitistheactualsaleofthemortgagedchattelinaccordancewithSec.14of
theChattelMortgageLaw(ActNo.1508)thatwouldbarthecreditorwhochoosestoforeclose
fromrecoveringanyunpaidbalance.Therehasbeenforeclosureofthemortgagewhenallthe
proceedingsoftheforeclosure,includingthesaleofthepropertyatpublicauction,havebeen
accomplished.Inthecaseatbar,thereisnodisputethatthesubjectvehicleisalreadyinthe
possession of Magna Financial Services. However, actual foreclosure has not been pursued,
commencedorconcludedbyit.Asit haspersistentlyandconsistentlyavowedthatitelectsthe
remedyofforeclosure,theCourtruledthattheCourtofAppealshascorrectlydirectedMagnato
proceedwiththeforeclosureofthesaidvehiclewithoutmore.
CHAPTER XII: EXTRAJUDICIAL FORECLOSURE OF MORTGAGE LAW
Issues Prior to Foreclosure Sale

1.
Blanketmortgageclauseordragnetclause(SpousesCuycovs.SpousesCuyco,G.R.No.
168736,April19,2006)
AccordingtotheCourt,thegeneralruleisthatamortgageliabilityisusuallylimitedtotheamount
mentionedinthecontract.However,theamountsnamedasconsiderationinacontractofmortgage
donotlimittheamountforwhichthemortgagemaystandassecurityiffromthefourcornersof
theinstrumenttheintenttosecurefutureandotherindebtednesscanbegathered. Thisstipulation
isvalidandbindingbetweenthepartiesandisknowninAmericanJurisprudenceastheblanket
mortgageclause,alsoknownasadragnetclause.
Adragnetclauseoperatesasaconvenienceandaccommodationtotheborrowersasitmakes
availableadditionalfundswithouttheirhavingtoexecuteadditionalsecuritydocuments,thereby
savingtime,travel,loanclosingcosts,costsofextralegalservices,recordingfees,etcetera.
Whilearealestatemortgagemayexceptionallysecurefutureloansoradvancements,thesefuture
debtsmustbesufficientlydescribedinthemortgagecontract.Anobligationisnotsecuredbya
mortgageunlessitcomesfairlywithinthetermsofthemortgagecontract.
ThepertinentprovisionsoftheNovember26,1991realestatemortgagereads:
ThattheMORTGAGORisindebteduntotheMORTGAGEEinthesumofONE
MILLIONFIVETHOUSANDPESOS(sic)(1,500,000.00)PhilippineCurrency,
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receiptwhereofisherebyacknowledgedandconfessed,payablewithinaperiodof
oneyear,withinterestattherateofeighteenpercent(18%)perannum;
Thatforandinconsiderationofsaidindebtedness,theMORTGAGORdoeshereby
conveyanddeliverbywayofMORTGAGEuntosaidMORTGAGEE,thelatters
heirsandassigns,thefollowingrealtytogetherwithalltheimprovementsthereon
andsituatedatCubao,QuezonCity,anddescribedasfollows:
xxxx
PROVIDEDHOWEVER,thatshouldtheMORTGAGORdulypayorcausetobe
paiduntotheMORTGAGEE orhisheirsandassigns,thesaidindebtednessof
ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00),
PhilippineCurrency,togetherwiththeagreedinterestthereon,withintheagreed
termofoneyearonamonthlybasisthenthisMORTGAGEshallbedischarged,
andrenderedofnoforceandeffect,otherwiseitshallsubsistandbesubjectto
foreclosureinthemannerandformprovidedbylaw.
Itisclearfromaperusaloftheaforequotedrealestatemortgagethatthereisnostipulationthatthe
mortgaged realty shall also secure future loans and advancements. Thus, what applies is the
generalruleabovestated.
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
securedbythesamerealestatemortgage,asshownintheacknowledgementreceipts,itisnot
sufficientinlawtobindtherealtyforitwasnotmadesubstantiallyintheformprescribedbylaw.
Inordertoconstitutealegalmortgage,itmustbeexecutedinapublicdocument,besidesbeing
recorded.Aprovisioninaprivatedocument,althoughdenominatingtheagreement asoneof
mortgage,cannotbeconsideredasitisnotsusceptibleofinscriptioninthepropertyregistry.A
mortgage in legal form is not constituted by a private document, even if such mortgage be
accompaniedwithdeliveryofpossessionofthemortgageproperty.Besides,byexpressprovisions
ofSection127ofActNo.496,amortgageaffectingland,whetherregisteredundersaidActornot
registeredatall,isnotdeemedtobesufficientinlawnormayitbeeffectivetoencumberorbind
the landunless madesubstantiallyin the form therein prescribed. It is required, among other
things,thatthedocumentbesignedbythemortgagorexecutingthesame,inthepresenceoftwo
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.
Whatthepartiescouldhavedoneinordertobindtherealtyfortheadditionalloanswastoexecute
anewrealestatemortgageortoamendtheoldmortgageconformablywiththeformprescribedby
thelaw. Failingtodoso,therealtycannotbeboundbysuchadditionalloans,whichmaybe
recoveredbytherespondentsinanordinaryactionforcollectionofsumsofmoney.
2.
Debtorsdefault;liquidateddebt(SelegnaManagementandDevelopmentCorporation,et
al.vs.UCPB,G.R.No.165662,May3,2006)
InthewordsoftheCourt,itisasettledruleoflawthatforeclosureisproperwhenthedebtorsare
in default of the payment of their obligation. In fact, the parties stipulated in their credit
agreements,mortgagecontractsandpromissorynotesthatrespondentwasauthorizedtoforeclose
on the mortgages, in case of a default by petitioners. That this authority was granted is not
disputed.
Morasolvendi, ordebtorsdefault,isdefinedasadelayinthefulfillmentofanobligation,by
reasonofacauseimputabletothedebtor.Therearethreerequisitesnecessaryforafindingof
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default.First,theobligationisdemandableandliquidated;second,thedebtordelaysperformance;
third,thecreditorjudiciallyorextrajudiciallyrequiresthedebtorsperformance.
TheCourtalsostatedthatadebtisliquidatedwhentheamountisknownorisdeterminableby
inspectionofthetermsandconditionsoftherelevantpromissorynotesandrelateddocumentation.
Failure to furnish a debtor a detailed statement of account does not ipso facto result in an
unliquidatedobligation.
3.
Remediesofmortgagecreditoralternative,notsuccessiveorcumulative(SuicoRattan&
BuriInteriors,Inc.,etal.vs.CA,etal.,G.R.No.138145,June15,2006;seealsoCaltex
Phils.Vs.IAC,etal.,G.R.74730,August25,1989)
TheCourtruledthatitissettledthatamortgagecreditormay,intherecoveryofadebtsecuredby
arealestatemortgage,instituteagainstthemortgagedebtoreitherapersonalactionfordebtora
real action to foreclose the mortgage.These remedies available to the mortgage creditor are
deemedalternativeandnotcumulative. Anelectionofoneremedyoperatesasawaiverofthe
other.Insustainingtherulethatprohibitsmortgagecreditorsfrompursuingboththeremediesofa
personalactionfordebtorarealactiontoforeclosethemortgage,theCourtheldinthecaseof
Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a rule which would authorize the
plaintifftobringapersonalactionagainstthedebtorandsimultaneouslyorsuccessivelyanother
actionagainstthemortgagedproperty,wouldresultnotonlyinmultiplicityofsuitssooffensiveto
justiceandobnoxioustolawandequity,butalsoinsubjectingthedefendanttothevexationof
beingsuedintheplaceofhisresidenceoroftheresidenceoftheplaintiff,andthenagaininthe
placewherethepropertylies.Hence,aremedyisdeemedchosenuponthefilingofthesuitfor
collectionoruponthefilingofthecomplaintinanactionforforeclosureofmortgage,pursuantto
theprovisionsofRule68oftheRulesofCourt.Astoextrajudicialforeclosure,suchremedyis
deemedelectedbythemortgagecreditoruponfilingofthepetitionnotwithanycourtofjustice
butwiththeofficeofthesheriffoftheprovincewherethesaleistobemade,inaccordancewith
theprovisionsofActNo.3135,asamendedbyActNo.4118.
4.
Mortgageinvalidifmortgagornotthepropertyowner;doctrineofmortgageeingoodfaith
notapplicable(Ereavs.QuerrerKaufman,G.R.No.165853,June22,2006)
The Court explainedthedoctrineof mortgagee ingood faith bycitingits decision in Cavite

DevelopmentBankv.Lim,381Phil.355(2000)asfollows:
Thereis,however,asituationwhere,despitethefactthatthemortgagorisnottheowner
of themortgagedproperty, his title being fraudulent, the mortgage contract and any
foreclosuresalearisingtherefromaregiveneffectbyreasonofpublicpolicy.Thisisthe
doctrineofmortgageeingoodfaithbasedontherulethatallpersonsdealingwiththe
propertycoveredbyaTorrens 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
upholdingtheindefeasibilityofacertificateoftitle,asevidenceoflawfulownershipof
thelandorofanyencumbrancethereon,protectsabuyerormortgageewho,ingood
faith,relieduponwhatappearsonthefaceofthecertificateoftitle.
Indeed,amortgageehasarighttorelyingoodfaithonthecertificateoftitleofthemortgagorof
thepropertygivenassecurityandintheabsenceofanysignthatmightarousesuspicion,hasno
obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful
ownerof,ordoesnothaveavalidtitleto,themortgagedproperty,themortgageeingoodfaithis
nonethelessentitledtoprotection.Thisdoctrinepresupposes,however,thatthemortgagor,whois
nottherightfulowneroftheproperty,hasalreadysucceededinobtainingaTorrenstitleoverthe
propertyinhisnameandthat,afterobtainingthesaidtitle,hesucceedsinmortgagingtheproperty
toanotherwhoreliesonwhatappearsonthesaidtitle.Theinnocentpurchaser(mortgageeinthis
case)forvalueprotectedbylawisonewhopurchasesatitledlandbyvirtueofadeedexecutedby
theregisteredownerhimself,notbyaforgeddeed,asthelawexpresslystates.Suchisnotthe
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situationofpetitioner,whohasbeenthevictimofimpostorspretendingtobetheregisteredowners
butwhoarenotsaidowners.Thedoctrineofmortgageeingoodfaithdoesnotapplytoasituation
wherethetitleisstillinthenameoftherightfulownerandthemortgagorisadifferentperson
pretendingtobetheowner.Insuchacase,themortgageeisnotaninnocentmortgageeforvalue
and the registered owner will generally not lose his title. We thus agree with the following
discussionoftheCA:
Thetrialcourtwronglyappliedinthiscasethedoctrineofmortgageeingoodfaith
whichhasbeenallowedinmanyinstancesbutinamilieudissimilarfromthiscase.This
doctrineisbasedontherulethatpersonsdealingwithpropertiescoveredbyaTorrens
certificateoftitlearenotrequiredtogobeyondwhatappearsonthefaceofthetitle.But
thisisonlyinasituationwherethemortgagorhasafraudulentorotherwisedefective
title,butnotwhenthemortgagorisanimpostorandaforger.
Inaforgedmortgage,asinthiscase,thedoctrineofmortgageeingoodfaithcannotbeapplied
andwillnotbenefitamortgageenomatterhowlargeishisorherreservoirofgoodfaithand
diligence.Suchmortgageisvoidandcannotprejudicetheregisteredownerwhosesignaturetothe
deedisfalsified.Whentheinstrumentpresentedisforged,evenifaccompaniedbytheowners
duplicatecertificateof title, the registered owner does not lose his title, andneither does the
assigneeintheforgeddeedacquireanyrightortitletotheproperty.Aninnocentpurchaserfor
valueisonewhopurchasesatitledlandbyvirtueofadeedexecutedbytheregisteredowner
himselfnotaforgeddeed.
5.
ForeclosureofmortgagearisingoutofasettlementofestatenotcoveredbyAct3135but
bySection7ofRule86oftheRevisedRulesofCourt(PhilippineNationalBankvs.CA,
etal.,G.R.121597,June29,2001)
Thiscaseinvolvesaforeclosureofmortgagearisingoutofasettlementofestate,whereinthe
administrator mortgaged a property belonging to the estate of the decedent, pursuant to an
authoritygivenbytheprobatecourt.TheCourtruledthatSection7ofRule86oftheRevised
RulesofCourt,ratherthanAct3135,istheapplicablelaw.Section7ofRule86 grantstothe
mortgageethreedistinct,independentandmutuallyexclusiveremediesthatcanbealternatively
pursuedbythemortgagecreditorforthesatisfactionofhiscreditincasethemortgagordies,
amongthem:
(1)towaivethemortgageandclaimtheentiredebtfromtheestateofthemortgagorasan
ordinaryclaim;
(2)toforeclosethemortgagejudiciallyandproveanydeficiencyasanordinaryclaim;and
(3)
torelyonthemortgageexclusively,foreclosingthesameatanytimebeforeitisbarredby
prescriptionwithoutrighttofileaclaimforanydeficiency.
In Perezv.PhilippineNationalBank, 124Phil.260(1966),theCourtrecognizedthatthethird
remedyincludesextrajudicialforeclosures.
6.
Newspaperofgeneralcirculation(Perez,etal.vs.Perez,etal.,G.R.No.143768,March
28,2005)
Tobeanewspaperofgeneralcirculation,itisenoughthatitispublishedforthedisseminationof
localnewsandgeneralinformation,thatithasabonafidesubscriptionlistofpayingsubscribers;
andthatitispublishedatregularintervals.Thenewspapermustnotalsobedevotedtotheinterests
orpublishedfortheentertainmentofaparticularclass,profession,trade,calling,raceorreligious
denomination.Thenewspaperneednothavethelargestcirculationsolongasitisofgeneral
circulation.
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7.
Waiverbypartiesofpublicationrequirementvoid(Ouanovs.CA,etal.,G.R.129279,
March4,2003;seealsoPNBvs.NepomucenoProductions,Inc.,etal.
,G.R.139479,
December27,2002)
Thegeneralruleisthateveryonehasarighttowaive,andagreetowaive,theadvantageofalaw
orrulemadesolelyforthebenefitandprotectionoftheindividualinhisprivatecapacity,ifitcan
bedispensedwithandrelinquishedwithoutinfringingonanypublicright,andwithoutdetriment
tothecommunityatlarge.
However, a waiver in derogation of a statutory right is not favored, and a waiver will be
inoperativeandvoidifitinfringesontherightsofothers,orwouldbeagainstpublicpolicyor
moralsandthepublicinterestmaybewaived.
Theprincipalobjectofanoticeofsaleinaforeclosureofmortgageisnotsomuchtonotifythe
mortgagorastoinformthepublicgenerallyofthenatureandconditionofthepropertytobesold,
andofthetime,place,andtermsofthesale.Noticesaregiventosecurebiddersandpreventa
sacrifice of the property. Clearly, the statutory requirements of posting and publication are
mandated,notforthemortgagorsbenefit,butforthepublicorthirdpersons.Infact,personal
notice to the mortgagor in extrajudicial foreclosure proceedings is not even necessary, unless
stipulated.Assuch,itisimbuedwithpublicpolicyconsiderationsandanywaiverthereonwould
beinconsistentwiththeintentandletterofActNo.3135.
Publication,therefore,isrequiredtogivetheforeclosuresaleareasonablywidepublicitysuchthat
those interestedmight attend the public sale. To allow the parties to waive this jurisdictional
requirementwouldresultinconvertingintoaprivatesalewhatoughttobeapublicauction.
Moreimportantly,thewaiverbeingvoidforbeingcontrarytotheexpressmandateofActNo.
3135,suchcannotberatifiedbyestoppel.Estoppelcannotgivevaliditytoanactthatisprohibited
bylaworonethatisagainstpublicpolicy.Neithercanthedefenseofillegalitybewaived.
8.
Republicationofnoticeofsale(DBPvs.CAandEmeraldResortsHotel,G.R.No.125838,
June10,2003)
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TheruleenunciatedbytheSupremeCourtinpreviouscasesisthatthepublicationof
the notice of extrajudicial sale is indispensable to the validity of an extrajudicial
foreclosuresaleofrealpropertyunderAct3135.Ifthesalecouldnotbeheldonthe
scheduled date, then a republication of the notice of extrajudicial sale would be
necessary.Thisistrueevenifthemortgagorandthemortgageeshouldagreetothe
reschedulingofthedateofsale.Failuretopublishthenoticeofauctionsaleonthenew
datewouldconstituteajurisdictionaldefectwhichwouldinvalidatethesale(Ouanovs.
CA,G.R.129279,March4,2003;
DBPvs.Aguirre,etal.
,G.R.No.144877,September
7,2001;MasantolRuralBankvs.CA
(204SCRA752[1991]).Inthiscase,thepublic
auction sale of the real properties originally scheduled on August 12, 1986 was
postponedtoSeptember11,1986upontherequestofthemortgagorwiththeagreement
ofDBP,themortgagee.NeithertheDBPnorthemortgagorrepublishedthenoticeof
therescheduledauctionsaleand,thus,theSupremeCourtruledthattheextrajudicial
foreclosureoftherealestatemortgagebyDBPwasnotvalid.
Obviously,republicationofthenoticewouldincreasetheexpensesofthemortgagee.It
wouldalsoencouragethepracticeofsomemortgagorsinrequestingpostponementoftheauction
saleandthenlaterattackingthevalidityofthesaleforlackofrepublication.
ThesecircumstanceshavenotescapedtheattentionoftheSupremeCourtandaremedywasprovidedin
providedintheformoftheNoticeofExtraJudicialSalenowprescribedinCircularNo.72002
issuedbytheOfficeoftheCourtAdministratoronJanuary22,2002.Section4(a)ofCircularNo.
72002providesthat:
Sec.4.
The Sheriff to whom the application for extrajudicial foreclosure of
mortgagewasraffledshalldothefollowing:
a.PrepareaNoticeofExtraJudicialSaleusingthefollowingform:
NOTICEOFEXTRAJUDICIALSALE
Upon extrajudicial petition for sale under Act 3135/1508 filed __________
against(nameandaddressofMortgagor/s)tosatisfythemortgageindebtedness
whichasof___________amountstoP________excludingpenalties,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'scheckandinPhilippineCurrency,thefollowingpropertywithallits
improvements,towit:
(DescriptionofProperty)
Allsealedbidsmustbesubmittedtotheundersignedontheabovestatedtime
anddate.
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Intheeventthepublicauctionshouldnottakeplaceonthesaiddate,itshallbe
heldon_______________withoutfurthernotice.
_____________(date)
SHERIFF
The last paragraph of the prescribed Notice of ExtraJudicial Sale allows the holding of a
rescheduled auction sale without reposting or republication of the notice. However, the
rescheduledauctionsalewillonlybevalidiftherescheduleddateofauctionisclearlyspecifiedin
thepriornoticeofsale.Theabsenceofthisinformationinthepriornoticeofsalewillrenderthe
rescheduledauctionsalevoidforlackofrepostingorrepublication.Ifthenoticeofauctionsale
containsthisparticularinformation,whetherornotthepartiesagreedtosuchrescheduleddate,
thereisnomoreneedfortherepostingorrepublicationofthenoticeoftherescheduledauction
sale.
CHAPTER XIV: SUPREME COURT INTERIM RULES OF PROCEDURE ON

CORPORATE REHABILITATION
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,
September24,2002)
ThiscaseinvolvedtheinterpretationofSection6ofRule4oftheSCInterimRulesofProcedure
onCorporateRehabilitation.Thesaidprovisionrequiresthetrialcourt,ifitfindsthepetitionfor
corporaterehabilitationtobesufficientinformandsubstance,toissue,amongotherthings,an
Order staying enforcement of all claims, whether for money or otherwise and whether such
enforcementisbycourtactionorotherwise,againstthedebtor,itsguarantorsandsuretiesnot
solidarilyliablewiththedebtor.Thestayorderiseffectivefromthedateofitsissuanceuntilthe
dismissalofthepetitionortheterminationoftherehabilitationproceedings.
AccordingtotheCourt,theinterimrulesmustbereadandappliedalongwithSection6(c)ofP.D.
902A, as amended, directing that upon the appointment of a management committee,
rehabilitationreceiver,boardorbodypursuanttothedecree,allactionsforclaimsagainstthe
distressed corporation pending before any court, tribunal, board or body shall be suspended
accordingly.
TheCourt pointed out that aclaimis a right to payment, whether or not it is reducedto
judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed,legalorequitable,andsecuredorunsecured.Theclaimofprivaterespondentsagainst
petitioner PAL for their missing luggage is a money claim or financial demand that the law
requirestobesuspendedpendingtherehabilitationproceedings.Quotingitsearlierdecisioninthe
caseofB.F.Homes,Inc.vs.CourtofAppeals,theCourtstatedthat.
...(T)hereasonforsuspendingactionsforclaimsagainstthecorporation
should not be difficult to discover. It is not really to enable the management
committeeortherehabilitationreceivertosubstitutethedefendantinanypending
actionagainstitbeforeanycourt,tribunal,boardorbody.Obviously,thereal
justificationistoenablethemanagementcommitteeorrehabilitationreceiverto
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.Toallowsuchotheractiontocontinuewouldonlyaddtotheburdenof
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the management committee or rehabilitation receiver, whose time, effort and

resourceswouldbewastedindefendingclaimsagainstthecorporationinsteadof
beingdirectedtowarditsrestructuringandrehabilitation.
2.
Nonsuspension of claims against guarantors and sureties solidarily liable with debtor
(MetropolitanWaterworksandSewerageSystemvs.Hon.RenaldoB.Daway,etal.,G.R.
No.160732,June21,2004)
In1997,MWSSgrantedMayniladWaterServices,Inc.underaConcessionAgreementa20year
periodtomanage,operate,repair,decommissionandrefurbishtheexistingMWSSwaterdelivery
andsewerageservicesintheWestZoneServiceArea,forwhichMayniladundertooktopaythe
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
issuanceofanIrrevocableStandbyLetterofCredit(ISLC)intheamountofUS$120millionin
favorofMWSS.
Mayniladsubsequentlydefaultedinthepaymentofitsconcessionfees.OnNovember24,2003,
MWSSgave notice tothe consortium of foreignbanks that it was drawingonthe ISLCand
demanded payment in the amount of US$98,923,640.15. Earlier, however, specifically on
November13,2003,Mayniladhadfiledapetitionforrehabilitationandthecourt(theRegional
TrialCourtofQuezonCity,Branch90)issuedtherequisiteStayOrderonNovember17,2003.It
alsoissuedanorder,datedNovember27,2003,declaringtheattemptofMWSStodrawonthe
ISLCasviolativeofthecourtsstayorderandorderingMWSStowithdrawitsdemandtothe
consortiumforpaymentundertheISLC.
Themainissue,accordingtotheSupremeCourt,iswhetherornottherehabilitationcourtactedin
excessofitsauthorityorjurisdictionwhenitenjoinedMWSSfromseekingthepaymentofthe
concessionfees.
(a)
TherehabilitationcourtreliedonSection1ofRule3oftheInterimRulesonCorporate
Rehabilitation(IRCR)tosupportitsjurisdictionovertheISLCandthebanksthatissuedit.The
saidSectionreadsinpartthatjurisdictionoverthoseaffectedbytheproceedingsisconsidered
acquireduponthepublicationofthenoticeofcommencementofproceedingsinanewspaperof
generalcirculation.AccordingtotheCourt,thereferencetothoseaffectedbytheproceedings
coverscreditorsorsuchotherpersonsorentitiesholdingassetsbelongingtothedebtorunder
rehabilitationthatshouldbereflectedintheauditedfinancialstatements.TheCourt,however,held
thatthebanksdonotholdanyassetsofMayniladthatwouldbematerialtotherehabilitation
proceedings. Maynilads financial statements do not show the ISLC as part of its assets or
liabilitiesandMayniladhasadmitteditisnot.InenjoiningMWSSfromclaiminganassetthatdid
notbelongtoMayniladandoverwhichitdidnotacquirejurisdiction,therehabilitationcourtacted
inexcessofitsjurisdiction.
(b)
Mayniladalleged,however,thatitisSection6(b)ofRule4oftheIRCRthatsupportits
claimthatthecommencementoftheprocesstodrawontheISLCisanenforcementofclaim
prohibitedbytheIRCRandtheorderoftherehabilitationcourt.Inotherwords,Mayniladis
claimingthatMWSSsactionconstitutesaclaimagainstthedebtor,itsguarantorsandsureties
notsolidarilyliablewiththedebtor.AccordingtotheCourt,Section6(b),Rule4oftheIRCR
doesnotenjointheenforcementofallclaimsagainstguarantorsandsuretiesbutonlythoseclaims
againstguarantorsandsuretieswhoarenotsolidarilyliablewiththedebtor.TheCourtconcluded
thatthebanksaresolidarilyliablewithMayniladbecausetheundertakingofthebanksunderthe
ISLCisaprimary,direct,definiteandabsoluteundertakingtopayandisnotconditionedonthe
priorexhaustionofMayniladsassets.Beingsolidary,theclaimsagainstthemcanbepursued
separatelyfromandindependentlyoftherehabilitationcase.
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3.
Purposeofsuspensionofactionsforclaimsagainstthecorporation(SpousesSobrejuanite,
etal.vs.ASBDevelopmentCorporation,G.R.No.165675,September30,2005)
Thepurposeforthesuspensionof the proceedings istoprevent acreditor fromobtainingan

advantageorpreferenceoveranotherandtoprotectandpreservetherightsofpartylitigantsas
wellastheinterestoftheinvestingpublicorcreditors.Suchsuspensionisintendedtogiveenough
breathingspaceforthemanagementcommitteeorrehabilitationreceivertomakethebusiness
viableagain,withouthavingtodivertattentionandresourcestolitigationsinvariousfora.The
suspension would enable the management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extrajudicial interference that might unduly
hinderorpreventtherescueofthedebtorcompany.Toallowsuchotheractiontocontinue
wouldonlyaddtotheburdenofthemanagementcommitteeorrehabilitationreceiver,whosetime,
effortandresourceswouldbewastedindefendingclaimsagainstthecorporationinsteadofbeing
directedtowarditsrestructuringandrehabilitation.
CHAPTER XV: SUPREME COURT INTERIM RULES OF PROCEDURE FOR INTRACORPORATE CONTROVERSIES
1.
Appointment of Interim Management Committee justified; Section 6(d) of PD 902A

interpreted (Jacinto, et al. vs. First Womens Credit Corporation, G.R. No. 154049,
August28,2003)
Petitioners, in the main, argue that the drastic relief of appointing an interim management
committeemustbegrantedonlyaftermuchseriousthought;inotherwords,theypositthatthe
creationofamanagementcommitteeforasolventandgoingcorporationshouldbealastresort
remedyconsideringthatitwoulddeprivetheBoardofDirectorsofitspoweroverthecorporation.
Further,petitionersaverthattheIMCwascreatedontheunfoundedallegationthattheydiverted
corporatefundstoRJGroupofCompanies.TheydenythechargeandassertthatRJGroupof
CompanieshadsettleditsobligationswithFWCCthroughanoffsettingagreementwhichwas
consentedtobyKatayamahimself.Besides,petitionerJacintosfinancialexposureassuretyto
FWCCscreditorbanksfarexceedstheamountsloanedtoRJGroupofCompanies.Jacintoclaims
thatheactedassuretyforFWCCinthelattersobligationswithLandBankandPNBamountingto
almostabillionpesos.Ifonthisaccountalone,theIMCshouldbedissolvedandmanagementof
FWCCshouldbegivenbacktotheBoardofDirectorsheadedbypetitionerJacinto.
Inexercisingthediscretiontoappointamanagementcommittee,theofficerortribunalbefore
whomtheapplicationwasmademusttakeintoaccountallthecircumstancesandfactsofthecase,
thepresenceofconditionsandgroundsjustifyingtherelief,theendsofjustice,therightsofallthe
parties interested in the controversy and the adequacy and effectiveness of other available
remedies.Thediscretionmustbeexercisedwithgreatcautionandcircumspectionandonlyfora
reasonstronglyappealingtothetribunalorofficerexercisingjurisdiction.Atanyrate,oncethe
discretionhasbeenexercised,thepresumptiontobeconsideredisthattheofficerortribunalhas
fairlyweighedandappraisedtheevidencesubmittedbytheparties.
IndeterminingwhetherHearingOfficerPalmarescorrectlyexercisedhisjudgmentwhenhe
orderedthecreationoftheIMC,itisnecessarytorefertoSec.6,par.(d),ofPD902A
Sec. 6. Inordertoeffectivelyexercisesuchjurisdiction,theCommissionshall
possessthefollowingpowers:xxxx(d)Tocreateandappointamanagement
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committee,board,orbodyuponpetitionormotupropiowhenthereisimminent
danger of dissipation, loss, wastage or destruction of assets or other
properties or paralization of business operations of such corporations or
entities which maybeprejudicial tothe interest of minoritystockholders,
partieslitigantsorthegeneralpublic(emphasissupplied).
Areadingoftheaforecitedlegalprovisionrevealsthatforaminoritystockholdertoobtainthe
appointmentofaninterimmanagementcommittee,hemustdomorethanmerelymakeaprima
facieshowingofadenialofhisrighttoshareintheconcernsofthecorporation;hemustshowthat
the corporate property is in danger of being wasted and destroyed; that the business of the
corporationisbeingdivertedfromthepurposeforwhichithasbeenorganized;andthatthereis
seriousparalizationofoperationsalltohisdetriment.Itisonlyinastrongcasewherethereisa
showingthatthemajorityareclearlyviolatingthecharteredrightsoftheminorityandputtingtheir
interestsinimminentdangerthatamanagementcommitteemaybecreated.
Inthisregard,meredisagreementamongstockholdersastotheaffairsofthecorporationwould
notinitselfsufficeasagroundfortheappointmentofamanagementcommittee.Atleastwhere
thereisnoimminentdangeroflossofcorporatepropertyorofanyotherinjurytostockholders,
managementofcorporatebusinessshouldnotbewrestedawayfromdulyelectedofficers,whoare
primafacieentitledtoadministertheaffairsofthecorporation,andplacedinthehandsofthe
management committee. However, where the dissension among stockholders is such that the
corporationcannotsuccessfullycarryonitscorporatefunctionstheappointmentofamanagement
committeebecomesimperative.
Afterareviewoftherecords,weareconvincedthattheappointmentoftheInterimManagement
Committeeisfullywarrantedbythecircumstances.ThefindingsofHearingOfficerPalmares
relativetothetransferoffundsfromFWCCtoRJGroupofCompanieswithoutthecorresponding
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
collectionofreceivablesaswellastheinabilityofFWCCtopayitspressingobligationsamply
supporttheconclusionthatthereisimminentdangerofdissipation,loss,wastageordestruction
ofcorporateassets.
The word imminent has been defined as impending or on the point of happening; while
dangermeansperilorexposuretolossorinjury.ThefindingsofFWCCsexternalauditor,
whichwereembodiedinanauditreporttheaccuracyofwhichwasnotquestionedbypetitioners,
supporttheconclusionthatpetitionersunrestrictedandcontinuousmanagementofFWCCposes
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.
PetitionersargumentthatKatayamaknewofthepracticedoesnotjustifytheimproprietyoftheir
dealingsinasmuchasacorporateactinherentlyillegaldoesnotceasetobeillegalsimplybecause
thequestioningstockholderisawareoftheillegalpracticeandhencecannotclaimthathewas
deceived. Also,petitionerscontentionthatthereisnoneedfortheIMCtooverseecorporate
operationssinceFWCChadcollectedontheobligationsofRJGroupofCompaniesthroughthe30
July1997DeedofAssignmentisflawed.PetitionersneedtoberemindedthatFWCChasnot
consummatedthecontract,thatis,collecttheassignedreceivables,andthereisstillthedangerthat
thesereceivablesmayturnouttobebadloansmuchtothedetrimentofFWCCasassignee.
Additionally,asadmittedbythepartiesandborneoutbytheevidenceonrecord,theprevailing
internaldisputeandfeudbetweenpetitionersandKatayamahaveresultedinthetotalparalization
ofFWCCsbusinessoperationsandadverselyaffecteditscollectionefforts.Inviewofthesefacts,
HearingOfficerPalmareswasclearlyjustifiedinorderingtheappointmentoftheIMCtooversee
theoperationofFWCCandpreserveitsassetspendingresolutionofthepartiesdispute.
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WithregardtopetitionersargumentthattheappointmentoftheIMCcausedtheminjurieswhich
faroutweighthebenefitsgrantedtoKatayama,sufficeittostatethatamanagementcommitteeis
nottherepresentativeoragentofthestockholderuponwhoseinstancethecommitteehasbeen
appointed; rather, it is for thetimebeinga ministerial officer and representative of the court
hearingthederivativesuit.Sinceitsappointmentisforthebenefitofallinterestedparties,itholds
andmanagesthepropertyforthebenefitofthoseultimatelyentitledto,andnotprimarilyforthe
benefitofthepartyatwhoseinstancetheappointmenthasbeenmade.
2.
Purposeandnatureofderivativesuit(Chuavs.CourtofAppeals,etal.,G.R.No.150793,
November19,2004)
UnderSection36oftheCorporationCode,readinrelationtoSection23,whereacorporationisan
injuredparty,itspowertosueislodgedwithitsboardofdirectorsortrustees.Anindividual
stockholderispermittedtoinstituteaderivativesuitonbehalfofthecorporationwhereinheholds
stocksinordertoprotectorvindicatecorporaterights,whenevertheofficialsofthecorporation
refusetosue,oraretheonestobesued,orholdthecontrolofthecorporation.Insuchactions,the
suingstockholderisregardedasanominalparty,withthecorporationastherealpartyininterest.
A derivative action is a suit by a shareholder to enforce a corporate cause of action. The
corporationisanecessarypartytothesuit.Andthereliefthatisgrantedisajudgmentagainsta
thirdpersoninfavorofthecorporation.Similarly,ifacorporationhasadefensetoanaction
against it and is not asserting it, a stockholder may intervene and defend on behalf of the
corporation.
3.
Notallstockholders/membersareindispensablepartiesinderivativesuit (R.N.Symaco
TradingCorporationvs.Santos,etal.,G.R.No.142474,August18,2005)
TheCourtruledthat,inaderivativesuit,itisenoughthatastockholder/memberoraminorityof
thestockholders/membersfilesthederivativesuitforandinbehalfofthecorporation.Afterall,
thestockholders/memberswhofileaderivativesuitaremerelynominalparties,therealpartyin
interestbeingthecorporationitselfforandinwhosebehalfthesuitisfiled.Anymonetarybenefits
underthedecisionofthecourtshallpertaintothecorporation.
4.
Appointmentofmanagementcommitteenotvalid (AoAs,etal.vs.CA,etal.,G.R.No.
128464,June20,2006)
TherelevantportionoftheCourtsdecisionisasfollows:
Refusaltoallowstockholders(ormembersofanonstockcorporation)toexaminebooksofthe
companyisnotagroundforappointingareceiver(orcreatingamanagementcommittee)since
thereareotheradequateremedies,suchasawritofmandamus.Misconductofcorporatedirectors
orotherofficersisnotagroundfortheappointmentofareceiverwherethereareoneormore
adequatelegalactionagainsttheofficers,wheretheyaresolvent,orotherremedies.
Theappointmentofareceiverforagoingcorporationisalastresortremedy,andshouldnotbe
employedwhenanotherremedyisavailable.Reliefbyreceivershipisanextraordinaryremedyand
isneverexercisedifthereisanadequateremedyatlaworiftheharmcanbepreventedbyan
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
corporationifappropriatereliefcanotherwisebehad.
The fact that the President of the LCP needs the concurrence of only two other directors to
authorizethereleaseofsurplusfundsplainlycontradictstheconclusionofconspiracyamongthe
presently11manboard.NeitherdoesthefactthattheBoardofDirectorsoftheLCPpreparesthe
annualbudgetandtheannualauditingofpropertiesoftheLCPjustifytheconclusionthatthe
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allegedactsofrespondentBatongwasdoneinconcertwiththeotherdirectors.Thereshouldhave
beenevidencethatsuchdissipationtookplacewiththeknowledgeandexpressorimpliedconsent
ofmostortheentireboard. Goodfaithisalwayspresumed.Asitistheobligationofonewho
allegesbadfaithtoproveit,soshouldheprovethatsuchbadfaithwassharedbyallpersonsto
whomheattributesthesame.Thelastresortremedyofreplacingtheentireboard,therefore,witha
managementcommittee,isuncalledfor.[SeealsoSyChim,etal.vs.SySiyHo&Sons,Inc.,G.R.
No.164958,January27,2006
5.
Power to create management committee includes power to reorganize the same

(Punongbayanvs.Punongbayan,etal.,G.R.No.157671,June20,2006)
ThedecisionoftheCourtstatedinpart:
Having the power to create a management committee, it follows that the RTC can order the
reorganizationoftheexistingmanagementcommittee.Here,knowingthatthedeadlockamongthe
membersofthecommittee(appointedbytheSEC)mayleadtotheparalyzationoftheschools
businessoperations,theRTCremovedthesaidmembersandappointednewmembers.Thisis
pursuant to Section 11, Rule 9 of the Interim Rules of Procedure Governing IntraCorporate
Controversieswhichprovides:
Amemberofthemanagementcommitteeisdeemedremoveduponappointmentbythe
courtofhisreplacementchoseninaccordancewithSection4ofthisRule.
Suchappointmentofnewmembersdoesnotmeanthecreationofanewmanagementcommittee.
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,whenitfailedtofunctionduetothedivisionamongthemembers,theRTCreplaced
them.Clearly,therewasnorevocationofthefinalOrderoftheSEC.
Significantly,inappointingnewmembersofthemanagementcommittee,chosenfromthelistsof
nominees submitted by bothpetitioner and respondents, the RTC did not deprive respondents
hereinoftheirrepresentationinthecommittee.
CHAPTER XVI: SECURITIES REGULATION CODE

REVISEDPARAGRAPHS16.14AND16.15ONTENDEROFFERS,CHAPTERXVI,PP.185186
16.14
Underwhatcircumstancesisatenderoffermandatory?(Sec.19;SRCRule19,
paragraph2)
ExceptwhenthemandatorytenderofferrequirementdoesnotapplypursuanttoSRCRule19,
paragraph3
(a) Anypersonorgroupofpersonsactinginconcertwhointendstoacquirethirtyfivepercent
(35%) or more of equity shares in a public company shall disclose such intention and
contemporaneouslymakeatenderofferforthepercentsoughttoallholdersofsuchclass,subject
toparagraph(9)(E)ofRule19,i.e.,ifthetenderoffershallbeforlessthanthetotaloutstanding
securitiesofaclassbutagreaternumberofsecuritiesistenderedpursuantthereto,thebiddershall
beboundtotakeupandpayforthesecuritiesonaproratabasis,disregardingfractions,according
tothenumberofsecuritiestenderedbyeachsecurityholderduringtheperiodsuchofferremains
open.
In the event that the tender offer is oversubscribed, the aggregate amount of securities to be
acquiredatthecloseofsuchtenderoffershallbeproportionatelydistributedacrossbothselling
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shareholder with whom the acquirer may have been in private negotiations and minority
shareholders.
(b) Anypersonorgroupofpersonsactinginconcertwhointendstoacquirethirtyfivepercent
(35%)ormoreofequitysharesinapubliccompanyinoneormoretransactionswithinaperiodof
twelve(12)monthsshallberequiredtomakeatenderoffertoallholdersofsuchclassforthe
numberofsharessoacquiredwithinthesaidperiod.Thisissomet6imesreferredtoasacreeping
tenderoffer.
(c)Ifanyacquisitionofevenlessthanthirtyfivepercent(35%)wouldresultinownershipofover
fiftyonepercent(51%)ofthetotaloutstandingequitysecuritiesofapubliccompany,theacquirer
shallberequiredtomakeatenderofferunderRule19foralltheoutstandingequitysecuritiesto
allremainingstockholdersofthesaidcompanyatapricesupportedbyafairnessopinionprovided
byanindependentfinancialadvisororequivalentthirdparty.Theacquirerinsuchatenderoffer
shallberequiredtoacceptanyandallsecuritiesthustendered.
Apubliccompanyisanycorporationwithaclassofequitysecuritieslistedonanexchangeor
withassetsinexcessofFiftyMillionPesos(P50,000,000)andhavingtwohundred(200)ormore
holders,atleasttwohundred(200)ofwhichareholdingatleastonehundred(100)sharesofa
classofitsequitysecurities.(SRCRule3,paragraph2.B)
16.15
Whattransactionsareexemptfromthemandatorytenderofferrequirement?(Sec.
19;SRCRule19,paragraph3)
Themandatorytenderofferrequirementshallnotapplytothefollowing:
(a) anypurchaseofsharesfromtheunissuedcapitalstock,providedthattheacquisitionwillnot
resulttoafiftypercent(50%)ormoreownershipofsharesbythepurchaser;
(b) anypurchaseofsharesfromanincreaseinauthorizedcapitalstock;
(c) any purchase of shares in connection with foreclosure proceedings involving a duly
constituted pledgeorsecurityarrangementwheretheacquisitionismadebythedebtoror
creditor;
(d) anypurchaseofsharesinconnectionwithprivatizationundertakenbythegovernmentofthe
Philippines;
(e) anypurchaseofsharesinconnectionwithcorporaterehabilitationundercourtsupervision;
(f)
anypurchaseofsharesthroughanopenmarketattheprevailingmarketprice;
(g) mergerorconsolidation.
ADDITIONALSUPREMECOURTCASE
Wherebothpartiesareequallyatfault,neitheronecouldhaverecourseagainsttheother
(AbacusSecuritiesCorporationvs.Ampil,G.R.No.160016,February27,2006)
Inthepresentcontroversy,thefollowingpertinentfactsareundisputed:(1)onApril8,1997,
respondentopenedacashaccountwithpetitionerforhistransactionsinsecurities;(2)respondents
purchaseswereconsistentlyunpaidfromApril10to30,1997;(3)respondentfailedtopayinfull,
orevenjusthisdeficiency,forthetransactionsonApril10and11,1997;(4)despiterespondents
failuretocoverhisinitialdeficiency,petitionersubsequentlypurchasedandsoldsecuritiesfor
respondentsaccountonApril25and29;(5)petitionerdidnotcancelorliquidateasubstantial
amountofrespondentsstocktransactionsuntilMay6,1997.
Stockmarkettransactionsaffectthegeneralpublicandthenationaleconomy.Theriseandfallof
stockmarketindicesreflecttoaconsiderabledegreethestateoftheeconomy.Trendsinstock
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prices tend to herald changes in business conditions. Consequently, securities transactions are
impressedwithpublicinterest,andarethussubjecttopublicregulation.Inparticular,thelawsand
regulationsrequiringpaymentoftradedshareswithinspecifiedperiodsaremeanttoprotectthe
economyfromexcessivestockmarketspeculations,andarethusmandatory.Inthepresentcase,
respondentcannotescapepaymentofstocksvalidlytradedbypetitioneronhisbehalf(i.e.,the
transactionsonApril10and11,1997).Thesetransactionstookplacebeforebothpartiesviolated
thetradinglawandrules.Hence,theyfalloutsidethepurviewoftheparidelictorule.Thepari
delictoruleappliesonlytotransactionsenteredintoaftertheinitialtradesmadeonApril10and
11,1997(i.e.,thetransactionsonApril25and29).
CHAPTER XVII: INTELLECTUAL PROPERTY CODE

1.
Copyright:Nameandcontainerofbeautycreamproductnotpropersubjectsofcopyright
andpatent(Khovs.CA,G.R.No.115758,March19,2002)
Inthecaseatbar,thepetitionerappliedfortheissuanceofapreliminaryinjunctiveorderonthe
groundthatsheisentitledtotheuseofthetrademarkonChinChunSuanditscontainerbasedon
her copyright and patent over the same. We first find it appropriate to rule on whether the
copyrightandpatentoverthenameandcontainerofabeautycreamproductwouldentitlethe
registranttotheuseandownershipoverthesametotheexclusionofothers.
Trademark, copyright and patents are different intellectual property rights that cannot be
interchangedwithoneanother.Atrademarkisanyvisiblesigncapableofdistinguishingthegoods
(trademark)orservices(servicemark)ofanenterpriseandshallincludeastampedormarked
containerofgoods.Inrelationthereto,atradenamemeansthenameordesignationidentifyingor
distinguishinganenterprise.Meanwhile,thescopeofacopyrightisconfinedtoliteraryandartistic
worksthatareoriginalintellectualcreationsintheliteraryandartisticdomainprotectedfromthe
momentoftheircreation.Patentableinventions,ontheotherhand,refertoanytechnicalsolution
of a problem in any field of human activity that is new, involves an inventive step and is
industriallyapplicable.
Petitionerhasnorighttosupportherclaimfortheexclusiveuseofthesubjecttradenameandits
container.Thenameandcontainerofabeautycreamproductarepropersubjectsofatrademark
inasmuchasthesamefallssquarelywithinitsdefinition.Inordertobeentitledtoexclusivelyuse
the same in the sale of the beauty cream product, the user must sufficiently prove that she
registeredoruseditbeforeanybodyelsedid.Thepetitionerscopyrightandpatentregistrationof
thenameandcontainerwouldnotguaranteehertherighttotheexclusiveuseofthesameforthe
reason that they are not appropriate subjects of the said intellectual rights. Consequently, a
preliminaryinjunctionordercannotbeissuedforthereasonthatthepetitionerhasnotproventhat
shehasaclearrightoverthesaidnameandcontainertotheexclusionofothers,nothavingproven
thatshehasregisteredatrademarktheretoorusedthesamebeforeanyonedid.
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2.
Trademarks: Actionforinfringementorunfaircompetitioncouldproceedindependently
orsimultaneouslywithadministrativeactionforcancellationofregisteredtrademark(Levi
Strauss[Phils.],Inc.vs.VogueTradersClothingCompany,G.R.No.132993,June29,
2005)
Anactionforinfringementorunfaircompetition,includingtheavailableremediesofinjunction
and damages, can proceed independently or simultaneously with an action for the
administrativecancellationofaregisteredtrademark.
3.
Copyright: Proofofownershipofcopyrightedmaterial;proofofcopying;nocopyright
protectionforworksofappliedartorindustrialdesign(Chingvs.Salinas,Sr.,etal.,G.R.
No.161295,June29,2005)
AnapplicantforasearchwarrantforinfringementunderR.A.No.8293mustdemonstratethe
existenceandthevalidityofhiscopyright.Ownershipofcopyrightedmaterialisshownbyproof
oforiginalityandcopyrightability.Byoriginalityismeantthatthematerialwasnotcopied,and
evidencesatleastminimalcreativity,thatitwasindependentlycreatedbytheauthor,andthatit
possessesatleastsomeminimaldegreeofcreativity.Copyingisshownbyproofofaccessto
copyrightedmaterialandsubstantialsimilaritybetweenthetwoworks.
o
Todischargehisburden,theapplicantmaypresentthecertificateofregistrationcoveringthework
or, in its absence, other evidence. A copyright certificate provides prima facie evidence of
originalitythatisoneelementofcopyrightvalidity.Itconstitutes primafacie evidenceofboth
validityandownershipandthevalidityofthefactsstatedinthecertificate.
o
Thereisnocopyrightprotectionforworksofappliedartorindustrialdesignthathaveaestheticor
artistic features that cannot be identified separately from the utilitarian aspects of the article.
Functionalcomponentsofusefularticles,nomatterhowartisticallydesigned,havegenerallybeen
deniedcopyrightprotectionunlesstheyareseparablefromtheusefularticle.
ANTI-MONEY LAUNDERING ACT

RA 9160 (2001), as amended by RA 9194 (2003)
1.
Whatismoneylaundering?
Money laundering, according to the definition adopted by the International Criminal Police
OrganizationorInterpol,denotesanyactorattemptedacttoconcealordisguisetheidentityof
illegallyobtainedproceedssothattheyappeartohaveoriginatedfromlegitimatesources. 1 The
purposeoflaunderingistodisguiseillegalprofitswithoutcompromisingthecriminalswhowish
tobenefitfromtheproceedsoftheiractivities.Section4ofRepublicActNo.9160,otherwise
knownastheAntiMoneyLaunderingAct (AMLA),defines moneylaunderingas a crime
wherebytheproceedsofanunlawfulactivityaretransactedtherebymakingthemappeartohave
originatedfromlegitimatesources.Inplainlanguage,moneylaunderingistheconversionofdirty
moneyintocleanmoney.
2.
Howismoneylaundered?
IntroductiontotheModelLegislationonLaundering,ConfiscationandInternationalCooperation
inRelationtotheProceedsofCrimepreparedbytheUnitedNationsOfficeforDrugControlandCrime
Prevention(1999).
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Thereare3commonstagesofmoneylaundering,namely,placementorthephysicaldisposalof
thecriminalproceeds, layering ortheseparationofthecriminalproceedsfromtheirsourceby
creatinglayersoffinancialtransactionstodisguisetheaudittrail,andintegrationortheprovision
ofapparentlegitimacytothecriminalproceeds.
Theplacementstageisintendedtoseveranydirectassociationbetweenthemoneyandthecrime
generatingit.Atthisstage,thelaundererintroduceshisillegalprofitsintothefinancialsystem.
Thismightbedonebybreakinguplargeamountsofcashintolessconspicuoussmallersums.
Thesesumsmaythenbedepositeddirectlyintooneormorebankaccounts,orusedtopurchase
monetaryinstruments,suchaschecks,moneyorders,securities,etc.,thatareafterwardsdeposited
intootheraccountsatotherplaces.
Afterthefundshaveenteredthefinancialsystem,thelayeringstagetakesplace.Theobjecthereis
to obscure the money trail to foil pursuit. At this stage, the launderer engages in a series of
conversionsormovementsofthefundstodistancethemfromtheirsource.Thefundsmightbe
usedtopurchaseinvestmentinstrumentsthataresubsequentlysold,ortheymightsimplybewired
to accounts inother banks in other countries. Sometimes, the transfers might be disguisedas
paymentsforgoodsorservices,thusgivingthemalegitimateappearance.
Oncethemannerofitsacquisitionanditssourcecannolongerbetraced,themoneymaynowbe
availabletothecriminalagain.Thisistheintegrationstagewhenthefundsreenterthelegitimate
economy.Thelaunderercouldtheninvestthelaunderedfundsintoanyassetorbusinessventure. 2
3.
Whatarecoveredinstitutions?
Thesearethepersons,corporationsandotherentitiessubjecttotheprovisionsoftheAMLA.
Specifically,thetermrefersto
(a) banks,nonbanks,quasibanks,trustentities,andallotherinstitutionsandtheirsubsidiaries
andaffiliatessupervisedorregulatedbytheBangkoSentralngPilipinas(BSP);
(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
managingsecuritiesorrenderingservicesasinvestmentagent,advisor,orconsultant,(ii)
mutualfunds,closeendinvestmentcompanies,commontrustfunds,preneedcompaniesand
othersimilarentities,(iii)foreignexchangecorporations,moneychangers,moneypayment,
remittance, and transfer companies and other similar entities, and (iv) other entities
administeringorotherwisedealingincurrency,commoditiesorfinancialderivativesbased
thereon,valuableobjects,cashsubstitutesandothersimilarmonetaryinstrumentsorproperty
supervisedorregulatedbySecuritiesandExchangeCommissionandExchangeCommission.
(Sec.3[a],AMLA)
4.
Whatisacoveredtransaction?
It is a transaction with a covered institution in cash or other equivalent monetary instrument

involvingatotalamountinexcessofP500,000withinonebankingday(Sec.3[b],AMLA).This
meansthatiftheamountinvolvedislessthanP500,000thenthecoveredinstitutionneednotmake
areporttotheAMLAunlessthetransactionisasuspicioustransaction.
5.
Whatisasuspicioustransaction?
SeeBasicFactsAboutMoneyLaundering,http://www.fatfgafi.org/Mlaundering_en.htm,asof
August14,2002.
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Itisatransactionwithacoveredinstitution,regardlessoftheamountinvolved,whereanyofthe
followingcircumstancesexist:
(a) thereisnounderlyinglegalortradeobligation,purposeoreconomicjustification;
(b) theclientisnotproperlyidentified;
(c) theamountinvolvedisnotcommensuratewiththebusinessorfinancialcapacityoftheclient;
(d) takingintoaccountallknowncircumstances,itmaybeperceivedthattheclient'stransaction
isstructuredinordertoavoidbeingthesubjectofreportingrequirementsundertheAct;
(e) anycircumstancerelatingtothetransactionwhichisobservedtodeviatefromtheprofileof
theclientand/ortheclient'spasttransactionswiththecoveredinstitution;
(f)
thetransactionisinanywayrelatedtoanunlawfulactivityoroffenseunderthisActthatis
abouttobe,isbeingorhasbeencommitted;or
(g) anytransactionthatissimilaroranalogoustoanyoftheforegoing.(Sec.3[b1],AMLA).
Atransactionmaybebothacoveredandsuspicioustransaction.
6.
Whatisanunlawfulactivity?
Itisanyactoromissionorseriesorcombinationofactsoromissionsinvolvingorhavingrelation
toanyofthecrimesandoffensesenumeratedinSection3(i)oftheAMLAsuchaskidnappingfor
ransom,plunder,robberyandextortion,juetengandmasiao,piracyonthehighseas,qualified
theft, swindling, smuggling, hijacking, destructive arson, murder, and violations of certain
provisionsoftheAntiGraftandCorruptPracticesAct,ComprehensiveDangerousDrugsActof
2002, ElectronicCommerceActof2000,and SecuritiesRegulationCodeof2000.Taxevasion
andotherviolationsoftheNationalInternalRevenueCodearenotincludedinthelistofunlawful
activities.Inothercountries,thetermpredicatecrimeisusedinsteadofunlawfulactivity.
7.
WhatarethemoneylaunderingoffensespenalizedundertheAMLA?
(a)Thetransactionofanymonetaryinstrumentorproperty,ortheattempttotransactthesame,
byanypersonknowingthatsuchmonetaryinstrumentorpropertyrepresents,involves,orrelates
to,theproceedsofanyunlawfulactivity;
(b)Theperformanceof,orfailuretoperform,anyactbyanyperson,knowingthatanymonetary
instrument or property involves the proceeds of any unlawful activity, as a result of which
performanceorfailuretoperformhefacilitatestheoffenseofmoneylaunderingreferredtoin
paragraph(a)above;
(c) Thefailurebyanyperson,knowingthatanymonetaryinstrumentorpropertyisrequired
undertheAMLAtobedisclosedandfiledwiththeAMLC,tomakesuchdisclosureandfiling.
(Sec.4,AMLA)
8.
WhatistheAntiMoneyLaunderingCouncil?
TheAntiMoneyLaunderingCouncilisthegovernmententitythatadministerstheAMLA.Itis
composedoftheGovernoroftheBangkoSentralngPilipinasaschairman,theCommissionerof
the Insurance Commission and the Chairman of the Securities and Exchange Commission as
members.TheAMLCshallactunanimouslyinthedischargeofitsfunctions.
9.
WhatarethecoveredinstitutionsrequiredtodotoundertheAMLAtoprevent
moneylaundering?
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Therearethreebasicactivitiescoveredinstitutionsarerequiredtodotopreventmoneylaundering
(Sec.9,AMLA):
(a)IdentifycustomersAcoveredinstitutionshallestablishandrecordthetrueidentityofits
clientsbasedonofficialdocuments.Itshallmaintainasystemofverifyingthetrueidentityofits
clientsand,incaseofcorporateclients,requireasystemofverifyingtheirlegalexistenceand
organizationalstructure,aswellastheauthorityandidentificationofallpersonspurportingtoact
on their behalf. Anonymous accounts, accounts under fictitious names, and all other similar
account are prohibited by the AMLA. However, Peso and foreign currency nonchecking
numberedaccountsareallowed.
(b)KeeprecordsCoveredinstitutionsarerequiredtomaintainandsafelystoreallrecordsofall
transactionsforaperiodoffiveyearsfromthedatesofthetransactions.Withrespecttoclosed
accounts,therecordsoncustomeridentification,accountfilesandbusinesscorrespondenceare
requiredtobepreservedandsafelystoredforatleastfiveyearsfromthedateswhentheywere
closed.
(c)ReportcoveredandsuspicioustransactionsCoveredinstitutionsshallreporttotheAMLC
allcoveredandsuspicioustransactionswithinfiveworkingdaysfromoccurrencethereof,unless
theSupervisingAuthorityconcerned(i.e.,theBSP,SECorOIC)prescribesalongerperiodnot
exceeding10workingdays.
10.
Whatisafreezeorder?
ItistheorderthattheCourtofAppealsmayissue,uponapplicationexpartebytheAMLCand
afterdeterminationthatprobablecauseexiststhatanymonetaryinstrumentorpropertyisinany
wayrelatedtoanunlawfulactivity,toblock,suspendorotherwiseplaceunderthecontrolofthe
coveredinstitutionconcernedthemonetaryinstrumentorpropertysubjectthereof.Afreezeorder
takeseffectimmediatelyandlastsforaperiodof20daysunlessextendedbytheCourtofAppeals,
end
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2007 Supplement to the Notes on Selected Commercial Laws

by Atty. Tristan A. Catindig June 12, 2007 All rights reserved.

CHAPTER I: BANGKO SENTRAL NG PILIPINAS LAW

CHAPTER II: GENERAL BANKING LAW OF 2000

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER IV: PHILIPPINE DEPOSIT INSURANCE CORPORATION

2007 Supplement to the Notes on Selected Commercial Laws

Is PDIC insurance coverage required of foreign currency deposits maintained in

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER V: TRUTH IN LENDING ACT

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER VI: LETTERS OF CREDIT

Possible parties to a letter of credit transaction; nature of letter of credittrust receipt

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER VII: TRUST RECEIPTS

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER XI: CHATTEL MORTGAGE LAW

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan[15] held:

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

That there should be actual foreclosure of the mortgaged vehicle was

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER XII: EXTRAJUDICIAL FORECLOSURE OF MORTGAGE LAW

Issues Prior to Foreclosure Sale

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

The Court explainedthedoctrineof mortgagee ingood faith bycitingits decision in Cavite

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER XIV: SUPREME COURT INTERIM RULES OF PROCEDURE ON

2007 Supplement to the Notes on Selected Commercial Laws

the management committee or rehabilitation receiver, whose time, effort and

2007 Supplement to the Notes on Selected Commercial Laws

Thepurposeforthesuspensionof the proceedings istoprevent acreditor fromobtainingan

Appointment of Interim Management Committee justified; Section 6(d) of PD 902A

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

Power to create management committee includes power to reorganize the same

CHAPTER XVI: SECURITIES REGULATION CODE

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

CHAPTER XVII: INTELLECTUAL PROPERTY CODE

2007 Supplement to the Notes on Selected Commercial Laws

ANTI-MONEY LAUNDERING ACT

2007 Supplement to the Notes on Selected Commercial Laws

It is a transaction with a covered institution in cash or other equivalent monetary instrument

2007 Supplement to the Notes on Selected Commercial Laws

2007 Supplement to the Notes on Selected Commercial Laws

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