LETTERS OF CREDIT

A. DEFINITION

Letters of credit are those issued by one merchant to another or for the
purpose of attending to a commercial transaction. (Art. 567 Code of Commerce).

A letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interest of seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have control of the goods before paying. (Bank
of America, NT and SA v Court of Appeals et. al., GR No. 105395, Dec. 10, 1993)

A letter of credit is defined as an engagement by a bank or other person

made at the request of a customer that the issuer will honor drafts or other demands
for payment upon compliance with the conditions specified in the credit. (Prudential
Bank v. Intermediate Appellate Court et. al., GR. No. 74886, Dec. 8, 1992)

A letter of credit is a written instrument whereby the writer requests or

authorizes the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment for debt therefore to the addressee. (Transfield
Philippines v. Luzon Hydro Corp.)

B. GOVERNING LAWS
Letters of Credits have long been and are still governed by the provisions
of the Uniform Customs and Practice for Documentary Credits of the International
Chamber of Commerce. (MWSS v. Daway, GR. No. 160732, June 21, 2004)

In Bank of P.I. vs De Nery (35 SCRA 256, 1970), the Supreme Court
pronounced that the observance of the U.C.P. is justified by Article 2 of the Code of
Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any
particular provision in the Code of Commerce, commercial transactions shall be
governed by the usages and customs generally observed.

C. NATURE OF LETTER OF CREDIT

1. A letter of credit is nothing more than a commitment by the issuer that
the party in whose favor it is issued and who can collect upon it, will have his credit
against the applicant of the letter duly paid in the amount specified therein. a letter
of credit which states that the bill shale be duly honored on presentation is not a
contract between the applicant and the issuing bank or between the applicant and
the Central Bank. The contract in which the applicant is a party and on which he can
claim a violation of vested rights is his application for the issuance of the letter of
Credit (Climaco vs. Central Bank of the Phils. Vol. *, Court of Appeals Reports 414,
No. 34, 691-R, Sept. 16, 1965)
2. Letters of credit under the Code of Commerce, are not negotiable
instruments being issued in favor of a specified person and not to order. Article 568
(1) of the Code of Commerce provides that the essential conditions of letters of credit
shall be:
(1) To be issued in favor of a definite person and not to bearer.
3. The bearer of the letter of credit is not considered bound to receive the
money; he may use the letter as he pleases, and the contracts an obligation only by
receiving the money. (Bouvier’s Law Dictionary)
Art. 572 of the Code of Commerce provides that “ If the bearer of a letter
of credit does not make use thereof within the period agreed upon with the drawer,
or, in default the period fixed, within six months, counted from its date, in any point

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 in the Philippines, and within twelve months outside thereof, it shall be void in fact
and in law.
4. Letters of credit were developed for the purpose of insuring to a seller
payment of a definite amount upon the presentation of documents and is thus a
commitment by the issuer that the party in whose favor it is issued an who can
collect upon it will have his credit against the applicant of the letter, duly paid in the
amount specified in the letter. They are effect absolute undertakings to pay the
money advanced or the amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory contracts and while they
are security arrangements, they are not converted thereby into contracts of guaranty.
What distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and other required
shipping documents are presented to it. They are definite undertakings to pay at
sight once the documents stipulated therein are presented. (MWSS v. Daway, GR.
No. 160732, June 21, 2004)

D. PARTIES TO A LETTER OF CREDIT

As enumerated by the Supreme Court in Lee vs. Court of Appeals, GR. No. 117913,
Feb. 1, 2002, the following are the parties to the letter of credit:
1. The buyer or importer;
2. The seller, also referred to as the beneficiary;
3. The opening bank which is usually the buyer’s bank which actually
issues the letter of credit;
4. The notifying bank which is the correspondent of the opening bank
through which it advises the beneficiary of the letter of credit;
5. The negotiating bank which is usually any bank in the city of the
beneficiary. the services of the notifying bank must always be utilized
if the letter of credit is to be advised to the beneficiary through cable;
6. The paying bank which buys or discounts the drafts contemplated by
the letter of credit if such draft is to be drawn on the opening bank or
another designated bank not in the city of the beneficiary. As a rule,
whenever the facilities of the opening bank are used, the beneficiary is
supposed to present his drafts to the notifying bank for negotiation;
and
7. The confirming bank which , upon the request of the beneficiary,
confirms the letter of credit issued by the opening bank.

E. RIGHTS and OBLIGATIONS of PARTIES

1. The buyer procures the letter of credit and obliges himself to reimburse
the issuing bank upon receipts of the documents of title;
2. The seller, who in compliance with the contract of sale ships the goods to
the buyer and delivers the document of title and draft to the issuing bank to recover
payment;
3. The bank issuing the letter of credit undertakes to pay the seller upon
receipt of the draft and proper document of titles and to surrender the documents to
the buyer upon reimbursement.
4.The notifying (advising) bank conveys to the seller the existence of the
letter of credit;
5. The paying bank undertakes to encash the drafts drawn by the exporter.
(Bank of America, NT and SA vs. Court of Appeals, GR. No. 105395, Dec. 10, 1993).
In case of a notifying bank, the correspondent bank assumes no liability
except to notify and or transmit to the beneficiary the existence of the other
letter of credit. A negotiating bank, on the other hand, is a correspondent
bank which buys or discounts a drafts under a letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has no
liability with respect to the seller but after negotiation, a contractual

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 relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit. (FEATI Bank vs.
CA)

F. BASIC PRINCIPLES OF LETTER OF CREDIT

1. Doctrine of Independence

The so-called “independence principle” assures the seller or the

beneficiary of prompt payment independent of any breach of the main contract
and precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any documents,
or for the good faith or acts and/ or omissions, solvency, performance or standing
or the consigner, the carriers, or the insurers of the goods, or any other person
whomsoever. (Transfield Philippines Inc. vs. Luzon Hydro Corporation, 443
SCRA 307, GR. No. 146717, Nov. 22, 2004)

2. Fraud exception principle

Fraud is an exception to the independence principle. Professor Dolan

opines that the untruthfulness of a certificate accompanying a demand for the
payment under a standby credit may qualify as fraud sufficient to support an
injunction against payment. However, injunction should not be granted unless:
(a) there is a clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and not only fraud under the main
agreement; and (c) irreparable injury might follow if injunction is not granted, of
the recovery of damages would be seriously damaged. (Transfield Philippines Inc.
vs. Luzon Hydro Corporation, 443 SCRA 307 GR. No. 14717, Nov. 22, 2004)

3. Doctrine of strict compliance

It is a settled rule in commercial transactions involving letter of

credit that the documents tendered must strictly conform to the terms of
the letter of credit. The tender of documents by the beneficiary (seller) must
include all documents required by the letter. A correspondent bank which
departs from what has been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it may not thereafter be
able to recover from the buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary. Thus, the rule strict compliance.
(FEATI Bank and Trust Company vs. Court of Appeals, 196 SCRA 576
(1991)

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 JURISPRUDENCE
BANK OF AMERICA, NT and SA V. CA et. al. GR. No.105395
December 10, 1993

FACTS:
Petitioner Bank of America (BA) Manila received by registered mail an
irrevocable letter of credit purportedly issued by bank BS, Thailand (issuing bank) for
the account of General chemicals Ltd (GCL), Thailand (buyer) in the amount of US$
2,782,000.00 to cover the sale of certain goods with BA, as advising bank, and private
respondent Inter-Resin Industrial Corporation (IRIC) (seller) as beneficiary. Upon
receipt of the letter of advice, with the letter of credit, IRIC sent its lawyer to BA to have
the letter of credit confirmed. BA,s employee in charge of letter of credit explained that
there was no need for confirmation because the letter of credit would not have been
transmitted if it were not genuine.
IRIC sought to make a partial availment under the letter of credit covering
shipments of goods to GCL valued at US$ 1,320,600. after being satisfied that he
documents IRIC submitted conformed with the conditions expressed in the letter of
credit, BA issued in favor of IRIC a cashier’s check for the peso equivalent of the draft. BA
adverse BS of the availment and sough corresponding reimbursement therefor.
When IRIS tried to make a second availment. BA stopped the processing or
IRIS’s documents upon receipt of telex from BS Thailand declaring the letter of credit
fraudulent. BA sued IRIC for recovery of the peso equivalent of the draft of the US$
1,320,000 on the partial availment of the now disallowed letter of credit.

ISSUES:
1) Whether BA has warranted the genuineness and authenticity of the letter of
credit and, corollarily, whether it has acted merely as an advising bank or as a
confirming bank.
2) Whether IRIC has actually shipped the goods (ropes) specified by the letter
of credit; and
3) Following the dishonor of the letter of credit by BS, whether BA may recover
against IRIC under the draft executed in its partial availment of the letter of
credit.
HELD:
1. BA has only been an advising, not confirming bank this much is clearly
evident, among other things, by the provisions of the letter of credit itself, the
petitions bank’s letter of advice, its request for payment of advising fee, and
the admission of Inter-Resin that it has paid the same. That BA has asked
IRIC to submit documents required by the letter of credit and eventually has
paid the proceeds thereof, did not obviously make it a confirming bank. The
fact, too, that the draft required by the letter of credit is to be drawn under
the account of GCL (buyer) only means the same had to be presented to Bank
of Ayudhya (issuing bank) for payment. It may be significant to recall that the
letter of credit is an engagement of the issuing bank, not the advising bank, to
pay the draft.
2. Whether or not IRIC sent waste instead of its products, is really of no
consequence. In the operation of a letter of credit, the involved banks deal
only with documents and not on goods described on those documents.
3. BA, as a negotiating bank, is entitled to recover on IRIS’s partial availment as
beneficiary of the letter of credit which has been disowned by the alleged
issuer bank.

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PRINCIPLES INVOLVED:
1) Concept and modern use of a letter of credit. “A letter of credit is financial
device developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable interest of a
seller who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. To break the impasse, the
buyer may be required to contract a bank to issue a letter of credit, the issuing
bank can authorize the seller to draw drafts and engage to pay them upon
their presentment simultaneously with the tender of documents required by
the letter of credit. The buyer and seller agree on what documents are to be
presented for the payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and
in the process secures the required shipping documents or documents of title.
To get paid, the seller executes a draft and presents it together with the
required documents to the issuing bank. The issuing bank redeems the draft
and pays cash to the seller if it finds that the documents submitted by the
seller conform with what the letter of credit requires. The bank then obtains
possession of the document upon paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and acquires the
document entitling him to the goods.”

2) Letters of credit distinguished from other accessory contracts. – What

characterizes letters of credit, as distinguished from other accessory contracts
, is the engagement of the issuing bank to pay the seller once the draft and the
issuing bank to pay the seller once the draft and the required documents are
presented to it. In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main contract. By the so called
independence principle, the bank determines compliance with the letter of
credit only by the examining the shipping documents presented; it is
precluded from determining whether the main contract is accomplished or
not.

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 FEATI BANK and TRUST COMPANY vs. COURT of APPEALS
196 SCRA 576, 1991

FACTS:
Private respondent Villaluz agreed to sell 2, 000 cubic meter of lauan logs to
Christiansen. The latter issued purchase order No. 76171.
On the instructions of the consignee, Hanmi Trade Developmet Ltd., de Santa
Ana California, the Security issued Irrevocable Letter of Credit available at sight in favor
of Villaluz for the sum of $54,000, the total purchase price of the lauan logs.
The letter of credit was mailed to the FEATI Bank and Trust Company with the
instruction to the latter that it forward the enclosed letter of credit to the beneficaiary.
Christiansen refused to issue the certification as required in paragraph 4 of the
letter of credit despite several request made by the private respondent.
Because of the absence of certification by Christiansen, FBTC resused to advance
the payment on the letter of credit.
Since the demands by the private respondent for Christiansen to execute the
certification proved futile, Villaluz instituted an action for mandamus and specific
performance against Christiansen and FBTC before the CFI.
However, while the case was still pending trial, Christiansen left the Philippines
without informing the court and his counsel. Hence, Villauz filed an amended complaint
to the make FBTC solidarily liable with Christiansen.
After trial, the CFI found FBTC solidarily liable. The trial court ruled that
petitioner, in accepting the obligation to notify the respondent that the irrevocable
credit has been transmitted to the petitioner on behalf of the private respondent, has
confirmed the letter. Thus, FBTC is a confirming bank, CA, in affirming the trial court’s
decision, added that petitioner acted as a guarantor of the issuing bank and in effect also
of the latter’s principal or client.

ISSUES:
1) Whether or not a correspondent bank is to be held liable under the letter of
credit despite non-compliance by the beneficiary with the terms thereof?
2) Whether of not petitioner is a notifying bank or a confirming bank
3) Whether or not petitioner acted as a guarantor of the issuing bank and in effect
also of the latter’s principal or client.
HELD:
1) Under the provisions of the UCP, the bank may only negotiate, accept or pay, if
the documents tendered to it are on their face in accordance with the terms and
conditions of the documentary credit. And since a correspondent bank, like the
petitioner principally deals only with document, the absence of any document
required in the documentary credit justifies the refusal by the correspondent
bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the completeness of the
documents tendered by the beneficiary.
2) The letter merely provided that the petitioner “forward the enclosed original
credit to the beneficiary.” Considering the aforesaid instruction to the petitioner
by the issuing bank, the Security Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a confirming banks a ruled by the
courts below.
If the petitioner was a confirming bank, then a categorical declaration
should have been stated in the letter of credit that the petitioner is to honor all
drafts drawn in conformity with the letter of credit. What was simply stated
therein was the instruction that the petitioner forward the original letter of
credit to the beneficiary.
3) The concept of guarantee vis-svis the concept of an irrevocable credit are
inconsistent with each other.

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 The guarantee theory destroys the independence of the bank’s
responsibility from the contract upon which it was opened. The nature of both
contracts is mutually in conflict with each other. In contracts of guarantee, the
guarantor’s obligation is merely collateral and it arises only upon the default of
the person primarily liable. On the other hand, in an irrevocable credit, the bank
undertakes a primary obligation.

LAND BANK OF THE PHILIPPINES vs. MONETS EXPORT AND

MANUFACTURING CORPORATION et. al.
GR. No. 161865, March 10, 2005

FACTS:
Petitioner Land Bank of the Philippines (Land Bank), and Monets Export and
Manufacturing Corporation (Monet) executed an Export Packing Credit Line agreement
under which Monet was given a credit line in the amount of P250,000.00, secured by the
proceeds of its export letters of credit, the continuing guaranty of the spouses Vicente V.
Tagle Sr. and Ma. Consuelo C. Tagle, and the third party mortgage executed by Pepita C.
Mendigoria.
The credit line agreement was renewed and amended several times until it was
increased to P5,000,000.00. Owing to the continued failure and refusal of Monet,
notwithstanding repeated demands, to pay its indebtedness to Land Bank, which have
ballooned to P11,464,246.19, a complaint for collection of sum of money with prayer for
preliminary attachment was filed by Land Bank with the RTC.
In their joint Answer with Compulsory Conterclaim, Monet and the Tagle
spouses alleged that Land Bank failed and refused to collect the receivables on their
export letter of credit against Wishbone Trading Company of Hongkong in the sum of
US$ 33,434.00, while it made unauthorized payments on their import letter of credit to
Beautilike (H.K.) LTd. in the amount of US $38,768.40, which seriously damaged the
business interest of Monet.
Meanwhile, Land Bank contended of Monet, the issuing bank in the Beautilike
transaction involving an import letter of credit, it only deals in documents and it is not
involved in the contract of the parties.

ISSUE: Whether or not Land Bank is correct.

HELD:
The relationship between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and meeting of the minds are lacking. Thus,
upon receipt by Land Bank of the documents of the title which conform with what the
letter of credit requires, it is duty bound to pay the seller.
Thus, no fault or acts of mismanagement can be attributed to Land Bank relative
to Monets import letter of credit.
Once the credit is established, the seller ships the goods to the buyer and in the
process secures the required shipping documents or documents of title. To get paid, the
seller executes a draft and presents it together with the required documents to the
issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds
that the documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement, the seller gets paid only
if he delivers the documents of title over the goods, while the buyer acquires the said
documents and control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory
contracts, is the engagement of the issuing bank to pay the seller once the draft and the
required shipping documents are presented to it. In turn, this arrangement assures the
seller of prompt payment, independent of any breach of the main sales contract. By the
so-called independence principle, the bank determines compliance with the letter of

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credits only by examining the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or not.
The Uniform Customs and Practice (USCP) for Documentary Credits provides
that credits, by their nature, are separate transactions from the sales or other contract(s)
on which they may be based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is included in the
credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiable and/or fulfill any other obligation under the credit is not subject to claims or
defenses by the applicant resulting from his relationship with the issuing bank or the
beneficiary.

QUESTIONS AND ANSWERS

1. Are letters of credit negotiable instruments?

Letters of credit are usually negotiable. The issuing bank is obligated to pay not
only the beneficiary, but also any bank nominated by the beneficiary. Negotiable
instruments are passed freely from one party to another almost in the same way as
money.

2. What is the exception to the independence principle?

The “Fraud exception rule.” It provides that the untruthfulness of a certificate

accompanying a demand for payment under a standby letter of credit may qualify as
fraud sufficient to support an injunction against payment. (Transfield v. Luzon Hydro,
G.R. No. 146717, Nov. 22, 2004)

3. Can Irrevocable Letters of Credit be amended?

Irrevocable Letters of Credit cannot be amended or cancelled without the

agreement of the credit parties. Unconfirmed irrevocable letters of credit cannot be
modified without the written consent of both the issuing bank and the beneficiary.
Confirmed irrevocable letters of credit need also confirming bank's written consent in
order any modification or cancellation to be effective.

4. I generally open letters of credit through my bank. How are your letters of credit
different?

The letters of credit that we open are opened using our bank accounts at prime banking
institutions. When you open the letter of credit through your bank, you use your credit
line. When you open through us, you use our credit lines.

5. Why do I need to pay your fee before you open the letter of credit? Can't you take
your fee out of the profits of our transaction?

We do not participate in the transactions of our clients as a party to the transaction

other than a provider of certain financing. Therefore, we do not participate in the profits
of our client's transactions. Our fees are the same regardless of the profit margin in the
transaction.

6. Can I cancel my letter of credit after it has been opened?

All of the instruments that we issue are irrevocable and cannot be canceled except by the
beneficiary.

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7. What type of collateral do you require to open a letter of credit?

In most cases we do not require a specific collateral deposit to open a letter of credit. We
offer transactional based finance. When a client wishes to open a letter of credit, he
presents us with the details of his transaction so that we can make a decision about the
transaction on its merit. The final decision by our company to enter into a transaction is
made according to a set of criteria.

8. What is the charge for opening a letter of credit?

The letter of credit charge depends on a number of factors. Our agents can provide you
with an up to date Tariff schedule.

9. What is the maximum size letter of credit that you open?

We are able to open letters of credit of almost any size. We consider the complexity of
the transaction; the goods that are being trades; and, other factors having to do with the
parties to the transactions and where they take place.

10. For what type of goods do you open letter of credit?

We can open letters of credit for any type of goods provided they fall into our ethical and
legal criteria. That said, we will not get involved in transactions involving weaponry or
ammunition under any circumstances.

11. I opened a letter of credit to my supplier, but he did not ship the goods. Will you
refund my fee?

Once the letter of credit is opened your fee cannot be refunded. We recommend to all of
our clients that they need to assure themselves of their suppliers' ability to perform
before opening any banking instruments to them.

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 WAREHOUSE RECEIPT LAW (Act No. 3135)

1. Warehouse Receipt

A warehouse receipt is a written acknowledgment by the warehouseman

that he has received the goods described therein and holds the same for the
person to whom it is issued or as the latter may order.
It is a contract between the owner of the goods or the person authorized
by the owner to transfer ownership or possession over the goods, on one hand,
and the warehouseman, on the other hand, for the latter to store the goods and
the former to pay the compensation for that service.
2. Warehouseman– a person lawfully engaged in the business of storing goods for
profit and issues warehouse receipt. Only a warehouseman may issue a
warehouse receipt.
3. Warehouse - a building or place where the goods are deposited and stored for
profit.
4. Non-negotiable Receipt – receipt in which it stated that the goods received will
be delivered to the depositor or to any other specified person.
5. Negotiable Receipt – receipt in which it is stated that the goods received shall
be delivered to the bearer or to the order of any person named in such receipt.
Purpose of the Law
1. To regulate the status, rights, and liabilities of the parties in a warehousing
contract;
2. To protect those who in good faith and for value, acquire negotiable warehouse
receipts by negotiation;
3. To render the title to, and the right of possession of, property stored in
warehouses more easily convertible;
4. To facilitate the use of warehouse receipts as documents of title; and
5. In order to accomplish these, to place much greater responsibility on the
warehouseman.
Form and Contents of the Warehouse Receipt:
1. Location of warehouse. This requirement is for the benefit of the holders of
warehouse receipts to enable them to determine where the goods are deposited
especially when the warehouseman has more than one warehouse located in
different places.
2. Date of issue of receipt. Although a warehouse receipt is not essential to create a
contract of storage, the date of issue appearing therein, indicates prima facie the
date when the contract of deposit is perfected and when the storage charges shall
begin to run against the depositor.
3. Consecutive number of receipt. The purpose of this requirement is to identify
each receipt with the goods which it was issued. There is no express requirement
as to when the consecutive numbering shall begin.
4. Person to whom goods are deliverable. This requirement determines the person
or person who shall prima facie be entitled lawfully to the possession of the goods
deposited.
5. Rate of storage charges. This states the consideration for the contract from the
view of the warehouseman.
6. Description of goods or packages. The general object of giving a description of
the goods in the receipt is for identification so that the identical property
delivered to the warehouseman may be delivered back by him upon the return of
the warehouse receipt. The mere fact that the goods deposited are incorrectly
described does not make the receipt when the identity of the goods is fully
established by the evidence.

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 7. Signature of warehouseman. The warehouseman’s signature furnishes the best
evidence of the fact that the warehouseman has received the goods described in
the receipt and has bound himself to assume all obligations in connection
therewith.
8. Warehouseman’s ownership of or interest in the goods. This is to prevent
abuses which in the past had arisen from the past had arisen from warehousemen
issuing receipts on their goods.
9. Statement of advances made and liabilities incurred. This is to preserve the
lien of the warehouseman over the goods stored or the proceeds thereof in his
hands.
Effect of Omission of Any of the Essential Terms
1. The validity of the warehouse receipt is not affected.
2. The warehouseman shall be held liable for damages to those injured by omission.
3. The negotiability of the warehouse receipt is not affected.
4. The issuance of warehouse receipt in the form provided by law is merely
permissive and directory and not mandatory in the sense that if the requirements
are not observed, then the goods delivered for the storage become ordinarily
deposits.
Terms Which May not be Inserted in a Warehouse Receipt
Under Section 3, the warehouseman is given the power to insert additional
terms or conditions in receipts issued by him subject to two (2) limitations under
subsection (a) and (b) . In addition to those limitations, the stipulations in the
receipt must not be contrary to law, morals, good customs, public order or public
policy.
1. Exemption from liability for misdelivery. Under subsection (a), a
warehouseman is not authorized to insert any term exempting him from
liability for misdelivery of goods because such would be against Section 10 of
the Act or for not giving statutory notice in case of sale of goods because such
would be contrary to Sections 33 and 34.
2. Exemption from liability for negligence. Under subsection (b), a
warehouseman cannot insert any term which would relieve him from liability
for his own negligence such as ‘’For account and at the risk of the depositor’’.
The warehouseman is required by law to exercise that degree of care in the
safekeeping of the goods entrusted to him which reasonable careful man
would exercise in regard to similar goods of his own.
Nature and Function of a Warehouse Receipts
1. It is a written acknowledgement by a warehouseman that he has received and
holds a certain goods therein described in store of the person to whom it is
issued.
2. It is a simple written contract between the owners of the goods and the
warehouseman to pay the compensation for that service.
3. It is a bilateral contract. It imports that goods are in the hands of a
warehouseman and is a symbolical representation of the property itself.
4. A warehouse receipt is not a negotiable instrument within the meaning of the
Negotiable Instrument Law in the technical sense that a bill of exchange or
promissory note is negotiable even though the Warehouse Receipts Act declares
it negotiable.
Persons to Whom Goods Must be Delivered
1. Person lawfully entitled to possession of goods or his agent. The warehouseman
is justified to deliver the goods to the person to whom a competent court has
ordered the delivery of goods or to an attaching creditor or to the purchaser in

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 case of sale of the goods by the warehouseman to enforce his lien where the goods
are perishable or hazardous.
2. Person entitled to delivery under a non-negotiable receipt or with written
authority.
3. Person in possession of negotiable receipt.

Negotiable Instrument v. Negotiable Warehouse Receipt

Negotiable Instrument
When altered deliberately, it
becomes null and void.
If originally payable to bearer, it
will always remain payable regardless of
the way it is endorsed.
A holder in due course may be able
to obtain a title better than that which the
party who negotiated the instrument to
him had.
Negotiable Warehouse Receipt
When altered, it is valid but it may
be enforced only in accordance with its
original tenor.
If payable to bearer and is endorsed
specially, it will be converted into a receipt
deliverable to order and can only be
negotiated further by indorsement and
delivery.
An indorsee even if a holder in due
course obtains only such title as the person
negotiating over the goods.

Rights of a Person to Whom a Non-negotiable Warehouse Receipt Has Been

Transferred
1. Right to the title of the goods as against the transferor;
2. Right to notify the warehouseman of the transfer thereof; and
3. The right thereafter to acquire the obligation of the warehouseman to hold the
goods for him.

Rights of a Person to Whom a Negotiable Warehouse Receipt Has Been Transferred

1. The right of the goods as against the transferor and
2. The right to compel the transferor to indorse the receipt. But if the intention of
the transferor is that the receipt should merely be transferred, the transferee has
no right to require the transferor to indorse the receipt.

Principal Obligations of the Warehouseman

A warehouseman is essentially a depositary with respect to the goods
received and stored by him in his warehouse. The following are the principal
obligations of the warehouseman:
1. To take care of the goods entrusted to his safekeeping.
General rule: A warehouseman is required to exercise such degree of care which
a reasonable careful owner would exercise over similar goods of his own. He shall
be liable for any loss or injury to the goods caused by his failure to exercise such
care.
Exception: He shall not be liable for any loss or injury which could not have
avoided by the exercise of such care.
Exception to the exception: He may limit his liability to an agreed value of the
property received in case of loss. He cannot stipulate that he will not be
responsible for any loss caused by his negligence.
2. To deliver the goods to the holder of the receipt or the depositor upon
demand, provided demand is accompanied with:

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 3. An offer to satisfy the warehouseman’s lien;
A warehouseman having a lien valid against the person demanding the goods may
refuse to deliver the goods to him until the lien is satisfied.
The offer to satisfy the warehouseman’s lien is, therefore, required before the
warehouseman is bound to deliver or return the goods.
4. An offer to surrender the negotiable receipt properly endorsed;
The offer to surrender the receipt is required for the protection of the
warehouseman since the receipt represents the goods described therein.
If the receipt is negotiable, the demand for the delivery of the goods must be
accompanied by an offer to surrender the receipt properly indorsed. If the receipt
issued is not negotiable, any person lawfully entitled to the possession of the
goods may be entitled to delivery without surrender of the receipt.
5. A readiness and willingness to sign an acknowledgement that the goods have
been delivered if such is requested by the warehouseman.
Lawful Excuses Non-delivery Goods
1. The warehouseman can refuse to deliver the goods if he has acquired title or right
to the possession of the goods:
2. Directly or indirectly from the transfer made by the depositor at the time of the
deposit for storage or subsequent thereto; or
3. From the warehouseman’s lien.
4. If someone other than the depositor or person claiming under the depositor has a
claim to the title or possession of the goods and the warehouseman has
information of such claim, the warehouseman shall be excused from liability from
refusing to deliver the goods either to the depositor or person claiming under him
until he has had a reasonable time to ascertain the validity of the adverse claim or
to bring legal proceedings to compel all claimants to interplead.
5. The warehouseman will not be required to deliver the goods if such had been lost.
But this is without prejudice to liabilities which may be incurred by him due to
such loss.
6. The warehouseman having a valid lien against the person demanding the goods
may refuse to deliver the goods to him until the lien is satisfied.
7. If goods have been lawfully sold or disposed of because of their perishable or
hazardous nature, the warehouseman shall not be liable for failure to deliver the
goods.
When is there misdelivery?
There is misdelivery when the warehouseman delivers the goods to a
person who is not in fact lawfully entitled to the possession of the goods.
Warehouseman’s Liability for Misdelivery
1. Where a warehouseman delivers the goods to one who is not in fact lawfully
entitled to the possession of them, the warehouseman shall be liable for
conversion/estafa to all having a right of property or possession in the goods if he
delivered the goods otherwise than as authorized. Conversion is an unauthorized
assumption and exercise of the right of ownership over goods belonging to
another through the alteration of their condition or the exclusion of the owner’s
right.

2. And though he delivered the goods as authorized he shall be so liable if prior to

such delivery he had either:
a. Been requested, by or on behalf of the person lawfully entitled to a
right of property or

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 possession in the goods, not to make such delivery or
b. Had information that the delivery about to be made was to one not
lawfully entitled to the possession of the goods.

Effects of Alteration on Liability of Warehouseman

The liability of a warehouseman under a warehouse receipt which has been
altered depends on the nature of the alteration as follows:
1. Alteration immaterial. If the alteration is immaterial, the tenor of the receipt is
not changed, whether fraudulent or not, authorized or not, the warehouseman is
liable on the altered receipt according to its original tenor;
2. Alteration material. If the alteration is material, the tenor of the receipt is
changed, but authorized, the warehouseman is liable according to the terms of
the receipt as altered;
3. Material innocently made. If the alteration is material but innocently made
though unauthorized, the warehouseman is liable on the altered receipt
according to its original tenor; and
4. Material alteration fraudulently made. If the alteration is material and
fraudulently made, the warehouseman is liable according to the original tenor of
the receipt to a purchaser of the receipt for value without notice, and even to the
alterer and subsequent purchasers with notice except that as regards to the last
two, the warehouseman’s liability is limited only to delivery as he is excused from
any liability.
Liability of a Warehouseman
1. Liability of a warehouseman in case of lost or destroyed receipt. Where a
negotiable receipt has been lost or destroyed, the court may order delivery to a
person upon satisfactory proof of such loss or destruction and upon proper
posting of a bond to protect the warehouseman from any liability or expense
which he may incur by reason of the original receipt remaining outstanding.
2. Liability of warehouseman as to duplicate. When more than one negotiable
receipt is issued for the same goods, the word ‘’duplicate” must be plainly placed
by the warehouseman upon the face of every such receipt, except on the first
issued. In such case, the warehouseman warrants (a) that the duplicate is an
accurate copy of the original receipt; and (b) such original receipt is uncancelled
at the date of the issue of the duplicate.
Extent of Warehouseman’s Lien

A warehouseman shall have a lien on goods deposited or on the proceeds thereof in

his hands for:
1. All lawful charges for storage and preservation of the goods
2. All lawful claims for money advances, interest, insurance, transportation, labor,
weighing, cooperating, and other charges and expenses in relation to such goods
3. All reasonable charges and expenses for notice and advertisements of sale and for
the sale of the goods where default has been made in satisfying the warehouse
lien.
How is a lien enforced?
1. By refusing to deliver the goods until the lien is satisfied;
2. By causing the extrajudicial sale of the property and applying the proceeds to the
value of the lien;
3. By filing a civil action for unpaid charges or by way of counterclaim in an action
to recover the property from him.

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How is a lien lost?
1. By surrendering possession of the goods. A warehouseman loses his lien upon
goods by voluntarily surrendering the possession thereof without requiring
payment of his lien. It will be presumed that the lien has been waived or
abandoned where the warehouseman permits a depositor to remove the goods
but not where the property is taken without the warehouseman’s consent or by
force or under a legal process, as by replevin suit.
2. By wrongfully refusing to deliver goods. The warehouseman also losses his lien
by refusing to deliver the goods where the holder of the receipt offers to comply
with the requirements of section 8. The loss of the warehouseman’s lien, does not
necessarily mean the extinguishment of the depositor’s obligation to pay the
warehousing fees and charges which continues to be personal liability.
Negotiation and Transfer of Receipts
How to negotiate a receipt deliverable to order.
1. By indorsing it in blank thereby making it deliverable to bearer or
2. By special indorsement, which would require further indorsements for further
negotiations.
In both cases, the indorsements must be coupled with delivery.
How to negotiate a receipt deliverable to bearer.
There is no need to indorse for negotiation. Physical delivery of the instrument will
suffice. But if the instrument is indorsed specially, the bearer character of the receipt is
destroyed and for further negotiation, there will be a need for indorsement.
Criminal Offenses
1. Warehouseman, or any officer, agent or servant of the warehouseman, issues or aids in
issuing a receipt knowing that the goods have not actually been received or are not under
his actual control at the time of issuing of such receipt.
LIABILITY: Imprisonment not exceeding 5 yrs or by a fine not exceeding P10,
000.00, or by both.

2. Warehouseman, or any officer, agent or servant of warehouseman, fraudulently issues

or aids in fraudulently issuing a receipt for goods knowing that it contains any false
statements.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding
P2,000.00, or by both.
3. Warehouseman, or any officer, agent or servant of warehouseman, issues or aids in
issuing a duplicate or additional negotiable receipt for goods knowing that a former
negotiable receipt for the same goods is outstanding and uncancelled, without plainly
placing “duplicate” (except in case of loss or destroyed receipts)
LIABILITY: Imprisonment not exceeding 5 yrs, or by a fine not exceeding
P10,000.00, or by both.
4. If there are goods deposited or held by the warehouseman as an owner, either solely or
jointly with others, and that warehouseman, or any officer, agent or his servant, knowing
such ownership, issues or aids in issuing a negotiable receipt not stating such ownership.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding
P2,000.00, or by both.
5. Warehouseman, or any officer, agent or servant of warehouseman, delivers goods out
of the possession of such warehouseman, knowing that a negotiable receipt is
outstanding and uncancelled, without obtaining the possession of such receipt at or
before the time of delivery

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 LIABILITY: Imprisonment not exceeding 1 yr, or a fine not exceeding P2,000.00,
or by both.
6. Any person who deposits goods to which he has no title, or upon which there is a lien
or mortgage, and who takes, for such goods a negotiable receipt which he afterwards
negotiates for value without disclosing his want of title or existence of the lien or
mortgage.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding
P2,000.00, or by both.

JURISPRUDENCE

Roman v. Asia Banking Corporation, G.R. No. L-17825, June 26, 1922
Legal principle: As provided by the Warehouse Receipts Act, in case the warehouse man
fails to mark it as “non-negotiable”, a holder of the receipt who purchase if for value
supposing it to be negotiable may, at his option, treat such receipt as imposing upon the
warehouseman the same liabilities he would have incurred had the receipt been
negotiable.
Facts: U. de Poli, for value received, issued a quedanconvering the 576 bultos of tobacco
to the Asia Banking Corporation. It was executed as a security for a loan. The aforesaid
576 butlos are part and parcel of the 2, 766 bultos purchased by U. de Poli from Felisa
Roman.
The quedan which is a warehouse receipt issued by the warehouse of U. de Poli
for 576 bultos of tobacco. In the left margin of the face of the receipt, U. de Poli certifies
that he is the sole owner of the merchandise therein described. The receipt is endorsed in
blank; it is not marked”non-negotiable” or “not negotiable”.
Since a sale was consummated between Roman and U. de Poli, Roman’s claim is a
vendor’s lien. The lower court ruled in favor of Roman on the theory that since the
transfer to Asia Banking Corp. (ASIA) was neither a pledge nor a mortgage, but a
security for a loan, the vendor’s lien of Roman should be accorded preference over it.
However, if the warehouse receipt issued was non-negotiable, the vendor’s lien of Roman
cannot prevail against the rights of ASIA as indorsee of the receipt.
Issue: Whether the quedan issued by U. de Poli in favor of ASIA negotiable, despite
failure to mark it as not negotiable?
Held: YES. The warehouse receipt in question is negotiable. It recited that certain
merchandise deposited in the ware house “pororden” of the depositor instead of “a la
orden”, there was no other direct statement showing whether the goods received are to
be delivered to the bearer, to a specified person, or to a specified order or his order.
However, the use of “pororden” was merely a clerical or grammatical error and that the
receipt was negotiable.
As provided by the Warehouse Receipts Act, in case the warehouse man fails to
mark it as “non-negotiable”, a holder of the receipt who purchase if for value supposing it
to be negotiable may, at his option, treat such receipt as imposing upon the
warehouseman the same liabilities he would have incurred had the receipt been
negotiable. This appears to have given any warehouse receipt not marked “non-
negotiable” practically the same effect as a receipt which, by its terms, is negotiable
provided the holder of such unmarked receipt acquired it for value supposing it to be
negotiable, circumstances which admittedly exist in the present case. Hence, the rights
of the indorsee, ASIA, are superior to the vendor’s lien.

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 CIR V. Hawaiian-Philippine Company, G.R. No. L-16315 , May 30, 1964
Legal Principle: A warehouseman has been defined as one who receives and stores goods
of another for compensation. For one to be considered engaged in the warehousing
business, therefore, it is sufficient that he receives goods owned by another for storage,
and collects fees in connection with the same.
Facts: The petitioner, a corporation duly organized in accordance with law, is operating
a sugar central in the City of Silay, Occidental Negros. It produces centrifugal sugar from
sugarcane supplied by planters. The processed sugar is divided between the planters and
the petitioner in the proportion stipulated in the milling contracts, and thereafter is
deposited in the warehouses of the latter. For the sugar deposited by the planters, the
petitioner issues the corresponding warehouse receipts of "quedans". It does not collect
storage charges on the sugar deposited in its warehouse during the first 90 days period
counted from the time it is extracted from the sugarcane. Upon the lapse of the first
ninety days and up to the beginning of the next milling season, it collects a fee of P0.30
per picul a month. Henceforth, if the sugar is not yet withdrawn, a penalty of P0.25 per
picul or fraction thereof a month is imposed.
The storage of sugar is carried in the books of the company denominated
"Manufacturing Cost Ledger Control"; the storage fees under Account No. 521620; the
expense accounts of the factory under Account No. 5200; and the so-called "Sugar
Bodega Operations" under Account No. 5216, under which is a Sub-Account No. 20,
captioned, "Credits". The collections from storage after the lapse of the first 90 days
period are entered in the company's books as debit to CASH, and credit to Expense
Account No. 2516-20
The credit for storage charges decreased the deductible expense resulting in the
corresponding increase of the taxable income of the petitioner. This is reflected by the
entries enclosed in parenthesis in Exhibit "G", under the heading "Storage Charges". The
alleged reason for this accounting operation is that, inasmuch as the "Sugar Bodega
Operations" is considered as an expense account, entries under it are "debits". Similarly,
since "Storage Charges" constitute "credit", the corresponding figures are enclosed in
parenthesis as they decrease the expenses of maintaining the sugar warehouses.
Upon investigation conducted by the Bureau, it was found that during the years
1949 to 1957, the petitioner realized from collected storage fees a total gross receipts of
P212,853.00, on the basis of which the respondent determined the petitioner's liability
for fixed and percentage taxes, 25% surcharge, and administrative penalty in the
aggregate amount of P8,411.99.
Issue: Whether petitioner is a warehouseman liable for the payment of the fixed and
percentage taxes prescribed in Sections 182 and 191 of the National Internal Revenue
Code
Held: YES. Respondent disclaims liability under the provisions quoted above, alleging
that it is not engaged the business of storing its planters' sugar for profit; that the
maintenance of its warehouses is merely incidental to its business of manufacturing
sugar and in compliance with its obligation to its planters. We find this to be without
merit.
It is clear from the facts of the case that, after manufacturing the sugar of its
planters, respondent stores it in its warehouses and issues the corresponding "quedans"
to the planters who own the sugar; that while the sugar is stored free during the first
ninety days from the date the it "quedans" are issued, the undisputed fact is that, upon
the expiration of said period, respondent charger, and collects storage fees; that for the
period beginning 1949 to 1957, respondent's total gross receipts from this particular
enterprise amounted to P212,853.00.
A warehouseman has been defined as one who receives and stores goods of
another for compensation. For one to be considered engaged in the warehousing

17 | P a g e
business, therefore, it is sufficient that he receives goods owned by another for storage,
and collects fees in connection with the same. In fact, Section 2 of the General Bonded
Warehouse Act, as amended, defines a warehouseman as "a person engaged in the
business of receiving commodity for storage."
That respondent stores its planters' sugar free of charge for the first ninety days
does not exempt it from liability under the legal provisions under consideration. Were
such fact sufficient for that purpose, the law imposing the tax would be rendered
ineffectual.

PNB v. LaureanoAtendido, G.R. No. L-6342, January 26, 1954

Legal Principle: Where a warehouse receipt or quedan is transferred or endorsed to a
creditor only to secure the payment of a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods covered by the warehouse receipt or
quedan but he merely retains the right to keep and with the consent of the owner to sell
them so as to satisfy the obligation from the proceeds of the sale.
Facts: LaureanoAtendido obtained from PNB a loan of P3k and pledged 2000 cavans of
palay to guarantee payment which were then deposited in the warehouse of Cheng Siong
Lam & Co and to that effect the borrower endorsed in favour of the bank the
corresponding warehouse receipt.
Before the maturity of the loan, the 2000 cavans of palay disappeared for
unknown reasons in the warehouse. When the loan matured, the borrower failed to pay
obligation
Defendant claimed that the warehouse receipt covering the palay which was
given as security having been endorsed in blank in favor of the bank and the palay having
been lost or disappeared, he thereby became relieved of liability.
Issue: Whether or not the surrender of the warehouse receipt covering 2000 cavans of
palay given as security, endorsed in blank, to PNB, has the effect of transferring their title
or ownership OR it should be considered merely as a guarantee to secure the payment of
the obligation of Defendant?
Held: Where a warehouse receipt or quedan is transferred or endorsed to a creditor only
to secure the payment of a loan or debt, the transferee or endorsee does not automatically
become the owner of the goods covered by the warehouse receipt or quedan but he
merely retains the right to keep and with the consent of the owner to sell them so as to
satisfy the obligation from the proceeds of the sale. This is for the simple reason that the
transaction involved is not a sale but only a mortgage or pledge, and that if the property
covered by the quedans or warehouse receipts is lost without fault or negligence of the
mortgagee or pledge or the transferee or endorsee of the warehouse receipt or quedan,
then said goods are to be regarded as lost on account of the real owner, mortgagor or
pledgor.
Nature of contract is Pledge supported by the stipulations embodied in the
contract signed by Defendant when he secured the loan from PNB. The 2000 cavans of
palay covered by the warehouse receipt were given to PNB only as a guarantee to secure
the fulfilment by Defendant in his obligation. This clearly appears in the contract
wherein it is expressly stated that said 2000 cavanes of palay were given as collateral
security.
It follows that by the very nature of the transaction its ownership remains with
the pledgor subject only to foreclosure in case of non-fulfillment of the obligation. By this
we mean that if the obligation is not paid upon maturity the most that the pledge can do
is to sell the property and apply the proceeds to the payment of the obligation and to
return the balance, if any, to the pledgor. This is the essence of the contract, for,

18 | P a g e
according to law, a pledge cannot become the owner of, nor appropriate to himself the
thing given in pledge.
If by the contract of pledge, the pledgor continues to be the owner of the thing
pledged during the pendency of the obligation, it stands to reason that in case of loss of
the property, the loss should be borne by the pledgor. The fact that the warehouse
receipt covering the palay was delivered, endorsed in blank, to the bank does not alter
the situation, the purpose of such endorsement being merely to transfer the juridical
possession of the property to the pledge and to forestall any possible disposition thereof
on the part of the pledgor.

QUESTIONS AND ANSWERS

1.What should be done to put the receipt within the purview of Warehouse
Receipts?
The warehouse receipt should be issued by the warehouseman because he is the
authorized person to issue such receipts.
2.What is the effect of the omission of the essential contents of the warehouse
receipts?
A warehouseman shall be liable to any person injured thereby all damages caused
by the omission from a negotiable receipt of any of the terms herein required. The
validity of the receipt not affected and negotiability of the receipt is also not affected.
3. What should accompany the demand for the return of the goods?
An offer to satisfy the warehouseman’s lien and an offer to surrender the receipt, if
negotiable with such indorsements as would be necessary for the negotiation of the
receipts.
4. What is the liability of the warehouseman for the non-existence or
misdescription of goods?
As a general rule, the warehouseman is under obligation to deliver the identical property
stored with him and if he fails to do so, he is liable directly to the owner .As against a
bona fide holder of a warehouse receipt, the warehouseman is estopped whether the
receipt is negotiable or not, to deny that he has received the goods described in it.
5. Does the warehouseman can refuse delivery because he acquired title or right over
the goods?
The warehouseman cannot refuse to deliver the goods on the ground that he has
acquired title or right to the possession of the same unless such title or right is
derived—
 Directly or indirectly from a transfer made by the depositor at the
time of the deposit for storage or subsequent thereto
 From the warehouseman’s lien

6. How do you attach or impose a lien over the goods covered by a warehouse
receipt?
If it is not negotiable, the court would issue a writ of attachment. If it is negotiable, the
court should require the surrender of the receipt and restrict further negotiations.
7. Against what property may the lien may be enforced?
a. Against all goods, whenever deposited, belonging to the person who is liable to the
debtor for the claims in regard to which the lien is asserted.

19 | P a g e
 b. Against all goods belonging to others which have been deposited at any time by
the person who is liable as debtor for claims in regard to which the lien is asserted if
such person had been entrusted with the possession of the goods that a pledge of the
same by him at the time of the deposit to one who took the goods in good faith for value
would have been valid.
8. How a warehouseman loses his lien?
a. By surrendering possession thereof
b. By refusing to deliver the goods when a demand is made with which he is bound to
comply under the provisions of the law

9. What are the warehouseman’s liabilities for misdelivery?

Where a warehouseman delivers the goods to one who is not in fact lawfully entitled
to the possession of them, the warehouseman shall be liable for conversion/estafa to
all having a right of property or possession in the goods if he delivered the goods
otherwise than as authorized . And though he delivered the goods as authorized he shall
be so liable if prior to such delivery he had either—
 Been requested by or on behalf of the person lawfully entitled to a right of
property or possession in the goods, not to make such delivery.
 Had information that the delivery about to be made was to one not lawfully
entitled to the possession of the goods.
10. What is the legal remedy of the warehouseman in case of conflicting claim?
File an action for interpleader. This is a remedy given to the warehouseman in case there
is more than one person who claims title or possession of the goods either as a defense to
an action brought against him for non-delivery or as an original suit; this would require
the different claimants to litigate among themselves.
Sec.18 provides that if someone other than the depositor or person claiming has a
claim to the title or possession of the goods, the warehouseman shall be excused from
liability for refusing to deliver the goods until he has a reasonable time to ascertain the
validity of the adverse claim or bring legal proceedings to compel claimants to interplead.

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 TRUST RECEIPTS LAW
(P.D. No. 115)

PURPOSE OF THE LAW

(a) to encourage and promote the use of trust receipts as an additional and
convenient aid to commerce and trade;
(b) to provide for the regulation of trust receipts transactions in order to assure
the protection of the rights and enforcement of obligations of the parties involved
therein; and
(c) to declare the misuse and/or misappropriation of goods or proceeds realized
from the sale of goods, documents or instruments released under trust receipts as a
criminal offense punishable under Article Three hundred and fifteen (Article 315) of the
Revised Penal Code.

TRUST RECEIPT DEFINITION

It refers to the written or printed document signed by the entrustee in

favor of the entruster containing terms and conditions substantially complying with the
provisions of P.D. 115 or the Trust Receipts Law. No further formality of execution or
authentication shall be necessary to the validity of a trust receipt.

TRUST RECEIPT TRANSACTION DEFINITION

It refers to any transaction by and between an entruster and the entrustee,

whereby the entruster (who owns or holds absolute title or security interests over
certain specified goods, documents or instruments) releases the same to the possession
of the entrustee upon the latter’s execution and delivery to the entruster of a signed
document called a “trust receipt”. (PD 115, Sec. 4)

PARTIES TO A TRUST RECEIPT

a. "Entrustee" shall refer to the person having or taking possession of goods, documents
or instruments under a trust receipt transaction, and any successor in interest of such
person for the purpose or purposes specified in the trust receipt agreement.

b. "Entruster" shall refer to the person holding title over the goods, documents, or
instruments subject of a trust receipt transaction, and any successor in interest of such
person.

***"Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary,
partnership, corporation, business trust or other association, and two more persons
having a joint or common interest.

IMPORTANCE OF TRUST RECEIPTS

(a) to encourage and promote the use of trust receipts as an additional and convenient
aid to commerce and trade;
(b) to provide for the regulation of trust receipts transactions in order to assure the
protection of the rights and enforcement of obligations of the parties involved therein;
and
(c) to declare the misuse and/or misappropriation of goods or proceeds realized from the
sale of goods, documents or instruments released under trust receipts as a criminal
offense punishable under Article Three hundred and fifteen of the Revised Penal Code.

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 DIFFERENCE BETWEEN TRUST RECEIPTS AND LETTERS OF CREDIT

Letters of Credit and Trust Receipts are commonly used to improve cash flow for
any type of business that imports/exports goods for sale or supplies commodities which
are used in the production of finished goods. Whether starting your own business or
expanding an existing business L/Cs and TRs are important financial instruments
designed to reduce risk and trim the high cost of potential import/export trade operation
failures. Successful import/export cash flow scenarios rely on these types of financial
strategies to create operational efficiencies important to thwarting risks associated with
a buyer’s receipt of contracted goods and a seller’s receipt of payment for such goods.

a. Identification

A Letter of Credit or L/C is a document issued by a bank that guarantees payment

to a seller for a specified amount, at a certain period of time. The buyer gains protection
through absolute compliance to the L/C terms before the payment to the seller is
released.
A Trust Receipt or TR is a document of release of goods to a customer by a bank.
After an L/C is drafted and the import shipment has arrived, this type of additional
financing may be offered in place of a buyer’s immediate payment. The customer may use
or sell the goods but the bank retains title to them.

b. Function

A typical scenario where an L/C is used is when an importer makes application to

a bank for credit to pay an exporter. When the buyer receives the goods from the seller
and is deemed compliant with the L/C in terms of timely presentation of documents and
goods that conform to the conditions set out by the L/C, the funds are released from the
bank to pay the seller.
Commonly, if the importer is in good standing with the bank, an offer of TR
financing will be extend. When the terms of the TR are agreed to (usually for payment in
60 to 90 days at a specified rate), the bank will release the goods to the buyer for the
purpose of manufacture or sale whilst retaining the title to the goods. The buyer is
required to keep the goods separate from its other business and hold the goods or
proceeds from the sale of goods subject to remittance or repossession of the bank.

b. Advantages

Major advantages of using a L/C for import/export transactions include the

buyer's ability to access certain suppliers who will not trade without a letter of credit,
payment of receivables is accelerated and supplier collection time is reduced. In these
cases, the buyer is assured payment as long as the L/C is compliant to its terms.
When you use a TR the buyer need note make payment immediately when
documents are presented. Among other advantages, the importer may take possession of
the goods for resale before paying the bank. As well, the buyer's working capital or cash
flow is not tied up and can be used for other business purposes.

d. Considerations

L/C financing may help with cash flow but the fees associated with
documentation and loan rates can be cost prohibitive. As with any contract agreement,
reviewing the details of the L/C before signing is of utmost importance. Buyers may gain
major advantages if the supplier does not participate in forming the terms of the L/C. The
seller should always review the contract in its early stages to resolve discrepancies and
vet errors before any bank is involved. If an error needs to be corrected or terms adjusted,
banks will charge additional fees. Sellers can request that buyers pay for all bank fees
associated with the L/C.

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 TR's may have unattractive associated rates and fees that can outweigh the
advantages of convenience and freed-up working capital. Considering the use of other
instruments like Import Documentary Collections may better help to reduce costs.

A. CONCEPT OF A TRUST RECEIPT TRANSACTION

A trust receipt transaction, within the meaning of this Decree, is any transaction
by and between a person referred to in this Decree as the entruster, and another person
referred to in this Decree as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed document called a "trust receipt".

1. LOAN /SECURITY FEATURE

 In a letter of credit-trust receipt arrangement, a bank extends a loan covered by

the letter of credit, and the trust receipts act as the security for the loan. In other
words, the transaction involves a loan feature represented by the letter of credit,
and a security feature which is in the covering trust receipt. [ Vintola v. Insular
Bank of Asia and America ]
 The security feature is what provides the much needed financial assistance to
our traders in the importation or purchase of goods or merchandise through the
use of those goods or merchandise as collateral for the advancements made by a
bank. The title of the bank to the security is the one sought to be protected and
not the loan which is a separate and distinct agreement. [People v. Nitafan
(1992)]

2. OWNERSHIP OF THE GOODS, DOCUMENTS AND INSTRUMENTS UNDER

A TRUST RECEIPT

 To secure the banker (entrustee) shall be repaid at the critical point – that is,
when the imported goods finally reach the hands of the intended vendee – the
banker takes the full title to the goods at the very beginning, and he continues to
hold that title as his indispensable security until the goods are sold.
 The importer (entruster) becomes absolute owner of the imported merchandise
as soon as he has paid its price. The ownership of the merchandise continues to
be vested in the owner thereof or in the person who has advance payment
(entrustee), until he has been paid full, or if the merchandise has already been
sold, the proceeds of the sale should be turned over to him by the importer or by
his representative or successor in interest. {Prudential Bank v. National Labor
Relations Commission (1995)]

B. RIGHTS OF THE ENTRUSTER

(1) In case of sale: Right to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount
owing to the entruster or as appears in the trust receipt.
(2) In case of non-sale: Right to the return of the goods, documents or instruments.
(3) Right to the enforcement of all other rights conferred on him in the trust receipt
(which are not contrary to the provisions of PD 115)
(4) Right to cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time upon
default or failure of the entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and the entrustee
(5) Right to sell the goods, documents or instruments at public or private sale, not less
than five days after serving or sending of notice to the entrustee of the intention to sell
(6) Right to purchase at a public sale the goods, documents, or instruments

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(7) Right to recover deficiency from the entrustee should the proceeds be insufficient
[PD 115, Sec. 7]
The entruster holding a security interest shall not, merely by virtue of such interest or
having given the entrustee liberty of sale or other disposition of the goods, documents or
instruments under the terms of the trust receipt transaction be responsible as principal
or as vendor under any sale or contract to sell made by the entrustee. [PD 115, Sec. 8]

B.1. VALIDITY OF THE SECURITY INTEREST AGAINST THE CREDITORS OF

THE ENTRUSTEE/INNOCENT PURCHASERS FOR VALUE

 The entruster’s security interest in goods, documents, or instruments pursuant to

the terms of a trust receipt shall be valid as against all creditors of the entrustee
for the duration of the trust receipt agreement. [PD 115, Sec. 12]
 A purchaser of goods from an entrustee with right to sell, or of documents or
instruments through their customary form of transfer, who buys the goods,
documents, or instruments for value and in good faith from the entrustee,
acquires said goods, documents or instruments free from the entruster’s security
Interest. [PD 115, Sec. 11]

C. OBLIGATIONS AND LIABILITIES OF THE ENTRUSTEE

1. hold the goods, documents or instruments in trust for the entruster and shall dispose
of them strictly in accordance with the terms and conditions of the trust receipt;
2. receive the proceeds in trust for the entruster and turn over the same to the entruster
to the extent of the amount owing to the entruster or as appears on the trust receipt;
3. insure the goods for their total value against loss from fire, theft, pilferage or other
casualties;
4. keep said goods or proceeds thereof whether in money or whatever form, separate and
capable of identification as property of the entruster; and
5. return the goods, documents or instruments in the event of non-sale or upon demand
of the entruster; and
6. observe terms and conditions of the trust receipt not contrary to PD 115. [PD 115,
Sec.9]

C.1. PAYMENT/DELIVERY OF PROCEEDS OF SALE OR DISPOSITION OF

GOODS, DOCUMENTS OR INSTRUMENTS

The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing
to the entruster or as appears in the trust receipt shall constitute the crime of estafa,
punishable under RPC 315, par.1 (b) [ PD 115,Sec.13]

C.2. RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF SALE

The risk of loss shall be borne by the entrustee. Loss of goods, documents or
instruments which are the subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault or negligence of the entrustee, shall
not extinguish his obligation to the entruster for the value thereof. [PD 115, Sec.10]

C.3. PENAL SANCTION IF OFFENDER IS A CORPORATION

If the violation or offense is committed by a corporation, partnership, association

or other juridical entities, the penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense. [P.D 115, Sec. 13]

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D. REMEDIES AVAILABLE

D.1. UPON DEFAULT OR FAILURE OF THE ENTRUSTEE TO COMPLY WITH

THE TERMS AND CONDITIONS

a.) The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom.
b.) The entruster may sell the goods, documents or instruments not less than five days
after serving or sending of the requisite notice, and the entruster may become a
purchaser at a public sale.
c.) The proceeds shall be applied
(a) to the payment of the expenses thereof;
(b) to the payment of the expenses of re-taking, keeping and storing the goods,
documents or instruments;
(c) to the satisfaction of the entrustee’s indebtedness to the entruster. [PD 115,
Sec. 7]

D.2. IN CASE OF FAILURE TO TURN OVER THE PROCEEDS OF THE SALE, OR

FAILURE TO RETURN IN CASE OF NON-SALE
File a criminal case for estafa under RPC 315, par. 1(b). [PD 115, Sec.13]

JURISPRUDENCE

PILIPINAS BANK, petitioner, vs. ALFREDO T. ONG and LEONCIA LIM,

respondents. [G.R. No. 133176. August 8, 2002]

FACTS:
On April 1991, Baliwag Mahogany Corporation (BMC), through its president,
respondent Alfredo T. Ong, applied for a domestic commercial letter of credit with
petitioner Pilipinas Bank (hereinafter referred to as the bank) to finance the purchase of
about 100,000 board feet of “Air Dried, Dark Red Lauan” sawn lumber.

The bank approved the application and issued Letter of Credit No. 91/725-HO in the
amount of P 3,500,000.00. To secure payment of the amount, BMC, through respondent
Ong, executed two (2) trust receipts providing inter alia that it shall turn over the
proceeds of the goods to the bank, if sold, or return the goods, if unsold, upon maturity
on July 28, 1991 and August 4, 1991.

On due dates, BNC failed to comply with the trust receipt agreement. On November 22,
1991, it filed with the Securities and Exchange Commission (SEC) a Petition for
Rehabilitation and for a Declaration in a State of Suspension of Payments under Section
6 (c) of P.D. No. 902-A, as amended, docketed as SEC Case No. 4109. On November 27,
1992, the SEC rendered a Decision approving the Rehabilitation Plan of BMC as
contained in the MOA and declaring it in a state of suspension of payments.

However, BMC and respondent Ong defaulted in the payment of their obligations under
the rescheduled payment scheme provided in the MOA.

ISSUE: Did the respondents, Ong and Leoncia Lim, as the president and treasurer of
BMC, respectively violate the Trust Receipt Law (PD No. 115)?

RULING: NO. The execution of the MOA constitutes a novation which “places
petitioner Bank in estoppel to insist on the original trust relation and constitutes a bar to
the filing of any criminal information for violation of the trust receipts law.”

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It has the effect of a compromise agreement, novated BMC’s existing obligations under
the trust receipt agreement. The novation converted the parties’ relationship into one of
an ordinary creditor and debtor. Moreover, the execution of the MOA precludes any
criminal liability on their part which may arise in case they violate any provision thereof.

The execution of the MOA extinguished respondents’ obligation under the trust receipt.
Respondents’ liability, if any, would only be civil in nature since the trust receipts were
transformed into mere loan documents after the execution of the MOA. This is
reinforced by the fact that the mortgage contracts executed by the BMC survived despite
its non-compliance with the conditions set forth in the MOA.

ALFREDO CHING, petitioner, versus THE SECRETARY OF JUSTICE, ASST. CITY

PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO SUDIAM of
the Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL BANKING
CORP. and THE PEOPLE OF THE PHILIPPINES, respondents.
(G. R. No. 164317 February 6, 2006)

FACTS:
Ching was the Senior Vice President of Philippine Blooming Mills, Inc (PBMI). PBMI,
through Ching applied with the Rizal Commercial Banking Corporation (RCBC) for the
issuance of Commercial Letters of Credit to finance its importation of assorted goods.
RCBC approved the application, and irrevocable Letters of Credit were issued in favor of
Ching (PBMI). The goods were purchased and delivered in trust to PBMI. Ching signed
13 trust receipts as SURETY, acknowledging delivery of goods to RCBC or to return
their value despite repeated demands. Thus, RCBC filed a criminal complaint for estafa
against Ching. The City Prosecutor found probable cause for estafa, thus 13 informations
were filed.

Ching appealed to the Minister of Justice which ordered the withdrawal of the
informations. RCBC refiled the criminal complaint for estafa before the office of the City
Prosecutor. The City Prosecutor ruled that there was no probable cause to charge Ching
as his liability was only civil and not criminal having signed the trust receipts as surety.
RCBC appealed to the Secretary of Justice which reversed the resolution of the City
prosecutor, holding that Ching as senior Vice-President of PBMI, executed the 13 trust
receipts and as such, was one responsible for the offense. The execution of said receipts
is enough to indict Ching as the official responsible for the violation of PD 115 (Trust
Receipts Law).

The Court of Appeals (CA) affirmed the decision of the Secretary of Justice. Hence, this
appeal.

ISSUE: Can Ching be held criminally liable for violating the Trust Receipts Law when he
signed the trust receipts merely as a surety and not as the entrustee?

RULING: Yes.An officer of a corporation who signed a trust receipt cannot hide behind
the cloak of the separate corporate personality of the corporation and cannot avoid
criminal persecution even though he had no physical possession of the goods nor is
benefitted by the delictual acts. Though the entrustee is a corporation, nevertheless, the
law specifically makes the officers, employees and other officers or persons responsible
for the offense, without prejudice to the civil liabilities of such corporation and/or board
of directors, officers, or other officials or employees responsible for the offense. The
rationale is that such officers or employees are vested with authority and responsibility
to devise means necessary to ensure compliance with the law and, if they fail to do so, are
held criminally accountable.

A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment. However, a corporation may be charged and prosecuted for
a crime of the imposable penalty is FINE.

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 Rosario Textile Mills versus Home Bankers Savings and Trust Company (G.R. No.
137232 June 29, 2005)

FACTS:
Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home
Bankers Savings and Trust Co. for an Omnibus Credit Line for P10 million. The bank
approved RTMC’s credit line but for only P8 million. The bank notified RTMC of the
grant of the said loan thru a letter dated March 2, 1989 which contained terms and
conditions conformed by RTMC thru Edilberto V. Yujuico.

On March 3, 1989, Yujuico signed a Surety Agreement in favor of the bank, in which he
bound himself jointly and severally with RTMC for the payment of all RTMC’s
indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by making
numerous drawdowns, each drawdown being covered by a separate promissory note and
trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of
eleven (11) promissory notes.

Yujuico contend that he should be absolved from liability. He alleged that the bank gave
assurance that the suretyship agreement was merely a formality under which Yujuico
will not be personally liable. He theorized that when RTMC imported the raw materials
needed for its manufacturer, using the credit line, he was merely acting on behalf of the
bank, the true owner of the goods by virtue of the trust receipts.

ISSUE: IsYujuico absolved from liability by the grant of the credit line and the execution
of the suretyship agreement?

RULING: No. Yujuico’s agreement conveniently ignores the true nature of its
transaction with the bank. A trust receipt is a security agreement pursuant to which a
bank acquires a ‘security interest’ in the goods. It secures an indebtedness and there can
be no such thing as security interest that secures no obligation.

In Samo vs. People, the Supreme Court described a trust receipt as “a security
transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise, and
who may not be able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. In this case, Yujuico signed to secure the obligation
of the bank to pay. Hence, he is liable under the trust receipts law.

QUESTIONS AND ANSWERS

1. What is the loan and security feature of the trust receipt transaction?
A trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit,
with the trust receipt as a security for the loan. In other words, the transaction involves a
loan feature represented by the letter of credit, and a security feature which is in the
covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to
which a bank acquires a "security interest" in the goods. It secures an indebtedness and
there can be no such thing as security interest that secures no obligation (Sps. Vintola vs.
Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987).

2. Who is the owner of the articles subject of the TR?

The entrustee. A trust receipt has two features, the loan and security features.
The loan is brought about by the fact that the entruster financed the importation or
purchase of the goods under TR. Until and unless this loan is paid, the obligation to pay
subsists. If the entrustee is made to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it were really so, it could dispose of the
goods in any manner that it wants, which it cannot do. To consider the entrustee as the

27 | P a g e
true owner from the inception of the transaction would be to disregard the loan feature
thereof (Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R.
No. 137232. June 29, 2005).

3. What is the penal sanction if offender is a corporation?

The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes
the officers or employees or other persons responsible for the offense liable to suffer the
penalty of imprisonment. The reason is obvious, corporations, partnerships, associations
and other juridical entities cannot be put to jail. Hence, the criminal liability falls on the
human agent responsible for the violation of the Trust Receipts Law (Ong vs. CA, G.R.
No. 119858, April 29, 2003).

4. In the event of default by the entrustee on his obligation under the trust receipt
agreement, is it absolutely necessary for the entruster to cancel the trust and take
possession of the goods to be able to enforce his right thereunder?
The law uses the word "may" in granting to the entruster the right to cancel the
trust and take possession of the goods. Consequently, the entrustee has the discretion to
avail of such right or seek any alternative action, such as a third party claim or a separate
civil action which it deems best to protect its right, at any time upon default or failure of
the entrustee to comply with any of the terms and conditions of the trust agreement
(South City Homes, Inc. v. BA Finance Corporation, G.R. No. 135462, Dec. 7, 2001).

5. What is the effect of novation of a trust agreement?

Where the entruster and entrustee entered into an agreement which provides for
conditions incompatible with the trust receipt agreement, the obligation under the trust
receipt is extinguished. Hence, the breach in the subsequent agreement does not give rise
to a criminal liability under P.D. 115 but only civil liability (Philippine Bank versus Ong,
G.R. No. 133176, Aug. 8, 2002).

6. Can deposits in a savings account opened by the buyer subsequent to the TR

transaction be applied to outstanding obligations under the TR account?
No, the receipt of the bank of a sum of money without reference to the trust
receipt obligation does not obligate the bank to apply the money received against the
trust receipt obligation. Neither does compensation arise because compensation is not
proper when one of the debts consists in civil liability arising from criminal
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).

7. What acts or omissions are penalized under the Trust Receipts Law?
It declares the failure to turn over goods or proceeds realized from sale thereof, as
a criminal offense under Article 315 (1) (b) of the Revised Penal Code. The law is violated
whenever the entrustee or person to whom trust receipts were issued to: (a) return the
goods covered by the trust receipts; or (b) return the proceeds of the sale of said goods
(Metropolitan Bank versus Tonda, G.R. No. 134436, August 16, 2000).

8. Is lack of intent to defraud a bar to the prosecution of these acts or omissions?

No. The TR Law is violated whenever the entrustee fails to: (1) turn over the
proceeds of the sale of the goods, or (2) return the goods covered by the trust receipts if
the goods are not sold. The mere failure to account or return gives rise to the crime which
is malumprohibitum. There is no requirement to prove intent to defraud (Ching versus
Secretary of Justice, G.R. No. 164317, February 6, 2006; Colinares versus Court of
Appeals, G.R. No. 90828, September 5, 2000; Ong versus Court of Appeals, G.R. No.
119858, April 29, 2003).

9. Mr. Noble, as the President of ABC Trading Inc executed a trust receipt in favor
of BPI Bank to secure the importation by this company of certain good. After release

28 | P a g e
and sale of the imported goods, the proceeds from the sale were not turned over the
BPI. Would BPI be justified in filing a case for estafa against Noble?

SUGGESTED ANSWER:
Yes, BPI would be justified in filing a case for estafa under PD 115 against Noble. The fact
that the trust receipt was issued in favor of a bank, instead of a seller, to secure the
importation of the goods did not preclude the application of the Trust Receipt Law.
Under the law, any officer or employee of a corporation responsible for the violotation of
a trust receipt is subject to the liability thereunder (Sia versus People 166 SCRA 655).

10. X buys goods from a foreign supplier using his credit line with a bank to pay for
the goods. Upon arrival of the goods at the pier, the bank requires X to sign a trust
receipt that contains the usual language. X disposes of the goods and receives
payment but does not pay the bank. The bank files a criminal action against X for
violation of the Trust Receipt Law. X asserts that the trust receipt is only to secure
his debt and that a criminal action cannot lie against him because that would be
violative of his constitutional right against “imprisonment for non-payment of a
debt.” Is he correct?

SUGGESTED ANSWER:
No. Violation of a trust receipt is criminal as it is punished as estafa under Art 315 of the
RPC. There is a public policy involved which is to assure the entruster the
reimbursement of the amount advanced or the balance thereof for the goods subject of
the trust receipt. The execution of the trust receipt or the use thereof promotes the
smooth flow of commerce as it helps the importer or buyer of the goods covered thereby.

11. PB & Co., Inc., a manufacturer of steel and steel products, imported certain raw
materials for use by it in the manufacture of its products. The importation was
effected through a trust receipt arrangement with AB Banking Corporation. When
it applied for issuance by AB Banking Corporation of a letter of credit, PB & Co.,
Inc., did not make any representation to the bank that it would be selling what it
had imported. It failed to pay the bank. When demand was made upon it to account
for the importation, to return the articles, or turn-over the proceeds of the sale
thereof to the bank, PB & Co., Inc., also failed. The bank sued PB & Co.’s President
who was the signatory of the trust receipt for estafa. The President put up the
defense that he could not be made liable because there was no deceit resulting in the
violation of the trust receipt because the raw materials were not sold but used by
the corporation in the manufacture of its products. Would those defenses be
sustainable? Why?

SUGGESTED ANSWER:
No, the defenses are not sustainable. The lack of deceit should not be sustained because
of the mere failure to account for the importation, or return the articles constitute abuse
of confidence under the crime, estafa. The facts that the goods were not sold but were
used in the manufacture of its products is immaterial because a violation of the trust
receipts law happened when it failed to account for the goods or return them to the Bank
upon demand.

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 CHATTEL MORTGAGE (Act. No. 1501)

Article 1484. In a contract of sale of personal property the price of which is

payable in installments, the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee's failure to pay cover two or more installments. In
this case, he shall have no further action against the purchaser to recover any unpaid
balance of the price. Any agreement to the contrary shall be void.
Article 1485. The preceding article shall be applied to contracts purporting to
be leases of personal property with option to buy, when the lessor has deprived the
lessee of the possession or enjoyment of the thing.
Article 2140. By a chattel mortgage, personal property is recorded in the
Chattel Mortgage Register as a security for the performance of an obligation. If the
movable, instead of being recorded, is delivered to the creditor or a third person, the
contract is a pledge and not a chattel mortgage.
Article 2141. The provisions of this Code on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages.
DEFINITION OF CHATTEL MORTGAGE:
 CHATTEL MORTGAGE is a contract by virtue of which a personal property is
recorded in the Chattel Mortgage Register as security for the performance of an
obligation.
 Section 3, Act 1508 (Chattel Mortgage Law )
 It is a “conditional sale” of personal property as security for the payment
of a debt, or the performance of some other obligation specified therein,
the condition being that the sale shall be void upon the seller paying to
the purchaser a sum of money or doing some other act named. If the
condition is performed according to its terms, the mortgage and sale
immediately become void, and the mortgagee is thereby divested of his
title.

CHARACTERISTICS:
1) It is an accessory contract because it secures performance of a principal
obligation.
2) It is a formal contract because it requires registration in the Chattel Mortgage
Register for its validity (but only as against third persons).
3) It is a unilateral contract because it produces only obligations on the part of the
creditor to free the thing from the encumbrance on fulfillment of the obligation.
4) The excess of the proceeds of the sale goes to the debtor or mortgagor.
5) Creditor or mortgagee can recover deficiency from the debtor or mortgagor,
except if covered by the Recto Law.

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 CHATTEL MORTGAGE DISTINGUISHED FROM PLEDGE:

Chattel Pledge
Mortgage

1) Delivery of Personal Property

Not required Delivery is
required for validity

2) Registration in the Chattel Mortgage

Register
Necessary for Not necessary;
validity of the CM Public document is
against third enough to bind third
persons persons

3) Right to Excess of Proceeds of Sale

The excess The excess
goes to the debtor/ goes to the
mortgagor pledgee/creditor,
unless otherwise
stipulated

4) Right to Recover Deficiency

Creditor/ Creditor/
mortgagee can mortgagee is not
recover from the entitled to recover any
debtor/ mortgagor, deficiency after the
except if covered by property is sold,
Recto Law notwithstanding
contrary stipulation

A. ESSENTIAL REQUISITES:

1) It is constituted to secure the fulfillment of a principal obligation.

2) The mortgagor must be the absolute owner of the thing mortgaged.
3) The persons constituting the mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose.
4) It cannot exist without a valid obligation.
5) It must be registered.
Registration of Chattel Mortgage:

(1)Period-before the mortgagor has complied with his principal obligation and
no right of innocent third persons is prejudiced.
(2)Venue-
a) If the mortgagor resides in the Philippines – in the office of the register of
deeds of the province in which the mortgagor resides at the time of the making of
the chattel mortgage.
b) If the mortgagor does not reside in the Philippines – in the province in which
the property is situated.
c) If the property is located in a different province – registration in both
provinces is required.

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 (3)Effect-
a) It creates real rights which follow the chattel.
b) It is an effective and binding notice to other creditors.
c) It gives the mortgagee symbolical possession.

Effect of failure to register in the Chattel Mortgage Registry:

The mortgage is binding between the parties. However, the right of the person in
whose favor the law establishes a mortgage is to demand the execution and the recording
of the instrument.
B. FORMAL REQUISITES:

(1) It should substantially comply with the form prescribed by law;

(2) It should be signed by the person/s executing the same in the presence of two
witnesses who shall sign the mortgage as witnesses to the execution thereof; and
(3) Each mortgagor and mortgagee or, in the absence of the mortgagee, his agent or
attorney, shall make and subscribe an affidavit in the form prescribed by law, which
affidavit, signed by the parties to the mortgage and the two witnesses and the certificate
of the oath signed by the person authorized to administer an oath shall be appended to
such mortgage and recorded therewith. [Sec. 5, Act 1508]
a) Affidavit of good faith is required, and it states that the chattel mortgage is—
i. Made solely for the purpose of securing the obligation specified in the
chattel mortgage, and
ii. The principal obligation is a just and valid obligation, and one not entered
into for the purpose of fraud.

C. AFTER-ACQUIRED PROPERTY

GENERAL RULE: A chattel mortgage shall cover only the property described
therein and not like or substituted property thereafter acquired by the mortgagor. (Sec 7,
Act 1508)

EXCEPTION: The after-acquired property is either:

1) in renewal of, or in substitution for, goods on hand when the mortgage was
executed; or
2) purchased with the proceeds of the sale of such goods (Torres v Limjap. 56 Phil
141, 1931)

D. AFTER-INCURRED OBLIGATIONS

GENERAL RULE: Chattel mortgage shall be made for the purpose of securing
the obligation SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER
PURPOSE. (Sec 3, Act 1508); A chattel mortgage can only cover obligations existing at
the time the mortgage is constituted (Acme Shoe, et al v CA, GR No. 103576, August 22,
1996).

EXCEPTION: When:
1) The old contract is amended or a new chattel mortgage is made which stipulates
an agreement covering the newly contracted debt; AND
2) Such contract must observe the formalities prescribed by the Chattel Mortgage
Law as mentioned in Section 5.

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E. RIGHT OF JUNIOR MORTGAGEE

The only right passes to junior mortgagee or the second mortgagee is the right of
redemption within the period of redemption allowed by law, for as long as the mortgagor
has not yet exercised his right of redemption.

GENERAL RULE: The rights of the first mortgagee over mortgaged properties
are superior to those of a subsequent attaching creditor and other junior mortgagees. In
Chattel Mortgage the right is only an EQUITY REDEMPTION.

Period within which equity of redemption may be exercised:

Right of redemption is exercised from the date the condition of chattel mortgage
is broken but BEFORE the foreclosure sale of collateral. The 30-day period to foreclose a
chattel mortgage is the minimum period after violation of the mortgage condition for the
mortgage creditor to cause the sale at public auction of the mortgaged chattel and is the
period of grace for the mortgagor to discharge the mortgage obligation.

Amount to be paid:
1) The amount due on such mortgagee; and
2) The costs and expenses incurred by such breach of condition before sale.

Persons entitled to redeem:

1) Mortgagor;
2) A person holding subsequent mortgagee;
3) A subsequent attaching creditor.

EFFECT OF TAKING POSSESSION OF MORTGAGED PROPERTY AS AGAINST

A JUNIOR MORTGAGEE:

In order to make a mortgaged property in a chattel mortgage to create a lien as

against possible rights of creditors, subsequent purchasers and encumbrancers in good
faith, it is necessary that the possession of the mortgaged chattels be transferred, or
within reasonable time the instrument be filed or recorded. Hence, a first chattel
mortgage unregistered is absolutely void against a second or junior mortgagee taken in
good faith; and such junior mortgagee need not be recorded at all to give priority over
such first mortgagee.

F. FORECLOSURE PROCEDURE
(Section 14, Chattel Mortgage Law)

1) Thirty (30) days after the condition of a chattel mortgage is broken, the
mortgagee may cause the mortgaged property or any part thereof to be sold at
public auction by a public officer at a public place in the municipality where the
mortgagor resides or where the property is situated;
2) The application for the foreclosure of the mortgagee should be filed with the
Executive Judge through the Clerk of Court;
3) After receipt of the application, the Clerk of Court shall, among other duties:
i. Raffle the application among the Sheriffs; and
ii. Cause the posting of the notice of sale.

4) Notice of the time, place and purpose of such sale must be posted, at least ten
(10) days before the date of sale, at 2 or more public places in the property is
situated;
5) The mortgagee shall notify the mortgagor and the persons holding subsequent
mortgages of the time and place of sale, at least 10 days before the sale, either by
notice in writing directed to him or left at his abode, if within the municipality,
or sent by mail if he does not reside in such community;

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 6) The officer making the sale shall, within 30 days thereafter, make in writing a
return of his doings and file the same in the office of the registry of deeds where
the mortgage is recorded, and the registry of deeds shall record the same. The
return shall particularly describe the articles sold and state the amount received
for each article.

DEFAULT AND FORECLOSURE:

The default of the mortgagor have no effect of vesting ownership of the

mortgaged property on the mortgagee. He is only permitted to recover his credit from
proceeds of the sale of the property at public auction through public officer in the
manner prescribed in Sec. 14, Act No. 1508. PactumCommissorium is prohibited.

G. REDEMPTION

Definition:
It is a transaction by which the mortgagor reacquires the property which may
have passed under the mortgage or divests the property of the lien which the mortgage
may have created.

Kinds:

(a) Equity of redemption: A mortgagor’s total ownership value or rights in a

mortgaged investment, property or asset.

In judicial foreclosure of real estate mortgage under the ROC, it is the right of the
mortgagor to redeem the mortgaged property by paying the secured debt within the 120
day period from entry of judgment or after the foreclosure sale, but before the sale of the
mortgaged property or confirmation of sale

(b) Right of redemption: The right to disencumber property or to free it from

a claim or lien, specifically the right to free from encumbrance of a foreclosure or
other judicial sale, or to recover the title passing thereby by paying what is due with
interests and costs.

In extrajudicial foreclosure of real estate mortgage, the right of the mortgagor to

redeem the property within a certain period after it was sold for the satisfaction of the debt.

(i) For natural persons – one year from the registration of the TCT
(ii) For juridical persons – three months from the foreclosure

Note: Formal offer to redeem must be with tender of redemption price to preserve
right of redemption

When is equity of redemption may be exercised?

Equity of redemption may be exercised by the mortgagor after his default in the
performance of his obligation but before the sale of the mortgaged property or
confirmation of sale.

The following may redeem if the condition of the mortgage is broken:

1) Mortgagor
2) A person holding subsequent mortgage
3) A subsequent attaching creditor (Sec. 13, Act 1508)

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H. CLAIM FOR DEFICIENCY

General Rule: The mortgagee is entitled to recover deficiency.

Exception:
1) Recto Law;
2) In accommodation mortgages, the accommodation mortgagor is liable only to the
extent of the value of the mortgaged property;
3) Due to death of mortgagor. (Vda. De Jacob v. CA, G.R. No. 88602, Apr. 6, 1990)

Application of Recto Law:

1) Sale of personal property, the price of which is payable in two or more

installments
2) Contracts purporting to be leases of personal property with option to buy (Art.
1485, NCC)
(Articles 1484 & 1485 of the Civil Code)

Requisites for the Sale to be covered under the Recto Law:

1) Sale of personal property
2) Payable in installments
3) CM constituted over the same property

Remedies of the Unpaid Seller under the Recto Law:

1) Exact fulfillment of the obligation, should the vendee fail to pay (action for
specific performance)
2) Cancel the sale, should the vendee’s failure to pay cover two or more installments
(rescission); or
3) Foreclose the chattel mortgage on the thing sold, should the vendee’s failure to
pay cover 2 or more installments.

JURISPRUDENCE
ACME SHOE vs. COURT OF APPEALS
G.R. No. 103576 August 22, 1996

PRINCIPLE/S:
1) Contracts of Security; Contracts of security are either personal or real. ). In
contracts of real security, such as a mortgage, that fulfillment is secured by an
encumbrance of property -- in chattel mortgage by the execution of the corresponding
and substantially in the form prescribed by law-- upon the essential condition that if the
obligation becomes due and the debtor defaults, then the property encumbered can be
alienated for the payment of the obligation, but that should the obligation be duly paid,
then the contract is automatically extinguished proceeding from the accessory character
of the agreement. As the law so puts it, once the obligation is complied with, then the
contract of security becomes, ipso facto, null and void.
2) The rule on after-incurred obligations; a chattel mortgage can only cover
obligations existing at the time the mortgage is constituted.

FACTS: Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic
Corporation, executed a chattel mortgage in favor of Producers Bank of the Philippines,
as a security for a corporate loan in the amount of P3M. The chattel mortgage contained a
clause that provided for the mortgage to stand as security for all other obligations
contracted before, during and after the constitution of the mortgage. The P3M was paid.
Subsequently, the corporation obtained additional financial accommodations totalling
P2.7M. This was also paid on the due date. Again, the bank extended another loan to the

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corporation in the amount of P1M, covered by four promissory notes. However, the
corporation was unable to pay this at maturity. Thereupon, the bank applied for an
extra-judicial foreclosure of mortgage.

ISSUE/S:
1) Whether or not extra-judicial foreclosure of the chattel mortgage is proper.

2)Would it be valid and effective to have a clause in a chattel mortgage that

purports to likewise extend its coverage to obligations yet to be contracted or incurred?

RULING:
1)No. The chattel mortgage was terminated when payment for the P3M loan was
made so there was no chattel mortgage to even foreclose at the time the bank instituted
the extra-judicial foreclosure.
Contracts of security are either personal or real. In contracts of real security, such
a mortgage, that fulfillment is secured by an encumbrance of property -- in chattel
mortgage by the execution-- upon the essential condition that if the obligation becomes
due and the debtor defaults, then the property encumbered can be alienated for the
payment of the obligation, but that should the obligation be duly paid, then the contract
is automatically extinguished proceeding from the accessory character of the agreement.
As the law so puts it, once the obligation is complied with, then the contract of security
becomes, ipso facto, null and void.
2) No. While a pledge, real estate mortgage, or antichresis may exceptionally
secure after-incurred obligations so long as these future debts are accurately described, a
chattel mortgage, however, can only cover obligations existing at the time the mortgage
is constituted. Although a promise expressed in a chattel mortgage to include debts that
are yet to be contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the old contract conformably with
the form prescribed by the Chattel Mortgage Law.

ALEJANDRO TORES, et al v FRANCISCO LIMJAP, special administrator of

the deceased Henson
GR No. 34385; September 21, 1931

PRINCIPLE/S:
1)The provision in Section 7 of Act 1508 does not apply to drug stores, bazaars
and all other stores in the nature of a revolving and floating business, i.e. one that deals
with the sale of either perishable goods, "rolling" goods, or goods subject to wear and
tear.

2)A stipulation in the chattel mortgage, extending its scope and effect to after-
acquired property, is valid and binding where the after-acquired property is in renewal
of, or in substitution for, goods on hand when the mortgage was executed, or is
purchased with the proceeds of the sale of such goods.

FACTS: Chattel mortgages were executed by defendant (Henson) on his drug store in
favor of the plaintiff as security for his loan he acquired from the latter. Included in the
contract is a stipulation authorizing Henson to sell the goods covered by the mortgage
and replace them with the other goods thereafter acquired. Since defendant failed to
comply with his obligation to pay the interest on the loans, plaintiffs wanted to take
possession of the chattels and moved to foreclose their mortgages thereon. The defendant
however asserted that the chattels (referring to the goods) which the plaintiffs sought to
recover were not the same property described in the mortgage and are therefore not to be
attached. According to him, even if the contract contained a stipulation extending its
scope and effect to after-acquired property, it is not valid because it contravenes the

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provision of Section 7 of Act 1508: “Chattel mortgage should cover only property
described therein and not like or substituted property thereafter acquired.”

ISSUE/S:

1) WON a stipulation in a mortgage extending its scope and effects to after-

acquired goods valid?
2) Are the goods in question covered by the chattel mortgage despite the express
provision of Section 7 of Act 1508?

RULING:

1) Yes, a stipulation is valid and binding if the after-acquired property is in

renewal of, or in substitution for, goods on hand when the mortgage was executed, or is
purchased with the proceeds of the sale of such goods. In the case, the goods on hand
when the mortgage was executed were substituted by these after-acquired properties.

2) Yes. The provision in the last paragraph of Section 7 of the Chattel Mortgage
law is not applicable to drug stores, bazaars and all other stores in the nature of a
revolving and floating business. The intention of the Law is to promote business and
trade in these Islands and to give impetus to the economic development of the country. If
said provision were intended to apply to this class of business, it would be practically
impossible to constitute a mortgage on such stores without closing them, contrary to the
very spirit about a handicap to trade and business, would restrain the circulation of
capital, and would defeat the purpose for which the law was enacted, to wit, the
promotion of business and the economic development of the country.

INDUSTRIAL FINANCE CORPORATION, petitioner,vs.

CASTOR TOBIAS, respondent.
G.R. No. L‐41555; July 27 1977

PRINCIPLE:
Should the vendee or purchaser of a personal property be in default in the
payment of two or more of the agreed installments, the vendor or seller has the option to
either exact fulfillment by the purchaser of -the obligation, or to cancel the sale, or to
foreclose the mortgage on the purchased personal property, if one was constituted. The
remedies provided for in Art. 1484 are considered alternative, not cumulative

FACTS: On June 16, 1968, Tobias bought on installment 1 Dodge truck from Leelin
Motors, Inc. executing a promissory note in favor of the latter, for the sum of P29.070.28
payable in thirty-six (36) equal installments with interest at the rate of 12% per annum.
To secure payment of the promissory note, respondent Tobias executed in favor of Leelin
Motors, Inc. a chattel mortgage on the Dodge truck.
On June 19, 1969, Leelin Motors, Inc. indorsed the promissory note and assigned
the chattel mortgage to petitioner Industrial Finance Corporation. Tobias paid 6
installments on the promissory note directly to the petitioner Industrial Finance
Corporation but defaulted on more than two installments, IFC through a letter gave
Tobias a choice of either paying the balance of the purchase price or surrender the truck.
Tobias responded to the letter voluntarily and willingly surrendering the truck which
was still in the custody of Leelin Motors ever since the truck met an accident. Upon
learning that the truck met an accident, IFC decided not to get the truck anymore from
Leelin Motors. Instead, IFC filed an action against Tobias to recover the unpaid balance
of the promissory note.
The lower court dismissed the complaint and on appeal, the CA affirmed the
decision of the CFI.

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ISSUE: Whether or not IFC is estopped to insist on its claim the balance of the
promissory note when it demanded the return or surrender of the track in its letter of
May 14, 1970.

RULING: No. The claim of respondent cannot be sustained. Art. 1484 is clear that
"should the vendee or purchaser of a personal property be in default in the payment of
two or more of the agreed installments, the vendor or seller has the option to either exact
fulfillment by the purchaser of -the obligation, or to cancel the sale, or to foreclose the
mortgage on the purchased personal property, if one was constituted. Since the case
involves the sale of personal property on installments Art. 1484 of the Civil Code should
apply.
Since the petitioner has not availed itself of the remedy of cancelling the sale of
the truck in question or of foreclosing the chattel mortgage on said truck, petitioner is
still free to avail of the remedy of exacting fulfillment.

MAGNA FINANCIAL SERVICES GROUP, INC. vs. ELIAS COLARINA

G.R. No. 158635, December 9, 2005

FACTS: Elias Colarina bought on installment one (1) unit Suzuki Multicab from Magna
Financial Services Group, Inc. After making down payment, Colarina executed
promissory note for the balance and executed a deed of chattel mortgage over the motor
vehicle. Colarina failed to pay monthly amortization beginning January 1999 and despite
repeated demands, he failed to settle the balance. Financial Services Group filed for
foreclosure of Chattel Mortgage with replevin. Colarina voluntarily surrendered physical
possession of the vehicle. The trial court rendered judgment in favour of Magna Financial
Services. Colarina appealed to the RTC but it affirmed the decision of the trial court.

ISSUE: Whether or not there is actual sale of the mortgaged vehicle that would bar the
creditor from recovering unpaid balance.

RULING: No. There was no actual foreclosure of the subject vehicle. Where the
mortgagee (Magna Financial Services Group, Inc.) elects a remedy of foreclosure, the law
requires the actual foreclosure of the mortgaged chattel in accordance with Sec. 14 of Act
No. 1508.
The law requires actual sale of the mortgaged chattel when the mortgagee elects a
remedy of foreclosure in order to recover the unpaid balance from mortgagor.
Under the law, the delivery of possession of the mortgaged property to the
mortgagee can only operate to extinguish liability of the mortgagor if the mortgagee had
actually caused the foreclosure sale of the mortgaged property when it recovered
possession thereof. In this case, there has been no actual sale of the property at public
auction; hence Magna Financial Services cannot recover the unpaid balance from
Colarina.

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 QUESTIONS AND ANSWERS

1)Distinguish a contract of chattel mortgage from a contract of pledge.

Answer: The following are the distinctions between a contract of chattel mortgage and a
contract of pledge:

1) A chattel mortgage is a formal contract while a pledge is a real contract;

2) In a contract of Chattel Mortgage, possession belongs to the creditor, while
in a contract of pledge possession belongs to the debtor;
3) A contract of chattel mortgage must be recorded in a public instrument to bind
third persons while a contract of pledge must be in a public instrument
containing description of the thing pledged and the date thereof to bind third
persons.

2) Juan constructed a building on a parcel of land he leased from Mario. He

executed a chattel mortgage over said building in favor of Pedro for a loan obtained
from the latter. When he could not pay Pedro, Pedro initiated foreclosure
proceedings. Juan claimed that the building he had constructed on the leased land
cannot be validly foreclosed because the building was, by law, an immovable. Is Juan
correct?
Answer: No, Juan is not correct. The Chattel Mortgage is void and cannot be foreclosed
because the building is an immovable and cannot be an object of a chattel mortgage.
However, If the building was intended and is built of light materials, the chattel
mortgage may be considered as valid as between the parties and it may be considered in
respect to them as movable property, since it can be removed from one place to another.

3)What kind of property can be the subject of a chattel mortgage?

Answer:
General rule: Personal property only
Exception: Real property covered by chattel mortgage:
a. Growing crops (Sec 7 of Act 1508 or Chattel Mortgage Law)
b. House built on another person’s land (Tumalad v Vicencio, 41 SCRA 143, 1971)
c. Machinery permanently affixed to a building, under the doctrine of estoppel
(Makati Leasing v Wearever Textile, 122 SCRA 296, 1983)

4) Can like or substituted property be deemed covered by a chattel mortgage?

Answer: Generally, NO because Sec 7 of Act 1508 expressly provides that only property
described therein and not like or substituted property thereafter acquired by a
mortgagor may be covered by a chattel mortgage. However, this provision does not apply
to drug stores, bazaars and all other stores in the nature of a revolving and floating
business, ie. One that deals with the sale of either perishable goods, “rolling” goods, or
goods subject to wear and tear. (Torres v Limjap, 56 Phil 141, 1931)

5) Is a promise expressing the inclusion of future debts in a chattel mortgage

initially contracted valid and enforceable?
Answer: It is valid but the security itself can’t be enforced or cannot exist/arise until
after a chattel mortgage agreement covering the newly contracted debt is executed either
by concluding a fresh contract or by amending the old one and provided that it conforms
to the formalities prescribed by the Chattel Mortgage Law.

6) What is the effect of a mortgagee, who does not have possession of the property
but registered the mortgage, to subsequent mortgagee?
Answer: The mortgagee has the right superior to the right of the subsequent mortgagee.
The mortgage has the force and effect of mortgage when registered. The mortgagee can
enforce his right on the day on which it is filed for record, or on which the property is
delivered.

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The mortgage then is given life and force as against all persons, second mortgagee or
subsequent mortgage.

7) Can a chattel mortgagee sue for deficiency following foreclosure?

Answer: Yes. A chattel mortgagee can sue for a deficiency judgment following
foreclosure.
Exception: The property sold in installments, the mortgagee can no longer take
any action against the purchaser to recover any unpaid balance of the price (Art 1484,
Civil Code).
Where the mortgagee elects a remedy of foreclosure, the law requires the actual
foreclosure of the mortgaged chattel

8) Where the proceeds from the sale of mortgage property (chattel mortgage) do
not fully satisfy the secured debt, is the mortgagee entitled to recover the deficiency
from the mortgagor? State the rule and exception if any.
Answer: Generally, yes, the mortaggee is entitled to recover the deficiency from the
mortgagor.(Ablazavs Ignacio, L-11460, May 23,1958)
An exception to the aforementioned rule may be found in Article 1484 which speaks of a
chattel mortgage as security for the purchase of personal property payable in
installments. Here, no deficiency judgment can be asked. Any agreement to the contrary
shall be void.

9) Can the unpaid seller avail of all remedies?

Answer: No, the remedies are alternative.

10) Is the mortgagee’s letter informing the mortgagor of his intent to foreclose is
already considered a foreclosure of the chattel?

Answer: No. A mere offer by the mortgagor to surrender the chattel, not accepted by the
mortgagee, does not preclude the mortgagee from bringing suit to recover the balance of
the purchase price. (Industrial Finance Corp v. Castor Tobias, G.R. No. L‐41555, July 27
1977)

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 REAL ESTATE MORTGAGE LAW
(Act No. 3135, as amended by R.A 4118)
Articles 2124 – 2131 Civil Code

Art. 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage. (1874a)

 DEFINITION OF REAL ESTATE MORTGAGE

Mortgage (otherwise known as “real estate mortgage or “real mortgage”) is a contract

whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially
subjecting to such security immovable property or real rights over immovable property which
obligation shall be satisfied with the proceeds of the sale of said property or rights in case the said
obligation is not complied with at the time stipulated. (De Leon)

It is a contract in which the debtor guarantees to the creditor the fulfillment of a principal
obligation, subjecting for the faithful compliance therewith a real property in case of non-fulfillment
of said obligation at the time stipulated. (12 Manresa, p. 460).

 ESSENTIAL REQUISITES

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. (1857)
Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things
in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858)
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage
may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have no other right than to demand the execution
and the recording of the document in which the mortgage is formalized. (1875a)

The Essential Requisites of Mortgage are:

1. That it is constituted to secure the fulfillment of a principal obligation;

2. That the mortgagor be the absolute owner of the thing pledged or mortgaged;
3. That the persons constituting the mortgage have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the purpose;
4. That the things in which the pledge or mortgage consists may be alienated for the payment
to the creditor when the principal obligation becomes due;
5. That the document in which it appears be recorded in the Registry of Property
A duly executed mortgage is presumed to be valid until the contrary is shown. To the party
attacking, rests the burden of proving its invalidity due to fraud, duress or illegality. The
right to attack the validity of a mortgage may be lost by a waiver of defects and objections, or
by unreasonable delay to act amounting to ratification.

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 REGISTRATION REQUIREMENTS

A registration, whether registered or not is binding between the parties, registration

being necessary only to make the same valid against third persons. Thus, registration only
operates as a notice of the mortgage to others, but neither adds to its validity nor convert an
invalid mortgage into a valid one between the parties. If the purpose of registration is merely to
give notice, the question regarding the effect or invalidity of instrument, are expected to be
decided after not before registration. It must follow as a necessary consequence that registration
must first be allowed and the validity or the effect litigated afterwards.

 WHY IS THERE A REQUIREMENT FOR THE REGISTRATION OF MORTGAGE?

1. Mortgagee is entitled to registration of mortgage as a matter of right.

The mortgagor is understood to have given his consent to its registration, and he cannot be
permitted to revoke it unilaterally.

2. Proceedings for registration do not determine validity of mortgage or its effect.

It is merely a declaration that the record of the title appears to be burdened with the
mortgage described. It must follow as a necessary consequence that registration must first be
allowed and its validity or effect litigated afterwards.

3. Registration without prejudice to better right of third parties.

A registered mortgage is superior to a contract to sell, subject to any liabilities the owner
(vendor / mortgagor) may have incurred in favor of the buyer. In a contract to sell, title is
retained by the vendor until full payment of the price.

4. Registrability of encumbrance acquired subsequent to the mortgage.

Where the mortgage deed has been duly registered, said deed forms part of the records for
the registration of the property mortgaged. Thus in a proceeding for the annotation of an
encumbrance over the property subsequently acquired, which is being opposed by the
mortgagee, the latter has no need for the introduction of the mortgage dee to prove its
existence.

5. Registrability of mortgage by surviving spouse of his/her undivided share of conjugal property.

The mortgage by the wife, after the death of her husband in an undivided one-half share of
the conjugal partnership is valid, the registration being an essential requirement in order
that the mortgage may be validly constituted. Registration will not affect the rights of the
deceased husband’s creditors or of his heirs for their interest is limited to the husband’s half
of the estate covered by the mortgage.

6. Subsequent registration of an adverse claim.

A prior registration of a lien creates a preference; hence, the subsequent annotation of an
adverse claim cannot defeat the rights of the mortgagee or the purchaser at the auction sale
whose rights were derived from prior mortgage validly registered.

 COVERAGE
Governs sales made under a special power inserted in or attached to any real-estate mortgage,
which is made as security for the payment of money or the fulfillment of any other obligation.
The Act will govern the manner in which the sale and redemption shall be effected, whether or
not provision for the same is made in the power. (Sec 1, Act 3135)

The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale
and redemption of the property if and when the mortgagee is given a special power or express
authority to do so in the deed itself or in a document annexed thereto.

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or
income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to

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 the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person. (1877)

 THE FOLLOWING ARE DEEMED TO BE INCLUDED IN A MORTGAGE OF REAL

PROPERTY:

1. New plantings;
2. Fruits, except those collected before the obligation falls due, and those removed and stored
when it falls due;
3. Accrued and unpaid rents as well as those which should have to be paid while the credit
remains wholly unsatisfied;
4. Buildings, machinery and accessories belonging to the mortgage debtor installed on a
mortgaged sugar central;
5. All objects permanently attached to a mortgaged land or building, although they may have
been placed there after the execution of the mortgage are also included;
6. A more costly building erected in place of the mortgaged building which was torn down by
the debtor.

Note: if the mortgaged estate passes into the hands of a third person, the mortgage does
not extend to any machinery, object, chattel or construction which he may have brought or
placed there and which such third person may remove whenever it is convenient for him to do
so.

 REMEDIES AVAILABLE TO MORTGAGE UPON DEFAULT OF THE MORTGAGOR

When a mortgagor (borrower) defaults on mortgage payments, the mortgagee (lender) has
several remedies at its disposal. The most frequently used remedies are a power of sale, an
action for judicial sale, and an action for foreclosure.

1. Power of sale
Following a default, a mortgagee may sell the mortgaged property pursuant to a private
power of sale. This remedy allows a mortgagee to force a sale of the mortgaged property for
the purpose of recovering the outstanding balance remaining on the mortgage.

When a mortgagee exercises its power of sale, it is able to convey the mortgaged property to
a third party purchaser despite the owner’s wishes or objection. The benefit of this remedy is
that the process is quite simple. Upon default, a mortgagee must provide notice to a
mortgagor that it intends to exercise its power of sale remedy. The mortgagee then only has
to wait 35 days before it can properly convey the mortgaged property. Within this period,
the mortgagor may stop the process only by providing for the entire balance remaining on
the mortgage.

The goal of the mortgagee using a power of sale is not to profit, but simply to recover the
balance outstanding on the mortgage. Provided that the proceeds extinguish the mortgage,
the defaulting mortgagor is actually entitled to the surplus proceeds. As a result, the
mortgagee can be held liable to the mortgagor if the property is not sold at its fair market
value. The common law is clear that when a mortgagee exercises its power of sale, it has a
duty to the mortgagor to receive the highest value possible. As a result, some mortgagees are
dissuaded from pursing a power of sale, instead choosing a remedy where liability can be
avoided.

2. Judicial sale
Similarly to a power of sale, a judicial sale allows the mortgagee to convey the mortgaged
property to a third party purchaser despite the owner’s wishes or objections. However, in a
judicial sale, the court oversees the entire process. Consequently, the mortgagee cannot be
held liable if the proceeds are only sufficient to pay off the outstanding balance on the

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 mortgage. As a result, several mortgagees select this mechanism as it insulates them from
future liability.

Countering the benefits though is the fact that a judicial sale is a lengthy process. It requires
greater notice to the mortgagor, and several appearances before the court. As a result of the
additional time and cost required, many mortgagees bypass the judicial sale remedy.

3. Foreclosure
Another remedy available to mortgagees is an action for foreclosure. Unlike the other two
remedies, when a mortgagee successfully forecloses a property, it receives a court order
awarding it full possessory and legal title of the mortgaged property. As a result, the
mortgagee is entitled to all the proceeds following a sale, meaning it has no duty to provide
the surplus to the mortgagor. While the full extinguishment of the mortgagor’s interest is
advantageous, it can also operate against the mortgagee. Where a property cannot be sold for
an amount sufficient enough to satisfy the outstanding mortgage, a mortgagee has no
standing to bring a claim against the mortgagor for the difference. Conversely, in both a
power of sale and judicial sale, a mortgagee may claim against a mortgagor for the deficiency
following a sale. This additional risk requires mortgagees to carefully consider the market
value of the property before deciding upon the foreclosure remedy.

 NEED FOR SPECIAL POWER OF ATTORNEY

A Special Power of Attorney is a legal document wherein a person designates another person to
do a particular act in his behalf. This document states the authority of a person and the limits of
his authority in doing a particular act. The person executing this document is called the
principal and the person designated by the principal to do a particular act is the agent. This
document, in order to be valid must be signed by the principal and notarized by a Notary Public.
The usual authorities given under a Special Power of Attorney are the following:
1. Authority to Sell a Real Property
2. Authority to Sell Shares of Stocks or other personal properties
3. Authority to manage the business of the principal
4. Authority to withdraw retirement benefits
5. Authority to obtain a loan
6. Authority to Mortgage Real Property
7. Other Acts which cannot be consummated without the proper authorization from the
concerned person.

 AUTHORITY TO FORECLOSE EXTRAJUDICIALLY

Foreclosure – It is a remedy available to the mortgagee by which he subjects the mortgaged

property to the satisfaction of the obligation to secure which the mortgage was given.

Validity and effect of foreclosure–Foreclosure is but a necessary consequence of non-payment

of mortgage indebtedness. As a general rule, the mortgage can be foreclosed only when the debt
remains unpaid at the time it is due. The right of foreclosure cannot be exercised by any other
person other than the creditor-mortgagee or his assigns.

A mortgage contract may contain an acceleration clause—

on occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes
due and payable.

 FORECLOSURE
The remedy available to the mortgagee by which he subjects the mortgaged property to the
satisfaction of the obligation to secure which the mortgage was given where the mortgagor is in
default in the payment of said obligation. Foreclosure may be effected judicially or extra-
judicially.

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 JUDICIAL FORECLOSURE UNDER THE RULES OF COURT

This is governed by Rule 68 of the Rules of Court.

1. Judicial action for the purpose. — A mortgage may be foreclosed judicially by bringing an
action for that purpose, in the proper court which has jurisdiction over the area wherein the
real property involved or a portion thereof, is situated. (see Sec.1, Rule 4, Rules of Court.)

2. Order to mortgagor to pay mortgage debt. — If the court finds the complaint to be well-
founded, it shall order the mortgagor to pay the amount due upon the mortgage debt or
obligation with interest and other charges within a period of not less than 90 days nor more
than 120 days from the entry of judgment. (Sec.2, Rule 68, Ibid.)

3. Sale to highest bidder at public auction. — If the mortgagor fails to pay at the time
directed in the order, the court, upon motion, shall order the property to be sold to the
highest bidder at public auction. (Sec. 3, Ibid.)

4. Confirmation of sale. — The sale when confirmed by an order of the court, also upon
motion, shall operate to divest the rights of all parties to the action and to vest their rights in
the purchaser subject to such right of redemption as may be allowed by law. (Ibid.)

5. Execution of judgment. — No judgment rendered in an action for foreclosure or mortgage

can be executed otherwise than in the manner prescribed by the law on mortgages, because
parties to an action are not authorized to change the procedure which it prescribed. (Piano
vs. Cayanong, 7 SCRA 397 [1963].)

6. Application of proceeds of sale. — The proceeds of the sale shall be applied to the payment
of the:
a. Costs of the sale;
b. The amount due the mortgagee;
c. Claims of junior encumbrancers or persons holding subsequent mortgages in the order
of their priority; and
d. The balance if any, shall be paid to the mortgagor or his duly authorized agent, or to
the person entitled to it. (Sec.4, Rule 68, Rules of Court.)

7. Execution of sheriff’s certificate. — In judicial foreclosures, the “foreclosure” is not

complete until the sheriff’s certificate is executed, acknowledged and recorded. In the
absence of a Certificate of Sale, no title passes by the foreclosure proceedings to the vendee.
It is only when the foreclosure proceedings are completed and the mortgaged property sold
to the purchaser that all interests of the mortgagor are cut off from the property.

 EXTRAJUDICIAL FORCLOSURE Under act No. 3135 as amended; and A.M. No. 99-10-05-
0 which prescribes the rules in cases of extrajudicial foreclosure of mortgages.

-A mortgage may be foreclosed extra judicially where there is inserted in the contract a
clause giving the mortgagee the power, upon default of the debtor, to foreclose the mortgage by an
extrajudicial sale of the mortgage property.(Sec.1, Act No. 3135)

1. Where to file
All applications for extrajudicial foreclosure of mortgage whether under the direction of the
sheriff or a notary public, pursuant to Act 3135, as amended by Act 4118, shall be filed with
the executive judge, through the Clerk of court.

2. Where to sell
Under Sec. 2 of Act No. 3138 as amended by Act No. 4118, Sale cannot be made legally
outside of the province in which the property sold is situated; and in case the place within said
province in which the sale is to be made is the subject of stipulation, Such sale shall be made in

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 said place in the municipal building of the municipality in which the property or part thereof
is situated.

3. Posting requirement
Sec.3, of Act No. 3135 merely requires that the notice of sale be posted in at least
three(3) places in the city or municipality where the property is situated, to wit: the Sheriff’s
Office, the Assessor’s office, and the Register of deeds which are certainly the public places
contemplated by law.(Fortune motor vs. Metropolitan Bank & trust Co., 265 SCRA 72)

4. Publication Requirement
a. Sufficiency of Newspaper Publication – Section 3
“Notice shall be given by posting notices of the sale for not less than twenty (20) days
in at least three (3) public places of the municipality or city where the property is situated,
and if such property is worth more than four hundred pesos (P400.00), such notice shall also
be published once a week for at least three (3) consecutive weeks in a newspaper of general
circulation in the municipality or city.”

b. Need for Republication in Case of Postponement

“Republication is necessary for the validity of a postponed extrajudicial foreclosure

sale. Another publication is required in case the auction sale is rescheduled, and the absence of
such republication invalidates the foreclosure sale. The last paragraph of the prescribed notice
of sale (under SC Circular 7-2002) allows the holding of a rescheduled auction sale without
reposting or republication of the notice. In the event the public auction should not take place
on the said date, it shall be held on __________, ______ without further notice. However, the
rescheduled auction sale will only be valid if the rescheduled date of auction is clearly
specified in the prior notice of sale. The absence of this information in the prior notice of sale
will render the rescheduled auction sale void for lack of reposting or republication.”

c. Personal notice to the mortgagor when and when not needed.

General rule: Personal notice to the mortgagor is not generally required.

Exception: Unless required in the mortgage contract, the lack of personal notice to the
mortgagor is not a ground to set aside foreclosure sale.

Unless otherwise stipulated by the parties to the mortgage contract, the debtor-
mortgagor need not be personally serve a copy of the notice of extrajudicial foreclosure.
(SC Circular 7-2002)

5. Personal Notice to the Mortgagor When and when not needed

General Rule: Personal notice to the mortgagor is not generally required. Exception: Unless
required in the mortgage contract, the lack of personal notice to the mortgagor is not a ground
to set aside a foreclosure sale.

Unless otherwise stipulated by the parties to the mortgage contract, the debtor-
mortgagor need not be personally served a copy of the notice of the extra- judicial
foreclosure. SC Circular 7-2002.

 POSSESSION BY PURCHASER OF FORCLOSED PROPERTY

Once title to the property has been consolidated in the buyer’s name upon failure of the
mortgagee to redeem the property within the one year redemption period, the writ of possession
becomes a matter of right belonging to the buyer.

Consequently, the buyers can demand possession of the property anytime. Its right to
possession has then ripened into the right of a confirmed absolute owner and the issuance of the
writ becomes a ministerial function that does not admit of the exercise of the courts discretion.

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 The court acting on an application for its issuance, should issue the writ as a matter of course
and without delay. (GR no. 172504 Donna C. Nagtalon vs. United Coconut Planter’s Bank, July
31, 2013)

 REMEDY OF DEBTOR IF FORECLOSURE IS NOT PROPER

Under Sec. 8 of Act no. 3135, the debtor may, in the proceedings in which possession was
requested, within 30 days after the purchaser is given possession was requested, within 30 days
after the purchaser is given possession of the property, pettion that the sale be set aside and the
writ of possession be cancelled because the mortgage was violated or the sale was not made in
accordance with the provisions thereof.

 REDEMPTION

DEFINITION:

Transaction by which the mortgagor reacquires or buys back the property which may have
passed under the mortgage or divests the property of the lien which the mortgage may have
created. It allows the owner to repurchase or buy back within a certain period and for a certain
amount, a property that has been sold due to the debt or encumbrance.

KINDS:

1. EQUITY OF REDEMPTION

Right of the mortgagor in case of judicial foreclosure to redeem the mortgaged

property after his default in the performance of the conditions of the mortgage but before the
confirmation of the sale of the mortgaged property.

2. RIGHT OF REDEMPTION

Right of the mortgagor in case of extrajudicial foreclosure to redeem the mortgaged property
within a certain period from and after it was sold for the satisfaction of the mortgage debt.

EQUITY OF REDEMPTION RIGHT OF REDEMPTION

 the equitable right of the mortgagor to  the statutory right of the mortgagor to
redeem redeem

 available before auction sale  available after auction sale

 available only judicial foreclosure  available only in extra-judicial

foreclosure, but by exception is
 The period for the exercise is within allowed in judicial foreclosure when
90 days but no more than 120 days the mortgagee is the PNB or a bank or
from entry of foreclosure judgment a banking institution

 one year from redemption is within

one year from date of registration of
the sheriff’s certificate of sale but not
after, the registration of the certificate
of sale with the applicable register of
deeds which in no case shall be more
than three months after foreclosure,
whichever is earlier

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REQUISITES OF VALID REDEMPTION

Pursuant to Section 28, Rule 39 of the Rules of Court and subject to the provisions of special
laws, the requisites for valid redemption are:

1. The redemption must be made within one (1) year from the date of the registration of the
certificate of sale, not from the date of the foreclosure sale. The existence of the right of
redemption operates to depress the market value of the property until the period expires, and to
render the period indefinite would render nugatory the period fixed by statute.

The period of redemption is not a prescriptive period but a condition precedent provided by law
to restrict the right of the person exercising redemption.

2. Payment of the purchase price of the property plus 1% interest per month together
with the taxes thereon, if any, paid by the purchaser and the amount of his prior lien, if
any, with the same rate of interest computed from the date of registration of the sale, up
to the time of redemption; and

3. Written notice of the redemption must be served on the officer who made the
sale and a duplicate fi led with the proper Register of Deeds. (Rosales vs. Yboa, 120 SCRA
869 [1983].)

4. In judicial foreclosure, the general rule is that the mortgagor of real estate can
no longer exercise his right of redemption after the sale is confirmed by the court.
Allowing a redemption after the lapse of the statutory period, when the buyer at the
foreclosure sale does not object but even consents to the redemption, will uphold the
policy of the law which is to aid rather than defeat the right of redemption. There is
nothing in the law which prevents a waiver of the statutory period for redemption.
(Ramirez vs. Court of Appeals, 219 SCRA 598 [1993].)

5. The mortgagor or his assignee is required to tender payment within the

prescribed period to make said redemption valid, or to preserve the right of redemption
for future enforcement beyond such period of redemption.

WHO MAY REDEEM?

1. The debtor;
2. The debtor's successors-in-interest;
3. Any judicial creditor or judgment creditor of the debtor;
4. Any person having a lien on the property subsequent to the mortgage or deed of trust under
which the property is sold (Redemption price to be paid by accommodation mortgagors

PERIOD OF REDEMPTION

1. Extra-judicial
a. Natural person – 1 year from the registration of the certificate of sale with Registry of
Deeds
b. Juridical Person – same rule as natural person
c. Juridical Person (mortgagee is bank) – 3 moths after foreclosure or before
registration of
certificate of foreclosure whichever is earlier

2. Judicial – before confirmation of the sale by the court

Note: Allowing redemption after the lapse of the statutory period when the buyer at the
statutory period when the buyer at the foreclosure sale does not object but even consents to

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 the redemption, will uphold the policy of the law which is to aid rather than defeat the right
of redemption.

AMOUNT OF REDEMPTION PRICE

1. Mortgagee is not a bank (Act No. 3135 in relation to Section 28, Rule 39 of the Revised
Rules of Court)
a. Purchase price of the property
b. 1% interest per month on the purchase price
c. Taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest
computed
from the date of registration of sale, up to the time of redemption.

2. Mortgagee is a bank. (General Banking Law of 2000)

a. Amount due under the mortgage deed
b. Interest
c. Cost and expenses

 EFFECTS OF PENDENCY OF ACTION FOR ANNULMENT OF SALE

The filing of Court action to enforce redemption has the effect of preserving the redemptioner’s
rights and freezing the expiration of one year period to redeem. (Banco Filipino v. CA)

 WRIT OF POSSESSION

DEFINITION:

A writ of possession is generally understood to be an order by a court whereby the sheriff is

commanded to place in possession of real or personal property the person entitled thereto such
as when a property is extrajudicially foreclosed. In a foreclosure of real estate mortgage, this
right of the writ is granted to the purchaser.

WHEN MAY BE ISSUED?

A writ of possession may be issued under the following instances:

1. Land registration proceeding;

2. In a Judicial Foreclosure of a real estate mortgage, provided that:
a. The debtor is in the possession of the mortgaged realty;
b. No third person, not a party to the foreclosure suit, had intervened.
3. In Extrajudicial foreclosure of real estate mortgage.
4. In Ordinary execution sales (Section 33, rule 39, rules of court)

DUTY OF THE COURT TO ISSUE SAID WRIT:

a. On extrajudicial foreclosure
The issuance of the writ of possession is merely a ministerial function of the court.(A.G
development corporation vs CA, 1997; mamerto marquez foundation Inc. vs Pizarro, 2005)

“In any sale made under the provisions of this act, the purchaser may petition the court of
first instance (now Regional Trial Court) of the province or place where the propert or any
part thereof is situated, to give him possession thereof during the redemption period,
furnishing bond in an amount equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that the sale was made without
violating the mortgage or without complying with the requirements of this act” ( Section 7,
Act 3135 as amended)

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 b. On Judicial Foreclosure

Also Ministerial.

“Upon the finality of the order of confirmation or upon the expiration of the period of
redemption when allowed by law, The purchaser at the auction sale or last redemptioner, if
any, shall be entitled to the possession of the property , unless a third party is actually
holding the same adversely to the judgment obligor”.

“The said purchaser or last redemptioner may secure a writ of possession , upon motion,
from the court which ordered the foreclosure” (section 3, second paragraph, rule 68, rules of
court)

Note: The right of the applicant or a subsequent purchaser to request for the issuance of a
writ of possession never prescribes. ( Rodil vs. Benedicto, 1980; Paderes vs Court of appeals,
2005)

ENFORCEMENT AGAINST THIRD PERSON:

GENERAL RULE:

The writ of possession issues as a matter of right 1) during redemption period, by filing a
petition ex parte and approval of the furnished bond, and 2) after the redemption period.

EXCEPTION:

No possession of the mortgage property may be awarded to the purchaser if a third party is
actually holding or in possession of the property adversely to the judgment debtor.

REASON FOR THE EXCEPTION:

One who claims to be the owner of the property possessed by another must bring the
appropriate judicial action for its physical recovery (Article 433, civil code of the Philippines)

An “ex parte” petition for issuance of a writ of possession is not, strictly speaking, a judicial
process contemplated in article 433.

REASON FOR THE REASON:

The writ of possession does not issue in case of doubt. The court may not grant the writ
through a mere motion where title is in doubt, the proceedings, being, for the issuance of the
writ is a mere incident in the transfer of title. ( PNB vs CA 374 scra 22; DBP vs prime
Neighborhood, 587 scra 582)

To do so would tantamount to the third Person’s summary ejectment, in violation of the

basic tenets of due process under the constitution which states that no person shall be deprived
of life, Liberty or Property without due process of law?

 PENDENCY OF ACTION FOR ANNULMENT OF SALE:

The law and jurisprudence are clear that both during and after the period of redemption, the
purchaser at the foreclosure sale is entitled as of right to a writ of possession , REGARDLESS of
whether or not there is a pending suit for annulment of the mortgage or the foreclosure sale
itself, without prejudice to the eventual outcome of said case. (De leon, credit transaction, 2011)

Any objection on the validity of the sale and the writ issued pursuant thereto should be threshed
out in a subsequent proceedings under section 8 of Act 3135.

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 “The debtor may, in the proceedings in which possession was requested, but not later than
thirty days after the purchaser was given possession, petition that the sale be set aside and the
writ of possession cancelled, specifying the damages suffered by him, because the mortgage was
not violated or the sale was not made in accordance with the provisions hereof, and the court
shall take cognizance of this petition in accordance with the summary procedure provided for in
section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds
the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond
furnished by the person who obtained possession. Either of the parties may appeal from the
order of the judge in accordance with section fourteen of Act Numbered Four hundred and
ninety-six; but the order of possession shall continue in effect during the pendency of the
appeal.”

Such question cannot be raised to opposed the issuance of the writ of possession, since the
proceeding is ex parte. (PNB vs Sanao Marketing Corp, 465 scra 287; Sulit vs CA, 268 scra 441)

 ANNULMENT OF SALE

DEFINITION:

It is a real action and a remedy available to the Mortgagor to make inoperative the foreclosure
sale of the real property mortgage if a ground exist.

An action to annul a real estate mortgage foreclosure sale is no different from an action to annul
a private sale of real property ( Muoz vs Llamas, 1950)

GROUNDS:

1. That there was a fraud, collusion, accident, mutual mistake, breach of trust or misconduct by
the purchaser.
2. That the sale had not been fairly and regularly conducted.
3. That the price was inadequate and inadequacy was so great as to shock the conscience of the
court. ( UPCB vs Spouses Beluso, 2007)

JURISPRUDENCE
1. San Juan vs. Court of Appeals, 363 SCRA 387

FACTS:
o Petitioner Asuncion San Juan mortgaged her property, a lot in Bacolod, to Private
Respondent Young Auto Supply Co., Inc.
o Upon default in the payment of the principal loan secured by the mortgage, an
extrajudicial foreclosure proceeding was instituted by private respondent before the city
sheriff of Bacolod City. Since private respondent was the sole bidder in the auction sale,
the corresponding Certificate of Sale was issued in its favor.
o The Certificate was registered with the Office of the Register of Deeds of Bacolod City.
o Private respondent filed, before the Regional Trial Court of Negros Occidental, a Petition
for the registration and the annotation of the final Certificate of Sale. During the trial,
petitioner manifested that the owners duplicate Certificate of Title to the property,
subject of the foreclosure sale, was in her possession. Thus, the trial court issued an
Order directing petitioner to deliver to private respondent within seventy-two (72)
hours therefrom the owners duplicate copy.
o Because of petitioners failure to comply with the Order, the trial court issued another
Order directed to annotate in the original Certificate of Title in favor of respondent
without the necessity of presenting the owners copy of the aforementioned transfer
certificate of title.

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 o The appellate court held that the final Certificate of Sale was properly and regularly
issued by the ex oficio city sheriff of Bacolod City. This was done by virtue of the alleged
failure of the oppositor, Asuncion San Juan, to exercise her right of redemption that has
already expired.
o The Court of Appeals added that the fact of the mortgage, its release and the Certificate
of Sale are matters of record in the Office of the Register of Deeds of Bacolod City. It
cannot be, therefore, said that these instruments were irregularly executed. For being
public documents, they are entitled to the presumption of regularity.

ISSUE: Whether or not the petitioner had been lawfully divested of her title to the
subject property.

RULING: Petition denied.

o To defend her title over the property, petitioner should have filed the necessary court
action from the moment she discovered the mortgage. Yet, it took almost three (3) years -
- well beyond the lapse of the redemption period -- and the issuance of the final
Certificate of Sale, before she protested and attacked the validity of the real estate
mortgage.
o The right to attack the validity of a mortgage may be lost by a waiver of defects and
objections, such as alleged fraud or misrepresentation. Mortgagors desiring to attack the
validity of a mortgage should act with promptness. Otherwise, unreasonable delay may
amount to ratification.
o A duly executed mortgage is presumed to be valid until the contrary is shown. To the
party attacking rests the burden of proving its invalidity due to fraud, duress or illegality.
It should be stressed that, as a general rule, courts will adopt such construction as will
sustain rather than defeat the mortgage.
o Once a mortgage has been signed in due form, the mortgagee is entitled to its registration
as a matter of right. By executing the mortgage, the mortgagor is understood to have
given his consent to its registration, and he cannot be permitted to revoke it unilaterally.
The validity and fulfillment of contracts can not be left to the will of one of the
contracting parties.
o The annotation of private respondents final Certificate of Sale in the Original Certificate
of Title, even without the presentation of petitioners duplicate, was valid. To rule
otherwise would result in a situation in which a purchaser in a foreclosure sale can never
consolidate his or her title to the property even after the lapse of the redemption period,
because of the sheer refusal or failure of the former owner to submit the latters duplicate
certificate of title.

2. METROPOLITAN BANK AND TRUST COMPANY, INC vs. EUGENIO

PEAFIEL

ISSUE: WON the notice of sale was published in a newspaper of general circulation

HELD:NO.
“For the purpose of extrajudicial foreclosure of mortgage, the party alleging non-
compliance with the requisite publication has the burden of proving the same.

Nonetheless, the publisher’s testimony that they "do not just offer to anybody" implies
that the newspaper is not available to the public in general. This statement, taken in conjunction
with the fact that there are no subscribers in Mandaluyong City, convinces the Court that
Maharlika Pilipinas is, in fact, not a newspaper of general circulation in MandaluyongCity The
object of a notice of sale is to inform the public of the nature and condition of the property to be
sold, and of the time,place and terms of the sale. Notices are given for the purpose of securing
bidders and to prevent a sacrifice of the property. The goal of the notice srequirement is to
achieve a "reasonably wide publicity" of the auction sale. This is why publication in a newspaper

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 of general circulation is required. The Court has previously taken judicial notice of the "far-
reaching effects" of publishing the notice of sale in a newspaper of general circulation.”

3. DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS and

EMERALD RESORT HOTEL CORPORATION

ISSUE: WON the extrajudicial foreclosure of real estate chattel mortgage is valid.

HELD:Void.

“There is no question that DBP published the notice of auction sale scheduled on
12August 1986. However, no auction sale took place on 12 August 1986 because DBP,at the
instance of ERHC, agreed to postpone the same to 11 September 1986.

Publication, therefore, is required to give the foreclosure sale a reasonablywide publicity

such that those interested might attend the public sale. To allow theparties to waive this
jurisdictional requirement would result in converting into aprivate sale what ought to be a
public auction.”

 ACT NO. 3135 - AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL
POWERS INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES

Section 1. When a sale is made under a special power inserted in or attached to any real-estate
mortgage hereafter made as security for the payment of money or the fulfillment of any other
obligation, the provisions of the following election shall govern as to the manner in which the sale
and redemption shall be effected, whether or not provision for the same is made in the power.

Sec. 2. Said sale cannot be made legally outside of the province in which the property sold is
situated; and in case the place within said province in which the sale is to be made is subject to
stipulation, such sale shall be made in said place or in the municipal building of the municipality
in which the property or part thereof is situated.

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least
three public places of the municipality or city where the property is situated, and if such property
is worth more than four hundred pesos, such notice shall also be published once a week for at
least three consecutive weeks in a newspaper of general circulation in the municipality or city.

Sec. 4. The sale shall be made at public auction, between the hours or nine in the morning and four
in the afternoon; and shall be under the direction of the sheriff of the province, the justice or
auxiliary justice of the peace of the municipality in which such sale has to be made, or a notary
public of said municipality, who shall be entitled to collect a fee of five pesos each day of actual
work performed, in addition to his expenses.

Sec. 5. At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may
participate in the bidding and purchase under the same conditions as any other bidder, unless the
contrary has been expressly provided in the mortgage or trust deed under which the sale is made.

Sec. 6. In all cases in which an extrajudicial sale is made under the special power herein before
referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of
said debtor, or any person having a lien on the property subsequent to the mortgage or deed of
trust under which the property is sold, may redeem the same at any time within the term of one
year from and after the date of the sale; and such redemption shall be governed by the provisions
of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of
Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.

Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of
First Instance of the province or place where the property or any part thereof is situated, to give
him possession thereof during the redemption period, furnishing bond in an amount equivalent to

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 the use of the property for a period of twelve months, to indemnify the debtor in case it be shown
that the sale was made without violating the mortgage or without complying with the
requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte
motion in the registration or cadastral proceedings if the property is registered, or in special
proceedings in the case of property registered under the Mortgage Law or under section one
hundred and ninety-four of the Administrative Code, or of any other real property encumbered
with a mortgage duly registered in the office of any register of deeds in accordance with any
existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect
the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four
hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and
the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the
sheriff of the province in which the property is situated, who shall execute said order immediately.

Sec. 8. The debtor may, in the proceedings in which possession was requested, but not later than
thirty days after the purchaser was given possession, petition that the sale be set aside and the
writ of possession cancelled, specifying the damages suffered by him, because the mortgage was
not violated or the sale was not made in accordance with the provisions hereof, and the court shall
take cognizance of this petition in accordance with the summary procedure provided for in
section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the
complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by
the person who obtained possession. Either of the parties may appeal from the order of the judge
in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order
of possession shall continue in effect during the pendency of the appeal.

Sec. 9. When the property is redeemed after the purchaser has been given possession, the
redeemer shall be entitled to deduct from the price of redemption any rentals that said purchaser
may have collected in case the property or any part thereof was rented; if the purchaser occupied
the property as his own dwelling, it being town property, or used it gainfully, it being rural
property, the redeemer may deduct from the price the interest of one per centum per month
provided for in section four hundred and sixty-five of the Code of Civil Procedure.

Sec. 10. This Act shall take effect on its approval.

Approved: March 6, 1924

 ACT NO. 4118 - AN ACT TO AMEND ACT NUMBERED THIRTY-ONE HUNDRED AND
THIRTY-FIVE, ENTITLED "AN ACT TO REGULATE THE SALE OF PROPERTY UNDER
SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES.

Section 1. Section six of Act Numbered Thirty-one hundred and thirty-five, entitled "An Act to
regulate the sale of property under special powers inserted in or annexed to real-estate
mortgages," is hereby amended to read as follows:

"Section 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of
said debtor, or any person having a lien on the property subsequent to the mortgage or deed of
trust under which the property is sold, may redeem the same at any time within the term of one
year from and after the date of the sale; and such redemption shall be governed by the provisions
of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of
Civil Procedure, in so far as these are not inconsistent with the provisions of this Act."

Sec. 2. The following three sections are hereby inserted after section six of said Act Numbered
Thirty-one hundred and thirty-five:

Section 7. In any sale made under the provisions of this Act, the purchaser may petition the Court
of First Instance of the province or place where the property or any part thereof is situated, to give
him possession thereof during the redemption period, furnishing bond in an amount equivalent to

54 | P a g e
the use of the property for a period of twelve months, to indemnify the debtor in case it be shown
that the sale was made without violating the mortgage or without complying with the
requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte
motion in the registration or cadastral proceedings if the property is registered, or in special
proceedings in the case of property registered under the Mortgage Law or under section one
hundred and ninety-four of the Administrative Code, or of any other real property encumbered
with a mortgage duly registered in the office of any register of deeds in accordance with any
existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect
the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four
hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and
the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the
sheriff of the province in which the property is situated, who shall execute said order immediately.

"Section 8. The debtor may, in the proceedings in which possession was requested, but not later
than thirty days after the purchaser was given possession, petition that the sale be set aside and
the writ of possession cancelled, specifying the damages suffered by him, because the mortgage
was not violated or the sale was not made in accordance with the provisions hereof, and the court
shall take cognizance of this petition in accordance with the summary procedure provided for in
section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the
complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by
the person who obtained possession. Either of the parties may appeal from the order of the judge
in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order
of possession shall continue in effect during the pendency of the appeal.

"Section 9. When the property is redeemed after the purchaser has been given possession, the
redeemer shall be entitled to deduct from the price of redemption any rentals that said purchaser
may have collected in case the property or any part thereof was rented; if the purchaser occupied
the property as his own dwelling, it being town property, or used it gainfully, it being rural
property, the redeemer may deduct from the price the interest of one per centum per month
provided for in section four hundred and sixty-five of the Code of Civil Procedure."

Sec. 3. The number of the present section seven of said Act Numbered Thirty-one hundred and
thirty-five is hereby changed, making it section ten.

Sec. 4. This Act shall take effect on its approval.

Approved: December 7, 1933

QUESTIONS AND ANSWERS

1. A real estate mortgage may be foreclosed judicially or extrajudicially. In what

instance may a mortgagee extrajudicially foreclose a real estate mortgage? (5%)

SUGGESTED ANSWER:
When a sale is made under a special power inserted or attached to any real-
estate mortgage, thereafter given as security for the payment of money or the
fulfillment of any other obligation, then the mortgagee may extrajudicially foreclose
the real estate mortgage (Sec. 1, Act No. 3135, as amended)

2. What are the three public places being contemplated by the law where posting
of notices shall be made?
a.) Sheriff’s office;
b.) Assessor’s office; and
c.) Register of deeds

RATIO: These are the places where people interested in purchasing real
estate congregate usually proceed.(De leon)

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 3. What is the effect if the posting and publication requirement is waived?

To allow the parties to waive the posting and publication requirements, would result
in converting into a private sale what ought to be a public auction.(PNB V.
Nepomuceno 394 scra 405)

4. What I the proper remedy to seek reversal of judgment in an action for

foreclosure of a real estate mortgage?

It has been held that the proper remedy to seek reversal of a judgment in an action for
forclosure of real estate mortgage is not a petition for annulment of judgment but an
appeal from the judgment itself or from the order confirming the sale of a real estate
mortgage. (Agbada v. Inter-urban developers, Inc., 389 SCRA 430)

5. What are the three most frequently used remedies available to mortgage upon default
of the mortgagor?

Power of sale, an action for judicial sale, and an action for foreclosure.

6. A mortgage contract may contain an acceleration clause. What does this mean?

On occasion of the mortgagor’s default, the whole sum remaining unpaid automatically
becomes due and payable.

7. What is the remedy of the debtor if the foreclosure is not proper?

Under Sec. 8 of Act no. 3135, the debtor may, in the proceedings in which possession was
requested, within 30 days after the purchaser is given possession was requested, within 30
days after the purchaser is given possession of the property, pettion that the sale be set aside
and the writ of possession be cancelled because the mortgage was violated or the sale was
not made in accordance with the provisions thereof.

8. What is the effect of pendency of action for annulment of sale?

The filing of Court action to enforce redemption has the effect of preserving the
redemptioner’s rights and freezing the expiration of one year period to redeem. (Banco
Filipino v. CA)

9. What is the difference between equity of redemption and right of redemption?

Right of the mortgagor in case of judicial foreclosure is the right of the owner to
redeem the mortgaged property after his default in the performance of the conditions of the
mortgage but before the confirmation of the sale of the mortgaged property. On the other
hand, Right of the mortgagor in case of extrajudicial foreclosure is the right of the owner to
redeem the mortgaged property within a certain period from and after it was sold for the
satisfaction of the mortgage debt.

10. Who are the persons entitled to redeem the property that was foreclosed?

a. The debtor;
b. The debtor's successors-in-interest;
c. Any judicial creditor or judgment creditor of the debtor;
d. Any person having a lien on the property subsequent to the mortgage or deed of trust
under which the property is sold (Redemption price to be paid by accommodation
mortgagors

56 | P a g e
 THE GENERAL BANKING LAW OF 2000 (R.A.8791)

BANKING INSTITUTION- an entity duly authorized by the Monetary Board of the

Central Bank to engage regularly in the lending of funds obtained from the public
through the receipt of deposits of any kind and regularly conducting such operation (Sec.
2, R.A. 337).

DISTINCTIONS BETWEEN AN ORDINARY AND A BANKING CORPORATION

Ordinary Corporation
Under the supervision of the SEC
May be organized as a stock or non-
stock corporation
May be registered with the SEC
without any Certificate of Authority issued by
a government agency
Must be composed of 5-15 directors,
each of whom must own at least one share of
the capital stock of the corporation
May issue par value or no par value
shares of stocks
May declare dividends out of its
unrestricted retained earnings
May acquire its own shares for a
legitimate corporate purpose provided it has accept them as security for a loan; except
unrestricted retained earnings in the books to when authorized by the monetary board, but
cover the shares to be acquired or purchased
Banking Corporation
Under the supervision of the SEC
Must generally be a stock corporation
Must secure a Certificate of Authority
from the Monetary Board of the BSP before it
can register with the SEC
Has also 5-15 directors, in case of
merger or consolidation, the directors shall not
exceed 21
Issues only par value shares of stocks
May not declare dividends if any of the
conditions under Sec. 57 of R.A. 8791 are
present
May not acquire its own shares or
such shares must be disposed of within 6
months from their acquisition

CLASSIFICATIONS OF BANKS OR BANKING INSTITUTIONS

SALIENT FEATURES GOVERNING

LAW
Universal Bank -authorized to engage in normal bank operations, R.A. 8791
financing, warehousing and non-allied
enterprises
-exercises the powers of an investment house
-has the highest capitalization requirement (see
table below)
Commercial -accepts or creates demand deposits R.A. 8791
Bank withdrawable by checks
-cannot exercise the powers of an investment
house and invest in non-allied enterprises
Offshore -foreign banking institution authorized by the R.A. 8791
Banking Units BSP to do business in the Philippines
-conducts business transactions in foreign
currencies involving the receipt of funds from
external sources and the utilization of such
resources in transactions with non-residents or
other offshore banking units
Savings and -accumulates funds of depositors for investment R.A. 8791
Mortgage Bank or for loans for personal or home financing
Stock Savings -accumulates savings deposits of members, R.A. 3779, R.A.

57 | P a g e
and Mortgage stockholders or other persons for loans or 7906
Association investments
Private R.A. 4093, R.A.
Development 7906
Banks
Rural Bank -provides credit for rural community purposes R.A. 7353, R.A.
7906
Cooperative -organized primarily to make financial and credit R.A. 6983
Banks services available to cooperatives
Islamic Banks -dealings and activities are subject to basic R.A. 6848
principles and rulings of Islamic Shariah
Specialized and -examples: DBP and LBP
Unique -governed by their respective charters but still
Government subject to the supervision and regulation by the
Banks BSP
Branches of R.A. 8791
Foreign Banks in
the Philippines

Amended Minimum Capital Requirements for Banks

Revised
Existing Minimum
Bank Category/Network Size Minimum
Capitalization
Capitalization
Universal Banks P 4.95 billion2/
 Head Office only P3.00billion
 Up to 10 branches 1/ 6.00billion
 11 to 100 branches1/ 15.00billion
 More than 100 branches1/ 20.00 billion
Commercial Banks 2.40 billion2/
 Head Office only 2.00billion
 Up to 10 branches1/ 4.00billion
 11 to 100 branches1/ 10.00billion
 More than 100 branches1/ 15.00 billion
Thrift Banks
Head Office in:
 Metro Manila 1.00 billion2/
 Cebu and Davao cities 500 million2/
 Other Areas 250 million2/
Head Office in the National Capital
Region (NCR)
 Head Office only 500million
 Up to 10 branches1/ 750million
 11 to 50 branches1/ 1.00billion
 More than 50 branches1/ 2.00 billion
Head Office in All Other Areas
Outside NCR
200million
 Head Office only
300million
 Up to 10 branches1/
400million
 11 to 50 branches1/
800 million
 More than 50 branches1/
Rural and Cooperative Banks
Head Office in:

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  Metro Manila 100million2/
 Cebu and Davao cities 50million2/
 Other cities 25million2/
 1st to 4th class municipalities 10million2/
 5th to 6th class municipalities 5 million2/
Head Office in NCR
 Head Office only 50million
 Up to 10 branches1/ 75million
 11 to 50 branches1/ 100million
 More than 50 branches1/ 200 million
Head Office in All Other Areas
Outside NCR (All Cities up to 3rd Class
Municipalities) 20million
 Head Office only 30million
 Up to 10 branches1/ 40million
 11 to 50 branches1/ 80 million
 More than 50 branches1/
Head Office in All Other Areas
Outside NCR (4th to 6th Class
Municipalities) 10million
 Head Office only 15million
 Up to 10 branches1/ 20million
 11 to 50 branches1/ 40 million
 More than 50 branches1/

QUASI-BANKING INSTITUTIONS- entities regularly lending funds but receiving

deposits only occasionally and not from the general public, such as trust companies and
non-stock savings and loan associations.
-also refers to those entities engaged in the borrowing of funds through the
issuance, endorsement or assignment with recourse or acceptance of deposit substitutes
for purposes of relending or purchasing of receivables and other obligations.
TRUST CORPORATIONS- quasi-banking corporations formed or organized for the
purpose of acting as trustee or administering any trust or holding property in trust or on
deposit for the use, benefit or behoove of others.
BANK POWERS AND LIABILITIES

BANKPOWERS

1. Banking powers - these are the main powers; without any of these powers, the entity
is not a bank (Sec. 3, RA 8791).

a. The power to accept deposits

b. The power to lend funds obtained in the form of deposits.

2. Powers of a commercial bank (Sec. 29, RA 8791)

a. General powers incident to corporations

b. All such powers as may be necessary to carry on the business of commercial banking
such as:
- accepting drafts and issuing letters of credit
- discounting and negotiating promissory notes, drafts, bills of exchange, and other
evidences of debt
-accepting or creating demand deposits
- receiving other types of deposits and deposit substitutes

59 | P a g e
-buying and selling foreign exchange and gold or silver bullion
-acquiring marketable bonds and other debt securities
-extending credit
c. To invest in equities of allied enterprises

3. Powers of a universal bank (Sec. 23, RA 8791)

a. Has the powers authorized for a commercial bank

b. Has the powers of an investment house
c. Has the power to invest the equities of allied (both financial or non-financial) or non-
allied enterprises

** allied enterprises- those entities which enhance or complement banking.

** financial allied enterprises- in thrift banks, rural banks, or other allied enterprise.
** non-financial allied enterprises- activities such as warehousing, lease of safety deposit boxes.

4. Corporate powers

According to sec. 8, R.A. 8791, a bank or a quasi-bank is a stock corporation. It has the
general powers incident to corporations.

Note:
R.A. 8791, section 14 states that the "Securities and Exchange Commission shall not register the
articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of
authority issued by the Monetary Board, under its seal..." as a bank is under the supervision,
policy direction, authority, and examination of the BangkoSentral (Sections 4-7, RA
8791).

A stock corporation is one which has a capital stock divided into shares and is
authorized to distribute to the holders of such shares dividends or allotments of the
surplus profits. (BP 68/Corporation Code, Sec. 3)

As a stock corporation, a bank is to issue par value stocks only, which are shares with a value
fixed in the articles of incorporation. (Sec. 9, RA 8791).

Furthermore, "to maintain the quality of bank management and afford better protection to depositors
and the public in general, the Monetary Board shall prescribe, pass upon and review the qualifications
and disqualifications of individuals elected or appointed bank directors or officers and disqualify those
unfit." - FIT AND PROPER RULE (Sec. 16, RA 8791).

The corporate powers of a bank are:

a. It is a legal or juridical person, with a personality separate and apart from its
individual stockholders, with the power to sue and be sued in its corporate name.

b. It has the power of succession by its corporate name for the period stated in the
articles of incorporation. It has the capacity to have continuity of existence despite the
changes on the persons who compose it. The personality continues despite the change of
stockholders or officers.

c. To adopt by-laws not contrary to law, morals, or public policy and to amend or repeal
the same in accordance with the Corporation Code.

d. To exercise such other powers as may be essential or necessary to carry out its
purposes as stated in the articles of incorporation.

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 LIABILITIES

1. Liability for tort

A bank will be held liable for the negligence of its officers or agents when acting within
the course and scope of their employment. (PCI Bank vs. CA 350 SCRA 446, 2001).

2. Liability for fraud

A bank is liable to innocent third persons where the representation is made in the course
of its business by a bank agent acting within the general scope of his authority even
though the agent is secretly a using his authority and attempting to perpetrate a fraud
upon his principal or some other person, for his own ultimate benefit (Phil Banking
Corp. vs. CA 419 SCRA 487, 2004).

3. Liability for acts and contracts

As a corporation, obligations incurred by the bank acting thru its authorized agents are
its sole liabilities.

Illustration:
The bank is bound by the agreement entered into by its branch manager with a
client's deposit at an interest of 17% p.a. The bank impugned the interest rate; however,
it is bound by the contract made. (BPI Family Bank vs. First Metro Investment Corp, 429
SCRA 30, 2004).

4. Liabilities for crimes

As a corporation, it cannot be held liable for a crime committed by its officers since it
does not have the essential element of malice. The responsible officers would be
criminally liable, without prejudice to the civil liabilities of such banking corporation.

DILIGENCE REQUIRED OF BANKS

*The banking system has become an indispensable institution in the modern world and
plays a vital role in the economic life of every civilized society- it is important that banks
should guard against injury attributable to negligence or bad faith on its part. THE
HIGHEST DEGREE OF DILIGENCE is expected, and high standards of integrity and
performance are required of banks. (Security Bank vs. RCBC, 577 SCRA 407, 2009).

*The degree of diligence required of banks is more than that of a reasonable man or a
good father of a family. In view of the fiduciary nature of their relationship with their
depositors, banks are duty-bound to treat the accounts of their clients with the highest
degree of care. (BPI vs. Lifetime Marketing Corp., 555 SCRA 373, 2008).

*The law imposes on banks a high degree of obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of banking.
(PNB vs. Pike, 470 SCRA 328, 2005).

*The fiduciary nature of banking requires banks to assume a degree of diligence

higher than that of a good father of a family. This fiduciary relationship means that the
bank’s obligation to observe high standards of integrity and performance is deemed
written into every deposit agreement between a bank and its depositor. (Phil Banking
Corp. vs. CA, G.R. No. 127469. January 15, 2014).

*The fiduciary nature of the relationship between a bank and its depositors
means that the bank is under obligation to treat the accounts of his depositors with

61 | P a g e
meticulous care whether such account consists only of a few hundred pesos or of
millions of pesos. (Simex International, Manila vs. CA, 183 SCRA 408, 1992).

Illustrations:

1. The bank was grossly negligent when it allowed the sum of PhP220,000.00 to be
withdrawn thru falsified withdrawal slips without the depositor's authority and
knowledge. The evidence showed that Bank did not exercise the degree of diligence it
ought to have exercised in dealing with its clients - diligence higher than that of a good
father of a family. If only respondent bank exercised such diligence, no anomaly or
irregularity would have happened. (Cagungun vs. Planters Dev. Bank, 473 SCRA 259,
2005).

2. The external auditor of the company forged the signature of its officers on several
checks and deposited the same to his account using a fictitious name. The court ruled
that a bank is required to take meticulous care of the deposits of its clients, who have the
right to expect high standards of integrity and performance from it. Among its
obligations in further care thereof is knowing the signatures of its clients. (PBI vs. Casa
Montessori Internationale, 430 SCRA 261, 2004).

NATURE OF BANK FUNDS AND BANK DEPOSITS

Deposits
Deposits consists of money placed into banking institutions for
safekeeping. The account holder has the right to withdraw deposited funds, as set forth
in the terms and conditions governing the account agreement.
These funds are liabilities of the bank, because these have to be returned
to the owners on demand. These likewise become assets of the bank.

Kinds of Deposits

1. Currents Deposits
The depositors of such deposits can withdraw and deposit money
whenever they desire. Since banks have to keep the deposited amount of such accounts
in cash always they carry either no interest or very low rate of interest.
Current Deposits are also called Demand Deposits because these can be
demanded or withdrawn by the depositors at any time they want. Thus, these are highly
useful for traders and big business firms because they have to make payments and accept
payments many times in a day.
Demand deposit accounts may have joint owners. Both owners must sign
when opening the account, but only one owner must sign when closing the account.
Either owner may deposit or withdraw funds and sign checks without permission from
the other owner.
Financial institutions typically create minimum balances for demand
deposit accounts. Accounts falling below the minimum value typically are assessed a fee
each time the balance drops below the required value.

2. Fixed Deposits

Fixed Deposits are also called Time Deposits , Certificate of Deposit or

Savings Bonds since these are the deposits which are deposited for a definite period of
time, thus, it cannot be withdrawn before the expiry of the stipulated time.
These deposits generally carry a higher rate of interest because banks can
use these for a definite time without having the fear of being withdrawn.
Generally speaking, the longer the term, the better the yield of the money.

3. Savings Deposits

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 Money up to a certain limit can be deposited and withdrawn once or
twice in a week, thus, the rate of interest is very less.
These accounts are not as convenient to use as checking accounts,
however, these accounts let customers keep liquid assets while still earning a monetary
return.

Types of Deposits Accounts

1. Individual or Single Account are individually-owned accounts or accounts

held under one name: either as natural person or juridical entity
2. Joint Account
a) "And" account. This is a co-ownership account wherein the signatures
of both co-depositors are required for withdrawals.
b) "And / Or" account. Eighter one of the co-depositors may deposit and
withdraw from the account without the knowledge, consent and signature of the other.
Upon the death of one, the survivor may withdraw the entire
balance on deposit.
Joint Accounts may be deemed a survivorship agreement depending on
the intention of the parties.
Survivorship agreement is one whereby the co-depositors agree to permit
either of them to withdraw the whole deposit during their lifetime and transferring the
balance to the survivor upon the death of one of them. It is not prohibited unless its
operation or effect may be violative of the law.

Deposit Substitutes (Quasi-banking functions)

An alternative form of obtaining funds from the public, other than

deposits, through the issuance, endorsement or acceptance of debt instruments for the
borrowers own-account, for the purpose of re-lending or purchasing of receivables and
other obligations (Sec. 95, RA 7653)

Special Rules on Depositors

1. Minors. They can open bank accounts in their own right provided that:
a) they are at least 7 years of age;
b) they are able to read and write and have sufficient discretion;
c) they are not otherwise disqualified by any other incapacity; and
d) it should only be savings or time deposits (Sec. 1, P.D. 734)
 Parents may deposit for their minor children and guardians for their wards
(Sec. 1, P.D. 734)
 With respect to thrift banks, if any guardian shall give notice in writing to
any thrift bank not to make payments of deposits, dividends, or interest to the
minor of whom he is the guardian, then such payment shall be made only to
the guardian (Sec. 22, Thrift Banks Act of 1995)
2. Married Women are allowed to open bank accounts without the assistance of
their husbands (R.A. 7192)
2. Corporations. Judicial persons are capacitated to open bank accounts with
respect to corporations, the opening of an account in its behalf is in fact a requirement
even before its life commences.

STIPULATION OF INTEREST

Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to
prescribe the maximum rates of interest for loans and certain forbearances. Pursuant to
such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series
of 1982, Section 5 of which provides:

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Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:

Sec. 1303. Interest and Other Charges.

— The rate of interest, including commissions, premiums, fees and other charges, on any
loan, or forbearance of any money, goods or credits, regardless of maturity and whether
secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to
the Usury Law, as amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated. However, contrary to
the stubborn insistence of petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without the other’s consent.

It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the
one who contracts, his act has no more efficacy than if it had been done under duress or
by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modification, especially when
it affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of
any binding effect.

GRANT OF LOANS AND SECURITY REQUIREMENTS

SECTION 39. Grant and Purpose of Loans and Other Credit Accommodations. - A
bank shall grant loans and other credit accommodations only in amounts and for the
periods of time essential for the effective completion of the operations to be financed.
Such grant of loans and other credit accommodations shall be consistent with safe and
sound banking practices. (75a)

The purpose of all loans and other credit accommodations shall be stated in the
application and in the contract between the bank and the borrower. If the bank finds
that the proceeds of the loan or other credit accommodation have been employed,
without its approval, for purposes other than those agreed upon with the bank, it shall
have the right to terminate the loan or other credit accommodation and demand
immediate repayment of the obligation. (77)

SECTION 40. Requirement for Grant Of Loans or 0ther Credit Accommodations. -

Before granting a loan or other credit accommodation, a bank must ascertain that the
debtor is capable of fulfilling his commitments to the bank.

Toward this end, a bank may demand from its credit applicants a statement of their
assets and liabilities and of their income and expenditures and such information as may
be prescribed by law or by rules and regulations of the Monetary Board to enable the
bank to properly evaluate the credit application which includes the corresponding
financial statements submitted for taxation purposes to the Bureau of Internal Revenue.
Should such statements prove to be false or incorrect in any material detail, the bank
may terminate any loan or other credit accommodation granted on the basis of said
statements and shall have the right to demand immediate repayment or liquidation of the
obligation.

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In formulating rules and regulations under this Section, the Monetary Board shall
recognize the peculiar characteristics of micro financing, such as cash flow-based lending
to the basic sectors that are not covered by traditional collateral. (76a).

PENALTIES FOR VIOLATIONS

a. Monetary Penalties - Fines of one-tenth of one percent (1/10 of 1%) of the excess
over the ceiling but not to exceed Thirty Thousand Pesos (P30,000.00) a day for each
SBL violation shall be assessed on the bank to be reckoned from the date the excess
started up to the date when such excess was eliminated: Provided, That a maximum fine
of Five Hundred Pesos (P500.00) a day for each violation shall be imposed against banks
with total resources of less than P50 million at the time of granting of loan/credit
accommodation.

b. Other Sanctions
First Offense – Reprimand for the directors/officers who approved the credit availment
which resulted in the excess with a warning that subsequent violations will be subject to
more severe sanctions.

Subsequent Offenses –
1. Fine of One Thousand Pesos (P1,000.00) for directors/officers who approved the
credit availment which resulted in the excess.
2. Suspension of the bank’s branching privileges and access to BangkoSentral
rediscounting facilities until the excess is eliminated.
3. Other penalties as the Monetary Board may impose depending on the gravity of the
offense.

JURISPRUDENCE
Republic vs Security Credit and Acceptance Corp. (19 SCRA 58)
Facts: Defendant corporation managed to induce the public to open 59 643 savings
deposits accounts with an aggregate amount of P1 689 136.74 deposited which it lent out
to borrowers. However, it was not authorized by the Central Bank to operate a banking
institution.
Issue: May Security Credit and Acceptance Corp. be considered as a banking institution?
Ruling: Yes. The determining factors in deciding whether a person or an entity is a
banking institutions are engagement in the lending of funds obtained from the public
and regularity in conducting such operation. The Corporation’s actions fall squarely on
such requisites.

ASSOCIATED BANK (Now WESTMONT BANK) vs. TAN

G.R. No. 156940. December 14, 2004

FACTS:

Tan is a businessman and a regular depositor-creditor of Associated Bank. He

deposited a postdated check with the said bank in the amount of Php101,000.00. The
check was duly entered in his bank record making his balance in the amount of
PhP297,000.00. Tan was advised that the check had been cleared and so on the same
date, Tan withdrew PhP240,000.00 leaving a balance of PhP57,793.45. A day after, he
deposited PhP50,000.00 making his existing balance in the amount of PhP107,793.45.
Tan issued checks to his business partners and suppliers. However, his partners
went back to him alleging that the check he issued bounced for insufficiency of funds. In
his Complaint, Tan alleged that he had sufficient funds to pay the checks he issued.

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 The bank averred that Tan had no cause of action and it argued that it had all the
right to debit the account of Tan by reason of the dishonor of the check deposited by him
which was withdrawn by him prior to its clearing. The bank did not inform Tan that a
debit had been made on his account.

ISSUE:
Did the bank treat the account of its depositor with the highest degree of care?

RULING:
No.The manager of the bank categorically admitted that she and the employees of
the bank allowed Tan to withdraw the amount of check deposited without clearance
from the drawee bank. This act clearly disregarded banking system. The Court confirmed
the ruling of the trial court that the bank manager was negligent in handling the
checking account of respondent Tan.

PCIB vs. Court of Appeals

G.R. No. 121413 January 29, 2001

FACTS: This case is composed of three consolidated petitions involving several checks,
payable to the Bureau of Internal Revenue, but was embezzled allegedly by an organized
syndicate.
I. G. R. Nos. 121413 and 121479
On October 19, 1977, plaintiff Ford issued a Citibank check amounting to
P4,746,114.41 in favor of the Commissioner of Internal Revenue for the payment of
manufacturer’s taxes. The check was deposited with defendant IBAA (now PCIB),
subsequently cleared the the Central Bank, and paid by Citibank to IBAA. The proceeds
never reached BIR, so plaintiff was compelled to make a second payment. Defendant
refused to reimburse plaintiff, and so the latter filed a complaint. An investigation
revealed that the check was recalled by Godofredo Rivera, the general ledger accountant
of Ford, and was replaced by a manager’s check. Alleged members of a syndicate
deposited the two manager’s checks with Pacific Banking Corporation. Ford filed a third
party complaint against Rivera and PBC. The case against PBC was dismissed. The case
against Rivera was likewise dismissed because summons could not be served. The trial
court held Citibank and PCIB jointly and severally liable to Ford, but the Court of
Appeals only held PCIB liable.
II. G. R. No. 128604
Ford drew two checks in favor of the Commissioner of Internal Revenue,
amounting to P5,851,706.37 and P6,311,591.73. Both are crossed checks payable to payee’s
account only. The checks never reached BIR, so plaintiff was compelled to make second
payments. Plaintiff instituted an action for recovery against PCIB and Citibank.
On investigation of NBI, the modus operandi was discovered. Gorofredo Rivera
made the checks but instead of delivering them to BIR, passed it to Castro, who was the
manager of PCIB San Andres. Castro opened a checking account in the name of a
fictitious person “Reynaldo Reyes”. Castro deposited a worthless Bank of America check
with the same amount as that issued by Ford. While being routed to the Central Bank
for clearing, the worthless check was replaced by the genuine one from Ford.
The trial court absolved PCIB and held Citibank liable, which decision was
affirmed in toto by the Court of Appeals.

ISSUES:
(1) Whether there is contributory negligence on the part of Ford
(2) Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the
drawee bank (Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue?

HELD:

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(1) The general rule is that if the master is injured by the negligence of a third person and
by the concurring contributory negligence of his own servant or agent, the latter's
negligence is imputed to his superior and will defeat the superior's action against the
third person, assuming, of course that the contributory negligence was the proximate
cause of the injury of which complaint is made. As defined, proximate cause is that
which, in the natural and continuous sequence, unbroken by any efficient, intervening
cause produces the injury and without the result would not have occurred. It appears
that although the employees of Ford initiated the transactions attributable to an
organized syndicate, in our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could
not be characterized as the proximate cause of the injury to the parties. The mere fact
that the forgery was committed by a drawer-payor's confidential employee or agent, who
by virtue of his position had unusual facilities for perpertrating the fraud and imposing
the forged paper upon the bank, does notentitle the bank toshift the loss to the drawer-
payor, in the absence of some circumstance raising estoppel against the drawer. This rule
likewise applies to the checks fraudulently negotiated or diverted by the confidential
employees who hold them in their possession.

(2) We have to scrutinize, separately, PCIBank's share of negligence when the syndicate
achieved its ultimate agenda of stealing the proceeds of these checks.
a. G. R. Nos. 121413 and 121479.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the
checks. The neglect of PCIBank employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of
care and prudence required in the circumstances. Furthermore, it was admitted that
PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an
agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted
instructions given by the payor or its agent. It is a well-settled rule that the relationship
between the payee or holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that of principal and agent.
A bank which receives such paper for collection is the agent of the payee or holder.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a
warning that the check should be deposited only in the account of the CIR. Thus, it is
the duty of the collecting bank PCIBank to ascertain that the check be deposited in
payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make the clearing
indorsement "all prior indorsements and/or lack of indorsement guaranteed".
Lastly, banking business requires that the one who first cashes and negotiates the
check must take some precautions to learn whether or not it is genuine. And if the one
cashing the check through indifference or other circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check
from the drawee whose sole fault was that it did not discover the forgery or the defect in
the title of the person negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank, without requiring proof
as to the identity of persons presenting it, or making inquiries with regard to them,
cannot hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such cases the drawee bank has a
right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus,
one who encashed a check which had been forged or diverted and in turn received
payment thereon from the drawee, is guilty of negligence which proximately contributed
to the success of the fraud practiced on the drawee bank. The latter may recover from the
holder the money paid on the check.
b. G. R. No. 128604
In this case, there was no evidence presented confirming the conscious
participation of PCIBank in the embezzlement. As a general rule, however, a banking
corporation is liable for the wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment. A bank will be held liable for

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the negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in
which its own management employees had participated. But in this case, responsibility
for negligence does not lie on PCIBank's shoulders alone.

QUESTIONS AND ANSWERS

BAR QUESTION (1978)

1. ABC Investment Corporation is engaged in the purchase of accounts receivables,
or specifically installment papers of purchasers of cars and trucks. As a source of its
funding, the corporation sells its bonds from time to time to the public. The
proceeds of which are utilized in financing operations. On the basis of these facts,
the Legal Counsel of the Central Bank rendered an opinion to the effect that ABC
Investment Corp. is a banking institution within the purview of the General
Banking Act.
Is this correct? Give reasons for your answer.
No, the opinion of the Legal Counsel is not correct because said corporation does
not fall within the definition of a bank. A bank as defined by law is one which is engaged
in the receipt of deposits of any kind. Moreover, being a financing corporation, it has not
been considered expressly by our law as a banking institution.

2. What are the main powers of a bank?

The banking powers of accepting deposits and lending funds from deposits.

3. What is meant by “fiduciary relationship” between a bank and its depositor?

The fiduciary nature of banking requires banks to assume a degree of

diligence higher than that of a good father of a family. This fiduciary relationship
means that the bank’s obligation to observe high standards of integrity and
performance is deemed written into every deposit agreement between a bank and its
depositor. (Phil Banking Corp. vs. CA, G.R. No. 127469. January 15, 2014). The bank
is under obligation to treat the accounts of his depositors with meticulous care
whether such account consists only of a few hundred pesos or of millions of pesos.
(Simex International, Manila vs. CA, 183 SCRA 408, 1992).

4. Mr. U, a bank employee, allowed withdrawal from an account of Mr. Z by a

certain person who claimed to be Mr. Z without verifying his signature.
Consequently, the withdrawal turned out to be an unauthorized one. Mr. Z filed a
complaint against the bank for damages. However, the bank averred that Mr. Z has
no cause of action against it as the one liable should be Mr. U. Is the bank’s
contention correct?

No.A bank will be held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. (PCI Bank vs. CA 350 SCRA 446,
2001).

5. What is the relationship between the depositor and the bank with respect to the
money deposited by the former with the latter?
There is a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the creditor. The depositor lends

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the bank money and the bank agrees to pay the depositor on demand. The savings
deposit agreement between the bank and the depositor is the contract that determines
the rights and obligations of the parties.
6. When a co-depositor inquires into the deposits, does he need the written consent
of the other depositor?
No. A co-payee in a check deposited in a bank is likewise a co-depositor.
No written consent therefore of the other co-payee is needed in an inquiry of the
deposits by the said co-depositor.

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 BANGKO SENTRAL NG PILIPINAS LAW
RA 7653 (1993)

A. STATE POLICIES
1. the State shall maintain a CENTRAL MONETARY AUTHORITY
2. that shall function and operate as an INDEPENDENT and ACCOUNTABLE BODY
CORPORATE in the discharge of its mandated responsibilities CONCERNING
MONEY, BANKING AND CREDIT
3. in line with this policy, and considering its unique functions and responsibilities, the
central monetary authority established under this Act, while being a government-
owned corporation, shall enjoy FISCAL and ADMINISTRATIVE AUTONOMY (sec.
1)
B. CREATION OF THE BSP
SECTION 2. Creation of the Bangko Sentral. — There is hereby established an
independent central monetary authority, which shall be a body corporate known as
the Bangko Sentral ng Pilipinas, hereafter referred to as the Bangko Sentral.
C. BSP RESPONSIBILITIES
1. provide POLICY DIRECTIONS in the areas of MONEY, BANKING, AND CREDIT
2. have SUPERVISION OVER the OPERATIONS of BANKS
3. excercise such REGULATORY POWERS as provided in this Act and other pertinent
laws over the operations of FINANCE COMPANIES and non-bank financial
institutions performing quasi-banking functions, hereafter referred to as QUASI-
BANKS, and institutions performing similar functions (sec. 3)
BSP Primary Objective
1. MAINTAIN PRICE STABILITY conducive to a balanced and sustainable growth of
the economy
2. it shall also promote and maintain MONETARY STABILITY and the
CONVERTIBILITY of the PESO

D. THE MONETARY BOARD

The powers and function of Bangko Sentral are exercised by its Monetary Board, which
has seven members appointed by the President of The Philippines. Under the New
Central Bank Act, one of the government sector members of the Monetary Board must
also be a member of the Cabinet designated by the President.

The New Central Bank Act establishes certain qualifications for the members of the
Monetary Board and also prohibits members from holding certain positions with other
governmental agencies and private institutions that may give rise to conflicts of interest.
With the exception of the members of the Cabinet, the Governor and the other members
of the Monetary Board serve terms of six years and may only be removed for cause.

The Monetary Board meets at least once a week. The Board may be called to a meeting by
the Governor of the Bangko Sentral or by two (2) other members of the Board. Usually,
the Board meets every Thursday but on some occasions, it convenes to discuss urgent
issues.

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Powers and Functions of the Monetary Board

In the exercise of its authority, the Monetary Board shall:

1. Issue rules and regulations it considers necessary for the effective discharge of
the responsibilities and exercise of the powers vested upon the Monetary Board
and the Bangko Sentral;
2. Direct the management, operations, and administration of the Bangko Sentral,
reorganize its personnel, and issue such rules and regulations as it may deem
necessary or convenient for this purpose. The legal units of the Bangko Sentral
shall be under the exclusive supervision and control of the Monetary Board;
3. Establish a human resource management system which shall govern the selection,
hiring, appointment, transfer, promotion, or dismissal of all personnel. Such
system shall aim to establish professionalism and excellence at all levels of the
Bangko Sentral in accordance with sound principles of management.
A compensation structure, based on job evaluation studies and wage surveys
subject to the Board's approval, shall be instituted as an integral component of
the Bangko Sentral's human resource development program.
On the recommendation of the Governor, appoint, fix the remunerations and
other emoluments, and remove personnel of the Bangko Sentral, subject to
pertinent civil service laws: Provided, That the Monetary Board shall have
exclusive and final authority to promote, transfer, assign, or reassign personnel of
the Bangko Sentral and these personnel actions are deemed made in the interest
of the service and not disciplinary: Provided, further, That the Monetary Board
may delegate such authority to the Governor under such guidelines as it may
determine;
4. Adopt an annual budget for and authorize such expenditures by the Bangko
Sentral in the interest of the effective administration and operations of the
Bangko Sentral in accordance with applicable laws and regulations; and
5. Indemnify its members and other officials of the Bangko Sentral, including
personnel of the departments performing supervision and examination functions
against all costs and expenses reasonably incurred by such persons in connection
with any civil or criminal action, suit or proceedings to which he may be, or is,
made a party by reason of the performance of his functions or duties, unless he is
finally adjudged in such action or proceeding to be liable for negligence or
misconduct.

E. HOW THE BSP HANDLES BANKS IN DISTRESS?

Examination and Supervision of the BSP (sec. 25)
the BSP shall have
a) SUPERVISION OVER
b) and CONDUCT PERIODIC or SPECIAL EXAMINATIONS of
a) BANKING institutions
b) QUASI-BANKS
c) INCLUDING their SUBSIDIARIES and AFFILIATES engaged in ALLIED
ACTIVITIES
- a SUBSIDIARY means a corporation MORE THAN 50% of the VOTING STOCK of
which is owned by a bank or quasi-bank
- an AFFILIATE means a corporation the VOTING STOCK of which, to the extent of
50% OR LESS, is owned by a bank or quasi-bank or which is related or linked to such
institution or intermediary through common stockholders or such other factors as
may be determined by the Monetary Board
The department heads and the EXAMINERS of the supervising and/or examining departments are
hereby AUTHORIZED

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1. to ADMINISTER OATHS to any director, officer, or employee of any institution under
their respective supervision or subject to their examination
2. and to COMPEL the PRESENTATION of all books, documents, papers or RECORDS
necessary in their judgment to ascertain the facts relative to the true condition of any
institution as well as the books and records of persons and entities relative to or in
connection with the operations, activities or transactions of the institution under
examination, SUBJECT to the provision of existing laws protecting or safeguarding
the SECRECY or confidentiality of BANK DEPOSITS as well as INVESTMENTS of
private persons, natural or juridical, in DEBT INSTRUMENTS issued by the
Government
No injunction against BSP (SEC. 25)
NO RESTRAINING ORDER or INJUNCTION shall be issued BY the COURT
ENJOINING the BSP from EXAMINING any institution subject to supervision or
examination by the BSPB
UNLESS there is
a) CONVINCING PROOF that the action of the BSP is PLAINLY ARBITRARY
and made in BAD FAITH
b) and the petitioner or plaintiff FILES with the clerk or judge of the court in
which the action is pending a BOND executed in favor of the BSP in an
amount to be fixed by the court
- the provisions of Rule 58 of the New Rules of Court insofar as they are applicable and
not inconsistent with the provisions of this section shall govern the issuance and
dissolution of the restraining order or injunction contemplated in this section
Conservatorship (SEC. 29)
Whenever
 on the BASIS of a REPORT submitted by the appropriate SUPERVISING or
EXAMINING DEPARTMENT
 the MB finds that a BANK or a QUASI-BANK is in a STATE of
CONTINUING INABILITY or UNWILLINGNESS to MAINTAIN a
CONDITION of LIQUIDITY deemed adequate to protect the interest of
depositors and creditors

The MB may APPOINT a CONSERVATOR w/ such POWERS as the MB shall deem necessary
a) to TAKE CHARGE of the ASSETS, liabilities, and the management thereof
b) REORGANIZE the MANAGEMENT
c) COLLECT all monies and debts due said institution
d) and exercise all powers necessary to RESTORE its VIABILITY
e) the conservator shall REPORT and be RESPONSIBLE TO the MB
f) and shall have the power to OVERRULE or REVOKE the ACTIONS of the
PREVIOUS management and BOARD of directors of the bank or quasi-bank
- (qualifications) the conservator should be competent and knowledgeable in BANK
OPERATIONS and MANAGEMENT
- (period) the conservatorship shall NOT EXCEED 1 YEAR
Remuneration:

1. The conservator shall receive remuneration to be fixed by the Monetary Board in an

amount NOT to EXCEED 2/3 of the SALARY of the PRESIDENT of the institution in
one (1) year, payable in twelve (12) equal monthly payments
2. If at any time within one-year period, the conservatorship is TERMINATED

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Bank Closure (sec. 30)
whenever, upon REPORT of the head of the supervising or examining department, the MB FINDS that a
bank or quasi-bank:

1. is UNABLE to PAY its LIABILITIES

 AS THEY BECOME DUE in the ORDINARY COURSE OF BUSINESS
 provided that this shall NOT INCLUDE inability to pay caused by
EXTRAORDINARY DEMANDS induced by FINANCIAL PANIC in the
BANKING COMMUNITY
2. has INSUFFICIENT REALIZABLE ASSETS, as determined by the BangkoSentral, to
meet its liabilities or
3. CANNOT CONTINUE in BUSINESS W/O INVOLVING PROBABLE LOSSES to its
DEPOSITORS or CREDITORS or
4. has WILLFULLY VIOLATED a CEASE AND DESIST ORDER under sec. 37 that has
BECOME FINAL involving ACTS or transactions which amount to FRAUD or a
DISSIPATION of the ASSETS of the institution
1. notifies the BSP or publicly announces a BANK HOLIDAY or in ANY MANNER
SUSPENDS the PAYMENT of its DEPOSIT LIABILITIES CONTINUOUSLY for
MORE THAN 30 DAYS (added ground under Sec 53 of RA8791)
2. Conducting business in an UNSAFE or UNSOUND manner (added ground under
Sec 56 of RA8791)
The MB may SUMMARILY and W/O need for PRIOR HEARING:
- FORBID the institution from DOING BUSINESS in the Philippines
- and DESIGNATE the PDIC as RECEIVER of the banking institution (for a bank)
- or ANY PERSON of RECOGNIZED COMPETENCE in banking or finance may be
designated AS RECEIVER (for a quasi-bank)
Receivership (Sec 30)
A. DUTIES OF THE RECEIVER UPON HIS DESIGNATION:
1. the receiver shall immediately GATHER and TAKE CHARGE of all the assets and
liabilities of the institution
2. ADMINISTER the same for the BENEFIT of its CREDITORS
3. exercise the GENERAL POWERS of a RECEIVER under the Revised Rules of Court
A) SHALL NOT PAY OR COMMIT ANY ACT THAT WILL INVOLVE THE
transfer OR DISPOSITION OF any asset OF THE INSTITUTION W/ THE
exception OF administrative expenditures
B) THE RECEIVER MAY deposit OR PLACE THE FUNDS OF THE INSTITUTION
IN non-speculative investments
4. NOT LATER than 90 DAYS FROM take over -- the receiver shall DETERMINE as
soon as possible, WHETHER the INSTITUTION may be REHABILITATED or
otherwise placed in such a condition so that it may be permitted to RESUME
BUSINESS with safety to its depositors and creditors and the general public:
Any determination for the RESUMPTION of business of the institution shall
be SUBJECT to PRIOR APPROVAL of the MB

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5. if the receiver DETERMINES that the institution CANNOT be REHABILITATED or
permitted to RESUME BUSINESS in accordance with the next preceding paragraph
a) the MB shall NOTIFY IN WRITING the BOARD of directors of its findings
b) and direct the receiver to PROCEED w/ the LIQUIDATION of the institution
Liquidation
A. DUTIES OF RECEIVER DURING LIQUIDATION (SEC 30):
1. FILE EX PARTE with the proper RTC, and W/O requirement of PRIOR NOTICE or
any other action, a PETITION FOR ASSISTANCE IN THE LIQUIDATION of the
institution
a) pursuant to a LIQUIDATION PLAN ADOPTED by the PDIC for general
application to all closed banks
b) in case of QUASI-BANKS, the liquidation plan shall be adopted by the MB
c) upon acquiring jurisdiction, the COURT shall, upon MOTION BY the
RECEIVER after due notice
- ADJUDICATE DISPUTED CLAIMS against the institution
- assist the ENFORCEMENT of INDIVIDUAL LIABILITIES of the stockholders,
directors and officers
- and DECIDE on OTHER ISSUES as may be material to implement the
liquidation plan adopted
d) the RECEIVER shall PAY the COST of the PROCEEDINGS from the assets of
the institution
2. CONVERT the ASSETS of the institutions TO MONEY
a) DISPOSE of the same to CREDITORS and OTHER PARTIES, for the purpose
of paying the debts of such institution in accordance with the rules on
CONCURRENCE AND PREFERENCE OF CREDIT under the Civil Code of
the Philippines
b) in the name of the institution, and w/ the assistance of counsel, INSTITUTE
such ACTIONS as may be necessary to COLLECT and RECOVER accounts
and assets of, or DEFEND any action against, the institution
- the ASSETS of an institution under receivership or liquidation shall be DEEMED in
CUSTODIA LEGIS in the hands of the receiver and shall, FROM the MOMENT the
institution was PLACED UNDER such RECEIVERSHIP or LIQUIDATION, be
EXEMPT from any order of garnishment, levy, attachment, or EXECUTION
- the ACTIONS of the MB taken under this section or under sec. 29 of this Act shall be
FINAL AND EXECUTORY, and may NOT be RESTRAINED or SET ASIDE BY the
COURT EXCEPT on PETITION FOR CERTIORARI on the ground that the action
taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction
- the PETITION for certiorari may ONLY be FILED BY the STOCKHOLDERS OF
RECORD representing the MAJORITY of the CAPITAL STOCK W/IN 10 DAYS
FROM RECEIPT by the board of directors of the institution of the ORDER directing
receivership, liquidation or conservatorship
- the DESIGNATION of a CONSERVATOR under Section 29 of this Act or the
APPOINTMENT of a RECEIVER under this section shall be VESTED
EXCLUSIVELY w/ the MB

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– the DESIGNATION of a CONSERVATOR is NOT a PRECONDITION to the
DESIGNATION of a RECEIVER
DISTRIBUTION OF ASSETS (SEC. 31)
In case of liquidation of a bank or quasi-bank, after PAYMENT of the COST of
proceedings, including reasonable EXPENSES and fees of the RECEIVER to be allowed
by the court, the receiver shall PAY the DEBTS of such institution, under order of the
court, in accordance with the rules on CONCURRENCE AND PREFERENCE OF
CREDIT as provided in the Civil Code.
DISPOSITION OF REVENUES AND EARNINGS (SEC 32)
All revenues and earnings realized by the receiver in winding up the affairs and
administering the assets of any bank or quasi-bank within the purview of this Act shall
be used to pay the COSTS, FEES AND EXPENSES mentioned in the preceding section,
SALARIES of such PERSONNEL whose employment is rendered necessary in the
discharge of the liquidation together with other additional expenses caused thereby.
The BALANCE of revenues and earnings, after the payment of all said expenses, shall
FORM PART of the ASSETS available for PAYMENT to CREDITORS.
DISPOSITION OF BANKING FRANCHISE (SEC. 33)
The Bangko Sentral may, if public interest so requires, award to an institution,
upon such terms and conditions as the Monetary Board may approve, the banking
franchise of a bank under liquidation to operate in the area where said bank or its
branches were previously operating: Provided, That whatever proceeds may be realized
from such award shall be subject to the appropriate exclusive disposition of the
Monetary Board.
F. HOW THE BSP HANDLES EXCHANGE CRISIS?
Exchange Crisis Authority (sec. 72)
in order
a) to achieve the PRIMARY OBJECTIVE of the BangkoSentral
b) or PROTECT the INTERNATIONAL RESERVES of the BangkoSentral in the
imminence of, or DURING an EXCHANGE CRISIS, or in time of NATIONAL
EMERGENCY
c) and to give the Monetary Board and the Government time in which to take
CONSTRUCTIVE MEASURES to forestall, combat, or overcome such a crisis
or emergency
the MB w/ the CONCURRENCE of AT LEAST 5 of its MEMBERS and W/ the APPROVAL of the
PRESIDENT of the Philippines may
a) TEMPORARILY SUSPEND or RESTRICT SALES OF EXCHANGE BY the
BSP
b) and may SUBJECT ALL TRANSACTIONS in GOLD and FOREIGN
EXCHANGE TO LICENSE by the BangkoSentral,
c) and may REQUIRE that any FOREIGN EXCHANGE thereafter OBTAINED
by any PERSON RESIDING or entity OPERATING IN the PHILIPPINES be
DELIVERED TO the BSP or to any bank or agent designated by the
BangkoSentral for the purpose, AT the EFFECTIVE EXCHANGE RATE or
rates
A. AS CUSTODIAN OF COUNTRY’S INTERNATIONAL RESERVES
International Monetary Stabilization. (Sec. 64)

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 The BangkoSentral shall exercise its powers under this Act to PRESERVE the
INTERNATIONAL VALUE of the PESO and to maintain its CONVERTIBILITY into
other freely convertible currencies primarily for, although not necessarily limited to,
current payments for foreign trade and invisibles.
International Reserves. (Sec. 65)
In order to maintain the international stability and convertibility of the
Philippine peso, the BangkoSentral shall MAINTAIN INTERNATIONAL RESERVES
adequate to meet any FORESEEABLE NET DEMANDS on the BangkoSentral for
FOREIGN CURRENCIES.
COMPOSITION OF THE INTERNATIONAL RESERVES. (Sec. 66)
The international reserves of the BangkoSentral may INCLUDE but shall NOT be
LIMITED to the following assets:
(a) GOLD; and
(b) ASSETS IN FOREIGN CURRENCIES in the form of: documents and
instruments customarily employed for the international transfer of funds;
demand and time deposits in central banks, treasuries and commercial banks
abroad; foreign government securities; and foreign notes and coins.
The Monetary Board shall endeavor to hold the foreign exchange resources of the
BangkoSentral in freely convertible currencies; moreover, the Board shall give particular
consideration to the prospects of continued strength and convertibility of the currencies
in which the reserve is maintained, as well as to the anticipated demands for such
currencies. The Monetary Board shall issue regulations determining the other
qualifications which foreign exchange assets must meet in order to be included in the
international reserves of the BangkoSentral.
The BangkoSentral shall be free to convert any of the assets in its international
reserves into other assets as described in subsections (a) and (b) of this section.
B. AS CONTROLLER OF CREDIT
Guiding Principle. (Sec. 61)
The Monetary Board shall endeavor to control any expansion or contraction in
monetary aggregates which is prejudicial to the attainment or maintenance of PRICE
STABILITY.
Power to Define Terms. (Sec. 62)
For purposes of this article and of this Act, the Monetary Board shall formulate
definitions of monetary aggregates, credit and prices and shall make public such
definitions and any changes thereof.
Action When ABNORMAL MOVEMENTS OCCUR IN THE MONETARY AGGREGATES,
CREDIT, OR PRICE LEVEL. (Sec. 63)
 Whenever abnormal movements in the monetary aggregates, in credit, or in prices
endanger the stability of the Philippine economy or important sectors thereof, the
Monetary Board shall:
(a) TAKE such REMEDIAL MEASURES as are appropriate and within the powers
granted to the Monetary Board and the BangkoSentral under the provisions of
this Act; and
(b) SUBMIT to the PRESIDENT of the Philippines and the CONGRESS, and make
public, a DETAILED REPORT which shall include, as a minimum, a description
and analysis of:

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 (1) the CAUSES of the rise or fall of the monetary aggregates, of credit or of
prices;
(2) the extent to which the changes in the monetary aggregates, in credit, or
in prices have been reflected in changes in the level of domestic output,
employment, wages and economic activity in general, and the NATURE
and SIGNIFICANCE of any such changes; and
(3) the MEASURES which the Monetary Board has TAKEN and the other
monetary, fiscal or administrative measures which it RECOMMENDS to
be adopted.
 Whenever the monetary aggregates, or the level of credit, increases or decreases by
MORE THAN fifteen percent (15%), or the cost of living index increases by MORE
THAN ten percent (10%), in relation to the level existing at the end of the
corresponding month of the preceding year, or even though any of these quantitative
guidelines have not been reached when in its judgment the circumstances so warrant,
the Monetary Board shall submit the reports mentioned in this section, and shall
state therein whether, in the opinion of the Board, said changes in the monetary
aggregates, credit or cost of living represent a threat to the stability of the Philippine
economy or of important sectors thereof.
 The Monetary Board shall continue to submit periodic reports to the President of the
Philippines and to Congress until it considers that the monetary, credit or price
disturbances have disappeared or have been adequately controlled.
Guiding Principles. (Sec. 81)
 The REDISCOUNTS, DISCOUNTS, LOANS AND ADVANCES which the
BangkoSentral is authorized to EXTEND to BANKING INSTITUTIONS under the
provisions of the present article of this Act shall be used to influence the volume of
credit consistent with the objective of price stability.
EXCHANGE CRISIS PROVISION (sec. 72) (supra)
Acquisition of Inconvertible Currencies (Sec. 73)
The BangkoSentral shall avoid the acquisition and holding of currencies which are not
freely convertible, and may acquire such currencies in an amount exceeding the
minimum balance necessary to cover current demands for said currencies only when, and
to the extent that, such acquisition is considered by the Monetary Board to be in the
national interest.
Exchange Rates. (Sec. 74)
 The Monetary Board shall DETERMINE the EXCHANGE RATE POLICY of the
country.
 The Monetary Board shall determine the rates at which the BangkoSentral shall buy
and sell spot exchange, and shall establish deviation limits from the effective
exchange rate or rates as it may deem proper.
 The BangkoSentral shall not collect any additional commissions or charges of any
sort, other than actual telegraphic or cable costs incurred by it.
 The Monetary Board shall similarly determine the rates for other types of foreign
exchange transactions by the BangkoSentral, including purchases and sales of foreign
notes and coins, but the margins between the effective exchange rates and the rates
thus established may not exceed the corresponding margins for spot exchange
transactions by more than the additional costs or expenses involved in each type of
transactions.

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Operations with Foreign Entities. (Sec. 75)
 The Monetary Board may authorize the BangkoSentral to grant loans to and receive
loans from foreign banks and other foreign or international entities, both public and
private, and may engage in such other operations with these entities as are in the
national interest and are appropriate to its character as a central bank.
 The BangkoSentral may also act as agent or correspondent for such entities.
 Upon authority of the Monetary Board, the BangkoSentral may pledge any gold or
other assets which it possesses as security against loans which it receives from
foreign or international entities.
Foreign Exchange Holdings of the Banks (Sec. 76)
 In order that the BangkoSentral may at all times have foreign exchange resources
sufficient to enable it to maintain the international stability and convertibility of the
peso, or in order to promote the domestic investment of bank resources, the
Monetary Board may require the banks to sell to the BangkoSentral or to other banks
all or part of their surplus holdings of foreign exchange.
 The Monetary Board may, whenever warranted, determine the net assets and net
liabilities of banks and shall, in making such a determination, take into account the
bank's networth, outstanding liabilities, actual and contingent, or such other
financial or performance ratios as may be appropriate under the circumstances.
Requirement of Balanced Currency Position (Sec. 77)
 The Monetary Board may require the banks to maintain a balanced position between
their assets and liabilities in Philippine pesos or in any other currency or currencies
in which they operate.
 The banks shall be granted a reasonable period of time in which to adjust their
currency positions to any such requirement.
 The powers granted under this section shall be exercised only when special
circumstances make such action necessary.
Regulation of Non-spot Exchange Transactions. (Sec. 78)
In order to restrain the banks from taking speculative positions with respect to future
fluctuations in foreign exchange rates, the Monetary Board may issue such regulations
governing bank purchases and sales of non-spot exchange as it may consider necessary
for said purpose.
Other Exchange Profits and Losses. (Sec. 79)
The banks shall bear the risks of non-compliance with the terms of the foreign exchange
documents and instruments which they buy and sell, and shall also bear any other
typically commercial or banking risks, including exchange risks not assumed by the
BangkoSentral under the provisions of the preceding section.
CREDIT OPERATIONS
Guiding Principles (Sec. 81)
The REDISCOUNTS, DISCOUNTS, LOANS AND ADVANCES which the
BangkoSentral is authorized to EXTEND to BANKING INSTITUTIONS under the
provisions of the present article of this Act shall be used to influence the volume of credit
consistent with the objective of price stability.

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 JURISPRUDENCE

ABACUS REAL ESTATE DEVELOPMENT v. MANILA BANKING CORP

[G.R. No. 162270. April 06, 2005]

The appointment of a receiver operates to suspend the authority of the bank and
of its directors and officers over its property and effects, such authority being reposed in
the receiver, and in this respect, the receivership is equivalent to an injunction to restrain
the bank officers from intermeddling with the property of the bank in any way.

Facts:
Manila Banking Corporation (Manila Bank, for brevity), owns a 1,435-square
meter parcel of land located along Gil Puyat Avenue Extension, Makati City and covered
by Transfer Certificate of Title (TCT) No. 132935 of the Registry of Deeds of Makati.
Prior to 1984, the bank began constructing on said land a 14-storey building. Not long
after, however, the bank encountered financial difficulties that rendered it unable to
finish construction of the building. Central Bank of the Philippines, now Bangko
Sentralng Pilipinas, ordered the closure of Manila Bank and placed it under receivership,
with Feliciano Miranda, Jr. being initially appointed as Receiver. The legality of the
closure was contested by the bank before the proper court. Manila Bank’s then acting
president, the late Vicente G. Puyat, in a bid to save the bank’s investment, started
scouting for possible investors who could finance the completion of the building earlier
mentioned.
A group of investors, represented by Calixto Y. Laureano (hereafter referred to
as Laureano group), wrote Vicente G. Puyat offering to lease the building for ten (10)
years and to advance the cost to complete the same, with the advanced cost to be
amortized and offset against rental payments during the term of the lease. Likewise, the
letter-offer stated that in consideration of advancing the construction cost, the group
wanted to be given the “exclusive option to purchase” the building and the lot on which
it was constructed. Vicente G. Puyat accepted the Laureano group’s offer and granted it
an “exclusive option to purchase” the lot and building for One Hundred Fifty Million
Pesos (P150,000,000.00). Later, or on October 31, 1989, the building was leased to
MEQCO for a period of ten (10) years pursuant to a contract of lease bearing that date.
MEQCO subleased the property to petitioner Abacus Real Estate Development Center,
Inc. (Abacus, for short), a corporation formed by the Laureano group for the purpose,
under identical provisions as that of the October 31, 1989 lease contract between Manila
Bank and MEQCO.

Issue:
Whether or not Vicente Puyat, acting as president of Manila Bank, has the power
to sell the disputed properties.

Held:
There can be no quibbling that respondent Manila Bank was under receivership,
pursuant to Central Bank’s MB Resolution No. 505 dated May 22, 1987, at the time the
late Vicente G. Puyat granted the “exclusive option to purchase” to the Laureano group
of investors. Owing to this defining reality, the appellate court was correct in declaring
that Vicente G. Puyat was without authority to grant the exclusive option to purchase
the lot and building in question. The invocation by the appellate court of the following
pronouncement inVillanueva vs. Court of Appeals was apropos, to say the least the
assets of the bank pass beyond its control into the possession and control of the receiver
whose duty it is to administer the assets for the benefit of the creditors of the bank.
Thus, the appointment of a receiver operates to suspend the authority of the bank and of
its directors and officers over its property and effects, such authority being reposed in
the receiver, and in this respect, the receivership is equivalent to an injunction to restrain
the bank officers from intermeddling with the property of the bank in any way. With

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respondent bank having been already placed under receivership, its officers, inclusive of
its acting president, Vicente G. Puyat, were no longer authorized to transact business in
connection with the bank’s assets and property. Clearly then, the “exclusive option to
purchase” granted by Vicente G. Puyat was and still is unenforceable against Manila
Bank.
Concededly, a contract unenforceable for lack of authority by one of the parties
may be ratified by the person in whose name the contract was executed. However, even
assuming, in gratia argument, that Atty. Renan Santos, Manila Bank’s receiver, approved
the “exclusive option to purchase” granted by Vicente G. Puyat, the same would still be
of no force and effect.

MIRANDA v. COURT OF APPEALS

[G.R. No. 169334, September 8, 2006]

Solidary liability cannot attach to the BSP, in its capacity as government

regulator of banks, and the PDIC as statutory receiver under R.A. No. 7653, because they
are the principal government agencies mandated by law to determine the financial
viability of banks and quasi-banks, and facilitate receivership and liquidation of closed
financial institutions, upon a factual determination of the latter’s insolvency.

Facts:
Leticia G. Miranda (Miranda) was a depositor of Prime Savings Bank. She
withdrew substantial amounts from her account, but instead of cash she opted to be
issued a crossed cashier’s check in the sum of P2,500,000 and cashier’s check in the
amount of P3,002,000. Petitioner deposited the two checks into her account in another
bank on the same day, however, Bangko Sentralng Pilipinas (BSP) suspended the
clearing privileges of Prime Savings Bank effective 2:00 p.m. of June 3, 1999. The two
checks of petitioner were returned to her unpaid. Subsequently, Prime Savings Bank
declared a bank holiday. The BSP placed Prime Savings Bank under the receivership of
the Philippine Deposit Insurance Corporation (PDIC).
Petitioner filed a civil action for sum of money in the Regional Trial Court to
recover the funds from her unpaid checks against Prime Savings Bank, PDIC and the BSP.
The court rendered judgment against defendants and ordered them to pay the plaintiff.
On appeal, the Court of Appeals reversed the trial court and ruled in favor of the PDIC
and BSP, dismissing the case against them, without prejudice to the right of petitioner to
file her claim before the court designated to adjudicate on claims against Prime Savings
Bank. Petitioner’s motion for reconsideration was denied. Hence, this petition.
Issue:
Whether or not the PDIC are solidarily liable to pay the petitioner.
Held:
Only Prime Savings Bank that is liable to pay for the amount of the two cashier’s
checks. Solidary liability cannot attach to the BSP, in its capacity as government
regulator of banks, and the PDIC as statutory receiver under R.A. No. 7653, because they
are the principal government agencies mandated by law to determine the financial
viability of banks and quasi-banks, and facilitate receivership and liquidation of closed
financial institutions, upon a factual determination of the latter’s insolvency. However,
in a situation involving the element of fraud, where a cashier’s check is purchased from a
bank at a time when it is insolvent, as its officers know or are bound to know by the
exercise of reasonable diligence, it has been held that the purchase is entitled to a
preference in the assets of the bank on its liquidation before the check is paid. Hence, the
CA decision is affirmed with modification that the claim of petitioner Miranda is entitled
to preference in the assets of PSB in its liquidation.

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 SUAN V. GONZALES
[A.C. No. 6377 March 12, 2007]

The filing of the intra-corporate case before the RTC to compel the bank to
disclose its stockholdings, to allow them the inspection of corporate books and records,
and the payment of damages does not amount to forum-shopping notwithstanding the
BSP’s investigation on the bank’s unsafe and unsound business practices

Facts:
Gonzales filed a case for Mandamus, Computation of Interests, Enforcement of
Inspection, Dividend and Appraisal Rights, Damages and Attorney’s Fees against the
Rural Green Bank of Caraga, Inc. and the members of its Board of Directors before the
Regional Trial Court (RTC) of Butuan City. The petition prayed for, inter alia, that a
temporary restraining order be issued enjoining the conduct of the annual stockholders’
meeting and the holding of the election of the Board of Directors. The trial court issued a
temporary restraining order (TRO) conditioned upon respondent’s posting of a bond.
Thereafter, Gonzales submitted a certification by Stronghold Insurance
Company, Incorporated (SICI) together with a Certification issued by then Court
Administrator, now Associate Justice, Presbitero J. Velasco, Jr. that, according to the
Clerk of Court of the Municipal Trial Court in Cities (MTCC) of Butuan City, SICI has
no pending obligation and/or liability to the government insofar as confiscated bonds in
civil and criminal cases are concerned.
Suan also claimed that in the complaint filed by respondent, together with
Eduardo, Purisima, Ruben, and Manuel, all surnamed Tan, before
the BangkoSentralngPilipinas (BSP) against Ismael E. Andaya and the members of the
Board of Directors of the Rural Green Bank of Caraga, Inc. for alleged gross violation of
the principles of good corporate governance, they represented themselves as the bank’s
minority stockholders with a total holdings amounting to more or less P5 million while
the controlling stockholders own approximately 80% of the authorized capital stock.
He also claimed that there was forum shopping as the RTC has jurisdiction over the case.

Issue:
Whether or not there was forum shopping in filing the complaint.

Held:
The filing of the intra-corporate case before the RTC does not amount to forum-
shopping. It is a formal demand of respondent’s legal rights in a court of justice in the
manner prescribed by the court or by the law with respect to the controversy involved.
The relief sought in the case is primarily to compel the bank to disclose its
stockholdings, to allow them the inspection of corporate books and records, and the
payment of damages. It was also prayed that a TRO be issued to enjoin the holding of the
annual stockholder’s meeting and the election of the members of the Board, which, only
courts of justice can issue.
On the other hand, the complaint filed with the BangkoSentralngPilipinas was an
invocation of the BSP’s supervisory powers over banking operations which does not
amount to a judicial proceeding. It brought to the attention of the BSP the alleged
questionable actions of the bank’s Board of Directors in violation of the principles of
good corporate governance. It prayed for the conduct of an investigation over the alleged
unsafe and unsound business practices of the bank and to make necessary corrective
measures to prevent the collapse of the bank.

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 QUESTIONS AND ANSWERS
Q1. What are the primary objectives of BSP?
A1:
1.1. To maintain price stability conducive to a balanced and sustainable growth of
the economy;
1.2. To promote and maintain monetary stability and the convertibility of the peso.

Q2. Can the bank still grant new loans and accept new deposits, while under
receivership?
A2. No. During the receivership, the assets and properties of the corporation are
being gathered for conversion into cash in preparation for distribution to creditors.
Granting new loans and accepting new deposits would constitutes doing business for
the bank in the ordinary course of business which is contrary to the purpose and nature
of receivership proceeding.

Q3. Where will the claims against the insolvent bank are filed?
A3. Where liquidation is undertaken with judicial intervention, all claims against
the insolvent bank should be filed in the liquidation proceeding. It is not necessary that a
claim be initially disputed in a court or agency before it is filed with the liquidation court
(Ong v. CA, GR. NO. 112830, Feb. 1, 1996).

Q4. Can the bank file its claim against another person/ entity before the liquidation
court?
A4. No. The exclusive jurisdiction of the liquidation court pertains only to the
adjudication of claims against the bank. It does not cover the reverse situation where it is
which files a claim against another person or legal entity (Manalo v. Ca, GR. NO. 141297,
Oct. 8, 2001).

Q5. Can the president or officers of the bank, placed under receivership authorize to
transact business in connection with the bank’s assets and property?
A5. No. The appointment of a receiver operates to suspend the authority of the
bank and its officers over the bank assets and properties, such authority being reposed in
the receiver (Abacus Real Estate Center, Inc. v. Manila Banking Corp., GR. NO. 162270,
APRIL 6, 2005).

Q6. Is the bank still obligated to pay the time deposits upon maturity despite the fact
that its operation was suspended by the Central Bank?
A6. The suspension of the operations of a bank cannot excuse non-compliance
with the obligation to remit the time deposits of depositors which matured before the
bank’s closure (Overseas Bank of Manila v. CA, GR. NO. 45886, APRIL 19, 1989).

Q7. What action will you institute to question the Monetary Board’s order?
A7. The order of the monetary board may be questioned on a petition for
certiorari on the ground that the action taken was in excess of jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction. The petition for certiorari
may only be filed by the stockholders of record representing the majority of the capital
stock within ten (10) days from receipt by the board of directors of the institution of the
order directing; receivership, liquidation or conservatorship (Section 30, R.A. NO. 7653).

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 LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405)

1.PURPOSES

RA 1405 has 2 allied purposes:

1. To discourage private hoarding; and
2. To encourage people to deposit their money in banking institutions so that it may
be utilized by way of authorized loans and thereby assist in economic
development.
Owing to this piece of litigation, the confidentiality of bank deposits remains to
be a basic state policy in the Philippines. Section 2 of the law institutionalized
this policy by characterizing as absolutely confidential in general all deposits of
whatever nature with banks and other financial institution in the country.

2. COVERAGE

RA 1405 covers all deposits of whatever nature with banks or banking

institutions in the Philippines and investments in government bonds are absolutely
confidential in nature and may not be examined, inquired or looked into by any person,
government official, bureau or office. (Section 2, RA 1405)

What is Deposit?
- Deposit refers to money or funds placed with a bank that can be withdrawn
on the depositor’s order or demand, such as deposit accounts in the form of
savings, current and time deposits.
- Deposits are characterized as being in the nature of a simple loan. The placing
of deposits in a bank creates a creditor-debtor relationship between the
depositor and the bank. As such, the bank, being the debtor, has the
obligation to pay a certain sum of money to the depositor, being the creditor.

What are investments in Government Bond?

- Refer to investments in bonds issued by Government of the Philippines, its
political subdivisions and its instrumentalities.
- Government bonds are debt securities which are unconditional obligations of
the state and backed by its full taxing power.
- Examples are treasury bills notes, retail treasury bonds and other free bonds

3. PROHIBITED ACTS AND PERSONS LIABLE

(i) Any person or government official who, or any government bureau or office
that, examines, inquires or looks into a bank deposit or government bond investment in
any of the instances not allowed in Section 2;
(ii) Any official or employee of a banking institution who makes a disclosure
concerning bank deposits to another in any instance not allowed by law (Sec. 3); and
(iii) Any person who commits a violation of any of the provisions of the law.
(Sec.5).

Under the General Banking Law, Bank directors, officers, employees or agents are
prohibited from disclosing to any unauthorized person, without order of a competent
court, any information relative to funds or properties belonging to private individuals,
corporations, or any other entity in the custody of the bank. (Sec. 55(b) RA 8791)

Thrift Banks Act and the Rural Bank Act likewise prohibit any bank officer,
employee or agent from disclosing any information on such funds or properties. (Sec 21
(a)(2), RA 7906 and Sec 26 (a)(2), RA 7353)

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EXCEPTIONS:
As a rule, all deposits of whatever nature in banks or banking institutions
in the Philippines and investments in government bonds are absolutely confidential in
nature. (Sec. 2, RA 1405)

I. Under the Law on Secrecy of Bank Deposits:

Section 2 of RA 1405, provides that bank deposits and government bond
investments may be examined inquired and looked into in the following
instances:
1) Upon written permission or consent in writing by the depositor;
For consent to be valid, it should be made knowingly, voluntarily and with
sufficient awareness of the relevant circumstances and likely consequences/
2) In cases of impeachment of the President, Vice President, Members of the
Supreme Court, Members of the Constitutional Commissions and
Ombudsman for the culpable violation of the Constitution, treason, bribery,
graft and corruption, other high crimes of betrayal of public trust. (Art. XI,
Sec. 2, Philippines Constitution)
3) Upon order of a competent court in cases of bribery or dereliction of duty of
public officials.
4) In cases where the money deposited or invested is the subject matter of
litigation.
The money deposited should be the very thing in dispute. (BSB Group, INC.
vs Go)

II. OTHER LAWS PROMOTING SECRECY OF BANK DEPOSITS POLICY

A. Under the Foreign Currency Deposit Act (Rep. Act 6426)

1) Except upon written permission by the depositor.
Foreign Currency Deposit Act are considered are hereby declared as and
considered of an absolutely confidential nature, and in no instance shall
foreign currency deposits be examined, inquired or looked into by any
person, government officials, bureau or office, whether judicial or
administrative, or any other entity whether public or private. (Sec. 8, RA
6426, amended by PD 1034, 1035 and 1246);

2) Foreign Currency Deposit Act accounts are exempt from attachment,

garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever. (Intengan vs CA, 377
SCRA 63)

B. ANTI-GRAFT AND CORRUPT PRACTICES ACT

1) Bank deposits of a public officials, his spouse and unmarried children may be
taken into consideration in the enforcement of Sec. 8 of the Anti-Graft and Corrupt
Practices Act.
 Sec. 8. Dismissal due to unexplained wealth.
… properties in the name of the spouse and unmarried children of such public
official may be taken into consideration, when their acquisition through
legitimate means cannot be satisfactorily shown.. (PNB vs Gancayco, 15
SCRA 91)
2) On unexplained wealth, before an in-camera inspection may be allowed of
bank deposits, there must be a pending case before a court of competent jurisdiction, the
account must be clearly identified, the bank personnel and the account holder must be
notified to be present during the inspection, and such inspection may cover only the
account in the pending case. (Marquez vs Desierto)

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C. EXCEPTIONS UNDER OTHER LAWS

Bank deposits and investments may be examined, inquired or looked into

as provided for under other laws in the following instances:
1) The ombudsman has the power to issue subpoena and subpoena ducestecum,
take testimony in any investigation or inquiry as well as examine and access bank
accounts and records,
2) The Philippine Deposit Insurance Commission and The BangkoSentral may
inquire into bank deposits where there is a finding of unsafe or unsound banking
practices;
3) Directors, Officers, Stockholders, and related interests who contract a loan or any
form of financial accommodation with their bank or related bank are required to
execute a written waiver of Secrecy of Deposits pursuant to the New Central
Bank Act.

GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS

The Secrecy of Bank Deposit Account does not prohibit attachment or

garnishment of bank accounts.
a) What is garnishment?
1. A court order directing that money or property of third party (usually wages
paid by an employer) be seized to satisfy a debt owned by a debtor to a
creditor.
2. A legal procedure by which a creditor can collect what a debtor owes by
reaching the debtor’s property when it is in the hands of someone other than
the debtor.
Garnishment without prior notice and a prior hearing violates the
fundamental principles of due process.
b) Garnishment vs Attachment
Garnishment is the process of seizing of property of the debtor that is in the
possession of a third party while attachment is the process of seizing property of
the debtor that is in the possession of the debtor.
c) Cases of garnishment of deposits, including foreign deposits.

PENALTIES FOR VIOLATION

SECTION 5. Any violation of this law will subject offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty thousand pesos
or both, in the discretion of the court.

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 JURISPRUDENCE

Ejercito vs. Sandiganbayan

Facts:
Joseph Victor G. Ejercito is the owner of Trust Account No. 858 which was
originally opened at Urban Bank but which is now maintained at Export and Industry
Bank, which is the purchaser and owner now of the former Urban Bank and Urbancorp
Investment, Inc. He is also the owner of Savings Account No. 0116-17345-9 which was
originally opened at Urban Bank
Estrada was subsequently charged with Plunder. The Sandiganbayan filed a
Request for Issuance of Subpoena DucesTecum for the issuance of a subpoena directing
the President of Export and Industry Bank (EIB, formerly Urban Bank) or his/her
authorized representative to produce various document related to the investigation.

Issue:
Whether or not a Trust Account is covered by the term “deposit” as used in R.A. 1405

Held:
YES.The Trust Account no. 858 is covered by the term “deposit”. The Trust
Agreement between petitioner and Urban Bank provides that the trust account covers
"deposit, placement or investment of funds" by Urban Bank for and in behalf of
petitioner.
The money deposited under Trust Account No. 858, was, therefore, intended not
merely to remain with the bank but to be invested by it elsewhere.
To hold that this type of account is not protected by R.A. 1405 would encourage
private hoarding of funds that could otherwise be invested by banks in other ventures,
contrary to the policy behind the law. Section 2 of the same law in fact even more clearly
shows that the term "deposits" as what the phrase “of whatever nature” proscribes
pertain not only to money which is deposited but also to those which are invested.
Clearly, therefore, RA 1405 is broad enough to cover Trust Account no. 858.

Intengan v. CA 377 SCRA 63, 2002

Facts:
Citibank filed a complaint for violation of the Corporation Code against 2 of its
officers. The complaint was attached with the affidavit of Vic Lim, VP of Citibank, who
was then instructed by the higher management of the bank to investigate the
anomalous/highly irregular activities of the said officers. As evidence, Lim annexed bank
records purporting to establish the deception practiced by the officers. Some of the
documents pertained to the dollar deposits of petitioners. As an incident to the
foregoing, petitioners filed respective motions for the exclusion and physical withdrawal
of their bank records that were attached to Lim’s affidavit. The filing of Information
against private respondents was recommended for alleged violation of Republic Act No.
1405. Private respondents appealed before the DOJ which ruled in their favor. Resort to
the Court, referred the matter to the CA which then held that the disclosure was proper
and falls under the exception under R.A. No. 1405.

Issue:
Whether or not the disclosure falls under the exception under R.A. No. 1405.

Ruling: NO.
The accounts in question are U.S. dollar deposits; consequently, the applicable
law is not Republic Act No. 1405 but Republic Act (RA) No. 6426, known as the
“Foreign Currency Deposit Act of the Philippines.” Thus, under R.A. No. 6426 there is
only a single exception to the secrecy of foreign currency deposits, that is, disclosure is
allowed only upon the written permission of the depositor. The violation of the secrecy

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of foreign deposit is punishable as an act malumprohibitum. Violation of Foreign Currency
Deposit Act prescribes in eight (8) years, and the filling of the complaint or information
of the alleged violation of the violation of the Secretary of Bank Deposit Act does not toll
the running of the prescriptive period.

SALVACION VS. CENTRAL BANK

G.R. No. 94723 August 21, 1997

FACTS:

Greg Bartelli, an American tourist, was arrested for committing four counts of
rape and serious illegal detention against Karen Salvacion. Police recovered from him
several dollar checks and a dollar account in the China Banking Corp. He was, however,
able to escape from prison. In a civil case filed against him, the trial court awarded
Salvacion moral, exemplary and attorney’s fees amounting to almost P1,000,000.00.
Salvacion tried to execute the judgment on the dollar deposit of Bartelli with the
China Banking Corp. but the latter refused arguing that Section 11 of Central Bank
Circular No. 960 exempts foreign currency deposits from attachment, garnishment, or
any other order or process of any court, legislative body, government agency or any
administrative body whatsoever. Salvacion therefore filed this action for declaratory
relief in the Supreme Court.

ISSUE:
Should Section 113 of Central Bank Circular No. 960 and Section 8 of Republic
Act No. 6426, as amended by PD 1246, otherwise known as the Foreign Currency
Deposit Act be made applicable to a foreign transient?

HELD:
NO. The provisions of Section 113 of Central Bank Circular No. 960 and
PD No. 1246, insofar as it amends Section 8 of Republic Act No. 6426, are hereby
held to be INAPPLICABLE to this case because of its peculiar circumstances.
Respondents are hereby required to comply with the writ of execution issued in
the civil case and to release to petitioners the dollar deposit of Bartelli in such
amount as would satisfy the judgment.

PHILIPPINE NATIONAL BANK vs. EMILIO A. GANCAYCO

G.R. No. L-18343, 30 September 1965
FACTS:
PNB was required to produce the records of the bank deposits of Jimenez who w
as then under investigation for unexplained wealth. In declining to reveal its records, the
plaintiff bank invoked Republic Act No. 1405 or the Law on Secrecy of Bank Deposits wi
th the following exceptions:

1) Upon written permission of the depositor;

2) In cases of impeachment;
3) Upon order of a competent court in cases of bribery or dereliction of duty of p
ublic officials;
4) In cases where the money deposited is the subject matter of the litigation.
ISSUE:
Whether or not a bank can be compelled to disclose the records of accounts of a d
epositor who is under investigation for unexplained wealth.

RULING:
Yes. Cases of unexplained wealth are similar to cases of bribery or dereliction of d
uty and no reason is seen why these two classes of cases cannot be excepted from the rul
e making bank deposits confidential. The policy as to one cannot be different from the po

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licy as to the other. This policy express the motion that a public office is a public trust an
d any person who enters upon its discharge does so with the full knowledge that his life,
so far as relevant to his duty, is open to public scrutiny.

QUESTIONS AND ANSWERS

1. A bought some goods from a department store and paid with his personal check. The
check was dishonored. On the assumption that the department store did not know
who A was, the store manager inquired from the check’s drawee bank the name of the
dishonored check. The drawee bank refused to disclose the name of the drawer
invoking the Secrecy of Bank Deposits Law. Is the bank correct?

ANSWER: In this case, the bank is not justified in not divulging the name of the
drawer to the store manager. The store manager is merely inquiring as to the name of the
drawer of the check. To divulge the same would not in any way amount to disclosure of
any. Also, the inquiry is not an investigation of any balance in favor of the drawer.

2. M, a newspaper columnist, while making a deposit in a bank, overheard a bank teller

informing a co-employee that G, a well-known public official, has just a few hundred
pesos in G’s bank account and that her check will probably bounce. M wrote about
this information in his newspaper column. G filed a complaint against M for
unlawfully disclosing information about her bank account. Will it prosper?

ANSWER: The suit will not prosper. The Law on Secrecy of Bank Deposits does
not penalize the mere receipt of information about a bank account. M, having merely
overheard the information on G’s account and not having examined, inquired or looked
into the said account cannot be penalized under Sec. 2 of the Bank Secrecy Law. Neither
could he be penalized under Sec. 3 of the Bank Secrecy Law since Sec. 3 refers to
disclosures made by officials or employees of banking institutions.

3. Shirlene bought P500,00 worth of Pabahay bonds issued by the Home Development
Mutual Fund, a government agency, through ABC bank. Afterwards, she placed the
bonds in a safety deposit box she rented from ABC bank. Ella one of the bank’s safety
deposit attendants, saw what shirlene placed inside her box, noting that they were in
her name. During lunch, she told her co-attendants what she saw and wondered aloud
how government employee like shirlene could have money to buy the bonds. Could
Shirlene file a complaint against Ella for violation of RA 1405?

ANSWER: Yes. Shirlene could. The disclosure by Ella to her co-attendants of the
existence, and the deposit in the safety box, of the bonds is a prohibited act under RA
1405. A deposit in a safety deposit act is also protected by the said law.

4. What does the law prohibits?

ANSWER:
a) The examination and inquiry or looking into all deposits of whatever nature
with the banks or banking institutions in the Philippines including the
investments in bonds issued by the Government or its political subdivisions
and instrumentalities by any person, government official, bureau; and
b) The disclosure by any official or employee of nay banking institution to any
unauthorized person of any information concerning said deposits.
5. What disclosures or inquiries into deposits are not prohibited?
ANSWER:
a) Upon written permission of the depositor;
b) In cases of impeachment;
c) Upon order of a competent court in cases or bribery or dereliction of duty of
public officials;

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 d) In cases where the money deposited or invested is the subject matter or
litigation;
e) Upon the order of the court or subpoena issued by the Ombudsman in cases
of unexplained wealth. This is subject to the following requisites:
i. Only an in-camera inspection is allowed;
ii. There must be a pending case before a court of competent jurisdiction;
iii. Account is clearly identified;
iv. Examination is limited to account subject of the court case; and
v. Bank personnel and the account holder must be notified to be present
during the inspection.
f) Upon the order of the Commissioner of Internal Revenue in respect of the
bank deposits of a decedent for the purpose of determining such decedent’s
gross estate;
g) Upon the order of the Commissioner of Internal Revenue when a taxpayer
files an application to compromise his tax liability by reason of financial
incapacity;
h) Upon examination made in the course of a special or general audit of a bank
as authorized by the Monetary Board after being satisfied that there is
reasonable ground to believe that a bank fraud or irregularity is being
committed and it has become necessary to look into the deposit to establish
the same;
i) Upon examination of a bank’s independent auditor, the result of which are for
the exclusive use of the bank;
j) In case of suspicious transaction under the Anti-Money Laundering Law;
k) Under the Anti-Money Laundering Law where banks are required to report
to Anti-Money Laundering Council any transaction in cash or other
equivalent monetary instrument in excess of P500,000.00 in any one day;
l) Also under Anti-Money Laundering Law, the Anti-Money Laundering
Council may inquire into a deposit or investment maintained with any
financial institution upon order of a competent court, in cases of violation of
the Act, when there is a probable cause that the deposit or investment is in
any way related to an unlawful activity as defined in the Act or a money
laundering offense under the Act;
m) When a director, officer, stockholder and related interest (DOSRI) obtains a
loan from his bank or its subsidiaries, or with related controlling interests of
more than 5% of the capital, or surplus of the bank, it shall constitute a
waiver of secrecy nature in all banks in the Philippines; and
n) Under the Unclaimed Balances Law;
o) The examination of a bank account under Section 10, Rule 57 in relation to
the examination of a party whose property is attached and persons indebted
to a defendant or controlling his property.

5) Who are the primarily liable for violations of the law?

ANSWER:The persons primarily liable for a violation of the law would be a bank
employee or officer and the person, government officer, agency or office looking into the
deposit when not authorized by any of the exceptions to the law.

Note: Investigations by the Monetary Board and the Bureau of Internal Revenue
are confidential in nature. Thus, any disclosure in violation of the confidentiality will
create liability.

6) Will the garnishment of a bank deposit violate the law?

ANSWER:No, the garnishment of a bank deposit will not violate the law. If the
existence of the deposit is disclosed, the same is considered as purely incidental to the
execution process.
What is to be disclosed only is the existence of the deposit, particularly whether
or not it is sufficient to satisfy the garnishment. Hence, a disclosure of the balance may
constitute a violation of the law.

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7) In a case where the money deposited or invested is the subject matter of the
litigation, could an inquiry into the whereabouts of the amount extend to the
deposits held in the name of persons other than the one responsible?
ANSWER: Even in cases not involving prosecution under the Anti-Graft and
Practices Act, an inquiry into the whereabouts of the amount converted necessarily
extends to whatever in concealed, held or recorded in the name of persons other than the
responsible inasmuch as the case is aimed at recovering the amount converted.
8) Are foreign currency deposits covered by the law?
ANSWERS: While the law does not cover foreign currency deposits, they
however are absolutely confidential and cannot be disclosed pursuant to RA 6426,
otherwise known as the Foreign Currency Deposit Act, the only exception to disclosure
being upon the written consent of the depositor.
An additional exemption has been provided by the Anti-Money Laundering Law
when it has been established that there is probable cause that the deposits involved are
in any way related to the offense of money laundering.
9) Will an unlawful examination of a bank account render the information obtained
inadmissible?
ANSWER: There is nothing in the law that provides that an unlawful
examination shall render the evidence obtained therefrom to be inadmissible.
10) What is the penalty for a violation of the law?
ANSWER: Upon conviction, a violator may be sentenced to imprisonment of not
more than 5 years or a fine of not more than 200,000.00, or both at the discretion of the
court.

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 PHILIPPINE DEPOSIT INSURANCE CORPORATION
(PDIC)
RA No. 3591, as amended

Objective:
To provide permanent and continuing deposit insurance coverage for the
depositing public to help promote public confidence and stability in the economy. It
ensures prompt payment of insured deposit, exercises complementary supervision of
banks, adopts responsive resolution.
Basic Policy (Section 2)
1. Insures the deposits of all banks which are entitled to the benefits of insurance;
2. Promote and safeguard the interest of the depositing public by providing
insurance coverage on all insured deposits and helping maintain a sound and
stable banking system;
3. Strengthen the mandatory deposit insurance coverage system to generate,
preserve, maintain faith and confidence in the country’s banking system;
4. Protect it from illegal schemes and machinations.
Concept of Insured deposit (Section 5)
>it covers only the amount due to any depositor for deposits in an insured bank, net of
any obligation to the insured bank as of date of closure, this does not exceed Five
Hundred Thousand Pesos(500,000.00).
>in determining the amount due to any depositor, it shall be added together all deposits
in the bank maintained in the same right and capacity for his or her benefit.
>a joint account regardless of the conjunction “and”, “or”, “and/or”, it shall be insured
separately from any individually owned deposit account

Provided:

1. If the account is held jointly by two or more natural persons or by two or more juridical
persons, the maximum insured deposit shall be divided equally among them, unless there
is another written sharing scheme;
2. If the account is held by a juridical person jointly with one or more natural persons,
the maximum insured deposit shall be presumed to belong entirely to such juridical
person;
3. The aggregate of interest of each co-owner over several joint accounts, whether owned
by the same or different combinations of individuals be subject to the maximum insured
deposit of Five Hundred Thousand Pesos (500,000.00);

Functions of PDIC:

1. Deposit Insurer
2. Co-regulator of banks
3. Receiver and liquidation of closed banks methods, and applies efficient , management
of receivership and liquidation functions
Types of deposit insured by PDIC:
1. deposits of all commercial banks
2. savings and mortgage banks
3. Rural banks
4. Private development banks
5. Cooperative banks
6. Savings and loan associations

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 7. Branches and agencies in the Philippines of foreign banks
8. All other corporations authorized to perform banking functions in the
Philippines
9. Foreign currency deposits (RA No. 6426)
PDIC Insurance coverage:
 Deposit insurance coverage is not determined on a per-account basis
 The type of account, whether checking, savings, time or other form of
deposit, has no bearing on the amount of insurance coverage.
 Deposits in different banking institutions are insured separately. But if
a bank has one or more branches, the main office and all branch
officers are considered as one bank.
Risk covered by PDIC:
1. Only the risk of a bank closure ordered by the Monetary Board
2. Not due to theft, fire, closure by reason of strike or existence of public
disorder, revolution or civil war
 The insurance premium is paid by the banks, not by the depositors.
The bank is assessed one-fifth (1/5) of one percent (1%) per annum of
the assessment base of the bank.
The list of priorities after payment of the maximum amount of insured deposit:
1. government taxes
2. Labor claims
3. Secured credits
4. Trust funds
 Funds held by insured bank in a fiduciary capacity and
includes without being limited to, funds held as trustee,
executor, administrator, guardian or agent (Section 5).
EXTENT OF LIABILITY
 The extent of the PDIC’s liability to a bank depositor is the amount due to
any depositor for deposits to the insured bank net of any obligation of the
depositor to the insured bank as of the date of closure but not to exceed Five
Hundred Thousand Pesos (500,000.00) per depositor.

DETERMINATIONS OF INSURED DEPOSITS

 PDIC shall commence the determination of insured deposits due the

depositors of a closed bank upon its actual takeover of the closed bank. PDIC
shall give notice to the depositors of the closed bank of the insured deposits
due them of whatever means deemed appropriate by the Board of Directors.
PDIC shall publish the notice once a week for atleast three (3) consecutive
weeks in a newspaper of general circulation as when appropriate, in a
newspaper circulated in the community or communities where the closed
bank or its branches are located (Sec. 16 R.A. No. 3591, as amended).
CALCULATION OF LIABILITY
 A. Per depositor, per capacity rule-capacity of the bank types of deposits
1. Demand-current accounts
2. Savings- saving accounts
3. Time deposits- time to mature

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 If the depositor has all three types of accounts with the same bank, he can
only recover up to the amount of Five Hundred Thousand Pesos. He is
considered as one depositor.

 B. joint accounts
A joint account regardless of whether the conjunction “and”, “or”, “and/or”
is used shall be insured separately from any individually-owned deposit
account. Provided that:
1. If the account is held jointly by two or more natural juridical
persons or entities, the maximum insured deposit shall be divided into as
many equal shares as there are individuals, juridical persons or entities,
unless a different sharing is stipulated in the document of deposit;
2. If the account is held by a juridical person or entity with one or
more natural persons, the maximum insured shall be presumed to belong
entirely to such juridical person or entity.

 C. Mode of payment

1. by cash; or
2. by making available to each depositor a transferred deposit in another
insured bank in an amount equal to insured deposit of such depositor (Sec. 14
R.A. 3591, as amended).
PDIC, in its discretion, may require proof of claims to be filed before
paying the insured deposits and that in any case where PDIC is not satisfied as to the
viability of a claim for an insured deposit, it may require final determination of a court of
competent jurisdiction before paying such claim (Sec. 14 R. A. 3591, as amended).
 D. Effect of payment of insured deposit
1. PDIC is discharged from any further liability to the depositor;
2. PDIC is subrogated to all the rights of the depositor against the closed bank
to the extent of such payment.

 E. Payments of insured deposits as preferred credit under article 2244 of the

Civil Code:
All payments by PDIC of insured deposits in closed banks partake of the
nature of public funds, and as such, must be considered a preferred credit
similar to taxes due to the National Government in the order of
preference, under Article 2244 of the Civil Code (Sec. 15 R. A. No. 3591 as
amended).

 F. Failure to settle claim of insured depositor

1. PDIC has six (6) months from the date of filing of claim for insured
deposit.
2. Failure to settle the claim within six months from the date of claim for
insured deposit, where such failure was due to grave abuse of discretion,
gross negligence, bad faith, or malice, shall upon conviction, subject the
directors, officers or employees of PDIC are responsible for the delay, to
imprisonment from six months to one year.
The period shall not apply if the validity of the claim requires the
resolution of issues of facts and/or law by another office, body or agency
(Sec. 14; R.A. 3591 as amended).

 G. Failure of depositor to claim insured deposits effect:

It constitute a waiver of his (depositor) right to claim if he fails to
claim his insured deposits with the PDIC within 2 years from the actual

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 takeover of the closed bank bt the receiver, unless otherwise waived by
PDIC (Sec. 16; R. A. 3591, as amended).
The period by which a depositor of insured deposits may file his
claim is within 2 years from the closure of the bank by the central bank.

Unsafe and/or Unsound Banking Practices

The PDIC hereby adopts the general principles and guidelines in Bangko Sentral
ng Pilipinas (BSP) Circular No. 341 (series of 2002), as amended by BSP Circular
No. 640 (series of 2009), relating to the determination of activities that may be
considered unsafe and/or unsound banking practices.

I. Principles in the Determination of Unsafe and/or Unsound Deposit-Related

Practices

In addition to the banking practices the PDIC may deem unsafe and/or unsound
under Section II hereof, the PDIC shall deem a deposit- related practice, activity,
transaction, or omission committed or being committed by banks or its directors,
officers and employees or agents to be an unsafe and/or unsound banking practice
when it has resulted or may result in:

1. Unreasonable delay in the processing or determination of the validity of

deposit claims in the event of bank closure; or
2. Material loss or damage or abnormal risk to the bank’s depositors,
creditors, shareholders, or to the PDIC; or
3. Material loss or damage or abnormal risk or danger to the safety, stability,
liquidity, or solvency of the bank.

II. Unsafe and/or Unsound Deposit-Related Practices

The following may be considered unsafe and/or unsound deposit-related
practices:
1. Performance of any deposit-related practice, activity, or transaction
without the requisite approvals or without adequate controls, as
mandated by existing laws, rules, and regulations, which may result to
unaccounted, undocumented and/or unrecorded deposits.
2. Failure to keep bank records (printed and/or electronic) within the bank
premises especially deposit documents such as, but not limited to,
signature cards, depositor information files, and deposit ledgers.

For purposes of this section, “premises” shall refer to places where a bank
has a legal right to stay or occupy to conduct its operations and/or keep
its records. It includes, but is not limited to, lands and buildings,
warehouses, storerooms, online storage, and offsite or backup sites owned
or leased by a bank. For those not owned by the bank, it must be covered
by a contract showing the bank’s legal right to stay or occupy therein.

3. Granting high interest rates when the bank has: (i) negative unimpaired
capital and (ii) either a liquid assets-to-deposits ratio of less than 10% or
an operating loss.

A bank is deemed offering high interest rates on deposits if the interest

rate is over 50% of the prevailing comparable market median rate for
similar bank categories.

Liquid assets refer to the sum of Cash, Due from BSP/Banks and Financial
Assets, net of allowance for credit losses.

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 4. Non-compliance with PDIC Regulatory Issuances.
5. Other deposit-related practices, activities, and transactions which the
PDIC may identify through appropriate issuances.

Attached for guidance is a list of specific activities which the PDIC may consider
to be unsafe and/or unsound banking practices (Annex A). The PDIC may
hereafter consider other acts or omissions as unsafe and/or unsound pursuant to
the general principles and guidelines in this Regulatory Issuance.

III. Consequences of Unsafe and/or Unsound Practices

The commission of unsafe and/or unsound practices as defined in this Regulatory

Issuance may have these consequences:

1. Deposit accounts and all information related thereto may be inquired into
or examined by PDIC upon the finding of unsafe and/or unsound banking
practices, notwithstanding any provisions of law to the contrary. (Section
8, 8th par., PDIC Charter)
2. The PDIC Board of Directors may issue a cease and desist order, and
require the bank or its directors or agents concerned to desist and/or
correct the practices or violations. (Section 7, PDIC Charter)
3. Deposit insurance on deposit accounts or transactions constituting,
and/or emanating from, unsafe and/or unsound banking practice/s as
determined by the PDIC Board shall not be paid, after due notice and
hearing, and publication of a directive to cease and desist from engaging in
the cited unsafe and/or unsound practice/s. (Section 4 (f), PDIC Charter)

The foregoing shall be without prejudice to the criminal, civil, and administrative
actions that may be instituted against, or fines imposed upon, the bank and its
responsible directors, officers, employees, or agents, pursuant to the provisions of
the PDIC Charter, PDIC Regulatory Issuances, and other pertinent laws.

How is insurance coverage determined?

In determining the insured amount, the outstanding balance of each account is adjusted,
such that interests are updated, withholding taxes are deducted, accounts maintained by
a depositor in the same right and capacity are added together; and whenever applicable,
unpaid loans and other obligations of the depositor are deducted; and in no case shall
insured deposit exceed P500,000.

R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for the following
accounts or transactions:

1. Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking
practices;

Deposits that are determined to be proceeds of an unlawful activity as defined under the
Anti-Money Laundering Law.

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 JURISPRUDENCE

PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC) VS. PHILIPPINE

COUNTRYSIDE RURAL BANK, INC. (PCRBI) ET AL.
G. R. No. 176433 January 24, 2011

FACTS:

On 2005 the Board of Directors of the PDIC Board adopting resolution No. 2005-
03-032 (3) approving the conduct of an investigation in accordance with Sec. 9 of R. A.
No. 3591, as amended, in the basis of the reports of examination of the Bangko Sentral ng
Pilipinas on ten (10) banks, four (4) of which are repondents in this petition for review.
The said resolution also created as Specail Investigation Team to conduct the said
investigation with the authority to administer oath, to examine, take and preserve
testimony of any person relating to the subject of the investigation and to examine
pertinent banks.
In accordance with the PDIC Board Resolution the head of the PDIC issued
Notice of Investigation to the President as the highest Ranking Officer of PCRBI. In the
course of investigation, PCRBI was found to have granted loans to certain, which were
settled by way of dacion of properties. The properties had already heen previously
foreclosed and consolidated under the names of PCRBI, BEAI, and RBCI.
Similarly, a notice of investigation was served and PCRBI, BEAI and a separate
notice of investigation served to RBCI. Subsequently, PCRBI, BEAI, and RBCI refused
entry to their bank premises and access to their records and documents by PDIC
Investigation Team. PCRBI latter refuses to the continuance of the PDIC upon the
advices of its legal counsel on the grounds that there is no prior approval from the
Monetary Board allowing the conduct of PDIC to investigate.

ISSUE:
Whether or not the approval of the Monetary Board of the Bsngko Sentral ng
Pilipinas is necessary before the PDIC may conduct an investigation of respondent
banks.

HELD:
PDIC is of the position that in order for it to exercise its power of investigation,
the law requires that:
a. the investigation is based on a complaint of a depositor or any government
agency or the report of examination of the BSP and PDIC
b. the complaint alleges, on the BSP and/or PDIC report of examination contains
adverse findings of fraud inequalities or anomalies committed by the bank and/or its
directors, officers, employees or agents; and
c. the investigation is upon the authority of the PDIC Board of Directors.
It argues that when it commenced its investigation on banks, all of the
aforementioned requirements were met. PDIC stresses that its power of examination is
different from its power of investigation, in such that the former requires prior approval
of the Monetary Board while the require merely the PDIC Board. It further claim that
power of examination cannot be exercised within twelve months from the last
examinations conducted, whereas the power of investigation merely to look into the
condition of the bank. Whereas the power of investigation aims to address fraud,
inequalities and anomalies based on complaint from depositors and other government
agencies upon reports of examination conducted by the PDIC or by the BSP.

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 Philippine Deposit Insurance Corporation vs. Court of Appeals
G.R. No. 118917 - December 22, 1997

FACTS: On September 22, 1983, plaintiffs-appellees invested in money market

placements with the Premiere Financing Corporation (PFC) in the sum of P10,000.00
each for which they were issued by the PFC corresponding promissory notes and
checks. On the same date (September 22, 1983), John Francis Cotaoco, for and in behalf
of plaintiffs-appellees, went to the PFC to encash the promissory notes and checks, but
the PFC referred him to the Regent Saving Bank (RSB). Instead of paying the
promissory notes and checks, the RSB, upon agreement of Cotaoco, issued the subject 13
certificates of time deposit with Nos. 09648 to 09660, inclusive, each stating, among
others, that the same certifies that the bearer thereof has deposited with the RSB the
sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the
certificate is insured up toP15,000.00 with the PDIC; and that the maturity date thereof
is on November 3, 1983 (Exhs. “B”, “B-1” to “B-12”).
On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to
encash the said certificates. Thereat, RSB Executive Vice President Jose M. Damian
requested Cotaoco for a deferment or an extension of a few days to enable the RSB to
raise the amount to pay for the same (Exh. “D”). Cotaoco agreed. Despite said extension,
the RSB still failed to pay the value of the certificates. Instead, RSB advised Cotaoco to
file a claim with the PDIC.
Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued
Resolution No. 788 (Exh. ‘2’, Records, p. 159) suspending the operations of the
RSB. Eventually, the records of RSB were secured and its deposit liabilities were
eventually determined. On December 7, 1984, the Monetary Board issued Resolution No.
1496 (Exh. ‘1’) liquidating the RSB. Subsequently, a masterlist or inventory of the RSB
assets and liabilities was prepared. However, the certificates of time deposit of
plaintiffs-appellees were not included in the list on the ground that the certificates were
not funded by the PFC or duly recorded as liabilities of RSB.
On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective
claims for the amount of the certificates (Exhs. “C”, “C-1”, to “C-12”). Sabina Yu, James
Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have similar claims on their
certificates of time deposit with the RSB, likewise filed their claims with the PDIC. To
their dismay, PDIC refused the aforesaid claims on the ground that the Traders Royal
Bank Check No. 299255 dated September 22, 1983 for the amount of P125,846.07 (Exh.
“B”) issued by PFC for the aforementioned certificates was returned by the drawee bank
for having been drawn against insufficient funds; and said check was not replaced by the
PFC, resulting in the cancellation of the certificates as indebtedness or liabilities of RSB.
Consequently, on March 31, 1987, private respondents filed an action for
collection against PDIC, RSB and the Central Bank.
On September 14, 1987, the trial court, declared the Central Bank in default for
failing to file an answer.
On May 29, 1989, the trial court rendered its decision ordering the defendants
therein to pay plaintiffs, jointly and severally, the amount corresponding to the latter’s
certificates of time deposit.
Both PDIC and RSB appealed.

ISSUE: Whether or not PDIC can be held liable for value of the certificates of time
deposit held by the petitioners.

HELD: NO. Whenever an insured bank shall have been closed on account of insolvency,
payment of the insured deposits in such bank shall be made by the Corporation as soon as
possible. The term “deposit” means the unpaid balance of money or its equivalent received
by a bank in the usual course of business and for which it has given or is obliged to give
credit to a commercial, checking, savings, time or thrift account or which is evidence by
passbook, check and/or certificate of deposit printed or issued in accordance with
Central Bank rules and regulations and other applicable laws, together with such other

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obligations of a bank which, consistent with banking usage and practices, the Board of
Directors shall determine and prescribe by regulations to be deposit liabilities of the
Bank. These pieces of evidence convincingly show that the subject CTDs were indeed
issued without RSB receiving any money therefor. No deposit, as defined in Section 3 (f)
of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC cannot be
held liable for value of the certificates of time deposit held by private respondents.

Philippine Deposit Insurance Corporation vs. Court of Appeals

A. G.R. No. 126911 April 30, 2003

FACTS: Prior to May 22, 1997, respondents had 71 certificates of time deposits
denominated as "Golden Time Deposits" (GTD) with an aggregate face value
of P1,115,889.96. May 22, 1987, a Friday, the Monetary Board (MB) of the Central Bank of
the Philippines, now Bangko Sentral ng Pilipinas, issued Resolution 5052 prohibiting
Manila Banking Corporation to do business in the Philippines, and placing its assets and
affairs under receivership. The Resolution, however, was not served on MBC until
Tuesday the following week, or on May 26, 1987, when the designated Receiver took
over. On May 25, 1987 - the next banking day following the issuance of the MB
Resolution, respondent Jose Abad was at the MBC at 9:00 a.m. for the purpose of pre-
terminating the71 aforementioned GTDs and re-depositing the fund represented thereby
into 28 new GTDs in denominations of P40,000.00 or less under the names of herein
respondents individually or jointly with each others Of the 28 new GTDs, Jose Abad pre-
terminated 8 and withdrew the value thereof in the total amount of P320,000.00.
Respondents thereafter filed their claims with the PDIC for the payment of the
remaining 20 insured GTDs. February 11, 1988, PDIC paid respondents the value of 3
claims in the total amount of P120,000.00. PDIC, however, withheld payment of the 17
remaining claims after Washington Solidum, Deputy Receiver of MBC-Iloilo, submitted
a report to the PDIC that there was massive conversion and substitution of trust and
deposit accounts on May 25, 1987 at MBC-Iloilo. Because of the report, PDIC entertained
serious reservation in recognizing respondents' GTDs as deposit liabilities of MBC-Iloilo.
Thus, PDIC filed a petition for declaratory relief against respondents with the RTC
of Iloilo City, for a judicial declaration determination of the insurability of respondents'
GTD sat MBC-Iloilo. In their Answer respondents set up a counterclaim against PDIC
whereby they asked for payment of their insured deposits. The Trial Court ordered
petitioners to pay the balance of the deposit insurance to respondents. The Court of
Appeals affirmed the decision of the lower court. Petitioner posits that the trial court
erred in ordering it to pay the balance of the deposit insurance to respondents,
maintaining that the instant petition stemmed from a petition for declaratory relief
which does not essentially entail an executory process, and the only relief that should
have been granted by the trial court is a declaration of the parties' rights and duties. As
such, petitioner continues, no order of payment may arise from the case as this is beyond
the office of declaratory relief proceedings.

ISSUE: Whether or not the trial court order the payment of the balance even if
the petition stemmed from a petition for declaratory relief which does not essentially
entail an executor process.

HELD: YES. Without doubt, a petition for declaratory relief does not essentially
entail an executory process. There is nothing in its nature, however, that prohibits a
counter claim from being set-up in the same action. There is nothing in the nature of
a special civil action for declaratory relief that prescribes the filing of a counterclaim
based on the same transaction, deed or contract subject of the complaint. A special civil
action is after all not essentially different from an ordinary civil action, which is generally
governed by Rules 1 to 56 of the Rules of Court, except that the former deals with a
special subject matter which makes necessary some special regulation. But the identity
between their fundamental nature is such that the same rules governing ordinary civil

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suits may and do apply to special civil actions if not inconsistent with or if they may
serve to supplement the provisions of the peculiar rules governing special laws.

QUESTIONS AND ANSWERS

1. What is PDIC’s overall mandate?

PDIC exists to provide permanent and continuing deposit insurance coverage for
the depositing public to help promote public confidence and stability in the economy. It
ensures prompt payment of insured deposits, exercises complementary supervision of
banks, adopts responsive resolution methods, and applies efficient management of
receivership and liquidation functions.
2. What is PDIC’s maximum deposit insurance coverage?

Effective June 1, 2009, the maximum deposit insurance coverage is P500,000 per
depositor. All deposit accounts by a depositor in a closed bank maintained in the same
right and capacity shall be added together.

Under R.A. No. 9576, the PDIC may propose to adjust the MDIC, subject to the approval
of the President of the Philippines, in case of a condition that threatens the monetary and
financial stability of the banking system that may have systemic consequences.
3. What is an insured deposit?

The term ‘insured deposit’ means the amount due to any bona fide depositor for
legitimate deposits in an insured bank net of any obligation of the depositor to the
insured bank as of date of closure, but not to exceed P500,000.00. A joint account shall
be insured separately from any individually-owned deposit account.

R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for the following
accounts or transactions:

1. Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking
practices;
4. Deposits that are determined to be proceeds of an unlawful activity as defined
under the Anti-Money Laundering Law.

4. Are all banks members of PDIC?

Membership of banks to PDIC is mandatory; hence, all operating banks are members of
PDIC.
5. What types of deposits are insured by PDIC?

Except for the exclusions stipulated in RA 9576, deposits of all commercial banks,
savings and mortgage banks, rural banks, private development banks, cooperative banks,
savings and loan associations, as well as branches and agencies in the Philippines of
foreign banks and all other corporations authorized to perform banking functions in the
Philippines, are insured with PDIC. As for Philippine banks with branches outside the
country, RA 9576 stipulates that subject to the approval of the Board of Directors, any
insured bank with branch outside the Philippines may elect to include for insurance its
deposit obligations payable at such branch.

Foreign currency deposits are also insured by PDIC pursuant to RA 6426 (“An act
instituting a foreign currency deposit system in the Philippines, and for other purposes”)

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and Central Bank (CB) Circular No. 1389. Depositors may receive payment in the same
currency in which the insured deposit is denominated.

Exclusions from deposit insurance coverage as stipulated in R.A. No. 9576:

1. Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking
practices;

Deposits that are determined to be proceeds of an unlawful activity as defined under the
Anti-Money Laundering Law.

6. Are deposits maintained in Philippine banks with branches outside the

Philippines insured by the PDIC?

The PDIC Charter provides that a Philippine bank may elect to insure with the PDIC its
deposits in branches outside the Philippines. As of 31 December 2012, no Philippine bank
has elected to insure deposits in their foreign branches with PDIC.

To verify if your deposits in a branch of a Philippine bank outside the Philippines are
covered by deposit insurance in the host foreign country, please inquire with the account
officer of your branch.

7. Can PDIC insurance coverage be increased by having several accounts in the same
name in an insured bank?
No. Deposit insurance coverage is not determined on a per-account basis. The type of
account (whether checking, savings, time or other form of deposit) has no bearing on the
amount of insurance coverage.
8. If I have deposits in several different insured banks, will my deposits be added
together for insurance purposes?
No. Deposits in different banking institutions are insured separately. However, if a bank
has one or more branches, the main office and all branch offices are considered as one
bank. Thus, if you have deposits at the main office and at one or more branch offices of
the same bank, the deposits are added together when determining deposit insurance
coverage, the total of which shall not exceed P500,000.
9. How long does it take PDIC to settle a claim for insured deposit?

PDIC aims to pay valid claims as soon as possible. Prior to payout, claims are examined
thoroughly. This is to protect the Deposit Insurance Fund (DIF) which is the source of
insurance payments. Sometimes, depositors mistakenly assume that the payouts are
sourced from their deposits. This is not the case. The payouts are from PDIC’s own
funds.

The claim for insured deposit should be settled within six (6) months from the date of
filing provided all requirements are met but the claim must be filed within twenty-four
(24) months after bank takeover. The six-month period shall not apply if the documents
of the claimant are incomplete or if the validity of the claim requires the resolution of
issues of facts and law by another office, body or agency, independently or in
coordination with PDIC.
10. What happens when the depositor of a closed bank fails to file his claim within
the 24-month period?
All rights of the depositor with respect to the insured deposit shall no longer be honored.
But he may still make a claim against the assets of the closed bank.

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11. If the deposit account in a closed bank is more than P500,000.00, what happens
to the excess of the maximum amount of insured deposit?

If the closed bank is not rehabilitated or taken over by another bank, amount in excess of
the P500,000 coverage can still be claimed upon the final liquidation of the remaining
assets of the closed bank.

The claim may be filed with the Liquidator of the closed bank but payment of the said
claim will depend on the bank's available assets to settle its preferred claims
(Government taxes, labor claims, secured credits and trust funds) and approval of the
Liquidation Court. The schedule of payment beyond the P500,000.00 maximum
insurance shall be based on priorities set by law.
12. What specific risks to a bank does PDIC cover?

PDIC covers only the risk of a bank closure ordered by the Monetary Board. Thus, bank
losses due to theft fire, closure by reason of strike or existence of public disorder,
revolution or civil war, are not covered by PDIC.

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 ANTI-MONEY LAUNDERING ACT
(R.A. 9160)

A. POLICY of the LAW

1. The integrity and confidentiality of bank accounts shall be protected and

preserved;
2. To ensure that the Philippines shall not be used as a money laundering
site for the proceeds of any unlawful activity.
3. Philippines shall not extend cooperation in transnational and
prosecutions of persons involved in money laundering activities wherever
committed

B. COVERED INSTITUTION

1. Banks
2. Non‐banks
3. Quasi‐banks
4. Trust entities
5. All other institutions, their subsidiaries and affiliates supervised or
regulated by BSP
6. Insurance companies and all other institutions supervised and regulated
by the Insurance Commission
7. Securities dealers, brokers, salesmen, investment houses and other similar
entities managing securities or rendering services as investment agent,
advisor, or consultant
8. Mutual funds, closed‐end investment companies, common trust funds,
pre‐need companies and other similar entities.
9. Foreign exchange, corporations, money changers, money payments,
remittance, and transfer companies and other similar entities; and
10. Other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects, cash
substitutes, and other similar monetary instruments or property
supervised or regulated by SEC. (Sec. 3 R.A. 9160, as amended)

C. OBLIGATIONS of COVERED INSTITUTIONS

 They are mandated by the AMLA to submit covered and suspicious

transaction reports to the AMLC.

D. COVERED TRANSACTIONS
 These are transactions in cash or other equivalent monetary instrument
involving a total amount in excess of 500,000.00 within 1 banking day.

E. SUSPICIOUS TRANSACTIONS
Regardless of amount, if any of the following is present:
1. No underlying economic, trade or legal justification
2. Client not properly identified; numbered accounts are allowed provided client is
identified.
3. Transaction is not commensurate with financial capability of the client
4. Transaction is so structured that it cannot be reported to the AMLC
5. Transaction which deviates from usual profile of the client
6. Relates to unlawful activity as defined by law

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 7. Analogous transactions

F. WHEN is MONEY LAUNDERING COMMITTED

 The meaning of Money Laundering

- A crime whereby the proceeds of unlawful activity are
transacted, making them appear to have come from lawful
transaction. (Sec. 4 R.A. 9160, as amended)

 Money laundering act is committed by the following persons:

a) Any person knowing that the monetary instrument or property
represents, involves, or relates to, the proceeds of any unlawful
activity, transacts or attempts to transact said monetary
instrument or property;
b) Any person knowing that any monetary instrument or property
involves the proceeds of any unlawful activity performs or fails to
perform any act as a result of which he facilitates the offense
referred to in No. 1 above
c) Any person knowing that any monetary instrument or property is
required under this Act to be disclosed and filed with the
Anti‐Money Laundering Council (AMLC), fails to do so. (Sec 4 R.A.
9160, as amended)

G. UNLAWFUL ACTIVITIES or PREDICATE CRIMES

 These refer to any act or omission or series or combination thereof

involving or having direct relation to the following:
a. Kidnapping for ransom
b. Drug trafficking and related offenses
c. Graft and corrupt practices
d. Plunder
e. Robbery and Extortion
f. Jueteng and Masiao
g. Piracy
h. Qualified theft
i. Swindling
j. Smuggling
k. Violations under the Electronic Commerce Act of 2000
l. Hijacking, destructive arson, and murder, including those
perpetrated by terrorists against non-combatant persons and
similar targets.
m. Fraudulent practices and other violations under the SRC of
2000;
n. Felonies or offenses of a similar nature that are punishable
under the penal laws of other countries. (Sec. 3(i) R.A. 9160, as
amended)

H. ANTI-MONEY LAUNDERING COUNCIL

 Composition:
1. Governor of Bangko Sentral ng Pilipinas as Chairman
2. Insurance Commissioner
3. Chairman of Security and Exchange Commissioner

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  The purpose of the law on creating the Anti-Money Laundering Council
1. To protect and preserve the integrity and confidentiality of bank
accounts;
2. To ensure that the Philippines shall not be used as a money
laundering site for proceeds of any unlawful activity; and
3. To extend cooperation in transnational investigation and
prosecution of person involved in money laundering activities
wherever committed.
 The AMLC is a collegial body where Chairman & members of AMLC are
entitled to one vote each
General Rule:
 AMLC acts unanimously in discharge of functions
Exception:
 In case of incapacity, absence or disability, any member to
discharge his functions, the officer designated shall act in his
stead.
 SECRETARIAT
 Headed by Exec. Director, appointed by AMLC for a term of
percentage years
qualifications:
a) member of Phil. Bar;
b) at least 35 years of age;
c) of good moral character;
d) with unquestionable integrity & known probity; and
e) Must have served for at least 5 years in Insurance Commission,
SEC or BSP & shall hold full-time permanent position within the
BSP.
General Rule:
Members of AMLC, Executive Director, all members of
Secretariat, on detail, on secondment shall not reveal in any
manner any information by reason of their office
Exception:
Under any orders of the court, Congress, or any government
offices authorized by law
 MEETING:
AMLC shall meet every first Monday of the month or as often
as may be necessary at the call of Chairman
 Through modern technologies such as, but not limited to
TELECONFERENCING & VIDEOCONFERENCING
 BUDGET: (appropriated by Congress)
 Used to defray operational expenses, including indemnification for
LEGAL COST & EXPENSES.

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I. FUNCTIONS

The following are the functions of the anti-money laundering act:

1. To require and receive reports of suspicious transactions from covered
institutions
Note: Covered institutions include, (banks and all other institutions and
their subsidiaries and affiliates supervised or regulated by BSP; insurance companies
and all other institutions supervised or regulated by the IC; and securities dealers and
other entities supervised or regulated by the SEC)
2. To issue orders addressed to the Supervising Authority or the covered
institution
3. To institute civil forfeiture proceedings and all other remedial proceedings
through the OSG
4. To cause the filing of complaints with the DOJ or the Ombudsman for the
prosecution of money laundering offenses
5. To investigate suspicious transactions and covered transactions deemed
suspicious after an investigation by AMLC
6. To apply before the CA, ex parte, for the freezing of any monetary
instrument/property alleged to be proceeds of any unlawful activity as
defined in the AMLA
7. To implement such measures as may be necessary and justified to counteract
money laundering
8. To receive and take action in respect of any request for assistance from
foreign states in their own anti-money laundering operations
9. To develop educational programs on the pernicious effects of money
laundering.
10. To enlist the assistance of any branch, department, bureau, office, agency or
instrumentality of the government, including GOCCs in undertaking any and
all anti-money laundering operations
11. To impose administrative sanctions for the violation of laws, rules,
regulations and orders and resolutions issued pursuant thereto. (Sec. 7 R.A.
9160, as amended)
12. To examine or inquire into bank deposits/investments upon order of any
competent court in cases of violation of the AMLA, when it has been
established that there is probable cause that the deposits/investments are
related to an unlawful activity. (Sec. 11 R.A. 9160, as amended)
Note: No court order, however, is necessary in cases involving kidnapping for
ransom; narcotics offenses; and hijacking, destructive arson and murder, including
those perpetrated by terrorists against non-combatant persons and similar targets.
J. FREEZING of MONETARY INSTRUMENT or PROPERTY

 The following has the jurisdiction for violations of Anti-Money

Laundering Act:

1. RTC – all cases on money laundering.

2. Sandiganbayan– Those committed by public officers and private persons in
conspiracy with them. (Sec. 5. R.A. (160, as amended)

 The Court of Appeals has the jurisdiction to issue a freeze order because,
It is solely the CA which has the authority to issue a freeze order upon
application ex parte by the AMLC and after determination that probable
cause exists.

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 It also has the exclusive jurisdiction to extend existing freeze orders previously
issued by the AMLC vis-à-vis accounts and deposits related to money-laundering
activities. (Republic v. Cabrini Green & Ramos, G.R. No. 154522, May 5, 2006)

K. AUTHORITY to INQUIRE INTO BANK DEPOSITS

 The Anti-Money Laundering Council (AMLC) can inquire into bank

deposits when

General Rule:
Only upon order of any competent court in cases of violation of
R.A.9160, as amended.
Exception:
No need of court order in cases of Kidnapping, Hijacking, Drugs,
Arson, Murder. (Sec. 11 R.A. 9160, as amended)

JURISPRUDENCE

REPUBLIC versus GLASGOW CREDIT and COLLECTION SERVICES INC.

FACTS:
Glasgow is a corporation existing under the laws of the Philippines and has funds
in the amount of P21, 301, 430.00 deposited with City state Savings Bank, Inc. (CSBI).
However, the aforestated bank account is related to the unlawful activities of
Estafa and violation of Securities Regulation Code.
Thus, the Republic filed a complaint in the Regional Trial Court of Manila for
civil forfeiture of assets with plea for issuance of temporary retraining order and writ of
preliminary injunction and was granted.
Glasgow filed a motion to dismiss alleging that the complaint was premature and
stated no case of action as there was still no conviction of Estafa or other criminal
violations, Hence, the petition.

ISSUE:
Is criminal conviction for unlawful activity is considered a pre requisites for the
institution of a civil forfeiture?

HELD:
NO, The complaint was sufficient in form and substance, the question submitted
to the court for determination is the sufficiency of the allegations made in the complaint
to constitute a cause of action and not whether those allegations of facts are true. A
finding of guilt for an unlawful activity is not an essential element for forfeiture.

REPUBLIC versus CABRINI GREEN and ROSS INC.

FACTS:

The Anti- Money Laundering Council (AMLC) issued freeze orders against
various accounts of respondents. The bank accounts were previously found prima facie
to be related to the unlawful activities.
Before the lapse of fifteen (15) days, AMLC filed with the Court of Appeals (CA)
petitions for extension of effectivity of its freeze orders.
However, Court of Appeals disregard the petitions. It ruled that it was not vested
by R.A 9160 with the power to extend a freeze order.

ISSUE:
Which court has jurisdiction to extend the effectivity of a freeze orders?

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HELD:
The law stands, it is solely the Court of Appeals which has the authority to issue
a freeze order as well as to extend its effectivity, It has the exclusive jurisdiction to
extend existing freeze orders previously issued by the Anti Money Laundering Council
accounts and deposits related to money-laundering activities.

REPUBLIC versus EUGENIO

FACTS:
Anti- Money Laundering Council filed an application to inquire or examine the
deposited or investments of Alvarez et. al, before the Regional Trial Court of Makati. The
latter granting the Anti- Money Laundering Council the authority to inquire and
examine the subject bank accounts.
The trial court being satisfied that there existed probable cause to believe
that the deposits in various accounts are related to the offense of violation of Anti-Graft
and corrupt practices Act now the subject of criminal prosecution.

ISSUE:
Whether or not the bank accounts of respondents can be examined.

HELD:
All bank deposits are absolutely confidential. However, the Anti Money
Laundering Act also provides exceptions to the Bank Secrecy Act. It may inquire into a
bank account upon orders of any competent court in case of violation of the Anti Money
Laundering Act.

QUESTIONS AND ANSWERS

1. Alvin is jobless but is reputed to be a jueteng operator. He has never been charged
or convicted of any crime. He maintains several bank accounts amounting to P100
Million. AMLC charged Alvin with violation of the Anti‐Money Laundering Law.
(Bar exam question 2002)

A. Can Alvin move to dismiss the case on the ground that he has no criminal record?
ANSWER:
No. The contention of Alvin is not tenable because under AMLA, "money
laundering crime" committed when the proceeds of an "unlawful activity," like
jueteng operations, are made to appear as having originated from legitimate sources.
The money laundering crime is separate from the unlawful activity of being a
juetengoperator, and requires no previous conviction for the unlawful activity. (Sec. 3,
AMLA)

B. In disclosing Alvin's bank accounts to the AMLC, did the bank violate any law?
ANSWER:
No, the bank did not violate any law. The bank being specified as a "covered
institution" under the Anti‐Money Laundering Law, is obliged to report to the AMLC
covered and suspicious transactions, without thereby violating any law. This is one of
the exceptions to the Secrecy of Bank Deposit
2. Rudy is jobless but is reputed to be a jueteng operator. He has never been
charged or convicted of any crime. He maintains several bank accounts and has
purchased 5 houses and lots for his children from the Luansing Realty, Inc.
Since he does not have any visible job, the company reported his purchases

107 | P a g e
to the Anti-Money Laundering Council (AMLC). Thereafter, AMLC charged him
with violation of the Anti-Money Laundering Law. Upon request of the AMLC,
the bank disclosed to it Rudy's bank deposits amounting to P100 Million.
Subsequently, he was charged in court for violation of the Anti-Money Laundering
Law. (Bar exam question 2002)
A: Can Rudy move to dismiss the case on the ground that he has no criminal
record? (2.5%)
ANSWER:
No. Under the Anti-Money Laundering Law, Rudy would be guilty of a
"money laundering crime" committed when the proceeds of an "unlawful activity,"
like jueteng operations, are made to appear as having originated from legitimate
sources. The money laundering crime is separate from the unlawful activity
of being a jueteng operator, and requires no previous conviction for the unlawful
activity (See also Sec. 3, Anti- Money Laundering Act of 2001).
B: To raise funds for his defense, Rudy sold the houses and lots to a friend. Can
Luansing Realty, Inc. be compelled to transfer to the buyer ownership of the
houses and lots? (2.5%)
ANSWER:
Luansing Realty, Inc. is a real estate company, hence it is not a covered institution
under Section 3 of the Anti- Money Laundering Act. Only banking
institutions, insurance companies, securities dealers and brokers, pre- need companies
and other entities administering or otherwise dealing in currency, commodities or
financial derivatives are covered institutions. Hence, Luansing Realty, Inc. may
not use the Anti-Money Laundering Act to refuse to transfer to the buyer ownership
of the houses and lots.
C: In disclosing Rudy's bank accounts to the AMLC, did the bank violate any law?
(2.5%)
ANSWER:
No, the bank did not violate any law. The bank being specified as a "covered
institution" under the Anti-Money Laundering Law, is obliged to report
to the AMLC covered and suspicious transactions, without thereby
violating any law. This is one of the exceptions to the Secrecy of Bank
Deposit Act.
D: Supposing the titles of the houses and lots are in possession of the Luansing
Realty, Inc., is it under obligation to deliver the titles to Rudy? (2.5%)
ANSWER
Yes, it has an obligation to deliver titles to Rudy. As Luansing Realty, Inc. is
not a covered institution under Section 3 of the Anti-Money Laundering Act, it may
not invoke this law to refuse delivery of the titles to Rudy.
3. Who shall be liable if the offender is a juridical entity?
Answer:
If the offender is a corporation, association, partnership or any judicial person,
the penalty shall be imposed upon the responsible officers, as the case may be, who
participated or failed to prevent its commission. If the offender is a juridical
person, the court may suspend or revoke its license. (Rule 3, Sec. 2 (par.6), IRR)

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4. Who has the authority to freeze accounts?
Answer:
The AMLC is authorized under Sections 6 (6) and 10 of the AMLA to freeze
any account or any monetary instrument or property subject thereof upon
determination that probable cause exists that the same is in any way related to any
unlawful activity and/or money laundering offense. The AMLC may freeze any
account or any monetary instrument or property subject thereof prior to the
institution or in the course of, the criminal proceedings involving the unlawful
activity and/or money laundering offense to which said account, monetary instrument
or property is any way related. The freeze order on such account shall be effective
immediately for a period not exceeding fifteen (15) days.
5. May a court issue TRO or writ of injunction to extend a freeze order?
Answer:
Only the CA and SC. No court shall issue a temporary restraining order or writ
of injunction against any freeze order issued by the AMLC or any court order extending
period of effectivity of the freeze order except the Court of Appeals or the Supreme
Court.(Rule 3, Sec. 3 (par.h), IRR)
6. Are institutions required to verify the identity of their clients through face-to-
face contracts?
Answer:
To the extent and through such means allowed under existing laws and
applicable rules and regulations of the BSP, the SEC and the IC, covered institutions
may create new accounts without face-to-face contract. (Rule 5, Sec. 1, par. D, IRR)
7. How should the AMLA be construed or implemented?
Answer:
It shall not be construed or implemented in a manner that will discriminate
against certain customer types, such as politically- exposed persons, as well as their
relatives, or against a certain religion, race or ethnic origin, or such other attributes or
profiles when used as the only basis to deny these persons access to the services
provided by the covered persons. Whenever a bank, or quasi-bank, financial
institution or whenever any person or entity commits said discriminatory act, the
person or persons responsible for such violation shall be subject to sanctions as
may be deemed appropriate by their respective regulators.”
8. Is personal knowledge necessary that the monetary instrument is the proceed of
unlawful activity to be qualified as an offender?
Answer:
Yes, Money laundering is committed by any person who, knowing that any
monetary instrument or property represents, involves, or relates to the proceeds of any
unlawful activity. Sec. 4, RA 10365.
9. What are the exemptions on the authority of the AMLC to inquire into bank
deposits of the offender?
Answer:
There is no need of acquiring a court order in cases of kidnapping, Hijacking,
Drugs, Arson and Murder. Because they are acts or omissions that involves direct
relation to the offended party.
10. What are the compositions of the Anti-money laundering council?
Answer:
The following are the compositions of the AMLC:
A: Governor of BangkoSentralngPilipinas as Chairman;
B: Insurance Commissioner;
C: Chairman of Security and Exchange Commissioner.

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 TRUTH IN LENDING ACT (R.A. 3765)

CIRCULAR NO. 158

Series of 1998

Pursuant to Monetary Board Resolution No. 369 dated 12 March 1998, amending the
composition of the reserve requirement on all types of peso deposit and deposit
substitute liabilities of expanded commercial banks, commercial banks and non-banks
with quasi-banking (NBQBs) functions and certain types of deposit and deposit
substitute liabilities of thrift banks and rural banks, and Monetary Board Resolution No.
403 dated 18 March 1998, advancing the effectivity date of the abovementioned changes,
Books I, II, III and IV of the Manual of Regulations are hereby amended as follows:

Book I

Expanded Commercial Banks and Commercial Banks

SECTION 1. Sections 1203, 1214, 1225, 1232, 1236 and 1253 of Book 1 of the Manual of
Regulations are hereby amended by reducing the required reserves against demand and
savings deposits, NOW accounts, time deposits and negotiable certificate of time
deposits regardless of maturity of banks with expanded commercial banking authority,
commercial banks, the Land Bank of the Philippines, the Development Bank of the
Philippines and the Al-Amanah Islamic Investment Bank of the Philippines from thirteen
percent (13%) to ten percent (10%).

SECTION 2. Section 1283 of Book I of the Manual of Regulations is hereby amended by

reducing the required reserves against deposit substitute liabilities regardless of maturity
from thirteen percent (13%) to ten percent (10%).

Book II

Thrift Banks

SECTION 3. Section 2203, Section 2225 and Section 2253 of Book II of the Manual of
Regulations are hereby amended by reducing the required reserves against demand
deposits and NOW accounts from thirteen percent (13%) to ten percent (10%).

SECTION 4. Section 2283 of Book II of the Manual of Regulations is hereby amended by

reducing the required reserves against deposit substitute liabilities regardless of maturity
from thirteen percent (13%) to ten percent (10%).

SECTION 5. Sections 2232, 2236, and 2253 of Book II of the Manual of Regulations are
hereby amended by reducing the required reserves against time deposits and negotiable
certificates of time deposits regardless of maturity from eleven percent (11%) to eight
percent (8%).

SECTION 6. Sections 2214 and 2253 of Book II of the Manual of Regulations are hereby
amended by reducing the required reserves against savings deposits from eleven percent
(11%) to eight percent (8%).

Book III

Rural Banks

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SECTION 7. Sections 3203 and 3253 of Book III of the Manual of Regulations are hereby
amended by reducing the required reserves against demand deposits from thirteen
percent (13%) to ten percent (10%).
SECTION 8. Sections 3225, 3236, and 3253 of Book III of the Manual of Regulations are
hereby amended by reducing the required reserves against NOW accounts from thirteen
percent (13%) to ten percent (10%).
SECTION 9. Under Sections 3214 and 3232 of Book III of the Manual of Regulations, the
required reserves against savings and time deposits regardless of maturity shall remain at
five percent (5%).

Book IV

Non-Bank Financial Intermediaries

SECTION 10. The first paragraph of Section 4283Q of Book IV of the Manual of
Regulations is hereby amended by reducing the required reserves against deposit
substitute liabilities, regardless of maturity, from thirteen percent (13%) to ten percent
(10%).

Books I, II, III and IV

Liquidity Reserves for all Financial Intermediaries

SECTION 11. On top of the regular reserve requirements, liquidity reserve ratios against
peso demand, savings, time deposit and deposit substitute liabilities shall be raised, as
follows:

a. For expanded commercial banks, commercial banks, and non-bank financial

intermediaries with quasi-banking functions (NBQBs), from four percent (4%) to
seven percent (7%);
b. For thrift banks, from three percent (3%) to six percent (6%); and
c. For rural banks, from zero to three percent (3%) against their demand deposit
liabilities.

The required liquidity reserve may be maintained in the form of short-term market-
yielding government securities purchased directly from the BSP-Treasury Department,
pursuant to Circular No. 10 dated 29 December 1993.

Form and Composition of Regular Reserves for all Financial Intermediaries

SECTION 12. Regular reserves shall be maintained in the same form and composition as
provided in Sections 1254, 2254, 3254, 1283, 2283.1, 3283, and 4283Q of Books I, II, III,
and IV, respectively, of the Manual of Regulations for Banks and Other Financial
Intermediaries.

“ TRUTH IN LENDING ACT”

I. Purpose: To protect the citizens of the state from a lack of awareness of the true cost
of credit to the user through a guaranteed full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national economy. It was
intended to ensure that credit terms are disclosed in a meaningful way so consumers can
compare credit terms more readily and knowledgeably. ( Section 2 )

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II. Obligation of Creditors to Person to whom CREDIT IS EXTENDED

Any creditor, PRIOR TO THE CONSUMPTION OF THE TRANSACTION

shall FURNISH a clear statement in writing setting forth, to the extent
applicable and in accordance with the rules and regulations prescribed by the
Board, the following INFORMATION; ( as provided in Section 4 )

a. the cash price or delivered price of the property or service to be acquired;

b. the amounts, if any, to be credited as down payment and/or trade-in;

c. the difference between the amounts set forth under clauses (1) and (2);

d. the charges, individually itemized, which are paid or to be paid by such

person in connection with the transaction but which are not incident to the
extension of credit;

e. the total amount to be financed;

f. the finance charge expressed in terms of pesos and centavos; and

g. the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

III. COVERED AND EXCLUDED TRANSACTIONS

A. THOSE COVERED ARE:

The law covers any creditor, which is defined as any person engaged in the
business of extending credit (including any person who as a regular business
practice make loans or sells or rents property or services on a time, credit, or
installment basis, either as principal or as agent) who requires as an incident
to the extension of credit, the payment of a finance charge.

B. THOSE EXCLUDED ARE:

The following transactions are exempt;

1. Credit extended primarily for a business, commercial, or agricultural purpose;

2. Credit extended to other than a natural person (including credit to government

agencies or instrumentalities);

3. Credit in excess of $25 thousand not secured by real or personal property used as
the principal dwelling of the consumer;

4. Public utility credit;

5. Credit extended by a broker-dealer registered with the Securities and Exchange

Commission (SEC) or the Commodity Futures Trading Commission (CFTC),
involving securities or commodities accounts;
6. Home fuel budget plans; and
7. Certain student loan programs.

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NOTE: When determining whether credit is for consumer purposes, the creditor must
evaluate all of the following:

• Any statement obtained from the consumer describing the purpose of the proceeds.

- For example, a statement that the proceeds will be used for a vacation trip would
indicate a consumer purpose.

- If the loan has a mixed-purpose (e.g., proceeds will be used to buy a car that will be
used for personal and business purposes), the lender must look to the primary
purpose of the loan to decide whether disclosures are necessary. A statement of
purpose from the consumer will help the lender make that decision.

- A checked box indicating that the loan is for a business purpose, absent any
documentation showing the intended use of the proceeds, could be insufficient
evidence that the loan did not have a consumer purpose.

• The consumer's primary occupation and how it relates to the use of the proceeds. The
higher the correlation between the consumer's occupation and the property purchased
from the loan proceeds, the greater the likelihood that the loan has a business purpose.

For example, proceeds used to purchase dental supplies for a dentist would indicate a
business purpose.

• Personal management of the assets purchased from proceeds. The lower the degree of
the borrower's personal involvement in the management of the investment or enterprise
purchased by the loan proceeds, the less likely the loan will have a business purpose.

For example, money borrowed to purchase stock in an automobile company by an

individual who does not work for that company would indicate a personal investment
and a consumer purpose.

• The size of the transaction. The larger the size of the transaction, the more likely the
loan will have a business purpose. For example, if the loan is for a $5,000,000 real estate
transaction, that might indicate a business purpose.

• The amount of income derived from the property acquired by the loan proceeds
relative to the borrower's total income. The lesser the income derived from the acquired
property, the more likely the loan will have a consumer purpose.

For example, if the borrower has an annual salary of $100,000 and receives about $500 in
annual dividends from the acquired property, that would indicate a consumer purpose.

IV. CONSEQUENCES OF NON-COMPLIANCE WITH OBLIGATION

1. Any creditor who violates the law is liable in the amount of P100 or in an amount equal
to twice the finance charged required by such creditor in connection with such

transaction, whichever is the greater, except that such liability shall not exceed P2,000
on any credit transaction. The action must be brought within one year from the date of
the occurrence of the violation.

2. The creditor is also liable for reasonable attorney’s fees and court costs as determined
by the court.

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3. Any person who willfully violates any provision of this law or any regulation issued
thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment of
not less than 6 months, nor more than one year or both.

However, no punishment or penalty under this law shall apply to the Philippine
Government or any agency or any political subdivision thereof. (section 6 )

JURISPRUDENCE

UCPB v. Sps. Beluso August 17, 2007 No. 159912

Facts:
UCPB granted spouses Beluso a Promissory Notes Line under a Credit Agreement
whereby the latter could avail from the former credit up to the maximum amount of P1.2
M, which was amended to increase P2.35 M. Spouses Beluso have executed a total of 5
promissory notes, the last two of which they claim to have never been released to them.
In any case, UCPB applied interest rates on the different promissory notes ranging from
18% to 34%, and thereafter continued to charge interests and penalties. When the
respondents failed to make payments, UCPB foreclosed their mortgaged properties.
Respondents filed a petition for annulment thereof. RTC ruled in favor of respondents
and the CA affirmed thereof. It was ruled that the provision on interest rates agreed upon
by the parties is void as the rates and bases therefor were determined solely by the
petitioner. UCPB argues that there is no violation of the principle of mutuality of
contracts, and assuming there is, it was already cured by estoppel on the part of
respondents.
Issue:
Is the contention of the petitioner UCPB meritorious?

Ruling:
No. Article 1308 provides that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them. In order that obligations
arising from contracts may have the force of law between the parties, there must be
mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will
of one of the contracting parties is void. The provision stating that the interest shall be at
theœrate indicative of DBD retail rate or as determined by the Branch Head is indeed
dependent solely on the will of petitioner UCPB. Under such provision, petitioner UCPB
has two choices on what the interest rate shall be: (1) a rate indicative of the DBD retail
rate; or (2) a rate as determined by the Branch Head. As UCPB is given this choice, the
rate should be categorically determinable in both choices. If either of these two choices
presents an opportunity for UCPB to fix the rate at will, the bank can easily choose such
an option, thus making the entire interest rate provision violative of the principle of
mutuality of contracts. Not just one, but rather both, of these choices are dependent
solely on the will of UCPB. Spouses Beluso had acknowledged before the RTC their
obligation to pay a 12% legal interest on their loans. There is sufficient basis to impose a
12% legal interest in favor of petitioner in the case at bar, as what we have voided is
merely the stipulated rate of interest and not the stipulation that the loan shall earn
interest. We uphold the contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes providing for the
compounding of interest were neither nullified by the RTC or the Court of Appeals, nor
assailed by the spouses Beluso. Note:€ Furthermore, opening a credit line does not create
a credit transaction of loan or mutuum, since the former is merely a preparatory contract
to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for
the considerations specified therefor, to lend to the other party amounts not exceeding

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the limit provided. The credit transaction thus occurred not when the credit line was
opened, but rather when the credit line was availed of. In the case at bar, the violation of
the Truth in Lending Act allegedly occurred not when the parties executed the Credit
Agreement, where no interest rate was mentioned, but when the parties executed the
promissory notes, where the allegedly offending interest rate was stipulated.

Consolidated Bank v. CA

Facts:
George King Tim Pua obtained several loans from Consolidated Bank for which
he executed several promissory notes. In order to secure Pua’s payment of the promissory
notes, he assigned the proceeds of his fire insurance policy. The proceeds of the fire
insurance policy was then applied to Pua’s obligations with Consolidated Bank. Pua sued
the bank for recovery of the unpaid balances on the promissory notes.
Issue:
Whether or not Pua is obliged to pay handling charges .
Ruling:
Banks and non-bank financial intermediaries authorized to engage in quest-
banking functions are required to strictly adhere to the provisions of the Truth in
Lending Act. Where the promissory note signed by the borrowers do not contain any
stipulation on the payment of handling charges, the bank cannot collect the same even though a
CB circular authorized banks to collect handling charges on loans over P500,00

DBP v. Arcilla Jr.

Facts:
Atty. Felipe Arcilla Jr. was employed by the DBP. After he was assigned to the legal department,
he decided to avail of a loan under the Individual Housing Project (IHP) of the bank for the
payment of the parcel of land purchased by him and for its construction. When Arcilla
resigned from DBP, the bank notified him that his loan has been converted to a regular housing
loan. Arcilla agreed to the reservation by the DBP of its right to increase the rate of
interest on the loan, as well as all other fees and charges on loans and advances pursuant to such
policy as it may adopt from time to time during the period of the loan.

Issue:
Whether or not DBP violated RA 3765 otherwise known as The Truth in Lending
Act.
Ruling:

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan
transaction, the bank, as creditor, is obliged to furnish a client with a clear statement, in
writing, setting forth, to the extent applicable and in accordance with the rules and
regulations prescribed by the Monetary Board of the Central Bank of the Philippines, the
following information:
1. the cash price or delivered price of the property or service to be acquired;
2. the amounts, if any, to be credited as down payment and/or trade-in;
3. the difference between the amounts set forth under clauses(1) and (2);
4. the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of
credit;
5. the total amount to be financed;
6. the finance charges expressed in terms of pesos and centavos; and
7. the percentage that the finance charge bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

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 If the borrower is not duly informed of the data required by the law prior to the
consummation of the availment or drawdown, the lender will have no right to
collect such charge or increases thereof, even if stipulated in the promissory
note. However, such failure shall not affect the validity or enforceability of any contract
or transaction.

QUESTIONS AND ANSWERS

1. What is the policy behind the Truth in Lending Act?

The declared policy behind the law is to protect the people from lack of awareness of the
true cost of credit by assuring full disclosure of such cost, with a view of preventing the
uninformed use of credit to the detriment of the national economy.

2. In that definition, what is meant by “credit”?

It means any loan, mortgage, deed of trust, advance, or discount; any conditional sales
contract; any contract to sell, or sale or contract of sale of property or services, either for
present or future delivery, under which part or all of the price is payable subsequent to
the making of such sale or contract; any rental-purchase contract; any contract or
arrangement for the hire, bailment, or leasing of property; any option, demand, lien,
pledge, or other claim against, or for the delivery of, property or money; any purchase, or
other acquisition of, or any credit upon the security of, any obligation of claim arising out
of any of the foregoing; and any transaction or series of transactions having a similar
purpose or effect.

3. In the same definition, what is meant by a “finance charge”?

A finance charge includes interest, fees, service charges, discounts, and such other
charges incident to the extension of credit as may be prescribed by the Monetary Board
of the Bangko Sentral ng Pilipinas through regulations.

4. What are the information required to be furnished to the debtor or borrower?

(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as
a simple annual rate on the outstanding unpaid balance of the obligation.

5. When and how should this information be furnished to the debtor or borrower?

The information enumerated above must be disclosed to the debtor or borrower prior to
the consummation of the transaction. The information must be clearly stated in writing.

6. What is the effect on the obligation in case of violations to the Truth in Lending
Act?

The contract or transaction remains valid or enforceable, subject to the penalties

discussed below.

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 FOREIGN INVESTMENT ACT (R.A. 7042, as amended)

I. POLICY OF THE LAW

a. On extent of foreign ownership of export enterprises, THERE ARE NO
RESTRICTIONS
- the state shall attract, promote and welcome productive investments
from FOREIGN individuals, partnerships, corporations and governments ( including
political subdivisions) which significantly contribute to national industrialization and
socio-economic development.

b. Foreigners can INVEST as much as 100% equity EXCEPT in areas included in

the NEGATIVE LISTS.
- Foreign investments that significantly expand livelihood and
employment for Filipinos.
- An investment which enhances the economic value of farm products.
- Serves mainly the domestic market.

II. DEFINITION OF TERMS

a. Foreign Investment
-an equity investment made by a non-Philippine national in the form of
foreign exchange and/or other assets actually transferred to the Philippines and duly
registered with the Central Bank which shall asses and appraise the value of such assets
other than foreign exchange.

b. Doing Business in the Philippines

- Solicitation of orders, service contracts, opening officers, and any other
ACTS that IMPLY a CONTINUITY of commercial dealings or arrangements.

Note: Doing business does not merely include mere investment as a shareholder
by a foreign entity in domestic corporations.

c. Export Enterprise
- an enterprise where a manufacturer, processor or service enterprise
EXPORTS SIXTY percent (60%) or more of its ourput.
- a trader purchases products domestically and EXPORTS SIXTY
percent (60%) or more of such purchases.

d. Domestic Market Enterprise

- an enterprise which PRODUCES GOODS FOR SALE
- RENDERS SERVICES to the domestic market ENTIRELY
- FAILURE to continuously export at least SIXTY percent (60%)

III. REGISTRATION OF INVESTMENT OF NON-PHILIPPINE NATIONALS

a. WITHOUT NEED OF PRIOR APPROVAL, a non-Philippine national who is

not disqualified by law may, upon registration with the Securities and Exchange
commission (SEC) or with the Bureau of Trade Regulation and Consumer
Protection (BPTRC) of the Department of Trade and Industry in the CASE OF
SINGLE PROPRIETORSHIPS, do BUSINESS or

b. INVEST in a DOMESTIC enterprise up to ONE HUNDRED percent (100%) of

its capital, unless said participation is prohibited or limited by law.

c. The SEC or BRTRCP shall not impose any limitations on the extent of foreign
ownership in an enterprise as the case may be.

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  Note: Any enterprise seeking to avail of incentives under the Omnibus
Investment code of 1987 must apply for registration with the Board of
Investments (BOI).

 A non-Philippine national in line of a business as an existing joint venture being a

substantial partner must DISCLOSE the facts of the partners in the joint venture.

 During the TRANSITORY period, SEC shall disallow registration of the applying
non-Philippine national if the existing joint venture enterprise, particularly the
Filipino partners, can REASONABLY PROVE that they are CAPABLE to make
the investment needed for the domestic market activities.

 SEC shall effect registration within fifteen (15) days upon submission of
completed requirements.

IV. FOREIGN INVESTMENT in DOMESTIC MARKET Enterprise

-Non-Philippine nationals may own up to one hundred percent (100%) of

domestic market enterprise unless foreign ownership therein is prohibited or
limited by the Constitution or the Foreign Investment Negative Lists.

V. FOREIGN INVESTMENT NEGATIVE LISTS

In Negative List A, It enumerates the areas of activities reserved to Philippine

nationals by mandate of the Constitution and specific laws.

No Foreign Equity

1. Mass Media except recording

2. Practice of professions
3. Retail trade enterprises with paid-up capital of not less than US$2,500,000.00
4. Cooperatives
5. Private Security Agencies
6. Small-scale Mining
7. Utilization of Marine Resources in archipelagic waters, territorial sea, and
exclusive economic zone
8. Ownership, operation and management of cockpits
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical
and radiological weapons and anti-personal mines
11. Manufacture of firecrackers and other pyrotechnic devices

Up to Twenty Percent (20%) Foreign Equity

12. Private radio communication network

Up to Twenty-Five Percent (25%) Foreign Equity
13. Private recruitment, whether for local or overseas employment
14. Contracts for the construction and repair of locally-funded public works,
except:
a. infrastructure/development projects covered in RA 7718; andˇ
b. projects which are foreign funded or assisted and required to undergo
international competitive bidding (Sec. 2(a) of RA 7718)

15. Contracts for construction of defense-related structure

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Up to Thirty Percent (30%) Foreign Equity

16. Advertising
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of natural resources
18. Ownership of Private Lands
19. Operation and management of public utilities
20. Ownership/establishment and administration of educational institutions
21. Culture, production, milling, processing, trading excepting retailing, of rice
and corn and acquiring, by barter, purchase or otherwise, rice and corn and the
byproducts thereof
22. Contracts for the supply of materials, goods and commodities to
23. Government owned or controlled corporation, company, agency or Municipal
24. Corporation
23. Project Proponent and facility Operator of a BOT project requiring a public
utilities franchise
24. Operation of deep-sea commercial fishing vessels
25. Adjustment Companies
26. Ownership of condominium units where the common areas in the
condominium projects are co-owned by the owners of the separate units or
owned by a corporation

Up to Sixty Percent (60%) Foreign Equity

27. Financing companies regulated by the Securities and Exchange Commission

28. Investment houses regulated by the SEC

What is the coverage of Negative List B?

In Negative List B, foreign ownership in certain business is limited for reason of

security, defense, risk to health and morals and protection of small-and-
medium scale enterprises. These are:

Up to Forty Percent (40 %) Foreign Equity

1. Manufacture, repair, storage and/or distribution of products and/or ingredients

requiring Philippine National Police (PNP) clearance:

a. Firearms (handguns to shotguns), parts of firearms and ammunition therefore,

instruments or implements used or intended to be used in the manufacture of
firearms
b. Gunpowder
c. Dynamite
d. Blasting supplies
e. Ingredients used in making explosives
f. Telescopic sight, sniper scope and other similar devices
2. Manufacture, repair, storage and/or distribution of products requiring Department of
National Defense (DND) clearance;

a. Guns and ammunition for warfare

b. Military ordnance and parts thereof (e.g., torpedoes, depth charges, bombs,
grenades, missiles)
c. Gunnery, bombing and fire control systems and components
d. Guided missiles/missile systems and components
e. Tactical aircraft (fixed and rotary -winged), parts and components thereof
f. Space vehicles and component systems
g. Combat vessels (air. land and naval) and auxiliaries
h. Weapons repair and maintenance equipment

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 i. Military communications equipment
j. Night vision equipment
k. Stimulated coherent radiation devices, components and accessories
l. Armament training devices
m. Others as may be determined by the Secretary of the DND
3. Manufacture and distribution of dangerous drugs
4. Sauna and steam bathhouses, massage clinics and other like activities
regulated by law because of risks posed to public health and morals
5. All forms of gambling, e.g. race track operation
6. Domestic market enterprises with paid-in equity capital of less than the
equivalent of US$200,000
7. Domestic market enterprises, which involve advanced technology or employ at
least fifty (50) direct employees with paid-in-equity capital of less than the
equivalent of US$100,000

JURISPRUDENCE

Steelcase, Inc. v. Design International Selections, Inc. (DISI), G.R. No. 171995, 18
April 2012

FACTS:
Steelcase, Inc. (Steelcase) granted Design International Selections, Inc. (DISI) the
right to market, sell, distribute, install, and service its products to end-user customers
within the Philippines. Steelcase argues that Section 3(d) of R.A. No. 7042 or the Foreign
Investments Act of 1991 (FIA) expressly states that the phrase doing business excludes
the appointment by a foreign corporation of a local distributor domiciled in the
Philippines which transacts business in its own name and for its own account. On the
other hand, DISI argues that it was appointed by Steelcase as the latter’s exclusive
distributor of Steelcase products. The dealership agreement between Steelcase and DISI
had been described by the owner himself as basically a buy and sell arrangement.

ISSUE:
Whether Steelcase had been doing business in the Philippines.

RULING: NO.
The appointment of a distributor in the Philippines is not sufficient to constitute
doing business unless it is under the full control of the foreign corporation. On the other
hand, if the distributor is an independent entity which buys and distributes products,
other than those of the foreign corporation, for its own name and its own account, the
latter cannot be considered to be doing business in the Philippines. Here, DISI was an
independent contractor which sold Steelcase products in its own name and for its own
account. As a result, Steelcase cannot be considered to be doing business in
the Philippines by its act of appointing a distributor as it falls under one of the
exceptions under R.A. No. 7042.

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 MR HOLDINGS, LTD vs. SHERIFF CARLOS P. BAJAR, SHERIFF FERDINAND M.
JANDUSAY, SOLIDBANK CORPORATION, AND MARCOPPER MINING
CORPORATION
G.R. No. 138104 April 11, 2002

FACTS:
Marcopper Mining Corporation was unable to pay its loans from the Asian
Development Bank (ADB). Later, ADB transferred all its rights to collect from
Marcopper to MR Holdings, Ltd. In order to pay MR Holdings, Marcopper assigned all
its assets to MR Holdings and executed therefor a Deed of Assignment in MR Holdings
favor.
Meanwhile, another creditor of Marcopper, Solidbank Corporation, won a case
against Marcopper. The court then issued a writ of execution directing Sheriff Carlos
Bajar to levy Marcopper’s assets.
MR Holdings then filed an opposition asserting that it is now the owner of
Marcopper’s assets hence, Bajar cannot levy them. The lower court denied MR Holdings
on the ground that the Deed of Assignment was made in bad faith and that MR Holdings
was a foreign corporation doing business without a license in the Philippines (by virtue
of the Deed of Assignment) and as such cannot sue in the Philippines.

ISSUE: Whether or not MR Holdings may sue on this particular transaction.

HELD: Yes. The Supreme Court emphasized the following rules when it comes to foreign
corporations doing business here in the Philippines:

1. if a foreign corporation does business in the Philippines without a license, it cannot

sue before the Philippine courts;
2. if a foreign corporation is not doing business in the Philippines, it needs no license to
sue before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction;
3. if a foreign corporation does business in the Philippines with the required license, it can
sue before Philippine courts on any transaction.

Being a mere assignee does not constitute “doing business” in the Philippines.
MR Holdings, a foreign corporation, cannot be said to be doing business simply because
it became an assignee of Marcopper. MR Holdings was not doing anything else other
than being a mere assignee. The only time that MR Holdings is considered to be doing
business here is that if it continues the business of Marcopper – which it did not.
Therefore, since it is not doing business here, pursuant to the rules above, it can
sue without any license before Philippine courts on an isolated transaction or on a cause
of action entirely independent of any business transaction.
Anent the issue of bad faith, the same was not proven. It appears that the deed of
assignment was an earlier agreement incidental to the loan agreement between ADB and
Marcopper which precedes the action brought by Solidbank against Marcopper.

HAHN v. CA
G.R. No. 113074; January 22, 1997

FACTS:
Petitioner Alfred Hahn is a Filipino citizen doing business under the name and
style "Hahn-Manila". On the other hand, private respondent (BMW) is a nonresident
foreign corporation existing under the laws of the former Federal Republic of Germany,
with principal office at Munich, Germany.
On March 7, 1967, petitioner executed in favor of private respondent a "Deed of
Assignment with Special Power of Attorney. Per the agreement, the parties "continue[d]
business relations as has been usual in the past without a formal contract."

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 But on February 16, 1993, in a meeting with a BMW representative and the
president of Columbia Motors Corporation (CMC), Jose Alvarez, petitioner was
informed that BMW was arranging to grant the exclusive dealership of BMW cars and
products to CMC, which had expressed interest in acquiring the same.
On February 24, 1993, petitioner received confirmation of the information from
BMW which, in a letter, expressed dissatisfaction with various aspects of petitioner's
business, mentioning among other things, decline in sales, deteriorating services, and
inadequate showroom and warehouse facilities, and petitioner's alleged failure to comply
with the standards for an exclusive BMW dealer.
Nonetheless, BMW expressed willingness to continue business relations with
the petitioner on the basis of a "standard BMW importer" contract, otherwise, it said, if
this was not acceptable to petitioner, BMW would have no alternative but to terminate
petitioner's exclusive dealership effective June 30, 1993.
Because of Hahn's insistence on the former business relations, BMW withdrew
on March 26, 1993 its offer of a "standard importer contract" and terminated the
exclusive dealer relationship effective June 30, 1993.
On April 29, 1993, BMW proposed that Hahn and CMC jointly import and
distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for
specific performance and damages against BMW to compel it to continue the exclusive
dealership.

ISSUE:
Whether petitioner Alfred Hahn is the agent or distributor in the Philippines of
private respondent BMW

HELD:
Alfred Hahn is an agent of BMW.
The Supreme Court held that agency is shown when Hahn claimed he took
orders for BMW cars and transmits them to BMW. Then BMW fixes the down payment
and pricing charges and will notify Hahn of the scheduled production month for the
orders, and reconfirm the orders by signing and returning to Hahn the acceptance sheets.

The payment is made by the buyer directly to BMW. Title to cars purchased
passed directly to the buyer and Hahn never paid for the purchase price of BMW cars
sold in the Philippines. Hahn was credited with a commission equal to 14% of the
purchase price upon the invoicing of a vehicle order by BMW. Upon confirmation in
writing that the vehicles had been registered in the Philippines and serviced by him,
Hahn received an additional 3% of the full purchase price. Hahn performed after-sale
services, including, warranty services. for which he received reimbursement from BMW.
All orders were on invoices and forms of BMW.

Moreover, the Court distinguished an agent from a broker. The court ruled that
an agent receives a commission upon the successful conclusion of a sale. On the other
hand, a broker earns his pay merely by bringing the buyer and the seller together, even if
no sale is eventually made.

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 QUESTIONS AND ANSWERS

1. What is the general policy of the government for foreign investments?

The Philippine government is encouraging foreign investors to invest in the

country with businesses that will provide opportunities in employment, develop the
productivity of resources, heighten the volume as well as the value of exports and
provide the future development of the economy’s foundation.
2. What requirements must be complied with before a foreign corporationcan do
business in the Philippines?

If the foreign corporation itself intends to do business in the Philippines under its
foreign charter, the foreign corporation must first secure a “License to do Business in the
Philippines” from the Philippine Securities & Exchange Commission (SEC). If the
foreign corporation intends to do business in the Philippines by incorporating a
Philippine company, the foreign corporation must first secure the approval of the SEC by
filing its incorporation papers, together with authenticated copies of its foreigncharter
and by-laws.

3. What is the effect of being issued a “License to Do Business in thePhilippines”?

When a foreign corporation is issued the license to do business in the

Philippines, it may commence to transact its business in the Philippines and continue to
do so for as long as it retain its authority to act as a corporation under the laws of the
country or state of its incorporation, unless such license is sooner surrendered, revoked,
suspended, or annulled.
4. How does the Philippines define foreign corporations?

Foreign corporations has been defined as one, which owes its existence to the laws of
another state, and generally, has no legal existence within another state. Section 123 of
the Corporation Code defines a foreign corporation as one formed, organized, and
existing under any laws other than those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in the Philippines.

5. Can a foreign company invest in the Philippines?

Yes. The Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179, 1996)
liberalized the entry of foreign investment into the Philippines. Under the FIA, foreign
investors are generally treated like their domestic counterparts and must register with
the Securities and Exchange Commission (SEC) (in the case of a corporation or
partnership) or with the Department of Trade and Industry’s Bureau of Trade Regulation
and Consumer Protection (in the case of a sole proprietorship).

6. What is the percentage of foreign equity allowed under the FIA?

With the liberalization of the foreign investment law, 100% foreign equity may be
allowed in all areas of investment except those reserved for Filipinos under the
Philippine Constitution and existing laws.

7. Is there a need for the foreign corporation to appoint its local agent in the
Philippines?

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Yes, if the foreign corporation intends to do business in the Philippines under its foreign
charter. Among the things to be stated in the verified application are the name and
address of the foreign corporation’s resident agent authorized to accept summons and
process in all legal proceedings and, pending the establishment of a local office, all
notices affecting the corporation.

8. What is the effect of failure to appoint or maintain a local agent?

The failure to appoint or maintain a resident agent in the Philippines, or after change of
its resident agent or his address, failure to submit to the SEC a statement of such change,
are grounds for revocation of a license granted to a foreign corporation to do business in
the Philippines.

9. Is there any Reciprocity Compliance?

Yes. Attached to the application shall also be a duly executed certificate under oath by
the authorized official or officials of the jurisdiction of incorporation of the foreign
corporation, attesting to the fact that the laws of the country or state of the applicant
allow Filipino citizens and corporation to do business therein.

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