LAST TWO MINUTES!!

1. Securities Regulation

1.1 Name some of the lines of defenses set up by the Securities Regulation Code to protect
investors in securities.

Answer (not exhaustive):

(a) Registration of securities (Sec. 8);
(b) Periodic reporting requirements (Secs. 17 and 18);
(c) Regulation of transactions of directors, officers and stockholders (Sec. 23)
(d) Prohibition against the manipulation of security prices (Sec. 24);
(e) Prohibition against fraudulent transactions (Sec. 26);
(f) Prohibition of insider trading (Sec. 27);
(g) Registration and licensing securities market professionals (Sec. 28);
(h) Regulation of OTC markets (Sec. 32);
(i) Registration of exchanges (Sec. 33);
(j) Registration and oversight of Self-regulatory organizations (Sec. 39).

1.2 Name some exempt transactions under the Securities Regulation Code.

Answer (not exhaustive): The sale of any security in any of the following transactions makes
inapplicable the requirement of registration under Section 8.1 of the SRC:
(a) Judicial and similar sales - At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in insolvency or bankruptcy;
(b) Foreclosure sales - By or for the account of a pledge holder, or mortgagee or any
other similar lien holder selling or offering for sale or delivery in the ordinary course of
business and not for the purpose of avoiding the provisions of the SRC, to liquidate a
bona fide debt, a security pledged in good faith as security for such debt (e.g., the
foreclosure of a chattel mortgage constituted on shares of stock);
(c) Isolated transactions - An isolated transaction in which any security is sold, offered
for sale, subscription or delivery by the owner thereof, or by his representative for the
owner's account, such sale or offer for sale, subscription or delivery not being made in
the course of repeated and successive transactions of a like character by such owner,
or on his account by such representative and such owner or representative not being
the underwriter of such security;
(d) Stock dividends - The distribution by a corporation, actively engaged in the business
authorized by its articles of incorporation, of securities to its stockholders or other
security holders as a stock dividend or other distribution out of surplus;
(e) Sales of shares to stockholders - The sale of capital stock of a corporation to its
own stockholders exclusively, where no commission or other remuneration is paid or
given directly or indirectly in connection with the sale of such capital stock (e.g., the
additional issuance of shares by a corporation out of its authorized but unissued
capital stock);
(f) Convertible securities - The issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of conversion entitling the holder
of the security surrendered in exchange to make such conversion (e.g., a convertible
preferred stock which the holder could convert at a certain ratio for common shares);
provided, that the security so surrendered has been registered under the SRC or was,
when sold, exempt from the provisions of the SRC, and that the security issued and
delivered in exchange, if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to registration under the SRC.

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 Upon such conversion, the par value of the security surrendered in such exchange
shall be deemed the price at which the securities issued and delivered in such
exchange are sold;
(g) Subscriptions for shares - Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in pursuance of an increase in its
authorized capital stock under the Corporation Code, when no expense is incurred, or
no commission, compensation or remuneration is paid or given in connection with the
sale or disposition of such securities and only when the purpose for soliciting, giving
or taking of such subscriptions is to comply with the requirements of such law as to
the percentage of the capital stock of a corporation which should be subscribed
before it can be registered and duly incorporated, or its authorized capital increased;
(h) Stock splits and reverse splits - The exchange of securities by the issuer with its
existing security holders exclusively, where no commission or other remuneration is
paid or given directly or indirectly for soliciting such exchange (e.g., a two-for-one
stock split, whereby the 1,000 outstanding shares of a corporation with a par value of
P100.00 are divided into 2,000 shares with a par value of P50.00, would require the
holders of the outstanding shares of stock to exchange their holdings for the new
shares);
(i) Sale to 19 or less - The sale of securities to fewer than 20 persons in the Philippines
during any twelve-month period;
(j) Sales to qualified buyers

1.3 List the transactions that are exempt from the mandatory tender offer requirement.

Answer:
(a) any purchase of shares from the unissued capital stock, provided that the acquisition
will not result to a fifty percent (50%) or more ownership of shares by the purchaser;
(b) any purchase of shares from an increase in authorized capital stock;
(c) any purchase of shares in connection with foreclosure proceedings involving a duly
constituted pledge or security arrangement where the acquisition is made by the
debtor or creditor;
(d) any purchase of shares in connection with privatization undertaken by the
government of the Philippines;
(e) any purchase of shares in connection with corporate rehabilitation under court
supervision;
(f) any purchase of shares through an open market at the prevailing market price;
(g) merger or consolidation.

1.4 According to the Supreme Court in the case of Abacus Securities Corporation vs. Ampil
(2006), what is the purpose of laws and regulations requiring payment of traded shares
within specified periods?

Answer: According to the Supreme Court in the case of Abacus Securities Corporation vs.
Ampil (2006), “[s]tock market transactions affect the general public and the national
economy. The rise and fall of stock market indices reflect to a considerable degree the
state of the economy. Trends in stock prices tend to herald changes in business
conditions. Consequently, securities transactions are impressed with public interest, and
are thus subject to public regulation. In particular, the laws and regulations requiring
payment of traded shares within specified periods are meant to protect the economy from
excessive stock market speculations, and are thus mandatory.”

1.5 Problem: Don Pedro has had his eyes on acquiring control of XYZ Corporation. The
opportunity to do so arose when he heard that one of the stockholders, Don Roberto, is

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 sick and in need of money for his medical expenses, Don Pedro offered to buy his shares
(which constitute 15% of the total outstanding shares of XYZ). If Don Pedro were to buy
Don Roberto’s shares, Don Pedro would own 51% of the total outstanding shares of XYZ.
Would Don Pedro then be required to make an offer to buy the shares of the other
stockholders?

Answer: No, Don Pedro would not be required to make an offer to buy the shares of the other
stockholders. The facts do not indicate that XYZ is a listed company. As such, the tender
offer provisions of the Securities Regulation Code would not be applicable.
Even if XYZ Corporation were a listed company subject to the tender offer provisions of
the SRC, the said provisions could not be invoked by the other stockholders to force Don
Pedro to make an offer to buy their shares because Don Pedro is trying to acquire only
15%, not 35% or more, of the total outstanding shares of XYZ.
Moreover, under SRC Rule 19 on tender offers, an acquirer would have to make a tender
offer for all the outstanding shares of the remaining stockholders if his acquisition would
result in ownership of over 51% of the total outstanding shares. In this case, even if he
were able to buy Don Roberto’s shares, Don Pedro would only own 51%, not more than
51%, of the total outstanding shares of XYZ.

1.6 Problem: Zabor Pharmaceutical Corporation made an initial public offering (IPO) of
1,000,000 shares of its authorized capital stock. As required by the Securities Regulation
Code, Zabor prepared and filed a registration statement which was signed by the persons
required to do so under the Code. The registration statement was accompanied by Zabor’s
audited financial statements duly certified by its external auditors, by the required opinion
of its retained legal counsel and by a statement from its medical director attesting to the
medical facts stated in the statement. The IPO was underwritten by All Makati Financial &
Investment Corporation. After its registration with the SEC, it was listed with the Philippine
Stock Exchange.
In its registration statement, Zabor said that Retrofax, its new drug that is supposed to
inhibit the growth of cancerous cells in the male prostate gland, has already received the
approval of the Bureau of Food and Drug. Indeed, the BFAD has approved Retrofax but
only for use by Zabor for five years in controlled tests between two groups of middle-aged
males: one group to take Retrofax and the other group to take a placebo. If Retrofax lives
up to expectations, billions of pesos are expected to flow into the coffers of Zabor.
Amina, an employee of the underwriter, wanted to but did not buy any Zabor shares. At
the time of the IPO, she didn’t have any investible funds. Blesilda, an assistant attorney in
the retained law firm of Zabor, bought 1,000 shares of the IPO. She did not read the
registration statement although she was furnished a copy of the prospectus by her broker
before she bought her shares. Carina, the secretary of the President of Zabor, was aware
of the untrue statement or omission in the registration statement but nonetheless bought
100 shares out of loyalty to her boss.
One month after the IPO, the untrue statement or omission of Zabor in its registration
statement became publicly known and the price of its shares in the stock market
plummeted to only half of its offering price.
(a) Could Zabor be sued in court?
(b) Who among Amina, Blesilda and Carina could sue Zabor?
(c) Who else could be sued by the plaintiff(s)?

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 (d) What damages could be recovered by the plaintiff(s)?
(e) Could Zabor make an offer of settlement?
(f) The by-laws of Zabor contain a provision which states that Zabor will indemnify any
officer or director who may be sued in connection with the performance of his duties
as such officer or director. If Roberto were sued and made to pay damages, could he
recover the same from Zabor?
(g) Does the plaintiff have to prove that the decline in value of the shares was caused by
the untrue statement or omission?
(h) Does the plaintiff have to prove fraud or bad faith?
(i) What is the prescriptive period for bringing suit in this case?

Answers:

(a) Yes, Zabor could be sued in court under Section 56.1 of the Securities Regulation
Code which provides that any person acquiring a security, the registration statement
of which or any part thereof contains on its effectivity date an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make such statement not misleading, and who suffers damage, unless
it is proved that at the time of such acquisition he knew of such untrue statement or
omission, may sue and recover damages.
(b) Amina could not sue because she did not acquire any shares of Zabor. Blesilda
could sue as she has acquired some shares of Zabor. The fact that she did not read
the registration statement is of no moment as it is not a requirement before she could
sue in court. Carina could not sue as she was aware of the untrue statement or
omission at the time she acquired her Zabor shares.
(c) Blesilda could sue the following:
(i) Every person who signed the registration statement (Sec. 56.1[a]). Under Sec.
12.4, the registration statement must be signed by the issuer’s executive officer,
principal operating officer, principal financial officer, comptroller, principal
accounting officer, and corporate secretary.
(ii) The directors of Zabor at the time of the filing of the registration statement (Sec.
56.1[b]);
(iii) The external auditors of Zabor (Sec. 56.1[d]);
(iv) The retained legal counsel of Zabor (Sec. 56.1[e]);
(v) The medical director of Zabor (Sec. 56.1[e]);
(vi) All Makati Financial & Investment Corporation as underwriter of Zabor’s IPO
(Sec. 56.1[g]).
(d) Blesilda could try to recover the following damages under Section 63:
(i) Actual damages;
(ii) Damages in an amount not exceeding triple the amount of the transaction;
(iii) Exemplary damages if she could prove bad faith, fraud, malevolence or
wantonness in the violation of Section 56.1;

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 (iv) Attorney’s fees not exceeding 30% of the award.
(e) Zabor could not make an offer of settlement. The same is available only in
investigations or proceedings before the Securities and Exchange Commission.
(Sec. 55)
(f) No, he cannot recover from Zabor the damages that he was made to pay. Section
63.3 provides that all persons held liable under the provisions of Section 56 shall
contribute equally to the total liability adjudged therein and in no case shall the
principal stockholders, directors and other officers of the issuer recover their
contribution to the liability from the issuer.
(g) No.
(h) No, unless the plaintiff would want to claim exemplary damages.
(i) The suit must be brought within 2 years after the discovery of the untrue statement
or the omission but within 5 years after the security was bona fide offered to the
public. (See Sec. 62.1)

1.7 Some terms related to securities and the stock exchange:

(a) Bear market- a securities market characterized by falling prices.
(b) Blue-chip stocks - common stocks of well-known companies with histories of profit
growth and dividend payment, as well as quality management, products and
services. Blue-chip stocks are usually high-priced and low-yielding. The term “blue
chip” comes from the game of poker in which the blue chip holds the highest value.
(c) Call option - an option to buy stock at a certain price within a certain time.
(d) Chain listing - the practice of listing the shares of a subsidiary or of a holding or
parent company in a situation where the shares of the holding or parent company or
the subsidiary, as the case may be, are already listed.
(e) Churning - the practice of some securities brokers to engage in excessive trading in
disregard of his customer’s investment objectives for the purpose of generating
commission business.
(f) Commodity futures contract - a contract calling for the delivery of a commodity at a
specified future time for a specified price (which is determined by auction on a
commodity futures exchange).
(g) Debenture - also known as a debenture bond, it is a credit instrument representing a
direct obligation of the issuing corporation, resting solely on its general credit without
specific mortgage or pledge, or assignment of property.
(h) Derivative - a financial instrument whose value is derived from or dependent on the
value of an underlying asset such as shares of stock or a foreign currency.
(i) Initial public offering - the first offering of a corporation’s stock to the public
(abbreviated as IPO).
(j) Lock-up - the non-disposition, sale or assignment of the shares owned by the
existing stockholders of a company applying for listing of its securities with a stock
exchange for a specified minimum period, e.g., 180 days, after the listing of the said
shares.
(k) Margin – the term used to refer to the money put up by an investor in order to open
a margin account.
(l) Margin account – the account opened by an investor with his broker before he
could engage in margin trading. To open the account, the investor must put in some

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 cash. This cash plus the amount borrowed by the investor from the broker will be
used by the broker in the purchase of securities on behalf of the investor.
(m) Margin call – refers to the demand by a broker, as creditor of a margin account, for
the investor/borrower to reduce the loan in order to maintain the required margin by
putting up more cash or collateral. If the investor cannot or does not wish to put up
more cash or collateral, then some of the securities held in the margin account would
have to be sold.
(n) Margin trading - refers to the purchase of securities by an investor using the credit
of the broker to pay for part of the said securities.
(o) Over-the-counter market - the market for securities (abbreviated as OTC) that are
not traded on any organized stock market exchange. It is a market with no physical
location, i.e., securities are quoted and sold by telephone or computer on a bid-and-
ask basis by dealers rather than being sold by public auction as on the stock
exchange.
(p) Private placement - the offer of securities directly to specific investors, rather than
to the general public, without using an intermediary such as an underwriter. A private
placement may constitute a public offering unless the securities involved are of an
exempt class or the offering is an exempt transaction.
(q) Put option - an option to sell stock at a certain price within a certain time.
(r) Rating agency – an organizations that publicly rates the credit quality of securities
issuers such as, in the United States, Moody’s Investors Service, Inc. and Standard &
Poor’s Corporation.
(s) Straddle or spread eagle option - an option to buy or sell stock at a certain price
within a certain time.
(t) Street name stock - a stock registered and held in the name of a broker instead of
the customer, either for safekeeping or as collateral for margin trading.
(u) Tombstone - an advertisement for an offering of new securities. It typically gives the
terms of the issue and lists the managers and underwriters.
(v) Warrant - a type of security that entitles its owner to buy a share of the issuing
corporation’s stock at a predetermined price regardless of the stock’s current market
value.

1.8 Some terms related to tender offers:1

(a) Any-and-all bid - an offer to buy all of the shares tendered in the target company.
This avoids proration of tendered shares.
(b) Leveraged buyout (LBO) - any acquisition of all of the non-management stock of a
company by its management, a third party, or both, with the acquirer borrowing most
or all of the purchase price. When an LBO is orchestrated by corporate insiders, it is
alternatively called a “management buyout” or MBO.
(c) White knight - a third company that the target persuades to merge with it or to make
a competing offer that it hopes will lead to a combination more to its liking.
(d) Black knight - a third company that spoils an offer that the target favors.
(e) Poison pill - refers generally to preferred stocks, rights, warrants, options, or debt
instruments that a target company distributes to its security holders. These
instruments are designed to deter non-negotiated takeovers by conferring certain
rights on shareholders upon the occurrence of a “triggering event”, such as a tender
offer or third-party acquisition of a specified percentage of stock. A flip-in right is a

1
Louis Loss and Joel Seligman, Fundamentals of Securities Regulation, 3rd ed., 1995, Little Brown
and Company, pp. 494-500.

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 right to acquire stock of the target; a flip-over right is a right to acquire stock of the
offeror.
(f) “Shark repellent” or “porcupine” provisions - defensive steps, normally involving
an amendment to the articles of incorporation, by-laws, or both, that a target company
might adopt to ward off potential offers such as adopting super-majority voting
requirements for mergers and the like.

2. Banking

2.1 What is the degree of diligence required of a bank, particularly when dealing with its
depositors or the public?

Answer: In one case, the Supreme Court held that a bank is required to exercise “high
standards of integrity and performance” or, in other words, a degree of diligence higher
than that of a good father of a family, when dealing with its depositors (Philippine Banking
Corporation vs. CA, G.R. No. 127469, January 15, 2004). In another case, the SC held
that banks have the duty to exercise the highest degree of diligence when transacting
with the public (Solidbank Corporation, et al. vs. Spouses Tan, G.R. 167346, April 2,
2007).

2.2 Name some areas of activity regulated by the General Banking Law of 2000.
Answer (not exhaustive):
(a) Acquisition by bank of own shares;
(b) Acquisition by bank of real estate;
(c) Conduct of banking business;
(d) Lending by banks;
(e) Establishment of banks and trust entities;
(f) Engaging in allied and non-allied activities;
(g) Outsourcing of bank functions.

2.3 What are the various ways by which the BSP and the PDIC could handle banks in
distress?
Answer (not exhaustive):
(a) Grant by BSP of extraordinary loans (Sec. 84, RA 7653);
(b) Extension by PDIC of financial and other assistance (Sec. 17, RA 3591, as
amended);
(c) Appointment by BSP of conservator (Sec. 29, RA 7653);
(d) Closure of bank by BSP (Sec. 30, RA 7653);
(e) Receivership of bank by PDIC (Secs. 8 and 10, RA 3591, as amended);
(f) Rehabilitation of closed bank (Sec. 30, RA 7653);
(g) Liquidation of closed bank (Sec. 30, RA 7653).

2.4 What is splitting of deposits?

Answer: Spitting of deposits refers to the act of a depositor, made (a) within 120 days
immediately preceding or during a bank-declared holiday, or (b) immediately preceding a
closure order issued by the Monetary Board, in breaking down and transferring his
deposits, with an outstanding balance of more than the statutory maximum amount of
insured deposit, into two or more accounts in the name(s) of natural or juridical persons
or entities who have no beneficial ownership of the transferred deposits in their names,
for the purpose of availing himself of the maximum deposit insurance coverage. (Sec.
21[f][5], PDIC Law, as last amended by RA 9576)

2.5 How is the secrecy of bank deposits maintained?

(a) Under the Secrecy of Bank Deposits Law

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 (i) Rule (Secs. 2-3, RA 1405, as amended)
(ii) Additional exceptions
(1) Under Sections 21,28 and 30 of RA 93721 or the Human Security Act of
2007)
RA 93721, notwithstanding the provisions of the Secrecy of Bank Deposits
Law (RA 1405, as amended), grants the justices of the Court of Appeals
designated as a special court to handle anti-terrorism cases the power to
authorize in writing any police or law enforcement officer and the members
of his or her team (a) to examine, or cause the examination of, the deposits,
placements, trust accounts, assets and records in a bank or financial
institution, (b) to gather or cause the gathering of any relevant information
about such deposits, placements, trust accounts, assets, and records from a
bank or financial institution, and (c) to freeze the said deposits, placements,
trust accounts, assets, and records, of (1) a person charged with or
suspected of the crime of terrorism or conspiracy to commit terrorism, or (2)
a judicially declared and outlawed terrorist organization, association, or
group of persons, or (3) a member of such judicially declared and outlawed
organization, association, or group of persons. (Secs. 21 and 28)
(2) Under Section 8, Paragraph Eight, RA 3591, as last amended by RA 9576
(2009).
This pertains to the grant to PDIC of additional power to inquire into or
examine deposit accounts and all information related thereto.
(b) Under the General Banking Law
(i) Prohibition against outsourcing of inherent banking functions (Sec. 55.1[e], RA
8791)
(ii) Prohibition against the employment of casuals and non-regular employees in
the conduct of bank business involving deposits (Sec. 55.14, RA 8791)
(iii) Prohibition against the extension of the probationary period of employees under
probation involved in handling deposits (Sec. 55.14, RA 8791)
(iv) Prohibition against the disclosure to any unauthorized person of any information
relative to the funds or properties in the custody of a bank belonging to private
individuals, corporations, or any other entity (Sec. 55.1[b], RA 8791).

2.6 Problem: Beta Bank was found insolvent by the Bangko Sentral ng Pilipinas and was
ordered closed by the latter.
(a) What does it mean when we say that a bank has been closed by the BSP?
(b) Could Beta Bank be liquidated immediately by PDIC?
(c) Jaime, one of the large depositors of Beta Bank, protested the reduction by PDIC of
the 42% per annum interest that the bank had agreed to pay on Jaime’s time
deposit and threatened to sue PDIC to compel the latter to pay the contractually
stipulated interest rate. If Jaime were to sue PDIC, do you think he would succeed?
(d) One of the accounts in the closed bank, with P1 million on deposit at the time of the
closure of the bank, is in the name of Lucky Corporation, Lotto, Inc., and Lorna
Labiosa.
(i) How much could Lorna recover from PDIC?
(ii) How about Lucky and Lotto?
(iii) Would your answer to (d)(ii) be the same if Lucky owed the bank P100,000.00
at the time of its closure?
(e) John Dunbar, one of the depositors of Beta Bank, was living in the United States at

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 the time of the closure of the bank and did not become aware of such closure until
three (3) years afterwards.
(i) Could John still claim his insured deposit from PDIC?
(ii) Assuming that John could no longer claim his insured deposit from PDIC, would
it still be possible for him to get back his deposit?
Answers:
(a) It means that the bank can no longer engage in the business of banking.
(b) No, PDIC cannot immediately liquidate Beta Bank. It must first act as, and perform
the duties of, a receiver. One of its duties as receiver is to determine, within 90 days
from its take over of the bank, whether the institution may be rehabilitated or
otherwise placed in such a condition that it may be permitted to resume business
with safety to its depositors and creditors and the general public. (Sec, 30, BSP Law)
(c) Jaime would not succeed if PDIC were able to prove that the stipulated interest on
his deposits is unusually high compared to the prevailing applicable interest rate.
The PDIC is authorized under Sec. 10(c)(8) of the PDIC Law, as amended by RA
9302, to make such reduction. Any such reduction, however, shall apply only to
unpaid interest.
(d) (i) Lorna could not recover from the PDIC. Under Section 4(g) of the PDIC Law, as
amended, if an account is held by a juridical person jointly with a natural person, the
maximum insured deposit is presumed to belong entirely to such juridical person,
unless a different sharing is stipulated in the instrument of deposit.
(d) (ii) Lucky Corporation and Lotto, Inc. would share equally the maximum insured
deposit (i.e., P250,000 each), unless a different sharing is stipulated in the
instrument of deposit.
(d) (iii) If Lucky Corporation owed the bank P100,000 at the time of its closure, the said
amount shall be deducted from its share of the maximum insured deposit (P250,000
less P100,000 = P150,000).
(e) (i) John could no longer claim his insured deposit from the PDIC. A depositor of a
closed bank, under Section 16(e) of the PDIC Law, as amended, has two (2) years
from actual takeover of the closed bank by the PDIC within which to claim his
insured deposit from the PDIC.
(e)(ii)  No, John could still file his claim against Beta Bank. Not having been paid by
PDIC, John’s claim against the closed bank shall revert to him.

2.7 Problem: Kirby borrows P200,000 from Forever Bank and secures the loan by a
mortgage on his condominium unit. ABC Credit Services, Inc., a corporation engaged in
the gathering of credit information, sends a letter to Forever Bank inquiring about any
property of Kirby on which the bank holds any interest and, if there is any, requesting that
it be furnished with a description of such property and the nature of the bank’s interest.
Jess Santos, a Vice President of the bank, replies to the inquiry and discloses the
requested details. Did the bank violate any law when Santos made the said disclosure?

Answer: Forever Bank did not violate any law when Santos made the disclosure. There was no
violation of the Secrecy of Bank Deposits Law inasmuch as the latter prohibits only the
disclosure of, or inquiry into, deposits with any banking institution or purchases of
government securities.
Neither was there a violation of Section 55.1(b) of the General Banking Law of 2000 as it
refers to funds or properties in the custody of the bank belonging to private individuals,
corporations, or any other entity. No bank deposit of Kirby, and no funds or properties
belonging to Kirby and in the custody of Forever Bank, is involved in the problem.

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2.8 Problem: What would you tell Cesar, Danny and Ernie, who are new stockholders and
directors of XYZ Bank, if they should approach you for advice on the following matters?
(a) Cesar asked you whether he, as a stockholder and director, could borrow from the
bank and what would be required in order that the bank could validly extend a loan to
him.
(b) Danny informed you that he owns a manpower company and that he would like to
supply to the bank janitors, messengers and tellers for employment during peak
periods of the year.
(c) Ernie disclosed to you that he plans to subscribe to 50% of the outstanding shares of
stock of the bank and that his friends Cesar and Danny have no objection to his plan.
Answers:
(a) Cesar, as a stockholder and director of the bank, could borrow from the bank (i) with
the written approval of a majority of all the directors of the bank, excluding the
director concerned; (ii) the said approval shall be entered upon the records of the
bank and a copy of such entry shall be transmitted forthwith to the appropriate
supervising and examining department of the BSP; (iii) the terms of his borrowing
shall not be less favorable to the bank than those offered to others; and (iv) the
amount to be borrowed by Cesar, together with all outstanding loans, credit
accommodations and guarantees extended to him by the bank, shall not exceed an
amount equivalent to his unencumbered deposits and the book value of his paid-in
capital contribution in the bank. (Sec. 36, RA 8791)
(b) I will advice Danny that while he could supply the bank with janitors and
messengers, he could not supply it with tellers as the General Banking Law does not
allow a bank to outsource functions that are inherently banking in character (such as
the work done by tellers). (Subsection 55.1[e], RA 8791]
(c) Upon the assumption that the outstanding shares of stock are all voting stocks, I will
advise Ernie that, even if his friends agree, he cannot invest in 50% of the
outstanding shares of stock of the bank as the General Banking Law allows a Filipino
individual to own only up to 40% of the voting stock of a bank. (Sec. 11, RA 8791;
BSP Circular No. 256, Series of 2000, dated August 15, 2000)

2.9 Problem: PDIC took over as receiver of Beta Bank on January 10, 2004 after the said
bank was ordered closed by the BSP. PDIC proceeded to perform its duties as such receiver
and, thirty days thereafter, sold to an interested third party a small parcel of land owned, but not
being used, by the bank.
(a) A creditor of the bank objected to the sale on the ground that PDIC has no authority to
make such sale. Is the objection valid?
(b) Would your answer be the same if PDIC explained that the parcel of land was acquired
by the bank in payment of a borrower’s loan obligation and that it had to sell the land as the 5-
year holding period provided by Section 51 of the General Banking Law is about to expire?

Answers:
(a) The objection of the creditor is valid. Under Section 30 of RA 7653 (BSP Law), the
receiver shall not, with the exception of administrative expenditures, pay or commit any act that
will involve the transfer or disposition of any asset of the institution.
(b) Yes, my answer would be the same. Section 51 of RA 8791 (General Banking Law of
2000) applies only to an operating bank, not to a closed bank.

3. Intellectual Property

3.1 Some IP terms and concepts:

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(a) Cybersquatting2 – the registration by a person or entity of a domain name that is
identical or confusingly similar to a registered trademark for the purpose of creating confusion as
to the source of the domain name.
(b) Distinctiveness3 – the concept that the first consideration in determining whether a
trademark is protectable is to determine whether the mark is distinctive of the products or
services on which the mark is used. Distinctiveness is either “inherent” in the trademark itself or
acquired through secondary meaning. There is a continuum of trademarks into which trademarks
could be slotted: from generic marks (which are not protectable at all) to inherently distinctive
marks (which are protectable).
(i) Generic marks4 - words that are found in the English (or other) language and
amount to the very noun required for a specific product. Trademarks could be generic
from inception (such as the mark LITE for use on a beer with supposedly fewer calories)
or they can become generic through use (such as the mark CELLOPHANE). The test to
determine whether a mark is generic or not is its primary significance to the relevant
consumer. If the primary significance to the consumer is to identify source, then it is a
valid mark; if the primary significance of the mark is to identify the product, then the mark
is generic and invalid.
(ii) Inherently Distinctive Marks5
(aa) Arbitrary marks – words or symbols which already exist in the
language, but are used as trademarks on goods and services with which
they are not normally associated, e.g., APPLE for computers and IVORY
for soap.
(bb) Fanciful marks – “coined” or “invented” words which do not exist
in any language, e.g., KODAK for photographic equipment, EXXON for
oil and gas products, and CLOROX for bleach.
(cc) Suggestive marks – those that suggests the goods or services
but does not go so far as to actually describe them, e.g., ORANGE
CRUSH when used on a flavored soda beverage.
(c) Domain name - any alphanumeric designation which is registered with or assigned by
any domain name registrar, domain name registry, or other domain name registration authority
as part of an electronic address on the internet (Sec. 45, Lanham Act). A domain name is not a
trademark. It does not distinguish the goods or services of an enterprise (Sec. 121.1, IPC)
(d) Evergreening - a business strategy that a pharmaceutical company may adopt when the
patent over one of its products is about to expire in order to prolong its patent over, and the flow
of its royalties from, such product. A manufacturer of a particular drug may also use evergreening
to restrict or prevent competition from manufacturers of generic equivalents to that drug. This
strategy is sometimes carried out by the manufacturer taking out a new patent (for example, over
a new pharmaceutical mixture).
(e) Parallel importation - the importation into the country of a non-counterfeit product
coming from another country without the permission of the intellectual property owner. Parallel
imports are often referred to as grey goods. Parallel importers ordinarily purchase products in
one country at a price (P1) which is cheaper than the price at which they are sold in a second
country (P2), import the products into the second country, and sell the products in that country at
a price which is usually between P1 and P2.

2
Sheldon W. Halpern, Craig Allen Nard, and Kenneth L. Port, Fundamentals of United States
Intellectual Property Law: Copyright, Patent, Trademark, 2nd ed., 2007, Kluwer Law International, p.
304.
3
Ibid. at 329.
4
Ibid. at 335.
5
Ibid. at 330-331.

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(f) Trade dress - the total compilation and image presented by a product configuration or
packaging. It includes the total look of a product and its packaging, as well as the design and
shape of the product itself.

3.2 Problem: Moriones Trading Corporation would like to import from India a medicine for the
relief of back problems called Likodax that is manufactured in India by Bharat Pharma, Inc., a
subsidiary of Bharat UK Ltd., the owner of the patent on Likodax. Bharat Filipinas, Inc., the
subsidiary in the Philippines of Bharat UK, does not manufacture, and has not yet imported and
sold Likodax, in the Philippines. Could Bharat UK prevent Moriones Trading from importing
Likodax into the Philippines?

Answer: Bharat UK could not prevent Moriones Trading from importing Likodax into the
Philippines inasmuch as Likodax has already been introduced in India by Bharat Pharma. The
IPC, as last amended, has adopted the international patent exhaustion principle pursuant to
which the sale of a patented drug or medicine anywhere in the world exhausts the rights of the
patent owner in respect thereof. Moreover, the right to import patented drugs and medicines is
now available under the IPC, as last amended, to any private third party such as Moriones.

3.3 Problem: Pedro, pursuant to a contract with Juicy Drinks, Inc., gathered, collected, and
stored in his warehouse the empty soda bottles of a ABC Soda, Inc., a competitor of Juicy
Drinks. Pedro’s obvious purpose is to reduce the supply of soda bottles that ABC Soda could use
in its bottling operations. No other act or conduct in respect of the soda bottles or against ABC
Soda was performed by Pedro. ABC Soda, after learning of Pedro’s acts, sued Pedro for unfair
competition under Section 168.3 of the IPC, i.e., for other acts contrary to good faith of a nature
calculated to discredit the goods, business, or services of ABC Soda. Is Pedro liable for unfair
competition?

Answer: Pedro is not liable for unfair competition. The problem does not indicate that the
hoarding of empty bottles of ABC Soda caused deception and confusion on the part of the
general public. Neither do the given facts show that there was an attempt on the part of Pedro to
use the empty bottles or pass them off as his goods. In addition, the IPC does not criminalize
bottle hoarding. The acts the IPC penalizes involve fraud and deceit. In short, the hoarding does
not make Pedro liable for unfair competition as there was no deception of, or fraud on, the end-
users. (Coca-Cola Bottlers Phils., Inc. vs. Gomez, G.R. 154491, November 14, 2008)

3.4 Problem: Jenny, an airline stewardess, augments her income by bringing back to the
Philippines from each trip abroad non-commercial quantities of patented and/or branded luxury
goods such as lipsticks, perfumes, bags, and shoes which she then sells at high-end tiangges
and bazaars. Decadent, a large department store primarily catering to the old and newly rich and
representing some of the patented and/or branded products brought in and sold by Jenny,
learned about her entrepreneurial activities and decided to take her to court.
(a) Could Decadent sue Jenny for trademark infringement or unfair competition?
(b) Assuming that it could not, could Decadent file some other action Jenny?

Answers:
(a) Decadent could not sue Jenny for trademark infringement or for unfair competition. Jenny
brought in and sold genuine goods, not fake goods or goods bearing infringing marks, or with
false designations of origin or description. (Secs. 168-169, IPC).
(b) With regard to the patented goods or the goods obtained from a patented process,
Decadent could sue Jenny for patent infringement, if so authorized by the patent owner, as
Jenny imported and sold the goods without the authorization of the patentee (Sec. 76, IPC).

3.5 Problem: Bien wrote a novel about the life of a Filipino expatriate in New York. Being out

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of funds, he sold the manuscript of the novel to Jorge. Bien told Jorge that he could publish the
novel at his own expense if he wants to. Jorge, after a few months, sold the manuscript to Fred.
Jorge also told Fred that he could publish the novel if he wants to. Bien died soon after the
aforementioned sale to Fred. A year later, Fred caused the novel to be published.
(a) If Bien’s heirs were to sue Fred for infringement of Bien’s copyright and demand the
payment of damages, could Fred successfully set up the defense that he was not aware that the
manuscript is copyrighted as it did not contain any notice of copyright and, therefore, he should
not be made to pay damages?
(b) Could Fred also successfully set up the defense that, even if the manuscript were
copyrighted, the copyright was assigned by Bien to Jorge and that the latter, in turn, assigned
the said right to Fred?
(c) Could the heirs of Bien make any claim against Jorge?
(d) Apart from damages, what two other remedies could the heirs of Bien ask the court to
grant them?

Answers:
(a) No. A notice of copyright need not be placed in a manuscript or any other copyrightable
work. Such notice is now discretionary on the part of the copyright holder. (Sec. 192)
(b) No. The assignment made by Bien to Jorge was not made in writing and it is, therefore,
inefficacious. Thus, Jorge had no right to transmit to Fred. (Sec. 180.2)
(c) Yes. They could claim up to 5% of the P100,000 received by Jorge when he sold the
manuscript to Fred pursuant to Section 200 of the IPC.
(d) The other remedies available to the heirs of Bien are as follows:
(i) Injunction to restrain infringement (Sec. 216.1[a]);
(ii) Actual damages and profits (Sec. 216.1[b]);
(iii) Impounding of the infringing articles (Sec. 216.1[c]);
(iv) Destruction of infringing articles (Sec. 216.1[d]);
(v) Moral and exemplary damages (Sec. 216.1[e]);
(vi) Filing of criminal action (Sec. 217).

3.6 Problem: Xeno applied for registration in his name of the trademark “Loving Care” for
use in a shoe-cleaning product. Yago opposed the application for the reasons that, first, Xeno
has not used the trademark in trade or commerce prior to the filing of the application, and,
second, Yago has registered an identical trademark for use in a line of body lotions six months
prior to the filing of Xeno’s application. Zoldar, a non-resident American national, also filed an
opposition to Xeno’s application on the ground that he is the owner of an identical trademark
registered in the United States (but not in the Philippines) for use in ladies undergarments and
that his mark is known throughout the world.
(a) Is the first reason given by Yago valid?
(b) In respect of Yago’s second reason, does it matter that shoe cleaning products and body
lotions belong to different classes under the Nice system of classification?
(c) Does Zoldar’s opposition have any merit?

Answers:
(a) No, it is not valid. Prior use of a trademark in trade or commerce before the filing of the
application is no longer a requirement under the Intellectual Property Code. (See Sec. 124, IPC)
(b) Yes, it matters. The registration by Yago of an identical trademark for use in products
belonging to a class different from that applied for by Xeno does not prevent Xeno from

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registering the same trademark. [Note: X’s product would probably fall under Class 2, Y’s under
Class 3, and Z’s Class 25.]
(c) No, it does not have any merit. First, the fact that Zoldar’s trademark may be
known throughout the world does not ipso facto entitle Zoldar to the benefits of the provisions of
the Intellectual Property Code dealing with well-known marks. A competent authority of the
Philippines must first consider Zoldar’s mark as a mark well known internationally and in the
Philippines. Second, even assuming that Zoldar’s mark is a well-known mark under the IPC, the
benefit of the IPC provisions on well-known marks cannot be accorded to Zoldar’s mark as it is
not registered in the Philippines and is used in products belonging to a class different from that
applied for by Xeno.

4. Others

4.1 According to the Supreme Court in the case of Ao-As, et al. vs. CA, et al. (2006), which of
the following circumstances, by itself, is a ground for the appointment of a management
committee?
(a) Refusal to allow stockholders to examine books of the company;
(b) Misconduct of corporate directors or officers;
(c) Bad judgment by directors;
(d) Misapplication of a company’s funds by the officers.

Answer: None. According to the Court, the appointment of a receiver or a management

committee for an ongoing corporation is a last resort remedy, and should not be employed when
another remedy is available. Relief by receivership is an extraordinary remedy and is never
exercised if there is an adequate remedy at law such as mandamus or if the harm could be
prevented by an injunction or a restraining order.

4.2 What is the doctrine of mortgagee in good faith as explained by the Supreme Court in the
case of Ereña vs. Querrer-Kaufman, G.R. No. 165853, June 22, 2006?

Answer: A mortgagee in good faith is one who relies in good faith on the certificate of title of the
mortgagor of the property given as security. He has no obligation to undertake further
investigation in the absence of any circumstance that might arouse suspicion. Hence, even if the
mortgagor is not the rightful owner of, or does not have a valid title to, the mortgaged property,
the mortgagee in good faith is nonetheless entitled to protection. This doctrine presupposes,
however, that the mortgagor, who is not the rightful owner of the property, has already
succeeded in obtaining a Torrens title over the property in his name and that, after obtaining the
said title, he succeeds in mortgaging the property to another who relies on what appears on the
said title. The innocent purchaser for value protected by law is the one who purchases a titled
land by virtue of a deed executed by the registered owner himself. The doctrine does not apply
to a situation where the title is still in the name of the rightful owner and the mortgagor is a
different person pretending to be the owner. In such a case, the mortgagee is not an innocent
mortgagee for value and the registered owner will generally not lose his title. (Ereña vs. Querrer-
Kaufman, G.R. No. 165853, June 22, 2006)

4.3 Problem: A week after you took your oath as a member of the Bar, a family friend, Tess,
went to see you about her plan to set up a warehouse. Not knowing much about the business,
she asked you the following questions:
(a) Could she store all kinds of commodities in his warehouse?
(b) Could she refuse to accept commodities for storage in her warehouse?
(c) As a warehouse operator, would she be required to obtain insurance against theft?
(d) Could she limit her liability to depositors to the amount of the bond she was required to
put up?

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Answers:
(a) Yes, Tess could store all kinds of commodities in her warehouse provided these
commodities are those that could be traded openly and legally and are of the kind specified in
her license. (Secs. 2 and 4, General Bonded Warehouse Act)
(b) No, Tess could not refuse to accept commodities for storage in her warehouse if (i) they
are of the kind specified in her license, (ii) they are in a suitable condition for warehousing, and
(iii) there is still sufficient space in her warehouse to accommodate them (Sec. 8). [Yes, Tess
could refuse to accept commodities for storage in her warehouse if they are not of the kind
specified in her license, or, even if they are of the kind specified in her license, they are not in a
suitable condition for warehousing or there is insufficient space to accommodate them in her
warehouse.]
(c) No. What Tess is required to do is insure the commodities she receives for storage
against fire. (Sec. 6)
(d) No. In case the bond given by Tony is not sufficient to cover the full market value of the
commodity stored, the depositor may run after any property or assets of Tony not exempt by law
from attachment and execution. (Sec. 7)

4.4 Problem: Wa-wa Warehousing Corporation receives from Delfin 30 bales of cotton for
deposit in its warehouse. Wa-wa issues to Delfin a receipt for such deposit. While the goods
were on deposit in the said warehouse, Conrad, a creditor of Delfin, obtains judgment against
Delfin for the recovery of a sum of money. The sheriff thereupon levies on the goods upon a writ
of execution and directs the warehouseman to deliver the goods. Is the warehouseman under
obligation to comply with the sheriff’s order?

Answer: Yes, as the problem does not state that the receipt issued by the warehouseman is a
negotiable warehouse receipt. If it were a negotiable warehouse receipt, the warehouseman
would not be under any obligation to comply with the sheriff’s order unless the said receipt is first
surrendered to the warehouseman. Under Section 25 of the Warehouse Receipts Act, if goods
are delivered to a warehouseman by the owner or by a person whose act would bind the owner,
and a negotiable receipt is issued for them, the goods cannot thereafter, while in the possession
of the warehouseman, be attached by garnishment or otherwise, or be levied upon under
execution, unless the negotiable receipt be first surrendered to the warehouseman, or its
negotiation enjoined.

4.5 Problem: Marcelo sells substantially all of his stock of goods to Ino, an innocent
purchaser for value, without complying with the requirements of the Bulk Sales Law.
(a) Is the sale void?
(b) Assuming that it is, what are the remedies available to the creditors of Marcelo, if any?

Answers:
(a) No, if there are no creditors at the time of the sale or the creditors have waived their
rights under the Bulk Sales Law in writing. If there are creditors at the time of the sale and they
have not waived in writing their rights under the Bulk Sales Law, the sale would be void.
(b) The creditors of Marcelo could file a criminal complaint against him for having violated the
provisions of the Bulk Sales Law by not fulfilling his duties thereunder. Upon conviction, Marcelo
could be imprisoned for not less than 6 months nor more than 5 years, or fined not more than
P5,000, or both, at the court’s discretion (Sec. 11). They may also sue to recover from Ino the
stock of goods he acquired from Marcelo if the offense of Marcelo involves (i) the non-delivery to
Ino of the sworn written statement of the names and addresses of all of Marcelo’s creditors, etc.,
or (ii) the non-application of the proceeds of the sale by Marcelo to the pro rata payment of the
bona fide claims of his creditors inasmuch as in the said cases the law deems the sale to Ino to
be fraudulent and void (Sec. 4).

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4.6 Problem: Hennessy Wong, a retailer of wines and spirits, purchased on credit from Triad
Imports Corporation, a liquor importer and wholesaler, 600 cases of Cabernet Sauvignon. Under
the terms of the purchase, Hennessy is required to make a down payment of 20% of the
purchase price and pay the balance out of the proceeds of the sale of the wine. If Hennessy
were unable to sell the wine within a ninety-day period then he is obligated to return the same to
Triad. These terms and other conditions were embodied in a trust receipt for the goods signed by
Hennessy in favor of Triad. Hennessy was able to sell only 350 cases of the wine and the
proceeds were not enough to pay the entire purchase price. Could Triad file a complaint for
estafa against Hennessy under the Trust Receipts Law if the latter were to fail to return the
remaining 250 cases of wine?

Answer: No. This is not a trust receipt transaction and the Trust Receipts Law does not cover
the trust receipt issued by Hennessy in favor of Triad. This is a purchase and sale transaction.
Pursuant to the last paragraph of Section 4 of the Trust Receipts Law, the sale of goods by a
person in the business of selling goods for profit who, at the outset of the transaction, has, as
against the buyer, general property rights [i.e., title] in such goods, or who sells the same to the
buyer on credit, retaining title or other interest as security for the payment of the purchase price,
does not constitute a trust receipt transaction.

4.7 Problem: Pedro obtained a loan of P5 million from ABC Bank that he secured by a
chattel mortgage on his helicopter worth P20 million. The bank registered the mortgage in the
chattel mortgage register of the Registry of Deeds of Pasay City (where Pedro resides and the
helicopter is kept). A month later, Mario, a creditor of Pedro who earlier filed a collection suit
against him, obtained a judgment in his favor, and levied on the helicopter. ABC Bank opposed
the levy on the ground that its registered mortgage lien takes precedence over the levy. Is ABC
Bank correct?

Answer: ABC Bank is not correct. Its mortgage lien does not take precedence over the levy.
Apart from registration in the chattel mortgage register of the Registry of Deeds of Pasay City,
the mortgage must also be registered with the Civil Aviation Authority of the Philippines to be
valid pursuant to the Civil Aviation Authority Act of 2008 (RA 9497).

4.8 Give an example of a transaction that could be deemed a suspicious transaction under
the Anti-Money Laundering Law

Answer:
Under Resolution No. 59, dated June 1, 2005, of the Anti-Money Laundering Council, the
following circumstances/transactions, based on international standards and local experience, are
considered suspicious transaction indicators or red flags which would obligate covered
institutions to exercise extra diligence where any of the said circumstances/transactions exists:
(1) Wire transfers between accounts, without visible economic or business purpose,
especially if the wire transfers are effected through countries that are identified or
connected with terrorist activities;
(2) Sources and/or beneficiaries of wire transfers are citizens of countries which are
identified or connected with terrorist activities;
(3) Repetitive deposits or withdrawals that cannot be explained or do not make sense;
(4) Value of the transaction is over and above what the client is capable of earning;
(5) Client is conducting a transaction that is out of the ordinary for his known business
interest;
(6) Deposits being made by individuals who make no connection or relation with the account
holder;

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(7) An individual receiving remittances, but has no family members working in the country
from which remittances is made;
(8) Client was reported and/or mentioned in the news to be involved in the terrorist activities;
(9) Client is under investigation by law enforcement agencies for possible involvement in
terrorist activities;
(10) Transactions of individuals, companies or Non-Governmental Organizations (NGOs) that
are affiliated or related to people suspected of being connected to a terrorist group or a
group that advocates violent overthrow of a government;
(11) Transactions of individuals, companies or NGOs that are suspected as being used to pay
or receive funds from revolutionary taxes;
(12) The NGO does not appear to have expenses normally related to relief of humanitarian
efforts;
(13) The absence of contribution from donors located within the country of origin of the NGO;
(14) A mismatch between the pattern and size of financial transactions on the one hand and
the stated purpose and activity of the NGO on the other;
(15) Incongruities between apparent sources and amount of funds raised or moved by the
NGO;
(16) Any other transaction that is similar, identical or analogous to any or the foregoing.

4.9 According to the Supreme Court in the case of Bank of America NT & SA vs. CA, et al.
(1993), what is the role played by each of the following entities in a letter of credit transaction?
(a) opening bank;
(b) notifying bank;
(c) negotiating bank;
(d) paying bank; and
(e) confirming bank?

Answers:
(a) The opening bank, which is usually the buyer's bank, is the one that issues the letter
of credit.
"The Opening Bank, usually the buyer's bank, is the bank which actually issues the
instrument. It is also known as the Issuing Bank. The selection of the opening bank is
important. It should be a strong bank, well known and well regarded in international trading
circles. This is the reason . . . smaller banks do not attempt to issue their own commercial
credit instruments but take advantage of the facilities of . . . much larger, stronger, and
better known correspondent banks . . . The purpose of commercial credit may not be
readily accomplished unless the opening bank is well known and well regarded" (P. 92,
William S. Shaterian, Export-Import Banking: The Instruments and Operations Utilized by
American Exporters and Importers and their Banks in Financing Foreign Trade, The Ronal
Press Company, New York, 1947, pp. 284-374, cited in footnote #13 of the decision).
(b) The notifying bank, which is the correspondent bank of the opening bank, is the one
that advises the beneficiary of the opening of the letter of credit.
"Whenever the instrument is not delivered to the buyer and by him mailed to the
beneficiary, the opening bank will advise the existence of the credit to the beneficiary
through its corresponding bank operating in the same locality as the seller. Such
correspondent bank becomes the Notifying Bank. The services of a notifying bank must
always be utilized if the credit is to be advised to the beneficiary by cable . . ." (Shaterian,
ibid,, p. 292, cited in footnote #15 of the decision).

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(c) The negotiating bank, which is usually any bank in the city or place of the beneficiary, is
the one that the buyer may approach to claim payment by having the draft discounted.
"If the draft contemplated by the credit instrument is to be drawn on the opening bank or on
another designated bank not in the city of the seller, any bank in the city of the seller which
buys or discounts the draft of the beneficiary becomes a Negotiating Bank. As a rule,
whenever the facilities of a notifying bank are used, the beneficiary is apt to offer his drafts
to the notifying bank for negotiation, thus giving the notifying bank the character of a
negotiating bank also. By negotiating the beneficiary's drafts, the negotiating bank becomes
"an endorser and bona fide holder" of the drafts and within the protection of the credit
instrument. It is also protected by the drawer's a signature, as the drawer's contingent
liability, as drawer, continues until discharged by the actual payment of the bills of
exchange." (Shaterian, ibid., p. 293, cited in footnote #18 of the decision).
(d) The paying bank is the one that buys or discounts the drafts contemplated by the letter
of credit, if such draft is to be drawn on the opening bank or on another designated bank not in
the city of the beneficiary.
"The Paying Bank is the bank on which the drafts are to be drawn. It may be the opening
bank, it may be a bank other than the opening bank and not in the city of the beneficiary, or
it may be a bank in the city of the beneficiary, usually the advising bank. If the beneficiary is
to draw and receive payment in his own currency, the notifying bank will be indicated as the
paying bank also. When the draft is to be paid in this manner, the paying bank assumes no
responsibility but merely pays the beneficiary and debits the payment immediately to the
account which the opening bank has with it. If the opening bank maintains no account with
the paying bank, the paying bank reimburses itself by drawing a bill of exchange on the
opening bank, in dollars, for the equivalent of the local currency paid to the beneficiary, at
its buying rate for dollar exchange. The beneficiary is entirely out of the transaction
because his draft is completely discharged by payment, and the credit arrangement
between the paying bank and the opening bank does not concern him" (Shaterian, ibid., pp.
293-294, cited in footnote #17 of the decision).
(e) The confirming bank is the one that, upon the request of the beneficiary, confirms the
letter of credit issued by the opening bank.
"Whenever the beneficiary stipulates that the obligation of the opening bank shall be also
made the obligation of a bank himself, we have what is known as the a confirmed
commercial credit and the bank local to the beneficiary becomes the Confirming Bank. In
view of the fact that commercial credits issued by American banks in favor of foreign sellers
are invariably issued only by . . . larger well known banks, no seller requests that they be
confirmed by another bank. The standing of the . . . opening bank is good enough. But
many foreign banks are not particularly strong or well known, compared with . . . banks
issuing these credit instruments. Indeed, many banks operating abroad are only known
through the Banker's Almanac. They serve a useful purpose in their own small communities
and perhaps maintain dollars account with the larger . . . banks. But their names are quite
meaningless to the . . . exporter, and when the foreign buyer offers to his . . . seller a credit
instrument issued by such a bank, the seller may not receive the protection and other
facilities which an instrument issued by a large, strong, and well known bank will give him.
To overcome this, he requests that the credit as issued by the local bank of the foreign
buyer be confirmed by a well known . . . bank, which will turn out to be (a) . . . bank with
which the local bank of the buyer carries a dollar account. The liability of the confirming
bank is a primary one and is not contingent in any sense of the word. It is as if the credit
were issued by the opening and confirming banks jointly, thus giving the beneficiary or a
holder for value of drafts drawn under the credit, the right to proceed against either or both
banks, the moment the credit instrument has been breached. The confirming bank receives
a commission for its confirmation from the opening bank which the opening bank, in turn,
passes on to the buyer of the merchandise" (Shaterian, ibid., pp. 294-295, cited in footnote
#16 of the decision).

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- end -

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