PASTOR

Case No. 9
Insular Bank of Asia & America vs. Intermediate Appellate Court
167 SCRA 450 (1988)

FACTS: Sometime in 1976 and 1977 respondent spouses Mendoza obtained two (2) loans from respondent Philippine American Life
Insurance Co. (Philam Life) in the total amount of P600,000.00 to finance the construction of their residential house at Mandaue
City. To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a
commercial bank. Thus, the Mendozas contracted with petitioner Insular Bank of Asia and America (IBAA) for the issuance of two (2)
irrevocable standby Letters of Credit in favor of Philam Life. The Mendozas failed to pay Philam Life the June 1978 amortization and
declared the rest of the future amortizations “entirely due and demandable”. The Trial Court ordered Defendants-spouses Ben S.
Mendoza and Juanita M. Mendoza to pay plaintiff Philippine American Life Insurance Company the sum of P322,000.00 since the
Mendoza spouses have already paid partial payments.

ISSUE: Whether or not the partial payments made by the principal obligors (respondent MENDOZAS) would have the corresponding
effect of reducing the liability of the petitioner as guarantor or surety under the terms of the standby LCs in question?

RULING: NO.
But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra
vires rather than a letter of credit, which is within the powers of a bank. The standby L/Cs are, "in effect an absolute undertaking to
pay the money advanced or the amount for which credit is given on the faith of the instrument." Payments made by the
Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these
payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate
undertaking under its L/Cs remains.

Guys, the case is not cited in the special commercial law book under the Standby L/C topic. Hence, no highlighted text here.

Eloise
Case No. 12 | Philippine Virginia Tobacco Administration vs. De Los Angeles (1988)
Irrevocable and revocable letters of credit

Facts: Private respondent Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) together
with two other entities, were awarded in a public bidding the right to import Virginia leaf tobacco. Subsequently, Petitioner
Philippine Virginia Tobacco Administration (PVTA) and Sevilla entered into a contract for the importation of tobacco and a
counterpart exportation of PVTA’s tobacco. Sevilla was requirede to open an irrevocable letter of credit with the Prudential Bank
and Trust Co. in favor of the PVTA to secure the payment of said balance. With the world market price under which respondent will
be exporting at a loss, Sevilla tried to negotiate the reduction of the procurement cost of the 2,101.479 kilos of PVTA tobacco it
already exported— which was denied by PVTA and the Office of the President. PVTA then attempted to collect from the letter of
credit with Prudential. Sevilla, after filing before the respondent Judge, was granted a writ of preliminary injunction enjoining
petitioner from drawing against the letter of credit.

Issue: Whether private respondent judge acted with GAD in ordering the release of funds to the applicant of the letter of credit.

Ruling: YES. Respondent Judge violated the irrevocability of the letter of credit issued by respondent Bank in favor of PVTA. An
irrevocable letter of credit cannot during its lifetime be cancelled or modified without the express permission of the beneficiary.
Consequently, if the finding on the trial on the merits is that respondent Sevilla has alleged unpaid balance due to PVTA, such unpaid
obligation would be unsecured. Further, there was no notice nor hearing prior the issuance, and that while the trial court has the
discretionary power to issue a preliminary mandatory injunction, the same is not absolute as the issuance of the writ is the
exception rather than the rule.
ANGELO
Case No. 15
RIGHTS AND OBLIGATIONS OF PARTIES
Prudential Bank & Trust Company vs. IAC

FACTS: Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries
To effect payment for said machineries, Philippine Rayon applied for a commercial letter of credit with the Prudential Bank and
Trust Company in favor of Nissho. To enable Philippine Rayon to take delivery, it executed, by prior arrangement with the Prudential
Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President of Philippine Rayon. The Philippine Rayon
ceased business operation. The obligation of the Philippine Rayon arising from the letter of credit and the trust receipt remained
unpaid and unliquidated.

ISSUE: Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced.

RULING: NO. The questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a
guarantor. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as
such, it must be strictly construed against the party responsible for its preparation. Through a letter of credit, the bank merely
substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds
mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. In the instant case then, the drawee was
necessarily the Prudential Bank. It was to the latter that the drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts.

JUSTO

Case no. 16
Letters of Credit (WEEK 1)
RODZSSEN SUPPLY CO. INC., v. FAR EAST BANK & TRUST CO. G.R. No. 109087. May 9, 2001.

FACTS: Defendant Rodzssen Supply, Inc. (Rodz) opened a 30-day domestic letter of credit (LC) in favor of in favor of Ekman and
Company, Inc. (Ekman) amounting to ₱ 90,000 with plaintiff Far East Bank and Trust Co. (FEBTC). The LC was for the purchase of 5
hydraulic chambers. The LC is about to expire on February 15, 1979 was extended to Oct. 16, 1979. 3 of the hydraulic chambers
were delivered to the Rodzssen. The remaining 2 hydraulic chambers were received by the Rodzssen after the expiration of LC.
FEBTC paid Ekman but Rodz refused to pay them back since they were delivered after the expiration of the LC.

ISSUES: 1. W/N it is proper for a banking institution to pay a letter of credit which has long expired or been cancelled.

RULING: 1. No. The subject Letter of Credit had become invalid upon the lapse of the period fixed therein. The bank paid Ekman
when the former was no longer bound to do so under the subject Letter of Credit. However, Rodzssen should pay respondent bank
the amount the latter expended for the equipment belatedly delivered by Ekman and voluntarily received and kept by petitioner
following the article on unjust enrichment (Artcile 2142 of NCC)
ARZHY note: this case focused on trust receipts
Case No. 17
Parties to a Letter of Credit
Abad vs. Court of Appeals, 181 SCRA 191 (1990)

FACTS: Private respondent Philippine Commercial and Industrial Bank (PCIB) granted TOMCO, Inc (now Southeast Timber Co. Phils
Inc) a domestic letter of credit for P80,000 in favor of its supplier (Oregon Industries, Inc.) to pay for one Skagit Yarder with
accessories. PCIB paid P80,000 to the supplier as the cost of the machinery. TOMCO made the required marginal deposit of P28,000
and signed and delivered to PCIB a trust receipt acknowledging receipt of the machinery in trust for the bank. In consideration of the
release of the machinery to TOMCO, petitioner signed a Deed of Continuing Guaranty at the back of the trust receipt whereby he
promised to pay the obligation jointly and severally with TOMCO. No payment has been made by either TOMCO or petitioner on the
letter of credit. Bank sued both for the obligation which already accumulated to P125,766.13, inclusive of interest and other charges,
as of August 26, 1970. TOMCO alleged that its marginal deposit should be deducted from the principal obligation hence,
computation of interest and other charges should be made on the balance of P52,000 only. Trial Court and CA ruled in favor of PCIB.

ISSUE: W/N the debtor (or its surety) is entitled to deduct the debtor's cash marginal deposit from the principal obligation under a
letter of credit and to have the interest charges computed only on the balance of the said obligation

RULING: YES. The marginal deposit is a collateral security given by the debtor and is supposed to be returned to him upon his
compliance with his secured obligation. It is only fair then that the importer's marginal deposit (if one was made, as in this case),
should be set off against his debt. Although Abad is only a surety, he may set up compensation as regards what the creditor owes
the principal debtor, TOMCO (Art. 1280, Civil Code). A letter of credit-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

GARCIA
CASE NO. 18
RIGHTS AND OBLIGATIONS OF PARTIES
Consolidated Bank & Trust Corporation vs. Court of Appeals, 356 SCRA 671 (2001)

FACTS: Continental Cement Corporation and Gregory Lim obtained from Consolidated Bank and Trust Corporation a letter of credit
in the amount of P1,068,150 for the purchase of around 500 liters of bunker fuel oil from Petrophil Corporation (Petrophil). On the
same date, Continental Cement paid a marginal deposit of P320,445 with the petitioner. In relation to this transaction, a trust receipt
was executed by Continental Cement for the amount of P1,001,520 with Respondent Lim, President of the Corporation, as
signatory. Eventually, Consolidated Bank claimed that Continental Cement failed to turn over the goods covered by the trust receipt
or the proceeds thereof prompting them to file a complaint for sum of money with application for preliminary attachment with the
RTC of Manila. Moreover, petitioner's contention that the marginal deposit made by respondent Corporation should not be
deducted outright from the amount of the letter of credit. Petitioner argues that the marginal deposit should be considered only
after computing the principal plus accrued interest and other charges.

ISSUE: Was petitioner’s contention with the marginal deposit correct?

RULING: NO.
To sustain petitioner on this score would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns no
interest in favour of the debtor-depositor, the bank is not only able to use the same for its own purposes, interest-free, but is also
able to earn interest on the money loaned to respondent Corporation. Indeed, it would be onerous to compute interest and other
charges on the face value of the letter of credit which the petitioner issued, without first crediting or setting off the marginal deposit
which the respondent Corporation paid to it.

COELI
 CASE NO. 19
LETTERS OF CREDIT: RIGHTS AND OBLIGATIONS OF PARTIES
MARPHIL EXPORT CORP & LIM v. ALLIED BANKING CORP (substituted by PNB)
GR 187922 (2016)

FACTS: PETITIONER MARPHIL is engaged in the exportation of agricultural products. MARPHIL exported cashew nuts to Intan
Trading in Hongkong. Upon application of Intan, Nanyang Commercial Bank in China issued irrevocable letters of credit to Intan, with
Marphil as beneficiary and Allied Bank as correspondent bank. After receiving the export documents, Allied Bank credited Marphil.
However, ALLIED BANK informed Marphil that Nanyang Bank noted some discrepancies in the shipping documents. Consequently,
NANYANG BANK refused to reimburse Allied Bank the amount the latter had credited in Marphil's credit line. Both the RTC and the
CA held Marphil liable for the amount equal to the face value of the Letter of Credit.

ISSUE: W/N Allied Bank is a confirming bank which undertakes Nanyang Bank's obligation as issuing bank.

RULING: NO. Allied Bank did not act as confirming bank in the said Letter of Credit. From the above-instructions, it is clear that Allied
did not undertake to assume the obligation of Nanyang to Marphil as its own, as if it had itself issued the Letter of Credit. At most, it
can only be a discounting bank which bought the drafts under the Letter of Credit. Following then the rules laid down in the case of
Bank of America, a negotiating bank has a right of recourse against the issuing bank, and until reimbursement is obtained, the
drawer of the draft continues to assume a contingent liability thereon.

AYEH

CASE NO. 23

LETTERS OF CREDIT – DOCTRINE OF INDEPENDENCE

Land Bank of the Philippines v Monet’s Export & Manufacturing Corporation (G.R. No. 161865. March 10, 2005)

FACTS: On 1981, petitioner, Land Bank and MEMC executed an Export Packing Credit Line Agreement , secured by the proceeds of
its export letters of credit, the continuing guaranty of the spouses Tagle, and the third-party mortgage executed by Pepita C.
Mendigoria. Owing to the continued failure and refusal of Monet, notwithstanding repeated demands, to pay its indebtedness to
Land Bank, a complaint for collection of sum of money with prayer for preliminary attachment was filed by Land Bank. MONET AND
THE TAGLE SPOUSES (defendants) alleged that Land Bank failed and refused to collect the receivables on their export letter of credit
against Wishbone Trading Company of Hong Kong, while it made unauthorized payments on their import letter of credit to
Beautilike (H.K.) Ltd. which seriously damaged the business interests of Monet. CA held that because of the non-collection and
unauthorized payment made by Land Bank on behalf of Monet, it suffered from lack of financial resources sufficient to buy the
needed materials to fill up the standing orders from its customers.

ISSUE: WON respondent Court palpably erred in not clearly establishing petitioner’s right to collect payment from private
respondents’ loan which has become long overdue and demandable.

RULING: YES, with regards the Beautilike account only. 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 this
so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping
documents presented; it is precluded from determining whether the main contract is actually accomplished or not.  The Court
finds merit in the contention of Land Bank that, as 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 between the parties. The relationship between the beneficiary and
the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking.