UNIVERSITY OF THE EAST

COLLEGE OF LAW

MERCANTILE LAW REVIEW

DEAN SERGIO CENIZA

SECTION IV-B-2
(Monday and Wednesday)

Afable, Fritz Jared Mansibang, Ferdinand

Alvior, Jeanen
Benitez, Miane Lee
Cabauatan, Karl Patrick
Calamba, Marion Jossette
Ducay, Christian Harvey
Manalili, Magnus Albert
Mayani, Aireen Joy
Pelisco, Queenie Anne
Pluma, Michael John Niño
Reyes, Renato Jr.
Suwalawan, Ellyn
Vitug, Louise Angelica
SPECIAL COMMERCIAL
LAW CASE DIGESTS
ANTI-MONEY LAUNDERING
LAW
1.
Republic v. Hon. Antonio Eugenio

Case digest of Louise Angelica Vitug

Doctrine: Even if the bank inquiry order may be availed of without need of a pre-existing case
under the AMLA, it does not follow that such order may be availed of ex parte. Although oriented
towards different purposes, the freeze order under Section 10 and the bank inquiry order under
Section 11 are similar in that they are extraordinary provisional reliefs which the AMLC may avail
of to effectively combat and prosecute money laundering offenses.

Section 10 states: “Freezing of Monetary Instrument or Property. ― The Court of Appeals, upon
application ex parte by the AMLC and after determination that probable cause exists that any
monetary instrument or property is in any way related to an unlawful activity as defined in Section
3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order shall
be for a period of twenty (20) days unless extended by the court.” Section 11 provides for authority
to inquire into bank deposits. It provides: “Notwithstanding the provisions of Republic Act No.
1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other laws,
the AMLC may inquire into or examine any particular deposit or investment with any banking
institution or non-bank financial institution upon order of any competent court in cases of violation
of this Act, when it has been established that there is probable cause that the deposits or
investments are related to an unlawful activity as defined in Section 3(i) hereof or a money
laundering offense under Section 4 hereof, except that no court order shall be required in cases
involving unlawful activities defined in Sections 3(i)1, (2) and (12).“

Facts: Several cases involved which arose as part of the aftermath of the ruling in Agan v.
Philippine International Airport Terminal Corporation (PIATCO), nullifying the concession
agreement awarded to PIATCO over the NAIA 3 project. A series of investigations concerning the
award of NAIA 3 contracts to PIATCO were undertaken by the Ombudsman and the Compliance
and Investigation Staff (CIS) of Anti Money Laundering Council (AMLC). OSG wrote to AMLC
requesting for assistance in obtaining evidence to reveal financial trail of surrounding NAIA 3
project.
CIS conducted an intelligence database search on the financial transactions of certain individuals
involved in the award, including Pantaleon Alvarez who was the chairman of the Pre-qualification
Bids and Awards Committee (PBAC) Technical Committee of NAIA-IPT3 Project. By this time,
Alvarez had already been charged by the Ombudsman with violation of Anti-Graft and Corrupt
Practices Act. The search revealed that Alvarez maintained eight bank accounts with six different
banks.
AMLC issued a resolution to authorize AMLC executive director to sign and verify an application
to inquire into or examine the deposits or investments of Pantaleon Alvarez, Wilfredo Trinidad,
Alfredo Liongson, and Cheng Yong, and their related web of accounts, and to authorize AMLC
Secretariat to conduct an inquiry into the subject accounts once RTC grants the application for
bank inquiry.
RTC Manila granted the authority of AMLC. Alvarez argues that nothing in the Anti-Money
Laundering Act authorized the AMLC to seek authority to inquire into bank accounts ex parte. The
Republic urged that it be immediately allowed to enforce the order, and that the appeal of Alvarez
from an order of inquiry was disallowed under AMLA. On 25 July 2006, the Manila RTC issued
an Order wherein it clarified that "the Ex Parte Order of this Court dated January 12, 2006 cannot
be implemented against the deposits or accounts of any of the persons enumerated in the AMLC
Application until the appeal of movant Alvarez is finally resolved, otherwise, the appeal would be
rendered moot and academic or even nugatory." In addition, the AMLC was ordered "not to
disclose or publish any information or document found or obtained in [v]iolation of the May 11,
2006 Order of this Court."

Issue: whether or not an order authorizing inquiry into or examination of bank accounts or
investment under Section 11 of AMLA can be ex-parte in nature

Held: No. Notice and hearing is required. Money laundering has been generally defined by the
International Criminal Police Organization (Interpol) `as "any act or attempted act to conceal or
disguise the identity of illegally obtained proceeds so that they appear to have originated from
legitimate sources."
Section 4 of the AMLA states that "[m]oney laundering is a crime whereby the proceeds of an
unlawful activity as [defined in the law] are transacted, thereby making them appear to have
originated from legitimate sources."The section further provides the three modes through which
the crime of money laundering is committed. Section 7 creates the AMLC and defines its powers,
which generally relate to the enforcement of the AMLA provisions and the initiation of legal actions
authorized in the AMLA such as civil forefeiture proceedings and complaints for the prosecution
of money laundering offenses.
In addition to providing for the definition and penalties for the crime of money laundering, the
AMLA also authorizes certain provisional remedies that would aid the AMLC in the enforcement
of the AMLA. These are the "freeze order" authorized under Section 10, and the "bank inquiry
order" authorized under Section 11.
Under Section 11, the AMLC may inquire into a bank account upon order of any competent court
in cases of violation of the AMLA, it having been established that there is probable cause that the
deposits or investments are related to unlawful activities as defined in Section 3(i) of the law, or
a money laundering offense under Section 4 thereof. Further, in instances where there is probable
cause that the deposits or investments are related to kidnapping for ransom, certain violations of
the Comprehensive Dangerous Drugs Act of 2002, hijacking and other violations under R.A. No.
6235, destructive arson and murder, then there is no need for the AMLC to obtain a court order
before it could inquire into such accounts.
Any exception to the rule of absolute confidentiality must be specifically legislated. Section 2 of
the Bank Secrecy Act itself prescribes exceptions whereby these bank accounts may be
examined by any person, government official, bureau or official; namely when: (1) upon written
permission of the depositor; (2) in cases of impeachment; (3) the examination of bank accounts
is upon order of a competent court in cases of bribery or dereliction of duty of public officials; and
(4) the money deposited or invested is the subject matter of the litigation. Section 8 of R.A. Act
No. 3019, the Anti-Graft and Corrupt Practices Act, has been recognized by this Court as
constituting an additional exception to the rule of absolute confidentiality, and there have been
other similar recognitions as well.
Although oriented towards different purposes, the freeze order under Section 10 and the bank
inquiry order under Section 11 are similar in that they are extraordinary provisional reliefs which
the AMLC may avail of to effectively combat and prosecute money laundering offenses. Crucially,
Sec. 10 uses specific language to authorize an ex parte application of provisional relief therein, a
circumstance absent in Sec. 11.
There certainly is fertile ground to contest the issuance of an ex parte order. Section 11 itself
requires that it be established that "there is probable cause that the deposits or investments are
related to unlawful activities," and it obviously is the court which stands as arbiter whether there
is indeed such probable cause. The process of inquiring into the existence of probable cause
would involve the function of determination reposed on the trial court. Determination clearly
implies a function of adjudication on the part of the trial court, and not a mechanical application of
a standard pre-determination by some other body. The word "determination" implies deliberation
and is, in normal legal contemplation, equivalent to "the decision of a court of justice.
 2.
Republic v. Glasglow Credit and Collection Services
Case digest of Louise Angelica Vitug

Doctrine: RA 9160, as amended, and its implementing rules and regulations lay down two
conditions when applying for civil forfeiture:
(1) when there is a suspicious transaction report or a covered transaction report deemed
suspicious after investigation by the AMLC; and
(2) the court has, in a petition filed for the purpose, ordered the seizure of any monetary instrument
or property, in whole or in part, directly or indirectly, related to said report.

Facts: On July 18, 2003, the Republic filed a complaint for civil forfeiture of assets with RTC
Manila against the bank deposits maintained by Glasglow in City State Savings Bank, Inc. This
case was filed pursuant to RA 9160 or the Anti-Money Laundering Act of 2001.
On July 21, 2003, RTC Manila issued a 72-hour temporary restraining order. On August 8, 2003,
a writ of preliminary injunction was issued. Meanwhile, summons to Glasglow was returned
unserved as it could no longer be found at its own address.
On October 8, 2003, the Republic filed a verified omnibus motion for issuance of alias summons
and leave of court to serve summons by publication. The court directed the issuance of alias
summons.
On January 30, 2004, trial court archived the case for failure to serve alias summons. On May 31,
2004, trial court ordered the reinstatement of the case directing the Republic to serve the alias
summons to Glasglow and CSBI within 15 days. On July 12, 2004, petitioner received a copy of
sheriff’s return stating that the alias summons was returned unserved as Glasglow was no longer
holding office at the given address. On August 11, 2005, the Republic filed a manifestation and
ex parte motion for leave of court to serve summons by publication.
On August 12, 2005, the OSG received a copy of Glasgow’s motion to dismiss by way of special
appearance. It alleged that (1) the court had no jurisdiction over its person as summons had not
yet been served on it; (2) the complaint was premature and stated no cause of action as there
was still no conviction for estafa or other criminal violations implicating Glasgow; and (3) there
was failure to prosecute on the part of the Republic.
On October 27, 2005, the trial court dismissed the case on the following grounds: (1) improper
venue as it should have been filed in the RTC of Pasig where CSBI, the depository bank of the
account sought to be forfeited, was located; (2) insufficiency of the complaint in form and
substance and (3) failure to prosecute. It lifted the writ of preliminary injunction and directed CSBI
to release to Glasgow or its authorized representative the funds in CA-005-10-000121-5.
Raising questions of law, the Republic filed this petition. On November 23, 2005, this court issued
a TRO restraining Glasgow and CSBI, their agents, representatives and/or persons acting upon
their orders from implementing the assailed October 27, 2005 order. It restrained Glasgow from
removing, dissipating or disposing of the funds in account no. CA-005-10-000121-5 and CSBI
from allowing any transaction on the said account.

Issue: whether the complaint for civil forfeiture was correctly dismissed on grounds of improper
venue, insufficiency in form and substance, and failure to prosecute

Held: The court agrees with the Republic, and the latter properly instituted the complaint for civil
forfeiture. A criminal conviction for an unlawful activity is not a prerequisite for the institution of a
civil forfeiture proceeding. Stated otherwise, a finding of guilt for an unlawful activity is not an
essential element of civil forfeiture. The complaint did not even have to show or allege that
Glasgow had been implicated in a conviction for, or the commission of, the unlawful activities of
estafa and violation of the Securities Regulation Code.
Thus, regardless of the absence, pendency or outcome of a criminal prosecution for the unlawful
activity or for money laundering, an action for civil forfeiture may be separately and independently
prosecuted and resolved.
RA 9160, as amended, and its implementing rules and regulations lay down two conditions when
applying for civil forfeiture: “(1) when there is a suspicious transaction report or a covered
transaction report deemed suspicious after investigation by the AMLC; and (2) the court has, in a
petition filed for the purpose, ordered the seizure of any monetary instrument or property, in whole
or in part, directly or indirectly, related to said report.”
It is the preliminary seizure of the property in question which brings it within the reach of the
judicial process. It is actually within the court’s possession when it is submitted to the process of
the court. The injunctive writ issued on August 8, 2003 removed account no. CA-005-10-000121-
5 from the effective control of either Glasgow or CSBI or their representatives or agents and
subjected it to the process of the court.
Since account no. CA-005-10-000121-5 of Glasgow in CSBI was (1) covered by several
suspicious transaction reports and (2) placed under the control of the trial court upon the issuance
of the writ of preliminary injunction, the conditions provided in Section 12(a) of RA 9160, as
amended, were satisfied. Hence, the Republic, represented by the AMLC, properly instituted the
complaint for civil forfeiture.
Rule 6.1 of RA 9160, as amended, states the conditions for civil forfeiture: “(a) Any person may
be charged with and convicted of both the offense of money laundering and the unlawful activity
as defined under Rule 3(i) of the AMLA; and (b) Any proceeding relating to the unlawful activity
shall be given precedence over the prosecution of any offense or violation under the AMLA without
prejudice to the application ex-parte by the AMLC to the Court of Appeals for a freeze order with
respect to the monetary instrument or property involved therein and resort to other remedies
provided under the AMLA, the Rules of Court and other pertinent laws and rules. “
Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture provides: “No prior criminal
charge, pendency of or conviction for an unlawful activity or money laundering offense is
necessary for the commencement or the resolution of a petition for civil forfeiture.”
 3.
Republic v. Cabrini Green & Ross, Inc.
Case digest of Louise Angelica Vitug

Doctrine: Congress enacted RA 9194 (An Act Amending Republic Act No. 9160, Otherwise
Known as the "Anti-Money Laundering Act of 2001"). It amended Section 10 of RA 9160 as
follows: “SEC. 7. Section 10 of [RA 9160] is hereby amended to read as follows: SEC. 10.
Freezing of Monetary Instrument or Property. – The Court of Appeals, upon application ex parte
by the AMLC and after determination that probable cause exists that any monetary instrument or
property is in any way related to an unlawful activity as defined in Sec. 3(i) hereof, may issue a
freeze order which shall be effective immediately. The freeze order shall be for a period of twenty
(20) days unless extended by the court.”
Section 12 of RA 9194 further provides: “Transitory Provision. – Existing freeze orders issued by
the AMLC shall remain in force for a period of thirty (30) days after the effectivity of this Act, unless
extended by the Court of Appeals.”

Facts: In the exercise of its power under Section 10 of RA 9160, the Anti-Money Laundering
Council (AMLC) issued freeze orders against various bank accounts of respondents. The frozen
bank accounts were previously found prima facie to be related to the unlawful activities of
respondents.
Under RA 9160, a freeze order issued by the AMLC is effective for a period not exceeding 15
days unless extended “upon order of the court.” Accordingly, before the lapse of the period of
effectivity of its freeze orders, the AMLC2 filed with the Court of Appeals (CA) various petitions
for extension of effectivity of its freeze orders.
The AMLC invoked the jurisdiction of the CA in the belief that the power given to the CA to issue
a TRO or writ of injunction against any freeze order issued by the AMLC carried with it the power
to extend the effectivity of a freeze order. In other words, the AMLC interpreted the phrase “upon
order of the court” to refer to the CA. However, the CA disagreed with the AMLC and dismissed
the petitions.

Issue: Which court has jurisdiction to extend the effectivity of a freeze order?

Held: The Court of Appeals has the sole authority to issue a freeze order as well as to extend its
effectivity. 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.
The amendment by RA 9194 of RA 9160 erased any doubt on the jurisdiction of the CA over the
extension of freeze orders. As the law now stands, it is solely the CA which has the authority to
issue a freeze order as well as to extend its effectivity. 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.
During the pendency of these petitions, or on March 3, 2003, Congress enacted RA 9194 (An Act
Amending Republic Act No. 9160, Otherwise Known as the “Anti-Money Laundering Act of 2001”).
It amended Section 10 of RA 9160 as follows: SEC. 7. Section 10 of [RA 9160] is hereby amended
to read as follows: “SEC. 10. Freezing of Monetary Instrument or Property: The Court of Appeals,
upon application ex parte by the AMLC and after determination that probable cause exists that
any monetary instrument or property is in any way related to an unlawful activity as defined in
Sec. 3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order
shall be for a period of twenty (20) days unless extended by the court.”
Section 12 of RA 9194 further provides: “Transitory Provision: Existing freeze orders issued by
the AMLC shall remain in force for a period of thirty (30) days after the effectivity of this Act, unless
extended by the Court of Appeals.”
The Office of the Solicitor General (OSG) thereafter filed a “Very Urgent Motion to Remand Cases
to the Honorable Court of Appeals,” pursuant to Republic Act 9194.
Thus, Republic v. R.A.B. Realty, Inc., et. Al. has been dismissed for being moot and academic,
while the cases Republic v. Cabrini, Republic v. Misa, et. al.; and Republic v. Albero de los Reyes,
et. al., are remanded to the Court of Appeals.
 4.

Ligot vs. Republic 692 SCRA 509 , March 06, 2013

Case digest of Miane Lee Benitez

DOCTRINE: Republic Act No. 9160; Money Laundering; Based on Section 10 of R.A. No. 9160,
as amended by R.A. No. 9194, there are only two requisites for the issuance of a freeze order:
(1) the application ex parte by the Anti-Money Laundering Council, and (2) the determination of
probable cause by the Court of Appeals.—The legal basis for the issuance of a freeze order is
Section 10 of RA No. 9160, as amended by RA No. 9194, which states: Section 10. Freezing of
Monetary Instrument or Property.

A freeze order is an extraordinary and interim relief issued by the CA to prevent the dissipation,
removal, or disposal of properties that are suspected to be the proceeds of, or related to, unlawful
activities as defined in Section 3(i) of RA No. 9160, as amended. The primary objective of a freeze
order is to temporarily preserve monetary instruments or property that are in any way related to
an unlawful activity or money laundering, by preventing the owner from utilizing them during the
duration of the freeze order. The relief is pre-emptive in character, meant to prevent the owner
from disposing his property and thwarting the State’s effort in building its case and eventually filing
civil forfeiture proceedings and/or prosecuting the owner.

FACTS: This is a petition for certiorari wherein Ligot et al claim that the Court of Appeals (CA)
acted with grave abuse of discretion amounting to lack or excess of jurisdiction when it issued its
resolution extending the freeze order issued against the Ligot’s properties for an indefinite period
of time. Lt. Gen. Ligot argues that the appellate court committed grave abuse of discretion
amounting to lack or excess of jurisdiction when it extended the freeze order issued against him
and his family even though no predicate crime had been duly proven or established to support
the allegation of money laundering. He also maintains that the freeze order issued against them
ceased to be effective in view of the 6-month extension limit of freeze orders provided under the
Rule in Civil Forfeiture Cases. The CA, in extending the freeze order, not only unduly deprived
him and his family of their property, in violation of due process, but also penalized them before
they had been convicted of the crimes they stand accused of.

ISSUE: Whether a petition for certiorari is the proper remedy in assailing the said freeze order.

RULING: (Generally) NO. Certiorari is not a proper remedy to assail freeze order. Section 57 of
the Rule in Civil Forfeiture Cases explicitly provides the remedy available in cases involving freeze
orders issued by the CA: Section 57. Appeal. - Any party aggrieved by the decision or ruling of
the court may appeal to the Supreme Court by petition for review on certiorari under Rule 45 of
the Rules of Court. The appeal shall not stay the enforcement of the subject decision or final order
unless the Supreme Court directs otherwise.

From this provision, it is apparent that the petitioners should have filed a petition for review on
certiorari, and not a petition for certiorari, to assail the CA resolution which extended the effectivity
period of the freeze order over their properties. Even assuming that a petition for certiorari is
available to the petitioners, a review of their petition shows that the issues they raise (i.e.,
existence of probable cause to support the freeze order; the applicability of the 6-month limit to
the extension of freeze orders embodied in the Rule of Procedure in Cases of Civil Forfeiture)
pertain to errors of judgment allegedly committed by the CA, which fall outside the Court’s limited
jurisdiction when resolving certiorari petitions.
As held in People v. Court of Appeals: In a petition for certiorari, the jurisdiction of the court is
narrow in scope. It is limited to resolving only errors of jurisdiction. It is not to stray at will and
resolve questions or issues beyond its competence such as errors of judgment. Errors of
judgment of the trial court are to be resolved by the appellate court in the appeal by and of error
or via a petition for review on certiorari in this Court under Rule 45 of the Rules of Court. Certiorari
will issue only to correct errors of jurisdiction. It is not a remedy to correct errors of judgment. An
error of judgment is one in which the court may commit in the exercise of its jurisdiction, and which
error is reversible only by an appeal. Error of jurisdiction is one where the act complained of was
issued by the court without or in excess of jurisdiction and which error is correctible only by the
extraordinary writ of certiorari. Certiorari will not be issued to cure errors by the trial court in its
appreciation of the evidence of the parties, and its conclusions anchored on the said findings and
its conclusions of law. As long as the court acts within its jurisdiction, any alleged errors committed
in the exercise of its discretion will amount to nothing more than mere errors of judgment,
correctible by an appeal or a petition for review under Rule 45 of the Rules of Court.

EXCEPTION: However, considering the issue of due process squarely brought before us in the
face of an apparent conflict between Section 10 of RA No. 9160, as amended, and Section 53(b)
of the Rule in Civil Forfeiture Cases, this Court finds it imperative to relax the application of the
rules of procedure and resolve this case on the merits in the interest of justice
 5.

Republic vs. First Pacific Network Inc., GR. 156646, November 19, 2014

Case digest of Miane Lee Benitez

DOCTRINE: A freeze order is an extraordinary and interim relief issued by the CA to prevent the
dissipation, removal, or disposal of properties that are suspected to be the proceeds of, or related
to, unlawful activities as defined in Section 3(i) of RA No. 9160, as amended. The primary
objective of a freeze order is to temporarily preserve monetary instruments or property that are in
any way related to an unlawful activity or money laundering, by preventing the owner from utilizing
them during the duration of the freeze order. The relief is pre-emptive in character, meant to
prevent the owner from disposing his property and thwarting the State’s effort in building its case
and eventually filing civil forfeiture proceedings and/or prosecuting the owner.

FACTS: Laundering Council (AMLC for brevity), a government agency created under Republic
ActNo. 9160, otherwise known as the Anti-Money Laundering Council Act of 2001 (AMLA),
received a report from a certain Reynaldo Geronimo, who claims to have personal knowledge
that respondent FPN [First Pacific Network, Inc.] is involved in illegal securities trading and
maintains a bank account at the main Branch of Standard Chartered Bank at Ayala Avenue,
Makati City(Standard Chartered for brevity), under Account Number 904-AE-49351009, where
petitioner allegedly deposited the proceeds of its illegal securities trading activities.

It appears that on 24 January 2002, the Regional Trial Court of Makati City, Branch 136,issued
three search warrants against several persons for Illegal Trading of Securities without the
necessary license issued by the Securities and Exchange Commission (SEC for brevity). On
25January 2002, the raiding teams composed of agents of the NBI and the SEC served the search
warrants, and were forthwith able to seize several documents, including, among others, false buy-
sell confirmation slips, client files, documents showing the share transactions of clients, stock
quotations, broker's scripts, and the fictitious names used by the brokers/salesmen and their
corresponding real names, belonging to First Pacific.

Upon further investigation, it was discovered that First Pacific was not registered with the SEC to
engage in the buying and selling of securities. The evidence gathered in such raid would tend to
show prima facie proof that First Pacific was engaged in illegal trading of securities, in
contravention of Section 28 of R.A. No. 8799. After evaluating the documents seized and the
report received, the AMLC found reasonable grounds to believe that the money deposited by First
Pacific with Standard Chartered was related to an illegal activity. It thus issued Resolution No.
041 directing the immediate issuance and service of the freeze order upon First Pacific's account.
Before the lapse of the freeze order, AMLC requested the Court of Appeals to extend the
effectivity of the freeze order against respondent First Pacific Network, Inc.'s (FPN) bank account
with the main branch of Standard Chartered Bank at Ayala Avenue, Makati City. The Court of
Appeals gave the AMLC an extension of not more than 30 days in its assailed September 5,
2002Decision. Dissatisfied with the ruling of the Court of Appeals, AMLC filed, on September
30, 2002,a Motion for Clarification which was denied by CA.

ISSUE: WON the freeze order issued against respondent’s bank account should be further
extended beyond the 30-day period granted by the Court of Appeals and until the appropriate
case has been filed against respondent.
RULING: Yes. A freeze order is an extraordinary and interim relief37 issued by the CA to prevent
the dissipation, removal, or disposal of properties that are suspected to be the proceeds of, or
related to, unlawful activities as defined in Section 3(i) of RA No. 9160, as amended.38 The primary
objective of a freeze order is to temporarily preserve monetary instruments or property that are in
any way related to an unlawful activity or money laundering, by preventing the owner from utilizing
them during the duration of the freeze order.39 The relief is pre-emptive in character, meant to
prevent the owner from disposing his property and thwarting the State’s effort in building its case
and eventually filing civil forfeiture proceedings and/or prosecuting the owner.

In the case at bar, we find no error in the decision of the Court of Appeals to extend freeze order
to a definite period of thirty (30) days. The of law and jurisprudence at the time of the issuance of
the assailed ruling of the CA gave the appellate court discretion to extend a freeze order only for
a reasonable period of time which was later clarified by AM. No. 05-11-04-SC as not exceeding
more than six (6) months. AMLC’s prayer that the freeze order at issue be extended until proper
legal action allowed under RA 9160 shall have been taken against respondent cannot be therefore
accommodated considering that both Congress and this Court have decreed, in no vague terms,
that a freeze order cannot be issued or extended for an indefinite period of time.
 6.
JOSE "JINGGOY" P. EJERCITO ESTRADA v. SANDIGANBAYAN; G.R. No. 217682, July
17, 2018

Case digest of Karl Patrick Cabauatan

DOCTRINE: “In Republic v. Eugenio, Jr., an ex post facto law is a law that either:
(1) makes criminal an act done before the passage of the law that was innocent when
done, and punishes such act; or
(2) aggravates a crime, or makes the crime greater than it was when committed; or
(3) changes the punishment and inflicts a greater punishment than the law annexed to the
crime when it was committed; or
(4) alters the legal rules of evidence, and authorizes conviction upon less or different
testimony than the law required at the time of the commission of the offense; or
(5) assumes to regulate civil rights and remedies only, but in effect imposes a penalty or
deprivation of a right for an act that was lawful when done; or
(6) deprives a person accused of a crime of some lawful protection to which he has
become entitled, such as the protection of a former conviction or acquittal, or a proclamation of
amnesty.

Unlike the passage of R.A. No. 9160 in order to allow an exception to the general rule on bank
secrecy, the amendment introduced by R.A. No. 10167 does away with the notice to the account
holder at the time when the bank inquiry order is applied for. In this case, the elimination of the
requirement of notice, by itself, is not a removal of any lawful protection to the account holder
because the AMLC is only exercising its investigative powers at this stage. Indeed, R.A. No.
10167, in recognition of the ex post facto clause of the Constitution, explicitly provides that "the
penal provisions shall not apply to acts done prior to the effectivity of the AMLA on October 17,
2001."

FACTS: On September 11, 2013, Benhur K. Luy, Merlina P. Sunas, Gertrudes K. Luy, Nova Kay
BatalMacalintal, Elena S. Abundo and Avelina C. Lingo (whistleblowers) executed their
PinagsamangSinumpaangSalaysay in which they revealed the details of the Pork Barrel Scam
that involved the misuse or illegal diversion by certain legislators of their allocations from the
Priority Development Assistance Fund (PDAF) in connivance with Janet Lim Napoles (Napoles),
the whistleblowers' former employer.
The National Bureau of Investigation (NBI) conducted its investigation, and on September 16,
2013 resolved to file in the Office of the Ombudsman verified criminal complaints for plunder,
malversation, direct bribery, and graft and corrupt practices against the persons involved in the
Pork Barrel Scam, including petitioner Senator Jose "Jinggoy" P. Ejercito Estrada (Estrada).
Acting on the criminal complaints, the Office of the Ombudsman requested the Anti-Money
Laundering Council (AMLC) on October 11, 2013 to conduct a financial investigation of the bank
accounts of the petitioners and others.
On March 28, 2014, the Office of the Ombudsman issued a joint resolution finding probable cause
to indict Estrada and other persons for plunder and for violation of Republic Act No. 3019 (The
AntiGraft and Corrupt Practices Act).
Meanwhile, the AMLC, determining that Estrada's accounts were probably related to the charge
of plunder and the violation of R.A. No. 3019 charged against him and others, authorized its
secretariat to file in the Court of Appeals (CA) an ex parte application for bank inquiry pursuant to
R.A. No. 9160, as amended (The Anti-Money Laundering Act). In the resolution promulgated on
May 28, 2014, the CA granted the ex parte application.
In the information dated June 5, 2014 filed in the Sandiganbayan, the Office of the Ombudsman
charged Estrada and others with plunder In the process of inquiring into Estrada's accounts, the
AMLC discovered that Estrada had transferred substantial sums of money to the accounts of his
wife, co-petitioner Ma. PresentacionVitugEjercito (Ejercito), on the dates relevant to the Pork
Barrel Scam. Considering that the transfers lacked apparent legal or economic justifications, the
AMLC concluded that the accounts were linked to a predicate crime of plunder. Hence, the AMLC
filed in the CA a supplemental ex parte application for the bank inquiry to be conducted on
Ejercito's accounts, among others. On August 15, 2014, the CA granted the supplemental ex
parte application.
On January 23, 2015, Estrada filed the motion to suppress. On February 2, 2015, the
Sandiganbayan issued the assailed resolution denying the motion to suppress. Estrada moved
for reconsideration, but the Sandiganbayan denied his motion on March 2, 2015. Hence, the
petitioners have come to the Court by petition for certiorari, prohibition and mandamus.
In its comment, the AMLC posits that Ejercito is not a proper party; that R.A. No. 10167 does not
violate the constitutional rights to privacy and to due process; that R.A. No. 10167 is not an ex
post facto law; that the Congress has the power to enact R.A. No. 10167; and that the Inquiry
Report did not emanate from a fishing expedition, and, as such, the Inquiry Report and the
testimony of Atty. Negradas were admissible as evidence against Estrada.

ISSUE: Whether R.A. No. 10167 is an ex post facto law?

RULING: The amendment to Section 11 of R.A. 9160 allowing an ex parte application for the
bank inquiry does not violate the proscription against ex post facto laws.
An ex post facto law is a law that either:
(1) makes criminal an act done before the passage of the law that was innocent when done, and
punishes such act; or
(2) aggravates a crime, or makes the crime greater than it was when committed; or
(3) changes the punishment and inflicts a greater punishment than the law annexed to the crime
when it was committed; or
(4) alters the legal rules of evidence, and authorizes conviction upon less or different testimony
than the law required at the time of the commission of the offense; or
(5) assumes to regulate civil rights and remedies only, but in effect imposes a penalty or
deprivation of a right for an act that was lawful when done; or
(6) deprives a person accused of a crime of some lawful protection to which he has become
entitled, such as the protection of a former conviction or acquittal, or a proclamation of amnesty.
The petitioners rely on Republic v. Eugenio, Jr., wherein the Court declared that the proscription
against ex post facto laws should be applied to the interpretation of the original text of Section 11
of R.A. No. 9160 because the passage of said law "stripped another layer off the rule on absolute
confidentiality that provided a measure of lawful protection to the account holder." Accordingly,
we held therein that the application for the bank inquiry order as the means of inquiring into
records of transactions entered into prior to the passage of R.A. No. 9160 would be constitutionally
infirm, offensive as it was to the ex post facto clause of the Constitution.
The petitioners' reliance on Republic v. Eugenio, Jr. is misplaced. Unlike the passage of R.A. No.
9160 in order to allow an exception to the general rule on bank secrecy, the amendment
introduced by R.A. No. 10167 does away with the notice to the account holder at the time when
the bank inquiry order is applied for. The elimination of the requirement of notice, by itself, is not
a removal of any lawful protection to the account holder because the AMLC is only exercising its
investigative powers at this stage. Indeed, R.A. No. 10167, in recognition of the ex post facto
clause of the Constitution, explicitly provides that "the penal provisions shall not apply to acts
done prior to the effectivity of the AMLA on October 17, 2001."
Furthermore, the AMLC's inquiry and examination into bank accounts are not undertaken
whimsically based on its investigative discretion. The AMLC and the CA are respectively required
to ascertain the existence of probable cause before any bank inquiry order is issued. Section 11
of R.A. 9160, even with the allowance of an ex parte application therefor, cannot be categorized
as authorizing the issuance of a general warrant. This is because a search warrant or warrant of
arrest contemplates a direct object but the bank inquiry order does not involve the seizure of
persons or property.
Lastly, the holder of a bank account subject of a bank inquiry order issued ex parte is not without
recourse. He has the opportunity to question the issuance of the bank inquiry order after a freeze
order is issued against the account. He can then assail not only the finding of probable cause for
the issuance of the freeze order, but also the finding of probable cause for the issuance of the
bank inquiry order.
 LETTERS OF CREDIT
1.

TRANSFIELD PHILIPPINES INC. v. LUZON HYDRO ELECTRIC CORP.; GR No 146717, Nov

22, 2004

Case digest of Karl Patrick Cabauatan

DOCTRINE: The independent nature of the letter of credit may be: (a) independence in toto where
the credit is independent from the justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b) independence may be only as to
the justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.

FACTS: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro
Corp. (LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet
and Ilocos. Transfield was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project. The contract provides for a period for which
the project is to be completed and also allows for the extension of the period provided that the
extension is based on justifiable grounds such as fortuitous event. In order to guarantee
performance by Transfield, two stand-by letters of credit were required to be opened. During the
construction of the plant, Transfield requested for extension of time citing typhoon and various
disputes delaying the construction. LHC did not give due course to the extension of the period
prayed for but referred the matter to arbitration committee. Because of the delay in the
construction of the plant, LHC called on the stand-by letters of credit because of default. However,
the demand was objected by Transfield on the ground that there is still pending arbitration on their
request for extension of time.

ISSUE: Whether or not LHC can collect from the letters of credit despite the pending arbitration
case

RULING: Transfield’s argument that any dispute must first be resolved by the parties, whether
through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit
in essence would convert the letter of credit into a mere guarantee.
The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.
Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that
the settlement of a dispute between the parties is not a pre-requisite for the release of funds under
a letter of credit. In other words, the argument is incompatible with the very nature of the letter of
credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered
into by the applicant and the beneficiary, there would be no practical and beneficial use for letters
of credit in commercial transactions.
The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called “independence principle” assures
the seller or the beneficiary of prompt payment independent of any breach of the main contract
and precludes the issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed thereon, nor do
they assume any liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any documents, or for the good
faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person whomsoever.
 2.
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. DE RENY FABRIC INDUSTRIES,
INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C. GONZALES,
defendants-appellants., G.R. No. L-24821, October 16, 1970

Case digest of Fritz Jared Afable

DOCTRINE:

That banks, in providing financing in international business transactions such as those entered
into by the appellants, do not deal with the property to be exported or shipped to the importer, but
deal only with documents pursuant to the Article 10 of the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of
Commerce," to which the Philippines is a signatory nation.

FACTS:

On four different occasions, the De Reny Fabric Industries, Inc. (De Reny), a Philippine
corporation through Aurora Carcereny and Aurora T. Tuyo, president and secretary, respectively
of the corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover
the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs
of various colors" from the J.B. Distributing Company (JBDC). All the applications of the
corporation were approved, and the corresponding Commercial L/C Agreements were executed
pursuant to banking procedures. Under these agreements, the aforementioned officers of the
corporation bound themselves personally as joint and solidary debtors with the corporation.
Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal
deposits as each letter of credit was opened.

By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit
addressed to its correspondent banks in the United States, with uniform instructions for them to
notify the beneficiary thereof, the JBDC, that they have been authorized to negotiate the latter's
sight drafts up to the amounts mentioned the respectively, if accompanied, upon presentation, by
a full set of negotiable clean "on board" ocean bills of lading covering the merchandise appearing
in the LCs. Consequently, the JBDC drew upon, presented to and negotiated with these banks,
its sight drafts covering the amounts of the merchandise ostensibly being exported by it, together
with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in
the L/Cs as above indicated. These correspondent banks then debited the account of the BPI with
them up to the full value of the drafts presented by the JBDC, plus commission thereon, and,
thereafter, endorsed and forwarded all documents to the BPI.

As each shipment arrived in the Philippines, the De Reny made partial payments to the Bank.
Further payments were, however, subsequently discontinued by the corporation when it became
established, as a result of a chemical test conducted by the National Science Development Board,
that the goods that arrived in Manila were colored chalks instead of dyestuffs.

The corporation also refused to take possession of these goods, and for this reason, the Bank
caused them to be deposited with a bonded warehouse up to the filing of its complaint with the
lower court.

The lower court rendered its decision ordering the corporation and its co-defendants (the herein
appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with interest thereon, as
provided for in the L/C Agreements, at the rate of 7% per annum from October 31, 1962 until fully
paid, plus costs.

ISSUE:

Whether or not it is the duty of BPI to take the necessary precaution to insure that the goods
shipped under the covering LCs conformed to the item appearing therein.

RULING:

NO. Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
appellants agreed that the Bank shall not be responsible for the "existence, character, quality,
quantity, conditions, packing, value, or delivery of the property purporting to be represented by
documents; for any difference in character, quality, quantity, condition, or value of the property
from that expressed in documents," or for "partial or incomplete shipment, or failure or omission
to ship any or all of the property referred to in the Credit," as well as "for any deviation from
instructions, delay, default or fraud by the shipper or anyone else in connection with the property
the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to these terms,
the appellants have, therefore, no recourse but to comply with their covenant.

But even without the said stipulation, the appellants cannot shift the burden of loss to the Bank
on account of the violation by their vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing
in international business transactions such as those entered into by the appellants, do not deal
with the property to be exported or shipped to the importer, but deal only with documents. The
Bank introduced in evidence a provision contained in the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of
Commerce," to which the Philippines is a signatory nation. Article 10 thereof provides:

In documentary credit operations, all parties concerned deal in documents and not in goods.
Payment, negotiation or acceptance against documents in accordance with the terms and
conditions of a credit by a Bank authorized to do so binds the party giving the authorization to
take up the documents and reimburse the Bank making the payment, negotiation or acceptance.

The existence of a custom in international banking and financing circles negating any duty on the
part of a bank to verify whether what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship, having been positively proven as a
fact, the appellants are bound by this established usage. They were, after all, the ones who tapped
the facilities afforded by the Bank in order to engage in international business.
 3.
BANK OF AMERICA, NT & SA, Petitioners, vs. COURT OF APPEALS, INTER-RESIN
INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE,
Respondent, G.R. No. 105395, December 10, 1993

Case digest of Fritz Jared Afable

DOCTRINE:

As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit.
The bare statement of the bank employees in responding to the inquiry made by Atty. Tanay,
InterResin's representative, on the authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's letter of advice, nor can it justify the
conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin
itself cannot claim to have been all that free from fault. As the seller, the issuance of the letter of
credit should have obviously been a great concern to it. It would have been strange if it did not,
prior to the letter of credit, enter into a contract, or negotiated at the very least, with General
Chemicals. In the ordinary course of business, the perfection of contract precedes the issuance
of a letter of credit.

Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising
bank. The view that Bank of America should have first checked the authenticity of the letter of
credit with bank of Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states
that: "Banks assume no liability or responsibility for the consequences arising out of the delay
and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ."

As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter
of credit, which it did. The word "APPARENT suggests appearance to unaided senses that is not
or may not be borne out by more rigorous examination or greater knowledge."

FACTS:

Bank of America received by registered mail an Irrevocable Letter of Credit No. 20272/81
purportedly issued by Bank of Ayudhya for the account of General Chemicals, Ltd. of Thailand to
cover the sale of plastic ropes and "agricultural files," with the Bank of America as advising bank
and Inter-Resin Industrial Corporation as beneficiary.

Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along
with the bank's communication, the letter of credit. Upon receipt of the letter-advice with the letter
of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit
confirmed. The bank did not. Reynaldo Dueñas, bank employee in charge of letters of credit,
however, explained to Atty. Tanay that there was no need for confirmation because the letter of
credit would not have been transmitted if it were not genuine.

Inter-Resin sought to make a partial availment under the letter of credit by submitting to Bank of
America invoices, covering the shipment of 24,000 bales of polyethylene rope to General
Chemicals, the corresponding packing list, export declaration and bill of lading. After being
satisfied that InterResin's documents conformed with the conditions expressed in the letter of
credit, Bank of America issued in favor of Inter-Resin a Cashier's Check. The check was picked
up by Inter-Resin's Executive Vice-President. Bank of America wrote Bank of Ayudhya advising
the latter of the availment under the letter of credit and sought the corresponding reimbursement
therefor.

Inter-Resin presented to Bank of America the documents for the second availment under the
same letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills
in set, evidencing the second shipment of goods. Immediately upon receipt of a telex from the
Bank of Ayudhya declaring the letter of credit fraudulent, Bank of America stopped the processing
of InterResin's documents and sent a telex to its branch office in Bangkok, Thailand, requesting
assistance in determining the authenticity of the letter of credit. Bank of America kept Inter-Resin
informed of the developments. Sensing a fraud, Bank of America sought the assistance of the
NBI. NBI agents discovered that the vans exported by Inter-Resin did not contain ropes but plastic
strips, wrappers, rags and waste materials.

Bank of America sued Inter-Resin for the recovery of P10, 219,093.20, the peso equivalent of the
draft on the partial availment of the now disowned letter of credit. On the other hand, Inter-Resin
claimed that not only was it entitled to retain P10, 219,093.20 on its first shipment but also to the
balance covering the second shipment.

The trial court ruled for Inter-Resin, holding that (a) Bank of America made assurances that
enticed Inter-Resin to send the merchandise to Thailand; (b) the telex declaring the letter of credit
fraudulent was unverified and self-serving, hence, hearsay, but even assuming that the letter of
credit was fake, "the fault should be borne by the BA which was careless and negligent" for failing
to utilize its modern means of communication to verify with Bank of Ayudhya in Thailand the
authenticity of the letter of credit before sending the same to Inter-Resin; (c) xxx; and (d) Bank of
America failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in

fact, the complaint for estafa through falsification of documents was dismissed by the Provincial
Fiscal of Rizal.

On appeal, the Court of Appeals sustained the trial court; hence, this present recourse by
petitioner Bank of America.

ISSUES:

1. Whether Bank of America has incurred any liability to the beneficiary under the letter of credit
and, corrolarily, whether it has acted merely as an advising bank or as a confirming bank?

2. Whether Bank of America may recover against Inter-Resin under the draft executed in its partial
availment of the letter of credit, following the dishonor of the letter of credit by Bank of Ayudhya?

RULING:

A letter of credit is a financial device developed by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and a buyer, who wants to have control of
the goods before paying. To break the impasse, the buyer may be required to contract a bank to
issue a letter of credit in favor of the seller so that, by virtue of the latter 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 the
seller agree on what documents are to be presented for 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
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
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 of 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.

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and
obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank
issuing the letter of credit, which 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; and, (c) the
seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the
documents of title and draft to the issuing bank to recover payment.

The number of the parties, not infrequently and almost invariably in international trade practice,
may be increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey
to the seller the existence of the credit; or, of a confirming bank 16 which will lend credence to the
letter of credit issued by a lesser known issuing bank; or, of a paying bank, which undertakes to
encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank
to claim payment, the buyer may approach another bank, termed the negotiating bank, to have
the draft discounted.

Being a product of international commerce, the impact of this commercial instrument transcends
national boundaries, and it is thus not uncommon to find a dearth of national law that can
adequately provide for its governance. This country is no exception. Our own Code of Commerce
basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder
then why great reliance has been placed on commercial usage and practice, which, in any case,
can be justified by the universal acceptance of the autonomy of contract rules. The rules were
later developed into what is now known as the Uniform Customs and Practice for Documentary
Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a
complete text by itself, for, to be sure, there are other principles, which, although part of lex
mercatoria, are not dealt with the U.C.P.

In FEATI Bank and Trust Company v. Court of Appeals, we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this international commercial credit regulatory set
of rules. 20 In Bank of Phil. Islands v. De Nery, we have said that the observances of the U.C.P.
is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any
particular provision in the Code of Commerce, commercial transactions shall be governed by
usages and customs generally observed. We have further observed that there being no specific
provisions which govern the legal complexities arising from transactions involving letters of credit
not only between or among banks themselves but also between banks and the seller or the buyer,
as the case may be, the applicability of the U.C.P. is undeniable.

1. On the first issue on whether Bank of America may recover against Inter-Resin under the draft
executed in its partial availment of the letter of credit, following the dishonor of the letter of credit
by Bank of Ayudhya, the Supreme Court ruled in the negative.

The Bank of America did not incur any liability. It cannot be disputed that Bank of America has, in
fact, only been an advising, not confirming, bank, and this much is clearly evident, among other
things, by the provisions of the letter of credit itself, the petitioner 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 Bank
of America has asked InterResin 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 General
Chemicals (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. Bank of America's letter has expressly stated that
"[t]he enclosure is solely an advise of credit opened by the abovementioned correspondent and
conveys no engagement by us." This written reservation by Bank of America in limiting its
obligation only to being an advising bank is in consonance with the provisions of U.C.P.

As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit.
The bare statement of the bank employees in responding to the inquiry made by Atty. Tanay,
InterResin's representative, on the authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's letter of advice, nor can it justify the
conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin
itself cannot claim to have been all that free from fault. As the seller, the issuance of the letter of
credit should have obviously been a great concern to it. It would have been strange if it did not,
prior to the letter of credit, enter into a contract, or negotiated at the very least, with General
Chemicals. In the ordinary course of business, the perfection of contract precedes the issuance
of a letter of credit. Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no real support in U.C.P. Article
18 of the U.C.P. states that: "Banks assume no liability or responsibility for the consequences
arising out of the delay and/or loss in transit of any messages, letters or documents, or for delay,
mutilation or other errors arising in the transmission of any telecommunication . . ." As advising
bank, Bank of America is bound only to check the "apparent authenticity" of the letter of credit,
which it did. The word "APPARENT suggests appearance to unaided senses that is not or may
not be borne out by more rigorous examination or greater knowledge."

2. On the second issue of whether the Bank of America may recover against Inter-Resin under
the draft executed in its partial availment of the letter of credit, following the dishonor of the letter
of credit by Bank of Ayudhya, the Supreme Court ruled in the affirmative.

This kind of transaction is what is commonly referred to as a discounting arrangement. Bank of

America has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship
of presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of
course, could have chosen other banks with which to negotiate the draft and the documents.) As
a negotiating bank, Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon. While Bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the Negotiable Instruments Law
and possible then allowed it to even go after the indorser of the draft, this failure, nonetheless,
does not preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself.
Inter-Resin admits having received P10, 219,093.20 from bank of America on the letter of credit
and in having executed the corresponding draft. The payment to Inter-Resin has given, as
aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya
which, in turn, would then seek indemnification from the buyer (the General Chemicals of
Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of America may
now turn to Inter-Resin for restitution.

Between the seller and the negotiating bank there does the usual relationship exist between a
drawer and purchaser of drafts. Unless drafts drawn in pursuance of the credit are indicated to be
without recourse therefore, the negotiating bank has the ordinary right of recourse against the
seller in the event of dishonor by the issuing bank. The fact that the correspondent and the
negotiating bank may be one and the same does not affect its rights and obligations in either
capacity, although a special agreement is always a possibility.
 4.

G.R. No. 94209 April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING

CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Case digest of Jeanen Alvior

DOCTRINE

Commercial transactions involving letters of credit are governed by the rule of strict
compliance. An irrevocable letter of credit is not synonymous with a confirmed letter of credit; in
an irrevocable letter of credit, the issuing bank may not, without the consent of the beneficiary
and the applicant revoke his undertaking under the letter; whereas, in a confirmed letter of credit,
the correspondent bank gives and absolute assurance to the beneficiary that it will undertake the
issuing bank’s obligation as its own according to the terms and conditions of the credit.
Mere opening of a letter of credit does not involve a specific appropriation of a sum of money
in favor of the beneficiary. The concept of guarantee vis-a-vis the concept of an irrevocable credit
are inconsistent with each other.

FACTS
Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of
lauan logs at$27.00 per cubic meter FOB.-After inspecting the logs, Christiansen issued purchase
order.-On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de
Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued
Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54,000.00, the
total purchase price of the lauan logs.-The letter of credit was mailed to the Feati Bank and Trust
Company (now City trust) with the instruction to the latter that it "forward the enclosed letter of
credit to the beneficiary.” The letter of credit further provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied by the documents specified therein.
Also incorporated by reference is the Uniform Customs and Practice for Documentary Credits).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen.
Before its loading, the logs were inspected by custom inspectors, all of whom certified to the good
condition and exports ability of the logs, and the loading was completed.
However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of
credit, despite several requests made by the private respondent. Because of the absence of the
certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment
on the letter of credit. Meanwhile, the logs arrived at Inchon, Korea and were received by the
consignee, Hanmi Trade Development Company, to whom Christiansen sold the logs and
obtained profit. Hanmi Trade Development Company, on the other hand sold the logs to Taisung
Lumber Company at Inchon, Korea.-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 the Feati Bank and Trust Company (now City
trust).The petitioner was impleaded as defendant before the lower court only to afford complete
relief should the court a quo order Christiansen to execute the required certification.
While the case was still pending trial, Christiansen left the Philippines without informing the Court
and his counsel. Hence, Villaluz, filed an amended complaint make the petitioner solidarily liable
with Christiansen.
ISSUE

The principal issue in this case is 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?

RULING
It is settled rule in commercial transactions involving letters 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 of strict
compliance.
In the United States, commercial transactions involving letters of credit are governed by the
rule of strict compliance. In the Philippines, the same holds true. The same rule must also be
followed. The case of Anglo-South American Trust Co. v. Uhe et al. (184 N.E. 741 [1933])
expounded clearly on the rule of strict compliance. “We have heretofore held that these letters of
credit are to be strictly complied with, which documents, and shipping documents must be
followed as stated in the letter. There is no discretion in the bank or trust company to waive any
requirements. The terms of the letter constitutes an agreement between the purchaser and the
bank.”
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings and the legal
relations arising from there varies. A credit may be an irrevocable credit and at the same time a
confirmed credit or vice-versa. An irrevocable credit refers to the duration of the letter of credit.
What it simply means is that the issuing bank may not without the consent of the beneficiary
(seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does
not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains
to the kind of obligation assumed by the correspondent bank. In this case, the correspondent
bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s
obligation as its own according to the terms and conditions of the credit.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that
the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer)
revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the
credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed
by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to
the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms
and conditions of the credit.
The mere opening of a letter of credit, it is to be noted, does not involve a specific
appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary
may be able to draw funds upon the letter of credit up to the designated amount specified in the
letter. It does not convey the notion that a particular sum of money has been specifically reserved
or has been held in trust. What actually transpires in an irrevocable credit is that the correspondent
bank does not receive in advance the sum of money from the buyer or the issuing bank. On the
contrary, when the correspondent bank accepts the tender and pays the amount stated in the
letter, the money that it doles out comes not from any particular fund that has been advanced by
the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement
from the issuing bank.
 The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The
concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each
other. In the first place, the guarantee theory destroys the independence of the bank’s
responsibility from the contract upon which it was opened. In the second place, 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.

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and
SETS ASIDE the decision of the Court of Appeals. The amended complaint is DISMISSED.
 5.

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO
R. CHI, respondents.

Case digest of Jeanen Alvior

DOCTRINE
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. Through a letter of credit, the bank merely substitutes
its own promise to pay for the promise to pay of 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.

FACTS
Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a 5-year deferred payment plan. To effect the payment,
PRMI applied for a commercial letter of credit with the Prudential Bank and Trust Company in
favor of Nissho. Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 Against
this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the Prudential
Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. Two of the original drafts were
accepted by PRMI through its president, Anacleto R. Chi, while the others were not. Upon the
arrival of the machineries, the Prudential Bank indorsed the shipping documents to the PRMI
which accepted delivery of the same. To enable PRMI to take delivery of the machineries, 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 PRMI company

At the back of the trust receipt was printed a form to be accomplished by 2 sureties who, by the
very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank
should the PRMI fail to pay the total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. . PRMI was able to take delivery of the textile machineries and
installed the same at its factory site. Chi argued that presentment for acceptance was necessary
to make PRMI liable. The trial court ruled that that presentment for acceptance was an
indispensable requisite for Philippine Rayon’s liability on the drafts to attach.

ISSUE
Whether or not presentment for acceptance of the drafts was indispensable to make PRMI liable?

RULING
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. Through a letter of credit, the bank merely substitutes its
own promise to pay for the promise to pay of 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 herein petitioner.
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. Presentment for acceptance is necessary only
in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). The
said section reads:
“SEC. 143. When presentment for acceptance must be made.—Presentment for acceptance
must be made: (a) Where the bill is payable after sight, or in any other case where presentment
for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill
expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn
payable elsewhere than at the residence or place of business of the drawee. In no other case is
presentment for acceptance necessary in order to render any party to the bill liable.” Obviously
then, sight drafts do not require presentment for acceptance.
Presentment for acceptance is defined an the production of a bill of exchange to a drawee for
acceptance. Acceptance, however, was not even necessary in the first place because the drafts
which were eventually issued were sight drafts. Even if these were not sight drafts, thereby
necessitating acceptance, it would be the Bank (Bank of America) — and not Philippine Rayon
— which had to accept the same for the latter was not the drawee.

The trial court and the public respondent, therefore, erred in ruling that presentment for
acceptance was an indispensable requisite for Philippine Rayon’s liability on the drafts to attach.
Contrary to both courts’ pronouncements, Philippine Rayon immediately became liable upon Bank
of America’s payment on the letter of credit. Such is the essence of the letter of credit issued by
the petitioner. A different conclusion would violate the principle upon which commercial letters of
credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company
Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the
latter had already received the imported machinery and the petitioner had fully paid for it.
 6.

MWSS vs DAWAY

Case digest of Marion Jossette Calamba

DOCTRINE: "The expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any
arrangement, however made or described, whereby a bank acting at the request and on
instructions of a customer or on its own behalf is to make payment against stipulated document(s)"
and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of credit as a
"definite undertaking of the issuing bank, provided that the stipulated documents are presented
to the nominated bank or the issuing bank and the terms and conditions of the Credit are complied
with, to pay at sight if the Credit provides for sight payment."

FACTS: In 1997, MWSS granted Maynilad under a Concession Agreement 20-yr period to
manage, operate, repair, decommission and refurbish MWSS water delivery and sewerage
services in the West Zone Service Area, andMaynilad undertook to pay concession fees on dates
agreed upon in said agreement.Maynilad was required under Section 6.9 of said contract to put
up a bond, bank guarantee or other security to MWSS.Maynilad arranged 3-yr facility with a
number of foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable
Standby Letter of Credit in the amount of US$120M for performance of Maynilad’s
obligations.Respondent Maynilad requested MWSS for a mechanism by which it hoped to recover
losses from depreciation of Philippine Peso against US Dollar. Failing to get what it desired,
Maynilad issued a Force Majeure Notice and unilaterally suspended the payment of the
concession fees. In an effort to salvage the Concession Agreement, the parties entered into a
Memorandum of Agreement (MOA) wherein Mayniladwas allowed to recover foreign exchange
losses under a formula agreed upon between them. After 2 months, Maynilad again filed another
Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, they
underwent arbitration. Amendment No. 1 on the agreement provided for a formula that would
allow Maynilad to recover foreign exchange losses it had incurred or would incur under the terms
of the Concession Agreement. In 2002, Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under the Concession
Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover
Maynilad’s foreign exchange losses.Maynilad filed a Notice of Early Termination of the
concession, which was challenged by MWSS. Appeals Panel ruled that there was no Event of
Termination as defined under the Concession Agreement and that, Maynilad should pay the
concession fees that had fallen due. Prior to the award of the Appeals Panel, Maynilad had filed
a petition for rehabilitation before the court a quo which resulted in the issuance of the Stay Order

ISSUE: W/N, rehabilitation court act in excess of its authority or jurisdiction when it enjoined
petitioner from seeking the payment of the concession fees from banks that issued the Irrevocable
Standby Letter of Credit in its favor and for the account of respondent Maynilad?

RULING:Yes. It is true that the stay order is immediately executory. It is also true, however, that
the Standby Letter of Credit and the banks that issued it were not within the jurisdiction of the
rehabilitation court. The call on the Standby Letter of Credit, therefore, could not be considered a
violation of the Stay Order.The determination of whether the public respondent was correct in
enjoining petitioner from drawing on the Standby Letter of Credit will have no bearing on the
determination to be made by public respondent whether the petition for rehabilitation has merit or
not.Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against guarantors and sureties who are not
solidarily liable with the debtor. Respondent Maynilad’s claim that the banks are not solidarily
liable with the debtor does not find support in jurisprudence. In an irrevocable letter of credit, the
bank undertakes a primary obligation. Aletter of credit as an engagement by a bank or other
person made at the request of a customer that the issuer shall honor drafts or other demands of
payment upon compliance with the conditions specified in the credit.

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 and 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 in 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.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. In the 1993 Revision it provides in Art. 2 that "the expressions Documentary Credit(s)
and Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a
bank acting at the request and on instructions of a customer or on its own behalf is to make
payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing
banks on an irrevocable letter of credit as a "definite undertaking of the issuing bank, provided
that the stipulated documents are presented to the nominated bank or the issuing bank and the
terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight
payment."The terms of the Irrevocable Standby Letter of Credit do not show that the obligations
of the banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at
the request of and for the account of Maynilad Water Services, Inc., in favor of MWSS, as a bond
for the full and prompt performance of the obligations by the concessionaire under the Concession
Agreement and petitioner is authorized by the banks to draw on it by the simple act of delivering
to the agent a written certification substantially in the form Annex "B" of the Letter of Credit. It
provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting,
the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the
Standby Letter of Credit regardless of the date on which the event giving rise to such Written
Certification arose. Except when a letter of credit specifically stipulates otherwise, the obligation
of the banks issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and definite undertaking
to pay the beneficiary upon the presentation of the set of documents required therein.
 7.

G.R. No. 74834 November 17, 1988

INSULAR BANK OF ASIA vs IAC

Case digest of Marion Jossette Calamba

DOCTRINE: Irrevocable Standby Letters of Credit are credit secures the payment of any
obligation of the accountee to you under that Loan Agreement xxx, including those pertaining to
(a) surcharges on defaulted account; stallments, (b) increased interest charges, and (c) liabilities
connected with taxes stipulated to be for Accountee's and provided however, that our maximum
liabilities hereunder shall not exceed the amount of P500,000.00 (Pl00.000.00 for the other LC).

FACTS: Sps Ben and Juanita Mendoza obtained 2 loans from Phil-AmLife for P600,000.00 to
finance the construction of their residential house inMandaue City at 14% interest for 5 years.
Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of
a commercial bank. Mendozas thus contracted with Insular Bankfor the issuance of 2 irrevocable
standby Letters of Credit in favor of Philam (one for 500K and second for 100K) which was
secured by a real estate mortgage for the same amount on the property of Respondent Spouses
in favor of IBAA. In 2 promissory notes for the 100k, both Notes authorized IBAA "to sell at public
or private sale such securities or things for the purpose of applying their proceeds to such
payments" of many particular obligation or obligations" the Mendozas may have to IBAA.
Mendozas failed to pay Philam Life the amortizationso Philam Life informed IBAA that it was
declaring both loans as "entirely due and demandable" and demanded payment of P492,996.30.
However, because IBAA contested the propriety of calling the entire loan, Philam Life desisted
and resumed availing of the L/Cs by drawing 5 more amortizations.Philam Life then demanded
payment from IBAA but averred they are mere guarantor of the Mendozas who are the principal
debtors. The REM which secured the 2 standby L/Cs was extrajudicially foreclosed by, and sold
at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder. Philam Life
filed suit against Respondent Spouses and IBAA before RTC Manila for recovery of the sum of
P274,779.56, the amount allegedly still owed under the loan. After trial, said Court rendered a
Decision finding that IBAA had paid Philam Life only P342,127.05 and not P372,227.65, as
claimed by IBAA, because of a stale IBAA Manager's check in the amount of P30,100.60, which
had to be deducted. Both parties appealed with IAC, and which reversed the Trial Court and ruled
instead that IBAA's liability was not reduced by virtue of the payments made by the Mendozas.

IBAA stresses that it has no more liability to Philam Life under the 2 standby LCs and, instead, is
entitled to a refund. Whereas Philam Life and the Mendoza spouses separately maintain that
IBAA's obligation under said 2 LCs is original and primary and is not reduced by the direct
payments made by the Mendozas to Philam Life.

ISSUE: W/N the partial payments made by the principal obligors (SPS MENDOZAS) reduced the
liability of petitioner IBAA as guarantor or surety under the terms of the standby LCs in question.

HELD: NO. While LCs 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 (Section 74[e], RA 337, General Banking Act). 1 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." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval v. Trask,,
12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary obligations and not accessory
contracts. Being separate and independent agreements, the payments made by the
Mendozascannot be added in computing IBAA's liability under its own standby letters of credit.
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.

In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties
that must govern.Letters of credit and contracts for the issuance of such letters are subject to the
same rules of construction as are ordinary commercial contracts. They are to receive a
reasonable and not a technical construction and although usage and custom cannot control
express terms in letters of credit, they are to be construed with reference to all the surrounding
facts and circumstances, to the particular and often varying terms in which they may be
expressed, the circumstances and intention of the parties to them, and the usages of the particular
trade of business contemplated.

The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows:

This credit secures the payment of any obligation of the accountee to you under that Loan
Agreement xxx, including those pertaining to (a) surcharges on defaulted account;
stallments, (b) increased interest charges, and (c) liabilities connected with taxes
stipulated to be for Accountee's and provided however, that our maximum liabilities
hereunder shall not exceed the amount of P500,000.00 (Pl00.000.00 for the other LC).

From the terms of the subject standby LCs itself, the LCs are to secure the payment of any
obligation of the Mendozas to Philam Life including all interests, surcharges and expenses
thereon but not to exceed P600,000.00.

Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on
the loan. Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the
obligation to pay Philam Life for this unexpended balance. The amount of P222,000.00, therefore,
considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA
under the explicit terms thereof, which IBAA had itself supplied. Letters of credit are strictly
construed to the end that the rights of those directly parties to them may be preserved and their
interest safeguarded. > Like any other writing, it will be construed most strongly against the writer
and so as to be reasonable and consistent with honest intentions.
 8.

BANK OF AMERICA, NT & SA, petitioners, vs. COURT OF APPEALS, INTER-RESIN

INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE,
respondents.
G.R. No. 105395. December 10, 1993.

Case digest of Christian Harvey Ducay

Doctrine: 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.

Facts: Bank of America received by registered mail an irrevocable letter of credit purportedly
issued by Bank of Ayudhya for the account of General Chemicals, in the amount of $2,782,000.00
to cover the sale of plastic ropes and agricultural files, wherein Inter-Resin serves as the
beneficiary.

Bank of America then notified Inter-Resin of the existence of the said letter of credit. Inter-Resin,
sought to make partial availment of the letter of credit by submitting to Bank of America invoices
and other necessary documents evidencing the partial shipment of the goods agreed upon. Upon
verifying the documents, Bank of America then paid Inter-Resin the amount of $1,320,600.00.

After the first availment, Inter-Resin then sent to Bank of America another set of documents
evidencing another shipment and to claim the balance of the letter of credit. However, Bank of
Ayudhya informed Bank of America that the letter of credit is fraudulent. The latter then sought
the help of NBI agents and found out that the goods delivered by Inter-Resin were not the actual
goods agreed upon. A case for estafa through falsification of commercial documents was filed
against the officers of Inter-Resin but was eventually dismissed by the prosecutors.

Now, Bank of America sued Inter-Resin for the recovery of $1,320,600.00 that it paid to the latter.
On the other hand, Inter-Resin filed a counterclaim and seeks to claim the balance remaining to
the letter of credit and that its officers had no hand in the alleged fraudulent transaction that
occurred.

The trial court as affirmed by the CA ruled in favor of Inter-Resin and held that it was Bank of
America’s fault in not verifying with Bank of Ayudhya the authenticity of the letter of credit and that
there was no proof that Inter-Resin participated in the alleged fraudulent transactions and in fact,
a case for estafa against its officers was dismissed. Hence, the present petition wherein Bank of
America contends that it merely acted as an advising bank so it has no liability to pay the balance
of the letter of credit. Moreover, it is entitled to recover the amount it paid to Inter-Resin due to
the fraudulent breach of contract committed by the latter.

Issue: Whether or not Bank of America may claim the amount it paid to Inter-Resin?

Held: The Supreme Court ruled in the AFFIRMATIVE.

In general, there would at least be three (3) parties to a letter of credit: (a) the buyer, who procures
the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents
of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of
the draft and proper documents of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the goods to
the buyer and delivers the documents of title and draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in international trade practice,
may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to
the seller the existence of the credit; or, of a confirming bank which will lend credence to the letter
of credit issued by a lesser known issuing bank; or, of a paying bank which undertakes to encash
the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim
payment, the buyer may approach another bank, termed the negotiating bank, to have the draft
discounted.

In this case, Bank of America acted in two capacities. First, it merely acted as an advising bank
and not as a confirming bank as can be seen from the letter it sent to Inter-Resin wherein it made
a reservation and clarification that it is merely acting as an advising bank. Such practice is in
consonance with the U.C.P (). The ruling of the trial court that was affirmed by the CA that it was
Bank of America’s fault in not verifying the authenticity of the letter of credit before sending it to
Inter-Resin finds no support in UCP. An advising bank is bound only to check the “apparent
authenticity” of the letter of credit, which it did. Second, it also acted as a negotiating bank. This
time, Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin
from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment.
As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon.

The other issues raised by Bank of America are irrelevant such as the issue of breach committed
by Inter-Resin. 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.

In conclusion, Bank of America as a negotiating bank has a right to recover the amount of
$1,320,600.00 it paid to Inter-Resin. Furthermore, as an advising bank, it is not liable to pay for
the balance of the letter of credit.
 TRUST RECEIPT
1.
LAND BANK OF THE PHILIPPINES, petitioner, vs. LAMBERTO C. PEREZ, NESTOR C.
KUN, MA. ESTELITA P. ANGELES-PANLILIO, and NAPOLEON O. GARCIA, respondents.
G.R. No. 166884. June 13, 2012

Case digest of Christian Harvey Ducay

Doctrine: There are two obligations in a trust receipt transaction. The first is covered by the
provision that refers to money under the obligation to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision referring to merchandise received
under the obligation to return it (devolvera) to the owner. Thus, under the Trust Receipts Law,
intent to defraud is presumed when (1) the entrustee fails to turn over the proceeds of the sale of
goods covered by the trust receipt to the entruster; or (2) when the entrustee fails to return the
goods under trust, if they are not disposed of in accordance with the terms of the trust receipts.

Facts: Land Bank of the Philippines (LBP) extended a credit accommodation to Asian
Construction and Development Corporation (ACDC) through the execution of an Omnibus Credit
Line Agreement (Agreement).

In various instances, ACDC used the Letters of Credit/Trust Receipts Facility of the Agreement to
buy construction materials. The respondents, as officers and representatives of ACDC, executed
trust receipts in connection with the construction materials, with a total principal amount of
P52,344,096.32. The trust receipts matured, but ACDC failed to return to LBP the proceeds of
the construction projects or the construction materials subject of the trust receipts.

As a result, LBP filed a case for Estafa or violation of Article 315, paragraph 1(b) of the Revised
Penal Code, in relation to P.D. 115, against the respondents. The respondents answered by
alleging that ACDC acted as a subcontractor for government projects such as the Metro Rail
Transit, the Clark Centennial Exposition and the Quezon Power Plant in Mauban, Quezon. Its
clients for the construction projects, which were the general contractors of these projects, have
not yet paid them; thus, ACDC had yet to receive the proceeds of the materials that were the
subject of the trust receipts and were allegedly used for these constructions. As there were no
proceeds received from these clients, no misappropriation thereof could have taken place.

The prosecutor dismissed the case but it was reversed by the Secretary of Justice. The case
reached the CA and it decided in favor of the respondents and held that the transaction between
the parties does not involve a trust receipt transaction but merely a loan agreement. Hence, the
present petition.

Issue: Whether the transaction between the parties is a trust receipt or a loan agreement?

Held: The Supreme Court ruled that the transaction involved is merely a loan agreement.
There are two obligations in a trust receipt transaction. The first is covered by the provision that
refers to money under the obligation to deliver it (entregarla) to the owner of the merchandise
sold. The second is covered by the provision referring to merchandise received under the
obligation to return it (devolvera) to the owner. Thus, under the Trust Receipts Law, intent to
defraud is presumed when (1) the entrustee fails to turn over the proceeds of the sale of goods
covered by the trust receipt to the entruster; or (2) when the entrustee fails to return the goods
under trust, if they are not disposed of in accordance with the terms of the trust receipts.

In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative—
the return of the proceeds of the sale or the return or recovery of the goods, whether raw or
processed.

When both parties enter into an agreement knowing that the return of the goods subject of the
trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by
the parties would be the return of the proceeds of the sale transaction. This transaction becomes
a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase
of the goods.

In this case, the Court cannot consider the agreements between the parties in this case to be trust
receipt transactions because (1) from the start, the parties were aware that ACDC could not
possibly be obligated to reconvey to LBP the materials or the end product for which they were
used; and (2) from the moment the materials were used for the government projects, they became
public, not LBP’s, property. Since these transactions are not trust receipts, an action for estafa
should not be brought against the respondents, who are liable only for a loan.
 2.
PNB V. SORIANO (G.R. No. 164051, October 3, 2012)
Case digest of Magnus Albert Manalili

DOCTRINE: Well-settled is the rule that, with respect to obligations to pay a sum of money, the
obligation is not novated by an instrument that expressly recognizes the old, changes only the
terms of payment, adds other obligations not incompatible with the old ones, or the new contract
merely supplements the old one.

FACTS: On March 20, 1997, PNB extended a credit facility in the form of (a) Floor Stock Line
(FSL) in the increased amount of Thirty Million Pesos to Lisam Enterprises, Inc. (LISAM), a family-
owned and controlled corporation that maintains an account with petitioner PNB.

On various dates, LISAM made several availments of the FSL in the total amount of
P29,645,944.55, the proceeds of which were credited to tits current account with PNB. For each
aailment, LISAM through Soriano executed 52 trust receipts. In a ddition to the promissory notes,
showing its receipts of the items in trust with the duty ti turnover the proceeds of the sale thereof
to PNB.

Sometime on January 21-22, 1998. PNB authorized personnel conducted an actual physical
inventory of LISAM’s motor vehicles and motorcycles and found that only four (4) units covered
by the TRs amounting to P158, 100.00 remained unsold.

Out of the P29, 544,944.55, as the outstanding principal balance of the total availments on the
line covered by TR, LISAM should have remitted to PNB P29, 487,844.55 Despite several formal
demands, respondent Soriano Failed and refused to turn over the said amount to the prejudice o
PNB

In refutation, Soriano filed a counter-affidavit asserting that her existing credit facilities with PNB
have been restricted, therefore extinguishing her criminal liability and novating the original loan
agreement.

ISSUE: WHETHER OR NOT THE RESTRUCTURING OF LISAM’S LOAN ACCOUNT NOVATED

THE ORIGINAL LOAN AGREEMENT

HELD: No. Petition Granted. Novation is one of the modes of extinguishment of obligation; it is a
single juridical act with a diptych function. The substitution or change of the obligation by a
subsequent one extinghuses the first, resulting in the creation of a new obligation in lieu of the
old. It is not a complete obliteration of the obligor-obiligee relationship, but operates as a relative
extinction of the original obligation.

In order for novation to take place, the concurrence of the following requisites is indispensable:
(1) There must be a previous valid obligation; (2) There must be an agreement of the parties
concerened to a new contract; (3) There must be the extinguishment of the old contract; and (4)
There must be the validity of the new contract.

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unmistakable. The
contracting parties must incontrovertibly disclos that their object in executing the new contract is
to extinghuish the old one. Upon the other hand, no specific form is required for an impled
novation, and all that is prescribed by the law would be an incompatibility between the two
contracts. Nevertheless, both kinds of novation must still be clcearly proven. Novation does not
extinguish criminal liability. It stands to reason therefore, that Soriano’s criminal liability under the
TRs subsists considering that the purported restructured Omnibus Line did not extinguish the civil
obligations under the floor stock line secured by TR.
 3.
ILDEFONSO S. CRISOLOGO v. PEOPLE [ GR No. 199481, Dec 03, 2012 ]

Case digest of Magnus Albert Manalili

DOCTRINE: Section 13 of the Trust Receipts Law explicitly provides that if the violation or offense
is committed by a corporation, as in this case, the penalty provided for under the law shall be
imposed upon the directors, officers, employees or other officials or person responsible for the
offense, without prejudice to the civil liabilities arising from the criminal offense.

FACTS: Sometime in January and February 1989, petitioner, as President of Novachemical

Industries, Inc. (Novachem), applied for commercial letters of credit from private respondent
China Banking Corporation (Chinabank) to finance the purchase of 1,600 kgs. of amoxicillin
trihydrate micronized from Hyundai Chemical Company based in Seoul, South Korea and glass
containers from San Miguel Corporation (SMC). Subsequently, Chinabank issued Letters of
Credit Nos. 89/0301 and DOM-33041 in the respective amounts of US$114,400.00 (originally
US$135,850.00) with a peso equivalent of P2,139,119.80 and P1,712,289.90. After petitioner
received the goods, he executed for and in behalf of Novachem the corresponding trust receipt
agreements dated May 24, 1989 and August 31, 1989 in favor of Chinabank.

On January 28, 2004, Chinabank, through its Staff Assistant, Ms. Maria Rosario De Mesa (Ms.
De Mesa), filed before the City Prosecutor's Office of Manila a Complaint-Affidavit charging
petitioner for violation of P.D. No. 115 in relation to Article 315 1(b) of the RPC for his purported
failure to turn-over the goods or the proceeds from the sale thereof, despite repeated demands.

ISSUE: Whether or not he is liable violation of the trust receipts law under the law?

HELD: In this case, petitioner was acquitted of the charge for violation of the Trust Receipts Law
in relation to Article 315 1(b) of the RPC. As such, he is relieved of the corporate criminal liability
as well as the corresponding civil liability arising therefrom. However, as correctly found by the
RTC and the CA, he may still be held liable for the trust receipts and L/C transactions he had
entered into in behalf of Novachem.

Settled is the rule that debts incurred by directors, officers, and employees acting as corporate
agents are not their direct liability but of the corporation they represent, except if they contractually
agree/stipulate or assume to be personally liable for the corporation's debts, as in this case.
 4.
METROPOLITAN BANK & TRUST COMPANY v SECRETARY OF JUSTICE
Case digest of Ferdinand Mansibang

DOCTRINE:
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 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" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of
the amount owing to the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt, or for other purposes substantially equivalent
to any one of the following:
1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case
of goods delivered under trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether in its original or processed
form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load,
unload, ship or transship or otherwise deal with them in a manner preliminary or necessary to
their sale; or
2. In the case of instruments, a) to sell or procure their sale or exchange; or b) to deliver them to
a principal; or c) to effect the consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation, collection or renewal.

FACTS:
In order to finance the importation of materials necessary for the operations of its sister
company, Titan Ikeda Construction and Development Corporation (TICDC), private respondents,
on behalf of Visaland, applied with petitioner for 24 letters of credit.
Simultaneous with the issuance of the letters of credit, private respondents signed trust
receipts in favor of petitioner. Private respondents bound themselves to sell the goods covered
by the letters of credit and to remit the proceeds to petitioner, if sold, or to return the goods, if not
sold, on or before their agreed maturity dates.
When the trust receipts matured, private respondents failed to return the goods to
petitioner, or to return their value amounting to ₱68,749,487.96 despite demand. Thus, petitioner
filed a criminal complaint for estafa against Visaland and private respondents with the Office of
the City Prosecutor of Manila.
The private respondents contended that they did not give much significance to the
documents they signed, considering the enormous value of the transaction involved. Thus, it is
highly improbable to mistake trust receipt documents for a contract of loan when the heading
thereon printed in bold and legible letters reads: "Trust Receipts."
The private respondents claimed that the contract entered into by the parties was a
Contract of Loan secured by a Real Estate Mortgage over two parcels of land. Also, according to
private respondents, petitioner made them sign documents bearing fine prints without apprising
them of the real nature of the transaction involved. Private respondents came to know of the trust
receipt transaction only after they were served a copy of the Affidavit-Complaint of the petitioner.
 The City Prosecutor found that no probable cause existed and dismissed the information.
Such was also affirmed by the Secretary of Justice and the Court of Appeals.

ISSUE:
Whether or not there is a probable cause for the prosecution of the respondents for the crime of
estafa

HELD:
As found in the Complaint-Affidavit of petitioner, private respondents were charged with
failing to account for or turn over to petitioner the merchandise or goods covered by the trust
receipts or the proceeds of the sale thereof in payment of their obligations thereunder.
The following pieces of evidence adduced from the affidavits and documents submitted before
the City Prosecutor are sufficient to establish the existence of probable cause, to wit:

First, the trust receipts bearing the genuine signatures of private respondents; second, the
demand letter of petitioner addressed to respondents; and third, the initial admission by private
respondents of the receipt of the imported goods from petitioner.
That private respondents did not sell the goods under the trust receipt but allowed it to be
used by their sister company is of no moment. The offense punished under Presidential Decree
No. 115 is in the nature of malum prohibitum. A mere failure to deliver the proceeds of the sale or
the goods, if not sold, constitutes a criminal offense that causes prejudice not only to another, but
more to the public interest.
Even more incredible is the contention of private respondents that they did not give much
significance to the documents they signed, considering the enormous value of the transaction
involved. Thus, it is highly improbable to mistake trust receipt documents for a contract of loan
when the heading thereon printed in bold and legible letters reads: "Trust Receipts." We are not
prejudging this case on the merits. However, by merely glancing at the documents submitted by
petitioner entitled "Trust Receipts" and the arguments advanced by private respondents, we are
convinced that there is probable cause to file the case and to hold them for trial.
 5.
ALFREDO CHING v COURT OF APPEALS

Case digest of Ferdinand Mansibang

DOCTRINE:
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 or to return said goods, documents or instruments if they were not
sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article Three hundred fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the
Revised Penal Code.

FACTS:
Petitioner was charged before the Regional Trial Court of Makati with four counts of estafa
punishable under Article 315, par. 1 (b) of the Revised Penal Code, in relation to Presidential
Decree 115, otherwise known as the "Trust Receipts Law."
The Petitioner filed an "Omnibus Motion to Strike Out Information, or in the Alternative to
Require Public Prosecutor to Conduct Preliminary Investigation, and to Suspend in the Meantime
Further Proceedings in these Cases."
Acting on the omnibus motion, the Regional Trial Court required the prosecutor's office to
conduct a preliminary investigation and suspended further proceedings in the criminal cases.
Petitioner Ching, together with Philippine Blooming Mills Co., Inc., filed a case before the
Regional Trial Court of Manila for declaration of nullity of documents and for damages. Ching then
filed a petition before the RTC-Makati, Branch 58, for the suspension of the criminal proceedings
on the ground of prejudicial question in acivil action.
The RTC-Makati issued an order which denied the petition for suspension and scheduled
the arraignment and pre-trial of the criminal cases. As a result, petitioner moved to reconsider the
order to which the prosecution filed an opposition which was denied. Petitioner brought before
the Court of Appeals a petition for certiorari and prohibition, which sought to declare the nullity of
the aforementioned orders. The Court of Appeals denied the petition.
The Petitioner urges that the transaction entered into between the parties was one of "pure loan
without any trust receipt agreement". According to petitioner, the trust receipt documents were
intended merely as "additional or side documents covering the said loan" contrary to petitioner's
allegation in his original complaint that the trust receipts were executed as collateral or security..

ISSUE:
(1) Whether or not the pendency of a civil action for damages and declaration of nullity of
documents, specifically trust receipts, warrants the suspension of criminal proceedings for estafa
in relation to PD 115 or the Trust Receipts Law
(2) Whether or not the the transaction was one of pure loan without any trust receipts agreement

HELD:
(1)
We agree with the findings of the trial court, as affirmed by the Court of Appeals, that no
prejudicial question exists in the present case.
As defined, a prejudicial question is one that arises in a case the resolution of which is a
logical antecedent of the issue involved therein, and the cognizance of which pertains to another
tribunal. The prejudicial question must be determinative of the case before the court but the
jurisdiction to try and resolve the question must be lodged in another court or tribunal.
 Verily, under the prevailing circumstances, the alleged prejudicial question in the civil case
for declaration of nullity of documents and for damages, does not juris et de jure determine the
guilt or innocence of the accused in the criminal action for estafa. Assuming arguendo that the
court hearing the civil aspect of the case adjudicates that the transaction entered into between
the parties was not a trust receipt agreement, nonetheless the guilt of the accused could still be
established and his culpability under penal laws determined by other evidence. To put it
differently, even on the assumption that the documents are declared of null, it does not ipso facto
follow that such declaration of nullity shall exonerate the accused from criminal prosecution and
liability.
In fine, we reiterate that the civil action for declaration of nullity of documents and for
damages does not constitute a prejudicial question to the criminal cases for estafa filed against
petitioner Ching.
(2)
The concept in which petitioner signed the trust receipts, that is whether he signed the
trust receipts as such trust receipts or as a mere evidence of a pure and simple loan transaction
is not decisive because precisely, a trust receipt is a security agreement of indebtedness.
Contrary to petitioner's assertions and in view of jurisprudence established in this
jurisdiction, a trust receipt is not merely an additional or side document to a principal contract,
which in the instant case is alleged by petitioner to be a pure and simple loan.
 6.

ANTHONY NG v PEOPLE OF THE PHILIPPINES

GR. No. 173905. APRIL 23, 2010.

Case digest of Aireen Joy Mayani

DOCTRINE:
A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster.
There are, therefore, two obligations in a trust receipt transaction: the first refers to money
received under the obligation involving the duty to turn it over (entregarla) to the owner of the
merchandise sold, while the second refers to the merchandise received under the obligation to
"return" it (devolvera) to the owner.

FACTS:
Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the business of
building and fabricating telecommunication towers under the trade name "Capitol Blacksmith and
Builders," applied for a credit line of PhP 3,000,000 with Asiatrust Development Bank, Inc.
(Asiatrust). In support of Asiatrust's credit investigation, petitioner voluntarily submitted the
following documents: (1) the contracts he had with Islacom, Smart, and Infocom; (2) the list of
projects wherein he was commissioned by the said telecommunication companies to build several
steel towers; and (3) the collectible amounts he has with the said companies.
On May 30, 1997, Asiatrust approved petitioner's loan application. Petitioner was then required
to sign several documents, among which are the Credit Line Agreement, Application and
Agreement for Irrevocable L/C, Trust Receipt Agreements,[4] and Promissory Notes. Though the
Promissory Notes matured on September 18, 1997, the two (2) aforementioned Trust Receipt
Agreements did not bear any maturity dates as they were left unfilled or in blank by Asiatrust.
After petitioner received the goods, consisting of chemicals and metal plates from his suppliers,
he utilized them to fabricate the communication towers ordered from him by his clients which were
installed in three project sites, namely: Isabel, Leyte; Panabo, Davao; and Tongonan.
As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to
Asiatrust. Asiatrust then conducted a surprise ocular inspection of petitioner's business through
Villarva S. Linga, Asiatrust's representative appraiser. Linga thereafter reported to Asiatrust that
he found that approximately 97% of the subject goods of the Trust Receipts were "sold-out and
that only 3 % of the goods pertaining to PN No. 1963 remained." Asiatrust then endorsed
petitioner's account to its Account Management Division for the possible restructuring of his loan.
The parties thereafter held a series of conferences to work out the problem and to determine a
way for petitioner to pay his debts. However, efforts towards a settlement failed to be reached.
On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed a Complaint-Affidavit
before the Office of the City Prosecutor of Quezon City. Consequently, on September 12, 1999,
an Information for Estafa, as defined and penalized under Art. 315, par. 1(b) of the RPC in relation
to Sec. 3, PD 115 or the Trust Receipts Law, was filed with the RTC.

ISSUE:
Whether petitioner is liable for estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115

HELD:
It is a well-recognized principle that factual findings of the trial court are entitled to great weight
and respect by this Court, more so when they are affirmed by the appellate court. However, the
rule is not without exceptions, such as: (1) when the conclusion is a finding grounded entirely on
speculations, surmises, and conjectures; (2) the inferences made are manifestly mistaken; (3)
there is grave abuse of discretion; and (4) the judgment is based on misapprehension of facts or
premised on the absence of evidence on record. Especially in criminal cases where the accused
stands to lose his liberty by virtue of his conviction, the Court must be satisfied that the factual
findings and conclusions of the lower courts leading to his conviction must satisfy the standard of
proof beyond reasonable doubt.
In the case at bar, petitioner was charged with Estafa under Art. 315, par. 1(b) of the RPC in
relation to PD 115. the essential elements of Estafa are: (1) that money, goods or other personal
property is received by the offender in trust or on commission, or for administration, or under any
obligation involving the duty to make delivery of or to return it; (2) that there be misappropriation
or conversion of such money or property by the offender, or denial on his part of such receipt; (3)
that such misappropriation or conversion or denial is to the prejudice of another; and (4) there is
demand by the offended party to the offender.
Likewise, Estafa can also be committed in what is called a "trust receipt transaction" under PD
115, which is defined as:
Section 4. What constitutes a trust receipts 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" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, documents or instruments themselves if they are unsold
or not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:
1. In the case of goods or documents: (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case
of goods delivered under trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether in its original or processed
form until the entrustee has complied full with his obligation under the trust receipt; or (c) to load,
unload, ship or transship or otherwise deal with them in a manner preliminary or necessary to
their sale; or
2. In the case of instruments: (a) to sell or procure their sale or exchange; or (b) to deliver them
to a principal; or (c) to effect the consummation of some transactions involving delivery to a
depository or register; or (d) to effect their presentation, collection or renewal.
The sale of good, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of transaction, has, as against the buyer,
general property rights in such goods, documents or instruments, 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 and is outside the purview and coverage of this
Decree.
In other words, a trust receipt transaction is one where the entrustee has the obligation to deliver
to the entruster the price of the sale, or if the merchandise is not sold, to return the merchandise
to the entruster. There are, therefore, two obligations in a trust receipt transaction: the first refers
to money received under the obligation involving the duty to turn it over (entregarla) to the owner
of the merchandise sold, while the second refers to the merchandise received under the obligation
to "return" it (devolvera) to the owner. A violation of any of these undertakings constitutes Estafa
defined under Art. 315, par. 1(b) of the RPC, as provided in Sec. 13 of PD 115.
A thorough examination of the facts obtaining in the instant case, however, reveals that the
transaction between petitioner and Asiatrust is not a trust receipt transaction but one of simple
loan.
PD 115 Does Not Apply
It must be remembered that petitioner was transparent to Asiatrust from the very beginning that
the subject goods were not being held for sale but were to be used for the fabrication of steel
communication towers in accordance with his contracts with Islacom, Smart, and Infocom. In
these contracts, he was commissioned to build, out of the materials received, steel
communication towers, not to sell them.
The true nature of a trust receipt transaction can be found in the "whereas" clause of PD 115
which states that a trust receipt is to be utilized "as a convenient business device to assist
importers and merchants solve their financing problems." Obviously, the State, in enacting the
law, sought to find a way to assist importers and merchants in their financing in order to encourage
commerce in the Philippines.
 7.
ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO v HOME BANKERS
SAVINGS AND TRUST COMPANY
G.R. No. 137232. June 29, 2005

Case digest of Aireen Joy Mayani

DOCTRINE:
A trust receipt is a security agreement pursuant to which a bank acquires a ‘security interest’ in
the goods. In Vintola vs. Insular Bank of Asia and America, we elucidated further that “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.”

FACTS:
Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers
Savings & 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 contains 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. They claimed that although the grant of
the credit line and the execution of the suretyship agreement. They 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
manufacture, using the credit line, it was merely acting on behalf of the bank, the true owner of
the goods by virtue of the trust receipts.

ISSUE:
Whether Yujuico is absolved from liability by the grant of the credit line and the execution of the
suretyship agreement.

HELD:
No. Yujuico’s argument 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. In Vintola vs. Insular Bank of Asia and America, we elucidated further that “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.” In Samo vs. People, we 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.”
If under the trust receipt, the bank 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 it wants, which it cannot do, just to give consistency with purpose of the trust receipt
of giving a stronger security for the loan obtained by the importer. To consider the bank as the
true owner from the inception of the transaction would be to disregard the loan feature thereof.
RTMC filed with the bank an application for a credit line in the amount of P10 million, but only P8
million was approved. RTMC then made withdrawals from this credit line and issued several
promissory notes in favor of the bank. In banking and commerce, a credit line is “that amount of
money or merchandise which a banker, merchant, or supplier agrees to supply to a person on
credit and generally agreed to in advance. It is the fixed limit of credit granted by a bank, retailer,
or credit card issuer to a customer, to the full extent of which the latter may avail himself of his
dealings with the former but which he must not exceed and is usually intended to cover a series
of transactions in which case, when the customer’s line of credit is nearly exhausted, he is
expected to reduce his indebtedness by payments before making any further drawings.
 8.

SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA vs. INSULAR BANK OF ASIA
AND AMERICA
G.R. No. 73271 May 29, 1987

Case digest of Queenie Anne Pelisco

DOCTRINE: 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."

FACTS: Sps. VINTOLAS, doing business under the name and style "Dax Kin International,"
engaged in the manufacture of raw sea shells into finished products, applied for and were granted
a domestic letter of credit by the Insular Bank of Asia and America (IBAA), Cebu City. The Letter
of Credit authorized the bank to negotiate for their account drafts drawn by their supplier for the
purchase of puka and olive seashells. In consideration thereof, the VINTOLAS, jointly and
severally, agreed to pay the bank "at maturity, in Philippine currency, the equivalent, of the
aforementioned amount or such portion thereof as may be drawn or paid, upon the faith of the
said credit together with the usual charges.

Having received the puka and olive shells, the VINTOLAS executed a Trust Receipt agreement
with IBAA. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as
the "latter's property with liberty to sell the same for its account.”

Having defaulted on their obligation, IBAA demanded payment from the VINTOLAS in a letter.
The VINTOLAS, who were unable to dispose of the shells, responded by offering to return the
goods. IBAA refused to accept the merchandise, and due to the continued refusal of the
VINTOLAS to make good their undertaking, IBAA charged them with Estafa for having
misappropriated, misapplied and converted for their own personal use and benefit the aforesaid
goods. During the trial of the criminal case the VINTOLAS turned over the seashells to the custody
of the Trial Court.

CFI acquitted the VINTOLAS of the crime charged, after finding that the element of
misappropriation or conversion was inexistent.

Shortly thereafter, IBAA commenced the present civil action to recover the value of the goods
before the RTC of Cebu. The court defendants jointly and severally to pay the plaintiff the sum of
P72,982.27.

The VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch
as, through no fault of their own, they were unable to dispose of the seashells, and that they have
relinquished possession thereof to the IBAA, as owner of the goods, by depositing them with the
Court.

ISSUE: Whether or not the trust receipt arrangement converted IBAA into owner of the goods,
hence VINTOLAS are relieved of their obligation from their loan.

RULING: No. 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.

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."

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It
was merely the holder of a security title for the advances it had made to the VINTOLAS. The
goods the VINTOLAS had purchased through IBAA financing remain their own property and they
hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor;
the latter remained a lender and creditor.

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that
because they have surrendered the goods to IBAA and subsequently deposited them in the
custody of the court, they are absolutely relieved of their obligation to pay their loan because of
their inability to dispose of the goods. The fact that they were unable to sell the seashells in
question does not affect IBAA's right to recover the advances it had made under the Letter of
Credit. In so arguing, the VINTOLAS conveniently close their eyes to their application for a Letter
of Credit wherein they expressly obligated themselves in these terms:

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in Philippine
Currency the equivalent of the above amount or such portion thereof as may be drawn or paid
upon the faith of said credit together with the usual charges. (Exhibit "A")

They further agreed that their marginal deposit of P8,000.00, later increased to P11,000.00 be
applied, without further proceedings or formalities to pay or reduce our obligation under this letter
of credit or its corresponding Trust Receipt.
 FRIA
1.
ALLIED BANKING CORPORATION vs. STEEL CORPORATION OF THE PHILIPPINES,
EQUITABLE PCI BANK, INC.
G.R. No. 191939 March 14, 2018

Case digest of Queenie Anne Pelisco

DOCTRINE: The Rehabilitation Rules provides that the court shall issue a commencement order
once it finds the petition for rehabilitation sufficient in form and substance. This commencement
order primarily contains: a declaration that the debtor is under rehabilitation, the appointment of
a rehabilitation receiver, a directive for all creditors to file their verified notices of claim, and an
order staying claims against the debtor.[10] The rehabilitation proceedings shall be deemed to have
commenced from the date of filing of the petition, which is also termed the commencement date.

FACTS: Equitable PCI Bank, Inc. (EPCIB), as creditor, filed a petition for the corporate
rehabilitation of its debtor (Steel Corporation of the Philippines) SCP with the RTC.

EPCIB alleged, among others, that due to the onslaught of the 1997 Asian Financial Crisis, SCP
began experiencing a downward trend in its financial condition which prompted various banks
and financial institutions to grant it with term loan facilities and working capital lines; that SCP
failed to make timely payments on its term loan facilities.

Allied Banking Corporation (ABC) granted SCP with a revolving credit facility denominated as a
letter of credit/trust receipt line in the amount of P100 million, which SCP availed of to finance the
importation of its raw materials. Pursuant to this arrangement, SCP executed a trust receipt
(TR),[5] which authorizes ABC to charge SCP's account in its possession under instances
specified in paragraph 9 thereof

The RTC issued an Order (the subject order) granting EPCIB's petition, and ruled that:
(c) Staying all claims against SCP, by all other corporations, persons or entities insofar as
they may be affected by the present proceedings, until further notice from this Court,
pursuant to Sec. 6, of Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation.
Steel Corporation of the Philippines is hereby prohibited from selling, encumbering, transferring
or disposing in any manner of its assets and properties except in the ordinary course of its
business and as may be approved by the Rehabilitation Receiver.

The CA affirmed the resolution of the RTC.

ABC appealed and contends that it was deprived of its right to due process when the RTC ordered
ABC to restore SCP's current account and to credit back the amount previously set off. ABC
asserts that it was not yet bound by the stay order when it made the setoff on 15 September 2006
because jurisdiction over it had not yet been acquired by the rehabilitation court; the stay order
was only published on 16 September 2006.

ISSUE: Whether or not RTC, as the rehabilitation court, properly invalidated ABC’s action.
RULING: Yes. The Rehabilitation Rules provides that the court shall issue a commencement
order once it finds the petition for rehabilitation sufficient in form and substance. This
commencement order primarily contains: a declaration that the debtor is under rehabilitation, the
appointment of a rehabilitation receiver, a directive for all creditors to file their verified notices of
claim, and an order staying claims against the debtor. [10] The rehabilitation proceedings shall be
deemed to have commenced from the date of filing of the petition, which is also termed the
commencement date.

Under the same Rules, the effects of such commencement order shall retroact to the date that
the petition was filed, and renders void any attempt to collect on or enforce a claim against the
debtor or to set off any debt by the debtor's creditors, after the commencement date, to wit:

The order issued by the RTC on 12 September 2006, which effectively initiated rehabilitation
proceedings and included a suspension of all claims against SCP, is akin to the commencement
order under the Rehabilitation Rules.

Clearly, therefore, if the Rehabilitation Rules were to be applied, the directive of the rehabilitation
court restoring SCP's current account and crediting back the offset amount is valid and proper,
since the offsetting was made on 15 September 2006, after the commencement date on 11
September 2006, when the petition for rehabilitation was filed.
 3.
Landbank of Philippines v. Fastech Synergy Philippines
GR No. 206150, Aug 09, 2017
Case digest of Michael John Niño Pluma
Doctrine:
Rehabilitation is statutorily defined under Republic Act No. 10142, otherwise known as the
"Financial Rehabilitation and Insolvency Act of 2010" (FRIA), as follows:

Section 4. Definition of Terms. — As used in this Act, the term:

Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its creditors
can recover by way of the present value of payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately liquidated. (Emphasis supplied)

Facts:
The Fastech Corporations claimed that they filed a joint petition since they have common
managers, assets, and creditors.[12] Due to financial losses, their assets would not be enough to
pay their peso and dollar debts various creditors.
respondents filed a verified Joint Petition for corporate rehabilitation (rehabilitation petition) before
the RTC-Makati, with prayer for the issuance of a Stay or Suspension Order
Among the common creditors listed in the rehabilitation petition was PDB, which had earlier filed
a petition for extrajudicial foreclosure of mortgage over the two (2) parcels of land. The foreclosure
sale was held on April 13, 2011, with PDB emerging as the highest bidder
Respondents claimed that this situation has impacted on their chance to recover from the losses
they have suffered over the years, since the said properties are being used by Fastech
Microassembly and Fastech Electronique... in their business operations, and a source of
significant revenue for their owner-lessor, Fastech Properties.
Hence, respondents submitted for the court's approval their proposed Rehabilitation Plan.
(a) a waiver of all accrued interests and penalties;
(b) a grace period of two (2) years to pay the principal amount of respondents' outstanding
loans,... (c) an interest rate of four percent (4%) and two percent (2%) per annum (p.a.) for
creditors whose credits are secured by real estate and chattel mortgages, respectively,the RTC-
Makati issued a Commencement Order with Stay Order Atty. Rosario S. Bernaldo as
Rehabilitation Receiver the RTC-Makati gave due course to the said petition, and, thereafter,
referred the same to the court-appointed Rehabilitation Receiver, who submitted in due time her
preliminary report, the court-appointed Rehabilitation Receiver submitted her comments, opining
that respondents may be successfully rehabilitated, considering the sufficiency of their assets to
cover their liabilities and the underlying assumptions, financial projections and procedures to
accomplish said goals in their Rehabilitation Plan.
the RTC-Makati dismissed the rehabilitation petition despite the favorable recommendation of its
appointed Rehabilitation Receiver.
found the facts and figures submitted by respondents to be unreliable in view of the disclaimer of
opinion of the independent auditors who reviewed respondents' 2009 financial statements
In the same vein, it did not give credence to the unaudited 2010 financial statements as the same
were mere photocopied documents and unsigned by any of respondents' responsible officers
respondents added new accounts and/or deleted/omitted certain accounts.
it rejected the revised financial projections as the bases for which were not submitted for its
evaluation on the ground of confidentiality
On April 30, 2012, the court-appointed Rehabilitation Receiver submitted a manifestation... before
the CA, maintaining that the rehabilitation of respondents is viable since the financial projections
and procedures set forth to accomplish the goals in their Rehabilitation Plan are attainable... the
CA rendered a Decision dated September 28, 2012 (September 28, 2012 Decision), reversing
and setting aside the RTC-Makati ruling
Accordingly, the CA reinstated the rehabilitation petition, approved respondents' Rehabilitation
Plan, and remanded the case to the RTC-Makati to supervise its implementation.
it permanently enjoined PDB from "effecting the foreclosure" of the subject properties during the
implementation of the Rehabilitation Plan.
Issues:
(a) whether or not the petition for review on certiorari was timely filed;
(b) the Rehabilitation Plan is feasible under FRIA.
Ruling:
In the present case, PDB was represented by both Janda Asia & Associates and DivinaLaw. It
was not disputed that Janda Asia & Associates, which remained a counsel of record, albeit, as
collaborating counsel, received notice of the CA's March 5, 2013 Resolution on March 12, 2013.
As such, it is from this date, and not from DivinaLaw's receipt of the notice of said resolution on
April 3, 2013 that the fifteen (15)-day period to file the petition for review on certiorari before the
Court started to run.
After a meticulous scrutiny of this case, the Court finds that the unjustified rehabilitation of
respondents, by virtue of the CA ruling if so allowed to prevail, warrants the relaxation of the
procedural rule violated by petitioners in the higher interest of substantial justice. The reasons
therefor are hereunder explained.
In the present case, however, the Rehabilitation Plan failed to comply with the minimum
requirements, i.e.: (a) material financial commitments to support the rehabilitation plan; and (b) a
proper liquidation analysis, under Section 18, Rule 3 of the 2008 Rules of Procedure on Corporate
Rehabilitation
The test in evaluating the economic feasibility of the plan was laid down in Bank of the Philippine
Islands v. Sarabia Manor Hotel Corporation
A perusal of the 2009 audited financial statements shows that respondents' cash operating
position was not even enough to meet their maturing obligations. Notably, their current assets
were materially lower than their current liabilities, and consisted mostly of advances to related
parties in the case of Fastech Micro assembly, Fastech Electronique, and Fastech Properties.[
Moreover, the independent auditors recognized the absence of available historical or reliable
market information to support the assumptions made by the management to determine the
recoverable amount (value in use) of respondents' properties and equipment
On the other hand, respondents' unaudited financial statements for the year 2010, and the months
of February and March 2011 were unaccompanied by any notes or explanation on how the figures
were arrived at.
Verily, respondents' Rehabilitation Plan should have shown that they have enough serviceable
assets to be able to continue its business operation
The CA's reliance on the expertise of the court-appointed Rehabilitation Receiver, who opined
that respondents' rehabilitation is viable, in order to justify its finding that the financial statements
submitted were reliable, overlooks the fact that the determination of the validity and the approval
of the rehabilitation plan is not the responsibility of the rehabilitation receiver, but remains the
function of the court.
The rehabilitation receiver's duty prior to the court's approval of the plan is to study the best way
to rehabilitate the debtor, and to ensure that the value of the debtor's properties is reasonably
maintained; and after approval, to implement the rehabilitation plan
Notwithstanding the credentials of the court-appointed rehabilitation receiver, the duty to
determine the feasibility of the rehabilitation of the debtor rests with the court. While the court may
consider the receiver's report favorably recommending the debtor's rehabilitation, it is not bound
thereby if, in its judgment, the debtor's rehabilitation is not feasible
Case law explains that corporate rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of successful
operation and solvency, the purpose being to enable the company to gain a new lease on life and
allow its creditors to be paid their claims out of its earnings
Thus, the basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the distressed corporation,[79] all with a view of effectively
restoring it to a state of solvency or to its former healthy financial condition through the adoption
of a rehabilitation plan
Section 18. Rehabilitation Plan. - The rehabilitation plan shall include
(c) the material financial commitments to support the rehabilitation plan;
(e) a liquidation analysis setting out for each creditor that the present value of payments it would
receive under the plan is more than that which it would receive if the assets of the debtor were
sold by a liquidator within a six-month period from the estimated date of filing of the petition;
A material financial commitment becomes significant in gauging the resolve, determination,
earnestness, and good faith of the distressed corporation in financing the proposed rehabilitation
plan... respondents will not require the infusion of additional capital as he, instead, proposed to
have all accrued penalties, charges, and interests waived, and a reduced interest rate
prospectively applied to all respondents' obligations, thus, there appears to be no concrete plan
to build on respondents' beleaguered financial position through substantial investments as the
plan for rehabilitation appears to be pegged merely on financial reprieves.
a distressed corporation cannot be restored to its former position of successful operation and
regain solvency by the sole strategy of delaying payments/waiving accrued interests and penalties
at the expense of the creditors.
while respondents have substantial total assets, a large portion of the assets of Fastech Synergy
and Fastech Properties is comprised of noncurrent assets, such as advances to affiliates and
investment properties while there is a claim that unnamed customers have made investments by
way of consigning production equipment, and advancing money to fund procurement of various
equipment intended to increase production capacity,[89] this can hardly be construed as a
material financial commitment which would inspire confidence that the rehabilitation would turn
out to be successful.
Respondents likewise failed to include any liquidation analysis in their Rehabilitation Plan.
The total liquidation assets and the estimated liquidation return to the creditors, as well as the fair
market value vis-a-vis the forced liquidation value of the fixed assets were not shown
The failure of the Rehabilitation Plan to state any material financial commitment to support
rehabilitation, as well as to include a liquidation analysis, renders the CA's considerations for
approving... as actually unsubstantiated, and hence, insufficient to decree the feasibility of
respondents' rehabilitation... it is imperative that a thorough examination and analysis of the
distressed corporation's financial data must be conducted.
the Court took note of the characteristics of an economically feasible rehabilitation plan as
opposed to an infeasible rehabilitation plan:
Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests
specific characteristics of an economically feasible rehabilitation plan: The debtor has assets that
can generate more cash if used in its daily operations than if sold. Liquidity issues can be
addressed by a practicable business plan that will generate enough cash to sustain daily
operations. The debtor has a definite source of financing for the proper and full implementation of
a Rehabilitation Plan that is anchored on realistic assumptions and goals.
On the other hand, this court enumerated the characteristics of a rehabilitation plan that is
infeasible:(a) the absence of a sound and workable business plan;(b) baseless and unexplained
assumptions, targets and goals;(c) speculative capital infusion or complete lack thereof for the
execution of the business plan;(d) cash flow cannot sustain daily operations; and(e) negative net
worth and the assets are near full depreciation or fully depreciated.
Professor Stephanie V. Gomez also suggests that the Financial and Rehabilitation and Insolvency
Act of 2010 emphasizes on rehabilitation that provides for better present value recovery for its
creditors.
 4.
GOLDEN CANE FURNITURE MANUFACTURING CORP., Petitioner vs. STEELPRO
PHILIPPINES, INC., SOCIAL SECURITY SYSTEM, AIR LIQUIDE PHILIPPINES, INC.,
CLARK DEVELOPMENT CORP., PHILIPPINE NATIONAL BANK, BUREAU OF INTERNAL
REVENUE, UP-TOWN INDUSTRIAL SALES, INC., Respondents

GR 198222, April 04, 2016

Case digest of Renato Reyes, Jr.

FACTS:

On November 3, 2008, Golden Cane filed a Petition for Corporate Rehabilitation with the
RTC of San Fernando, Pampanga. RTC issued a Stay Order.

In 2009, the RTC denied due course to the petition because of: 1.) litis pendentia and
forum shopping due to the pendency of the separate Petition for Suspension of Payments
involving the same parties filed by Golden Cane in 2007; 2.) the consistent failure of the
rehabilitation receiver to fulfill her duties; 3.) the receiver’s failure to file her bond on time; and 4.)
the receiver’s failure to submit Golden Cane’s interim financial statements. The RTC dismissed
the petition and lifted the Stay Order.

Golden Cane moved for reconsideration of the dismissal. The RTC denied the motion for
reconsideration.

Golden Cane elevated the case to the CA via a petition for certiorari. The CA
dismissed the petition outright for being the wrong mode of appeal. The CA held that the
correct remedy is a petition for review under Rule 43 of the Rules of Court pursuant to A.M. No.
04-9-07-SC.

Golden Cane moved to reconsider the dismissal but the CA denied the motion. Hence,
on 2011, Golden Cane filed the present petition for review on certiorari. Golden Cane argues:

1.) that A.M. No. 08-10-SC or the 2008 Rules of Procedure on Corporate
Rehabilitation (the 2008 Rules) took effect on January 16, 2009, and suspended A.M.
No. 04-9-07-SC;
2.) that under Rule 8 of the 2008 Rules, an order denying due course to the petition
for rehabilitation rendered before the approval or dis-approval of the
rehabilitation plan is not appealable to the CA under Rule 43; and,
3.) that the remedy against such an order is a petition for certiorari under Rule 65 of the
Rules of Court.

ISSUE:

Whether the correct remedy to challenge the outright dismissal of Golden Cane’s petition
for rehabilitation is a petition for review under Rule 43 or a petition for certiorari under Rule 65,
both of the Rules of Court.

RULING:
 A corporate rehabilitation case is a special proceeding in rem wherein the petitioner seeks
to establish the status of a party or a particular fact, i.e., the inability of the corporate debtor to
pay its debts when they fall due. It is summary and non-adversarial in nature. Its end-goal is to
secure the approval of a rehabilitation plan to facilitate the successful recovery of the corporate
debtor. It does not seek relief from an injury caused by another party.

Jurisdiction over corporate rehabilitation originally fell within the jurisdiction of the
Securities and Exchange Commission (SEC) which had absolute jurisdiction, control and
supervision over all Philippine corporations. With the enactment of the Securities Regulation Code
in 2000, this jurisdiction was transferred to the Regional Trial Courts.

The Court enacted A.M. No. 00-8-10-SC or the Interim Rules of procedure on
Corporate Rehabilitation (Interim Rules) which took effect on December 15, 2000. Under the
Interim Rules, a motion for reconsideration was a prohibited pleading. Orders issued by
the rehabilitation court were also immediately executor unless restrained by the appellate
court.

The Interim Rules, however, did not specifically indicate the mode of appeal that governed
corporate rehabilitation cases. Thus, in 2004, the Court enacted A.M. No. 04-9-07-SC to clarify
the proper mode of appeal from decisions and final orders of rehabilitation courts:

“All decisions and final orders in cases falling under the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate Controversies under
Republic Act 8799 shall be appealable to the Court of Appeals through a Petition for Review under
Rule 43 of the Rules of Court.”

In 2008, this Court enacted the Rules of Procedure on Corporate Rehabilitation (2008
Rules). The 2008 Rules:

• Included motions for reconsideration as a relief from any order of the court prior to the
approval of the rehabilitation plan
• Allowed a petition for certiorari under Rule 65 of the Rules of Court as a recourse,
but only against an order issued after the approval of the rehabilitation plan.
• Adopted the mode of appeal prescribed in A.M. No. 04-9-07-SC against an order
approving or dis-approving the rehabilitation plan.

In 2010, Congress enacted the Financial Rehabilitation and Insolvency Act (FRIA) which
updated the existing laws on corporate rehabilitation. The Court promulgated A.M. No. 12-12-
11-SC, or the Financial Rehabilitation Rules of Procedure (2013 Rules) on August 27, 2013.
It adopted the same remedies as the 2008 Rules against interlocutory orders of the rehabilitation
court. However, the 2013 Rules eliminated the remedy of appeal from the rehabilitation
court’s approval or disapproval of the rehabilitation plan.

Under the 2013 Rules, the Rehabilitation Court’s final order approving or disapproving
a rehabilitation plan is no longer subject to appeal; It can only be reviewed through a
petition for certiorari. The 2013 Rules narrowed the scope of appellate review from errors of
law and fact under Rule 43, to errors of jurisdiction or abuse of discretion under Rule 65. It
effectively lends more credence to the factual findings and the judgment of rehabilitation courts.

Golden Cane’s Petition for Corporate Rehabilitation falls under the regime of the
Interim Rules (A.M. No. 00-8-10-SC).
 Pursuant to A.M. No. 04-9-07-SC, the correct remedy against all decisions and final orders of
the rehabilitation courts in proceedings governed by the Interim Rules is a PETITION FOR
REVIEW to the CA under Rule 43 of the Rules of Court. A petition for certiorari under Rule 65 of
the Rules of Court is evidently the wrong mode of appeal.

Even if Golden Cane’s petition were under the regime of the 2008 Rules, the correct remedy
would still have been a petition for review to the Court of Appeals under Rule 43. The outright
dismissal of the petition can be seen as equivalent to the disapproval of the rehabilitation
plan. Ultimately, the result is the failure of rehabilitation.
 5.
MARILYN VICTORIO-AQUINO, Petitioner, vs. PACIFIC PLANS, INC. and MAMERTO
A. MARCELO, JR. (Court-Appointed Rehabilitation Receiver of Pacific Plans, Inc.),
Respondents.

G.R. No. 193108, December 10, 2014

Case digest of Renato Reyes, Jr.

FACTS:

Respondent Pacific Plans, Inc. (now “APEC”) is engaged in the business of selling pre-
need plans and educational plans, including traditional open-ended educational plans
(PEPTrads). PEPTrads are educational plans where respondent guarantees to pay the
planholder, without regard to the actual cost at the time of enrolment, the full amount of tuition
and other school fees of a designated beneficiary.

Petitioner is a holder of two (2) units of respondent’s PEPTrads.

On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing
planholders as they fall due, respondent filed a Petition for Corporate Rehabilitation with the
Regional Trial Court, praying that it be placed under rehabilitation and suspension of payments.
At the time of filing of the Petition for Corporate Rehabilitation, respondent had more or less
34,000 outstanding PEPTrads.

On April 12, 2005, the Rehabilitation Court issued a Stay Order, directing the suspension
of payments of the obligations of respondent and ordering all creditors and interested parties to
file their comments/oppositions, respectively, to the Petition for Corporate Rehabilitation. The
same Order also appointed respondent Marcelo as the rehabilitation receiver.

Pursuant to the prevailing rules on corporate rehabilitation, respondent submitted to the

Rehabilitation Court its proposed rehabilitation plan. Under the terms thereof, respondent
proposed the implementation of a “Swap,” which will essentially give the planholder a means to
exit from the PEPTrads at terms and conditions relative to a termination value that is
more advantageous than those provided under the educational plan in case of voluntary
termination.

The rehabilitation receiver submitted an Alternative Rehabilitation Plan and was approved
by the Court. However due to the fact that the value of the Philippine Peso strengthened and
appreciated, the rehabilitation receiver submitted a Modified Rehabilitation Plan.

ISSUE:
Whether or not the Rehabilitation Court has the authority to sanction a rehabilitation
plan, or the modification thereof, even when the essential feature of the plan involves forcing
creditors to reduce their claims against respondent.

HELD:
 YES. The Court upheld the “cram-down” power of the Rehabilitation Court pursuant to
Sec. 23 of FRIA which states that the court may approve a rehabilitation plan over the opposition
of creditors, holding a majority of the total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly
unreasonable.
Moreover, notwithstanding the rejection of the Rehabilitation Plan by the creditors,
the court may confirm the Rehabilitation Plan if all of the following circumstances are present:

1.) The Rehabilitation Plan complies with the requirements specified in this Act;
2.) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
3.) The shareholders, owners or partners of the juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan; and
4.) The Rehabilitation Plan would likely provide the objecting class of creditors
with compensation which has a net present value greater than that which they would have
received if the debtor were under liquidation.