XVII. Truth In Lending Act (R.A. No.

3765)
1. Embassy Appliance sells home theater components that are designed and
customized as entertainment centers for consumers within the medium-to-
high price bracket. Most, if not all, of these packages are sold on
installment basis, usually by means of credit cards allowing a maximum of
36 equal monthly payments. Preferred credit cards of this type are those
issued by banks, which regularly hold mall-wide sales blitzes participated
in by appliance retailers like Embassy Appliances. The salesclerk who is
attending to you simply swipes your credit card on the electronic approval
machine (which momentarily prints out your charge slip since you have
unlimited credit), tears the slip from the machine, hands the same over to
you for your signature, and without more, proceeds to arrange the delivery
and installation of your new home theatre system. You know you will
receive a statement on your credit card purchases from the bank
containing an option to pay only a minimum amount, which is usually 1/36
of the total price you were charges for your purchase. Did Embassy
Appliance comply with the provisions of the Truth in Lending Act?

Answer:
There is no need for Embassy Appliances to comply with the Truth in Lending
Act. The transaction is not a sale on installment basis. Embassy Appliances is a
seller on cash basis. It is the credit card company which allows the buyer to enjoy
the privilege of paying the price on installment basis. (BAR 2000)

A. Disclosure Requirement

1. Without going into unnecessary details, discuss the legal consequences of

a creditor’s failure to comply with the Truth in Lending Act, including the
effect on the validity or enforceability of the contract or transaction
involved.

Answer:
The failure of a creditor to comply with the Truth in Lending Act would result in
the debtor being allowed to recover the interest payment from the creditor but
the validity of the contract or transaction itself is not adversely affected. (BAR
1986)

2. Dana Gianina purchase on a 36-month installment basis the latest model of

the NISSAN Sentra Sedan car from the Jobel Cars, Inc. In addition to the
advertised selling price, the latter imposed finance charges consisting of
 interests, fees and service charges. It did not, however, submit to Dana a
written statement setting forth therein the information required by the Truth
in Lending Act (RA No. 3765). Nevertheless, the conditional deed of sale
which the parties executed mentioned that the total amount indicated
therein included such finance charges.
a) Has there been substantial compliance of the aforesaid Act?

Answer:
No. there was no substantial compliance with the Truth in Lending Act. The law
provides that the creditor must make a full disclosure of the credit cost. The
statement that the total amount due includes the principal and the financial
charges, without specifying the amounts due on each portion thereof would be
insufficient and unacceptable.

b) If your answer to the foregoing question is in the negative, what is the

effect of the violation on the contract?

Answer:
A violation of the Truth in Lending Act will not adversely affect the validity of the
contract itself.

c) In the event of a violation of the Act, what remedies may be availed of by

Dana?

Answer:
The violation of the Truth in Lending Act would allow Dana to refuse payment of
financial charges or, if already paid, to recover the same. Dana may also initiate
criminal charges against the creditor. (BAR 1991)

3. TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the

statement is FALSE. Explain your answer in not more than 2 sentences.
A loan agreement which provides that the debtor shall pay interest at the
rate determined by the bank’s branch manager violates the disclosure
requirement of the Truth in Lending Act.

Answer:
 True. This is contrary to the duty of the creditor to disclose in detail the interests,
charges and other figures indicating in detail the cost of the credit granted to the
debtor. (BAR 2009)

4. XYZ Corporation bought 10 units of Honda Civic from CCC Corporation.

ABC Bank granted a loan to XYC Corporation which executed a financing
agreement which provided for the principal amount, the installment
payments, the interest rates and the due dates. On due dates of the
installment payments, XYZ Corporation was asked to pay for some
handling charges and other fees which were not mentioned in the financing
Agreement. Can XYC Corporation refuse to pay the same?
a) No, because handling charges and other fees are usual in certain
banking transactions;
b) Yes, because ABC Bank is required to provide XYZ Corporation not only
the amount of the monthly installments but also the details of the
finance charges as required by the Truth in Lending Act;
c) No, because the Financing Agreement is a valid document to establish
the existence of the obligation;
d) Yes, because legally, finance charges are never allowed in any banking
transaction.
Answer:
b) Yes, because ABC Bank is required to provide XYZ Corporation not only the
amount of the monthly installments but also the details of the finance charges as
required by the Truth in Lending Act. (BAR 2012)

XVIII. Other Special Laws

XIX. PDIC Law

1. X, a bank depositor has a P15,000 savings deposit and a P20,000 time

deposit with a bank. If the bank becomes insolvent, and is closed by the
Government, how much if any, is the guaranteed amount he can obtain as a
matter of right for the two accounts? Explain.

Answer:
He can only obtain P10,000 as a matter of right, by way of guarantee. Under the
Philippine Deposit Insurance Act, the maximum amount covered by insurance is
P10,000. And by express provision of law, this includes all kinds of deposits—
savings current as well as time deposits—in the name of or for the benefit of one
person. (BAR 1975)
 Note: The term “insured deposits” means the amount due to any bona fide
depositor for legitimate deposits in an insured bank net of any obligation of the
depositor to the insured bank as of the date of the closure but not to exceed
P500,000. (Sec.4 (g), RA 9302)

2. The Deposit Insurance Law insures deposits up to P10,000.00 per

depositor. X has three separate deposits in a single bank, namely,
P15,000.00—Savings Deposit; P15,000.00—Current Deposit (checking
account). Later on, the bank ran into financial trouble and was ordered by
the Central Bank to close and liquidate.

How much may X recover? Answer with reasons.

Answer:
X may recover only up to P10,000.00. According to Sec. 3(f) of the Deposit
Insurance Corporation Act the term “deposit” means the unpaid balance of
money or its equivalent received by a bank in the usual course of business and
for which it has given or is obliged to give credit to a commercial, checking,
savings, time or thrift account or which is evidenced by its certificate of deposit,
and trust funds held by such bank x x x. “The fact therefore that X has savings,
time, and current deposits in the same bank is immaterial. They all came under
the same heading of deposit”

In Sec. 3(g) of the same Act, the term “insured deposit” is defined as the net
amount due to any depositor for deposits in an insured bank (after deducting
offset) less any part thereof of which is in excess of P10,000.00 x x x.” Likewise,
Sec. 10(a) thereof, insofar as pertinent provides: “That the maximum amount of
the insured deposit of any depositor shall be P10,000.00”. Evidently, irrespective
of kinds of deposits of a particular depositor and the total amount corresponding
to the same, he is entitled to recover only up to P10,000.00 in case of closure
and liquidation of the bank. (BAR 1977)

3. When Oriental Bank was ordered close by Central Bank on May 15, 1985,
Elizabeth Diaz had 3 separate deposit accounts in her name with the same
bank, namely: P200,000 in time deposit; P100,000 in current deposit; and
P50,000 in savings deposit.
Under the PDIC law, how much, if any, could she recover from each of the 3
separate accounts? Explain.

Answer:
Under the PDIC law, Elizabeth Diaz, although having 3 separate deposit
accounts in her name, totaling P350,000, in the Oriental Bank which was ordered
 close by the Central Bank, can recover only the aggregate amount of P40,000
because the maximum amount of the insured deposit of any depositor, not for
every account of a depositor in the bank, is only P40,000.

Note: Section 4 (g) of RA No. 9302 provides that the term “insured deposits”
means the amount due to any bona fide depositor for legitimate deposits in an
insured bank net of any obligation of the depositor to the insured bank as of the
date of the closure but not to exceed P500,000.00. (BAR 1985)

4. An employee of a large manufacturing firm earns a salary which is just a bit

more than what he need for a comfortable living. He is thus able to still
maintain a P10,000 savings account, a P20,000 checking account, a
P30,000 money market placement and a P40,000 trust fund in a medium-
size commercial bank.

State which of the four accounts are deemed insured by the PDIC?

Answer:
The P10,000 savings account and the P20,000 checking account are deemed
insured by the PDIC. (BAR 1997)

5. When OCCIDENTAL Bank folded up to insolvency, Manuel had the

following separate deposits in his name; P200,000 in savings deposit;
P250,000 in time deposit; P50,000 in a current account; P1 M in a trust
account; and P3 M in money market placement. Under the PDIC Act, how
much could Manuel recover?

Answer:
Manuel can recover P500,000 because this is the total of his savings deposit,
time deposit and current account. The trust account and the money market
placements are not included in the insured deposits. (BAR 2010)

6. X is a depositor of AAA Bank. She has 3 deposit accounts all under her
name. One, in checking account, one in saving account and another one in
time deposit account. Each account has a balance of P250,000.
AAA Bank became insolvent. PDIC closed the Bank. X therefore is unable
to withdraw from all of the accounts. She then filed her claims with the
PDIC. Which statement is most accurate?

a) X can claim a total of P500,000 for all 3 accounts;

b) X can only claim from 1 account of P250,000;
 c) X can claim a total of P750,000 from all 3 accounts;
d) X cannot claim anything from any of the deposit accounts.

Answer:
a) X can claim a total of P500,000 for all 3 accounts. (BAR 2012)

XXI. Financial Rehabilitation and Insolvency Act (FRIA)

1. Whom does the assignee in solvency represent—the debtor, the creditors,
the court, etc? Can said assignee in insolvency take possession of the
assets of the conjugal partnership?

Answer:
The assignee in insolvency represents the insolvent debtor, the unsecured
creditors, and secured creditors who as allowed to prove their claims and the
court which has control over him. Provision of the Civil Code 2238 states that: So
long as the conjugal partnership or absolute community subsists, its property
shall not be among the assets to be taken possession of by the assignee for the
payment of the insolvent debtor’s obligation, except insofar as the latter have
redounded to the benefit of family. If it is the husband who is insolvent, the
administration of the conjugal partnership or absolute community may, by order
of the court, be transferred to the wife or to a third person other than the
assignee. (BAR 1975)

2. On September 6, 1978, A convened his principal creditors, including B, and

informed them that he was in a state of insolvency. Knowing of this, B
immediately transferred his credit against the property of A located in
another jurisdiction to C, a close relative, who immediately filed action in
said jurisdiction against A and attached the property of A. Later, a petition
for insolvency was filed by A, and D was appointed assignee. Learning of
the transfer, D now sues B for damages. Can D recover? Give reasons.

Answer:
D may not sue B for damages. Under the Insolvency Law, D may have the
attachment made by C dissolve if levied within one month next preceding the
commencement of the insolvency proceedings. (Sec. 32, Insolvency Law.) (BAR
1979)

3. “Y” Company convenes its principal creditors in an informal meeting and

informs them that it is in a state of insolvency. “Z”, one of the creditors
attending the meeting, finds out that in the balance sheet distributed,
 mention is made of a C-54 plane owned by the company in the United
States. Thereupon, “Z” executes a deed of assignment, transferring his
credits or receivables from “Y” company to a subsidiary in the U.S. The
latter, in a proper legal action, attaches and disposes of the plane to
answer for credit assigned by “Z”. Subsequently, “Y” Company files a
petition for voluntary insolvency. Has “Z” violated any provision of the
Insolvency Law thereby making it liable for damages for having disposed
of his credit or receivables from the company in favor of a subsidiary in the
U.S.?

Answer:
Z who is a creditor, may not be liable for damages, under the Insolvency Law.
The assignee may, however, under the powers granted to him by the insolvent
debtor and take possession thereof, within the limits provided by law. (Sec. 36,
Insolvency Law) (BAR 1980)

4. The Blue Star Corporation filed with the RTC a petition for rehabilitation on
the ground that it foresaw
the impossibility of paying its obligations as they fall due. Finding the
petition sufficient in form and
substance, the court issued an Order appointing a rehabilitation receiver
and staying the enforcement
of all claims against the corporation.
What is the rationale for the Stay Order?

Answer:
The stay order is a recognition that all assets of a corporation under rehabilitation
are held in trust for the equal benefit of all creditors under the doctrine of
“equality is equity”. As all the creditors ought to stand on equal footing, not any
one of them should be paid ahead of others. Furthermore, the stay order will
enable the management committee or the rehabilitation receiver to effectively
exercise its or his powers free from judicial or extrajudicial interference that might
unduly hinder or prevent the “rescue” of the distressed company, rather than to
waste its/his time, effort and resources in defending claims against the
corporation. (BAR 2006)

5. DMP Corporation (DMP) obtained a loan of P20 M from National Bank (NB)
secured by a real estate mortgage over a 63,380-square meter land situated
in Cabanatuan City. Due to the Asian Economic Crisis, DMP experienced
liquidity problems disenabling it from paying its loan on time. For that
reason, NB sought the extrajudicial foreclosure of the said mortgage by
filing a petition for sale on June 30, 2003. On September 4, 2003, the
mortgaged property was sold at public auction, which was eventually
 awarded to NB as the highest bidder. That same day, the Sheriff executed a
Certificate of Sale in favor of NB.
On October 21, 2003, DMP filed a Petition for Rehabilitation before the RTC.
Pursuant to this, a Stay Order was issued by the RTC on October 27, 2003.
On the other hand, NB caused the recording of the Sheriff’s certificate of
Sale on December 3, 2003 with the Register of Deeds of Cabanatuan City.
NB executed an Affidavit of Consolidation of Ownership and had the same
annotated on the title of DMP. Consequently, the Register of Deeds
cancelled DMP’s title and issued a new title in the name of NB on December
10, 2003.

NB also filed on March 17, 2004 an Ex-Parte Petition for Issuance of Writ of
Possession before the RTC of Cabanatuan City. After hearing, the RTC
issued on September 6, 2004 an Order directing the Issuance of the Writ of
Possession, which was issued on October 4, 2004.

DMP claims that all subsequent actions pertaining to the Cabanatuan

property should have been held in abeyance after the Stay Order was
issued by the rehabilitation court. Is DMP correct?

Answer:
No. DMP is not correct. Since the foreclosure of the mortgage and the issuance
of the certificate of sale in favor of the mortgagee were done prior to the
appointment of a Rehabilitation Receiver and the issuance of the Stay Order, all
the actions taken with respect to the foreclosed mortgaged property which were
subsequent to the issuance of the Stay Order were not affected by the Stay
Order. Thus, after the redemption period expired without the mortgagor
redeeming the foreclosed property, the mortgagee becomes the absolute owner
of the property and it was within its right to ask for consolidation of title and the
issuance of new title in its favor. The writ of possession procured by the
mortgagee despite the subsequent issuance of Stay Order in the rehabilitation
proceeding instituted is also valid. (BAR 2014)

A. Liquidation of Insolvent Juridical Debtors

a. Voluntary Liquidation

1. Act No. 1956, more popularly known as The Insolvency Law, deals with
XXX voluntary insolvency and involuntary insolvency.
Briefly discuss the said subjects and outline the procedure that will have to
be undertaken in connection therewith.

Answer:
1) Requisites for Voluntary Insolvency—Voluntary insolvency shall be instituted
under the following requisites:
 a) Petition: To be filed by an insolvent debtor,
a.1) Owing debts exceeding in the amount the sum of P1,000, and
a.2) Setting forth in his petition:
 His place of residence
 The period of his residence therein immediately prior to filing
said petition
 His inability to pay, all his debts in full
 His willingness to surrender all his property, estate and effects
not exempt from execution for the benefit of his creditors, and
 An application to be adjudged an insolvent

a.3) To be verified by the petitioner.
b) Documents to accompany the petition:
b.1) Verified schedule
b.2) Verified inventory
c) Venue: RTC of the province or city in which the debtor has resided for 6
months next preceding the filing of such petition. (BAR 1985)

2. Is the issuance of an order, declaring a petitioner in a Voluntary Insolvency

proceeding insolvent, mandatory upon the court?

Answer:
Assuming that the petition was in due form and substance and that the assets of
the petitioner are less than his liabilities, the court must adjudicate the
insolvency. (BAR 1991)

3. What are the effects of a judgment in insolvency in Voluntary Insolvency

cases?

Answer:
The adjudication or declaration of insolvency by the court, after hearing or
default, shall have the following effects:
1. Forbid the payment to the debtor of any debt due to him and the
delivery to him of any property belonging to him;
2. Forbid the transfer of any property by him; and
3. Stay of all civil proceedings against the insolvent but foreclosure may
be allowed. (BAR 1991)

4. Distinguish between voluntary insolvency and involuntary insolvency.

Answer:
 In voluntary insolvency, it is the debtor himself who files the petition for
insolvency, while in involuntary insolvency, at least 3 creditors are the ones who
file the petition for insolvency against the insolvent debtor. (BAR 1995)

5. a) Can a distressed corporation file a petition for corporate rehabilitation

after the dismissal of its earlier petition for insolvency? Why?

b) Can the corporation file a petition for rehabilitation first, and after it is
dismissed file a petition for insolvency? Why?

c) Explain the key phrase “equality is equity” in corporate rehabilitation

proceedings.

Answer:
a) Yes, the dismissal of a petition for insolvency does not preclude the
distressed corporation from filing a petition for corporate rehabilitation. The
dismissal of the petition for insolvency only means that the corporation may still
be restored to solvency.

b) Yes, the dismissal of a petition for rehabilitation means that the

corporation can no longer be restored to solvency. Hence, it can file a petition for
insolvency.

c) All assets of a corporation under rehabilitation receivership are held in

trust for the equal benefit of all creditors, precluding one from obtaining an
advantage or preference over another by the expediency of attachment,
execution or otherwise. Once the corporation is taken over by a receiver, all the
creditors stand on equal footing and no one may be paid ahead of the others.
This is precisely the reason for suspending all pending claims against the
corporation under receivership. This is called the “pari passu principle”. (BAR
2008)

6. Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a
petition for voluntary rehabilitation must be approved by:
a. A majority vote of the Board of Directors and authorized by the vote
of the stockholders representing at least a majority of the
outstanding capital stock.
b. A majority vote of the Board of Directors and authorized by the vote
of the stockholder representing at least 2/3 of the outstanding capital
stock.
c. 2/3 vote of the Board of Directors and authorized by the vote of the
stockholders representing at least a majority of the outstanding
capital stock.
 d. 2/3 vote of the Board of Directors and authorized by the vote of the
stockholders representing at least 2/3 of the outstanding capital
stock.

Answer:
b. A majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least 2/3 of the outstanding capital stock. (BAR
2014)
b. Involuntary Liquidation
1. Act No. 1956, more popularly known as The Insolvency Law, deals with
XXX involuntary insolvency.
Briefly discuss the said subjects and outline the procedure that will have to be
undertaken in connection therewith.

Answer:
2) Requisites for Involuntary Insolvency—Involuntary insolvency shall be instituted
under the following requisites:
a) Petition: To be filed,
a.1) By 3 or more creditors, residents of the Philippines, and none of them
has become a creditor by assignment within 30 days prior to the filing of the
petition,
a.2) Said creditors with credits accrued in the Philippines and in the
aggregate amount not less than P1,000, and
a.3) Setting forth in the petition one or more acts of insolvency mentioned
in Section 20 of the Insolvency Law; and
a.4) To be verified by at least 3 of the petitioning creditors.

b) Document to accompany the petition: A bond, approved by the court, with at

least two (2) sureties, in such penal sum as the court shall direct.

c) Venue: RTC of the province or city in which the debtor resides or has
principal place of business (no need of 6 months residence). (BAR 1985)

2. Distinguish between voluntary insolvency and involuntary insolvency.

 Answer:
In voluntary insolvency, it is the debtor himself who files the petition for
insolvency, while in involuntary insolvency, at least 3 creditors are the ones who
file the petition for insolvency against the insolvent debtor. (BAR 1995)

c. Conversion by the Court into Liquidation Proceedings

d. Powers of the SEC
1. One day jerry haw, doing business under the name Starlight Enterprises, a
sole proprietorship, finds himself short on cash and unable to pay his
debts as they fall due although he has sufficient property to cover such
debts. He asks you, as his retained counsel, for advice on the following
queries:
a) Should he file a petition with the SEC to be declared in a state of
suspension of payments in view of the said financial condition he
faces? Explain your answer.
b) Should he sell profit participation certificates to his 10 brothers
and sisters in order to raise cash for his business? Explain your
answer.

Answer:
a) I would counsel Jerry Haw to file the Petition for Suspension of Payment with
the ordinary courts, rather than the SEC. SEC’s jurisdiction over such cases is
confined only to petitions filed by corporations and partnerships under its
regulatory powers.
b) Instead of selling profit participation certificates, I would urge Jerry Haw to
enter into a partnership or to incorporate in order to raise cash for his business.
(BAR 1990)

2. Debtor Corporation and its principal stockholders filed with the SEC a
petition for rehabilitation and declaration of a state of suspension of
payments under P.D. 902-A. The objective was for SEC to take control of
the corporation and all its assets and liabilities, earnings and operations
and rehabilitating the company for the benefit of investors and creditors.

Generally, the unsecured creditors had manifested willingness to

cooperate with Debtor Corporation. The secured creditors, however,
expressed serious objections and reservations.
First Bank had already initiated judicial foreclosure proceedings on the
mortgage constituted on the factory of Debtor Corporation.

Second Bank had already initiated foreclosure proceedings on a third-party

mortgage constituted on certain assets of the principal stockholders.

Third Bank had already filed a suit against the principal stockholders who
had held themselves liable jointly and severally for the loans of Debtor
Corporation with said Bank.

After hearing, the SEC directed the appointment of a rehabilitation receiver

and ordered the suspension of all actions and claims against the Debtor
Corporation as well as against the principal stockholders.
a) Discuss the validity of the SEC order of suspension?
b) Discuss the effects of the SEC order of suspension on the judicial
foreclosure proceedings initiated by First Bank.
c) Would the order of suspension have any legal effect on the
foreclosure proceedings initiated by Second Bank? Explain.
d) Would the order of suspension have any effect on the suit filed by
Third Bank? Explain.
e) What are the legal consequences of a rehabilitation receivership?
f) What measures may the receiver take to preserve the assets of
Debtor Corporation?

Answer:
a) The SEC order of suspension of payment is valid with respect to the
debtor corporation, but not with respect to the principal stockholder. The
SEC has jurisdiction to declare suspension of payments with respect to
corporations, partnership or associations, but not with respect to
individuals.

b) The SEC order of suspension of payment suspended the judicial

proceedings initiated by First Bank. According to the Supreme Court in a
line of cases, the suspension order applies to secured creditors and to the
action to enforce the security against the corporation regardless of the
stage thereof.

c) The order of suspension of payments suspended the foreclosure

proceedings initiated by the Second Bank. While the foreclosure is against
the property of a third party, it is in reality an action to collect the principal
obligation owed by the corporation. During the time that the payment of
 the principal obligation is suspended, the debtor corporation is considered
to be not in default and, therefore, even the right to enforce the security,
whether owned by the debtor-corporation or of a third party, has not yet
arisen.

d) For the same reason as in (c), the order of suspension of payments

suspended the suit filed by Third Bank against the principal stockholders.

e) Under PD 902-A, the appointment of a rehabilitation receiver will suspend

all actions for claims against the corporation and the corporation will be
placed under rehabilitation in accordance with a rehabilitation plan
approved by the Commission.

f) To preserve the assets of the Debtor Corporation, the receiver may take
custody of, and control over, all the existing assets and property of the
corporation; evaluate existing assets and liabilities, earnings and
operations of the corporation; and determine the best way to salvage and
protect the interest of the investors and creditors. (BAR 1999)