Hizon Notes Special Commercial Laws

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon

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UNIVERSITY OF SANTO TOMAS
Faculty of Civil Law
A.Y. 2012-2013
First Semester
SPECIAL COMMERCIAL LAWS
LETTERS OF CREDIT
A: It is neither a surety nor a guarantor. The liability of the
Definition issuing bank is primary and solidary. It is also not entitled to
the benefit of excussion.
Q: What are letters of credit?
Q: What is the purpose of the letters of credit?
A: Any arrangement however named of described, whereby a
A: To ensure certainty of payment. The seller is assured of
bank acting upon the request of its client or in its own behalf,
payment because the bank intervenes and makes the
agrees to pay another, against a stipulated documents
commitment to pay. This addresses problems arising from the
provided that the terms of the credit are complied with.
Q: What is the duration of LC?
A:
1. Upon the period fixed by the parties; or

2. If none is fixed:
a. 6 months from its date if used in the Philippines; b.
12 months if used abroad
Governing law seller’s refusal to part with his goods before being paid and
the buyer’s refusal to part with his money before acquiring
Q: What laws govern commercial transactions? the goods, thus, facilitating commercial transactions.
A: In the absence of any particular provision in the Code of NOTE: The issuing bank should pay the beneficiary upon the
Commerce, commercial transaction shall be governed by latter’s submission of the stipulated documents and
usage and customs genereally observed. compliance with the terms of the credit even though there is
a pending issue on whether or not the main contract
Letter of credit as an independent contract underlying the letter of credit has been paid or fulfilled or not.
Q: Is a letter of credit an accessory contract? Q: What are the 2 kinds of letters of credit?
A: Letters of credit are in effect an absolute undertaking to A:

pay the money advanced or the amount for which credit is
given on the faith of the instrument. They are primary COMMERCIAL STANDBY
obligations and not accessory contracts.
Involves contracts of sale Involves non-sale
NOTE: A letter of credit by itself does not come into operation transactions
without a contract supporting it. It is not a contract that can
Payable only upon Payable upon certification
stand on its own, it needs a supporting contract. In a
presentation by the seller by the beneficiary of the
commercial letter of credit it is a sale; in standby letter of
beneficiary of documents applicant’s
credit, it is a non-sale transaction.
that show he has non-performance of the
performed his contract agreement.
Q: Describe the liability of the bank which issued the letter
of credit.
cannot be amended or altered or revoked without
Q: What are the other kinds of letters of credit? the consent of the beneficiary
2. Revocable letter of credit – can be amended, altered
A: or revoked even without the consent of the
1. Irrevocable letter of credit – A letter of credit wherein beneficiary
the terms and the undertakings of the issuing bank
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3. Confirmed letter of credit - the liability of the
confirming bank is primary Parties to a letter of credit
4. Non-confirmed letter of credit
Q: Who are the parties to the letter of credit?
Irrevocable letter of credit
A:
Q: Is irrevocable letter of credit and confirmed letter of 1. Applicant
credit synonymous? 2. Beneficiary
3. Issuing bank
A: An irrevocable letter of credit is not synonymous with a
confirmed letter of credit. In an irrevocable letter of credit, Q: Who is the applicant?
the issuing bank may not, without the consent of the
beneficiary and the applicant, revoke its undertaking under A: He may be a buyer, importer or obligor. The person who
the letter, whereas, in a confirmed letter of credit, the procures the opening of letter of credit and who agrees to
correspondent bank gives an absolute assurance to the reimburse the issuing bank any and all amount should be paid
beneficiary that it will undertake the issuing bank’s obligation under the letter of credit once the issuing bank is compelled
as its own according to the terms and condition of the credit. to pay because the beneficiary is able to submit the
IRREVOCABLE LETTER CONFIRMED LETTER OF document stipulated.
OF CREDIT CREDIT
He agrees to pay the bank that issued the letter of credit. The
The issuing bank may not, The correspondent bank applicant has no obligation to reimburse the issuing bank if
without the consent of the gives an absolute the latter pays without the stipulated amounts duly paid
beneficiary and the assurance to the under the letter of credit.
applicant, revoke its beneficiary that it will
undertaking under the undertake the issuing Q: Who is the beneficiary?
letter bank’s obligation as its
own according to the A: The one entitled to payment from the issuing bank upon
terms and conditions of his submission of the document stipulated and compliance
the credit with the terms of the credit.
Q: What is the effect of the failure of the beneficiary to fulfill

his obligation under the main contract?
Q: Can the irrevocable nature of letter of credit be changed?
A: It does not negate his right to payment from the issuing
A: The terms of an irrevocable letter of credit cannot be bank as long as he is able to submit the required documents
changed without the consent of the parties, particularly the and comply with the terms of the credit, without prejudice to
beneficiary thereof (Philippine Virginia Tobacco his
Administration v. De Los Angeles, 164 SCRA 543, 1988).
Q: Can a court order the release to the applicant the

proceeds of an irrevocable letter of credit without the
consent of the beneficiary?
A: No, such order violates the irrevocable nature of the letter

of credit. The terms of an irrevocable letter of credit cannot
be changed without the consent of the parties, particularly
the beneficiary thereof.
liability against the account party under the law on contract
Paying bank An agent of the issuing bank for the purpose
and damages of making payment to the beneficiary.
He can also be the advising bank
Q: Who is the issuing bank?
Confirming bank It lends credence to a letter of credit issued by
A: The one that undertakes to pay the beneficiary upon a lesser known bank as if it is the one who
submission of the beneficiary of these stipulated documents issued the letter of credit.
and compliance with the terms of the credit. Its obligation is similar to an issuing bank.
Thus, beneficiary may tender documents to
Q: Enumerate the other parties. the confirming bank and collect payment
Negotiating The bank in the city of the beneficiary which

A: bank buys or discounts the drafts contemplated by
Advising or Not liable to pay the beneficiary; it does not the LC, if such draft is to be drawn on the
Notifying have any contractual relations with the opening bank not in the city of the beneficiary
bank beneficiary. Its only obligation is to determine
the apparent authenticity of the letter of
credit; to check if at first glance that the same
is genuine or valid:
a. If valid, the advising/notifying bank
notifies the beneficiary of the letter
of credit; transmit the letter of
credit in favor of the beneficiary so
that the beneficiary can cause
shipment of the equipment
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Corresponden If the account party is in the Philippines and

t bank of the beneficiary is abroad, the beneficiary will
issuing bank be notified and consequently will be paid
through the correspondent bank
Q: Describe the duty of the advising bank?
A: It determines the apparent authenticity of the letter of

credit and notifies the beneficiary of the letter of credit.
He does not guarantee the genuineness or due execution of

the letter of credit. It is not liable for damages even if it turns
out to be spurious provided the spurious character is not
apparent on the face of the instrument.
Q: Does the advising bank have the obligation to pay the Three distinct relationships arising from a letter of credit
beneficiary?
Q: Explain the three (3) distinct but intertwined contract
A: relationships that are indispensable in a letter of credit
GR: No transaction.
XPN: When the advising bank is also the confirming or 1. Between the applicant/buyer/importer and the
paying bank beneficiary/seller/exporter–The applicant/ buyer/
importer is the one who procures the letter of credit
while the beneficiary/seller/exporter is the one 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 for the goods. Their
relationship is governed by the contract of sale. unjust enrichment.
2. Between the issuing bank and the
beneficiary/seller/exporter – The issuing bank is the one Q: Should the marginal deposit made by the customer, in
that issues the letter of credit and undertakes to pay the possession of the bank be first deducted from the principal
seller upon receipt of the draft and proper documents of indebtedness before computing the interest?
title. On the other hand, the beneficiary/seller/exporter
surrenders document of title to the bank in compliance A: Yes, since it is supposed to be returned upon compliance
with the terms of the LC. Their relationship is governed by with his obligation. Indeed, it would be onerous to compute
the terms of the LC. interest and other charges on the face value of the letter of
3. Between the issuing bank and the credit which the issuing bank issued, without first crediting or
applicant/buyer/importer – The applicant/buyer/ setting off the marginal deposit which the importer paid to it.
importer obliges himself to reimburse the issuing bank Requiring the importer to pay the interest on the entire letter
upon receipt of the documents of title. Their relationship of credit without deducting first his marginal deposit would be
is governed by the terms of the application for the a clear case of unjust enrichment by the bank.
issuance of the letter of credit by the bank.
NOTE: The applicant has the right to have the marginal
NOTE: These relationships while interrelated are distinct and deposit deducted from the principal obligation under the
separate from each other. letter of credit and to have the interest computed only on the
balance and not on the face value thereof.
Q: When is the bank entitled to reimbursement?
A: Once the issuing bank shall have paid the beneficiary after Doctrine of Independence
the latter’s compliance with the terms of the LC. Presentment
for acceptance to the customer/applicant is not a condition Q: What is the doctrine of independence?
sine qua non for reimbursement.
A: Under this doctrine, the obligation of the issuing bank to
Q: Is presentment a condition prior to reimbursement? pay the beneficiary does not depend on the fulfillment or
non-fulfillment of the contract supporting the letter of credit.
A: Presentment for acceptance to the customer or applicant If it is a commercial letter of credit, the obligation if the
of the drafts drawn by the beneficiary is not a condition sine issuing bank to pay the beneficiary is not affected by any
qua non for reimbursement (Prudential Bank & Trust Co. v. breach of contract by the seller to the buyer because the
IAC, 216 SCRA 257, 1992) contract between the issuing bank and beneficiary is separate
and distinct from the contract between the seller and the
Q: What is the consequence of payment upon an expired LC? buyer.
A: An issuing bank which paid the beneficiary of an expired Q: Does the issuing bank have the obligation to determine
letter of credit can recover the payment from the applicant whether or not the main contract has been fulfilled or not?
which obtained the goods from the beneficiary to prevent
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A: No. The issuing bank is liable to pay the beneficiary upon
the latter’s submission of the stipulated documents and Q: What is the exception to the doctrine of independence?
compliance with the terms of the credit regardless of any
breach of contract by the beneficiary to the applicant of the A: Fraud exception principle
letter of credit.
Fraud exception Principle
The SC held that banks deals with documents, they don’t deal
with goods. The issuing bank has no obligation to check the Q: What is the Fraud exception principle?
object, the quantity or quality of the goods. The bank needs
not to verify or go beyond the four corners of the document.
The issuing bank will determine the documents to be
submitted, where the stipulated documents tendered
faithfully. If the documents were submitted, the issuing pays
the seller.
A: The beneficiary may be enjoined from collecting on the A: It is any transaction between the entruster and entrustee
letter of credit if the following elements are present: a. There whereby the entruster who owns or holds absolute title or
is fraud on the part of the beneficiary b. Fraud must be in security interests over certain specified goods, documents or
relation to the independent purpose or character of the credit instrument, releases the same to the possession of entrustee
c. Unless the beneficiary is restrained, the applicant shall upon the latter’s execution of a TR agreement.
suffer grave and irreparable injury.
It is a transaction wherein the entrustee binds himself to hold
NOTE: To be an exception, the fraud must NOT be in relation the designated goods in trust for the entruster and, in case of
to the performance of the main contract but in relation to the default, to sell such goods, documents or instrument with the
independent purpose or character of the credit. obligation to turn over to the entruster the proceeds to the
extent of the amount owing to it or to turn over the goods,
Q: What is the remedy for a fraudulent abuse? documents or instrument itself if not sold.
A: Injunction. NOTE: To be in the nature of a trust receipt, the entruster

should have financed the acquisition or importation of the
Doctrine of Strict Compliance goods. The funds should have been delivered before or
simultaneously with delivery of the goods.
Q: How should commercial transaction involving letter of
credit be complied? Q: What is a trust receipt (TR)?
A: Commercial transaction involving letters of credit are A: It is the written or printed document signed by the
governed by the rule on strict compliance. entrustee in favor of the entruster containing terms and
conditions substantially complying with the provisions of PD
Q: What is the so-called doctrine of strict compliance? 115.
A: The documents that the beneficiary should submit to the Q: What is the consequence where the execution of the trust
issuing bank or confirming bank must strictly conform to the receipt agreement was made only after the goods covered
documents stipulated. If there is discrepancy, the issuing bank by it had been purchased by and delivered to the entrustee
is not liable to pay. If it pays, it pays at its own risk and cannot and the latter as a consequence acquired ownership over the
obtain reimbursement from the applicant. goods?
It matters not that the submission of the documents are A: In such case, the transaction does not involve a trust
unfair, unjust or inequitable, the point is, it requires that the receipt but a simple loan even though the parties
document stipulated must be the document to be submitted, denominated the transaction as one of trust receipt (Colinares
otherwise, the issuing bank is not liable or the beneficiary is v. CA, 339 SCRA 609, 2000; Consolidated Bank and Trust Corp.,
not entitled to payment. v. CA, 356 SCRA 671, 2001.)
Parties to a trust receipt agreement
Q: Who are the parties to a trust receipt agreement?

TRUST RECEIPT
A:
Definition
1. Entruster
Q: What is a trust receipt transaction? 2. Entrustee
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Q: Who is an entruster? 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
A: A lender, financer or creditor. Person holding title over the under the provisions of Article Three hundred and fifteen, paragraph one (b)
goods documents or instruments (GDI) subject of a trust of Act Numbered Three thousand eight hundred and fifteen, as amended,
receipt transaction; releases possession of the goods upon otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical
execution of trust receipt. entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
Q: Who is an entrustee? responsible for the offense, without prejudice to the civil liabilities arising
from the criminal offense.
A: A borrower, buyer, importer or debtor. Person to whom the
goods are delivered for sale or processing in trust, with the P.D 115 is not violative of the constitutional provision
obligation to return the proceeds of sale of the goods or the against imprisonment for the non-payment of debt
goods themselves to the entruster
Q: Is PD 115 violative of the constitutional provision against
LCs and TRs, not negotiable instruments imprisonment for the non-payment of debt?
Q: Are letters of credit and trust receipt considered as A: No because what is sought to be penalized is not the non
negotiable instruments? payment of debt but the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of
A: No, but drafts in connection with the former are negotiable another. It punishes the act not as an offense against property
instruments (Lee v. CA 375 SCRA 579, 2002). but against public order (People v. Nitafan, 207 SCRA 726,
1992).
2 features of a trust receipt agreement
a. Loan feature NOTE: The penal sanction covers:

b. Security feature 1. Criminal liability
2. Civil liability
Q: Discuss the dual features of a trust receipt agreement.
Estafa
A: A trust receipt has a loan and security features. The
entruster (bank) extends loan to the entrustee (importer and Q: What is the effect of the failure of the entrustee to deliver
retail dealers) to finance the importation of goods or the proceeds of the sale of the goods or instruments subject
instruments in favor of the entrustee who may not be able to to the trust receipt or return the goods?
obtain credit except thru utilization of the merchandise
imported or purchased. A: It will constitute estafa.
The security feature is in the covering trust receipt which Q: May the civil action for the collection of the loan be
secures the indebtedness. instituted independently of the criminal action?
Effect of failure on the part of entrustee to comply with its A: Yes.

obligations
Q: What is the effect of the acquittal of the entrustee in the
Q: What is the effect of payment of the loan or delivery of criminal case as a result of the surrender or consignation of
the sale proceeds equivalent to the full amount? the goods?
A: It extinguishes both criminal and civil liabilities of the A: The acquittal of the entrustee in the criminal case as a
entrustee. result of the surrender or consignation of the goods is not a
bar to the filing of a separate civil action to enforce payment
Section 13. Penalty clause. The failure of an entrustee to turn over the of the loan (Vintola v. Insular Bank of Asia and America, 150
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
SCRA 140, 1987).
Q: What is the effect of compromise of estafa case arising Penalty in case of corporation
from trust receipt transaction, after the case has been filed
in court? Q: What if the entrustee is a corporation?
A: Compromise of estafa case arising from trust receipt A: In such case, the law makes the officers or employees or
transaction, after the case has been filed in court does not other persons responsible for the offense liable to suffer the
amount to novation and does not erase the criminal liability of
the accused (Ong v. CA, 124 SCRA 578, 1983).
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penalty of imprisonment. The criminal liability falls on the Q: What is the effect of non-payment of the loan? A:
human agent responsible for the violation of the Trust Receipt
Law. The civil obligation still remains.
A person who admits being the agent of the entrustee Q: What is the effect of the loss of the goods subject of the
corporation is a person responsible for the offense if he is the trust receipt?
signatory of the trust receipts and if he cannot explain why he
is not responsible for the failure to turn over the proceeds of A: Loss of the goods subject of the trust receipt, regardless of
the sale or account for the goods covered by the trust receipt. the cause does not extinguish the civil liability of the
entrustee.
Q: Why are the officers, employees, etc. of a corporation
responsible for the offense? Q: What is the effect of return of goods?
A: It is because they are vested with the authority and A: If the loan is not yet paid, the return of the goods may
responsibility to devise means necessary to ensure extinguish the criminal liability but not the civil liability of the
compliance with the law, and if they fail to do so, are held entrustee unless the goods are sold and the proceeds thereof
criminally accountable. Yet, a corporation may be charged and applied in full payment of the loan.
prosecuted for a crime if the imposable penalty is fine (Ching
v. Sec. of Justice, 481 SCRA 609, 2006) Penal sanction applies to goods intended for sale only
Q: When does the penal sanction under the trust receipts
Q: Is the person signing the trust receipt for the corporation law apply?
solidarily liable with the entrustee-corporation for the civil
liability arising from the criminal offense?
A: No. He may however be personally liable if he bound A: Jurisprudence provides that the penal sanction does not
himself to pay the debt of the corporation under a separate apply in case the goods are not intended for sale or resale as
contract of surety or guarantee (Ong v. CA, 401 SCRA 649, when they are for actual use.
2003).
Cases where no criminal liability despite execution of
Q: Can we file a criminal case against the corporation? TR agreement
A: It depends, if the penalty is imprisonment, we cannot file a 1. Compliance with the terms of the trust receipt either
criminal case, but if the penalty is a fine or forfeiture or by:
revocation of the corporation’s franchise, then we can. a. payment,
b. return of the proceeds or
Civil obligation remains as long as loan is not paid c. return of the goods.
and security features. The loan is brought about by the fact
2. The transaction is not a trust receipt within the that the entruster financed the importation or purchase of the
contemplation of the trust receipts law goods under TR. Until and unless this loan is paid, the
3. Surrender of the goods to the entruster obligation to pay subsists. If the entrustee is made to appear
4. Non-delivery of the goods to entrustee as the owner, it was but an artificial expedient, more of legal
5. Compromise agreement before the filing of the fiction than fact, for if it were really so, it could dispose of the
criminal information for violation of the TR law goods in any manner that it wants, which it cannot do. To
6. Cancellation of the trust and taking possession by the consider the entrustee as the true owner from the inception
entruster of the transaction would be to disregard the loan feature
thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings
NOTE: Mere repossession of the goods will and Trust Company, 2005)
extinguish criminal liability.
Q: Can the entrustee mortgage or pledge the articles in
7. Loss of the goods due to force majeure trust?
8. Consignment
A: The articles covered by the trust receipts are owned by the
Entrustee, owner of the articles subject of the TR entruster and they were only held by the entrustee in trust.
While it was allowed to sell the items, the entrustee had no
Q: Who is the owner of the articles subject of the TR? opportunity to dispose of them or any part thereof or their
proceeds through conditional sale, pledge or any other
means. Accordingly, the entrustee has neither ownership,
A: The entrustee. A trust receipt has two features, the loan
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free disposal nor the authority to freely dispose of the debts consist in civil liability when one of the debts consists in
articles. Hence, the entrustee could not have subjected them civil liability arising from a criminal offense (Metropolitan
to a chattel mortgage (DBP v. Prudential Bank, 475 SCRA 623, Bank and Trust Company v. Tonda, 338 SCRA 254, 2000).
2005).
Rights of the entruster
NOTE: The entrustee cannot mortgage the goods because one
of the requisites of a valid mortgage is that the mortgagor Q: What are the right of an entuster?
must be the absolute owner of the property mortgaged or
must have free disposal thereof. Entrustee is not the absolute A:
owner of the goods nor has the free disposal thereof. 1. To be entitled to the proceeds of the sale of the goods
under trust receipt to the extent of the amount
Receipt of bank of sum of money without reference to trust owing to him or to return the goods in case of
receipt obligation non-sale
2. To cancel the trust and take possession of the goods or
Q: What is the effect of the receipt of the bank of a sum of of the proceeds realized therefrom at any time upon
money without reference to the trust receipt obligation to default by the entrustee
which the same pertains? 3. To sell the goods with at least 5-day notice to the
entrustee and apply the proceeds in payment of the
A: It does not obligate the bank to apply the money received obligation. Entrustee is liable to pay deficiency, if any.
against the trust receipt obligation.
Validity of the security interest as against creditors of the
Q: Does it have the effect of compensation?
A: No since compensation is not proper when one of the entrustee/innocent purchasers for value
trust for the entruster and to dispose of them strictly
Q: As between the entruster and the creditors of the in accordance with the terms of TR;
entrustee, who has a better right over the goods? 2. To receive the proceeds of the sale for the entruster
and to turn over the same to the entruster to the
A: The entruster. His security interest in goods, documents, or extent of amount owing to the entruster;
instruments pursuant to the written terms of a trust receipt 3. To insure GDI against loss from fire, theft, pilferage or
shall be valid as against all creditors of the entrustee for the other casualties.
duration of the trust receipt agreement. 4. To keep GDI or the proceeds thereof, whether in
Q: Who can defeat the rights of the entruster over the money or whatever form, separate and capable of
goods? identification as property of the entruster;
5. To return GDI to the entruster in case they could not be
A: A purchaser in good faith. He acquires goods, documents or sold or upon demand of the entruster; and
instruments free from the entruster's security interest. 6. To observe all other conditions of the trust receipts.
(Sec. 9, P.D. 115)
Goods covered by TR not subject to levy
Q: Are the goods covered by a trust receipt subject to levy? Order for application of proceeds
A: Q: What is the order in the application of proceeds of

GR: No, the law warrants the validity of entruster’s security the TR transactions?
interest as against creditors of the trust receipt agreement
during the duration of the trust receipt agreement. A:
1. Expenses of the sale
XPN: When the properties are in the hands of an innocent
purchaser for value and in good faith (Prudential Bank v.
2. Expenses derived from storing the goods
NLRC, 251 SCRA 421, 1995). 3. Principal obligation
Obligations or liability of the entrustee Q: Is the entrustee liable for the deficiency? A:
Q: What are the obligations and liabilitites of the entrustee? Yes, but any excess shall likewise belong to him.
A:
1. To hold good, documents and instruments (GDI) in
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entrustee to deliver the proceeds of the sale of the
Liability for loss of goods, documents or instruments goods under the trust receipt up to the extent of his
obligation to the entruster.
Q: Who shall bear the loss of goods which are the subject of
TR?
A: The entrustee. Loss of goods, documents or instruments

which are the subject of a TR, pending their disposition,
irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his obligation
to the entruster for the value thereof. (Sec. 10, P.D. 115)
NOTE: The principle of res perit domino will not apply against
the entruster
NOTE: The civil action may be instituted:
Remedies
a. In the criminal action
Q: What are the remedies available to the entruster? b. Separately filed independently of the criminal action
CRIMINAL ACTION CIVIL ACTION
A:
1. File a criminal action for estafa in case of failure of the
under the old chattel mortgage law has been supplanted by
Based on ex-delicto Based on ex-contracto
the definition of chattel mortgage under Art 2140 of the Civil
Code. It is now an accessory contract, no longer a conditional
sale.
2. Cancel the trust and take possession of the goods at
CHARACTERISTICS OF CHATTEL MORTGAGE
any time upon default of the entrustee
3. After the repossession, the entruster may sell the
1. An accessory contract because it is for the purpose of
goods upon at least 5-day notice to the entrustee
securing the performance of a principal obligation; 2. A formal
and apply the proceeds in payment of the obligation.
contract because of its enforceability, registration in the
The entrustee is liable for deficiency or entitled to
Chattel Mortgage Register is indispensable;
excess, if any.
3. A unilateral contract because it produces only obligations
4. If a surety secures the obligation of the entrustee in
on the part of the creditor to free the thing from
addition to the trust receipt, the law does not
encumbrance on the fulfillment of the obligation.
obligate the entruster to cancel the trust or take
possession of the goods. He can proceed against the
NOTE: The extinguishment of the accessory contract does not
surety. The options belong to the entruster.
extinguish the principal contract; the extinguishment of the
principal contract extinguishes the accessory contract.
Q: In the event of default, is it mandatory or compulsory for
the entruster to cancel the trust and take possession of the
ESSENTIAL REQUISITES
goods to be able to enforce his rights?
Q: What are the essential requisites for a valid chattel
A: No, the law uses the word “may” in granting to the
mortgage?
entruster the right to cancel the trust and take possession of
the goods. Thus, he has the discretion to avail itself of such
A:
right to sue or seek alternative actions, such as third party
claim or a separate civil action which it deems bets to protect
its right, at any time upon default or failure of the entrustee 1. Constituted to secure fulfillment of the principal
to comply with any of the terms and conditions of the obligation
agreement (South City Homes, Inc. v. BA Finance Corporation, 2. Mortgagor is the absolute owner of the property 3.
371 SCRA 603, 2001). Mortgagor has free disposal of the property, in the
absence thereof, that he be legally authorized for such
purpose
4. That it involves a personal property. (Sec. 2085,NCC)
CHATTEL MORTGAGE FORMAL REQUISITES
Q: What is a chattel mortgage? Q: What are the formal requisites for a valid chattel
mortgage?
A: An accessory contract whereby a personal property is
recorded in the Chattel Mortgage Register to secure the A:
performance of a principal obligation.
1. Affidavit of good faith
NOTE: The concept of a chattel mortgage as a conditional sale
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2. Registration with the Chattel Mortgage Registry 3. If It is not one entered into for purposes of fraud.
necessary, additional registration with the proper
government agency Q: What is the effect of absence of affidavit of good faith?
Affidavit of Good Faith A: It does not affect the validity of the chattel mortgage but
the same will be unenforceable against third persons.
Q: What is an affidavit of good faith?
Q: What is the status of an unrecorded CM?
A: A certificate included in the chattel mortgage contract
executed by both mortgagor and mortgagee stating that: A: The mortgage is valid and binding between the parties.
Registration is necessary only for the purpose of binding third
1. The obligation is valid, just and subsisting; and 2. person.
Aircrafts Civil Aviation Authority of the
NOTE: In an action for collection, the non-registration of the
Philippines (CAAP)
chattel mortgage which ordinarily does not bind third persons
is not critical. The rule is different when the remedy resorted
to is foreclosure.
Q: What is the effect if the mortgage is not registered?
A: It is nevertheless binding between the parties.
Q: What is the period within which the registration should

be made?
A: The law does not provide any specific time. Yet, the law is Chattel mortgage vs. Pledge
substantially and sufficiently complied with:
a. where the registration is made by the mortgagee Q: Distinguish chattel mortgage from pledge.
before the mortgagor has complied with his principal
obligation and; A:
b. no right of innocent third persons Is prejudiced.
CHATTEL MORTGAGE PLEDGE
Q: What is the effect of registration?
Delivery
A: It creates real right—it is an effective and binding notice to Delivery is not necessary Delivery is necessary
the other creditors of its existence and creates a real right or
lien which follows the chattel wherever it goes. Registration
The registration gives the mortgagee symbolical possession. Registration in the Chattel Registration in the Registry
The efficacy of the act of recording a chattel mortgage Mortgage register is Property is not necessary.
consists in the fact that it operates as a constructive notice of necessary for its
the existence of the contract. enforceability
Dual Registration rule Security

Q: Explain the “Dual registration rule”?
Cannot secure future Can secure future obligations
A: The property must be registered: obligations
a. Place where the mortgagor resides Law governing the sale

b. In the place where the property is situated
Procedure for the sale of Art. 2112, NCC
the thing given as security
XPN:
is governed by Sec. 14, Act
No. 1508
a. If the mortgagor resides in the same place where the
property is located; or Excess
b. If the amount of the loan is more than P500,000.00,
registration should be made in the city or If the property is If the property is sold, the
municipality where the property is situated (P.D. foreclosed, the excess goes debtor is not entitled to the
1159, Sec. 113 & 114) to the debtor excess unless otherwise
agreed.
RULES:
Private motor Land Transportation Office (LTO) Recovery of deficiency
vehicle
The creditor is entitled to The creditor is not entitled
Public motor Land Transportation Franchise & recover the deficiency from to recover the deficiency
vehicle Regulatory Board (LTFRB) the debtor except if the notwithstanding any
Vessels Maritime Industry Authority (MARINA)
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chattel mortgage is a stipulation to the contrary.

security for the purchase
of property in installments
Possession
Possession remains with Possession is vested in the

the debtor creditor
Contract
Formal contract Real contract
Recording in a public instrument
Must be recorded in a Must be in a public

public instrument to bind instrument containing
third persons description of the thing
pledged and the date
thereof to bind third
persons
SUBJECT MATTER OF CHATTEL MORTGAGE by the Public Service Commission (LTFRB);

6. House of mixed materials;
Q: What is the subject matter of chattel mortgage? A: It 7. House intended to be demolished for what are really
mortgaged in this case are the materials thereof; 8. House
must always be personal or movable property. Q: What built on rented land since it did not form part of the land;
It is settled that an object placed on land by one who had
are the properties mortgageable under the law? A: only a temporary right to it does not become immobilized
by attachment;
1. Shares of stock in a corporation- If the owner of the shares 9. A house of strong materials- as long as the parties to the
is not domiciled in the same province where the contract so agree and no innocent third party will be
corporation is domiciled, the registration must be made prejudiced thereby.
in both provinces.
2. An interest in business, for its personal proper capable of Q: What is the effect if a chattel mortgage is constituted on
appropriation; machinery permanently attached on the ground?
3. Machinery treated by the parties as personal property A: It is to be considered as personal property and the chattel
subsequently installed on leased land; mortgage constituted thereon is null and void, regardless of
4. Vessels but it is essential that the mortgage is recorded in who owns the land. However, the chattel mortgage is binding
the office of the MARINA (Maritime Industry Authority) on the contracting parties but cannot prejudice innocent third
to be effective as to third persons. It is not necessary that parties (Makati Leasing and Finance Corp. v. Wearever Textile
it be recorded in the office of the register of deeds; Mills, Inc. 122 SCRA 296, 1983).
5. Motor vehicles-which must be registered with the Land
Transportation Commission (LTO) and with respect to In accordance with Art. 2125 of the Civil Code, an
vehicles used for public services, it must also be approved unregistered chattel mortgage is valid and binding between
the parties because registration is necessary only for the a 3rd party, an innocent purchaser for value.
purpose of binding third persons (Filipinas Marble Corp. v. IAC,
142 SCRA 180, 1986). That innocent purchaser for value has a right inferior
compared to the rights of the judgment creditors of D
Q: What is the appropriate remedy to unbolt the machinery
for the simple reason that the innocent purchaser for
preparatory to the extra-judicial foreclosure?
value simply steps into the shoes of the original
A: mortgagee and acquires only whatever rights, title, or
1. Action for replevin preparatory to extra-judicial interest that the mortgagee originally had over the
foreclosure house and subject to the same limitations.
2. Simply, judicially foreclose
If the right of the right of the original mortgagee is
Mortgagee vs. Innocent purchaser for value enforceable only against the mortgagor, the right of the
innocent purchaser for value, the assignee of the
In one case, the court held that chattel mortgage over a original mortgagee is also valid and enforceable only
house is valid between the contracting parties even against the mortgagor. But, that does not prejudice or
though it is a real property. Since it is a valid mortgage, affect innocent 3rd parties, like judgment creditors of the
the mortgagee can foreclose in case of default. mortgagor.
But, even if he has foreclosed the chattel mortgage, it After-Acquired Property

does not bind the judgment creditor of D because it
does not affect innocent 3rd parties. That conclusion Q: Can the CM cover after‐acquired properties?
will not change even if the mortgagee sold the house to
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commitment that can be compelled upon, the security itself,
A: however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted
GR: No, because Section 7 of Act 1508 provides: A chattel debt is executed either by:
mortgage shall be deemed to cover only the property a. concluding a fresh chattel mortgage or
described therein and not like or substituted property b. by amending the old contract conformably with the
thereafter acquired by the mortgagor and placed in the same form prescribed by the Chattel Mortgage Law
depository as the property originally mortgage.
Q: Does the law require a minute and specific description of
XPN: Where the after‐acquired property is in renewal of, or in every chattel mortgage in the deed of mortgage?
substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of A: No, it only requires that the description of the mortgaged
such goods. property be such as to enable the parties to the mortgage or
any other person to identify the same after a reasonable
NOTE: While pledge, real estate mortgage, or anti-chresis may investigation and inquiry.
secure after-incurred obligations so long as these future debts
are accurately described, a chattel mortgage can only cover After-Incurred Obligation
obligations existing at the time the mortgage is constituted.
Q: Can the CM cover after‐incurred obligations?
Although the promise expressed in the chattel mortgage to
include debts that are yet to be contracted can be a binding A: No, the affidavit of good faith in a CM makes it obvious that
the debt referred to in the law is current, not an obligation continuing security and is not discharged by the repayment of
that is yet merely contemplated. (Acme Shoe v. CA, G.R. No. the amount named in the mortgage, until the full amount of
103576, Aug. 22, 1996) the advancements is paid. It permitted the mortgagor to take
the money as it is needed and thus avoid the necessity of
Q: What then is the consequence of a CM covering paying interest until the necessity for its use actually arises.
after‐incurred obligations?
Remedies available in case of simple loan
A: A promise expressed in a CM to include debts that are yet
to be contracted can be a binding commitment that can be Q: What does the word “default” cover?
compelled upon. The security itself, however, does not come
into existence or arise until after a CM agreement covering A:
newly contracted debt is executed either by concluding a 1. non-payment
fresh CM or by amending the old contract conformably with 2. violation of the terms of the agreement
the form prescribed by the CM law. The remedy of
foreclosure can only cover the debts extant at the time of Q: What is the effect of stipulation prohibiting the
constitution and during the life of the CM sought to be mortgagor from exercising acts of ownership?
foreclosed.
A: Such agreement is void. Since the mortgagor remains the
Dragnet clause owner of the chattel, he can sell it even if the chattel
mortgage agreement prohibits the mortgagor from selling the
Q: What is a dragnet clause? chattel without the consent of the mortgagee.
A: It is a clause which operates as a convenience and The sale, however, is without prejudice to:
accommodation to the barrowers as it makes available a. his criminal prosecution under the permanent
additional funds without their having to execute additional provisions of the RPC
security documents, thereby saving time, travel, loan closing b. the sale can be considered as violation of the terms of
costs, costs of extra legal services, recording fees etc. the chattel mortgage
It subsumes all debts of past or future origin. Q: What are the remedies in case of default?
Q: How do you construe such clause? A:

1. action for collection
A: It must be carefully scrutinized and strictly construed 2. foreclosure
particularly where the mortgage contract is one of adhesion.
NOTE: There is no rescission in case of simple loan.
NOTE: A mortgage given to secure future advancements is a
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of the proceeds thereof to the payment of his claim.
Q: What is the nature of these remedies?
Q: State the essence of a contract of mortgage?
A: They are alternative remedies. The election of one bars the
other remedies. A: The essence of a contract of mortgage indebtedness is that
NOTE: The mere filing of the collection case bars the

foreclosure, regardless of the venue (whether here or
abroad).
Foreclosure
Q: What is foreclosure?
A: It is the remedy available to the mortgagee by which he

subjects the mortgaged property to the satisfaction of the a property has been identified or set apart from the mass of
obligation to secure which the mortgage was given through the property of the debtor-mortgagor as security for the
the sale of the property at public auction and the application payment of money or the fulfillment of an obligation to
answer the amount of indebtedness in case of default of extra-judicial foreclosure of the chattel mortgage or b.
payment. judicial foreclosure.
Q: What are the kinds of foreclosure? NOTE: Foreclosure can be:

1. public sale
A: 2. private sale, if stipulated by the parties
1. judicial foreclosure
2. extra-judicial foreclosure Two-bidder Rule
Judicial foreclosure Q: What is the so-called “Two-bidder rule”?
Q: What is judicial foreclosure? A: There must be at least 2 participating bidders for the
auction sale to be valid.
A: By bringing an action for that purpose in the RTC of the
province or city where the real property or any part therof Q: Does the two-bidder rule apply to chattel mortgage?
lies.
A: No, it only applies to pledge.
The proceeds of the sale shall be applied to the payment of
the:
Twin Periods Rule
a. Costs of the sale;
Q: What is the “twin periods rule”?
b. Amount due to the mortgagee;
c. Claims of persons holding subsequent mortgages
A: In case of the equity of redemption, the mortgagor has the
in the order of their priority; and
right to prevent the sale by paying the debt within 30 days
d. Balance if any shall be paid to the mortgagor.
from default. So it is a grace period that the law affords in
favor of the mortgagor. Within the 30 days grace period there
Extra-judicial foreclosure must be a “Notice of sale” given to the mortgagor.
Q: What is Extra-judicial foreclosure? Also, there must be a 10-day notice to the mortgagor prior to
the sale.
A: A mortgage may be foreclosed extra judicially where there
is inserted in the contract, a clause giving the mortgagee the Claim of deficiency
power, upon default of the debtor, to foreclose the mortgage
by an extrajudicial sale of the mortgaged property. Q: Can the mortgagee claim in case of deficiency?
Q: What is the remedy if the mortgagee cannot obtain A:

possession of mortgaged property?
GR: Yes, mortgagee is entitled to recover deficiency.
A: If a mortgagee cannot obtain possession of a mortgaged
property for its sale on foreclosure, the mortgagee cannot XPNS:
take the property by force but must institute the appropriate
action in the court.
1. Contrary stipulation
a. He must bring a civil action for replevin either to
2. Transactions covered by Recto Law (Art. 1484, NCC)
recover such possession as preliminary step on the
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3. In accommodation mortgages, the accommodation
mortgagor is liable only to the extent of the value of A: No, it is void.
the mortgaged property;
4. Due to death of mortgagor. Q: Does the claim for deficiency prescribe?
Q: In case of pledge, is a stipulation to recover deficiency A: A mortgage action prescribes in 10 years from the time the
valid? right of action accrues, that is, from the time the mortgagor
defaults in the payment of his obligation to the mortgagee
and not from the date of the execution of the mortgage (1) Exact fulfillment of the obligation, should the vendee fail to
pay;
contract.
(2) Cancel the sale, should the vendee's failure to pay cover two
or more installments;
Accommodation mortgagor (3) Foreclose the chattel mortgage on the thing sold if one has
been constituted, should the vendee's failure to pay cover two or
more installments. In this case, he shall have no further action
Q: Who is an “accommodation party”?
against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.
A: He is a person who has signed the instrument as maker, Q: When does the Recto Law apply?
drawer, acceptor, or indoser without receiving value therefor,
and for the purpose of lending his name to some other A:
persons. He is liable on the instrument notwithstanding that 1. Sale of personal property, the price of which is payable
such holder at the time of taking the instrument knew such in two or more installments
person to be only an accommodation party. The 2. Contracts purporting to be leases of personal property
accommodation party has right, after paying the holder, to with option to buy (Art. 1485, NCC)
obtain reimbursement from the party accommodated since
the relation between them is in effect that of principal and Q: What are the requisites for the sale to be covered under
surety, the accommodation party being the surety. the Recto Law?
NOTE: Ordinarily, the debtor is also the mortgagor, but it is A:

also possible that a 3rd party may constitute a mortgage in
favor of the mortgagor. This arrangement is valid even if the 1. Sale of personal property
accommodating party does not receive anything. 2. Payable in installments
3. CM constituted over the same property
Q: What is the extent of the liability of the accommodation
mortgagor? Q: Under the Recto Law, what are the remedies of the
unpaid seller?
A: His liability is limited only to the value of the property he
secured for another. A:
Death of mortgagor 1. Exact fulfillment of the obligation, should the vendee

fail to pay (action for specific performance)
Q: What is the remedy in case of death of the mortgagor? 2. Cancel the sale, should the vendee’s failure to pay
cover two or more installments (rescission); or
A: 3. Foreclose the chattel mortgage on the thing sold,
1. File a money claim against the estate (whether real should the vendee’s failure to pay cover 2 or more
property or personal property). If the mortgagee installments.
chose this remedy, he is deemed to have abandoned
the mortgage and he lost priority. Q: Can the unpaid seller avail of all remedies?
2. To foreclose the mortgage by ordinary action in court
and recover any deficiency against the estate in A: No, the remedies are alternative.
administration; and,
3. To foreclose without action at any time within the The three remedies under this article, available to the vendor
period allowed by the statute of limitations who has sold personal property on the installment plan, are
alternative, not cumulative. In other words, if the vendor has
Transactions covered by Recto Law elected to avail himself of any of the remedies, he is deemed
(Articles 1484 & 1485 of the civil code Civil Code) to have renounced the others (Tolentino, Vol.V).
ART. 1484. In a contract of sale of personal property the price of which is
Q: What is the reason for this rule?
payable in installments, the vendor may exercise any of the following
remedies:
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preliminary to the extra-judicial foreclosure of a chattel
A: According to Sen. Tolentino, in case the vendor elects mortgage.
to foreclose the mortgage, if one has been given on the
property, he is not obliged to return to the purchaser Q: Who can institute replevin suit?
the amount of the installment already paid should there
A: It is not only the owner but also a person “entitled to the
be an agreement to that effect, and it is not
possession” of the property can institute a replevin suit.
unconscionable.
Q: In case of recovery of property through replevin
NOTE: In all proceedings for the foreclosure of chattel preparatory to foreclosure, is it a bar to avail of other
mortgages, executed on the chattels, which have been remedies?
sold on the installment plan, the mortgagee is limited to
the property only in the mortgage. A: Recovery of property through a replevin case preparatory
to foreclosure will not bar the other remedies if there was no
actual foreclosure. If seller‐mortgagee opts to file an action
Thus, the principal object of Article 1484 was to remedy
for specific performance, he shall be deemed to have waived
the abuses committed in connection with the his right as a mortgagee but may still levy on the mortgaged
foreclosure of chattel mortgages. This prevents property (on execution).
mortgagees from seizing the engaged property, buying
REPLEVIN
it at foreclosure for a low price and then bringing suit
against the mortgagor for the deficiency judgment. The VOUNTARY INVOLUNTARY
almost invariable result of this procedure was that the
mortgagor found himself minus the property and still Not akin to foreclosure Akin to foreclosure; a bar
owing practically the full amount of the original to other remedies which
indebtedness. Ex: surrender of the property are alternative
NOTE: According to Dean Divina, the reason for this rule is to Not a bar to avail of other
encourage the mortgagee/creditor to make a “reasonable remedies
bid.” If he bids at a low price, the company will record on its
book of accounts the deficiency as a loss. To prevent this XPN: if possession is in
situation, the mortgagee will bid at a reasonable amount. view of dacion en pago
Art. 1484 not applicable in case mortgagee is not the vendor
Q: Does Article 1484 apply as against a mortgagee who is not Q:

the venodor of the chattel mortgaged? Is
the
A: Art. 1484 of the NCC does not apply as against a mortgagee mortgagee’s letter informing the mortgagor of his intent to
who is not the vendor of the chattel mortgaged. Thus, a suit foreclose is already considered a foreclosure of the chattel?
for replevin is not equivalent to an exercise of the remedy of
foreclosure under Art. 1484 of the NCC. Hence, a A: No. A mere offer by the mortgagor to surrender the chattel,
vendor-mortgagee is not barred from making a claim for not accepted by the mortgagee, does not preclude the
specific performance against the buyer-mortgagor, by the mortgagee from bringing suit to recover the balance of the
mere fact that the former was already able to secure a writ of purchase price.
replevin.
Q: Is mere demand sufficient to foreclose the object?
Rescission
A: A mere demad to surrender the object which is not heeded
NOTE: In rescission, there should be “mutual restitution” by the mortgagor will not amount to foreclosure, but the
except in case of stipulation of forfeiture of prior payments. repossession thereof by the vendor-mortgagee would have
the effect of foreclosure (Borbon II v. Servicewide Specialist,
Replevin 258 SCRA 634, 1996).
Q: What is replevin? Q: Is a mortgagee of a personal property sold on

A: It is the appropriate action to recover possession installments, after taking possession of the property, legally
obligated to foreclose the chattel mortgage and sell it at no longer cancel the sale. The three remedies of the vendor in
public auction? case the vendee defaults, in a contract of sale of personal
A: Having opted to foreclose the chattel mortgage, GAMI can
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property the price of which is payable in installment under
Article 1484 of the Civil Code, are alternative and cannot be Having chosen to foreclose the chattel mortgage, and
exercised simultaneously or cumulatively by the vendor bought the purchased vehicles at the public auction as
creditor (Esguerra v. CA, 1989). the highest bidder, it submitted itself to the
consequences of the law as specifically mentioned, by
Q: What are included in the term “debt” which are
extinguished under the Recto Law? which it is deemed to have renounced any and all rights
which it might otherwise have under the promissory
A: note and the chattel mortgage as well as the payment
1. Principal of the unpaid balance.
2. Interest
3. Cost of collection Under the law, should the vendor choose to foreclose
the mortgage, he has to content himself with the
Q: Who bears the necessary expenses incurred in the proceeds of the sale at the public auction of the chattels
prosecution by the mortgagee of the action for replevin to which were sold on installment and mortgaged to him
regain possession of the chattel? and having chosen the remedy of foreclosure, he
cannot nor should he be allowed to insist on the sale of
A: It is the mortgagor who bears such expenses.
the house and lot of the vendees, for to do so would be
Q: What does recoverable expense include? equivalent to obtaining a writ of execution against them
concerning other properties which are separate and
A: It includes expenses properly incurred in affecting seizure distinct from those which were sold on installment. This
of the chattel and reasonable attorney’s fees in prosecuting would indeed be contrary to public policy and the very
the action for replevin (Agustin v. CA, 271 SCRA 463, 1997). spirit and purpose of the law, limiting the vendor's right
to foreclose the chattel mortgage only on the thing
NOTE: The “cost of repossession” which is brought by the sold.
unjustified refusal of the mortgagor can still be recovered and
is not deemed extinguished. IMPORTANT: SIMPLE LOAN v. RECTO LAW
Additional security SIMPLE LOAN RECTO LAW
Q: What is the effect of the foreclosure as regards the Taking of property through replevin
personal property which are not subject of the sale but are
given as additional security? The taking of possession by The taking of possession by
replevin is not equivalent replevin is tantamount to
to foreclosure foreclosure which bars the
A: Under Art. 1484 of the NCC, the vendor of personal
action for specific
property sold on installment who chooses the remedy of
performance
foreclosure of the chattel mortgage is limited to the
foreclosure of the items sold only and not to the other items Remedies
not subject of the sale although also given as additional
securitty. The foreclosure of the latter is null and void (Ridad v. 1. Foreclosure 1. Action for specific
Filipinas Investment and Finance Corporation, 120 SCRA 246, 2. Action for specific performance;
1983). performance 2. Cancellation or
rescission; or
All other additional securities are barred once the mortgagee 3. Foreclose the
chose to foreclose. This also bars him from going against the chattel mortgage
surety or guarantor. on
the thing sold
Ridad v. Filipinas Investment and Finance Corporation
Suggested remedy Effect of election of action for collection
Foreclose! Don’t even Weigh the options Election of action for If it is a transaction falling
think about it because you collection is a bar to the under the Recto Law, its
have a lien in such case other remedy only when the mortgagee
actually forecloses or
Recovery of deficiency elects the
You can recover for Precludes the mortgagee

deficiency. And the right to to recover the deficiency
recover deficiency may be
enforced against any one of
the solidary co-debtors, if
any, and is not limited to
the mortgagor for the
reason that the chattel
mortgage is just a security,
not a mode of payment.
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remedy of foreclosure that

he is subject to the rule
that he cannot recover any
unpaid claims.
So if he files an action for

collection and obtained
judgment then he can levy
any and all properties of
the mortgagor until the
debt is paid or satisfied.
NOTE: In case of transactions under the Recto Law, it is only properties?

when there has been a foreclosure of the chattel mortgage
that the vendee-mortgagor would be permitted to escape A: None.
from deficiency liability. Hence, if the case is one for specific
performance, even when this action is selected after the Q: When is equity of redemption may be exercised?
vendee has refused to surrender the mortgaged property to
permit n extra-judicial foreclosure, the property may still be A: Equity of redemption may be exercised by the mortgagor
levied on execution. after his default in the performance of his obligation but
before the sale of the mortgaged property or confirmation of
Equity of redemption sale.
Q: Is there a right of redemption in case of personal Q: When is the right of redemption available?
and (there are at least 20 despositors)
A: The SC said that there are only 3 cases where there is a 3. Lends money to the public.
right of redemption. And they do not involve personal
property. They only pertain to real property. There are only 3: NOTE: The fourth element under the old code, habituality, has
1. Extrajudicial foreclosure of Real Estate Mortgage under been deleted.
Act 3135
2. Execution sale of a real property under the Rule 39 of Q: Is a transaction involving purchase of receivables
Rules of Court considered as banking transaction?
3. Judicial foreclosure of a real estate mortgage, if the
mortgagee is a bank or a credit institution A: If it is a transaction not involving a loan but purchase of
receivables at a discount, it is well within the purview of
NOTE: So the mortgagee cannot foreclose right away after "investing, reinvesting or trading in securities" which an
default. He has to give the mortgagor 30 days grace period. investment company is authorized to perform and does not
That is what you call “equity of redemption”. The right of the constitute a violation of the General Banking Act.
mortgagor to prevent the sale by paying the debt within 30
days from default. It is only when he failed the debt that there This transaction is known as a deposit substitute.
can be actual foreclosure of chattel mortgage.
NOTE: What is prohibited by law is for investment companies
to lend funds obtained from the public through receipts of
deposit, which is a function of banking institutions. But here,
BANKING LAWS:
the funds supposedly "lent" to petitioners have not been
GENERAL BANKING ACT shown to have been obtained from the public by way of
deposits, hence, the inapplicability of banking laws (Bañas v.
BANK Asia Pacific Finance Corp., 2000).
Q: What are banks? Paluwagan
A: Entities engaged in the lending of funds obtained through Q: Describe the concept of paluwagan?
deposits from public.
A: Even if there are more than 20 members, such is not
Elements considered as banks: the funds are not obtained in the form of
deposits. It is for savings among its members.
Q: What are the elements determinative of a bank?
Deposit-taking activity
A:
Q: What is a “deposit-taking activity”?
1. Must be authorized by law;
2. Accepts fund, in the form of a deposit, from the public;
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A: The funds given to the bank gives rise to a creditor-debtor and similar instruments with recourse, and repurchase
relationship. The ownership of the funds is thus transferred to agreements.
the banks and the latter are free to use the funds as it pleases.
Quasi-banks
Deposit substitutes
Q: What are quasi-banks?
Q: What are deposit substitutes?
A: These are entities engaged in the borrowing of funds
A: It is an alternative form of obtaining funds from the public, through the issuance, endorsement or assignment with
other than deposits, through the issuance, endorsement, or recourse or acceptance of deposit substitutes for purposes of
acceptance of debt instruments, for the borrower's own re-lending or purchasing of receivables and other obligations.
account, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may NOTE: Quasi-banks are also under BSP. They have to secure a
include, but need not be limited to, banker’s acceptances, license from the BSP.
promissory notes, participations, certificates of assignment
a) Savings and mortgage banks;
Banks vs. Quasi-Banks b) Stock savings and loan associations;
BANKS QUASI-BANKS c) Private development banks, which are primarily
Obtains funds from the Refer to entities engaged in

public in the form of the borrowing of funds
deposit through the issuance,
endorsement or
assignment with recourse
or acceptance of deposit
substitutes for purposes of
re‐lending or purchasing of
receivables and other
obligations
governed by the Thrift Banks Act (R.A. 7906).
Deposits are insured with Not insured with PDIC
PDIC 4. Rural banks
5. Cooperative banks
There is creditor-debtor No creditor-debtor 6. Islamic banks
relationship relationship 7. Other classification of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas.
Must secure from the Bangko Sentral ng Pilipinas (BSP)
Bank power and liabilities
Universal a. Powers of a commercial bank
Quo Warranto proceedings bank b. Power of an investment house
c. Power to invest in the equities of
Q: What is the appropriate proceeding to question a allied enterprises
corporation who performs functions of a bank without the d. Power to invest in the equities of
license from BSP? non-allied enterprises
A: Any corporation who does these functions and activities Commerc a. General power incident to a
without a corresponding license or approval from the SEC can ial bank corporation
be ousted by way of quo warranto proceedings (Republic of b. All such powers as may be
the Philippines v. Security Credit and Acceptance Corp, et al., necessary to carry on the business
1967). of commercial banking such as
(ADD EBC):
Classification of Banks 1. Accepting drafts and issuing LCs
2. Discounting and negotiating
1. Universal banks ‐ can exercise the powers of an investment promissory notes, drafts, bills
house and invest in non‐allied enterprises and have the of exchange, and other
highest capitalization requirement. evidence of indebtedness
3. Accepting or creating demand
Capital: 4.950 billion deposits
4. Receiving other types of
2. Commercial banks ‐ Ordinary banks governed by the GBL deposit and deposit substitute
which have a lower capitalization requirement than 5. Buying and selling foreign
universal banks and can neither exercise the powers of an exchange and gold or silver
investment house nor invest in non‐allied enterprises. bullion
Capital: 2.4 billion
3. Thrift banks – These are:

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6. Acquiring marketable bonds
and other debt securities and
extending credit
c. Power to invest in the equities of
allied enterprises
NOTE: Whatever a commercial bank can do, a universal bank valuable objects
can also perform 2. act as financial agent and buy and sell for the account
securities
Allied and non-allied transactions 3. make collections and payments for the account of
others
Q: What do you mean by “to invest in equity”? 4. perform such other services not incompatible with
banking business and;
A: It means to be a stockholder of another corporation 5. upon prior approval of the BSP, act as manager adviser
of investment management accounts
Q: What are allied or related undertakings? 6. rent out safety deposit box
A: Any undertaking which is about money such as: Renting out of deposit box
a. Foreign exchange Q: Is a safety deposit box a form of deposit or lease?
b. Leasing
c. Investment company A: The contract for the use of a safe deposit box should be
d. Insurance company governed by the law on lease.
e. Warehousing
NOTE: An example of non-allied undertaking is cargo Under the old banking law, a safety deposit box is a special
operations. deposit. However, the new General Banking Law, while
retaining the renting of safe deposit box as one of the services
Q: What are the kinds of underwriting agreements? that the bank may render, deleted reference to depository
function.
A:
Sia v. Court of appeals
FIRM COMMITMENT BEST EFFORTS
Justice Edgardo Paras was of the opinion that the contract for
Those which are underwriter does not the use of safety deposit box is governed by the law on lease.
considered as sold guarantee that it will sell The Supreme Court did not agree with him and said that
the entire contract for the use of safety deposit box is a “special kind of
deposit.” In other words the bank must exercise the due
The underwriter purchases The underwriter merely diligence required of depository in safekeeping or preserving
outright the securities and sells for commission of the object inside the safety deposit box.
then resells the same
The basis for this is that under the Old General Banking Act, it
provided that in renting out safety deposit boxes the bank
shall act as a depositary. Because the law itself provides for
Banking and incidental powers this SC concluded that the contract for the use of safety
deposit box is governed by deposits.
Q: What are the other services that a bank may offer?
New Law retains the authority of the Bank to rent out safety
A: deposit box but silent on being a depositary.
1. receive in custody funds, documents, and other
security of debts (foreclosure)
Power to acquire real properties d. as it shall purchase at sales under judgments,,
decrees, mortgages, or trust deeds (execution
Q: Can the bank acquire real property in settlement of a civil sale to satisfy judgment)
liability arising from a crime?
NOTE: Any property acquired under b-d should be disposed of
A: Generally, no. within 5 years from the acquisition because the bank is not a
realty company.
XPNS: It can only acquire real property when:
a. it is needed for business (Business) Q: Can banks acquire ownership of real property by virtue of
b. as shall be conveyed to it in satisfaction of debts the deed of transfer executed by its former employee in
previously contracted in the course of its satisfaction of a civil liability arising from the criminal
dealings (Dacion en pago) offense?
c. as shall be mortgaged to it in good faith by way of
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A: A bank cannot acquire ownership of real property by virtue Q: In what transactions this highest degree of care or
of the deed of transfer executed by its former employee in diligence is applied?
satisfaction of a civil liability arising from the criminal offense
since debts referred to in the law are only those resulting A: This applies only to cases where banks are acting in their
from previous loans and similar transactions made or entered fiduciary capacity, that is, as depository of the deposits of
into by a bank in the ordinary course of its business. their depositors. (Reyes v. CA, G.R. No. 118492, 2001)
Diligence required of banks NOTE: The General Banking Law of 2000 requires banks the
highest degree of standards of integrity and performance.
Q: What is the degree of diligence required of banks in Hence, a bank is “under obligation to treat the accounts of its
handling deposits? depositors with meticulous care” (Philippine Savings Bank v.
Chowking Food Corporation, 2008).
A: Extraordinary diligence. The appropriate standard of
diligence must be very high, if not the highest, degree of Q: What is the effect when the teller gave the passbook to a
diligence; highest degree of care (PCI Bank vs. CA, 350 SCRA wrong person?
446, PBCom vs. CA, 2001)
A: If the teller gives the passbook to the wrong person, they
Q: Does the bank need to exercise extra‐ordinary diligence in would be clothing that person presumptive ownership of the
all commercial transactions? passbook, facilitating unauthorized withdrawals by that
person. For failing to return the passbook to authorized
A: No, the degree of diligence required of banks, is more than representative of the depositor, the bank presumptively failed
that of a good father of the family where the fiduciary nature to observe such high degree of diligence in safeguarding the
of their relationship with their depositors is concerned, that is, passbook and insuring its return to the party authorized to
depositary of deposits. But the same higher degree of receive the same. The bank’s liability, however, is mitigated by
diligence is not expected to be exerted by banks in the depositor’s contributory negligence in allowing a
commercial transactions that do not involve their fiduciary withdrawal slip signed by authorized signatories to
relationship with their depositors, such as sale and issuance of fall into the hands of an impostor. (Consolidated Bank and
foreign exchange demand draft. (Reyes v. CA, 2001) Trust Corporation vs. CA, 2003).
accounts with utmost care, confidence, and dishonesty (PNB v.
Q: Did a bank exercise the diligence required when the Rodriguez, et al., 566 SCRA 513, 2008).
pretermination of the account is allowed despite
discrepancies in the signature and photograph of the person Nature of bank funds and bank deposits
claiming to be the depositor and failure to surrender the
original certificate of time deposit? Q: What law governs bank deposits?
A: No. The bank is negligent because the depositor did not A: The law on loans. Creditor and debtor relationship is
present the certificate of deposit created between the Bank and the depositors.
Q: Is the bank liable when an employee encashed a check Q: What is the nature of a bank deposit?
without the requisite of endorsement?
A: All kinds of bank deposits are loan. The bank can make use
A: Yes. The fiduciary nature of the relationship between the as its own the money deposited. Said amount is not being
bank and the depositors must always be of paramount held in trust for the depositor nor is it being kept for
concern. (Philippine Savings Bank vs. Chowking, 2008). safekeeping.
NOTE: In a checking transaction, the drawee bank has the Bank not a trustee
duty to verify the genuineness of the signature of the drawer
and to pay the checks strictly in accordance with the drawer’s Q: Is a bank a trustee?
instructions—to the named payee in the check. Otherwise,
the drawee will be violating the instructions of the drawer and A: No, the fiduciary nature of a bank-depositor relationship
it shall be liable for the amount charged to the drawer’s does not convert the contract between the bank and its
account. The drawee bank had the responsibility to ascertain depositors from a simple loan to trust agreement. Failure by
the regularity of the endorsements, and the genuineness of the bank to pay the depositor is failure to pay a simple loan,
the signatures on the checks before accepting them for and not a breach of trust.
deposit. Thus, banks are minded to treat their customer’s
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reflect at any given time the amount of money the depositor
Mandamus will not lie can dispose of as he sees fit, confident that the bank will
deliver it as and to whomever he directs. A blunder on the
Q: In the enforcement of obligations concerning deposit, will part of the bank, such as the dishonor of the check without
the remedy of mandamus lie? good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even civil
A: No, because all kinds of deposit are loans. Thus, the and criminal litigation.
relationship being contractual in nature, mandamus cannot
be availed of because mandamus will not lie to enforce the Stipulation of interest
performance of contractual obligations.
NOTE: Circular 905 suspended the Usury Law, but it has
Q: After procuring a checking account, the depositor issued not been repealed.
several checks. He was surprised to learn later that they had
been dishonored for insufficient funds. Investigation
Circular 905 lifted the ceiling on the interest rate. The
disclosed that deposits made by the depositor were not
credited to its account. Is the bank liable for damages? bank and its depositors are therefore free to stipulate
on the rate of interest for loans. Nevertheless, if the
A: Yes, the depositor expects the bank to treat his account interest is unconscionable, it may be nullified on the
with utmost fidelity, whether such account consist only of a grounds of equity.
few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and as Limitations with respect to bank’s loan functions
promptly as possible. This has to be done if the account is to
There is a maximum amount of loan a bank may grant to 1
Q: What are the limitations imposed upon the banks borrower. That is not to exceed 25% of the bank’s net worth
with respect to its loan function?
NOTE: Branches from part of the Bank. It has no separate
legal personality from the bank.
A:
1. Single borrower’s limit Loans against real estate
2. Loans against real estate
3. Loans against personal property Q: What is the limitation regarding loans against real
4. DOSRI regulation estate?
Single borrower’s limit A: Except as the Monetary Board may otherwise

prescribe, loans and credit accommodations against real
Q: Discuss the single-borrower’s limit? estate shall not exceed 75% of the appraised value of
A: Unless otherwise prescribed by the Monetary Board, the respective real estate security plus 60% of the
the total amount of loans, credit accommodations and appraised value of the insured improvements
guarantees that may be extended by a bank to a single
borrower shall not exceed 25% of the net worth of such Loans against personal property
bank.
Q: What is the limitation regarding loans against
NOTE: The amount may be increased by an additional personal property?
10% of the bank’s net worth provided that the
additional liabilities are adequately secured by
A: Loans on the security of chattels and intangible
documents of title covering readily marketable and non properties shall not exceed 75% of the appraised value
perishable goods. of the security.
Q: What is the purpose of the rule? DOSRI regulation

A: To diversify the bank’s loan portfolio. Q: State the so-called “Dorsi Regulation.”
Q: Let us say the bank has 10 Billion, can the bank lend the A: No director or officer of any bank shall, directly or
entire 10 Billion to Henry Sy? indirectly, for himself, or as the representative agent of
A: No, because the law provides for a single borrower’s limit.
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others: limited to an amount equivalent to their respective
unencumbered deposits and book value of their pre-paid
a. borrow from such bank contribution to the bank.
b. nor shall become a guarantor, Q: What are excluded from the limits?
c. indorser
d. surety for loans from such bank to others
e. or in any be an obligor
f. or incur any contractual liability to the bank
Except with the written approval of at least majority of all the

directors of the bank excluding the director concerned. The
required approval shall be entered upon the records of the
bank and a copy of such entry shall be submitted forthwith to
the appropriate supervising and examining department of
BSP.
A: Non-risk loans such as:
The outstanding loans, credit accommodations and
guarantees which a bank may extend to the DOSRI shall be 1. Loans secured by obligations of the Bangko Sentral ng
Pilipinas or the Philippine Government
2. Loans fully guaranteed by the Government 3. Loans 1. Procedural requirements ‐
covered by assignment of deposits maintained in the
lending bank and held in the Philippines a. Loan must be approved by the majority of all the
4. Loans, credit accommodations and acceptances under directors not including the director concerned
letters of credit to the extent covered by margin (not merely majority of the quorum)
deposits b. CB approval is not necessary; however, there is a
5. Other loans or credit accommodations which the MB need to inform them prior to the transaction. c. Loan
may specify as non‐risk items. must be entered in the books of the corporation.
(Sec. 36)
Q: Who are covered by the DOSRI Regulation?
2. Substantive requirement or ceiling requirement ‐ Loan
A: must not exceed the paid in contribution and
unencumbered deposits. (Not to exceed 15% of the
a. Director –those who are directly elected by the portfolio or 100% of the net worth, whichever is
stockholders including those who represent lower.) (Sec. 36 [4])
themselves as director
b. Officer –including those who advertises themselves c. Q: What is the effect of non‐compliance with the foregoing
Stockholder, which should at least 1% (if below 1% ‐ not requirements?
anymore covered)
d. Related Interests, such as DOS’s spouses, their A: Violation of DOSRI is a crime and carries with it penal
relatives within the first degree whether by sanction.
consanguinity or affinity, partnership whereby DOS is
a partner or a corporation where DOS owns at least Q: What are the transactions covered by the DOSRI
20% regulation?
Q: Who are included under the first degree? A: The transactions covered are loan and credit
accommodation. Not being a loan, the ceiling will not apply to
A: lease and sale. However, it should still comply with the
procedural requirement.
1. Parents
2. Parents-in-law NOTE: Each and every requirement constitutes a separate
3. Children violation or offense.
4. Children-in-law
5. Spouse Ex: no board approval
NOTE: Common-law or illegitimate spouse is not included Q: What is the effect of the non-comppliance with the
requirements such as the single borrowers limit with regard
the loan?
Requirements under the DOSRI Accounts
A: The same is valid without prejudice to criminal prosecution.
Q: In case of DOSRI accounts, what are the requirements In the case of Republic v. Sandiganbayan, Cojuangco (12 April
that must be complied with? 2011, G.R. No. 166859), the Supreme Court held that the
loans, assuming that they were of a DOSRI
A:
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nature or without the benefit of the required approvals or in
excess of the Single Borrower’s Limit, would not be void for Q: What is the arms‐length rule?
that reason. Instead, the bank or the officers responsible for
the approval and grant of the DOSRI loan would be subject A: It provides that any dealings of a bank with any of its DOSRI
only to sanctions under the law. shall be upon terms not less favorable to the bank than those
offered to others.
NOTE: Despite such pronouncement, the crime has already
prescribed. Violation of special penal laws has a prescriptive NOTE: The arms-length rule is the basis. Loans of directors,
period of 10 years. etc. should be beyond question. They should be above board.
This is because a bank is a “nationalized activity.”
Penalties for violation of the limitations
Q: What does NATIONALIZED ACTIVITY mean?
Q: What are the penalties for the violations?
A: It is an activity either wholly or partly reserved for Filipinos.
A:
1. Fines in amounts as the MB may determine but not

exceed P30,000 a day for each violation
2. Suspension of privileges:
a. Quasi-banking function
b. Clearing operation
c. Foreign exchange
d. Rediscounting facility with BSP
3. Dissolution of the bank through a quo warranto

proceeding NOTE: A bank is partly reserved for Filipinos, because
4. If the offender is a director or officer, the MB may also Foreigners are allowed to be stock-holders of a bank but not
remove or suspend such director or officer 5. Penal to exceed 40% of the Bank’s capital stocks.
sanction
Q: What about DOMESTIC CORPORATION?
Structure of bank
A: 40%
Q: What is the nature of a bank?
Q: What about FOREIGN BANK/corporation owned by
A: It is only organized as a stock corporation. They cannot be foreigners?
organized as a non-stock corporation, because a non-stock is
not organized for profit. A: 40%
Q: What are the KINDS OF SHARE-HOLDERS/stock-holders? Q: How do you distinguish the 40% share ownership limit of
a natural person who is a Filipino and 40% share limit of a
1. Natural persons foreigner?
a. Filipino
b. Foreigner A:
FILIPINO FOREIGNER
2. Juridical persons
a. corporation or Individual Aggregate which means that
i. may be owned by a Filipino (domestic shares held by foreigners and
corporations) corporations owned by
ii. or by Foreigners (as in foreign banks) foreigners shall not exceed
b. partnership 40% of the bank’s capital
stocks.
NOTE: The new law allows any natural person to own up to
40% of the capital stocks of a bank. So foreign held stocks whether
owned by natural persons or
Q: Can one group of persons or an entire family, under the corporation cannot exceed
new law, own the entire bank? 40% of the bank.
A: Yes, for as long as not one of them own more than 40%
(maximum) of the capital shares/stock of the Bank.
Q: What about domestic corporations?
Q: What about a foreigner? Is there a limit on the number of
share a foreigner can own in bank? A:
A: Only up to 40%. Foreigners can only own 40% of the bank.
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GR: A corporation may only own 40% of the bank Securities and Exchange Commission (for banking
functions)
XPNS:
1. In case of wholly owned thrift bank subsidiary of a Q: What is Bangko Sentral ng Pilipinas (BSP)?
universal bank – This is because a universal bank can
own up to 100% of a thrift bank A: The state’s central monetary authority; it is the government
2. If the shares of a corporation are listed in the stock agency charged with the responsibility of administering the
exchange - it can own up to 60% of the bank. This monetary, banking and credit system of the country and is
privilege can be exercised only once. In other words a granted the power of supervision and
corporation whose shares are listed can own 60% of examination over bank and non‐bank financial institutions
1 bank only. As to the other banks the maximum is performing quasi‐banking functions, including savings and
still 40%. loan associations.
3. If the corporation is in existence for 10 years it can own
up to 60% of the bank. This privilege can only Q: Does it enjoy fiscal and administrative authority?
exercised once
A: Yes.
Q: How many directors are allowed for a bank?
NOTE: Amando M. Tetangco, Jr. assumed office as Governor
A: Not less than 5 not more than 15 (min of 5, maximum of of the Bangko Sentral ng Pilipinas in July 2005.
15) and 2 of whom must be independent directors.
Q: What are the objectives of BSP?
Q: Who are INDEPENDENT DIRECTORS?
A: Directors not part of management 1. It shall provide policy directions in the areas if money,
banking and credit
Q: Is there an EXCEPTION? (allowable directors) 2. It shall have supervision over banks and exercise
regulatory powers over finance companies and non
A: In case of MERGER or CONSOLIDATION law allows 21 bank financial institutions performing quasi-banking
directors. functions
3. It is mandated to maintain price stability conducive to
Q: Can you have foreigners as officer of a Bank? Can you a balance and sustainable growth of the economy 4. It
appoint foreign officers in your Bank? shall promote and maintain monetary stability and the
convertability of the peso
A: No. Under the Anti-Dummy Law, foreigners cannot be
appointed to any executive possession of any corporation Monetary Board
engaged in nationalized activity. Since a bank is nationalized
you cannot have foreigner occupying executive positions in a Q: What is the Monetary Board?
bank.
A: The powers and function of Bangko Sentral are exercised by
You can only appoint them as consultants, advisers but they its Monetary Board, which has seven members.
cannot occupy executive positions.
Q: Who are the members of the Monetary Board?
Bangko Sentral ng Pilipinas
A:
Q: Who has supervisory power over the banks?
Chairman Amando M. Tetangco, Jr.
A: Members Cesar V. Purisima
1. Bangko Sentral ng Pilipinas (for ultra vires act) 2. Alfredo C. Antonio
Ignacio R. Bunye guaranteed by the Republic and shall be legal tender in the
Peter B. Favila Philippines for all debts, both public and private (Sec. 52)
Felipe M. Medalla
Armando L. Suratos Q: What is the legal tender power of coins?
Legal tender A:
1. 1‐Peso, 5‐Peso and 10‐Peso coins: In amounts not
Q: What is Legal Tender? exceeding P1,000.00
A: All notes and coins issued by the Bangko Sentral are fully
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2. .25 centavo coin or less: In amounts not exceeding
P100.00 (Circular No. 537, 2006) Q: What is conservatorship?
Q: What are the rules on BSP’s Authority to replace legal A: Whenever on the basis of the report of appropriate
tender? supervising and examining department, the Monetary Board
finds that a bank or quasi-bank is in a state of continuing
A: inability or unwillingness to maintain a condition of liquidity
deemed adequate to protect its depositors and creditors, the
1. Notes and coins called in for replacement shall remain Monetary Board may appoint a conservator to take charge of
legal tender for a period of one year from the date of the assets, liabilities and management thereof.
call.
2. After that period, they shall cease to be legal tender Q: Who is a conservator?
during the following year or for such longer period as
MB may determine. A: One appointed if the bank is in the state of illiquidity or the
3. After the expiration of this latter period, the notes and bank fails or refuses to maintain a state of liquidity adequate
coins which have not been exchanged shall cease to to protect its depositors and creditors. The bank still has more
be a liability of BSP and shall be demonetized. assets than its liabilities but its assets are not liquid or not in
cash thus it cannot pay its obligation when it falls due. The
bank, not the Central Bank, pays for fees.
REMEDIES OF BSP IN CASE OF BANKS IN DISTRESS Q: What do you mean by “illiquidity”?
Q: What are the remedies of the Bangko Sentral ng Pilipinas A: The bank still has more assets than its liabilities but its
in case of banks in distress? assets are not liquid or not in cash thus it cannot pay its
obligation when it falls due.
A: Place the bank in:
1. Conservatorship Q: What are the assets of the banks?
2. Receivership
3. Closure of the bank A:
1. Cash
Conservatorship 2. Properties (real or personal)
3. Receivables
4. Collectibles perfected transactions?
Q: What are the liabilities? A: Such powers cannot extend to post facto repudiation of
perfected transactions. Thus, the law merely gives contracts
A: that are deemed to be defective‐ void, voidable,
1. Deposits unenforceable or rescissible. Hence, the conservator merely
2. Deposit Substitutes takes the place of the bank’s board.
3. Standing Letter of Credits
4. Obligations Due to Credits 5. To bring court actions to assail or repudiate contracts
entered into by the bank.
Q: What are the powers of a conservator?
Q: When is conservatorship terminated?
A:
A:
1. To take charge of the assets, liabilities, and the
management thereof 1. When Monetary Board is satisfied that the institution
2. Recognize the management can continue to operate on its own and the
3. collect all monies and debts due said bank 4. Exercise all conservatorship is no longer necessary.
powers necessary to restore its viability with the power to 2. When the Monetary Board, on the basis of the report
overrule or revoke the actions of the previous management of the conservator or of its own findings, determine
and board of directors of the bank or quasi‐bank that the continuance in business of the institution
would involve probable losses to its depositors or
Q: Can the power to overrule or revoke the actions of the creditors, the bank will go under receivership.
previous management and board of directors extend to
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Receivership
A: No, the receiver only has authority to administer the same
Q: What is receivership? for the benefit of its creditors.
A: The Monetary Board may appoint a receiver if the MB finds NOTE: Once the bank is placed under receivership, its officers
that a bank or quasi-bank: can no longer authorized to transact business in connection
a. is unable to pay its liabilities as they come due in the with the bank’s assets and property.
ordinary course of business provided that this sahll
not include inability to pay caused by extra-ordinary Q: Can the court appoint a receiver for a bank?
demands induced by financial panic in the banking
community A: No. The power belongs to the BSP.
b. has insufficient realizable assets, as determined by the
BSP, to meet its liabilities; or Q: Should the issue of whether or not the Monetary Board’s
c. cannot continue in business without involving probable resolution is arbitrary be only raised in a separate action?
loss to its depositors and creditors; or d. has willfully
violated a cease and desist order that has become final A: No. While resolutions of the Monetary Board forbidding a
involving transactions which amount to fraud or bank to do business on account of a condition of insolvency
dissipation of bank assets, the Monetary Board may and appointing a receiver to take charge of the bank’s assets
summarily and without need for prior hearing forbid the or determining whether the bank may be rehabilitated or
institution from doing business in the Philippines and should be liquidated are by law “final and executory.”
designate the PDIC as the receiver of the bank However, they can be set aside by the court on one specific
ground ‐ if the action is plainly arbitrary and made in bad
Q: Who is a receiver? faith. Such contention can be asserted as an affirmative
defense of a counterclaim in the proceeding for assistance in
A: One appointed if bank is already insolvent which means liquidation.
that its liabilities are greater than its assets. Q: Does the filing of an intra-corporate case before the RTC
and a complaint with the BSP (to compel a bank to disclose
Q: Is the receiver authorized to transact business in its stockholdings) innvoking BSP’s superviory powers over
connection with the bank’s assets and property? banking corporations amount to judicial proceeding and
thus, constitute forum shopping? conservators or receivers have powers of dominion?
A: No, it does not constitute judicial proceeding. Much more, A: No, they only have acts of administration, they cannot sell
it does not constitute forum shopping. The 2 proceedings are properties of banks, they cannot approved option to purchase
of different relief. The complaint filed with the BSP was an properties, just purely acts of administration.
invocation of its supervisory powers over banking operations
which does not amount to a judicial proceeding (Suan v. Closure
Gonzales, 518 SCRA 82, 2007).
Q: Can the BSP close a bank without prior hearing?
Q: What are the similarities between conservatorship and
receivership? A: Yes, because if prior hearing is required then bank run will
be the order of the day. The power of BSP to close a bank is a
A: valid exercise of police power. If there is showing of bad faith
or grave abuse of discretion, it can be set aside and subject to
CONSERVATORSHIP RECEIVERSHIP
judicial scrutiny.
1. Both can only perform acts of administration and not
acts of dominion. Q: Can BSP close a bank on the strength of a report by the
2. While they have the power to revoke the actions of the supervising and examining department without complete
previous management and the Board of Directors, they notice of such bank?
cannot invoke a valid contract.
3. Neither can approve an option to purchase real property A: Yes
CLOSE NOW‐HEAR LATER DOCTRINE
Q: Q: What is the close now‐hear later doctrine?

Do
A: The law does not contemplate prior notice and hearing
before the bank may be directed to stop operations and
placed under receivership. The purpose is to prevent
unwarranted dissipation of the bank’s assets and as a valid
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exercise of police power to protect the depositors, creditors,
stockholders and the general public.
Promissory estoppel
Q: What is the rule of promissory estoppel?
A: When the Central Bank made express representations that

it would support the bank and avoid its liquidation if its
majority stockholders would execute a voting trust agreement
turning over the management of the bank to the CB or its
nominees and mortgage or assign their properties to CB to Q: Can the closure and liquidation of a bank, which is
cover the overdraft balance of the bank, the CB may not considered an exercise of police power, be the subject of
thereafter renege on its representation and liquidate the bank judicial inquiry?
after the majority stockholders of the bank complied with the
conditions and parted with value to the profit of CB, which
A: Yes. While the closure and liquidation of a bank may be
thus acquired additional security for its own advances to the
considered an exercise of police power, the validity of such
detriment of the bank’s stockholders, depositors and other
exercise of police power is subject to judicial inquiry and
creditors under the rule of promissory estoppel (Ramos v.
could be set aside if it is either capricious, discriminatory,
Central Bank of the Philippines, 41 SCRA 565, 1971).
whimsical, arbitrary, unjust or a denial or due process and
equal protection clauses of the Constitution
Valid exercise of police power
Q: Upon maturity of the time deposit, the bank failed to
remit. By reason of punitive action taken by Central Bank, do business on account of a condition of insolvency and
the bank has been prevented from performing banking appointing a receiver to take charge of the bank’s assets or
operations. Is the bank still obligated to pay the time determining whether the bank may be rehabilitated or should
deposits despite the fact that its operations were suspended be liquidated by law “final and executory.” However, they can
by the Central Bank? be set aside by the ground if the action is plainly arbitrary and
made in good faith. Such actions can be asserted as an
A: The suspension of operations of a bank cannot excuse affirmative defense of a counterclaim in the proceeding for
non‐compliance with the obligation to remit the time deposits assistance in liquidation.
of depositors which matured before the bank’s closure.
NOTE: The Court perceives no reason whatever why a banking
Assailing the order of conservatoship, receivership or institution’s claim that a resolution of the Monetary Board
closure under Section 29 of the Central Bank Act should be set aside
as plainly arbitrary and made in bad faith cannot be asserted
Q: How can the order of conservatoship, receivership or as an affirmative defense or a counterclaim in the proceeding
closure be assailed? for assistance in liquidation, but only as a cause of action in a
separate and distinct action. There is no provision of law
A: which expressly or even by implication imposes the
1. By the stockholders representing at least majority of requirement for a separate proceeding exclusively occupied
the outstanding capital stock with adjudicating this issue. Moreover, to declare the issue as
2. Within 10 days from receipt by the board of directors beyond the scope of matters cognizable in a proceeding for
of the order assistance in liquidation would be to engender that
3. Thru a petition for certiorari on the ground that the multiplicity of proceedings which the law abhors (Salud v.
action taken by the BSP was in excess of jurisdiction Central Bank, G.R. No. L-17620, 1986).
or with grave abuse of discretion as to amount to
lack of jurisdiction Q: Can a bank be held liable to pay interest on deposit once
it closed and ceased operations?
Q: Should the issue of whether or not the MB’s resolution is
arbitrary be only raised in a separate action? A: Generally, no.
A: No. While the resolutions of the MB forbidding a bank to NOTES
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CONSERVATORSHIP RECEIVERSHIP LIQUIDATION
Grounds
1. Continuing inability 1. Inability to pay liabilities as they fall 1. Insolvency
2. Unwilling‐ness to maintain condition due 2. Bank cannot be rehabilitated
of liquidity e.g: bank run, rumors, etc.
2. Assets are less than its liabilities
3. Cannot continue business
4. without causing damage;
5. Violation of a cease and desist
6. “Bank holiday” for more than 30
days.
Effects
1. Juridical personality is retained. 1. Juridical personality is retained 1. Juridical personality is retained.

2. Perfected transactions cannot be 2. Suspension of operation /stoppage Perfected transactions cannot be
repudiated; of business repudiated;
3. Assets deemed in custodia legis
Liquidation under the Corporation Code. There are substantial differences

in the procedure for involuntary dissolution and liquidation of
Q: When can there be liquidation? a corporation under the Corporation Code and that of a bank
under the New Central Bank Act so that the requirements in
A: If the bank cannot be restored to its financial health upon one cannot simply be imposed in the other (In Re: Petition for
the recommendation of the conservator or receiver or head of Assistance in the Liquidation in the Rural Bank of Bokod
the supervising and examining department, BSP shall file the (Benguet), PDIC v. Bureau of Internal Revenue, 511 SCRA 123,
petition with the RTC for assistance in liquidation. 2006).
NOTE: Once the liquidation proceedings have been initiated, Claims against the insolvent bank
the majority stockholders of the bank can no longer file a
separate action or petition to assail the order of closure. Q: Where should the claims against insolvent bank be filed?
Instead, issues on validity of closure should be raised as
affirmative defenses in the liquidation proceeding. This is A: All claims against the insolvent bank should be filed in the
necessary to prevent multiplicity of suits or conflicting liquidation proceeding. It is not necessary that a claim be
resolutions. initially disputed in a court or agency before it is filed with the
liquidation court (Ong v. CA, 253 SCRA 105, 1996).
Lack of tax clearance; effect
Q: What is the exception to this rule?
Q: Can the liquidation of bank be carried out despite lack of
tax clearance? A: It does not apply to a petition for the issuance of a writ of
possession for foreclosed property filed by the bank.
A:
Q: All claims against the insolvent bank should be filed in the
GR: Dissolution of a CORPORATION cannot be approved liquidation proceeding. What is the purpose of such rule?
unless there is payment of taxes
A: The requirement that all claims against the bank be
XPN: Closure and liquidation of banks which is governed by a pursued in the liquidation proceedings is intended: a. to
special law. The authority of the BSP to close cannot be prevent multiplicity of actions against the insolvent bank, and;
impaired. b. designed to establish due process and orderliness in the
liquidation bank
NOTEl Unlike in the voluntary dissolution of a corporation
Q: What is the nature of a petition for the Issuance of a Writ Q: What is the nature of bank deposits?
of Possession?
A:
A: It is not in the nature of a disputed claim against the bank.
On the contrary, it is an action instituted by the bank itself for GR: Not preferred credits
the preservation of its asset and protection of its property.
Bank deposits, not preferred credits
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of depositors which matured before the bank’s closure
XPN: When the deoposits are covered by a cashier’s check (Overseas Bank of Manila v. CA, 172 SCRA 521, 1989).
purchased from the bank when the bank officers knew or
ought to have known that the bank is insolvent. Q: What is the effect of the closure of a bank as regards the
collection and foreclosure of mortgages?
NOTE: In a situation involving the element of fraud, where a
cashier’s check is purchased from a bank at a time when it is A: Even if the bank is questioning the vlidity of its closure,
insolvent, as its officers know or are bound to know by the during the pendency of the case the liquidator can continue
exercise of reasonable diligence, the purchase is entitled to prosecution suits for collection and foreclosure of mortgages,
preference in the assets of the bank on its liquidation as they are acts done in the usual course of administration of
(Miranda v. PDIC, 501 SCRA 288, 2006). the bank.
Effect of final judgment against the bank
Q: What is the effect of final judgment against the bank? LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405)
A: Any final judgment against the bank which has been Q: What is the purpose?
ordered or closed should be stayed as to execute the
judgment would unduly deplete the assets of the bank to the A:
prejudice of other creditors. After the Monetary Board has 1. To encourage deposit in banking institutions; and 2. To
declared that a bank is insolvent and has ordered it to cease discourage private hoarding so that banks may lend such
operations, the Board becomes the trustee of its assets for the funds and assist in the economic development of the
equal benefit of all the creditors, including depositors. The country.

assets of the insolvent banking institution are held in trust for Prohibited acts
the equal benefit of all creditors, and after its insolvency, one
cannot obtain an advantage or a preference over another by Q: What are the prohibited acts?
an attachment, execution or otherwise.
A:
Q: Will the suspension of the operations of a bank excuse 1. It shall be unlawful for any official or employee of a
non-compliance with its obligation to remit the deposit of bank to disclose to any person other than those
depositors? excepted by law any information concerning deposit
2. Non-bank official or employee is not covered by the
A: No, the suspension of operations of a bank cannot excuse prohibition
non-compliance with the obligation to remit the time deposits 3. Disclosure by a bank official or employee of
information about a bank deposit in favor of a co
employee in the course of the performance of his Q: What are the requisites?
duties is not covered by the prohibition
A:
Q: What are the kinds of deposits covered?
1. Funds given to the banks
A: 2. Ownership over the funds is transferred to the bank 3.
1. All deposits of whatever nature with banks or banking The bank is free to use the funds as he pleases 4. The
institutions found in the Philippines; or Investments in bank has the obligation to return the money
bonds issued by the Philippine government, its upon demand by the depositor under Art 1980 Civil
branches, and institutions Code.
2. Trust funds and any sum of money invested in the bank 5. Bank Deposits shall be governed by the Law on Loans
which the bank may use for loans and similar (Art 1980 Civil Code).
transaction are now included in the term “deposits”
3. Deposits are thus no longer limited to those governed Q: What does investment in government securities mean?
by law on loans giving rise to creditor debtor
relationship A: Any investment in security issued or guaranteed by the
government is covered. Government securities are
Q: What do you mean by Bank Deposits in this context? Instruments issued or guaranteed by the government.
Meaning the payment shall be made or guaranteed by the
A: This means funds given to the bank giving to a creditor government.
debtor relationship.
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Examples: Treasury Bills, Erap Bonds, Maharlika Bonds (during
the FVR’s time), GSIS Civil Trade Treasury Bonds and any
obligation of the government evidenced by a debt instrument
is covered by 1405.
Trust funds
Q: Are trust funds covered by the term “deposit?”
A: Yes, the money deposited under the trust agreement is

intended not merely to remain with the bank but to be
invested by it elsewhere. To hold that this type of account is
not protected by R.A. 1405 would encourage private hoarding
Q: When may deposits be disclosed, examined or looked
of funds that could otherwise be invested by banks in other
into?
ventures, contrary to the policy behind the law. (Ejercito v.
Sandiganbayan, G.R. No. 157294‐95, Nov. 30, 2006)
A:
1. Written permission of the depositor
NOTE: Despite such pronouncement that trust funds are
considered deposits, trust funds remain not covered by PDIC. 2. Impeachment
3. Order of competent court in:
Exceptions a. Bribery or dereliction of duty of public officials b.
Subject matter of litigation is the money deposited
c. Unexplained wealth (plunder is akin to
unexplained wealth)
d. Violation of Anti-Graft and Corrupt Practices Act
e. Prima facie violation of the Anti-Money
Laundering Law
NOTE: Disclousre can only be made to the Anti
Money Laundering Council. Bank inquiry order is
not necessary if the predicate crime is:
i. kidnapping,
ii. hijacking court, it may be a very powerful committee but the fact
iii. arson remain that it is not a court.
iv. murder
v. violation of dangerous drugs act Q: The Fiscal is conducting an investigation on Violation of
f. violation of the Human Security Act B.P 22, to complete the investigation, the Fiscal issued a
g. garnishment of bank deposits subpoena to the bank where the check was drawn against to
produce related documents and records of the respondent in
4. Upon order of the Commissioner of Internal Revenue in a criminal case, can the Bank comply without violating the
respect of the bank deposits of a decedent for the law?
purpose of determining such decedent’s gross
estate. A: No, because the Fiscal is not a court, it has to be a court
NOTE: The bank cannot disclose to the heirs of the order.
deceased depositor but only to the BIR
5. Upon the order of the Commissioner of Internal Q: Can the bank disclose the name of the depositor? Is it
Revenue in respect of bank deposits of a taxpayer protected by RA 1405?
who has filed an application for compromise of his
tax liability by reason of financial incapacity to pay A: Still debatable. According to Dean Divina, this should be
his tax liability. covered because of Section 3 of RA 1405?
6. Under the Unclaimed Balances Law, the bank may
Section 3. It shall be unlawful for any official or
disclose to the National Treasurer information employee of a banking institution to disclose to any
concerning dormant deposits for the purpose of person other than those mentioned in Section two
initiating escheat proceedings hereof any information concerning said deposits.
7. In case the law is repealed, superseded or modified by
any law to the contrary. Money deposited as the subject matter of litigation
Q: Let say the Senate Blue Ribbon Committee is conducting Q: A one transfer for $1000, and ended up being remitted to
an investigation on the extent of jueteng activities in the account paying in the Philippines for $1000,000. So the
Pampanga. In aid of legislation, the Senate Blue Ribbon teller must have overlooked, she misread the instrument, so
Committee invited persons suspected to be involved in the account of that the payee was credited was $1000,000.
jueteng and subpoenad various banks in Metro Manila, He consulted his lawyer and such lawyer advised to
directing such banks to produce documents or records of the withdraw, spend such money. The payee withdrew the
person suspected to be involved in jueteng activities. funds, and he deposited such withdrawn amounts to various
Supposedly, it is in aid of legislation, can the bank comply banks. Thereafter, the Bank discovered the error and filed an
without violating Republic Act 1405 (Law on Secrecy of Bank action for the reimbursement or return of the money. They
Deposits)? ask the court to subpoena ad tefistificandum to
A: No, because the Senate Blue Ribbon Committee is not a
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compel the bank managers who have certain accounts recovered Php1000,000 for the amount for which the
suspected to be depository of the funds. When one of the account of A was debited. After 1 year, it was discovered, so
Bank managers is suppose to testify, he was opposed by the Union Bank filed a petition to examine the account of A.
lawyer of the payee arguing such testimony by invoking Allied Bank opposed the action of the ground that it will
Republic Act 1405. Does the testimony violate Republic Act
1405?
A: No, because the subject matter of litigation is the money

deposited, the subpoena ad tefistificandum is a court order
directing the person involved to testify. Being a court order
and being the subject matter of litigation of the money
deposited falls within the exception. Therefore the bank
manager can testify without violating the law.
Q: A issued a check for Php1000,000, it was drawn against

Allied Bank and such check was deposited with Union Bank.
violate the right of A under Republic act 1405, which the
Union Bank undecoded the charged slip. Union Bank only
Union Bank counter-argue that it will not because the
recovers Php1000 from Allied Bank when it should have
subject matter of litigation is the account where the money examine deposits?
is deposited. Is the money found in the account of A is the
subject matter of the litigation? A:
1. There is a pending case before court of competent
A: No, because the cause of action of the Union bank is to jurisdiction
recover the difference between Php1000,000 and Php1000, it 2. The account must be clearly identified
paid Php1000,000 to payee depositor but only got P1000. 3. There is notice upon the account holder and bank
Union Bank is a collecting Bank, it collects the amount personnel of their presence during inspection
covered by a check from the drawee bank so it can credit the 4. The same must be limited to the account
account of the depositor. So the cause of action of the Union
bank is to recover the difference between Php1000,000 and NOTE: The inspection must cover only the account identified
Php1000, and not necessarily the funds in the account of A, so in the pending case (Marquez v. Desierto, G.R. No. 138569,
it is any money that falls under the difference between Sept. 11, 2003).
Php1000,000 and Php1000. The right to privacy is a right
guaranteed by the constitution and if it examines the account Q: Can a bank be compelled to disclose the records of the
of the depositor which do not fall under the exception violates accounts of a depositor under the investigation for
such right to privacy. unexplained wealth?
Bribery, dereliction of duty, prosecution for unexplained A: Since cases of unexplained wealth are similar to cases of
wealth, prosecution for Anti-graft and Corrupt Practices Act bribery, dereliction of duty, no reason is seen why it cannot be
excepted from the rule making bank deposits confidential. In
Q: A special prosecutor was conducting an investigation for this connection, inquiry into illegally acquired property in
violation of unexplained wealth law involving a public anti‐graft cases extends to cases where such property is
official suspected to have an ill-gotten wealth. In the course concealed by being held or recorded in the name of other
of the investigation, the special prosecutor issued a persons. This is also because the Anti‐Graft and Corrupt
subpoena were such public official maintained an account. Practices Act, bank deposits shall be taken into consideration
The Bank opposed citing the R.A 1405. Decide. in determining whether or not a public officer has acquired
property manifestly out of proportion with his lawful income.
A: The SC said that when it comes to investigation of (PNB v. Gancayco, G.R. No. L‐18343, Sept. 30, 1965).
unexplained wealth under anti-graft and corrupt practices act,
the prosecutor may have access to bank deposits. Although a Garnishment
special prosecutor is not a court, but the SC
allowed the examination under the exception on the Q: Does garnishment of a bank deposit violate the law?
accounts, documents or records.
A: No, the prohibition against examination does not preclude
The SC relied on the Anti-graft and Corrupt Practices Act and its being garnished for satisfaction of judgment. The
unexplained wealth law, in both laws it provided that Bank disclosure is purely incidental to the execution process and it
deposits shall be taken into account in the enforcement of was not the intention of the legislature to place bank deposits
these laws. So, when it comes to anti-graft and corrupt beyond the reach of judgment creditor.
practices act, bribery or dereliction of duty and the
unexplained wealth law, even a prosecutor may have access to Q: How about foreign currency deposits, can they be subject
bank deposits. to garnishment?
Ombudsman’s Authority
Q: What are the requisites before the Ombudsman may
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A: extent of its justice. The garnishment of a foreign currency
deposit should be allowed to prevent injustice and for
GR: Foreign currency deposits shall be exempt from equitable grounds, otherwise, it would negate Article 10 of
attachment, garnishment, or any other order or process of the New Civil Code which provides that “in case of doubt in
any court, legislative body, government agency or any the interpretation or application of laws, it is presumed that
administrative body whatsoever. (Sec 8. R.A. 6426) the lawmaking body intended right and justice to prevail
XPN: The application of Section 8 of R.A. 6426 depends on the Unlclaimed Deposits Law
Q: Under the Unclaimed Balances Law, the bank may Q: What are the exceptions to the rule that foreign deposits
disclose to the National Treasurer information concerning are privilged and confidential?
dormant deposits for the purpose of initiating escheat
proceedings. What is the exception? A:
1. Written permission of the depositor
A: In case of “automatic roll-over clause.”
Q: What is an “automatic roll-over clause”? 2. Impeachment

3. Court order
A: This refers to whether your term deposit will automatically a. Violation of the Anti-Money Laundering Law
roll over into a new fixed term once it reaches maturity. b. Human Security
Before your account reaches maturity, you have to notify your 4. Equittable consideration
institution of what you wish to do with your money, whether 5. One invoking is not the owner or a co-owner 6. The BIR
you decide to collect or transfer it to another term deposit. under the tax Code may inquire into the deposits for the
purpose of computing the tax due of the estate of a
NOTE: Deposits with “Automatic roll-over clause” are not deceased depositor. Because foreign currency are not
subject to prescription. They cannot be escheated. exempt for estate tax
7. The BIR under the Tax code may inquire into the bank
Foreign currency deposits not covered deposits of a taxpayer who has filed an application
for compromise of his tax liability on the ground of
Q: Are foreign currency deposits covered by the Secrecy in financial incapacity
Bank Deposits (R.A. 1405)? 8. The PCGG under its mandate may have access to bank
deposit for the purpose of recovering illegally
A: acquired funds
9. In case a law is passed repealing or amending RA 6426
GR: No. Foreign currency deposits are covered by R.A. 6426
otherwise known as the Foreign Currency Act. Under the Q: How about escheat proceedinggs?
same law, all authorized foreign currency deposits are
considered of an absolutely confidential nature and, except A: According to the Secretary of Justice, foreign currency
upon the written permission of the depositors, in no instance deposits are exempt from escheat proceedings because
shall be examined, inquired or looked into by any person, escheat is akin to garnishment, since foreign currency deposits
government official, bureau or office whether judicial or are exempt from garnishment and escheat is a form or specie
administrative private. of garnishment, therefore foreign currency deposits are
exempt from escheat proceedings. Being exempt from escheat
Q: Can the foreign currency deposit of a transient foreigner proceedings, the bank has no authority to disclose to the
who illegally detained and raped a minor Filipina, be National Treasurer any information about foreign currency
garnished to satisfy the award for damages to the victim? dormant accounts.
A: The exemption from garnishment of foreign currency
deposits under R.A. 6426 cannot be invoked to escape liability Filing of the comlaint for violation of RA 1405 does not toll
for the damages to the victim. The garnishment of the the running of the prescriptive period to file the appropriate
transient foreigner’s foreign currency deposit should be complaint for violation of R.A. 6426
allowed to prevent injustice and for equitable grounds. The
law was enacted to encourage foreign currency deposit and Q: Does the filing of the comlaint for violation of RA 1405
not to benefit a wrongdoer (Salvacion vs. Central Bank of the toll the running of the prescriptive period to file the
Philippines, G.R. 94723, August 21, 1997). appropriate complaint for violation of R.A. 6426?
RA 1405 AND RA 6426 COMPARED
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A: No, it did not toll the running of the prescriptive period to the safety deposit box?
file the appropriate complaint for violation of R.A. 6426
(Intengan v. CA, 377 SCRA 63, 2002). A: No, because it will violate RA 8791.
GENERAL BANKING LAW: Provisions of secrecy Q: What if the depositor did not pay rents on the safety
deposit box?
NOTE: General Banking Law prohibits disclosure of any
information among funds other than deposits as well as A: If the depositor is not paying rents, then the Bank will force
properties in the bank’s possession belonging in the private open the safety deposit box. In case of force opening, the Bank
entity. It covers funds other than deposits. Prior to the case of will know the contents of the box, so every time the bank will
Ejercito vs Sandiganbayan, trust funds are confidential not force open the Box it engages with the services of the notary
because of RA 705 but because of RA 8791, but now TRUST public to make sure that the owner of the safety
FUNDS ARE COVERED BY RA 1405 hence funds other than deposit box will not put a tag on the contents of Safety
deposits for as long as the banks may use the same for loans deposit box way beyond human imagination.
or similar transactions.
Q: Can the bank disclose the whereabouts of a client, let say
Q: What law governs trust funds? that a bank has 2 clients and one is indebted to the other,
can the bank upon the request of the creditor disclose
A: They are now governed by 2 laws: information on the whereabouts of the debtor?
1. RA 8791 and
2. RA 1405. A: This information is not covered by 1405, 6426 or 8791
because it is not funds, but it is covered by the Constitution
the right to privacy.
The Supreme Court did not go beyond explaining what NOTE: Bottom line is that “whatever information we give to
exceptions will apply because under RA 8791 there are 2 the bank is confidential or privilege and can only be disclose in
exceptions (written permission and court order). There are those cases provided by law”
funds which are not covered by RA 1405, these funds that the
bank cannot be use for loans and other similar transactions.
Q: When are funds considered as deposited? ANTI-MONEY LAUNDERING LAW (R.A. 9160, a amended)
A: Funds which are deposited or invested with the bank which Q: What is the policy of the law?
the bank can use for loans and similar transactions” if the
bank can use it for loans and similar transactions then it is not A: To protect and preserve the integrity and confidentiality of
covered by RA 1405 but it is governed by RA 8791.
bank accounts and to ensure that the Philippines shall not be
used as a money laundering site for the proceeds of any
Examples of these are funds obtained by the bank for “strict unlawful activity.
deposit” meaning for safe keeping. Since the bank cannot use
these funds for loans, it is not covered by RA 1405 but they
Q: What is money laundering?
are covered by RA 8791.
A: Money laundering is a crime whereby the proceeds of an
NOTE: Whether 1405 or 8791 both laws say that it cannot be
unlawful activity as defined in the AMLA are transacted or
inquired or looked in to but the problem lies on which
attempted to be transacted to make them appear to have
exception would apply.
originated from legitimate sources.
Q: Can the bank disclose information about the contents of
Anti-Money Laundering Council
freeze order with the Court of Appeals. Such order may be
Q: What is the Anti-Money Laundering Council (AMLC) issued ex parte.
The government body tasked to carry out the implementation It is also authorized to inquire into bank deposits or
of the Anti-Money Laundering Law is the Anti-Money investments, regardless of currency but it needs a bank
Laundering Council. It is authorized to impose administrative inquiry order. The AMLC shall apply for a bank inquiry order
sanctions for the violation of the law, rules or regulations with any competent court. Such competent court is the
issued pursuant to the Anti-Money Laundering Law. Regional Trial Court. The bank inquiry order cannot be issued
ex parte but under the recent law dated June 2012, bank
It may freeze monetary instrument or property alleged to be inquiry order can now be issued ex parte.
the proceeds of unlawful activity. The AMLC shall apply for a
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9. foreign exchange, corporations, money changers,
Covered institutions money payments, remittance and transfer companies
and other similar entities; and
Q: What are the covered institutions? 10. Other entities administering or otherwise dealing in
currency, commodities or financial derivatives based
A: thereon, valuable objects, cash substitutes, and
other similar monetary instruments or property
1. Institutions supervised or regulated by the BSP 2. supervised or regulated by SEC.
Institutions supervised and regulated by the Insurance
Commission; and Q: What are the obligations of covered institutions?
3. Entities dealing in currency, commodities, or financial
derivatives based thereon valuable objects, cash A:
substitutes, and other similar monetary or property
supervised and regulated by the SEC. 1. Customer identification
NOTE: (Enumeration under Golden Notes 2011) 2. Record keeping (records should be kept and safely
stored for 5 years from the date of the transaction) 3.
1. Banks Reporting of covered and suspicious transactions
2. Non‐banks
3. Quasi‐banks Covered transactions
4. Trust entities
5. All other institutions, their subsidiaries and affiliates Q: What is a covered transaction?
supervised or regulated by BSP
6. Insurance companies and all other institutions A: A covered transaction in cash or other equivalent monetary
supervised and regulated by the Insurance instrument involving in a total amount in excess of
Commission five hundred thousand pesos (P500,000) within one banking
7. Securities dealers, brokers, salesmen, investment day.
houses and other similar entities managing securities
or rendering services as investment agent, advisor, or Suspicious transactions
consultant
8. Mutual funds, closed‐end investment companies, Q: What are suspicious transactions?
common trust funds, pre‐need companies and other
similar entities A: Suspicious transactions are transactions with covered
institutions, regardless of the amounts involved, where any of 1. Knowingly transacting or attempting to transact any
the following circumstances exist: monetary instrument/property which represents,
involves, or relates to, the proceeds of any unlawful
1. There is no underlying legal or trade obligation, activity (Action)
purpose or economic justification
2. The client is not properly identified 2. Knowingly performing or failing to perform an act in
3. The amount involved is not commensurate with the relation to any monetary instrument/property
business or financial capacity of the client; involving the proceeds of any unlawful activity as a
4. Taking into account all known circumstances, it may be result of which he facilitated the offense of money
perceived that the client’s transaction is structured in laundering (Omission).
order to avoid being the subject of reporting
requirements under the AMLA; 3. Knowingly failing to disclose and file with the AMLC
5. Any circumstances relating to the transaction which is any monetary instrument/ property required to be
observed to deviate from the profile of the client disclosed and filed (Failure to report).
and/or the client’s past transactions with the
covered institution; Safe Harbor Provision
6. The transactions is in a way related to an unlawful
activity or offense under the AMLA that is about to Q: What is the so-called “Safe harbor provision”?
be, is being or has been committed; or
7. Any transactions that is similar or analogous to any of A: No administrative, criminal or civil proceedings shall lie
the foregoing. against any person for having made a covered transaction
report in the regular performance of his duties and in good
Q: What are the acts punishable under R.A. 9160? faith, whether or not such reporting results in any criminal
prosecution under the AMLA or any other Philippine law.
A:
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Venue of action; Jurisdiction
Q: Which court has jurisdiction for violations of the AMLA?
A:
1. RTC-all cases of Anti-Money Laundering
2. Sandiganbayan- those committed by public officers and
private persons in conspiracy with them
Predicate crimes
5. Robbery and extortion;
Q: What is the unlawful activity referred to in R.A. 9160? 6. Jueteng and Masiao;
7. Piracy;
A: Unlawful activity is the offense which generates dirty 8. Qualified theft;
money. It is commonly called the predicate crime refers to any 9. Swindling;
act or omission or series or combination thereof involving or
10. Smuggling;
having relation to the following:
11. Violations under the Electronic Commerce Act of
2000;
1. Kidnapping for ransom;
12. Hijacking, destructive arson and murder, including
2. Drug trafficking and related offenses;
those perpetrated by terrorists against non
3. Graft and corrupt practices; combatant persons and similar targets;
4. Plunder; 13. Fraudulent practices and other violations under the
Securities Regulation Code of 2000;
14. Felonies or offenses of a similar nature that are
punishable under the penal laws of other countries.
Bank inquiry
issuance of the bank inquiry order, nothing in Sec. 11
Q: Is there a need for a pre-existing or pending case in court specifically authorizes that such court order may be issued ex
for violation of the Anti-Money Laundering Law before a parte. The necessary implication of this finding that Sec. 11 of
bank inquiry order may be issued by a court? the AMLA does not generally authorize the issuance ex parte
of the bank inquiry order would be that such orders cannot be
A: No. issued unless notice is given to the owners of the account,
allowing them the to contest the issuance of the order.
Q: Can a bank inquirty be availed of ex-parte?
The court receiving the application for inquiry order cannot
A: The AMLC is authorized to inquire into bank deposits or simply take the AMLC’s word that probable cause exists that
investments, regardless of currency but it needs a bank the deposits or investments are related to an unlawful activity.
inquiry order. The AMLC shall apply for a bank inquiry order It will have to exercise its own determinative function in order
with any competent court. Such competent court is the to be convinced of such fact. The account holder would be
Regional Trial Court. The bank inquiry order cannot be issued certainly capable of contesting such probable cause if given
ex parte but under the recent law dated June 2012, bank the opportunity to be apprised of the pending application to
inquiry order can now be issued ex parte. inquire into his account; hence a notice requirement would
Prior to June 2012: not be an empty spectacle (Republic v. Eugenio, et al. G.R. No.
174629, Feb. 14, 2008).
A: No. A bank inquiry order, unlike a freeze order cannot be
issued unless notice is given to the owners of the account, Q: What are the exceptions to the rule that a court order is
allowing them the opportunity to contest the issuance of such necessary before the AMLC can inquire into bank deposits?
order (Republic v. Eugenio, 545 SCRA 384, 2008).
A: No court order is required in the following cases:
NOTE: Still, even if the bank inquiry order may be availed of
without need of a pre-existing case under the AMLA, it does 1. Kidnapping for ransom;
not follow that such order may be availed of ex parte. It is 2. Drug trafficking and related offenses;
evident that Sec. 11 does not specifically authorize, as a 3. Hijacking;
general rule, the issuance ex parte of the bank inquiry order. 4. Destructive arson;
Of course, Sec. 11 also allows the AMLC to inquire into bank 5. Murder
accounts without having to obtain a judicial order in cases 6. Those perpetrated by terrorists against non combatant
where there is probable cause that the deposits or persons and similar targets.
investments are related to kidnapping for ransom, certain
violations of the Comprehensive Dangerous Drugs Act of Freeze order
2002, hijacking and other violations under R.A. No. 6235,
destructive arson and murder. Q: Which court has jurisdiction in the freezing of monetary
instrument or property?
In the instances where a court order is required for the
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Jurisdiction
A: The Court of Appeals has the jurisdiction to freeze the
account upon application ex parte by the AMLC and after Regional Trial Court Court of Appeals
determination that probable cause exists that any monetary
instrument or property is in any way related to an unlawful Issuance
activity.
Under the recent law Can be issued ex parte
Note: The freeze order shall be for a period of 20 days unless dated June 2012, bank
extended by the court. inquiry order can now be
BANK INQUIRY ORDER FREEZE ORDER issued ex parte.
The AMLC is authorized to The AMLC may freeze Duration

inquire into bank deposits monetary instrument or
or investments, regardless property alleged to be the N/A The freeze order shall be
of currency but it needs a proceeds of unlawful for a period of 20 days
bank inquiry order. activity. unless extended by the
court.
Q: Does the AMLC have the authority to inquire into bank Q: When is an interest considered as usurious?
deposits?
A: A rate of interest is USURIOUS if it in excess of the ceiling
A: Notwithstanding the provisions of R.A. 1405 (The Bank set forth by the Bangko Sentral ng Pilipinas (BSP).
Secrecy Law), as amended; R.A. 6426, as amended; R.A. 8791
(General Banking Law of 2000), and other laws, the AMLA Circular 905
may inquire into or examine any particular deposit or
investment with any banking institution or non-bank financial In 1982 CB issued Circular 905 lifting the ceiling on interest
institution upon order of any competent court in cases of rate. There being no ceiling in interest rates then there is no
violation of AMLA when it has been established that there is usurious rate of interest.
probable cause that the deposits or investments involved are
in any way related to an unlawful activity. Truth in Lending Law
Q: Alvin is jobless but is reputed to be a jueteng operator. He When the Truth in Lending Law was passed the Usury Law
has never been charged or convicted of any crime. He was still in place. Under said law the rate of interest is
maintains several bank accounts amounting to P100 Million. usurious if the interest is more than 12% for secured loans
AMLC charged Alvin with violation of the Anti‐Money and more than 40% for unsecured loan (no collateral, no
Laundering Law. Can Alvin move to dismiss the case on the mortgages).
ground that he has no criminal record?
Many persons were found to circumvent the usury law by
A: No. The contention of Alvin is not tenable because under sticking to the ceiling but collecting other items not on their
AMLA, "money laundering crime" committed when the interest but other charges. Since they are not interest then
proceeds of an "unlawful activity," like jueteng operations, are they are not usurious but they jacked up the cost of credit. So
made to appear as having originated from legitimate sources. this is why the Truth in Lending Law was passed – to
compliment the Usury Law.
The money laundering crime is separate from the unlawful
activity of being a jueteng operator, and requires no previous Purpose
conviction for the unlawful activity. (Sec. 3, AMLA)
Q: In disclosing Alvin's bank accounts to the AMLC, did the
Q: What is the purpose of Truth in Lending Act (TILA)?
bank violate any law?
A:
A: No, the bank did not violate any law. The bank being
specified as a "covered institution" under the Anti‐Money
Laundering Law, is obliged to report to the AMLC covered and 1. To complement the Usury Law;
suspicious transactions, without thereby violating any law. 2. To protect persons from a lack of awareness of the true
This is one of the exceptions to the Secrecy of Bank Deposit cost of credit by assuring full disclosure of such
Act.
TRUTH IN LENDING ACT (RA 3765) (TILA)
Historical Background
The Truth in Lending Law was pass to compliment the then

USURY LAW. The USURY LAW is suspended (not repealed) as
of
1982. The Central Bank (CB) lifted the ceiling on interest rate.
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cost with a view of preventing the uninformed use of 5. The total amount
credit to the detriment of the national economy.
Example: If the car has a value of 3M and down
Q: What are the items required to be disclosed? payment is 1M, how much is the amount to be
financed? 2M. It is payable in 5 years, then 2M plus
A: Prior to the consummation fo a loan transaction, the bank, interest over 5 years. It has to be indicated.
as creditor, is obliged to finish a client with a clear statement,
in writing, setting forth, to the extent applicable and in 6. Finance charges (interest)
accordance with the Rules and regulations prescribed by the Example: compounded monthly, in
Monetary Board of the CB, the ff. information: arrears/discounted, collectible quarterly/annually
Q: What if a promissory note grants the creditor the power
a. the cash price or delivered prie of the property or service to to unilaterally fix the interest rate?
be acquired
b. the amounts if any, to be credited as down payment and or A: That means the promissory note does not contain a clear
trade-in statement in writing of finance charge. Such provision is illegal
c. the difference between the amounts set forth under clauses not only because it violates the provisions of the Civil Code on
1 and 2 mutuality of contracts but also because it violates the Truth in
d. the charges, individually itemmized which are to be paid by Lending Act.
such person in connection with the transaction but which
are not incident to the extension of credit Uncovered transactions
e. the finance charges expressed in terms of pesos and
centavos Q: What transactions are not covered by TILA?
f. the percentage charges bears to the total amount to be
A:
The
law
financed expressed as a simple annual rate on the does not apply to transaction on cash basis but only where
outstanding unpaid balance of the obligation (the unpaid there is a credit component (Dean Divina).
interest on the outstanding obligation)
NOTE: It also does not apply to:
Illustration: A wants to purchase a car on installment basis. 1. Those which do not involve the payment of any finance
The cost of the car is 3M. He made a down payment of P1M. charges by the debtor; and
The balance (P2M) is covered by a promissory note payable 2. Where the debtor is the one specifying a definite and
over 60 mos. (5 yrs to pay). The truth in lending law requires fixed set of credit terms such as bank deposits,
the creditor (the car company) to disclose to the borrower insurance contracts, sale of bonds, etc.
(the buyer to the car) the ff information:
The TILA is also applicable only to a creditor as defined by law,
1. Cost Price/Delivery Price - How much is the cost or a person engaged in the business of extending credit.
value of the delivery of the car? P3M
2. Amount of Down Payment – P1M; OR “Trade In” (if the Q: You want to buy a DVD component. You went to SM
borrower wants to trade his old car in exchange for a Appliance Center. You got it and you got your credit card
new car then the trade in value has to be indicated in from your wallet, and then presented it to the sales lady. The
the document) sales lady swiped it into the machine. After 1 month you got
3. The Difference bet. 1 and 2 a billing statement from your card company. It turns out that
4. Charges not incident to the credit which must be you have a revolving credit with the card company. You are
itemized. allowed to pay 36 months with the card company 0 interests
for 36 mos. So you are not forced to pay affront. You will pay
Examples: handling fee, service fee, registration fee, on installment basis for 36 mos. 0 interest. Billing statement
comes; it says “12% interest on the invoice charges and other
fees or charges that the card company may determine from
time to time.” Did SM Appliance Center Violated that Truth
in Lend Law? Effect of non-compliance
A: No because the transaction between SM and the card Q: What are the effects of non-compliance?
holder is on cash basis. The installment basis is between the
card holder and the card company. If there is anyone required A:
to comply with the Truth in Lending Law it is the card 1. Charges not disclosed need not be paid and
company. The truth in lending law does not apply when there 2. If paid can be recovered
is no “credit component” in the transaction. It does not apply
when the transaction is payable in cash.
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3. Unenforceability and declaration of nullity are not the or transactions. more than one year or both.
consequences of non-compliance with the Truth in
Lending Act.
4. The offender is liable to pay a penalty for an amount
equal to twice the finance charge required by such Q: What is the penalty for violation of law?
creditor but not exceed P2,000 on any credit
transaction. The action to recover the penalty should A: The penalty for violation of the law is P100.00 or an
be brought within 1 year from the date of the amount equal to twice the finance charge required by such
occurrence of the violation. creditor in connection with such transaction, whichever is
5. In case of willful violation of the law, the offender shall greater, except that such liability shall not exceed P2,000 on
be liable to pay a fine or imprisonment or both at the any credit transaction.
option of the court.
Q: When must an action for violation of the Truth in Lending
Q: What if the borrower is not duly informed of the data Act be brought?
required by RA 3765 prior to the consummation of the
availment or drawdown? A: Within 1 year from the date of the occurrence of the
violation.
A: The lender will have no right to collect such charge or
increases thereof, even if stipulated in the promissory note.
NOTE: As the penalty depends on the finance charge required
However, such failure will not affect the validity or
of the borrower, the borrower’s cause of action would only
enforceability of any contract or transaction (Development
accrue when such finance charge is required.
Bank of the Philippines v. Arcilla, Jr., 462 SCRA 599, 2005).
Q: Who can file the action to recover?
ON THE TRANSACTION ON THE CREDITOR
A: The action to recover the penalty may be instituted by the
Failure to disclose to any person any information in violation aggrieved private person separately and independently from
of TILA or any regulation issued. the criminal case for the same offense (UCPB v. Sps. Beluso,
(Sec. 6 [a]) 530 SCRA 567, 2007).
Charges not itemized cannot Liable in the amount of P100
be collected. If already paid, or in an amount equal to
can be recovered twice the finance charged
required by such creditor, PHILIPPINE DEPOSIT INSURANCE CORPORATION
whichever is the greater, (R.A. 3591 as amended by RA 9302)
however, such liability shall
not exceed P2,000 on any Basic Policy
credit transaction.
Q: What is the basic policy for the creation of PDIC?
Willful violation of any provision of TILA or any regulation issued.
Except as provided in Shall be liable to a fine of not A: Promote and safeguard the interest of the depositing public
subsection (a), nothing shall less than P1,000 or more than by way of providing permanent and continuing insurance
affect the validity or P5,000 or imprisonment for coverage on all insure deposits.
enforceability of any contract not less than 6 months, nor
Insured deposit
the bank to insure their deposits dependent on the amount of
Q: What is an insured deposit? the all the deposits. If the bank collapses, then you can file
your claim with PDIC. This is the concept of PDIC. It ensures
A: Insured deposit means the amount due to any bona fide your deposit even without you paying the premium (which is
depositor for legitimate deposits in an insured bank net of any paid by the bank).
obligation of the depositor to the insured bank as of the date
of closure, but not to exceed P500,000.00. Such net amount Q: When is the PDIC liable?
shall be determined according to such regulations as the
Board of Directors may prescribe. (As amended by Sec. 3, R.A. A: PDIC can only be liable if the insured bank actually receives
9576) deposit and the bank is ordered to be closed by the BSP.
Liability to depositors Q: What are the CONDITIONS to make PDIC liable?
Q: Where does PDIC get the premiums? A:

1. The bank must have receive deposits
A: It collects premiums from the “banks.” Not from the 2. The bank became insolvent or closed because of
depositors/client. It is based on a certain percentage of the insolvency. If the bank is operating in good condition
total deposits, ¼ - 1%. Every year PDIC collects premium from
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you don’t go to PDIC. You go to the bank to get back
your money. Q: When will the liability by the PDIC to pay insured deposits
commence?
Q: What are the requisites in order for the deposits be
covered by the insurance? A: PDIC shall commence the determination of insured
deposits due to the depositors of the closed bank upon its
A: actual take-over of the closed bank.
1. The unpaid balance of money or its equivalent Deposit accounts covered

received by a bank in the usual course of business
and for which it has given of is obliged to give credit The following accounts are COVERED by PDIC:
to a commercial, checking, savings, time or thrift 1. Savings
account 2. Current/Checking Account (these are the same) 3.
2. Must give rise to creditor-debtor relationship between Dollar Deposits – the new law made it clear Dollar
the bank and the depositor Deposits are covered. You have to convert the same to
Philippine Currency at the time of closure of the Bank.
Q: What is the rule in case of deposits in a branch of
domestic bank outside the Philippines? Q: Are the deposits in foreign currency covered by the
insurance?
A: Deposits in a branch of domestic bank outside the
Philippines shall not be covered unless the insured elects to A: Deposit obligations in foreign currency of any insured bank
include the same for insurance subject to approval of the are likewise insured.
PDIC.
NOTE:
Foreign
currency
deposits are
covered
under the
provisions of
RA 3591, as
amended,
and
insurance
Commencement of liability
payment shall be in the same currency in which the insured
deposits are denominated.
P500,000.00 per depositor.
Accounts not covered
Accounts NOT Covered by PDIC: Determination of the insured deposits
1. Trust Fund Q: When and how shall PDIC commence the determination
2. Money Market Placement - here you buy securities of insured deposits?
from the bank there is no creditor debtor
relationship) A: PDIC shall commence the determination of insured
deposits due the depositors of a closed bank upon its actual
Q: What is a trust fund? take-over of the closed bank. PDIC shall give notice to the
depositors of the closed bank of the insured deposits due
A: Funds held by an insured bank in a fiduciary capacity and them by whatever means deemed appropriated by the Board
include, without being limited to, funds as trustee, executor, of Directors. PDIC shall publish the notice once a week for at
administrator, guardian or agent. least 3 consecutive weeks in a newspaper of general
circulation or, when appropriate, in a newspaper circulated in
Q: Why is Trust Fund not included? the community or communities where the closed bank or its
branches are located.
A: Because what are covered by the PDIC are only deposits,
funds deposited with the bank giving rise to a creditor debtor Calculation of liability
relationship. So if there is no creditor-debtor relationship then
that is not insured with PDIC. Per depositor, per capacity rule
Extent of liability Q: What are the types of deposits covered?
Q: What is the extent of PDIC’s liability? A: Demand, savings, and time deposits. If the depositor has all
three types of accounts with the same bank, he can only
A: The amount due to any depositor for deposits in an insured recover up to P500,000.00. He is considered as one depositor.
bank net of any obligation of the depositor to the insured
bank as of the date of the closure, but not exceed Q: Is the liabiity of PDI on a per bank or per branch basis?
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A: Per bank basis. others.
3. If the account is held jointly by two or more natural
Q: How o you determine the amount due to a depositor? persons, or by 2 or more juridical persons or entities,
the maximum insured deposit shall be divided into as
A: In determining such amount due to any depositor, there many equal shares as there are individuals, juridical
shall be added together all deposits in the bank maintained in persons or entities, unless a different sharing is
the same right and capacity for his benefit either in his own stipulated in the document of deposit;
name and the name of the others. 4. If the account is held by a juridical person jointly with a
natural person, the maximum shall be presumed to
Joint accounts belong entirely to such juridical person or entity.
5. The aggregate of the interests of each co‐owner over
Rules: several joint accounts, whether owned by the same
or different combinations of individuals, juridical
1. Deduct any loan of the depositor from the deposit with persons or entities, shall likewise be subject to the
the insured bank to determine net insured deposit maximum insured deposit of P500,000.00.
2. Individually owned deposit account is insured
separately from joint accounts regardless of whether Illustration:
the conjunction “and,” “or,” “and/or” is issued. In
determining such amount due to any depositor, there 1. A has P400k deposit- can recover P400k
shall be added together all deposits in the bank 2. A has P200k deposit in 3 branches- only P500k 3. A has
maintained in the same right and capacity for his P200k deposit in 3 branches of ABC and another P200k
benefit either in his own name and the name of the deposit in 3 branches of XYZ- P500k on each bank
4. A
and/or B P600k deposit- P300k each preferred credits against the closed bank?
Mode of payment A: Yes. All the payments made by PDIC of insured deposits in
closed banks partake of the nature of public funds, and as
Q: What are the modes of payment? such, must be considered a preferred credit similar to taxes
due to the National Government in the order of preference
A: under Article 2244 of the New Civil Code.
1. Cash
2. Making available to each depositor a transferred Q: What is the period by which PDIC shall settle a claim of
deposit in another insured bank in an amount equal the insured depositor?
to insured deposit of such depositor, subject to
submission of proof of claims A: PDIC has 6 months from the date of filing of claim for
insured deposit.
Effect of payment of insured deposits
Q: What is the effect of failure to settle a claim of insured of
Q: What is the effect of payment of the insured deposits? insured depositor within the 6-month period?
A: A:
1. PDIC is discharged from any further liability to the GR: Failure to settle the claim within 6 months, where such
depositor failure was due to grave abuse of discretion, gross negligence,
2. PDIC, upon the payment of any depositor, shall be bad faith, or malice, shall, upon conviction, subject the
subrogated to all the rights of the depositor against directors, officers or employees of PDIC responsible for the
the closed bank to the extent of such payment. delay, to imprisonment from 6 months to one year.
Subrogation shall include the right on the part of
PDIC to receive the same dividends from the XPN: The period shall not apply if the validity of the claim
proceeds of the assets of such closed bank and requires the resolution of issues of facts and or law by
recoveries on account of stockholder’s equity as another office, body or agency.
would have been payable to the depositor on a claim
for the insured deposit but such depositor shall retain Failure of depositor to claim insured deposits
his claim by any uninsured portion of his deposit.
Q: What is the period within which a depositor of insured
Q: Are the insured deposits paid by PDIC considered as deposits may file his claim?
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approval of the MB provided that no examination can be
A: 2 years from the closure of the bank by the Central Bank.
Q: What is the effect of failure of depositor to claim insured

deposits?
A: Unless otherwise waived by the PDIC, if the depositor in

the closed bank shall fail to claim his insured deposit with
PDIC within 2 years from actual take-over of the closed bank
by the receiver or does not enforce his claim filed with the
PDIC within 2 years after the 2-year period to file a claim, all
rights of the depositor against the PDIC with respect to the
insured deposit shall be barred; however, all rights of the conducted within 12 months from the last examination date;
depositor against the closed bank and its shareholders or the provided, however that PDIC may, in coordination with BSP
receivership estate to which the PDIC may have become conduct a special examination if there is a threatened or
subrogated shall thereupon revert to the depositor. impending closure of a bank.
Q: When may the PDIC examine banks and deposit Prohibiting against splitting of deposits
accounts?
Q: When does splitting of deposits occur?
A: The PDIC may conduct examination of banks with prior
A: Whenever a depositor’s deposit account exceeds
P500,000.00 is broken down and transferred into 2 or more closed in the past and PDIC , any way, has the power to reduce
accounts in the name/s of natural or juridical persons who the interest rate to a reasonable level.
have no beneficial ownership on transferred deposits within
120 days immediately preceding or during a bank‐declared
bank holiday, or immediately preceding a closure order by the
Monetary Board of the BSP for the purpose of availing of the
maximum deposit insurance coverage. WAREHOUSE RECEIPTS LAW
Q: What is he penalty for splitting of deposits? Q: What is a “warehouse receipt”?
A: The penalty of prison mayor or a fine or not less than A: A warehouse receipt is both an acknowledgment receipt
P50,000.00 but not more than P2,000,000.00 or both, at the and a bilateral contract between a warehouseman and a
discretion of the court. depositor.
Prohibition against issuance of TRO Q: When does Warehouse Receipts Law apply?
Q: What is rule regarding issuances of TROs, etc. against PDIC A: This law only applies if the receipt is issued by a
for acts under R.A. 3591, as amended? “warehouseman as defined by law.”
A: Nature and Functions
GR: No court, except the CA, shall issue any TRO, preliminary Q: What is the nature of a warehouse receipt?
injunction or preliminary mandatory injunction against PDIC
for any action under R.A. 3591, as amended. Such prohibition A:
applies in all cases disputes or controversies instituted by a 1. It is a written acknowledgment by the warehouseman
private party, the insured bank, or any shareholder of the that he has received and holds certain goods therein
insured bank. described in his warehouse for the person to whom
the document is issued.
XPN: The Supreme Court may issue a restraining order or 2. Receipts not issued by a warehouseman are not
injunction when the matter is of extreme urgency involving warehouse receipts although in the form of
constitutional issue, such that unless a temporary restraining warehouse receipts. This transaction will not be
order is issued, grave injustice and irreparable injury will arise. governed by the warehouse receipts law but by the
law on deposit
PDIC may reduce interest on deposit 3. A warehouse receipt is not a negotiable instrument
within the meaning of the Negotiable Instruments
Q: Does PDIC have the power to reduce interest on deposit? Law even though the warehouse receipt, as a
document of title, may be negotiable
A: PDIC law now empowers the PDIC to reduce the interest
rate on any deposit made within 6 months prior to closure. So Q: What are the 2-fold functions of the warehouse receipt?
if you are induced by the “offer” of the bank of its high
interest rate, think twice because all of these banks have
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A:
Warehouse receipts issued Other receipts of
1. A contract by warehouses, whether documents issued in
2. A receipt public or private, bonded bailment contracts other
or not than warehouse receipts
Q: Distinguish Warehouse Receipts Law from the Documents (Civil Code 1507‐1520)1
of Title under the Civil Code.
A:
WAREHOUSE RECEIPTS LAW DOCUMENTS OF TITLE Q: Who is a warehouse man?
UNDER THE CIVIL CODE
A: A person, natural or juridical, lawfully engaged in the
business of storing of goods for profit. (Sec. 58, WRL)
warehouseman has the obligation to safekeep and
Q: What are the rights of a warehouseman?
A: preserve the goods of the goods in his possession

1. He has to be paid storage charges and other fees as using due diligence of a good family, pending the
may be stipulated in the warehouse receipt. If he is delivery to the depositor or any person entitled to
not paid the storage charges, he may withhold possession and he has the right to be paid storage
delivery of the goods in his possession; OR charges as stipulated in the document.
2. When there is an offer pay the lien or the charges but
the claimant/depositor doesn’t want surrender the Q: What is the form of a warehouse receipt and what are its
receipt, then the warehouseman cannot be essential terms?
compelled to deliver; OR
3. If the depositor/claimant doesn’t want to acknowledge A: It need not be in particular form but must embody within
the receipt of goods, then the warehouseman cannot its written or printed terms:
be compelled to deliver.
1. The location of the warehouse
Q: What are the basic conditions before a warehouseman 2. The date of the issue
can be compelled to deliver? 3. The consecutive number of the receipt
4. A statement whether the goods received will be
A: delivered to bearer, to a specified person or to a
specified person or his order
1. The lien must be paid. This is compose of storage 5. Fees
charges and other fees. 6. description of the goods
2. The receipt must be surrendered or returned to the 7. The signature of the warehouseman
warehouseman 8. If the receipt is issued for goods of which the
3. The claimant/depositor must acknowledge the receipt warehouseman is the owner, either solely or jointly
of the goods or in common with others, the fact of such
ownership; and
Q: What is a warehouse? 9. A statement of the amount of advances made and of
liabilities incurred for which the warehouseman
A: The building or place where goods are deposited and claims a lien. (Sec. 2)
stored for profit.
Q: What are the effects of omission of any of the essential
1
Article 1507 A document of title in which it is stated that the goods referred terms?
to therein will be delivered to the bearer, or to the order of any person
named in such document is a negotiable document of title. (n) A:
1. A warehouseman shall be liable to any person injured
Q: Who may issue warehouse receipt? thereby for all damages caused by the omission
2. Validity of receipt not affected
A: 3. Negotiability of receipts not affected
1. A warehouseman, whether public or private, bonded 4. Contract is converted to ordinary deposit.
or not. (Sec. 1)
2. A person authorized by a warehouseman.
Q: if X is warehouseman and he issued a warehouse receipt,

what does that mean?
A:
1. It means that the warehouseman acknowledges the

receipt of the goods,
2. And it is bilateral contract in the sense that the
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Q: What is the effect when the goods deposited are negotiated warehouse receipt, the latter has the
incorrectly described? better right
5. Between the unpaid seller of the goods deposited to
A: It does not make the receipt ineffective when the identity the warehouseman and the holder of a duly
of the goods is fully established by evidence. Thus, the negotiated warehouse receipt, the latter has the
indorsement and delivery shall constitute sufficient transfer of better right
the title of the goods. 6. The rights of the assignee of a non-negotiable
warehouse receipt may be defeated by the judgment
GR: Warehouseman shall be liable for damages for creditor of the depositor or the unpaid seller of the
non‐existence or misdescription of goods at the time of its goods deposited pending notice to the
issue. warehouseman of the assignment or transfer
7. If the goods were stolen from the owner and deposited
XPN: When the goods are described based on: to the warehouseman who subsequently issued a
warehouse receipt which in turn was duly negotiated
1. Series or labels upon them to an innocent purchaser for value, the owner has
2. Statement that the goods are of certain kind. the better right than the holder of the negotiable
warehouse receipt. This is because a thief transfers
Q: What terms may and may not be inserted? no title.
8. If the goods were deposited by the owner for which
A: A warehouseman may insert in a receipt issued by him any the warehouseman issued a negotiable warehouse
receipt but the receipt was negotiated in bad faith,
other terms and conditions provided that such terms and
the holder of such negotiable warehouse receipt has
conditions shall not be:
a better right against owner because the validity of
the negotiation is not impaired by the fact that such
1. Contrary to the Warehouse Receipts Law. (Sec. 3) 2.
negotiation was a breach of duty on the part of the
Terms reducing the required diligence of the
person making the negotiation provided the holder
warehouseman.
has no notice of the breach of duty or fraud, mistake
3. Contrary to law, morals, good customs, public order or
or duress.
public policy.
9. The
4. Those exempting the warehouseman from liability for
negotiation
misdelivery or for not giving statutory notice in case
of the
of sale of goods.
warehouse
5. Those exempting the warehouseman from liability for receipt by
negligence. the buyer
of goods
To whom delivered from and
deposited
Q: To whom is the warehouse receipt delivered? to the
warehouse
A: is valid even if the warehouseman who issued a
negotiable receipt was not paid by the buyer.
In general
KINDS OF WAREHOUSE RECEIPTS
1. To the person lawfully entitled to the possession of the
goods or his agent Q: What are the kinds of warehouse receipts?
2. The person entitled to the delivery under a non
negotiable receipt A:
3. Person in possession of a duly negotiated warehouse 1. Negotiable warehouse receipt- is a receipt in which it
receipt is stated that the goods received will be delivered to
the bearer or to the order of any person named in
such receipt.
Specific situations 2. Non-negotiable warehouse receipts- a receipt in
which it is stated that the goods received will be
4. Between a judgment creditor and holder of a duly delivered to the depositor or to any other specified
person.
Rights of the holder of the Rights of transferee:
Negotiable warehouse Non-negotiable receipt:
receipt warehouse receipt
1. If indorsed: 1. Acquires title to the
May be acquired through May be acquired through goods subject to the terms
negotiation transfer or assignment a. Acquires title to the of any agreement with the
goods as the person transferor. (Sec. 42)
negotiating. (Sec. 41) 2. Acquires the right to
b. Acquires the direct notify the warehouseman
of
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Good covered cannot be Pending notification to the

obligation of the the transfer and thereby garnished, attached or warehouseman, goods can
warehouseman to hold acquires the direct levied on execution by be.
possession of the goods for obligation of the execution, unless:
him as if the warehouseman to hold 1. Receipt is Reason: Absent such
warehouseman directly possession of the goods surrendered. notice, both the
contracted with him. for him. (Sec. 42) 2. Its negotiation is warehouseman and the
(Ibid.) enjoined by sheriff have a right to
NOTE: Prior to notice, the the assume that the goods are
2. If not indorsed: He may title of the transferee may court. still owned by the person
compel indorsement; be defeated by the levy of 3. The goods are whose name appears in the
otherwise, he would an attachment or impounded receipt.
acquire title as that of an execution upon the goods by
assignee (Section 43). by a creditor of the the court. (Sec.
transferor or by a 25)
notification to the
warehouseman by the Note: This shall not apply if
transferor or a subsequent the person depositing is
purchaser from the not the owner of the
transferor of a subsequent goods or one who has no
sale of the goods by the right to convey title to the
transferor. (Sec. 42) goods binding upon the
owner.
Defeats the lien of the Acquires the title as that of
seller of the goods covered his transferor. Protects the purchaser in The assignee only steps
thereby. good faith and for value. into the shoes of the
assignor.
Q: What are the advantages of a negotiable warehouse

receipt?
1. The goods while in the possession of the

warehouseman cannot be garnished or levied on
execution
UNLESS:
a. the receipt is surrendered or
b. the negotiation is enjoined, or
c. the receipt is impounded by order of court
2. The holder of the negotiable warehouse receipt are
not subject to the unpaid vendor’s lien.
3. The holder of the negotiable warehouse receipt Q: Distinguish between negotiable instrument and
acquires the direct obligation of the warehouseman negotiable warehouse receipts.
to hold the goods in his favor with or without notice
of the negotiation. A:
NEGOTIABLE INSTRUMENT NEGOTIABLE
Q: What is required in a non‐negotiable receipt?
WAREHOUSE RECEIPT
A: It shall have plainly placed upon its face by the The obligation is to pay In a warehouse receipt, the
warehouseman issuing it “non‐negotiable,” or “not money while in a endorsers or immediate
negotiable.” (Sec. 7) warehouse receipt, the parties are not liable for
obligation is to deliver any failure on the part of
NOTE: Failure to mark “non‐negotiable” shall make it goods. the warehouseman or
negotiable (if the holder purchased it for value supposing it to previous endorsers of the
be negotiable). receipt to fulfill their
obligations.
Q: How is it transferred?
The general endorsers The endorsers of a
A: A non‐negotiable warehouse receipt may be transferred by warrant that the negotiable warehouse
its delivery to the transferee accompanied by a deed of instrument, after due receipt may however be
assignment, donation or other form of transfer. presentment, shall be paid held liable for breach of
and in that case of warranties, such as:
Q: dishonor and notice of 1. The receipt is
dishonor is duly given, the genuine and in
endorser shall pay the respects what it
holder purports to be;
2. They have legal title
to the instrument;
3. The goods are fit for
consumption and
merchantable;
4. They are not aware
What is the effect of indorsement?
A: Even if the receipt is indorsed, the transferee acquires no

additional right (Sec. 39)
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form that it may be negotiated by delivery. (Sec. 40)
of any information
Q: What happens if the indorsement is necessary but the
that would render
negotiable receipt was only delivered?
the instrument
valueless or
A:
worthless
Q: Who may negotiate?
A:
1. The owner thereof;
2. Any person to whom the possession or custody of the
receipt has been entrusted by the owner, if, by the
terms of the receipt, the goods are deliverable to the
order of the person to whom the possession or
custody of receipt has been entrusted or in such
surrendered, or impounded or its negotiation
1. The transferee acquires title against the transferor 2. enjoined.

There is no direct obligation of the warehouseman; and 3. The goods that the receipt covers are not subject to a
3. The transferee can compel the transferor to complete seller’s lien or stoppage in transit.
the negotiation by indorsing the instrument.
Negotiation takes effect as of the time when the RIGHTS OF A TRANSFEREE OF A NON-NEGOTIABLE
indorsement is actually made. WAREHOUSE RECEIPT
Q: In case the signature of an owner of a negotiable receipt Q: What are the rights of a holder of a negotiable warehouse
was forged and the forger who now holds the negotiable receipt?
receipt was able to withdraw the goods from the
warehouseman. What are the rights of the owner of the A:
negotiable receipt? 1. The title to the goods as against the transferor 2. The
right to notify the warehouseman of the transfer thereof
A: If under the terms of the negotiable warehouse receipt, 3. The right, thereafter, to acquire the obligation of the
the goods are deliverable to the depositor or to his order, the warehouseman to hold the goods for him
owner of the said negotiable receipt may proceed against the 4. The right of the transferee is not absolute as it is
warehouseman and/or the holder. Without the valid subject to the terms if any agreement with the
indorsement of the owner to the holder or in blank, the transferor. He merely steps into the shoes of the
warehouseman is liable to the owner for conversion in the transferor.
misdelivery. If, however, by the terms of the negotiable
warehouse receipt, the goods are deliverable to bearer (either Q: Coco was issued by a warehouseman a negotiable receipt
because it is so expressed in the warehouse receipt or for safekeeping by the latter of his goods. Can the judgment
because of a blank indorsement by a person to whose order creditor of Coco levy by execution the goods covered by the
the goods are deliverable) the owner may only proceed negotiable receipt?
against the holder. The warehouseman is not liable for
conversion where the goods are delivered to a person in A: The goods cannot, while in the possession of the
possession of a bearer negotiable instrument. warehouseman, be attached by garnishment or otherwise, or
be levied upon under an execution unless the receipt be first
RIGHTS OF A HOLDER OF A NEGOTIABLE WAREHOUSE surrendered to the warehouseman, or its negotiation
RECEIPT enjoined. The warehouseman cannot be compelled to deliver
the actual possession of the goods until the receipt is
Q: What are the rights of a holder of a negotiable warehouse surrendered to it or impounded by the court.
receipt?
A: Q: Assuming that prior to the levy, the receipt was sold to
1. The holder of a negotiable receipt acquires: a. Such title Yoyo on the basis of which he filed a claim with the sheriff.
to the goods as the depositor or the person negotiating Would Yoyo have better rights to the goods than the
had or had ability to convey to a purchaser in good faith creditor? Explain your answer.
for value;
b. The direct obligation of the warehouseman to hold A: Yes. Yoyo, as a holder for value of the receipt, has a better
possession of the goods for him according to the right to the goods than the creditor. It is Yoyo that can
terms of the receipt as if the warehouseman had surrender the receipt which is in its possession and can
contracted directly with him comply with the other requirements which will oblige the
2. The goods covered by the receipt cannot be garnished warehouseman to deliver the goods, namely, to sign a receipt
or levied upon under execution unless the receipt is
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for the delivery of the goods, and to pay the warehouseman's that the owner/warehouseman was deprived of the
liens and fees and other charges. (1999 Bar Question) possession of the same by fraud, mistake or conversion.
Q: Bon took the goods of Angela without her consent and DUTIES OF WAREHOUSEMAN
deposited the same with a warehouseman. The latter issued
to Bon a negotiable receipt which she indorsed for value to Q: What are the duties of warehouseman?
Ryan. Between Angela and Ryan, who has better right over
the goods? Why? A:
1. To take care of the goods entrusted to his safekeeping
A: Ryan has better right to the goods. The goods are covered with the same care as reasonably careful owner of
by a negotiable warehouse receipt which was indorsed to similar goods would exercise
Ryan for value. The negotiation to Ryan was not impaired by 2. To deliver the goods to the holder of the receipt or the
the fact that Bon took the goods without the consent of deposit provided the following conditions are
Angela, as Ryan had no notice of such fact. Moreover, Ryan is fulfilled.
in possession of the warehouse receipt and only he can a. Offer to satisfy the warehouseman’s lien
surrender it to the warehouseman. (Sec. 8, WRL) b. Offer to surrender the receipt, if negotiable with
such indorsements as would be necessary for
Q: What is the proper recourse of the warehouseman if he is the negotiation of the receipt
uncertain as to who is entitled to the goods? Explain. c. Readiness and willingness to sign when the goods
are delivered acknowledgement that they have
A: Since there is a conflicting claim of ownership or title, the received
warehouseman should file a complaint in interpleader
requiring Ryan and Angela to interplead. The matter involves a NOTE: The refusal of the warehouseman who previously
judicial question as to whose claim is valid. owned goods stored with it to deliver the goods to the
endorsee of the receipt on the ground that the goods had not
Q: What is the rule where a warehouse receipt is transferred been paid by the buyer is unlawful.
to secure payment of a loan by way of pledge or mortgage?
The warehouseman has no cause of action for repossession
A: The pledgee or mortgagee does not automatically become and damages against a person to whom it delivered deposited
the owner of the goods but merely retains the right to keep articles on the basis of an alleged falsified the delivery permit
and with the consent of the owner to sell them so as to satisfy where the real parties interested in the questioned articles
the obligation from the proceeds for the simple reason that have not yet sued the warehouseman for damages on account
the transaction is not a sale but only a mortgage or pledge. of wrongful delivery.
Likewise, if the property is lost without the fault or negligence
of the mortgagee or pledgee, then said goods are to be Q: What if the receipts are lost or destroyed?
regarded as lost on account of the real owner, mortgagor or
pledgor. A: A court of competent jurisdiction may order the delivery of
the goods only:
Q: Does the non‐payment by the original depositors of the
purchase price render the further negotiation of the receipt a. Upon satisfactory proof of the loss or destruction of
invalid? the receipt; and
b. Upon the giving of a bond with sufficient sureties to be
A: No, the negotiation of the warehouse receipt by the buyer approved by the court. (Sec. 14)
of goods purchased from and deposited to the
warehouseman is valid even if the warehouseman who issued NOTE: The delivery of the goods under an order of the court
the negotiable warehouse receipt was not paid by the buyer. shall not relieve the warehouseman from liability to a person
The validity of the negotiation cannot be impaired by the fact to whom the negotiable receipt has been or shall be
negotiated for value without notice of the proceedings or of into the contract;
the delivery of the goods. (Sec. 14) 3. Established practice; or
4. Where the warehouse receipt contains a
Q: When does the duty to insure the goods arise? representation to that effect.
A: Q: What is conversion?
1. Where the law provides A: An unathorized assumption and exercise of the right of
2. Where it was an inducement for the depositor to enter ownership over goods belonging to another through the
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alteration of their condition or the exclusion of the owner’s notice, and even to the alterer and subsequent
right. purchasers with notice except that as regards to the
last two, the warehouseman’s liability is limited only
Q: What are the instances where a warehouseman is liable to delivery as he is excused from any liability.
for conversion?
Q: What are the instances where a warehouseman is
A: criminally liable for his acts?
1. Where the delivery is made to person other than those A:

authorized
2. Even if delivered to persons entitled, he may still be 1. Issuance of receipts for goods not received. (Sec. 50) 2.
liable for conversion if prior to delivery: Issuance of receipt containing false statement. (Sec. 51)
a. He had been requested not to make such delivery; 3. Issuance of duplicate negotiable warehouse receipt not
or marked as such. (Sec. 52)
b. He had received notice of the adverse claim or 4. Issuance of a negotiable warehouse receipt of which he
title of a third person. is an owner without stating such fact of ownership.
(Sec. 53)
Q: Give the effects of alteration of the receipt on the liability 5. Delivery of goods without obtaining negotiable
of the warehouseman. warehouse receipt. (Sec. 54)
6. Negotiation of receipt for mortgaged goods. (Sec. 5)
A: 7. Issuance of warehouse receipts for good not received.
(Sec. 50)
8. Commingling of goods. (Sec. 24)
Q: What
are the
other
acts for
which
1. Alteration immaterial – whether fraudulent or not, warehouseman is liable?

whether authorized or not, the warehouseman is
liable on the altered receipt according to its original A:
tenor 1. Failure to stamp “duplicate” on copies of negotiable
2. Authorized material alteration – the warehouseman is receipt. (Sec.6)
liable according to the terms of the receipt as altered 2. Failure to place “non‐negotiable” or “not‐negotiable”
3. Material alteration innocently made – the on a non‐negotiable receipt. (Sec. 7)
warehouseman is liable on the altered receipt 3. Misdelivery of goods.(Sec. 10)
according to its original receipt 4. Failure to effect cancellation of a negotiable receipt
4. Material alteration fraudulently made – warehouseman upon delivery of the goods. (Sec. 11)
is liable according to the original tenor of the receipt 5. Issuing receipt for non‐existing goods or misdescribed
to a purchaser of the receipt for value without
goods. (Sec.20) him is his security, just like a pledge mortgage for the payment
6. Failure to take care of the goods. (Sec. 21) of the charges for the storage and preservation of the goods,
7. Failure to give notice in case of sale of goods to satisfy money advanced and other expenses in relation to such
lien (Sec. 33) or because the goods are perishable or goods.
hazardous. (Sec. 34)
Q: What are the remedies available to the warehouseman to
WAREHOUSEMAN’S LIEN enforce his lien?
Q: What is the rule when more than one negotiable receipt A:

is issued for the same goods? 1. Refuse to deliver the goods until his lien is satisfied 2.
To sell the goods and apply the proceeds to the value of
A: A warehouseman shall be liable for all damages caused by the lien
his failure to do so to anyone who purchased the subsequent 3. By other means allowed by law to a creditor against his
receipt for value supposing it to be an original, even though debtor for the collection from the depositor of all
the purchase be after the delivery of the goods by the charges and advances which the debtor contracted
warehouseman to the holder of the original receipt (Sec. 6). with the warehouseman; or
4. Such remedies allowed by law for the enforcement of a
Q: What is the warehouseman’s lien? lien against personal property.
A: The warehouseman’s lien over the goods deposited with Q: What is the rule in case of the lien of the warehouse?
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Must be registered, otherwise, it is not valid against third

persons although binding between the parties
Real right and real property by itself
A: A warehouseman’s lien should in no event go beyond the

value of the credit in favor of the pledge.
Q: Where will the warehouseman’s fees and charges cease

to accrue?
A: A warehouseman fees and charges cease to accrue from

the date of the rejection by the warehouseman to heed the
lawful demand by the endorsee if the quedan for the release
of the goods.
NOTE: In this contract, as a general rule, the debtor retains

REAL ESTATE MORTGAGE LAW possession of the property mortgaged as a security for the
payment of the sum barrowed from the creditor because by
Q: What is the essence a contract of mortgage? mortgage, the debtor merely subjects the property to a lien
but ownership thereof is not parted with.
A: Its essence is that a property has been identified or set
apart from the mass of property of the debtor as security for It is not however essential that the property mortgaged
the fulfillment of his obligation, in case of default of payment. remains in the possession of the mortgagor. Thus, the latter
may deliver said property to the mortgagee without thereby
altering the nature of the contract.
Q: What is real estate mortgage (REM)?
A: It is a contract whereby the debtor secures to the creditor

the fulfillment of a principal obligation, specially subjecting to
such security immovable property or real rights over mortgage debtor
immovable property which obligation shall be satisfied with 5. All objects permanently attached to a mortgaged land
the proceeds of the sale of said property or rights in case the or building although they may have been placed
said obligation is not complied with at the time stipulated. there after the execution of the mortgage are also
included;
Nature 6. A more costly building erected in place of the
mortgaged building which was torn down by the
Q: What is the nature of REM? debtor unless the mortgaged estate passes to the
hands of a third person, the mortgage does not
A: It creates real right over the property, such that in extend to any machinery, object or construction
subsequent transfers by the mortgagor, the transferee must which he may have brought or placed there and
respect the mortgage. which such third person may remove whenever it is
convenient for him to do so.
REAL ESTATE MORTGAGE
After-acquired properties
Consensual contract
Subject matter is real property Q: What is the effect of any stipulation in the mortgage
contract including after-acquired properties?
Possession of the thing mortgaged remains with the debtor
A: It is valid. This is common and logical in cases where the
Mortgagee does not possess such right properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold or to be
Sale may be judicial or extrajudicial used but with the understanding that they shall be replaced
with others to be thereafter acquired by the mortgagor. Its
purpose is to maintain the original value of the properties
given as security.
Q: What else are deemed included in a mortgage of real
property? A mortgage given to secure future advancements enables the
parties to provide continuous dealings, the nature or extent of
A: which may not be known or anticipated at the time, and they
avoid the expense and inconvenience of executing a new
1. New plantings; security on each new transaction.
2. Fruits, except those collected before the obligation falls
due, and those removed and stored when it falls Q: In such stipulation is the attachment of lien retroactive?
due;
3. Accrued and unpaid rents as well as those which A: The said lien attaches and vests not at the time said
should have to be paid while certain credits remains improvements are constructed but on the date of the
wholly unsatisfied; recording and registration of the deed of mortgage.
4. Buildings, machinery and accessories belonging to the
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NOTE: As a rule, an action to foreclose a mortgage must be additional funds without their having to execute additional
limited to the amount mentioned in the mortgage. But the security documents, thereby saving time, travel, loan closing
amounts named as consideration in a contract of mortgage do costs, costs of extra legal services, recording fees etc. It
not limit the amount for which the mortgage may stand as subsumes all debts of past or future origin.
security, if from the 4 corners of the instrument the intent to
secure future loans or advancements and other indebtedness Q: How do you construe such clause?
can be gathered.
A: It must be carefully scrutinized and strictly construed
Dragnet clause particularly where the mortgage contract is one of adhesion.
Q: What is a dragnet clause?
A: It is a clause which operates as a convenience and

accommodation to the barrowers as it makes available
NOTE: A mortgage must sufficiently describe the debt sought for collection may be sustained to prevent unjust
to be secured, and an obligation is not secured by a mortgage enrichment.
unless it comes fairly within the terms of the mortgage. 3. If the loan is secured by the real estate and chattel
mortgages and the mortgagee elects to foreclose the
But where the obligation is not a series of indeterminate sums chattel mortgage, he cannot file an action to recover
incurred over a period of time but 2 specific amounts any deficiency unless he has foreclosed too the REM
procured in a single instance, what applies is the general rule and the proceeds thereof are still insufficient to
state above that an action to foreclose a mortgage must be satisfy the debt
limited to the amount mentioned in the mortgage. 4. The filing of criminal case for violation of BP 22 by the
mortgagee-creditor against the mortgagor will bar
A mortgage given to secure future advancements is a the former from exercising the remedy of foreclosure
continuing security and is not discharged by the repayment of because under the Rules of Criminal Procedure, he is
the amount named in the mortgage, until the full amount of deemed to have already availed himself the remedy
the advancements is paid. It permitted the mortgagor to take of collection suit.
the money as it is needed and thus avoid the necessity of
paying interest until the necessity for its use actually arises Foreclosure of REM
Stipulation forbidding owner from alienating immovable Q: What is foreclosure?

property
A: It is the remedy available to the mortgagee by which he
Art. 2130. A stipulation forbidding the owner from alienating subjects the mortgaged property to the satisfaction of the
the immovable mortgaged shall be void. (n) obligation to secure which the mortgage was given through
the sale of the property at public auction and the application
NOTE: The mortgagee can simply withhold his consent and of the proceeds thereof to the payment of his claim.
thereby prevent the mortgagor from selling the property. Yet,
in case of alienation of property, the transferee is bound to NOTE: Foreclosure denotes the procedure adopted by the
respect the encumbrance because being a real right, the mortgagee to terminate the rights of the mortgagor on the
property remains subject to the fulfillment of the obligation property and includes the sale itself.
for whose guaranty it was constituted.
Q: What is the remedy of a party aggrieved by the
Remedies available to mortgagee upon default of the foreclosure?
mortgagor
A: He may petition that the sale be set aside and the writ of
Q: What are the remedies available to mortgagee upon possession be canceled because the mortgage was not
default of the mortgagor? violated or the sale was not made in accordance with the
A:
1. He may file an action for collection to enforce payment

of the loan secured by the REM. The filing of an
action for collection, regardless of venue, precludes
the remedy of foreclosure,
2. As an alternative remedy, the mortgage may foreclose
the mortgage. The foreclosure may be done judicially
or extra-judicially. Foreclsoure bars action for
collection unless it is done to recover deficiency after
the foreclosure sale. The only exception is when the
complaint for judicial foreclosure is filed but the court
dismissed because the REM did not have the written
conformity of the spouse but the court ordered the
mortgagee to file an action for collection. The action
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provisions thereof. He may ask for the annulment of the
foreclosure sale on ground that: a. Sheriff’s Office;
b. Assessor’s Office; and
a. There was fraud, collusion, accident, mutual mistake, c. Register of Deed
breach of trust or misconduct by the purchaser;
b. Sale had not been fairly and regularly conducted; c. The Q: What is the posting requirement be waived?
price was inadequate and the inadequacy was so great as
to shock the conscience of the court. A: The posting requirement is jurisdictional and as such,
cannot be waived. The certificate of posting may be waived
Need of power of attorney but not the actual posting itself.
Q: What is the requirement regarding the agreement Publication requirement

involving real estate mortgage? Q: In what newspaper shall the notice of sale be published?
A: The loan or mortgage agreement should contain a special A: It shall be published in a newspaper of general circulation
power of attorney authorizing the mortgagee to foreclose once a week for 3 consecutive weeks.
extra-judicially (to take possession of the property and sell it
in case of default). This SPA is the basis of the right of the Q: What is the test to determine the sufficiency of
mortgagee to foreclose the mortgage extra-judicially. newspaper of general circulation?
Q: Why is special of power of attorney needed? A: It should cater to the general community and not to
A: Because an extrajudicial foreclosure may only be effected if specific group or interest only.
the mortgage contract covering a real estate, clause is
incorporated therein giving the mortgagee the power, upon Q: When is a paper deemed a newspaper of general
default of the debtor to foreclose the mortgage by an circulation?
extrajudicial sale of the mortgaged property.
A:
Procedure
1. It must be published for the dissemination of local
Q: Where is the venue of the action? news and general information;
2. It must have a bona fide subscription list of paying
A: The petition for sale is not an ordinary action and is subscribers;
therefor not governed by the rules on venue. The petition/s 3. It must be published at regular intervals; and 4. It must
for sale must be filed with the Office of the Clerk of Court of be available to the public in general and not just to a
the City where the real property/ies is/are situated. select few chosen by the publisher, otherwise, the precise
objective of publication of notice of sale will not be
Posting requirement realized;
5. It must not be devoted to the interests or published for
Q: Where should the notice of sale be posted? the entertainment of a particular profession, trade,
calling, race or religion.
A: It shall be posted in a conspicious place where the sale shall
be conducted: Need for Republication in case of postponement
Q: When is republication required?
Yet, the failure to post a notice is not per se a ground for
A: In case of postponement, the notice of sale must be invalidating a foreclosure sale provided that the notice thereof
republished once a week for 3 consecutive weeks unless the is duly published in a newspaper of general circulation. The
notice of sale contains an alternative date and the sale is publication accordingly alone is more than sufficient
subsequently conducted on such date. compliance with the notice-posting requirement.
Q: Can the publication and posting requirements be waived? Personal notice to the mortgagor when and when need not
needed
A: No, they are imbued with public policy considerations and
any waiver thereon would be inconsistent with the intent and Q: Is personal notice to the mortgagor of the date, time and
letter or the law. It would thus be converting into a private place of the sale required?
sale what ought to be a public auction.
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A: the proceeds of the sale, is the mortgagee entitled to recover
GR: No because publication amounts to notice to the whole the deficiency?
world
XPN: Personal amounts to notice to the whole worls unless A: Yes. However, in case of extrajudicial foreclosures, Act.
personal notice is required by: 3135 does not give a mortgagee the right to recover
1. Stipulation, in which case, it must be complied with in deficiency after the public auction sale, neither does it
addition to publication, otherwise, the foreclosure is expressly or impliedly prohibit such recover.
void.
NOTE: To recover deficiency, the extrajudicial foreclosure
Possession by purchaser of foreclosed property must be valid.
Q: During the period of redemption, is the mortgagee Q: Why is the mortgagee entitled to recover deficiency?
entitled to possession as a matter of right?
A: In both extrajudicial and judicial foreclosures, the mortgage
A: is but a security and not a satisfaction of the indebtedness. It
is of no importance if the buyer or highest bidder is the
GR: No. During the period of redemption, the mortgagee is creditor himself.
not entitled to possession as a matter of right. It is
discretionary to the court and subject to bond requirement. NOTE: Where a third person is the mortgagor, he is not liable
for any deficiency in the absence of a contrary stipulation. The
XPN: But if the petition for writ of possession is prayed for action for the recovery of such deficiency must be directed
after the expiration of the redemption period and against the debtor.
consolidation of title in favor of the mortgagee, the issuance CONCEPT OF DEFICIENCY JUDGMENT
of the writ is ministerial duty on the part of the court and
bond is not required. Q: Explain the concept of deficiency judgment.
A: If the deficiency is embodied in the judgment, it is referred
Remedy in case of foreclosure to as deficiency judgment. A mortgagee may recover any
deficiency in the mortgage account which is not realized in the
Q: If there is a balance due to the mortgagee after applying foreclosure sale and that an independent civil action for the
recovery of the deficiency may be filed even during the period subjection of the property is only resorted to upon the failure
of redemption. to pay the debt. Thus, the money indebtedness is the principal
thing not the foreclosure of the property which is the only
Q: What is the prescriptive period for the action? result or an incident of the failure to pay the debt.
A: The action to recover a deficiency after foreclosure NOTE: The fact that the property mortgaged is destroyed is
prescribes after 10 years from the time the right of action not ground to reduce the indebtedness secured.
accrues.
Action for the foreclosure of mortgage survives after the
The mortgagee in both real and chattel mortgages has, by law, death of the mortgagor
the right to claim for the deficiency resulting from the price
obtained in the sale of the property at public auction. Q: Does the action for the foreclosure of mortgage survive
after the death of the mortgagor?
NATURE OF JUDICIAL FORECLOSURE PROCEEDING
A: Yes. It is an action which survives the death of the
Q: What is the nature of judicial foreclosure proceeding? mortgagor because the claim against him is not a pure money
claim but an action to enforce a mortgagee lien.
A: It is an action quasi in rem which is based on a personal Consequently, the judgment rendered therein may be
claim against a specific property of the defendant. Its purpose enforced by a writ of execution.
is to have the property seized and sold by court order to the
end that the proceeds thereof be applied to the payment of Q: What is the remedy?
plaintiff’s claim.
A: It may be prosecuted against the executor or administrator
Q: What is the result of failure to pay indebtedness? independently of the testate or intestate proceedings for the
settlement of the mortgagor’s estate.
A: The principal obligation is the money indebtedness and the
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NATURE OF POWER OF FORECLOSURE BY EXTRAJUDICIAL

SALE
NOTE: The power to foreclose is not an ordinary agency that

contemplates exclusively the representation of the principal
by the agent but is primarily an authority conferred upon the
mortgagee for the latter’s own protection.
Q: What is the nature of the power of foreclosure by extra

judicial sale?
Q: Is a stipulation of upset price valid?
A: It is an ancillary stipulation supported by the same cause
or consideration for the mortgage and forms an essential and
A: A stipulation in a mortgage of real property fixing an upset
inseparable part of the bilateral agreement. It is proper only
price—the minimum price at which the property shall be
when so provided under a special power inserted in or
sold—to become operative in the event of a foreclose sale at
attached to the mortgage contract.
public auction is null and void for the property must be sold to
the highest bidder.
NOTE: The power to decide to foreclose or not is the
prerogative of the mortgagee.
It is debatable however if the rule will still apply where the
purchaser happens to be the creditor or mortgagee himself.
STIPULATION OF UPSET PRICE
EFFECT OF INADEQUACY OF THE PRICE
Q: What is the effect of the inadequacy in the price in

foreclosure sale?
has only 1 cause of action.
A: Where there is a right to redeem, inadequacy of the price is
not material because the judgment debtor may reacquire the Q: What are the remedies of the CR holding a real estate
property or else sell his right to redeem and thus recover any mortgage for the satisfaction of his credit in case the MR
loss he claims to have suffered by reason of the price obtained dies?
at the auction sale.
A:
Q: Is inadequacy of price sufficient to annul or set aside
foreclosure sale? 1. Waive the mortgage and claim the entire debt from the
estate of the MR as an ordinary claim;
A: Mere inadequacy of the price will not be sufficient to annul 2. Foreclose the mortgage judicially and prove any
or set aside the foreclosure sale. The property may be sold for deficiency as an ordinary claim;
less than its fair market value upon the theory that the lesser 3. Rely on the mortgage exclusively, foreclosing the same
the price the easier for the owner of to effect the redemption at any time before it is barred by prescription
so that the low price even works to his advantage. without right to file a claim for any deficiency. This is
NOTE: The value of the property has no bearing on the bid an extrajudicial foreclosure which bars any
price at the public auction, provided that it was regularly and subsequent deficiency claim against the estate of
honestly conducted. the deceased.
WAIVER OF SECURITY BY MORTGAGEE Q: Does foreclosure have retroactive effect?
NOTE: The ME may institute either a: A: A foreclosure sale retroacts to the date of the registration
of the mortgage and that a person who takes a mortgage in
a. personal action for debt (he may waive the right to good faith and for valuable consideration, the record showing
foreclose his mortgage and maintain a personal clear title to the MR will be protected against equitable claims
action for recovery of the indebtedness) or on the title in favor of third persons of which he had no actual
b. a real action to foreclose the mortgage. In either case, or constructive notice.
he is entitled to obtain a deficiency judgment for
whatever sum might be due after the liquidation of NOTE: A notice of adverse claim annotated after the
the property covered by the mortgaged. registration of the mortgage but before the foreclosure and
sale at public auction of the property cannot affect the rights
Q: What is the nature of these remedies? of the ME. Thus, it no longer matters that the annotation of
the sheriff’s certificate of sale and the affidavit of
A: The remedy is alternative and not cumulative or consolidation of ownership was made subsequent to the
successive—mortgagee cannot have both remedies since he annotation of the notice of lis pendens.
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REDEMPTION Q: What is the redemption period?
Q: What is redemption? A:
A: It is the transaction by which the mortgagor reacquires or GR: Within one year from the registration of the sale and not
buys back the property which may have passed under the from actual sale.
mortgage or divests the property of the lien which the
mortgage may have created.
Q: What is the purpose of redemption?
A: The concept of redemption is to allow the owner to

repurchase or buy back, within a certain period and for a
certain amount, a property that has been sold due to debt,
tax, or encumbrance.
XPN: If the following requisites are present, the redemption NOTE: Being an incorporeal right, the value of an equity of
period is 3 months from the date of the sale or registration, redemption can neither be quantified nor equated with actual
whichever comes earlier: value of the property nor equated with the actual value of the
property upon which it may be exercised.
1. The mortgagor is a juridical person
2. The mortgagor is a bank, quasi-bank or trust entity Acquired by second mortgagee
3. The mode of foreclose is extrajudicial
Q: Describe the right of a second mortgagee?
NOTE: The one year redemption period rule still applies if the
mortgagor is a natural person and/or the mortgagee is not a A: A second mortgagee acquires only the equity redemption
bank, quasi-bank or trust entity and/or the mode of foreclose vested in the mortgagor, and his rights are strictly subordinate
is judicial (but in the latter case, only if the mortgagee is a to the superior lien of the first mortgagee.
bank or a credit institution because if the mortgagee is
different, there is no right of redemption in judicial Taking physical possession not necessary for levy
foreclosure but only equity of redemption).
Q: Is taking of possession necessary for levy?
Kinds of redemption
A: To levy upon the mortgagor’s equity of redemption, it is not
Q: What are the kinds of redemption? necessary for the sheriff to take physical possession of the
mortgaged property.
A:
RIGHT OF REDEMPTION
1. Equity redemption –right of mortgagor in case of
judicial foreclosure to redeem the mortgaged Q: What is the period to exercise the right of redemption?
property after his default in the performance of the
conditions of the mortgage but before the A: The mortgagor may redeem the property at any time within
confirmation of the sale of the mortgaged property. the term of 1 year from and after the date of the sale, i.e., the
2. Right of redemption –the right of the mortgagor in date of registration of the certificate of sale with the
case of extra-judicial foreclosure to redeem the appropriate Registry of Deeds.
mortgaged property within a certain period from and
after it was sold for the satisfaction of the mortgaged Q: Does the filing of an action by redemption to enforce his
debt. right to redeem suspend the running period of the statutory
EQUITY OF REDEMPTION period to redeem the property?
Exercised before confirmation of sale A: No. It doesn’t also bar the purchaser at public auction from
procuring a writ of possession after the period had lapsed,
Q: When can the mortgagor exercise the equity of without prejudice to the final outcome of the action to
redemption?
A: The mortgagor must exercise his equity of redemption

before but not after the sale is confirmed by the court. It is
simply the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the
secured debt within the 90-day period after the judgment
becomes final in accordance with Rule 68, or even after the
foreclosure sale but prior to its confirmation.
Q: What if the case is one of judicial foreclosure?
A: No equivalent right of redemption exists.

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enforce the right of redemption. It also doesn’t suspend the
period to institute an action to annul the foreclosure sale. A:
1. voluntary agreement of the parties to extend the
GENERAL BANKING LAW OF 2000 redemption period
2. debtor’s commitment to pay redemption price on a
The General Banking Law of 2000 (R.A. 8791) now provides fixed date.
that juridical mortgagors like partnerships and corporations
are barred from the right of redemption of mortgaged Q: What is the effect of the exercise of the right?
property sold pursuant to an extrajudicial foreclosure, after
the registration of the certificate of foreclosure with the A:
applicable Register of Deeds. This amendment is open to
constitutional objection of being violative of equal protection 1. redemption eliminates from his title the lien created by
guarantee for it discriminates against corporate or juridical the levy or attachment or judgment or registration of
mortgagors and the prohibition against the impairment of the the mortgage thereon.
obligation of contracts. 2. Redemption defeats the inchoate right of purchaser
and restores the property to the same condition as if
Also, R.A. 8791 now limits the redemption period to only 3 no sale had been made
months, to begin from the date of the foreclosure sale but not 3. It does not give the mortgagor a new title, but merely
after the registration of the certificate of foreclosure sale restores to him the title freed of the encumbrance
which ever comes first. of the lien foreclosed.
4. The exercise of the right of redemption is an implied
Q: What is the effect of failure to exercise right? admission of the regularity of the foreclosure sale
A: The title to the property sold under a mortgagee and steps the mortgagor from later impugning its
foreclosure remains with the mortgagor or his grantee until validity on that ground
the expiration of redemption period. The right of purchaser at
the foreclosure sale is merely inchoate until after the period NOTE: What is actually effected where redemption is
of redemption has expired without the right being exercised. exercised is not the recovery of the property since ownership
is never lost. Redemption is inconsistent with the claim of
If no redemption is made within the prescribed period, the invalidity of the sale.
purchaser becomes the absolute owner of the property. He
has the absolute right to a writ of possession which is the final Q: What if the mortgaged property is sold to a 3rd party?
process to carry out or consummate the extrajudicial
foreclosure. Henceforth, the mortgagor losses his right over A: A sale by the mortgagor to a 3rd party of the mortgaged
the property. property during the period for redemption transfers only the
right to redeem the property and the right to possess, use
Q: Is this provision regarding the one-year period to exercise and enjoy the same during the period.
the right of redemption mandatory?
NOTE: Under Rule 39, the judgment debtor remains in
A: It is only directory and can be extended by agreement of possession of the property foreclosed and sold, during the
the parties. period of redemption, but he cannot make a conveyance of
the ownership of the property as said ownership belongs to
Q: What are the 2 requisites for this agreement of the the purchaser at the foreclosure sale.
parties?
without force or effect. The mortgagor is entitled to the
Q: What if the sale is not registered and made without equitable remedy of redemption.
consent of the mortgagee?
CONFIRMATION BY COURT OF AUCTION SALE IN JUDICIAL
A: The buyer was not validly substituted as debtor, and hence, FORECLOSURE
had no right to redeem.
Q: What is the procedure for the equity of redemption right
Q: What is the effect of an extra-judicial foreclosure effected of the mortgagor?
with fraud?
A:
A: Such is null and void ab initio. The consolidation of
ownership of the subject property to the mortgagee as the 1. Pay the secured debt within the 120-day period from
highest bidder and its subsequent resale to a 3rd party are also the entry of judgment in accordance with Sec.
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2, Rule 68 or even after the foreclosure sale but prior confirmation as the rights and interests of the parties and
to its confirmation ends of justice may require.
2. In case of compromise agreement, parties may agree
on the amounts to be paid, when they should be NOTE: The subsequent sale by purchaser to a 3rd person of the
paid, and the effects of non-payment or violation of mortgaged property does not prevent the court from granting
the terms of their agreement the mortgagor a period within which to redeem the property
by paying the judgment debt and the expenses of sale and
Q: What is the nature of judicial foreclosure or real estate costs.
mortgage?
Q: Without the confirmation by the court, what is the effect
A: The general rule is that the mortgagor cannot exercise his of acceptance of bid at the foreclosure sale?
right of redemption after the sale is confirmed.
A: It does not confer title on the purchaser who is nothing
Q: What is the importance of confirmation of the sale of the more than a preferred bidder.
mortgaged real property?
Q: What is the nature of the mortrgagor’s right of
A: It cuts off all the rights or interests of the mortgagor and of redemption?
the mortgagee and persons holding under him, and with them
the equity of redemption in the property and vests them in A:
the purchaser. Confirmation retroacts to the date of the sale.
It is a final order not merely interlocutory. Nature of the mortgagor’s right of redemption
CONTROL OF COURT OVER PROCEEDINGS 1. An absolute privilege – the exercise of which is entirely
dependent
upon the will
and discretion
of
redemptioner.
Thus, there is
no legal
obligation to
exercise the
right
The formal offer
to redeem is not a
BEFORE CONFIRMATION distinct step or condition sine qua non to the filing of an
action in court for the valid exercise of the right of legal
Q: Who controls the proceedings over the proceedings redemption.
before the confirmation?
Q: What then constitutes a condition precedent?
A: The court retains control of the proceedings by exercising
sound discretion in regard to it either granting or withholding A: Either a formal offer to redeem or the filing of an action in
court together with the consignation of the redemption price
within the reglementary period. Q: What will toll the running?
2.A mere statutory privilege – it must be exercised in the A: What will toll the running of the period is the action to
mode and within the period prescribed by the statute. compute the redemption price.
The filing of an action to enforce redemption within the Q: Who may redeem?
period is equivalent to a formal offer to redeem and should
the court allow the redemption, the redemptioner should A:
then pay the amount already determined.
1. The mortgagor
The right on redemption is liberally construed in favor of the 2. His successors
original owner of the property. 3. Assign
4. Junior encumbrancer
By executing a dacion en pago by the mortgagor in favor of
the mortgagee, the former waived the redemption period Amount of redemption price
normally given a mortgagor.
Q: What is the amount of the redemption price?
3. Involves title to foreclosed property
A:
Redemption period NOT interrupted by the filing of an 1. If the mortgagee is a bank, quasi-bank, or trust entity,
action for nullity of sale the bid price is the:
a. outstanding obligation
Q: Is the redemption period interrupted by the filing of an
action for nullity of sale?
A: No.
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b. plus interest stipulated in the mortgage agreement
c. plus cost and expenses incurred during the
foreclosure less any income derived from the
property,
2. If the mortgagor is an accomodation mortgagor, the
redemption price is the amount of the bid price plus
12% interest per annum
3. If the mortgagee is not a bank, quasi-bank or trust
entity, the redemption price is the amount of the bid
price plus 12% per annum.
Q: What is the redemption price in case of accomodation Effect of the pendency of action for annulment of sale
mortgagors?
Q: Is the filing of an action to nullify the extrajudicial sale a
A: Accommodation mortgagors are not liable for the payment prejudicial question to the petition filed by the mortgagee
of the loan of the debtor. The liability of the accommodation for the issuance of the writ of possession?
mortgagors extends only up to the loan value of their
mortgaged property and not to the entire loan itself. Hence, it A: No, a complaint for annulment of extrajudicial sale is a civil
is only just that they be allowed to redeem their mortgaged action and a petition for the issuance of writ of possession is
property by paying only the winning bid price thereof (plus but an incident to the land registration proceeding hence no
interest thereon) at the public auction sale. prejudicial question can arise from the two actions.
Q: What is the effect of the pendency of action for

annulment of sale?
A: If the foreclosure is irregular, the mortgagor may file an

action to nullify the sale. Such action however, does not
suspend the running of the redemption period or the issuance b. To obtain judicial foreclosure.
of the writ of possession if such writ is prayed for after
expiration of the redemption period. REPLEVIN
Writ of possession Q: What is replevin?
Q: Is the issuance of the writ of possession ministerial or A: It is the appropriate action to recover possession
discretionary? preliminary to the extra-judicial foreclosure of a chattel
mortgage.
A: The issuance of the writ of possession after the expiration
of redemption period and consolidation of title is the Q: Who can institute replevin suit?
ministerial duty of the court. It can be granted ex parte and
not subject to a bond requirement. A: It is not only the owner but also a person “entitled to the
possession” of the property can institute a replevin suit.
Q: To whom can the writ of possession be enforced?
Q: When does a mortgagee become a transferee?
A: Only against:
1. The mortgagor A: He becomes a transferee only after acquiring the property
2. His successors in interest in the foreclosure sale and subsequently consolidates his title
3. Assigns to it.
Q: Can the writ of possession be enforced against 3rd

persons?
ACT 3135
A: No, it cannot be enforced against third persons whose title
is adverse to the mortgagor, in which case, an action to Q: What are the stages in extra-judicial foreclosure?
recover possession is the appropriate remedy.
A:
Remedy of mortgagee to obtain possession
1. Execution of contract of loan and REM agreement with
Q: What is the remedy in case the mortgagee cannot obtain
the corresponding SPA;
possession?
2. Default of the mortgagor-debtor either by:
A: If a mortgagee cannot obtain possession of the mortgaged
a. Non-payment; or
property for its sale on foreclosure, he must bring a civil
b. Violation of the terms of the loan or REM
action either to:
agreement.
a. To recover such possession as a preliminary step to the
sale or
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3. Filing of petition for sale with Clerk of Court who acts provinces, the venue of the extrajudicial foreclosure
as ex-officio sheriff. Then, the clerk of court will raffle proceedings is the place where each of the mortgaged
it among the sheriffs who will conduct the property is located.
foreclosure sale once given the authority to do so;
Q: Will the above rule violate the principle of indivisibility of
Q: Where should the petition be filed? Is it subject to the the mortgagee?
rules on venue?
A: It is not subject to the rules on venue. The petition is filed

where the property is located.
Q: What if the mortgaged properties are located in different

places or provinces?
A: In case the mortgaged properties are located in different

A: No. The principle of indivisibility of the mortgagee states 7. Redemption – the mortgagor reacquires or buys back
that all the mortgaged properties will answer for the the property, which may have passed under the
mortgage debt and the partial payment of the debt does not mortgage
extinguish that part paid corresponding to the mortgaged 8. Consolidation of title
properties.
Q: How is the title consolidated?
NOTE: There is no more indivisibility of mortgage after the
foreclosure. The mortgagor can redeem on a piece-meal basis. A: By filing an affidavit with the Register of Deeds. Q: What
Q: What is the prescriptive period of a mortgage action? must the affidavit of consolidation of title indicate?
A: It prescribes in 10 years from the time the right of action A: It must indicate the relevant dates to show mortgagor’s
accrues. failure to redeem within the allowable time. This enables the
mortgagee to acquire full ownership over the property. His
Q: When does the right of action accrue? inchoate right ripens to full ownership.
A: It accrues from the time the mortgagor defaults in the 9. Cancellation of title of the mortgagor and issuance of a
payment of his obligation to the mortgagor defaults in the new title in favor of the mortgagee
payment of his obligation to the mortgagee and not from the
time of the execution of the mortgage contract; Q: What is the basis of this?
4. Compliance with certain jurisdictional requirements: A: The basis of which is the order of court confirming the sale.
a. Publication- in a newspaper of general circulation 10. Petition for writ of possession

once a week for 3 consecutive weeks; and
b. Posting- of the notice of sale for not less than 20
Q: Is there a need to file an ejectment suit?
days in at least 3 public/conspicuous places in
the province or municipality where the property
A: No. That would be very costly and although a summay
is located.
proceeding, ejectment cases take long period of time.
NOTE: A certificate of posting is not indispensable for the
Q: What is writ of possession?
validity of an extra-judicial foreclosure sale of real property.
What the law requires is the posting of the notice of sale and
A: Here, the mortgagee employs force to oust the mortgagor
not the certificate of posting.
from the property.
5. Foreclosure- the remedy available to the mortgagee by
Q: Can this writ of possession be issued during the
which he subjects the mortgaged property to the
redemption period?
satisfaction of the obligation to secure which the
mortgage was given
A: This writ may be even issued during the redemption
6. Registration of sale with the Register of Deeds
period.
NOTE: This pertains to the annotation of the sale to the
Q: Is a bond required?
Transfer Certificate of Title on file with the Register of Deeds
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A: Yes, This writ may be even issued during the redemption
period provided the mortgagee is issued a bond but the grant Q: What is the rule in case of republication?
of which is discretionary on the part of the court.
A:
Q: What if petition for the writ is filed after the expiration of
the redemption period? GR: Republication is absolute
A: The issuance of which is ministerial on the part of the XPNs:

court. This writ can be issued without the issuance of a bond;
in fact, it can even be issued ex parte. 1. The publication also states an alternative date and the
sale pushed through on that date
Q: Is the writ suspended by the mere filing of the mortgagor 2. The sale was not finished and is continued the
of an action to annul the foreclosure sale? followi8ng day until completed
3. When there is waiver
A: No.
Q: What is the effect of clerical errors?
Publication requirement
A: Clerical errors in the name of the mortgagor and the
Q: Is there a need for personal notice? technical description in the notice of sale are not sufficient to
annul a foreclosure.
A: No. The publication takes the place of the notice.
Q: Can the notices required by law be waived?
XPN:
A: No.
Notices
are
given to
secure
bidders
and
prevent
sacrifice
of
1. When the mortgagee assumes the obligation to notify property.

the mortgagor
2. unless so stipulated. Two-bidder rule not applicable
Q: What is meant by “once a week for 3 consecutive weeks”? NOTE: The case of PS Bank v. Certeza scrapped the 2-bidder
rule. Neither Act No. 3135 nor the previous circulars issued by
A: A period of 7 days, inclusive of the first day of publication. the Court governing extrajudicial foreclosures provide for a
The publication must be made 7 days apart. similar requirement. The two-bidder rule is provided under
P.D. No. 1594 and its implementing rules with respect to
Q: What happens when the foreclosure sale is postponed? contracts for government infrastructure projects because of
the public interest involved. Although there is a public interest
A: The notice of sale must be republished once a week for 3 in the regularity of extrajudicial foreclosure of mortgages, the
consecutive weeks, otherwise, foreclosure is invalid. private interest is predominant. The reason, therefore, for the
requirement that there must be at least two bidders is not as
Q: What is the effect of loss of the “affidavit of publisher”? exigent as in the case of contracts for government
infrastructure projects. It is no longer required to have at least
A: The presumption of regularity in the performance of duty is two bidders in an extrajudicial foreclosure of mortgage
not applicable. The affidavit must be produced, otherwise,
there is no such publication, hence, no valid public sale. Q: Does the two-bidder rule apply in case of foreclosure of a
real estate mortgage?
Republication
A: No.
b. if the highest bidder is not the mortgagee, then the
Foreclosure sale purchaser needs to pay cash and remit his payment
to the mortgagee.
Q: How is the foreclosure sale conducted?
Failure to implead subordinate lien holders
A: The highest bidder wins.
Q: What is the effect of failure to implead subordinate lien
a. if the mortgagee wins, there is no need to pay cash to holders to the mortgage as defendants in foreclosure
the mortgagor, and thus, the bid price would simply proceedings? Would that render the proceedings not valid?
be applied to the amount of obligation
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A: No. The only effect of failure on the part of the mortgagee months from foreclosure, whichever is earlier, under what
to make the subordinate lien holder a defendant is that the conditions?
decree of foreclosure in a suit to which the holders of a
second lien are not parties leaves equity of redemption in A:
favor of such lien holders unforeclosed and unaffected.
1. mortgagor must be a juridical person that is either a
Right of redemption partnership or a corporation
2. morgtagee is:
Q: When must the buyer exercise the right of redemption? a. bank
b. quasi-bank
A: 1 year from the date of registration of the certificate of c. trust entity
sale. 3. foreclosure is done extra-judicially
Q: What is the effect of the exercise of the right of Q: Primetime Corp. obtained a P10 M, 5-year loan from the
redemption? Universal Bank. As security for the loan the following
securities were agreed:
A: The exercise of the right of redemption is an implied a. a real estate mortgage over the land and building
admission of the regularity of the foreclosure sale and estops owned by Primetime Corp
the mortgagor from later impugning its validity on that b. joint and several promissory note of Mr. Primo
ground. Redemption is inconsistent with the claim of the Timbol, the President of Primetime Corp.
invalidity of the sale. c. a real estate mortgage over the residential house and
lot owned by Mr. Timbol.
Q: When does the 1 year period for redemption not apply?
A: It does not apply to real estate mortgages constituted by The Primetime Corp. was not able to pay the obligation.
juridical persons in favor of: Thus, the real estate was foreclosed.
a. bank A:
b. quasi-bank
c. trust entity a. With respect to the real estate mortgage over the land
and building owned by Primetime Corp., a juridical
Q: The period of redemption can only be exercised until but body, the period of redemption is only 3 months
not after the registration of the certificate of sale or 3 b. With respect to the real estate mortgage over the
house and lot owned by Mr. Timbol, the period of
By force of law; the No such obligation;
redemption is 1 year from the date of registration of
purchaser at public the law will not
the certificate of sale.
auction is bound to compel the purchaser
accept the redemption to resell
Q: What if the mortgagor is an estate?
A: The issue is not yet settled. Probably 3 months, since it is

already a judicial person since the mortgagor in such case has Redemption Price
already died.
Q: What is the rule as to the redemption price in case the
Right of redemption vs. repurchase mortgagee is a banking institution?
Q: Differentiate the Right of redemption and repurchase. A: The redemption price is the amount fixed by the court in
the order of execution or the amount due under the
A: mortgaged deed.
RIGHT OF REDEMPTION REPURCHASE Q: How about in case of accommodation mortgagors?
Becomes functus The exercise of the A: Accomodation mortgagors are not liable for the payment of
officio on the date of right of redemption the loan of the debtor. The liability of the accommodation
expiry and after the period is not extends only up to the loan value of their mortgaged property
really one of and not to the entire loan itself. Hence, its only just that they
redemption but be allowed to redeem their mortgaged property by paying
repurchase only the winning bid price thereof (plus interest thereon) at
the public auction.
Q: What is the effect of filing an action to annul the

foreclosure sale during the one year redemption period?
Facultad de Derecho
SANTO TOMAS

(3A)_____________________________________________________________________________________________________________
A: It will not toll the running of the 1 year redemption period.
Non-banks Bid price
+
NOTE: A judicial action instituted for the sole purpose of
Interest of 12% per annum
determining the amount of the redemption price, if before
the expiration of the original period to redeem, has the effect
NOTE: In this case, there
of a valid exercise of the right of the right to redeem and will
is encouragement for a
suspend the running of the period of redemption even if
higher bid to make the
unaccompanied by a simultaneous tender of the redemption
redemption more difficult
price.
Summary
Mortgagee is a bank but Value of the loan
AMOUNT mortgagor is an
accommodation
Banks Outstanding mortgagor
Quasi-banks obligation +
Trust entity Interest stipulated
under the agreement
Q: Are the bidder obliged to bid based on the FMV?
A: No.
XPN: Grossly inadequate/shocking to the conscience

Registry of Property
Q: What if the right of redemption is exercised beyond the 1 b. Despite the non-registration, the mortgagee had prior
year period, what will be the interest rate? knowledge of the existence and the duration of the
lease (actual knowledge being equivalent to
A: The interest rate is the stipulated interest rate for the one registration)
year period but beyond such 1 year period, an interest rate of
12% per annum shall be imposed. Remedies of 3rd parties
Owner of the mortgaged property Q: What are the remedies available in favor of 3rd parties
adversely affected by the order for the issuance of the writ
Q: Who is the owner of the mortgaged property? of possession in favor of the winning bidder?
A: During the redemption period, the mortgagor is still the A:

owner. Hence, he may still execute attributes of ownership
during the period such as executing a second mortgage on the 1. Terceria to determine whether the sheriffs has
same subject property. rightfully or wrongfully taken hold of the property
not belonging to the judgment debtor or obligor
Q: The mortgagee introduced improvements on the property 2. An independent separate action to vindicate their
sought to be redeemed. Will the cost of the improvements claim of ownership and/or possession over the
be imputed to the redemption price? foreclosed property.
A: No, to rule otherwise would defeat the purpose of the law. Q: What is the effect of filing a collection case?
Q: What is the remedy if the mortgagor failed to redeem but A: It is tantamount to abandonment of the remedy to
refuses to surrender the certificate of title? foreclose the REM. The principle applies even though the
mortgage was constituted on the property of a 3rd party
A: The court may order the Register of Deeds to register the mortgagor and collection suit was filed before foreign courts.
final deed of sale because otherwise the buyer will never be
able to consolidate his title. JUDICIAL FORECLOSURE
Q: What if the property is in the possession of the lessee Q: What are the stages in judicial foreclose?
whose lease has not terminated?
A:
A: The mortgagee is entitled to the issuance of writ of
possession even if the property is in the possession of a lessee 1. File a complaint against the mortgagor –together with
whose lease has not expired the subsequent lien holders, otherwise equity of
redemption will not be divested
XPNS:
a. The lease had been previously registered in the
Facultad de Derecho
SANTO TOMAS

(3A)_____________________________________________________________________________________________________________
2. Hearing
3. Judgment A: Its purpose is to declare the sale valid in accordance with
4. Entry judgment- this is the reckoning point whereby the law.
the period of equity of redemption is computed 5. 90-120
days from the entry of judgment for the mortgagor to pay 9. Issuance of the order confirming the sale
his debt, as determined by the court
6. Upon failure to pay, the mortgagee must file a Motion Q: Is this order confirming the sale appealable?
for Execution foreclosing the mortgage
7. Execution sale
8. Mortgagee to file Motion for Confirmation of Sale
Q: What is the purpose of the Motion for Confirmation of

Sale?
GR: Only in Judicial GR: There is no right of
A: Yes because it is not an interlocutory order. Thus, the foreclosure redemption in juridical
mortgagee must wait until the finality of the order foreclosure, only
XPN: In case of extra equity in redemption
10. Cancellation of the title of the mortgagor and judicial foreclosure
issuance of new title to the mortgagee involving a bank as XPN: If the mortgagee
mortgagee and a or bidder is:
Q: What is the basis of this? juridical person as a. Bank
mortgagor c. Credit
A: The order of the court confirming the sale institution, the
mortgagor has
11. Motion for writ of possession from the same court 1 year from the
that ordered the foreclosure registration of
order
Q: When can you exercise the right of redemption in judicial confirming the
foreclosure? sale and the
certificate of
A: sale to redeem
the property
GR: There is no right of redemption in judicial foreclosure,
only equity of redemption To whom conferred
XPN: If the mortgagee or bidder is a: May be acquired by a To the

second mortgagee in a. mortgagor,
a. Bank case of sale of b. successors-in
b. Credit institution, the mortgagor has 1 year from the property interest
registration of order confirming the sale and the c. or any
certificate of sale to redeem the property judgment
creditor of the
EQUITY OF REDEMPTION mortgagor
Q: What is equity of redemption? Period
A: The right of the mortgagor not to be divested of the In judicial foreclosure: GR: Extra-judicial
ownership of the mortgaged property and to stop the 90-120 days from foreclosure under Act
foreclosure sale by paying the mortgage debt within 90-120 entry of judgment or 3135-1 year from the
days from entry of judgment and even beyond, until finality of until finality of order date of registration of
order confirming the sale. confirming sale certificate of sale
EQUITY OF RIGHT OF REDEMPTION
XPN: in banks, 3
REDEMPTION
months from the date
of actual sale or
registration whichever
is earlier
When exercised
After the entry of Only after foreclosure
judgment but before sale
foreclosure sale;
After foreclosure sale
but before
confirmation sale
Facultad de Derecho
SANTO TOMAS

(3A)_____________________________________________________________________________________________________________
ACT 3135 v. RULE 68 of Rules of Court2 The amount realized from the foreclosure sale of the mortgaged property
shall, after deducting the costs of the sale, be paid to the person foreclosing
the mortgage, and when there shall be any balance or residue, after paying
2
RULE 68 off the mortgage debt due, the same shall be paid to junior encumbrancers
FORECLOSURE OF REAL ESTATE MORTGAGE in the order of their priority, to be ascertained by the court, or if there be no
such encumbrancers or there be a balance or residue after payment to them,
Section 1. Complaint in action for foreclosure. then to the mortgagor or his duly authorized agent, or to the person entitled
to it.
In an action for the foreclosure of a mortgage or other encumbrance upon
real estate, the complaint shall set forth the date and due execution of the Sec. 5. How sale to proceed in case the debt is not all due.
mortgage; its assignments, if any; the names and residences of the If the debt for which the mortgage or encumbrance was held is not all due as
mortgagor and the mortgagee; a description of the mortgaged property; a provided in the judgment, as soon as a sufficient portion of the property has
statement of the date of the note or other documentary evidence of the been sold to pay the total amount and the costs due, the sale shall
obligation secured by the mortgage, the amount claimed to be unpaid terminate; and afterwards, as often as more becomes due for principal or
thereon; and the names and residences of all persons having or claiming an interest and other valid charges, the court may, on motion, order more to be
interest in the property subordinate in right to that of the holder of the sold. But if the property cannot be sold in portions without prejudice to the
mortgage, all of whom shall be made defendants in the action. parties, the whole shall be ordered to be sold in the first instance, and the
entire debt and costs shall be paid, if the proceeds of the sale be sufficient
Sec. 2. Judgment on foreclosure for payment or sale. therefor, there being a rebate of interest where such rebate is proper.
If upon the trial in such action the court shall find the facts set forth in the
complaint to be true, it shall ascertain the amount due to the plaintiff upon Sec. 6. Deficiency judgment.
the mortgage debt or obligation, including interest and other charges as If upon the sale of any real property as provided in the next preceding
approved by the court, and costs, and shall render judgment for the sum so section there be a balance due to the plaintiff after applying the proceeds of
found due and order that the same be paid to the court or to the judgment the sale, the court, upon motion, shall render judgment against the
obligee within a period of not less than ninety (90) days nor more than one
hundred twenty (120) days from the entry of judgment, and that in default of ACT 3135 RULE 68 of Rules of
such payment the property shall be sold at public auction to satisfy the Court
judgment.
Sec. 3. Sale of mortgaged property; effect. There should be a No special power of

When the defendant, after being directed to do so as provided in the next
preceding section, fails to pay the amount of the judgment within the period
special power of attorney is required
specified therein, the court, upon motion, shall order the property to be sold attorney
in the manner and under the provisions of Rule 39 and other regulations
governing sales of real estate under execution. Such sale shall not affect the If not registered, the Can extra-judicially
rights of persons holding prior encumbrances upon the property or a part only remedy is the foreclose even if not
thereof, and when confirmed by an order of the court, also upon motion, it
shall operate to divest the rights in the property of all the parties to the
judicial foreclosure registered
action and to vest their rights in the purchaser, subject to such rights of
redemption as may be allowed by law.
Upon the finality of the order of confirmation or upon the expiration of the
period of redemption when allowed by law, the purchaser at the auction sale
or last redemptioner, if any, shall be entitled to the possession of the
property unless a third party is actually holding the same adversely to the
judgment obligor. The said purchaser or last redemptioner may secure a writ
of possession, upon motion, from the court which ordered the foreclosure.
Sec. 4. Disposition of proceeds of sale.

be personally liable to the plaintiff, upon which execution may issue
Process: immediately if the balance is all due at the time of the rendition of the
judgment; otherwise, the plaintiff shall be entitled to execution at such time
1. File a complaint as the balance remaining becomes due under the terms of the original
contract, which time shall be stated in the judgment.
for judicial
foreclosure Sec. 7. Registration.
2. Implead the
junior A certified copy of the final order of the court confirming the sale shall be
registered in the registry of deeds. If no right of redemption exists, the
mortgagors, certificate of title in the name of the mortgagor shall be cancelled, and a new
otherwise, the one issued in the name of the purchaser.
equity of
Where a right of redemption exists, the certificate of title in the name of the
redemption is
mortgagor shall not be cancelled, but the certificate of sale and the order
reserved to confirming the sale shall be registered and a brief memorandum thereof
them made by the registrar of deeds upon the certificate of title. In the event the
3. Order property is redeemed, the deed of redemption shall be registered with the
registry of deeds, and a brief memorandum thereof shall be made by the
confirming the registrar of deeds on said certificate of title.
sale
If the property is not redeemed, the final deed of sale executed by the sheriff
in favor of the purchaser at the foreclosure sale shall be registered with the
registry of deeds; whereupon the certificate of title in the name of the
mortgagor shall be cancelled and a new one issued in the name of the
ACTION FOR FORECLOSURE purchaser.
Sec. 8. Applicability of other provisions.

Q: What is the effect of filing of action for foreclosure?
The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable to the
judicial foreclosure of real estate mortgages under this Rule insofar as the
former are not inconsistent with or may serve to supplement the provisions
defendant for any such balance for which, by the record of the case, he may of the latter.
Facultad de Derecho
SANTO TOMAS

(3A)_____________________________________________________________________________________________________________
A:
GR: It bars the action for collection
XPN: In case of deficiency
Mortgage by spouses
Q: What if the mortgage was entered into by the spouses?
A: The surviving spouse should also be impleaded. The

surviving spouse is an indispensable party
DRAGNET CLAUSE
Q: What is a dragnet clause?
A: Such agreement that covers future debts without executing

another fresh agreement or amendment.
NOTE: An agreement with a dragnet clause is valid. In case of

chattel mortgage, there is a need to execute a fresh
agreement or an agreement which modifies the previous
ones.
Currency
Q: What if the agreement provides that the loan should be

in peso but the actual payment was made in dollars? What
should be the currency of the redemption price?
A: It is the currency stipulated, thus, the payment should be in

the currency stipulated.
REFERENCES
▪ DIVINA, Nilo T., Handbook on Philippine Commercial Law

(2nd Edition), 2010, CIBI Foundation, Inc.
▪ Divina Notes on Banking and Special Commercial Laws 2012
▪ UST Golden Notes, 2011
▪ Marx Notes
NOTES
Facultad de Derecho
SANTO TOMAS

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NOTES ON SPECIAL COMMERCIAL LAWS

Kenneth and King C. Hizon

SPECIAL COMMERCIAL LAWS

Q: What is the duration of LC?

1. Upon the period fixed by the parties; or

A: Letters of credit are in effect an absolute undertaking to A:

NOTES ON SPECIAL COMMERCIAL LAWS

Q: What is the effect of the failure of the beneficiary to fulfill

Q: Can a court order the release to the applicant the

A: No, such order violates the irrevocable nature of the letter

Negotiating The bank in the city of the beneficiary which

NOTES ON SPECIAL COMMERCIAL LAWS

Corresponden If the account party is in the Philippines and

Q: Describe the duty of the advising bank?

A: It determines the apparent authenticity of the letter of

He does not guarantee the genuineness or due execution of

NOTES ON SPECIAL COMMERCIAL LAWS

A: Injunction. NOTE: To be in the nature of a trust receipt, the entruster

Parties to a trust receipt agreement

Q: Who are the parties to a trust receipt agreement?

NOTES ON SPECIAL COMMERCIAL LAWS

a. Loan feature NOTE: The penal sanction covers:

Effect of failure on the part of entrustee to comply with its A: Yes.

NOTES ON SPECIAL COMMERCIAL LAWS

NOTES ON SPECIAL COMMERCIAL LAWS

A: Q: What is the order in the application of proceeds of

NOTES ON SPECIAL COMMERCIAL LAWS

A: The entrustee. Loss of goods, documents or instruments

CHATTEL MORTGAGE FORMAL REQUISITES

NOTES ON SPECIAL COMMERCIAL LAWS

Q: What is the effect if the mortgage is not registered?

A: It is nevertheless binding between the parties.

Q: What is the period within which the registration should

Dual Registration rule Security

a. Place where the mortgagor resides Law governing the sale

Vessels Maritime Industry Authority (MARINA)

chattel mortgage is a stipulation to the contrary.

Possession remains with Possession is vested in the

Formal contract Real contract

Recording in a public instrument

Must be recorded in a Must be in a public

SUBJECT MATTER OF CHATTEL MORTGAGE by the Public Service Commission (LTFRB);

But, even if he has foreclosed the chattel mortgage, it After-Acquired Property

NOTES ON SPECIAL COMMERCIAL LAWS

Q: How do you construe such clause? A:

NOTES ON SPECIAL COMMERCIAL LAWS

NOTE: The mere filing of the collection case bars the

A: It is the remedy available to the mortgagee by which he

Q: What are the kinds of foreclosure? NOTE: Foreclosure can be:

Judicial foreclosure Q: What is the so-called “Two-bidder rule”?

Q: What is the remedy if the mortgagee cannot obtain A:

NOTES ON SPECIAL COMMERCIAL LAWS

NOTE: Ordinarily, the debtor is also the mortgagor, but it is A:

Death of mortgagor 1. Exact fulfillment of the obligation, should the vendee

NOTES ON SPECIAL COMMERCIAL LAWS

Art. 1484 not applicable in case mortgagee is not the vendor

Q: Does Article 1484 apply as against a mortgagee who is not Q:

Q: What is replevin? Q: Is a mortgagee of a personal property sold on

A: Having opted to foreclose the chattel mortgage, GAMI can

NOTES ON SPECIAL COMMERCIAL LAWS

Additional security SIMPLE LOAN RECTO LAW

You can recover for Precludes the mortgagee

NOTES ON SPECIAL COMMERCIAL LAWS

remedy of foreclosure that