catindig reviewer

COMLAW REVIEWER 2009 james-deng-carol-mario-des-ria-marvin-reizel-chris-ricky-owen-sop 1 of 196

STUDY GUIDE OF THE SPECIAL COMMERCIAL

LAWSProf. Tristan A. Catindig

I. BULK SALES LAWAct 3952 (1932), as amended by RA 111 (1947)

1.1. Topics

A. PurposeTo prevent the defrauding of creditors by the secret sale or disposal or mortgage in bulk of all or substantially all of merchant’s stock of goods in bulk

B. Types of Sales in Bulk

Sec. 2 1) Any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor, or assignor; or2) sale, transfer, mortgage or assignment of all, or substantially all, of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor, or 3) of all, or substantially all, of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor, or assignor, shall be deemed to be a sale and transfer in bulk, in contemplation of this Act:

C. Duties of Person Selling in Bulk

Sec 3, 4, 5 and 91) Deliver a sworn written statement of the names and addresses of all creditors to whom the vendor or mortgagor may be indebted, indicating the amount of indebtedness due or owing, or to become due or owing (Sec. 3);2) To apply the proceeds of the sale or mortgage pro-rata to creditors (Sec. 4);3) At least 10 days before sale/transfer/execution of mortgage, make detailed inventory and to preserve the same showing the quantity and, to the extent possible, the cost price to the vendor, etc. of each article to be included in the sale, etc. (Sec. 5);4) Give notice to every creditor at least 10 days before the sale or transfer (Sec. 5);

5) Registration of the documents in Bureau of Trade Regulation and Consumer Protection (Sec. 9).

D. When Law not Applicable1) All creditors give written waiver (Sec. 2);2) Judicial sales (Sec. 8)

E. Consequences of non-compliance with duties

From San Beda reviewer1. Between the parties Valid contract2. Between persons other than the creditor

Valid contract

3. As to effected creditors of the seller/mortgagor

Void contract

F. Interpretation of StatuteThe law is penal in nature and in derogation of the right to alienate property without restriction. Thus, its provisions must be strictly construed against the State and liberally in favor of the accused.

1.2 Case

Sale Of Foundry Shop Not Covered By BLS

PEOPLE V WONG SZU TUNG (1954)

The object of the sale – a foundry shop – is not covered by the provisions of the Bulk sales law. What was sold was the shop itself, together with the goodwill and credits, equipment, tools and machinery thereof (including a Dodge truck), which are not the stock of merchandise, goods, wares, provisions or materials in bulk referred to in the law. A foundry shop manufactures iron works or processes or casts metals. It does not sell merchandise.

II. GENERAL BONDED WAREHOUSE ACTAct 3893 (1931), as amended by RA 237 (1948)

2.1 Topics

A. Purpose1) regulate the business of receiving commodities for storage;2) to protect persons who may want to avail of the services;3) to encourage the establishment of more warehouses.

B. Business of receiving commodity for storage


Sec. 21) the warehouseman is obligated to return the very same commodity delivered to him or to pay its value;2) the commodity delivered is to be milled for the owner thereof;3) the commodity delivered is commingled with the commodity belonging to other persons, and the warehouseman is obligate to return commodity of the same kind or to pay its value.

C. Requirement of License

Sec. 3To achieve the purposes mentioned above, any person who wants to engage in the business of receiving commodities for storage is required by the Act to first secure a license therefore from the DTI

D. Duties of Bonded Warehouseman1) insure the commodity received for storage against fire (Sec. 6);2) receive for storage any commodity of the kind customarily stored by him in the warehouse, so far as his license and the capacity of his warehouse will permit, without making any discrimination between the persons desiring to avail themselves of warehouse facilities (Sec. 8);3) keep a complete record of all commodities received by him, of the receipts issued therefore, of the withdrawals, of the liquidation, and of al the receipts returned to and cancelled by him (Sec. 9)

2.2 Cases

Receipt of Palay for Milling

LIMJOCO V DIRECTOR OF COMMERCE (1965)

FACTS: Petitioner and husband are owners of a rice mill. The issue was whether of not the General Bonded Warehouse Act is applicable to her business. Petitioner argues that since her business is the milling of palay, the delivery thereof to her is merely incidental to such business and does not constitute storage within the meaning of the statute.

HELD: The General Bonded Warehouse Act is applicable. SEC 2 is too clear to permit of any exercise in construction or semantics. It does not stop at the bare use of the word "storage," but expressly provides that any contract or transaction wherein the palay delivered is to be milled for and on account of the owner shall be deemed included in the business of receiving rice for storage for the purpose of the Act. In other words, it is enough that the palay is delivered, even if only to have it milled. The main intention of the lawmaker is to give protection to the owner of the commodity against possible abuses (and we might add negligence) of the person to whom the physical control of his properties is delivered.

GOZALES V GO TIONG (1958)

FACTS: Prior to the issuance of the license to Go Tiong to operate as bonded warehouseman, he had on several occasions received palay for deposit from plaintiff Gonzales, totaling 368 sacks, for which he issued .After he was licensed as bonded warehouseman, Go Tiong again received various deliveries of palay from plaintiff, totaling 492 sacks, for which he issued the corresponding receipts, all the grand total of 860 sacks, valued at P8,600 at the rate of P10 per sack.

On or about March 15, 1953, plaintiff demanded from Go Tiong the value of his deposits in the amount of P8,600, but he was told to return after two days, which he did, but Go Tiong again told him to come back. A few days later, the warehouse burned to the ground. When plaintiff filed suit co claim his losses, Go Tiong argued that the former’s claim is governed by the Civil Code and not by the Bonded Warehouse Act (Act No. 3893, as amended by Republic Act No. 247), for the reason that, as already stated, what Go Tiong issued to plaintiff were ordinary receipts, not the warehouse receipts contemplated by the Warehouse


Receipts Law, and because the deposits of palay of plaintiff were gratuitous.

HELD: Bonded Warehouse Act applicable. Act No. 3893 as amended is a special law regulating the business of receiving commodities for storage and defining the rights and obligations of a bonded warehouseman and those transacting business with him. Consequently, any deposit made with him as a bonded warehouseman must necessarily be governed by the provisions of Act No. 3893. The kind or nature of the receipts issued by him for the deposits is not very material much less decisive. Though it is desirable that receipts issued by a bonded warehouseman should conform to the provisions of the Warehouse Receipts Law, said provisions in our opinion are not mandatory and indispensable in the sense that if they fell short of the requirements of the Warehouse Receipts Act, then the commodities delivered for storage become ordinary deposits and will not be governed by the provisions of the Bonded Warehouse Act. Under SEC 1 of the Warehouse Receipts Act, one would gather the impression that the issuance of a warehouse receipt in the form provided by it is merely permissive and directory and not obligatory.

III. WAREHOUSE RECEIPTS ACTAct 2137 (1912)

3.1 Topics

A. Purpose To prescribe the rights and duties of a warehouseman and to regulate the relationship between a warehouseman and:1) the depositor of goods;2) holder of a warehouse receipt for the goods;3) person lawfully entitled to the possession of the goods; or4) other persons.

B. Obligation to issue receipt

Sec. 2A warehouseman is required to issue a receipt for the commodity he receives for storage. No form is prescribed, but it should at least contain the following information:1. Location of the warehouse2. Date of Issue3. Receipt number4. Language to indicate if the receipt were negotiable or non-negotiable5. Rate of storage charges6. Description of goods or packages containing them

7. Signature of the warehouseman or his agentLanguage indicating if the warehouseman is an owner solely or jointly with others, of the goods deposited and8. Statement of advances made by the warehouseman for which he claims a lien

C. Degree of Care

Sec. 3That degree of care which a reasonably careful man would exercise in regard to similar goods of his own.

D. Kinds or Receipts (Sec. 4-7)1) Non-negotiable receipta. one which states that the goods received by the warehouseman will be delivered to the depositor or to any other specified personb. the word “non-negotiable” should be placed plainly upon its face2) Negotiable receipta. One which states that the goods received by the warehouseman will be delivered to the bearer or to the order of any person named in such receipt.b. Can not be converted to non-negotiable

E. Obligation to Deliver Goods (Sec. 8-9)1) Deliver to whom – upon demanda. Holder of the receipt for the goodsb. Depositor2) The demand should be accompanied by:a. An offer to satisfy the warehouseman’s lienb. An offer to surrender the receipt if it is negotiablec. A readiness and willingness to sign an acknowledgement, when the goods are delivered, that they have been delivered if such is requested by the warehouseman.F. Liability for Misdelivery or Conversion (Sec. 10, 17-18)1) Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them2) He would also be liable for misdelivery even if he delivers to a person holding a non-negotiable receipt or a negotiable receipt, as provided in SEC 9(b) or (c) of the Act, if prior to such delivery he had either:a. Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such deliver; orb. Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods.

G. Rights of Holder of Receipt Covering Goods vs. Owner of GoodsNot being a negotiable instrument (but a Document of Title), the holder of the receipt can


only acquire such rights /title to the goods as the person negotiating the receipt had. Thus, as between the owner of the good, and a holder of the receipt of the good which was apparently stolen, the former has a better right.

H. When negotiable receipt not required to be surrendered (Sec. 9, 14 and 16)1) Warehouseman is justified in delivering goods to the following persons (Sec. 9):a. the person lawfully entitled to the possession of the goods, or his agent;b. A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for the goods, or who has written authority from the person so entitled either indorsed upon the receipt or written upon another paper; orc. A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or order, or to bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by the terms of the receipt or by his mediate or immediate indorser.2) Where a negotiable receipt has been lost or destroyed (Sec. 14)a. A court of competent jurisdiction may order the delivery of the goods upon:i. satisfactory proof of such loss or destruction and ii. upon the giving of a bond with sufficient sureties to be approved by the court to protect the warehouseman from any liability or expenseb. The court may also in its discretion order the payment of the warehouseman's reasonable costs and counsel fees.c. The delivery of the goods under an order of the court as provided in this SEC, shall not relieve the warehouseman from liability to a person to whom the negotiable receipt has been or shall be negotiated for value without notice of the proceedings or of the delivery of the goods.3) Warehouseman cannot set up title in himself (Sec. 16)a. No title or right to the possession of the goods, on the part of the warehouseman shall excuse the warehouseman from liability for refusing to deliver the goods according to the terms of the receipt.b. EXECEPT: such title or right is derived directly or indirectly from a transfer made by the depositor at the time of or subsequent to the deposit for storage, or from the warehouseman's lien,

I. Commingling of Goods (Sec. 22-23)1) A warehouseman must keep the goods of a depositor separate from the goods of other depositors, or from the goods of the same

depositor for which a separate receipt has been issued. 2) Rationale: permit the inspection and redelivery of the goods deposited at all times3) EXCEPT: a. The goods are fungible, ANDb. The commingling is authorized by agreement or by custom.

J. Other Liabilities of Warehouseman1) Failure to mark a receipt intended to be non-negotiable as “non-negotiable” (Sec. 7)a. Because the holder of the receipt may treat the same as negotiable.2) Failure to take up and cancel a negotiable receipt when goods are delivered (Sec. 11)a. The warehouseman shall be liable for failure to deliver the goods to any one who purchases for value in good faithi. WON such purchaser acquired title to the receipt before or after the delivery of the goods by the warehouseman.ii. Shall be guilty of a crime punishable by fine or imprisonment.b. EXCEPT:i. Goods have been lawfully sold to satisfy a warehouseman’s lien.ii. Goods have been lawfully sold or disposed of because of their perishable or hazardous nature.3) Failure to take up and cancel a negotiable receipt or to place upon it a statement of what goods have been delivered, when goods are partly delivered (Sec. 12)a. Same as #2.4) For altered receiptsKind of Alteration Warehouseman’s

Liability Immaterial Liable according to the

terms of the receipts as originally issued

Authorized Liable according to the terms of the receipts as authorized

Unauthorized but without fraudulent intent

Liable according to the terms of the receipts as they were before the alteration

Unauthorized but with fraudulent intent

Liable according to the terms of the receipts as originally issued, even against: i) a purchaser of the receipt for value with notice of the alteration; 2) to the person who made the alteration and to any person who took it with notice of the alteration.

However, in the latter case, such material and


fraudulent alteration shall excuse the warehouseman from any other liability to the said persons.

5) For non-existence or misdescription of goods (Sec. 20)a. Liable for damages to holder of a receipt if at time of its issue, goods not yet existed or by failure of the goods to match desciptionb. EXCEPT:i. Statement of the marks or labels upon them or upon the packages containing them;ii. Statement that the goods are of a certain kind at that the packages containing the goods contain goods of a certain kinds or by words of similar importEg: “received box said to contain...” and not “box containing…”6) For commingling goods (Sec. 24)a. Shall be liable severally to each depositor for the care and redelivery of the depositor’s share of the mass of commingled goods to the same extent and under the same circumstances as if the goods had been kept separate7) For issuing receipts for goods not received (Sec. 50)a. Shall be guilty of a crime if he issues a receipt for goods that have not actually been received by him or are not under his actual control at the time of the issuance of the receipt8) For issuing receipts containing false statements (Sec. 51)a. Shall be guilty of a crime if he fraudulently issues a receipt for goods knowing that it contains any false statement9) For issuing duplicate receipts not so marked (Sec. 52)a. Guilty of crime if issues a duplicate or additional negotiable receipt for goods knowing that a former negotiable receipt for the same goods or any part of them is outstanding and uncancelled, without plainly placing upon the face of the receipt the word “duplicate”b. EXCEPT: in the case of a lost or destroyed receipt after proceedings as provided for in Sec. 1410) For issuing receipts for the warehouseman’s goods which do not state that fact (Sec. 53)a. Guilty of a crime if he issues a negotiable receipt for oods deposited with or held by him of which he knows that he is the owner, solely or jointly or in common with others, if he fails to state such ownership in the receipt11) For delivery of goods without obtaining negotiable receipt (sec. 54)a. Guilty of a crime if he delivers gods our of his possession knowing that a negotiable receipt is oustanding and cancelledb. EXCEPT:

i. Goods have been lawfully sold to satisfy a warehouseman’s lien.ii. Goods have been lawfully sold or disposed of because of their perishable or hazardous nature.iii. In the case of lost or destroyed receipt after proceedings (Sec. 14)

K. Warehouseman’s Lien (Sec. 27, 28, 29, and 31)1) Definitiona. A warehouseman has a lien on the goods deposited with him or on the proceeds thereof in the his hands for all lawful charges for storage and preservation of the goods, money advanced by him in relation to such goods such as the expenses of transportation or labor, etc. 2) Against what propertya. All goods belonging to the person liable for the chargesb. All goods belonging to others deposited by the person liable for the charges who has been entrusted with the possession of the goods and could have validly pledged the same3) Lose Liena. Warehouseman may lose lien by:i. surrendering the possession of the goods because it is possessory in natureii. refusing to deliver the goods when a demand is made with which he is bound to comply4) Effect of sale to satisfy liena. The warehouseman shall not, after the sale, be liable for failure to deliver the goods to the depositor or owner of the goods or to the holder of the receipt

3.2 Case

PNB V JUDGE BENITO C. SE, JR. (1996)

FACTS: PNB filed for attachment of several quedans of sugar in the possession of Noah’s Ark Sugar refinery. The sugar was security for loans of PNB’s clients which they failed to pay. Noah’s Ark claimed that they were the owners of the sugar.

HELD: While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees. Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in accordance with SEC 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehouseman’s lien is possessory in nature.


SEC 14. Lost or destroyed receipts. — Where a negotiable receipt has been lost or destroyed, a court of competent jurisdiction may order the delivery of the goods upon satisfactory proof of such loss or destruction and upon the giving of a bond with sufficient sureties to be approved by the court to protect the warehouseman from any liability or expense, which he or any person injured by such delivery may incur by reason of the original receipt remaining outstanding. The court may also in its discretion order the payment of the warehouseman's reasonable costs and counsel fees.

The delivery of the goods under an order of the court as provided in this SEC, shall not relieve the warehouseman from liability to a person to whom the negotiable receipt has been or shall be negotiated for value without notice of the proceedings or of the delivery of the goods.

SEC 36. Effect of sale. — After goods have been lawfully sold to satisfy a warehouseman's lien, or have been lawfully sold or disposed of because of their perishable or hazardous nature, the warehouseman shall not thereafter be liable for failure to deliver the goods to the depositor or owner of the goods or to a holder of the receipt given for the goods when they were deposited, even if such receipt be negotiable.

IV. CHATTEL MORTGAGE LAWAct 1508 (1906), in relation to Articles 1484, 1485, 2140 and 2140 Civil Code

Act 1508Sec. 3 Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title.

Sec 4 Validity. — A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated: Provided, however, That if the

property is situated in a different province from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.

Sec 5 Form. — A chattel mortgage shall be deemed to be sufficient when made substantially in accordance with the following form, and shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the mortgage as above stated, and the certificate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith.

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

"This mortgage made this ____ day of ______19____ by _______________, a resident of the municipality of ______________, Province of ____________, Philippine Islands mortgagor, to ____________, a resident of the municipality of ___________, Province of ______________, Philippine Islands, mortgagee, witnesseth:

"That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal property situated in the municipality of ______________, Province of ____________ and now in the possession of said mortgagor, to wit:

(Here insert specific description of the property mortgaged.)

"This mortgage is given as security for the payment to the said ______, mortgagee, of promissory notes for the sum of ____________ pesos, with (or without, as the case may be) interest thereon at the rate of ___________ per centum per annum, according to the terms of __________, certain promissory notes, dated _________, and in the words and figures following (here insert copy of the note or notes secured).

"(If the mortgage is given for the performance of some other obligation aside from the payment of promissory notes, describe correctly but concisely the obligation to be performed.)"The conditions of this obligation are such that if the mortgagor, his heirs, executors, or


administrators shall well and truly perform the full obligation (or obligations) above stated according to the terms thereof, then this obligation shall be null and void.

"Executed at the municipality of _________, in the Province of ________, this _____ day of 19_____

____________________(Signature of mortgagor.)

"In the presence of

"_________________"_________________(Two witnesses sign here.)FORM OF OATH."We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud."

FORM OF CERTIFICATE OF OATH."At ___________, in the Province of _________, personally appeared ____________, the parties who signed the foregoing affidavit and made oath to the truth thereof before me.

"_____________________________"(Notary public, justice of the peace, 1 or other officer, as the case may be.)

Sec 6 Corporations. — When a corporation is a party to such mortgage the affidavit required may be made and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage the affidavit may be made and subscribed by one member thereof.

Sec 7 Descriptions of property. — The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same.

If the property mortgaged be large cattle," as defined by SEC one of Act Numbered Eleven and forty-seven, 2 and the amendments thereof, the description of said property in the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos, or cowlicks, and other marks of ownership as described and set forth in the certificate of ownership of said animal or animals, together with the number and place of

issue of such certificates of ownership.

If growing crops be mortgaged the mortgage may contain an agreement stipulating that the mortgagor binds himself properly to tend, care for and protect the crop while growing, and faithfully and without delay to harvest the same, and that in default of the performance of such duties the mortgage may enter upon the premises, take all the necessary measures for the protection of said crop, and retain possession thereof and sell the same, and from the proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor or those entitled to the same.

A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding.

Sec. 8 Failure of mortgagee to discharge the mortgage. — If the mortgagee, assign, administrator, executor, or either of them, after performance of the condition before or after the breach thereof, or after tender of the performance of the condition, at or after the time fixed for the performance, does not within ten days after being requested thereto by any person entitled to redeem, discharge the mortgage in the manner provided by law, the person entitled to redeem may recover of the person whose duty it is to discharge the same twenty pesos for his neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject-matter thereof.

Sec. 13 When the condition of a chattel mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the sale thereof. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it by the terms of this Act.

Sec. 14 Sale of property at public auction; Officer's return; Fees; Disposition of proceeds. — The mortgagee, his executor, administrator,


or assign, may, after thirty days from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides, or where the property is situated, provided at least ten days' notice of the time, place, and purpose of such sale has been posted at two or more public places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the sale.

The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the register of deeds where the mortgage is recorded, and the register of deeds shall record the same. The fees of the officer for selling the property shall be the same as in the case of sale on execution as provided in Act Numbered One hundred and ninety, 4 and the amendments thereto, and the fees of the register of deeds for registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the register of deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand.

If the sale includes any "large cattle," a certificate of transfer as required by SEC sixteen of Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of the municipality where the sale was held to the purchaser thereof.

Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(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 against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-A-a)

Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-A-a)

Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. (n)

Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages. (n)

4.1 Topics

Essential Requisites1) That it be constituted to secure the fulfilment of a principal obligation;2) That the mortgagor be the absolute owner of the thing mortgaged;3) That the persons constituting the mortgage have the free disposal of their property or, in the absence thereof, that they be legally authorized for the purpose; and4) That the object be personal and movable property.

Formal Requirements1) Signed by the person executing the same in the presence of two witnesses;2) Accompanied by an affidavit of good faith and a certificate of oath;3) Mortgaged property must be described in such a manner as to enable anybody reading the document, after reasonable inquiry and investigation, to be able to identify the same.

Registration: When And WhereWhenNo specific time is provided under the law. However, such registration must be made:1) before the mortgagor has complied with his principal obligation; and2) no right of an innocent third person is prejudiced.

Where


1) Where the mortgagor resides in the Philippines, in his place of residence;2) Where the mortgagor resides abroad, in the place where the property is situated;3) Where the mortgagor resides in a place different from where the property is situated, in the place where the mortgagor resides and where the property is situated, except where the amount of the mortgage is more than Php50,000 in which case the registration of the mortgage in the province where the property is situated shall be sufficient registration.

For motor vehicles, the chattel mortgage must also be registered with the Land Transportation Office to bind third persons.

After-Acquired, Future Or Substituted PropertyFuture or after-acquired property can be subject of a chattel mortgage if:1) The properties mortgaged are:a. Perishable; or b. Subject to inevitable wear and tear; orc. Intended to be sold or used but with the understanding that they would be replaced with similar properties to be thereafter acquired by the mortgagor2) In the case of other properties, if the inclusion of such future or after-acquired properties is expressly stipulated and a supplement to the mortgage specifically listing and describing such property is executed and registered in the chattel mortgage register.Like or substituted property cannot be deemed covered by a chattel mortgage, unless the property is described in a supplement to the mortgage.

After-Incurred ObligationWhile a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

One of the requisites of a chattel mortgage is the execution of an affidavit of good faith, which requires an oath that the mortgage is for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud.

This requirement makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. (Acme Shoe v CA)

Right Of Junior Mortgagee

Art. 13After a first mortgage is executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee by virtue of the second mortgage.

Foreclosure Procedure

Art 14; SC Circular No. 7-2002, Dated January 22, 20021) 30 days after the condition of a chattel mortgage is broken, the mortgagee may cause the mortgaged property or any part thereof to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides or where the property is situated.2) The application for the foreclosure of the mortgage should be filed with the Executive Judge through the Clerk of Court.3) After receipt of the application, the Clerk of Court shall, among other duties:a. Raffle the application among the Sheriffs; andb. Cause the posting of the notice of sale.4) Notice of the time, place and purpose of such sale must be posted, at least 10 days before the date of sale, at 2 or more public places in the municipality where the mortgagor resides or where the property is situated.5) The mortgagee shall notify the mortgagor and the persons holding subsequent mortgages of the time and place of sale, at least 10 days before the sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality.6) The officer making the sale shall, within 30 days thereafter, make in writing a return of his doings and file the same in the office of the registry of deeds where the mortgage is recorded, and the registry of deeds shall record the same. The return shall particularly describe the articles sold and state the amount received for each article.


RedemptionThere is no right of redemption in Chattel Mortgage. There is only an EQUITY of REDEMPTION.1) Period within which equity of redemption may be exercised.From the date the condition of the Chattel Mortgage is broken but BEFORE the foreclosure sale of the collateral thereof.> The 30-day period to foreclose a Chattel Mortgage is the minimum period after violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattel AND is a period of grace for the mortgagor to discharge the mortgage obligation. 2) Amount to be paid.a. The amount due on such mortgage; andb. The costs and expenses incurred by such breach of condition before the sale thereof.3) Persons entitled to redeem.a. Mortgagor;b. A person holding a subsequent mortgage;c. A subsequent attaching creditor.

Claim For Deficiency; Rule And ExceptionRule: A chattel mortgagee may sue for a deficiency following foreclosure.Exception: in the case of personal property sold in installments where the chattel mortgagor/vendee’s failure to pay covers 2 or more installments.

4.2 Cases

Chattel Mortgage On House Not Binding On Third Persons Not Parties To Contract

PIANSAY V DAVID (1964)

FACTS: Conrado David received a loan from Claudia Vda. De Uy Kim. In order to secure the loan, he executed a chattel mortgage on a house. The chattel mortgage was registered with the Register of Deeds. The mortgaged house was sold to Claudia at a public auction, which Claudia, in turn, sold to Salvador Piansay.

Meanwhile, Marcos Mangubat filed a complaint against Conrado for collection of a loan. Marcos levied upon the house that was in possession of Salvador, and at the same time, demanded payment of rentals from Salvador.

ISSUE: WON the chattel mortgage constituted in favour of Claudia is valid

HELD: NO. Claudia had no right to foreclose the chattel mortgage constituted in her favor, because it was in reality a mere contract of an

unsecured loan. Therefore, the contract of sale between Claudia and Salvador was of no effect.

Regardless of the validity of a contract constituting a chattel mortgage on a house, as between the parties to said contract, the same cannot and does not bind third persons, who are not parties to the aforementioned contract or their privies. As a consequence, the sale of the house is null and void insofar is Marcos Mangubat is concerned.

Chattel Mortgage Over House Built On Another Person’s Land

TUMALAD V VIVENCIO (1971)

FACTS: Petitioners executed a chattel mortgage in favor of respondents over their house, which is located in a land that is being rented by petitioners from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds and was executed to guarantee a loan.

Since the petitioners defaulted on their loan, the mortgage was extrajudicially foreclosed and the house was sold to respondents at a public auction.

Respondents commenced a civil case in the municipal court, which decided against the petitioners and ordered the latter to vacate the premises and to pay rent until the premises is completely vacated.

Petitioners argue that the chattel mortgage is void ab initio relying on the following grounds:1) That their signatures on the chattel mortgage was obtained through fraud, deceit or trickery; and2) That the subject matter of the chattel mortgage is a house, and being an immovable, it can only be subject of a real estate mortgage and not a chattel mortgage.

ISSUE: WON the chattel mortgage is valid

HELD: YES. That parties to a deed of chattel mortgage may agree to consider a house as personal property for the purposes of said contract is good only insofar as the contracting parties are concerned. This is based partly upon the principle of estoppel.

In a case, the SC held that a mortgaged house built on a rented land was held to be a personal property, not only because the deed of mortgage considered it as such, but also because it did not form part of the land, for it now settled that an object placed on land by one who had only a temporary right to the


same, does not become immobilized by attachment. Hence, if a house belonging to a person stands on a rented land belonging to another person, it may be mortgaged as a personal property as so stipulated in the document of mortgage. It should be noted, however that the principle is predicated on statements by the owner declaring his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise.

In the case at bar, the house on rented land is expressly designated as chattel mortgage. Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage, petitioners could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise.

Moreover, the subject house stood on a rented lot to which petitioners merely ad a temporary right as lessee, and although this cannot in itself determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty.

Finally, it is the petitioners themselves, as debtor-mortgagors, who are attacking the validity of the chattel mortgage. The doctrine of estoppels applied to petitioners.

Chattel Mortgage Over Machinery

MAKATI LEASING V WEAREVER TEXTILE MILLS (1983)

FACTS: In order to obtain financial accommodations from petitioner Makati Leasing and Finance Corp., private respondent Wearever Textile Mills, discounted and assigned several receivables with the former. To secure the collection of the receivables assigned, private respondent executed a Chattel Mortgage over certain raw materials inventory as well as a machinery.

Upon private respondent’s default, petitioner filed a complaint to effect the seizure of the machinery. The lower court issued a writ of seizure and in order to enforce the said writ, the sheriff went to the premises and removed the main drive motor of the subject machinery.

Private respondent questions the act of the sheriff arguing that the drive motor the

machinery in suit cannot be subject of a chattel mortgage because it is real property pursuant to Art. 415 of the New of Civil Code, the same being attached to the ground by means of bolts and the only way to remove it would be to drill out or destroy the concrete floor.

ISSUE: WON the machinery in suit is real or personal property

HELD: It is personal property. As the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is because one who has so agreed is stopped from denying the existence of the chattel mortgage.

The characterization of the subject machinery as chattel by the private respondent is indicative of intention and impresses upon the property the character as determined by the parties. In other words, the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

In addition, records show that no steps were taken to nullify the mortgage and that the private respondent has benefited from the contract. Equity dictates that one should not benefit at the expense of another. Private respondent could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom.

After-Acquired Property

TORRES V LIMJAP

FACTS: Jose B. Henson executed in favor of the respondents a chattel mortgage on his drug store in order to secure a loan. In the instrument of the chattel mortgage, it was stipulated that the mortgagor was authorized to sell the goods covered thereby and to replace them with other goods thereafter acquired.

Petitioner attacks the validity of the stipulation and insists that a stipulation authorizing the disposal and substitution of the chattels mortgaged does not operate to extend the mortgage to after-acquired property, and that such stipulation is in contravention of the express provision of the last paragraph of SEC 7 Act No. 1508.

ISSUE: WON the chattel mortgage on the after-acquired property is valid


HELD: YES. In the interpretation and construction of a statute, the intent of the law-maker should always be ascertained and given effect. In enacting Act No. 1508, the primary aim of the law-making body was undoubtedly to promote business and trade and to give impetus to the economic development of the country. Bearing this in mind, it could not have been the intention of the Philippine Commission to apply the provision of SEC 7 to stores open to the public for retail business, where the goods are constantly sold and substituted with new stock.

A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods.

In other words, a mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage.

In sum, the court held:1) That the provision of the last paragraph of SEC 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business; and2) That the stipulation in the chattel mortgages in question, extending their effect to after-acquired property, is valid and binding.

After-Incurred Obligation

ACME SHOE V CA (1996)

FACTS: Petitioner Chua Pac, the president and general manager of co-petitioner “Acme Shoe, Rubber & Plastic Corporation,” executed for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank. The mortgage stands as a security for petitioner’s corporate loan of Php3M. However, a provision in the chattel mortgage agreement states that the mortgage shall also stand as a security for the payment of subsequent promissory note or notes, either as a renewal or a new loan.

In due time, the petitioner paid the Php3M loan. Subsequently, however, it obtained additional financial accommodations from respondent and failed to settle this additional loan.

Respondent then applied for an extrajudicial foreclosure of the chattel mortgage. The petitioner seeks to enjoin the foreclosure.

ISSUE: WON a clause in a chattel mortgage, which extend its coverage to obligations yet to be contracted or incurred, is valid and effective

HELD: NO. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

One of the requisites of a chattel mortgage is the execution of an affidavit of good faith, which requires an oath that the mortgage is for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud.

This requirement makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the Php3M loan which petitioner corporation later fully paid. By virtue of SEC 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated.

With the full payment of the Php3M loan, there was no longer any chattel mortgage that could cover the new loans that were concluded thereafter.


Specific Performance

SOUTHERN MOTORS V MOSCOSO (1961)

FACTS: Private respondent Southern Motors, Inc. sold to petitioner Angel Moscoso a Chevrolet truck. Upon making a down payment, Angel executed a promissory note and a chattel mortgage on the truck.

Upon the failure of Angel to pay the installments, Southern Motors filed a complaint against Angel, to recover the unpaid balance of the purchase price. A writ of attachment was issued by the lower court and the Chevrolet truck and a house and lot belonging to Angel were attached by the sheriff. The sheriff then sold the truck at a public auction in which Southern Motors was the only bidder.

The trial court then condemned Angel to pay Southern Motors the deficiency.

Angel questions this order of the court and alleged that the attachment caused to be levied on the truck and its immediate sale at public auction, was tantamount to the foreclosure of the chattel mortgage on said truck.

Southern Motors counters and claims that in filing the complaint, it chose to exact fulfilment of the obligation (specific performance) and is thus entitled to sue for the unpaid balance of the purchase price.

ISSUE: WON the deficiency of the purchase price can still be recovered

HELD: YES. The case is governed by Art. 1484 of the New Civil Code. (SEE Art. 1484, NCC)

Southern Motors had chosen the first remedy. The complaint is an ordinary civil action for recovery of the remaining unpaid balance die on the promissory note. This is shown by the following circumstances:1) Southern Motors had not adopted the procedure or methods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for ordinary civil actions2) Southern Motors not only attached the truck but also the house and lot of Angel.

Nothing unlawful or irregular in Southern Motors’ act of attaching the mortgaged truck itself. As Southern Motors has chosen to exact the fulfilment of Angel’s obligation, the former may enforce execution of the judgment rendered in its favor on the personal and real

property of the latter not exempt from execution sufficient to satisfy the judgment.

Attachment is merely an incident to an ordinary civil action. Therefore, the mortgage creditor may recover judgment on the mortgage debt and cause an execution on the mortgaged property and may cause an attachment to be issued and levied on such property, upon beginning his civil action.

No Recourse Against Additional Mortgaged Property

1) Residential house and lot

LEVY HERMANOS V PACIFIC COMMERCIAL (1941)

FACTS: In addition to a chattel mortgage on the motor vehicles that they bought, the Hermanos also executed a mortgage on a residential lot and house of strong materials.

HELD: The SC held that the mortgage is void insofar as it included the house and lot of vendees. It said that the vendor cannot be allowed to insist on the sale of the house and lot of the vendees for to do so would be equivalent to obtaining a writ of execution against them concerning other properties which are separate and distinct from those which are sold on installment. This would be contrary to public policy limiting the vendor’s right to foreclose the chattel mortgage only on the thing sold.

2) Parcel of land mortgaged by third party

CRUZ V FILIPINAS INVESTMENT (1968)

FACTS: Plaintiff Ruperto G. Cruz purchased on installments, from Far East Motor Corporation, an Isuzu Diesel Bus, for which Ruperto executed a promissory note and a chattel mortgage on the same vehicle.

As an additional security, Felicidad Vda. De Reyes, in the form of a SECOND MORTGAGE, a parcel of land and a building.

Far East Motor Corp. then assigned all its rights and interest in the Deeds of Chattel Mortgage and in the Deed of Real Estate Mortgage to Filipinas Investment and Finance Corp.


Ruperto defaulted. Filipinas took steps to foreclose the chattel mortgage, however, the vehicle had been damaged in an accident. This is the reason why after the foreclosure sale of the chattel, the proceeds were not sufficient to discharge fully indebtedness of Ruperto.

Therefore, Filipinas prepared to foreclose the real estate mortgage on Mrs. Reyes’ land by paying the mortgage indebtedness of Mrs. Reyes to DBP, requesting the sheriff to take possession, and by posting notices of sale.

Although Filipinas admits that the remedies in Art. 1484 of the New Civil Code is alternative, it claims that what is being withheld from the vendor therein is only the right to recover “against the purchaser”, and not a recourse to the additional security put up, not by the purchaser himself, but by a third person.

ISSUE: WON Filipinas, which has already extrajudicially foreclosed the chattel mortgage executed by the buyer, Ruperto, may also extrajudicially foreclose the real estate mortgage constituted by Mrs. Reyes on her own land, as additional security, for the payment of the balance of Ruperto’s obligation, still remaining unpaid

HELD: The remedies in Art. 1484 of the NCC are alternative, not cumulative, that the exercise of one would bar the exercise of the others. The reason for this doctrine was to remedy the abuses committed in connection with the foreclosure of chattel mortgages.

To sustain Filipinas’ argument is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee; so ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Art. 1484 would be indirectly subverted, and public policy overturned.

Neither is there validity to Filipinas’ allegation that, since the law speaks of “action”, the restriction should be confined only to the bringing of judicial suits or proceedings in court.

The word “action” is without a definite or exclusive meaning. Considering the purpose for which the prohibition contained in Art. 1484 was intended, the word “action” used therein may be construed as referring to any judicial or extrajudicial proceeding by virtue of which the vendor may lawfully be enabled to exact

recovery of the supposed unsatisfied balance of the purchase price from the purchaser or his privy. Certainly, an extrajudicial foreclosure of real estate mortgage is one such proceeding.

Right Of Recourse Against Seller/Assignor

FILIPINAS INVESTMENT V VITUG (1969)

FACTS: Julian R. Vitug executed and delivered to Supreme Sales & Development Corp. a promissory note, accompanied by a chattel mortgage to secure his purchase of a 4-door consul sedan. Then, Supreme Sales negotiated and assigned all its rights, title, and interests to the same to Filipinas Investment & Finance Corp., the assignment indicating that it is with recourse against Supreme Sales.

Julian defaulted in the payment of 4 installments due which resulted in the entire obligation becoming due and demandable. Pursuant to this, Filipinas obtained a writ of replevin but this became unnecessary as Julian voluntarily surrendered possession of the car. The car was sold at a public auction but since the proceeds still left a deficiency, Filipinas wants to hold Supreme Sales liable.

Supreme Sales claims that the with-recourse provision in the assignment is violative of the Recto Law, which declares null and void any agreement in contravention thereof.

ISSUE: WON the Recto Law is applicable in the case at bar, making the with recourse provision contained in the agreement null and void

HELD: NO. The remedy presently being sought is not against the buyer of the car but against the seller. Under the Recto Law, what Congress seeks to protect are only the buyers on installment who more often than not have been victimized by sellers who, before the enactment of this law, succeeded in unjustly enriching themselves at the expense of the buyers because aside from recovering the goods sold, upon default of the buyer in the payment of two instalments, still retained for themselves all amounts already paid, in addition, furthermore, to other damages, such as attorney’s fees, and costs. Surely, Congress could not have intended to impair and much less do away with the right of the seller to make commercial use of his credit against the buyer, provided said buyer is not burdened beyond what this law allows.

In the case at bar, the assignment made by Supreme Sales to Filipinas of the promissory note and mortgage of Julian Vitug precisely stipulated that Filipinas had a right of recourse against the seller should the buyer fail to pay.


Since the Recto Law is not applicable in this case, the said provision remains valid.

The case is remanded for further proceedings.

Right Of Unpaid Seller Under Art. 1484, Civil Code, Alternative Not Cumulative

SPOUSES ROSARIO V PCI LEASING AND FINANCE, INC. (2005)

FACTS: Spouses Rosario purchased an Isuzu Elf pick up utility vehicle from Car Merchants, Inc. covered by a Purchase Agreement. In order to pay the balance of the purchase price, the spouses contracted a loan with PCI Leasing wherein they executed a promissory note in favor of PCI Leasing agreeing that in case of default, the sum and interest shall immediately become due and demandable. In addition, the spouses also executed a chattel mortgage in favor of PCI Leasing over the vehicle.

Since the spouses failed to pay their loan, PCI Leasing instituted a complaint that led to the issuance of the trial court of a writ of replevin, in pursuance of which the sheriff seized the vehicle and turned over the possession to PCI Leasing.

The spouses Car Merchants had assigned to PCI Leasing its right to collect the balance; hence, it was subrogated to the rights of Car Merchants subject to the limitations of Art. 1484NCC. Furthermore, they allege that since PCI Leasing opted to foreclose the chattel mortgage, it was estopped from collecting the unpaid balance of the purchase price.

ISSUE: WON PCI Leasing is the assignee of Car Merchant; WON Art. 1484 of the NCC is applicable

HELD: NO. There is no factual basis on the claim that Car Merchants had assigned its rights to collect the balance of the purchase price to PCI Leasing. In fact, what the evidence shows is that the spouses secured a loan from PCI Leasing and even executed a promissory note and a chattel mortgage in its favor.Under Art. 1625 of the NCC, an assignment of credit, right or action must appear in a public document to bind third persons. Since there is no evidence that Car Merchants executed such a deed, Art 1484 of the NCC does not apply in this case.

Even assuming that Art 1484 is applicable, PCI Leasing is not proscribed from suing the spouses for their unpaid balance. The fact is that PCI Leasing did not foreclose the chattel mortgage, but opted to sue the spouses for the

balance of their account under the promissory note, with a plea for writ of replevin. By securing a writ of replevin, the respondent did not thereby foreclose the chattel mortgage. If there has been no foreclosure of the chattel mortgage or a foreclosure sale, then the prohibition against further collection of the balance price does not apply.

A creditor is not obliged to foreclose a chattel mortgage even if there is one; precisely the law says that any of the remedies may be exercised by the seller.

Only Actual Sale Of Mortgaged Chattel Bars Foreclosing Creditor From Recovering Unpaid Balance

MAGNA FINANCIAL SERVICES GROUP, INC. V COLARINA (2005)

FACTS: Elias Colarina bought on installment a Suzuki Multicab from Magna Financial Services Group, Inc. whereby he executed an integrated promissory note and deed of chattel mortgage over the vehicle.

Since Colarina failed to pay the monthly amortization, Magna filed a Complaint for Foreclosure of Chattel Mortgage with Replevin. From the complaint, it will show that Magna availed itself of the first and third remedies under Art. 1484 of the NCC.

A writ of replevin was issued by the court and upon service of the same to Colarina, he voluntarily surrendered possession of the vehicle to the sheriff, who in turn, surrendered possession to Magna.

Colarina points to the inconsistency of the remedies or reliefs sought by the Magna in its Complaint where it prayed for the custody of the chattel mortgage and at the same time asked for the payment of the unpaid balance on the motor vehicle.

ISSUE: WON Magna opted to foreclose the chattel mortgage

HELD: YES. A contract of chattel mortgage is in the nature of a conditional sale of personal property given as a security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms, the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title. On the other hand, in case of non payment,


foreclosure is one of the remedies available to a mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given.

Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action or by foreclosure under power of sale contained in the mortgage. Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the mortgaged property to be seized by the sheriff, as agent of the mortgagee, and have it sold at public auction in the manner prescribed by SEC 14 of Act No. 1508, or the Chattel Mortgage Law. This rule governs extrajudicial foreclosure of chattel mortgage. In sum, since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for.

ISSUE: WON there has been an actual foreclosure of the subject vehicle

HELD: NO. Where the mortgagee elects a remedy of foreclosure, the law requires the actual foreclosure of the mortgaged chattel.

It is actual sale of the mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would bar the creditor (who chooses to foreclose) from recovering any unpaid balance. And it is deemed that there has been foreclosure of the mortgage when all the proceedings of the foreclosure, including the sale of the property at public auction, have been accomplished.

Be that as it may, although no actual foreclosure as contemplated under the law has taken place in this case, since the vehicle is already in the possession of Magna and it has persistently and consistently elected the remedy of foreclosure, the Court of Appeals, thus, ruled correctly in directing the foreclosure of the said vehicle without more.

PD 1417Further Amending SEC 198 Of The Revised Administrative Code As Amended By Republic Act Nos. 116 And 2711, By Increasing The Fees Collectible In Connection With Registration Of Chattel MortgagesWHEREAS, there has been an unprecedented increase in the cost of equipment, materials and supplies used by the Land Registration Commission;WHEREAS, it is in consonance with sound fiscal policy that the registration fees collectible by

the Land Registration Commission through its registries of deeds be adjusted accordingly. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers in me vested by the Constitution, do hereby decree and order:SEC 1. SEC 198 of the Revised Administrative Code, as amended by Republic Act Nos. 116 and 2711, is hereby further amended to read as follows:"Sec. 198. Registration of chattel mortgages and fees collectible in connection therewith. Every register of deeds shall keep a primary entry book and a registration book for chattel mortgages; shall certify on each mortgage filed for record, as well as on its duplicate, the date, hour, and minute when the same was by him received; and shall record in such books any chattel mortgage, assignment, or discharge thereof, and any other instruments relating to a recorded mortgage, and all such instruments shall be presented to him in duplicate the original to be filed and the duplicate to be returned to the person concerned.The recording of a mortgage shall be effected by making an entry, which shall be given a correlative number, setting forth the names of the mortgages and the mortgagor, the sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving the proper file number thereof. The recording of other instruments relating to a recorded mortgage shall be effected by way of annotations on the space provided therefor in the registration book, after the same shall have been entered in the primary entry book. The register of deeds shall also certify the officer's return of sale upon any mortgage, making reference upon the record of such officer's return to the volume and page of the record of the mortgage, and a reference of such return on the record of the mortgage itself, and give a certified copy thereof, when requested, upon payment of the lawful fees for such copy; and certify upon each mortgage officer's return of sale or discharge of mortgage, and upon any other instrument relating to such a recorded mortgage, both on the original and on the duplicate, the date, hour and minute when the same is received for record and record such certificate with the return itself and keep an alphabetical index or mortgagors and mortgagees, which record and index shall be open to public inspection. Duly certified copies of such records and of filed instruments shall be receivable as evidence in any court.


The register of deeds shall collect the following fees for services rendered by him under this SEC:(a) For entry or presentation of any document in the primary entry book, five pesos. Supporting papers presented together with the principal document need not be charged any entry or presentation fee unless the party in interest desires that they be likewise entered.(b) For filing and recording each chattel mortgage, including the necessary certificates and affidavits, the fees established in the following schedule shall be collected: "1. When the amount of the mortgage does not exceed six thousand pesos, seven pesos for the first five hundred pesos or fractional part thereof, and three pesos for each additional five hundred pesos or fractional part thereof."2. When the amount of the mortgage is more than six thousand pesos but does not exceed thirty thousand pesos, forty-eight pesos for the initial amount not exceeding eight thousand pesos, and eight pesos for each additional two thousand pesos or fractional part thereof."3. When the amount of the mortgage is more than thirty thousand pesos but does not exceed one hundred thousand pesos, one hundred fifty pesos for initial amount not exceeding thirty-five thousand pesos, and fourteen pesos for each additional five thousand pesos or fractional part thereof."4. When the amount of the mortgage is more than one hundred thousand pesos but does not exceed five hundred thousand pesos, three hundred fifty-two pesos for the initial amount not exceeding one hundred ten thousand pesos and twenty pesos for each additional ten thousand pesos or fractional part thereof."5. When the amount of the mortgage is more than five hundred thousand pesos, one thousand one hundred sixty-two pesos for the initial amount not exceeding five hundred twenty thousand pesos, and thirty pesos for each additional twenty thousand pesos or fractional part thereof: Provided, however, That registration of the mortgage in the province where the property is situated shall be sufficient registration: And provided, further, That if the mortgage is to be registered in more than one city or province, the register of deeds of the city or province where the instrument is first presented for registration shall collect the full amount of the fees due in accordance with the schedule prescribed above, and the register of deeds of the other city or province where the same instrument is also to be registered shall collect only a sum equivalent to twenty per centum of the amount of fees due and paid in the first city or province, but in no case shall the fees payable in any registry be less than the minimum fixed in this schedule.

"(c) For recording each instrument of sale, conveyance, or transfer of the property which is subject of a recorded mortgage, or of the assignment of mortgage credit, the fees established in the preceding schedule shall be collected on the basis of ten per centum of the amount of the mortgage or unpaid balance thereof: Provided, That the latter is stated in the instrument. "(d) For recording each notice of attachment, including the necessary index and annotations, eight pesos."(e) For recording each release of mortgage, including the necessary index and reference, the fees established in the schedule under paragraph (b) above shall be collected on the basis of five per centum of the amount of the mortgage."(f) For recording each release of attachment, including the proper annotations, five pesos."(g) For recording each sheriff's return of sale, including the index and reference, seven pesos."(h) For recording a power of attorney, appointment of judicial guardian, administrator, or trustee, or any other instrument in which a person is given power to act in behalf of another in connection with a mortgage, ten pesos. "(i) For recording each instrument or order relating to a recorded mortgage, including the necessary index and reference, for which no specific fee is provided above five pesos."(j) For certified copies of records, such fees as are allowed by law for copies kept by the register of deeds."(k) For issuing a certificate relative to, or showing the existence or non-existence of, and entry in the registration book, or a document on file, for each such certificate containing not more than two hundred words, five pesos; if it exceeds that number, an additional fee of one peso shall collected for every one hundred words or fractional part thereof, in excess of the first two hundred words."(l) For services rendered in attending to requests for references to, or researches on any document on file in the registry, there shall be collected a fee of two pesos per document."SEC 2. This decree shall take effect upon its approval.Done in the City of Manila, this 9th day of June, in the year of Our Lord, nineteen hundred and seventy-eight

Circular No. 7-2002To: All Executive Judges, Clerks Of Court, Sheriffs In The Office Of The Clerk Of Court And Branch Sheriffs In The Regional Trial CourtsSubject: Guidelines For The Enforcement Of Supreme Court Resolution


Of December 14, 1999 In Administrative Matter No. 99-10-05-0 (Re: Procedure In Extra-Judicial Foreclosure OfMortgage), As Amended By The Resolutions Dated January 30, 2001 And August 7, 2001

These guidelines are issued pursuant to the Supreme Court En Banc Resolution of December 14, 1999 in Administrative Matter No. 99-10-05-0, as amended by the resolutions of January 30, 2001 and August 7, 2001, directing the Office of the Court Administrator to prepare the guidelines for the enforcement of A.M. No. 99-10-05-0 on the extra-judicial foreclosure of mortgages.Sec. 1. All applications for extra-judicial foreclosure of mortgage, whether under the direction of the Sheriff or a notary public pursuant to Art. No. 3135, as amended, and Act 1508, as amended, shall be filed with the Executive Judge, through the Clerk of Court, who is also the Ex-Officio Sheriff (A.M. No. 99-10-05-0, as amended, March 1, 2001).Sec. 2. Upon receipt of the application, the Clerk of Court shall:a. Examine the same to ensure that the special power of attorney authorizing the extra-judicial foreclosure of the real property is either inserted into or attached to the deed of real estate mortgage (Act No. 3135, Sec. 1, as amended);b. Give a file number to the application and endorse the date and time of its filing and thereafter docket the same, keeping, in this connection, separate docket books for extra-judicial foreclosure sales conducted by the Sheriff and those conducted by notaries public;c. For the conduct of extra-judicial foreclosure of real estate or chattel mortgage under the direction of the sheriff, collect the appropriate filing fees and issues the corresponding official receipt pursuant to the following schedule:If the amount of the indebtedness or the mortgagee’s claim is:(1) Less than P50,000.00 ………………….. P275.00(2) P50,000.00 or more but less thanP100,000.00 ……………………………..... 400.00(3) P100,000.00 or more but less thanP150,000.00 ………………………………. 500.00(4) P150,000.00 or more but less thanP200,000.00 ………………………………. 650.00(5) P200,000.00 or more but less thanP250,000.00 …………………………….. 1,000.00(6) P250,000.00 or more but less than

P300,000.00 ………………………….…. 1,250.00(7) P300,000.00 or more but less thanP400,000.00 …………………………….. 1,500.00(8) P400,000 or more but less thanP500,000.00 …………………………….. 1,750.00(9) P500,000.00 or more but not more thanP100,000,000.00 ……………………..…. 2,000.00(10) For each P1,000.00 in excess ofP1,000,000.00……………………………….. 10.00(SEC 7 (c), Rule 141, Rules of Court, as amended by A.M. No. 00-2-01-SC, February 1, 2000).Cooperatives, thrift banks, and rural banks are not exempt from the payment of filing fees and other fees under these guidelines (A.M. No. 98-9-280-RTC, September 29, 1998; A.M. No. 99-3-93-RTC, April 20, 1999; and A.M. No. 92-9-408-0).d. In case the application is for the extra-judicial foreclosure of mortgages of real estates and/or chattels in different locations covering one indebtedness, issue, apart from the official receipt for the fees, a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, for purposes of having the application docketed with the Clerks of Court in the places where the other properties are located and of allowing the extra-judicial foreclosure to proceed thereat. (A.M. No. 99-10-05-0, par. 2(e)).Sec. 3. The application for extra-judicial foreclosure shall be raffled under the supervision of the Executive Judge, with the assistance of the Clerk of Court and Ex-Oficio Sheriff, among all Sheriffs including those assigned to the Office of the Clerk of court and Sheriffs assigned in the branches of the court. A Sheriff to whom the case has been raffled shall be excluded in the succeeding raffles and shall participate again only after all other Sheriffs shall have been assigned a case by raffle (Administrative Circular No. 3-98, Feb. 5, 1998).Sec. 4. The Sheriff to whom the application for extra-judicial foreclosure of mortgage was raffled shall do the following:a. Prepare a Notice of Extra-judicial Sale using the following form:“NOTICE OF EXTRA-JUDICIAL SALE”“Upon extra-judicial petition for sale under Act 3135 / 1508 filed __________________ against (name and address of Mortgator/s) to satisfy the mortgage indebtedness which as of ___________ amounts to P _________________, excluding penalties, charges, attorney’s fees and expenses of foreclosure, the undersigned or his duly authorized deputy will sell at public auction on (date of sale) _______________ at 10:00 A.M. or soon thereafter at the main entrance of the


___________ (place of sale) to the highest bidder, for cash or manager’s check and in Philippine Currency, the following property with all its improvements, to wit:”(Description of Property)”“All sealed bids must be submitted to the undersigned on the above stated time and date.”“In the event the public auction should not take place on the said date, it shall be held on _______________, _______________ without further notice.”________________ (date)“SHERIFF”b. (1) In case of foreclosure of real estate mortgage, cause the publication of the notice of sale by posting it for not less than twenty (20) days in at least three (3) public places in the municipality or city where the property is situated and if such property is worth more than four hundred (P400.00) pesos, by having such notice published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the municipality or city (Sec. 3, Act No. 3135, as amended). The Executive Judge shall designate a regular working day and definite time each week during which said notice shall be distributed personally by him for publication to qualified newspapers or periodicals as defined in Sec. 1 of P.D. No. 1079, which distribution shall be effected by raffle (A.M. No. 01-1-07-SC, Oct. 16, 2001). Unless otherwise stipulated by the parties to the mortgage contract, the debtor-mortgagor need not be personally served a copy of the notice of the extra-judicial foreclosure.For real estate mortgages covering loans not exceeding P100,000.00, exclusive of interests due and unpaid, granted by rural banks (RA No. 7353, Sec. 6) or thrift banks (RA No. 7906, Sec. 18),publication in a newspaper shall be dispensed with, it being sufficient that the notices of foreclosure are posted for a period of sixty (60) days immediately preceding the public auction in the most conspicuous areas of the municipal building, the municipal public market, the rural bank, the barangay hall, and the barangay public market, if any, where the land mortgaged is situated. Proof of publication shall be accomplished by an affidavit of the Sheriff and shall be attached to the records of the case.(2) In case of foreclosure of a chattel mortgage, post the notice for at least ten (10) days in two (2) or more public places in the municipality where the mortgagor resides or where the property is situated (Sec. 14, Act No. 1508, as amended).Sec. 5. Conduct of the extra-judicial foreclosure sale –a. The bidding shall be made through sealed bids which must be submitted to the

Sheriff who shall conduct the sale between the hours of 9 a.m. and 4 p.m. of the date of the auction (Act 3135, Sec. 4). The property mortgaged shall be awarded to the party submitting the highest bid and, in case of a tie, an open bidding shall be conducted between the highest bidders. Payments of the winning bid shall be made either in cash or in manager’s check, in Philippine currency, within five (5) days from notice.b. The sale must be made in the province in which the real property is situated and, in case the place within the said province in which the sale is to be made is the subject of stipulation, such sale shall be made in said place in the municipal building of the municipality in which the property or part thereof is situated (Act No. 3135, as amended, Sec. 2);in case of a chattel mortgage, the sale shall be made at a place in the municipality where the mortgagor resides or where the property is situated (Sec. 14, Act No. 1508, as amended).Sec. 6. After the sale, the Clerk of Courts shall collect the appropriate fees pursuant to Sec. 9(1), Rule 141, as amended by A.M No. 00-2-01-SC, computed on the basis of the amount actually collected by him, which fee shall not exceed P100,000.00 (A.M. No. 99-10-05-0, March 1, 2001, 2[d]). The amount paid shall not be subject to a refund even if the foreclosed property is subsequently redeemed.Sec. 7. In case of foreclosure under Act No. 1508, the Sheriff shall, within thirty (30) days from the sale, prepare a return and file the same in the Office of the Registry of Deeds where the mortgage is recorded.Sec. 8. The Sheriff or the notary public who conducted the sale shall report the name/s of the bidder/s to the Clerk of Court.Sec. 9. Upon presentation of the appropriate receipts, the Clerk of Court shall issue and sign the Certificate of Sale, subject to the approval of the Executive Judge or, in the latter’s absence, the Vice-Executive Judge. Prior to the issuance of the certificate of Sale, the Clerk of court shall, in extra-judicial foreclosure conducted under the direction of the sheriff, collect P300.00 as provided in SEC 20(d), Rule 141, as amended, and in extra-judicial foreclosure sales conducted under the direction of a notary public, collect the appropriate fees pursuant to Rule 141, §20(e), which amount shall not exceed P100,000.00 (Minute Res., A.M. No. 99-10-05-0, August 7, 2001).Sec. 10. After the Certificate of Sale has been issued, the Clerk of Court shall keep the complete records for a period of one (1) year from the date of registration of the certificate of sale with the Register of Deeds, after which the records shall be archived. Notwithstanding the foregoing, juridical persons whose property is


sold pursuant to an extra-judicial foreclosure shall have the right to redeem the property until, but not later than, the registration of the certificate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is earlier (R.A. 8791, SEC 47). In case the property is redeemed, the Clerk of Court shall assess the redemptioner’s fee as provided in SEC 7 (k), Rule 141, as amended. If the property is not redeemed, the Clerk of Court shall, as a requisite for the issuance of the final Deed of Sale, assess the highest bidder the amount of P300.00 as provided in SEC 20(d), Rule 141, as amended.Sec. 11. These guidelines shall take effect on April 22, 2002.Issued this 22nd day of January 2002

V. AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL ESTATE MORTGAGESAct 3135, as amended by Act 4118 (1933), Sec 6 RA 7353 (1992), Sec 18 RA 7906 (1995), Sec 47 RA 8791 (2000)

5.1 Topics

Remedies Available To Mortgagee Upon Default Of MortgagorForeclosure: A remedy available to the mortgagee where he subjects the mortgaged property to the satisfaction of the obligation to secure for which the mortgage was given. It may be effected either judicially or extrajudicially.

Authority To Foreclose Mortgage Extrajudicially1) The only instance when an extrajudicial foreclosure may be effected is when a sale is made and a Special Power of Attorney to extrajudicially foreclose is inserted or attached to the Real Estate Mortgage (REM).2) If the REM is silent as to the manner of foreclosing the mortgage, extrajudicial foreclosure may not be effected and Rule 68 of the Rules of Court in Judicial Foreclosure shall apply.

Procedure

Where to file> Application should be filed with the Executive Judge through the Clerk of Court.> After the receipt of the application, the Clerk of Court shall:1) examine the same to ensure that the special power if attorney authorizing the EJF of the real

property is either inserted or attached to the deed of real estate mortgage.2) raffle the application among the Sheriffs3) cause the posting and /or publication of the notice of sale

Where to sell> place where each of the mortgaged property is located. > The sale must be made in the province where the property to be sold is situated. Sale outside the province is illegal.> If the mortgage deed specified a place in the municipality in the province where the sale would be made, such sale shall be made in such place.> If the place of sale in the municipality was not stipulated, the sale shall be made in the municipal building of the municipality in which the property or part thereof is situated.

Posting Requirement/ Publication Requirement1) Notices of the sale shall be posted for not less than 20 days in at least 3 public places in the city or municipality where the property is situated.2) If property is worth more than P400, the notice of the sale shall also be published once a week for 3 consecutive weeks in a newspaper of general circulation in the city or municipality.

EXCEPTION to the requirement of newspaper publication even if mortgaged property is worth more than P400:> For real estate mortgages covering loans not exceeding P100,000, exclusive of interests due and unpaid, granted by rural or thrift banks, publication in a newspaper shall be dispensed with, it being sufficient that notices of foreclosure are posted for a period of 60 days immediately preceding the public auction in the most conspicuous areas at the premises of the rural bank or thrift bank, as the case may be, and at the municipal building, municipal public market, barangay hall and barangay public market if any or where the land is situated

Unless otherwise stipulated by the parties in the mortgage contract, the debtor/mortgagor need not be personally served a copy of the notice of extrajudicial foreclosure.No personal notice is required because an EJF is an action in rem requiring only the publication of the notice of the sale to bind the parties interested.> Failure to post notice is NOT per se a ground for invalidating the sale provided that the notice


thereof is duly published in a newspaper of general circulation. (DBP vs. Aguirre)> The object of the notice is to inform the public of the sale and to secure as many bidders as possible to get the best price for the property. > Republication: Republication in the manner prescribed by Act 3135 is necessary for the validity of a postponed EJF sale. The absence of such republication invalidates the foreclosure sale.

Conduct Of Sale1) Sale shall be by public auction or bidding made through sealed bids.2) Sealed bids are submitted to the Sheriff who shall conduct the sale between the hours of 9:00 A.M. to 4:00 P.M. of the date of auction. The sale shall be under the direction of:a. Sheriff of the province; orb. Municipality or auxiliary municipal judge of the municipality in which the sale is to be made; orc. Notary public of the said municipality3) Property shall be awarded to the highest bidder, in case of a tie, an open bidding shall be conducted between the highest bidders.> No auction sale shall be held unless there are at least 2 participating bidders (in case of second sale, if there is only one bidder, the sale shall proceed)4) Payment of the winning bid shall be made either in cash or in manager’s check, in Philippine currency, within 5 days from notice.> Inadequacy of the price would not nullify the sale unless the price is so inadequate as to shock the conscience of the court. In fact the property may be sold for less than its FMV because the lesser the price the easier for the owner to effect redemption. (Valmonte v CA)> If the proceeds of the sale are in excess of the amount claimed by the mortgagee, the excess shall be turned over to the mortgagor. 5) Creditor may be barred from participating in the bidding, only IF so provided in the mortgage deed. Hence, creditor or any of his representatives may participate absent any express provision in the mortgage or trust deed barring him.6) Certificate of sale issued by the clerk of court must be approved by the executive judge or in his absence the vice-executive judge. No certificate of sale shall be issued in favor of the highest bidder until all fees have been paid

Possession By Purchaser Of Foreclosed Property

1. During redemption periodThe purchaser of the foreclosed property is not automatically entitled to possession of the property. He must file an ex parte application and give a bond in the amount equivalent to the

use of the property for a period of 12 months. Upon approval of the bond, the court shall order the issuance of a writ of possession.However, a writ of possession may be issued in an EJF of REM, only if the debtor is in possession and no third party has intervened. (PNB vs. CA)

2. After the lapse of the redemption periodConsolidation of the title becomes a matter of right on the part of the purchaser and the issuance of a certificate of sale in his favor becomes ministerial upon the Registry of Deeds.To obtain possession, the purchaser may either ask for a writ of possession or bring an independent action such as a suit of ejectment.

Remedy Of Debtor If Foreclosure Not ProperThe debtor, in the proceedings in which possession was requested, but not later than 30 days after the purchaser was given possession, petition the sale to be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided in SEC 112 of Act 496 (now SEC 108 of PD 1529) and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond which the parties may have furnished by the person who obtained the possession. Either of the parties may appeal from the order of the judge in accordance with SEC 14 of Act 496 (no SEC 33 of PD 1529), but the order of possession shall continue in effect during the pendency of the appeal.

Redemption

Who may redeem1) the debtor2) his successor in interest3) any judicial creditor having an interest4) any person having a lien on the property subsequent to the mortgage under which the property is sold.

Period of RedemptionOne year from the date of the registration of certificate of sale.

SEC 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a


lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale, and such redemption shall be governed by the provisions of SECs 29-31 and 35 of the Rules of Court.

Date of Sale: has been construed by the Supreme Court as the date of registration of the sheriff’s certificate of foreclosure sale in the office of the Register of Deeds concerned. Where the mortgaged property sold to third party by the mortgagor: transfers only the right to redeem the property and the right to possess, use and enjoy the same during the redemption period.Where the mortgaged property sold to third party by mortgagee after the foreclosure: the mortgagor may still redeem it at the amount of the principal obligation plus interest until the time of actual redemption and not of the purchase price.

Requisites For A Valid Exercise Of Right Of Redemption1) The redemption must have been made within a year from the date of registration of the certificate of sale.2) Payment of the Purchase price of the property plus 1% interest per month with the taxes, if paid by the purchaser and the amount of his prior lien, if any computed from the date of the registration of the sale up to the time of redemption.3) Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the proper Registry of Deeds.4) The redemption must be made before the sale is confirmed by the court.5. Tender of payment must be made for the full amount of the purchase price, otherwise, to allow payment by instalments would be to allow the extension of the redemption period.

2 Kinds of Redemption1) Equity of Redemption – right of the mortgagor in case of a judicial foreclosure to recover the mortgaged property after his default in the performance the conditions of the mortgage but before the confirmation of sale of the mortgaged property.2) Right of redemption – right of the mortgagor in case of extrajudicial foreclosure to redeem the mortgaged property within a certain period after it was sold for the satisfaction of the mortgage debt. This is the kind of redemption contemplated in ACT 3135.

Equity of Redemption

Right of Redemption

Governing LawGoverned by Rule 68 of the Rules of Court

Governed by SEC 29-31 of Rule 39

Applicability1. in judicial foreclosure of REM;2. in EJF of REM involving a bank as a mortgagee and a juridical person as a mortgagor

1. in judicial foreclosure of REM involving a bank as a mortgagee, whether the mortgagor is a natural or a juridical person;2. in EJF of REM However, no right of redemption exists if it involves a bank as a mortgagee and a juridical person as a mortgagor.

To whom conferredConferred by law only to the mortgagor but acquired by second mortgagee since his right is subordinate to the first mortgagee.

Conferred by law to the mortgagor, his successors-in-interest or any judgment creditor of the mortgagor.

PeriodCan be exercised within a period of not less than 90 days nor more than 120 days from entry of judgment or even after foreclosure of sale but prior to confirmation.

Can be exercised within 1 year from date of registration of certificate of sale.

When ExercisedCan be exercised after entry of judgment but before foreclosure sale and after foreclosure sale but prior to confirmation of sale.

Can be exercised ONLY after the foreclosure sale.

Redemption PriceRedemption price depends on the judgment of the court as to the amount due to plaintiff upon mortgage debt with interest and charges approved by the court and costs.

Redemption price depends on the purchase price as fixed in Sec 26 Rule 39 ROC except in cases under SEC 78 of the General Banking Law, the amount and the interest to be paid by the mortgagor will be the amount due and the rate stipulated in the mortgage loan not the purchase price and legal interest under the ROC.

5.2 Cases


Action For Foreclosure Of Mortgage Prescribes After 10 Years From The Time The Right Of Action Accrued, I.E. When The Mortgagor Defaults In The Payment Of His Obligation

CANDO V SPOUSES OLAZO (2007)

Even from a cursory reading of the appeal, it is indelibly clear that the trial court committed an appalling blunder when it ruled that an action for foreclosure of mortgage prescribes after ten (10) years from the date of the mortgage contract. Under Article 1142 of the Civil Code, a mortgage action prescribes after ten (10) years. Jurisprudence, however, has clarified this rule by holding that a mortgage action prescribes after ten (10) years from the time the right of action accrued, which is obviously not the same as the date of the mortgage contract. Stated differently, an action to enforce a right arising from a mortgage should be enforced within ten (10) years from the time the right of action accrues; otherwise, it will be barred by prescription and the mortgage creditor will lose his rights under the mortgage. The right of action accrues when the mortgagor defaults in the payment of his obligation to the mortgagee.

Remedies Available To Mortgagee Alternative, Not Successive Or Cumulative

CALTEX PHILS v IAC (1989)

Where a debt is secured by a mortgage and there is a default in payment on the part of the mortgagor, the mortgagee has a choice of one (1) of two (2) remedies, but he cannot have both. The mortgagee may: 1) foreclosure the mortgage; or 2) file an ordinary action to collect the debt.

When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings

On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on the same mortgaged property, but

he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor.

CALTEX submits that the principles enunciated in the Bachrach case are not applicable nor determinative of the case at bar for the reason that the factual circumstances obtained in the said case are totally different from the instant case. In the Bachrach case, the plaintiff instituted an action to foreclose the mortgage after the money judgment in its favor remained unsatisfied whereas in the present case, CALTEX initially filed a complaint for collection of the debt and during the pendency thereof foreclosed extrajudicially the mortgage.

We disagree. Although the facts in the Bachrach case and in the present case are not identical, there is similarity in the fact that the plaintiffs in these two cases availed of both remedies although they are entitled to a choice of only one.

BANK OF AMERICA NT & SA V AMERICAN REALTY CORP (1999)

Anent real properties in particular, the Court has laid down the rule that a mortgage creditor may institute against the mortgage debtor either a personal action for debt or a real action to foreclose the mortgage.

In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the of the 1997 Rules of Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any court of justice but with the Office of the Sheriff of the province where the sale is to be made, in accordance with the provisions of Act No. 3135, as amended by Act No. 4118. In the case at bench, private respondent ARC constituted real estate mortgages over its properties as security for the debt of the principal debtors. By doing so, private respondent subjected itself to the liabilities of a third party mortgagor. Under the law, third persons who are not parties to a loan may secure the latter by pledging or mortgaging their own property. Notwithstanding, there is no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of another's obligation by mortgaging his own property, to be solidarily


bound with the principal obligor. The signatory to the principal contract - loan - remains to be primarily bound. It is only upon default of the latter that the creditor may have recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan.

SUICO RATTAN & BURI INTERIORS V CA (2006)

The remedy of extrajudicial foreclosure is deemed chosen not on the day of the sale but on the day of the filing of a petition for foreclosure with the office of the Provincial Chief. Since the filing of petition for foreclosure was earlier than the filing of action for sum of money, the remedy of foreclosure was chosen first, even if the actual foreclosure sale was conducted after the filing of action for sum of money.

The rule is that the remedies of action for sum of money and foreclosure are alternative and not cumulative. Hence, the action for sum of money by Metrobank was validly dismissed because it already filed a petition for foreclosure before it filed the action. If it had filed an action for recovery of deficiency instead of collection of sum of money, it would not have been dismissed. (Because recovery of deficiency is allowed for Real Estate Mortgage within 10 years after foreclosure)

Mortgage invalid if mortgagor not the property owner; doctrine of mortgagee in good faith not applicable

ERENA V QUERRER-KAUFFMAN (2006)

One of the essential requisites of a mortgage contract is that the mortgagor must be the absolute owner of the thing mortgaged. A mortgage is thus invalid if the mortgagor is not the property owner. In this case, the trial court and the CA are one in finding that based on the evidence on record, the owner of the property is Kauffman who was not the one who mortgaged the same to Erena.

The doctrine of mortgagee in good faith cannot apply in this case. This doctrine is based on the rule that persons dealing with properties covered by a TCT are not required to go beyond what appears on the face of the title. But this is only in a situation where the mortgagor has a fraudulent or defective title, but not when the mortgagor is an impostor and a forger.

In a forged mortgage, as in this case, the doctrine of mortgagee in good faith cannot be

applied and will not benefit a mortgagee no matter how large is his or her reservoir of good faith and diligence. Such mortgage is void and cannot prejudice the registered owner whose signature to the deed is falsified. When the instrument presented is forged, even if accompanied by the owner’s duplicate certificate of title, the registered owner does not lose his title, and neither does the assignee in the forged deed acquire any right or title to the property. An innocent purchaser for value is one who purchases a titled land bay virtue of a deed executed by the registered owner himself not a forged deed.

Newspaper of General Circulation

PEREZ V PEREZ (2005)

To be newspaper of general circulation, it is enough that it is published for the dissemination of local news and general information; that it has a bona fide subscription list of paying subscribers and that it is published at regular intervals.

The newspaper must not also be devoted to the interests or published for the entertainment of a particular class, profession, trade, calling, race, or religious denomination. The newspaper need not have the largest circulation as long as it is of general circulation.

In this case, the Olongapo News was the only newspaper in general circulation in Bataan at the time the notice of auction was published

Waiver By Parties Of Posting And Publication Requirements Void

PNB V NEPOMUCENO PRODUCTIONS, INC. (2002)FACTS: Petitioner PNB granted respondents a 4 Million Pesos credit line to finance the filming of the movie “Pacific Connection.” The loan was secured by mortgages on respondents’ real and personal properties, to wit: (1) the Malugay property; (2) the Forbes property; and (3) several motion picture equipments. The credit line was later increased to 6 Million Pesos and finally to 7.5 Million Pesos. Respondents defaulted in their obligation. Petitioner sought foreclosure of the mortgaged properties. The auction sale was re-scheduled several times without need of republication of the notice of sale, as stipulated in the Agreement to Postpone Sale, until finally, the auction sale proceeded, with petitioner as the highest bidder in the amount of P10,432,776.97. Aggrieved, respondents filed a Civil Case with the RTC, an action for annulment of foreclosure sale and


damages with injunction. Respondents contended that the foreclosure sale is null and void because: (1) the obligation is yet to mature as there were negotiations for an additional loan amount; (2) lack of publication; (3) the purchase price was grossly inadequate and unconscionable; and (4) the foreclosure proceedings were initiated by petitioner in bad faith.

RTC ordered the annulment and setting aside of the foreclosure proceedings and auction sale on the ground that there was lack of publication of the notice of sale. Petitioner appealed to the CA. CA dismissed petitioner’s appeal with regard to the Forbes Park property as the same was already the subject of a Deed of Reconveyance executed by petitioner in favor of respondents as well as a Compromise Agreement dated between the same parties. As to the Malugay property, CA affirmed the RTC decision.

ISSUE: WON the parties to the mortgage can validly waive the posting and publication requirements mandated by Act No. 3135.

HELD NO. Act. No. 3135, as amended, governing extrajudicial foreclosure of mortgages on real property is specific with regard to the posting and publication requirements of the notice of sale, to wit:“Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.”

On this score, it is well settled that what Act No. 3135 requires is: (1) the posting of notices of sale in three public places; and, (2) the publication of the same in a newspaper of general circulation. Failure to publish the notice of sale constitutes a jurisdictional defect, which invalidates the sale. Petitioner and respondents have absolutely no right to waive the posting and publication requirements of Act No. 3135. While it is established that rights may be waived, Article 6 of the Civil Code explicitly provides that such waiver is subject to the condition that it is not contrary to law, public order, public policy, morals, or good customs, or prejudicial to a third person with a right recognized by law.

The principal object of a notice of sale in a foreclosure of mortgage is not so much to notify the mortgagor as to inform the public generally

of the nature and condition of the property to be sold, and of the time, place, and terms of the sale. Notices are given to secure bidders and prevent a sacrifice of the property. Clearly, the statutory requirements of posting and publication are mandated, not for the mortgagor’s benefit, but for the public or third persons. In fact, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not even necessary, unless stipulated. As such, it is imbued with public policy considerations and any waiver thereon would be inconsistent with the intent and letter of Act No. 3135. Moreover, statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly complied with and slight deviations therefrom will invalidate the notice and render the sale at the very least voidable.

Thus, in the recent case of Development Bank of the Philippines v. Aguirre, the foreclosure sale held more than two (2) months after the published date of sale was considered void for lack of republication. Similarly, in the instant case, the lack of republication of the notice of the subject foreclosure sale renders it void.

OUANO V CA (2003)

FACTS: Julieta M. Ouano obtained a loan from the PNB in the amount of P104,280.00. As security for said loan, she executed a real estate mortgage over two parcels of land. She defaulted on her obligation. PNB filed a petition for extrajudicial foreclosure with the City Sheriff of Mandaue City. The sheriff prepared a notice of sale setting the date of public auction of the two parcels of land on December 5, 1980 at 9:00 a.m. to 4:00 p.m. He caused the notice to be published in the Cebu Daily Times, a newspaper of general circulation in Mandaue City, in its issues of November 13, 20 and 27, 1980. He likewise posted copies thereof in public places in Mandaue City and in the place where the properties are located. However, the sale as scheduled and published did not take place as the parties, on four separate dates, executed Agreements to Postpone Sale (Agreements). These Agreements were addressed to the sheriff, requesting the latter to defer the auction sale to another date at the same time and place, “without any further republication of the Notice.” In all the postponements, no new notice of sale was issued, nor was there any republication or reposting of notice for the rescheduled dates. Finally, on May 29, 1981, the sheriff conducted the auction sale, awarding the two parcels of land to PNB, the only bidder. He executed a


Certificate of Sale certifying the sale for and in consideration of P195, 510.50.

As Julieta failed to redeem the properties within the one year period from registration of sale, PNB consolidated its title on February 12, 1983. On February 23 of the same year, it conveyed the properties to Alfredo Ouano, the brother of Julieta, under a Deed of Promise to Sell payable in five years. On March 28, 1983, Julieta sent demand letters to PNB and Ouano, pointing out irregularities in the foreclosure sale. On April 18, 1983, Julieta filed a complaint with the RTC of Cebu for the nullification of the May 29, 1981 foreclosure sale. Ouano filed a motion for leave to intervene, and filed his Answer in Intervention to protect his rights over the properties.

While the case was pending, on February 25, 1986, PNB executed a Deed of Sale in favor of Ouano. The Register of Deeds of Mandaue City accordingly cancelled the TCTs in PNB’s name and issued in lieu thereof TCTs in the name of petitioner over the two parcels of land. On January 29, 1990, the Regional Trial Court of Cebu rendered a decision in favor of Julieta, holding that the lack of republication rendered the foreclosure sale void. Not satisfied, PNB and Ouano brought the case to the CA. In its decision, said court affirmed the trial court’s ruling on the same ground that there was no compliance with the mandatory requirements of posting and publication of notice of sale. Ouano filed a motion for reconsideration, which was denied for lack of merit by the same court on April 15, 1997.

ISSUE: WON requirements of Act No. 3135 were complied with in the May 29, 1981 foreclosure sale

HELD: NO. Act No. 3135 (as amended by Act No. 4118) SEC 3, which provides:

SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty (20) days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality of city.

It is a well-settled rule that statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly complied with, and that even slight deviations therefrom will invalidate the notice and render the sale at least voidable. Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect

invalidating the sale. Consequently, such defect renders the sale absolutely void and no title passes. Ouano, however, insists that there was substantial compliance with the publication requirement, considering that prior publication and posting of the notice of the first date were made.

In Tambunting v. Court of Appeals, we held that republication in the manner prescribed by Act No. 3135 is necessary for the validity of a postponed extrajudicial foreclosure sale. Thus we stated:

Where required by the statute or by the terms of the foreclosure decree, public notice of the place and time of the mortgage foreclosure sale must be given, a statute requiring it being held applicable to subsequent sales as well as to the first advertised sale of the property

Ouano further contends that republication may be waived voluntarily by the parties.

This argument has no basis in law.

See PNB vs. Nepomuceno

The principal object of a notice of sale in a foreclosure of mortgage is not so much to notify the mortgagor as to inform the public generally of the nature and condition of the property to be sold, and of the time, place, and terms of the sale. Notices are given to secure bidders and prevent a sacrifice of the property. Clearly, the statutory requirements of posting and publication are mandated, not for the mortgagor’s benefit, but for the public or third persons. In fact, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not even necessary, unless stipulated. As such, it is imbued with public policy considerations and any waiver thereon would be inconsistent with the intent and letter of Act No. 3135. Publication, therefore, is required to give the foreclosure sale a reasonably wide publicity such that those interested might attend the public sale. To allow the parties to waive this jurisdictional requirement would result in converting into a private sale what ought to be a public auction.


Moreover, assuming arguendo that the written waivers are valid, we find noticeable flaws that would nevertheless invalidate the foreclosure proceedings. First, the Agreements, as worded, only waived “further republication of the notice of sale.” Nothing in the Agreements indicates that the parties likewise dispensed with the reposting of the notices of sale. As there was no reposting of notice of the May 29, 1981 sale, the foreclosure fell short of the requirements of Act No. 3135. Second, we observe that the Agreements were executed and filed with the sheriff several days after each rescheduled date. The first agreement was timely filed, two days prior to the originally scheduled sale on December 5, 1980. The subsequent agreements, however, was executed and filed several days after the rescheduled sales. On the rescheduled dates, therefore, no public sale occurred, nor was there any request to postpone filed with the sheriff, except for the first one. In short, the Agreements are clearly defective for having been belatedly executed and filed with the sheriff. PNB is at fault. It is the mortgagee who causes the mortgaged property to be sold, and the date of sale is fixed upon his instruction. PNB’s inaction on the scheduled date of sale and belated filing of requests to postpone may be deemed as an abandonment of the petition to foreclose it filed with the sheriff. Consequently, its right to foreclose the mortgage based on said petition lapsed. Ouano asserts that Rule 39, SEC 24 of the Rules of Court, which allows adjournment of execution sales by agreement of the parties should be applied.

The said provision provides:

Sec. 24. Adjournment of Sale – By written consent of debtor and creditor, the officer may adjourn any sale upon execution to any date agreed upon in writing by the parties. Without such agreement, he may adjourn the sale from day to day, if it becomes necessary to do so for lack of time to complete the sale on the day fixed in the notice.

Distinction should be made of the three different kinds of sales under the law, namely:

an ordinary execution sale (ROC Rule 39)

a judicial foreclosure sale (ROC Rule 68)

an extrajudicial foreclosure sale (Act 3135)

A different set of law applies to each class of sale mentioned. The cited provision in the Rules of Court hence does not apply to an

extrajudicial foreclosure sale. Moreover, even assuming that the aforecited provision applies, all it authorizes is the adjournment of the execution sale by agreement of the parties. Nowhere does it state that republication and reposting of notice for the postponed sale may be waived. Thus, it cannot, by any means, sanction the waiver in the case at bar.

Publication Of Notice Of Foreclosure Sale More Than Sufficient Compliance With The Posting Notice Requirement Of The Law

OLIZON V CA(1994)

We take judicial notice of the fact that newspaper publications have more far-reaching effects than posting on bulletin boards in public places. There is a greater probability that an announcement or notice published in a newspaper of general circulation, which is distributed nationwide, shall have a readership of more people than that posted in a public bulletin board, no matter how strategic its location may be, which caters only to a limited few. Hence, the publication of the notice of sale in the newspaper of general circulation alone is more than sufficient compliance with the notice-posting requirement of the law. By such publication, a reasonably wide publicity had been effected such that those interested might attend the public sale, and the purpose of the law had been thereby subserved.

The object of a notice of sale is to inform the public of the nature and condition of the property to be sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If these objects are attained, immaterial errors and mistakes will not affect the sufficiency of the notice; but if mistakes or omissions occur in the notices of sale, which are calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, such mistakes or omissions will be fatal to the validity of the notice, and also to the sale made pursuant thereto.

In the instant case, the aforesaid objective was attained since there was sufficient publicity of the sale through the newspaper publication. There is completely no showing that the property was sold for a price far below its value as to insinuate any bad faith, nor was there any showing or even an intimation of collusion between the sheriff who conducted the sale and respondent bank. This being so, the alleged non-compliance with the posting requirement,


even if true, will not justify the setting aside of the sale.

Foreclosure Void If Sale Does Not Take Place On The Date Specified In Published Notice

DBP V AGUIRRE (2001)

Failure to post notice is not per se a ground for invalidating the sale, provided notice is duly published in a newspaper of general circulation. In Olizon vs. CA, the Court held that newspaper have more-far-reaching effects than posting on bulletin boards in public places. Because of the greater probability of readership of more people and that newspapers are distributed nationwide, there is a reasonably wide publicity. Those interested might attend the public sale. Publication in the newspaper of general circulation alone is more than sufficient compliance with the notice-posting requirement of the law.

Here, the sale was held more than two months after the published date of the sale, rendering the sale void. In Masantol Rural Bank, Inc. v. CA the Court stated that failure to publish the notice of auction sale as required by the statute constitutes a jurisdictional defect which invalidates the sale. Masantol squarely applies. Although lack of republication of notice of sale has not been raised, SC may rule on the relevant issue of DBP’s lack of jurisdiction to hold the foreclosure sale.Republication Of Notice Of Sale

DBP V CA (2003)

Posting requirement was complied with in this case but not the publication requirement. DBP published the notice of auction sale scheduled on 12 August 1986. However, no auction sale took place on 12 August 1986 because DBP, at the instance of ERHC, agreed to postpone the same to 11 September 1986.

The Court held recently in Ouano v. Court of Appeals that republication in the manner prescribed by Act No. 3135 is necessary for the validity of a postponed extrajudicial foreclosure sale. Another publication is required in case the auction sale is rescheduled, and the absence of such republication invalidates the foreclosure sale.

The Court also ruled in Ouano that the parties have no right to waive the publication requirement in Act No. 3135.

Publication, therefore, is required to give the foreclosure sale a reasonably wide publicity

such that those interested might attend the public sale. To allow the parties to waive this jurisdictional requirement would result in converting into a private sale what ought to be a public auction.

Foreclosure Of Mortgage Arising Out Of A Settlement Of Estate Not Covered By Act 3135

PNB V CA (2001)

WON Act 3135 is applicable in the case? NO.

WON PNB may still recover deficiency from the estate? NO. Since it elected to extra-judicially foreclose the mortgage.

The case at bar involves a foreclosure of mortgage arising out of a settlement of estate, wherein the administrator mortgaged a property belonging to the estate of the decedent, pursuant to an authority given by the probate court. The Rules of Court on Special Proceedings comes into play decisively. SEC 7, Rule 86 of the Rules of Court is appropriately applicable to the case at hand and not Act 3135.

Case law now holds that this rule grants to the mortgagee three distinct, independent and mutually exclusive remedies that can be alternatively pursued by the mortgagee creditor for the satisfaction of his credit in case the mortgagor dies, among them:1. To waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;2. To foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and 3. To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription without right to file a claim for deficiency.

The plain result of adopting the last mode of foreclosure, which PNB did in this case, is that the creditor waives his right to recover any deficiency from the estate.

Inadequacy of Bid Price

VALMONTE V CA (1999)

It is well-settled that when there is right to redeem, inadequacy of price is of no moment for the reason that the judgment debtor has always had the chance to redeem and reacquire the property. In fact, the property may be sold


for less of its fair market value precisely because the lesser the price, the easier for the owner to effect redemption.

Issuance Of A Writ Of Possession

SAMSON V RIVERA (2004)

This Court has consistently held that the duty of the trial court to grant a writ of possession is ministerial. Such writ issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond. No discretion is left to the trial court. Any question regarding the regularity and validity of the sale, as well as the consequent cancellation of the writ, is to be determined in a subsequent proceeding as outlined in SEC 8 of Act 3135. Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte. The recourse is available even before the expiration of the redemption period provided by law and the Rules of Court.

The purchaser, who has a right to possession that extends after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made. Hence, at any time following the consolidation of ownership and the issuance of a new transfer certificate of title in the name of the purchaser, he or she is even more entitled to possession of the property. In such a case, the bond required under SEC 7 of Act 3135 is no longer necessary, since possession becomes an absolute right of the purchaser as the confirmed owner.

This Court has long settled that a pending action for annulment of mortgage or foreclosure does not stay the issuance of a writ of possession. Therefore, the contention of petitioners that the RTC should have consolidated Civil Case No. 01-6219 with LR Case No. 01-2698 and resolved the annulment case prior to the issuance of the Writ of Possession is unavailing.

DBP V SPOUSES GATAL (2005)

WON the RTC validly dismissed the petition for writ of possession on the ground of Litis Pendentia given that a complaint for injunction with TRO was pending, in which action sought to declare the sale to Torrefranca as void and to uphold the spouses’ right to pre-emption. NO.

The rights asserted and the reliefs sought by the parties in both cases are not identical. Thus, Litis Pendentia is unavailing.

Sec 33, Rule 39 of the ROC: if no redemption be made within a year from the date of the registration of the certificate of sale, the purchaser is entitled to a conveyance and possession of the property,

Here, no redemption was made within a year from January 1996. So in August, 1997, more than a year after, DBP filed a petition for writ of possession. This is in order.

Where, as here, the title is consolidated in the name of the mortgagee, the writ of possession becomes a matter of right on the part of the mortgagee, and a ministerial duty on the part of the court to issue the same.

The pendency of a separate civil suit questioning the validity of the sale of the mortgaged property cannot bar the issuance of the writ of possession.

Posting Of Bond Not Necessary If Writ Of Possession Applied For After Ownership Has Vested On The Creditor-Mortgagee

METROPOLITAN BANK AND TRUST COMPANY V SPOUSES BANCE (2008)

The writ of possession was not irregular despite the fact that petitioner did not post a bond. The posting of a bond as a condition for the issuance of the writ of possession becomes necessary only if it is applied for within one year from the registration of the sale with the register of deeds, i.e., during the redemption period inasmuch as ownership has not yet vested on the creditor-mortgagee. After the one-year period, and no redemption was made, the mortgagor loses all interest over it. In this case, respondents were already stripped of their rights over the properties when they failed to redeem the same within one year from May 3, 1999, the date of registration of the sale. Hence, when petitioner applied for the writ after the expiration of the redemption period there was even more reason to issue the writ.

Exception To The Rule That Issuance Of Writ Of Possession Ministerial And May Be Done Ex Parte

CHINA BANKING CORP V SPOUSES LOZADA (2008)

The exception provided under SEC 33 of Rule 39 of the Revised Rules of Court (to the general rule that issuance of a writ of possession is ministerial and may be done ex parte) contemplates a situation in which a third party holds the property by adverse title or right,


such as that of a co-owner, tenant or usufructuary. The co-owner, agricultural tenant, and usufructuary possess the property in their own right, and they are not merely the successor or transferee of the right of possession of another co-owner or the owner of the property. The spouses Lozada cannot claim that their right of possession over Unit No. 402 is analogous to any of these.It is true that in the case presently before this Court, PPGI executed in favor of the spouses Lozada the Contract to Sell covering Unit No. 402 before it constituted in favor of CBC the real estate mortgages on 51 Project units including Unit No. 402. Nonetheless, it must be emphasized that what PPGI executed in favor of the spouses Lozada was a Contract to Sell, a mere promise to sell, which, at the moment of its execution, did not yet transfer possession, much less, title to Unit No. 402 from PPGI to the spouses Lozada. When PPGI constituted the real estate mortgage on Unit No. 402 in favor of CBC six months later, possession of and title to the property still resided in PPGI. And when PPGI subsequently ceded possession of Unit No. 402, upon its completion, to the spouses Lozada, such right was already burdened by the terms and conditions of the mortgage constituted thereon. By merely stepping into the shoes of PPGI, the spouses Lozada’s right of possession to Unit No. 402 cannot be less or more than PPGI’s.

The spouses Lozada, having succeeded PPGI in the possession of Unit No. 402, cannot be considered a third party holding the said property adversely to PPGI, the defaulting debtor/mortgagor. Resultantly, the general rule, and not the exception, applies to the instant Petition. It was the mandatory and ministerial duty of the Makati City RTC to grant the ex parte petition of CBC and order the issuance of a writ of possession in the latter’s favor over Unit No. 402. It was likewise mandatory and ministerial for the Clerk of Court to comply with the Makati City RTC order by issuing the writ of possession, and for the Sheriff to implement the writ by first issuing a notice to vacate to the occupants of Unit No. 402.

Nature Of Redemption Period

SPOUSES LANDRITO V CA (2005)

In Lazo v. Republic Surety & Insurance Co., Inc., this Court has made it clear that it is only where, by voluntary agreement of the parties, consisting of extensions of the redemption period, followed by commitment by the debtor to pay the redemption price at a fixed date, will

the concept of legal redemption be converted into one of conventional redemption.

Here, there is no showing whatsoever that petitioners agreed to pay the redemption price. On the contrary, their act of filing their complaint to declare the nullity of the foreclosure sale is indicative of their refusal to pay the redemption price on the alleged deadline set by the husband. At the very least, if they so believed that their loan obligation was only for P1,000,000.00, petitioners should have made an offer to redeem within one (1) year from the registration of the sheriff’s certificate of sale, together with a tender of the same amount. This, they never did.

It must be remembered that the period of redemption is not a prescriptive period but a condition precedent provided by law to restrict the right of the person exercising redemption. Correspondingly, if a person exercising the right of redemption has offered to redeem the property within the period fixed, he is considered to have complied with the condition precedent prescribed by law and may thereafter bring an action to enforce redemption. If, on the other hand, the period is allowed to lapse before the right of redemption is exercised, then the action to enforce redemption will not prosper, even if the action is brought within the ordinary prescriptive period. Moreover, the period within which to redeem the property sold at a sheriff’s sale is not suspended by the institution of an action to annul the foreclosure sale. It is clear, then, that petitioners have lost any right or interest over the subject property primarily because of their failure to redeem the same in the manner and within the period prescribed by law. Their belated attempts to question the legality and validity of the foreclosure proceedings and public auction must accordingly fail.

One Year Of Period Of Redemption Computed From Date Of Registration Of Certificate Of Foreclosure Sale

REYES V NOBLEJAS (1967)

Redemption is not the concern merely of the auction-vendee and the mortgagor, but also of the latter’s successors in interest or any judicial creditor or judgment creditor of said mortgagor, or any person having a lien on the property subsequent to the mortgage under which the property has been sold. It is precisely for this reason that the certificate of sale should be registered, for only upon such registration may it legally be said that proper notice, though constructive, has been served unto possible redemptioners contemplated in the law. It is for


this reason that the date of sale mentioned in SEC 6 of Act 3135 should be construed to mean the date of registration of the certificate of sale in the office of the register of deeds concerned. The Land Registration Commissioner was right in ordering the Register of Deeds of Rizal to deny the registration of the Deed of Sale and the Affidavit of Consolidation of Ownership, the simultaneous registration of which documents was sought by herein petitioner even before the certificate of sale issued by the sheriff was registered.

Extension Of 1-Year Redemption Period

LAZO V REPUBLIC SURETY (1970)

The parties had abandoned entirely the concept of legal redemption in this case and converted it into one of conventional redemption, in which the only governing factor was the agreement between them.

The plaintiffs' repeated requests for time within which to redeem, each with a definite date of expiration, generated binding contracts when approved by the defendant company. A contract, needless to say, has the force of law between the parties. In any event, the principle of estoppel would step in to prevent the plaintiffs from going back upon their own acts and representations to the prejudice of the other party who relied upon them. This is a principle of equity and natural justice, expressly adopted in our Civil Code (Arts. 1431 et seq.) and articulated as one of the conclusive presumptions in Rule 31, Sec. 3(a), of our Rules of Court as follows:

Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it.

IBAAN RURAL BANK V CA (1999)

When petitioner received a copy of the Certificate of Sale registered in the Office of the Register of Deeds of Lipa City, it had actual and constructive knowledge of the certificate and its contents. For two years, it did not object to the two-year redemption period provided in the certificate. Thus, it could be said that petitioner consented to the two-year redemption period especially since it had time to object and did not. When circumstances imply a duty to speak on the part of the person for whom an obligation is proposed, his silence can be construed as consent. By its silence and

inaction, petitioner misled private respondents to believe that they had two years within which to redeem the mortgage. After the lapse of two years, petitioner is estopped from asserting that the period for redemption was only one year and that the period had already lapsed.

The doctrine in Lazo vs. Republic Surety and Insurance Co., Inc. does not apply in this case. In that case the court held that the one year period of redemption provided in Act No. 3135 is only directory and can be extended by agreement of the parties. But it bears noting that in Lazo the parties voluntarily agreed to extend the redemption period. Thus, the concept of legal redemption was converted by the parties in Lazo into conventional redemption. This is not so in the instant case. There was no voluntary agreement. In fact, the sheriff unilaterally and arbitrarily extended the period of redemption to two (2) years in the Certificate of Sale. The parties were not even privy to the extension made by the sheriff. Nonetheless, as above discussed, the bank cannot after the lapse of two years insist that the redemption period was one year only.

Additionally, the rule on redemption is liberally interpreted in favor of the original owner of a property. The fact alone that he is allowed the right to redeem clearly demonstrates the solicitousness of the law in giving him another opportunity, should his fortune improve, to recover his lost property.

Right Of Redemption Distinguished From Equity Of Redemption

HUERTA ALBA RESORT V CA (2000)

From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has been adjudged to have was only the equity of redemption over subject properties. On the distinction between the equity of redemption and right of redemption, the case of Gregorio Y. Limpin vs. Intermediate Appellate Court,7 [166 SCRA 87.] comes to the fore:

The equity of redemption is, to be sure, different from and should not be confused with the right of redemption.

The right of redemption in relation to a mortgage - understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale - exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the


mortgagee is the Philippine National Bank or a bank or banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriff’s certificate of foreclosure sale.

Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, ‘when confirmed by an order of the court, x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.’ Such rights exceptionally ‘allowed by law’ (i.e., even after confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure - after confirmation by the court of the foreclosure sale - which right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, ‘when confirmed by an order of the court. x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.’ There then exists only what is known as the equity of redemption. This 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.

This is the mortgagor’s equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period ‘from the date of service of the order,’ and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be effected any longer.

Redemption Price To Be Paid By Accommodation Mortgagors

BELO V PNB (2001)

Eduardo Belo, assignor of the petitioners, is an accommodation mortgagor. Accommodation mortgagors as such are not in any way liable for the payment of the loan or principal obligation of the debtor/borrower. The liability of the accommodation mortgagor extends only up to the loan value of their mortgaged property and not to the entire loan itself. Hence, it is only just that they be allowed to redeem their mortgaged property by paying only the winning bid price plus interest at the public auction sale with respect only to the property belonging to the accommodation mortgagor.

The principle of indivisibility of mortgage contracts does not apply to the right of redemption of an accommodation mortgagor and her assignees. Indivisibility arises only where there is a debt, that is, there is a debtor-creditor relationship. But, this relationship is wanting in the case at bar in the sense that petitioners are assignees of an accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical to allow the petitioners to redeem only the property belonging to their assignor, Eduardo Belo.

With respect to the 4 parcels of land belonging to Eslabon Spouses, petitioners being total strangers to said lots lack legal personality to redeem the same. Fair play and justice demand that respondent PNB’s interest of recovering its entire bank claim should not be at the expense of petitioners, as assignees of Belo, who is not indebted to it.

Preserving The Right Of Redemption Beyond Redemption Period

HI-YIELD REALTY V CA (2002)

What is the redemptioner’s option therefore when the redemption period is about to expire and the redemption cannot take place on account of disagreement over the redemption price?

According to jurisprudence, the redemptioner faced with such a problem may preserve his right of redemption through judicial action which in every case must be filed within the one-year period of redemption. The filing of the court action to enforce redemption, being equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights and "freezing" the expiration of the one-year period. This is a fair interpretation provided the action is filed on time and in good faith, the redemption price is finally determined and paid within a reasonable time, and the rights of the parties are respected.


Stated otherwise, the foregoing interpretation, as applied to the case at bar, has three critical dimensions: (1) timely redemption or redemption by expiration date (or, as what happened in this case, the redemptioner was forced to resort to judicial action to "freeze" the expiration of the redemption period); (2) good faith as always, meaning, the filing of the private respondent’s action on August 13, 1993 must have been for the sole purpose of determining the redemption price and not to stretch the redemptive period indefinitely; and (3) once the redemption price is determined within a reasonable time, the redemptioner must make prompt payment in full.

In the instant case, the respondents did not tender payment within the period set by the trial court. Instead, they asked for a 45-day extension to tender payment. Such 45-day extension for payment must be denied.

The pendency of the right of redemption depresses the market value of the land until the period expires. Permitting private respondent to file a suit for redemption, with either party unable to foresee when final judgment will come, renders meaningless the period fixed by the statute for effecting the redemption. It makes the redemptive period indefinite and cripples any effort of the landowner to realize the value of his land. In the same way, the buyer cannot immediately recover his investment. Thus, unless and until the redemption is resolved with finality, both the landowner’s and buyer’s needs cannot be met. Petitioner and private respondent herein were thus basically posed on similar footing before redemption. But whoever of them stands to be irreparably injured in the long run deserves the Court’s equitable protection.

In the instant case, the fact that private respondent made a formal offer to redeem before the expiration of the period to redeem was not squarely at issue. The focal issue here is whether or not the extension of the redemptive period by the trial court was well within private respondent’s preserved right to redeem. The circumstances clearly show it was not.

The opportunity to redeem the subject property was never denied to private respondent. His timely formal offer through judicial action to redeem was likewise recognized. But that is where it ends. We cannot sanction and grant every succeeding motion or petition - specially if frivolous or unreasonable - filed by him because this would manifestly and

unreasonably delay the final resolution of ownership of the subject property.

In this case, no definite tender of payment was made since there is no consignation. Consignation should have been made to show good faith and financial capability to redeem. Failure to consign was downright reflective of Francisco’s incapability to pay from the very start

Case For Judicial Redemption Not Filed In Good Faith But For The Purpose Of Stretching The Period Of Redemption Indefinitely

TOLENTINO V CA (2007)

The general rule in redemption is that it is not sufficient that a person offering to redeem simply manifests his/her desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repurchase. Bona fide redemption necessarily implies a reasonable and valid tender of the entire purchase price, otherwise the rule on the redemption period fixed by law can easily be circumvented.

The records show that the correct redemption price had been determined prior to the filing of the complaint for judicial redemption. Petitioner had been furnished updated Statements of Account specifying the redemption price even prior to the consolidation of the title of the foreclosed property in the bank's name. The inclusion of late payment charges, foreclosure expense, attorney's fees, liquidated damages, foreclosure fee, and interests therein was pursuant to the Loan Agreement. Considering that the Loan Agreement was read and freely adhered to by petitioner, the stipulations therein are binding on her. Based on the foregoing, it is clear that petitioner did not file the instant case for judicial redemption in good faith. It was not filed for the purpose of determining the correct redemption price but to stretch the redemption period indefinitely, which is not allowed by law.‘

VI. BANGKO SENTRAL NG PILIPINAS LAWRA 7653

6.1 Topics

State Policies


SEC 1 Declaration of Policy. — The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. In line with this policy, and considering its unique functions and responsibilities, the central monetary authority established under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy.

How State Policies Are To Be Achieved

SEC 2 Creation of the Bangko Sentral. — There is hereby established an independent central monetary authority, which shall be a body corporate known as the Bangko Sentral ng Pilipinas, hereafter referred to as the Bangko Sentral. The capital of the Bangko Sentral shall be Fifty billion pesos (P50,000,000,000), to be fully subscribed by the Government of the Republic, hereafter referred to as the Government, Ten billion pesos (P10,000,000,000) of which shall be fully paid for by the Government upon the effectivity of this Act and the balance to be paid for within a period of two (2) years from the effectivity of this Act in such manner and form as the Government, through the Secretary of Finance and the Secretary of Budget and Management, may thereafter determine.

SEC 6. Composition of the Monetary Board. — The powers and functions of the Bangko Sentral shall be exercised by the Bangko Sentral Monetary Board, hereafter referred to as the Monetary Board, composed of seven (7) members appointed by the President of the Philippines for a term of six (6) years.

The seven (7) members are:(a) the Governor of the Bangko Sentral, who shall be the Chairman of the Monetary Board. The Governor of the Bangko Sentral shall be head of a department and his appointment shall be subject to confirmation by the Commission on Appointments. Whenever the Governor is unable to attend a meeting of the Board, he shall designate a Deputy Governor to act as his alternate: Provided, That in such event, the Monetary Board shall designate one of its members as acting Chairman;

(b) a member of the Cabinet to be designated by the President of the Philippines. Whenever the designated Cabinet Member is unable to attend a meeting of the Board, he shall designate an Undersecretary in his Department to attend as his alternate; and

(c) five (5) members who shall come from the private sector, all of whom shall serve full-time: Provided, however, That of the members first appointed under the provisions of this subSEC, three (3) shall have a term of six (6) years, and the other two (2), three (3) years. No member of the Monetary Board may be reappointed more than once.

SEC 9. Disqualifications. — In addition to the disqualifications imposed by Republic Act No. 6713, a member of the Monetary Board is disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of office as member of the Monetary Board.

The members of the Monetary Board coming from the private sector shall not hold any other public office or public employment during their tenure. No person shall be a member of the Monetary Board if he has been connected directly with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment; likewise, no member of the Monetary Board shall be employed in any such institution within two (2) years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution.

SEC 11. Meetings. — The Monetary Board shall meet at least once a week. The Board may be called to a meeting by the Governor of the Bangko Sentral or by two (2) other members of the Board.

The presence of four (4) members shall constitute a quorum: Provided, That in all cases the Governor or his duly designated alternate shall be among the four (4).

Unless otherwise provided in this Act, all decisions of the Monetary Board shall require the concurrence of at least four (4) members.

The Bangko Sentral shall maintain and preserve a complete record of the proceedings and deliberations of the Monetary Board, including the tapes and transcripts of the stenographic notes, either in their original form or in microfilm.

SEC 15. Exercise of Authority. — In the exercise of its authority, the Monetary Board shall:


(a) issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested upon the Monetary Board and the Bangko Sentral. The rules and regulations issued shall be reported to the President and the Congress within fifteen (15) days from the date of their issuance;

(b) direct the management, operations, and administration of the Bangko Sentral, reorganize its personnel, and issue such rules and regulations as it may deem necessary or convenient for this purpose. The legal units of the Bangko Sentral shall be under the exclusive supervision and control of the Monetary Board;

(c) establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel. Such system shall aim to establish professionalism and excellence at all levels of the Bangko Sentral in accordance with sound principles of management.

A compensation structure, based on job evaluation studies and wage surveys an subject to the Board's approval, shall be instituted as an integral component of the Bangko Sentral's human resource development program: Provided, That the Monetary Board shal make its own system conform as closely as possible with the principles provided for under Republic Act No. 6758: Provided, however, That compensation and wage structure of employees whose positions fall under salary grade 19 and below shall be in accordance with the rates prescribed under Republic Act No. 6758.

On the recommendation of the Governor, appoint, fix the remunerations and other emoluments, and remove personnel of the Bangko Sentral, subject to pertinent civil service laws: Provided, That the Monetary Board shall have exclusive and final authority to promote, transfer, assign, or reassign personnel of the Bangko Sentral and these personnel actions are deemed made in the interest of the service and not disciplinary: Provided, further, That the Monetary Board may delegate such authority to the Governor under such guidelines as it may determine.

(d) adopt an annual budget for and authorize such expenditures by the Bangko Sentral as are in the interest of the effective administration and operations of

(e) the Bangko Sentral in accordance with applicable laws and regulations; and(f) indemnify its members and other officials of the Bangko Sentral, including personnel of the

departments performing supervision and examination functions against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceedings to which he may be, or is, made a party by reason of the performance of his functions or duties, unless he is finally adjudged in such action or proceeding to be liable for negligence or misconduct.

In the event of a settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the Bangko Sentral is advised by external counsel that the person to be indemnified did not commit any negligence or misconduct.

The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the Bangko Sentral in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the member, officer, or employee to repay the amount advanced should it ultimately be determined by the Monetary Board that he is not entitled to be indemnified as provided in this subSEC.

SEC 16. Responsibility. — Members of the Monetary Board, officials, examiners, and employees of the Bangko Sentral who willfully violate this Act or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of hi duties shall be held liable for any loss or injury suffered by the Bangko Sentral or other banking institutions as a result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence.

Similar responsibility shall apply to members, officers, and employees of the Bangko Sentral for:(1) the disclosure of any information of a confidential nature, or any information on the discussions or resolutions of the Monetary Board, or about the confidential operations of the Bangko Sentral, unless the disclosure is in connection with the performance of official functions with the Bangko Sentral, or is with prior authorization of the Monetary Board or the Governor; or

(2) the use of such information for personal gain or to the detriment of the Government, the Bangko Sentral or third parties: Provided, however, That any data or information required to be submitted to the President and/or the Congress, or to be published under the


provisions of this Act shall not be considered confidential.

SEC 18. Representation of the Monetary Board and the Bangko Sentral. — The Governor of the Bangko Sentral shall be the principal representative of the Monetary Board and of the Bangko Sentral and, in such capacity and in accordance with the instructions of the Monetary Board, he shall be empowered to:(a) represent the Monetary Board and the Bangko Sentral in all dealings with other offices, agencies and instrumentalities of the Government and all other persons or entities, public or private, whether domestic, foreign or international;

(b) sign contracts entered into by the Bangko Sentral, notes and securities issued by the Bangko Sentral, all reports, balance sheets, profit and loss statements, correspondence and other documents of the Bangko Sentral.

The signature of the Governor may be in facsimile whenever appropriate;

(c) represent the Bangko Sentral, either personally or through counsel, including private counsel, as may be authorized by the Monetary Board, in any legal proceedings, action or specialized legal studies; and

(d) delegate his power to represent the Bangko Sentral, as provided in subSECs (a), (b) and (c) of this SEC, to other officers upon his own responsibility: Provided, however, That in order to preserve the integrity and the prestige of his office, the Governor of the Bangko Sentral may choose not to participate in preliminary discussions with any multilateral banking or financial institution on any negotiations for the Government within or outside the Philippines. During the negotiations, he may instead be represented by a permanent negotiator.

SEC 47. Appointment and Personnel. — The Chairman of the Commission on Audit shall act as the ex officio auditor of the Bangko Sentral and, as such, he is empowered and authorized to appoint a representative who shall be the auditor of the Bangko Sentral and, in accordance with law, fix his salary, and to appoint and fix salaries and number of personnel to assist said representative in his work. The salaries and other emoluments shall be paid by the Commission. The auditor of the Bangko Sentral and personnel under him may be removed only by the Chairman of the Commission.

The representative of the Chairman of the Commission must be a certified public

accountant with at least ten (10) years experience as such. No relative of any member of the Monetary Board or the Chairman of the Commission within the sixth degree of consanguinity or affinity shall be appointed such representative.

How The BSP Handles In Distress?

Conservatorship (RA 7653 SEC 29 and RA 8971 SEC 67)

SEC 29. Appointment of Conservator. — Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. The conservator should be competent and knowledgeable in bank operations and management.

The conservatorship shall not exceed one (1) year.

The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any time within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned.


The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board, on the basis of the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case the provisions of SEC 30 shall apply.

SEC 67. Conservatorship. — The grounds and procedures for placing a bank under conservatorship, as well as, the powers and duties of the conservator appointed for the bank shall be governed by the provisions of SEC 29 and the last two paragraphs of SEC 30 of the New CentralBank Act: Provided, That this SEC shall also apply to conservatorship proceedings of quasi-banks. (n)

Closure (SEC 30 and R.A. 8791 SECs 53 & 56.4)

SEC 30. Proceedings in Receivership and Liquidation. — Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasibank:

(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community;

(b) by the Bangko Sentral, to meet its liabilities; or

(c) cannot continue in business without involving probable losses to its depositors or creditors; or

(d)has willfully violated a cease and desist order under SEC 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution.

For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver.

The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in nonspeculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board.

If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of theinstitution. The receiver shall:

1. file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the institution.

2. convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the


purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution.

The actions of the Monetary Board taken under this SEC or under SEC 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator under SEC 29 of this Act or the appointment of a receiver under this SEC shall be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is not a precondition to the designation of a receiver.

SEC 53. Other Banking Services. — In addition to the operations specifically authorized in this Act, a bank may perform the following services:53.1. Receive in custody funds, documents and valuable objects;53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities;53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business;53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and53.5. Rent out safety deposit boxes.

The bank shall perform the services permitted under SubSECs 53.1, 53.2, 53.3 and 53.4 as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities.The Monetary Board may regulate the operations authorized by this SEC in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank.In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. (72a)

SEC 56. Conducting Business in an Unsafe or Unsound Manner. — In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this SEC, the Monetary Board shall consider any of the following circumstances:

56.4. The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby.

Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in SEC 37 of the New Central Bank Act, take action under SEC 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. (n)

Receivership ( SEC 30; and R.A. 8791 SECs 69-70)

SEC 30. Proceedings in Receivership and Liquidation. — Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasibank:

(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by


financial panic in the banking community;

(b) by the Bangko Sentral, to meet its liabilities; or

(c) cannot continue in business without involving probable losses to its depositors or creditors; or

(d)has willfully violated a cease and desist order under SEC 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution.

For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver.

The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in nonspeculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board.

If the receiver determines that the institution cannot be rehabilitated or permitted to resumebusiness in accordance with the next preceding paragraph, the Monetary Board shall notify in writingthe board of directors of its findings and direct the receiver to proceed with the liquidation of theinstitution. The receiver shall:

1. file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine

Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the institution.

2. convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution.


SEC 69. Receivership and Involuntary Liquidation. — The grounds and procedures for placing a bank under receivership or liquidation, as well as the powers and duties of the receiver or liquidator appointed for the bank shall be governed by the provisions of SECs 30, 31, 32, and 33 of the New Central Bank Act: Provided, That the petitioner or plaintiff files


with the clerk or judge of the court in which the action is pending a bond, executed in favor of the Bangko Sentral, in an amount to be fixed by the court. This SEC shall also apply to the extent possible to the receivership and liquidation proceedings of quasi-banks. (n)

SEC 70. Penalty for Transactions After a Bank Becomes Insolvent. — Any director or officer of any bank declared insolvent or placed under receivership by the Monetary Board who refuses to turn over the bank's records and assets to the designated receivers, or who tampers with banks records, or who appropriates for himself or another party or destroys or causes the misappropriation and destruction of the bank's assets, or who receives or permits or causes to be received in said bank any deposit, collection of loans and/or receivables, or who pays out or permits or causes to be paid out any funds of said bank, or who transfers or permits or causes to be transferred any securities or property of said bank shall be subject to the penal provisions of the New Central Bank Act. (85a)

Liquidation (SEC 30; and R.A. 8791 SEC 69)

SEC 30. Proceedings in Receivership and Liquidation. — Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasibank:(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided,That this shall not include inability to pay caused by extraordinary demands induced byfinancial panic in the banking community;(b) by the Bangko Sentral, to meet its liabilities; or(c) cannot continue in business without involving probable losses to its depositors or creditors; or(d) has willfully violated a cease and desist order under SEC 37 that has become final, involvingacts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid theinstitution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution.

For a quasi-bank, any person of recognized competence in banking or finance may be designed

as receiver.

The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors, and exercise the general powers of areceiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in nonspeculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors andthe general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board.

If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall:1. file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the institution.2. convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or


liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution.


SEC 69. Receivership and Involuntary Liquidation. — The grounds and procedures for placing a bank under receivership or liquidation, as well as the powers and duties of the receiver or liquidator appointed for the bank shall be governed by the provisions of SECs 30, 31, 32, and 33 of the New Central Bank Act: Provided, That the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond, executed in favor of the Bangko Sentral, in an amount to be fixed by the court. This SEC shall also apply to the extent possible to the receivership and liquidation proceedings of quasi-banks. (n)

How The BSP Handles Exchange Crises?

SEC 72. Emergency Restrictions on Exchange Operations. — In order to achieve theprimary objective of the Bangko Sentral as set forth in SEC 3 of this Act, or protect the internationalreserves of the Bangko Sentral in the imminence of, or during an exchange crisis, or in time of nationalemergency and to give the Monetary Board and the Government time in which to take constructivemeasures to forestall, combat, or overcome such a crisis or emergency, the Monetary Board, with the

concurrence of at least five (5) of its members and with the approval of the President of the Philippines,may temporarily suspend or restrict sales of exchange by the Bangko Sentral, and may subject alltransactions in gold and foreign exchange to license by the Bangko Sentral, and may require that anyforeign exchange thereafter obtained by any person residing or entity operating in the Philippines bedelivered to the Bangko Sentral or to any bank or agent designated by the Bangko Sentral for thepurpose, at the effective exchange rate or rates: Provided, however, That foreign currency depositsmade under Republic Act No. 6426 shall be exempt from these requirements.

Functions of the BSP

SEC 50. Exclusive Issue Power. — The Bangko Sentral shall have the sole power and authority to issue currency, within the territory of the Philippines. No other person or entity, public or private, may put into circulation notes, coins or any other object or document which, in the opinion of the Monetary Board, might circulate as currency, nor reproduce or imitate the facsimiles of Bangko Sentral notes without prior authority from the Bangko Sentral.

The Monetary Board may issue such regulations as it may deem advisable in order to prevent the circulation of foreign currency or of currency substitutes as well as to prevent the reproduction of facsimiles of Bangko Sentral notes.

The Bangko Sentral shall have the authority to investigate, make arrests, conduct searches and seizures in accordance with law, for the purpose of maintaining the integrity of the currency.

Violation of this provision or any regulation issued by the Bangko Sentral pursuant thereto shall constitute an offense punishable by imprisonment of not less than five (5) years but not more than ten(10) years. In case the Revised Penal Code provides for a greater penalty, then that penalty shall be imposed.SEC 51. Liability for Notes and Coins. — Notes and coins issued by the Bangko Sentralshall be liabilities of the Bangko Sentral and may be issued only against, and in amounts not exceeding,


the assets of the Bangko Sentral. Said notes and coins shall be a first and paramount lien on all assetsof the Bangko Sentral.The Bangko Sentral's holdings of its own notes and coins shall not be considered as part of itscurrency issue and, accordingly, shall not form part of the assets or liabilities of the Bangko Sentral.

SEC 52. Legal Tender Power. — All notes and coins issued by the Bangko Sentral shallbe fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in thePhilippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by theMonetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) fordenominations of Twenty-five centavos and above, and in amounts not exceeding Twenty pesos(P20.00) for denominations of Ten centavos or less.

SEC 53. Characteristics of the Currency. — The Monetary Board, with the approval ofthe President of the Philippines, shall prescribe the denominations, dimensions, designs, inscriptionsand other characteristics of notes issued by the Bangko Sentral: Provided, however, That said notesshall state that they are liabilities of the Bangko Sentral and are fully guaranteed by the Government ofthe Republic of the Philippines. Said notes shall bear the signatures, in facsimile, of the President of thePhilippines and of the Governor of the Bangko Sentral.

Similarly, the Monetary Board, with the approval of the President of the Philippines, shallprescribe the weight, fineness, designs, denominations and other characteristics of the coins issued bythe Bangko Sentral. In the minting of coins, the Monetary Board shall give full consideration to theavailability of suitable metals and to their relative prices and cost of minting.

SEC 54. Printing of Notes and Mining of Coins. — The Monetary Board shall prescribethe amounts of notes and coins to be printed and minted, respectively, and the conditions to which the

printing of notes and the minting of coins shall be subject. The Monetary Board shall have the authorityto contract institutions, mints or firms for such operations.

All expenses incurred in the printing of notes and the minting of coins shall be for the account ofthe Bangko Sentral.

SEC 55. Interconvertibility of Currency. — The Bangko Sentral shall exchange, ondemand and without charge, Philippine currency of any denomination for Philippine notes and coins ofany other denomination requested. If for any reason the Bangko Sentral is temporarily unable toprovide notes or coins of the denominations requested, it shall meet its obligations by delivering notesand coins of the denominations which most nearly approximate those requested.

SEC 56. Replacement of Currency Unfit for Circulation. — The Bangko Sentral shallwithdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever areunfit for circulation and shall replace them by adequate notes and coins: Provided, however, That theBangko Sentral shall not replace notes and coins the identification of which is impossible, coins whichshow signs of filing, clipping or perforation, and notes which have lost more than two-fifths (2/5) of theirsurface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall bewithdrawn from circulation and demonetized without compensation to the bearer.

SEC 57. Retirement of Old Notes and Coins. — The Bangko Sentral may call in forreplacement notes of any series or denomination which are more than five (5) years old and coins whichare more than (10) years old.

Notes and coins called in for replacement in accordance with this provision shall remain legaltender for a period of one (1) year from the date of call. After this period, they shall cease to be legaltender but during the following year, or for such longer period as the Monetary Board may determine,


they may be exchanged at par and without charge in the Bangko Sentral and by agents duly authorizedby the Bangko Sentral for this purpose. After the expiration of this latter period, the notes and coinswhich have not been exchanged shall cease to be a liability of the Bangko Sentral and shall bedemonetized. The Bangko Sentral shall also demonetize all notes and coins which have been called inand replaced.

B. DEMAND DEPOSITS

SEC 58. Definition. — For purposes of this Act, the term "demand deposits" means allthose liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currencyand are subject to payment in legal tender upon demand by the presentation of checks.

SEC 59. Issue of Demand Deposits. — Only banks duly authorized to do so may acceptfunds or create liabilities payable in pesos upon demand by the presentation of checks, and suchoperations shall be subject to the control of the Monetary Board in accordance with the powers grantedit with respect thereto under this Act.

SEC 60. Legal Character. — Checks representing demand deposits do not have legaltender power and their acceptance in the payment of debts, both public and private, is at the option ofthe creditor: Provided, however, That a check which has been cleared and credited to the account of thecreditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amountcredited to his account.

SEC 61. Guiding Principle. — The Monetary Board shall endeavor to control anyexpansion or contraction in monetary aggregates which is prejudicial to the attainment or maintenanceof price stability.

SEC 62. Power to Define Terms. — For purposes of this article and of this Act, theMonetary Board shall formulate definitions of monetary aggregates, credit and prices and shall makepublic such definitions and any changes thereof.

SEC 63. Action When Abnormal Movements Occur in the Monetary Aggregates, Credit, or Price Level. — Whenever abnormal movements in the monetary aggregates, in credit, or inprices endanger the stability of the Philippine economy or important sectors thereof, the Monetary Boardshall:(a) take such remedial measures as are appropriate and within the powers granted to theMonetary Board and the Bangko Sentral under the provisions of this Act; and(b) submit to the President of the Philippines and the Congress, and make public, a detailedreport which shall include, as a minimum, a description and analysis of:(1) the causes of the rise or fall of the monetary aggregates, of credit or of prices;(2) the extent to which the changes in the monetary aggregates, in credit, or in priceshave been reflected in changes in the level of domestic output, employment, wagesand economic activity in general, and the nature and significance of any suchchanges; and(3) the measures which the Monetary Board has taken and the other monetary, fiscal oradministrative measures which it recommends to be adopted.Whenever the monetary aggregates, or the level of credit, increases or decreases by more thanfifteen percent (15%), or the cost of living index increases by more than ten percent (10%), in relation to the level existing at the end of the corresponding month of the preceding year, or even though any of these quantitative guidelines have not been reached when in its judgment the circumstances so warrant, the Monetary Board shall submit the reports mentioned in this SEC, and shall state therein whether, in the opinion of the Board, said changes in the monetary aggregates, credit or cost of living represent a threat to the stability of the Philippine economy or of important sectors thereof.

The Monetary Board shall continue to submit periodic reports to the President of the Philippines and to Congress until it considers that the monetary, credit or price disturbances have disappeared or have been adequately controlled.

SEC 64. International Monetary Stabilization. — The Bangko Sentral shall exercise its powers under this Act to preserve the international value of the peso and to maintain its convertibility into other freely convertible currencies primarily for, although


not necessarily limited to, current payments for foreign trade and invisibles.

SEC 65. International Reserves. — In order to maintain the international stability and convertibility of the Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies.

In judging the adequacy of the international reserves, the Monetary Board shall be guided by the prospective receipts and payments of foreign exchange by the Philippines. The Board shall give special attention to the volume and maturity of the Bangko Sentral's own liabilities in foreign currencies, to the volume and maturity of the foreign exchange assets and liabilities of other banks operating in the Philippines and, insofar as they are known or can be estimated, the volume and maturity of the foreign exchange assets and liabilities of all other persons and entities in the Philippines.

SEC 66. Composition of the International Reserves. — The international reserves ofthe Bangko Sentral may include but shall not be limited to the following assets:(a) gold; and(b) assets in foreign currencies in the form of: documents and instruments customarily employedfor the international transfer of funds; demand and time deposits in central banks, treasuriesand commercial banks abroad; foreign government securities; and foreign notes and coins.

The Monetary Board shall endeavor to hold the foreign exchange resources of the BangkoSentral in freely convertible currencies; moreover, the Board shall give particular consideration to theprospects of continued strength and convertibility of the currencies in which the reserve is maintained,as well as to the anticipated demands for such currencies. The Monetary Board shall issue regulationsdetermining the other qualifications which foreign exchange assets must meet in order to be included inthe international reserves of the Bangko Sentral.

The Bangko Sentral shall be free to convert any of the assets in its international reserves intoother assets as described in subSECs (a) and (b) of this SEC.

SEC 81. Guiding Principles. — The rediscounts, discounts, loans and advances whichthe Bangko Sentral is authorized to extend to banking institutions under the provisions of the presentarticle of this Act shall be used to influence the volume of credit consistent with the objective of pricestability.

SEC 82. Authorized Types of Operations. — Subject to the principle stated in thepreceding SEC of this Act, the Bangko Sentral may normally and regularly carry on the followingcredit operations with banking institutions operating in the Philippines:(a) Commercial credits. — The Bangko Sentral may rediscount, discount, buy and sell bills,acceptances, promissory notes and other credit instruments with maturities of not more thanone hundred eighty (180) days from the date of their rediscount, discount or acquisition bythe Bangko Sentral and resulting from transactions related to:(1) the importation, exportation, purchase or sale of readily saleable goods and products,or their transportation within the Philippines; or(2) the storing of non-perishable goods and products which are duly insured anddeposited, under conditions assuring their preservation, in authorized bondedwarehouses or in other places approved by the Monetary Board.(b) Production credits. — The Bangko Sentral may rediscount, discount, buy and sell bills,acceptances, promissory notes and other credit instruments having maturities of not morethan three hundred sixty (360) days from the date of their rediscount, discount or acquisitionby the Bangko Sentral and resulting from transactions related to the production or processingof agricultural, animal, mineral, or industrial products. Documents or instruments acquired inaccordance with this subSEC shall be secured by a pledge of the respective crops orproducts: Provided, however, That the crops or products need not be pledged to secure thedocuments if the original loan granted by the Bangko Sentral is secured by a lien or mortgageon real estate property seventy percent (70%) of the appraised value of which equals orexceeds the amount of the loan granted.

(c) Other credits. — Special credit instruments not otherwise rediscountable under theimmediately preceding subSECs (a) and (b) may be eligible for rediscounting inaccordance with rules and regulations which the Bangko Sentral shall prescribe. Whenever


necessary, the Bangko Sentral shall provide funds from non-inflationary sources: Provided,however, That the Monetary Board shall prescribe additional safeguards for disbursing thesefunds.

(d) Advances. — The Bangko Sentral may grant advances against the following kinds ofcollaterals for fixed periods which, with the exception of advances against collateral named inclause (4) of the present subSEC, shall not exceed one hundred eighty (180) days:(1) gold coins or bullion;(2) securities representing obligations of the Bangko Sentral or of other domesticinstitutions of recognized solvency;(3) the credit instruments to which reference is made in subSEC (a) of this SEC;(4) the credit instruments to which reference is made in subSEC (b) of this SEC, forperiods which shall not exceed three hundred sixty (360) days;(5) utilized portions of advances in current amount covered by regular overdraftagreements related to operations included under subSECs (a) and (b) of thisSEC, and certified as to amount and liquidity by the institution soliciting theadvance;(6) negotiable treasury bills, certificates of indebtedness, notes and other negotiableobligations of the Government maturing within three (3) years from the date of theadvance; and(7) negotiable bonds issued by the Government of the Philippines, by Philippineprovincial, city or municipal governments, or by any Philippine Governmentinstrumentality, and having maturities of not more than ten (10) years from the date ofadvance.The rediscounts, discounts, loans and advances made in accordance with the provisions of thisSEC may not be renewed or extended unless extraordinary circumstances fully justify such renewalor extension.Advances made against the collateral named in clauses (6) and (7) of subSEC (d) of thisSEC may not exceed eighty percent (80%) of the current market value of the collateral.

C. SPECIAL CREDIT OPERATIONSEC 83. Loans for Liquidity Purposes. — The Bangko Sentral may extend loans and advancesto banking institutions for a period of not more than seven (7) days without any collateral for the purpose

of providing liquidity to the banking system in times of need.

D. EMERGENCY CREDIT OPERATIONSEC 84. Emergency Loans and Advances. — In periods of national and/or localemergency or of imminent financial panic which directly threaten monetary and banking stability, theMonetary Board may, by a vote of at least five (5) of its members, authorize the Bangko Sentral to grantextraordinary loans or advances to banking institutions secured by assets as defined hereunder:Provided, That while such loans or advances are outstanding, the debtor institution shall not, exceptupon prior authorization by the Monetary Board, expand the total volume of its loans or investments.The Monetary Board may, at its discretion, likewise authorize the Bangko Sentral to grantemergency loans or advances to banking institutions, even during normal periods, for the purpose ofassisting a bank in a precarious financial condition or under serious financial pressures brought byunforeseen events, or events which, though foreseeable, could not be prevented by the bankconcerned: Provided, however, That the Monetary Board has ascertained that the bank is not insolventand has the assets defined hereunder to secure the advances: Provided, further, That a concurrent voteof at least five (5) members of the Monetary Board is obtained.

The amount of any emergency loan or advance shall not exceed the sum of fifty percent (50%)of total deposits and deposit substitutes of the banking institution and shall be disbursed in two (2) ormore tranches. The amount of the first tranche shall be limited to twenty-five percent (25%) of the totaldeposit and deposit substitutes of the institution and shall be secured by government securities to theextent of their applicable loan values and other unencumbered first class collaterals which the MonetaryBoard may approve: Provided, That if as determined by the Monetary Board, the circumstancessurrounding the emergency warrant a loan or advance greater than the amount provided hereinabove,


the amount of the first tranche may exceed twenty-five percent (25%) of the bank's total deposit anddeposit substitutes if the same is adequately secured by applicable loan values of governmentsecurities and unencumbered first class collaterals approved by the Monetary Board, and the principalstockholders of the institution furnish an acceptable undertaking to indemnify and hold harmless fromsuit a conservator whose appointment the Monetary Board may find necessary at any time.

Prior to the release of the first tranche, the banking institution shall submit to the Bangko Sentrala resolution of its board of directors authorizing the Bangko Sentral to evaluate other assets of thebanking institution certified by its external auditor to be good and available for collateral purposesshould the release of the subsequent tranche be thereafter applied for.

The Monetary Board may, by a vote of at least five (5) of its members, authorize the release ofa subsequent tranche on condition that the principal stockholders of the institution:(a) furnish an acceptable undertaking to indemnify and hold harmless from suit a conservatorwhose appointment the Monetary Board may find necessary at any time; and(b) provide acceptable security which, in the judgment of the Monetary Board, would beadequate to supplement, where necessary, the assets tendered by the banking institution tocollateralize the subsequent tranche.In connection with the exercise of these powers, the prohibitions in SEC 128 of this Act shallnot apply insofar as it refers to acceptance as collateral of shares and their acquisition as a result offoreclosure proceedings, including the exercise of voting rights pertaining to said shares: Provided,however, That should the Bangko Sentral acquire any of the shares it has accepted as collateral as aresult of foreclosure proceedings, the Bangko Sentral shall dispose of said shares by public biddingwithin one (1) year from the date of consolidation of title by the Bangko Sentral.

Whenever a financial institution incurs an overdraft in its account with the Bangko Sentral, the

same shall be eliminated within the period prescribed in SEC 102 of this Act.

E. CREDIT TERMSSEC 85. Interest and Rediscount. — The Bangko Sentral shall collect interest and otherappropriate charges on all loans and advances it extends, the closure, receivership or liquidations of thedebtor-institution notwithstanding. This provision shall apply prospectively.

The Monetary Board shall fix the interest and rediscount rates to be charged by the BangkoSentral on its credit operations in accordance with the character and term of the operation, but after dueconsideration has been given to the credit needs of the market, the composition of the Bangko Sentral'sportfolio, and the general requirements of the national monetary policy. Interest and rediscount ratesshall be applied to all banks of the same category uniformly and without discrimination.

SEC 86. Endorsement. — The documents rediscounted, discounted, bought or acceptedas collateral by the Bangko Sentral in the course of the credit operations authorized in this article shallbear the endorsement of the institution from which they are received.

SEC 87. Repayment of Credits. — Documents rediscounted, discounted or accepted ascollateral by the Bangko Sentral must be withdrawn by the borrowing institution on the dates of theirmaturities, or upon liquidation of the obligations which they represent or to which they relate wheneversaid obligations have been liquidated prior to their dates of maturity.Banks shall have the right at any time to withdraw any documents which they have presented tothe Bangko Sentral as collateral, upon payment in full of the corresponding debt to the Bangko Sentral,including interest charges.

SEC 88. Other requirements. — The Monetary Board may prescribe, within the generalpowers granted to it under this Act, additional conditions which borrowing institutions must satisfy inorder to have access to the credit of the Bangko Sentral. These conditions may refer to the rates of


interest charged by the banks, to the purposes for which their loans in general are destined, and to anyother clearly definable aspect of the credit policy of the bank.

SEC 89. Provisional Advances to the National Government. — The Bangko Sentralmay make direct provisional advances with or without interest to the National Government to financeexpenditures authorized in its annual appropriation: Provided, That said advances shall be repaid beforethe end of three (3) months extendible by another three (3) months as the Monetary Board may allowfollowing the date the National Government received such provisional advances and shall not, in theiraggregate, exceed twenty percent (20%) of the average annual income of the borrower for the last three(3) preceding fiscal years.

SEC 94. Reserve Requirements. — In order to control the volume of money created bythe credit operations of the banking system, all banks operating in the Philippines shall be required tomaintain reserves against their deposit liabilities: Provided, That the Monetary Board may, at itsdiscretion, also require all banks and/or quasi-banks to maintain reserves against funds held in trust andliabilities for deposit substitutes as defined in this Act. The required reserves of each bank shall beproportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in theBangko Sentral. Reserve requirements shall be applied to all banks of the same category uniformly andwithout discrimination.Reserves against deposit substitutes, if imposed, shall be determined in the same manner asprovided for reserve requirements against regular bank deposits, with respect to the imposition,increase, and computation of reserves.

The Monetary Board may exempt from reserve requirements deposits and deposit substituteswith remaining maturities of two (2) years or more, as well as interbank borrowings.Since the requirement to maintain bank reserves is imposed primarily to control the volume of

money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the MonetaryBoard decides otherwise as warranted by circumstances.

SEC 102. Interbank Settlement. — The Bangko Sentral shall establish facilities forinterbank clearing under such rules and regulations as the Monetary Board may prescribe: Provided,That the Bangko Sentral may charge administrative and other fees for the maintenance of suchfacilities.

The deposit reserves maintained by the banks in the Bangko Sentral in accordance with theprovisions of SEC 94 of this Act shall serve as basis for the clearing of checks and the settlement ofinterbank balances, subject to such rules and regulations as the Monetary Board may issue with respectto such operations: Provided, That any bank which incurs on overdrawing in its deposit account with theBangko Sentral shall fully cover said overdraft, including interest thereon at a rate equivalent to onetenthof one percent (1/10 of 1%) per day or the prevailing ninety-one-day treasury bill rate plus threepercentage points, whichever is higher, not later than the next clearing day: Provided, further, Thatsettlement of clearing balances shall not be effected for any account which continues to be overdrawnfor five (5) consecutive banking days until such time as the overdrawing is fully covered or otherwiseconverted into an emergency loan or advance pursuant to the provisions of SEC 84 of this Act:Provided, finally, That the appropriate clearing office shall be officially notified of banks with overdrawnbalances. Banks with existing overdrafts with the Bangko Sentral as of the effectivity of this Act shall,within such period as may be prescribed by the Monetary Board, either convert the overdraft into anemergency loan or advance with a plan of payment, or settle such overdrafts, and that, upon failure toso comply herewith, the Bangko Sentral shall take such action against the bank as may be warrantedunder this Act.


SEC 103. Exemption from Attachment and Other Purposes. — Deposits maintainedby banks with the Bangko Sentral as part of their reserve requirements shall be exempt fromattachment, garnishments, or any other order or process of any court, government agency or any otheradministrative body issued to satisfy the claim of a party other than the Government, or its politicalsubdivisions or instrumentalities.

SEC 110. Designation of Bangko Sentral as Banker of the Government. — TheBangko Sentral shall act as a banker of the Government, its political subdivisions and instrumentalities.

SEC 111. Representation with the International Monetary Fund. — The BangkoSentral shall represent the Government in all dealings, negotiations and transactions with theInternational Monetary Fund and shall carry such accounts as may result from Philippine membershipin, or operations with, said Fund.

SEC 112. Representation with Other Financial Institutions. — The Bangko Sentralmay be authorized by the Government to represent it in dealings, negotiations or transactions with theInternational Bank for Reconstruction and Development and with other foreign or international financialinstitutions or agencies. The President may, however, designate any of his other financial advisors tojointly represent the Government in such dealings, negotiations or transactions.

SEC 113. Official Deposits. — The Bangko Sentral shall be the official depository of theGovernment, its political subdivisions and instrumentalities as well as of government-owned orcontrolled corporations and, as a general policy, their cash balances should be deposited with theBangko Sentral, with only minimum working balances to be held by government-owned banks and suchother banks incorporated in the Philippines as the Monetary Board may designate, subject to such rulesand regulations as the Board may prescribe: Provided, That such banks may hold deposits of thepolitical subdivisions and instrumentalities of the Government beyond their minimum working balances

whenever such subdivisions or instrumentalities have outstanding loans with said banks.The Bangko Sentral may pay interest on deposits of the Government or of its politicalsubdivisions and instrumentalities, as well as on deposits of banks with the Bangko Sentral.

SEC 114. Fiscal Operations. — The Bangko Sentral shall open a general cash accountfor the Treasurer of the Philippines, in which the liquid funds of the Government shall be deposited.Transfers of funds from this account to other accounts shall be made only upon order of theTreasurer of the Philippines.

SEC 115. Other Banks as Agents of the Bangko Sentral. — In the performance of itsfunctions as fiscal agent, the Bangko Sentral may engage the services of other government-owned andcontrolled banks and of other domestic banks for operations in localities at home or abroad in which theBangko Sentral does not have offices or agencies adequately equipped to perform said operations:Provided, however, That for fiscal operations in foreign countries, the Bangko Sentral may engage theservices of foreign banking and financial institutions.

SEC 116. Remuneration for Services. — The Bangko Sentral may charge equitablerates, commissions or fees for services which it renders to the Government, its political subdivisions andinstrumentalities.

ARTICLE II. THE MARKETING AND STABILIZATION OF SECURITIES FOR THEACCOUNT OF THE GOVERNMENT

A. THE ISSUE AND PLACING OF GOVERNMENT SECURITIESSEC 117. Issue of Government Obligations. — The issue of securities representingobligations of the Government, its political subdivisions or instrumentalities, may be made through theBangko Sentral, which may act as agent of, and for the account of, the Government or its respectivesubdivisions or instrumentality, as the case may be: Provided, however, That the Bangko Sentral shall


not guarantee the placement of said securities, and shall not subscribe to their issue except to replaceits maturing holdings of securities with the same type as the maturing securities.

SEC 118. Methods of Placing Government Securities. — The Bangko Sentral mayplace the securities to which the preceding SEC refers through direct sale to financial institutions andthe public.The Bangko Sentral shall not be a member of any stock exchange or syndicate, but mayintervene therein for the sole purpose of regulating their operations in the placing of governmentsecurities.The Government, or its political subdivisions or instrumentalities, shall reimburse the BangkoSentral for the expenses incurred in the placing of the aforesaid securities.

SEC 119. Servicing and Redemption of the Public Debt. — The servicing andredemption of the public debt shall also be effected through the Bangko Sentral.

B. BANGKO SENTRAL SUPPORT OF THE GOVERNMENT SECURITIES MARKETSEC 120. The Securities Stabilization Fund. — There shall be established a"Securities Stabilization Fund" which shall be administered by the Bangko Sentral for the account of theGovernment.The operations of the Securities Stabilization Fund shall consist of purchases and sales, in theopen market, of bonds and other evidences of indebtedness issued or fully guaranteed by theGovernment. The purpose of these operations shall be to increase the liquidity and stabilize the valueof said securities in order thereby to promote investment in government obligations.The Monetary Board shall use the resources of the Fund to prevent, or moderate, sharpfluctuations in the quotations of said government obligations, but shall not endeavor to alter movementsof the market resulting from basic changes in the pattern or level of interest rates.The Monetary Board shall issue such regulations as may be necessary to implement theprovisions of this SEC.

SEC 121. Resources of the Securities Stabilization Fund. — Subject to SEC 132of this Act, the resources of the Securities Stabilization Fund shall come from the balance of the fund as

held by the Central Bank under Republic Act No. 265 as of the effective date of this Act.

SEC 122. Profits and Losses of the Fund. — The Securities Stabilization Fund shallretain net profits which it may make on its operations, regardless of whether said profits arise fromcapital gains or from interest earnings. The Fund shall correspondingly bear any net losses which itmay incur.

ARTICLE III. FUNCTIONS AS FINANCIAL ADVISOR OF THE GOVERNMENT

SEC 123. Financial Advice on Official Credit Operations. — Before undertaking anycredit operation abroad, the Government, through the Secretary of Finance, shall request the opinion, inwriting, of the Monetary Board on the monetary implications of the contemplated action. Such opinionsmust similarly be requested by all political subdivisions and instrumentalities of the Government beforeany credit operation abroad is undertaken by them.The opinion of the Monetary Board shall be based on the gold and foreign exchange resourcesand obligations of the nation and on the effects of the proposed operation on the balance of paymentsand on monetary aggregates.Whenever the Government, or any of its political subdivisions or instrumentalities, contemplatesborrowing within the Philippines, the prior opinion of the Monetary Board shall likewise be requested inorder that the Board may render an opinion on the probable effects of the proposed operation onmonetary aggregates, the price level, and the balance of payments.

SEC 124. Representation on the National Economic and Development Authority. —In order to assure effective coordination between the economic, financial and fiscal policies of theGovernment and the monetary, credit and exchange policies of the Bangko Sentral, the DeputyGovernor designated by the Governor of the Bangko Sentral shall be an ex officio member of theNational Economic and Development Authority Board.


Exclusive issue power

SEC 50. Exclusive Issue Power. — The Bangko Sentral shall have the sole power andauthority to issue currency, within the territory of the Philippines. No other person or entity, public orprivate, may put into circulation notes, coins or any other object or document which, in the opinion of theMonetary Board, might circulate as currency, nor reproduce or imitate the facsimiles of Bangko Sentralnotes without prior authority from the Bangko Sentral.

The Monetary Board may issue such regulations as it may deem advisable in order to preventthe circulation of foreign currency or of currency substitutes as well as to prevent the reproduction offacsimiles of Bangko Sentral notes.

The Bangko Sentral shall have the authority to investigate, make arrests, conduct searches andseizures in accordance with law, for the purpose of maintaining the integrity of the currency.Violation of this provision or any regulation issued by the Bangko Sentral pursuant thereto shallconstitute an offense punishable by imprisonment of not less than five (5) years but not more than ten(10) years. In case the Revised Penal Code provides for a greater penalty, then that penalty shall beimposed.

Liability for notes and coins

SEC 51. Liability for Notes and Coins. — Notes and coins issued by the Bangko Sentralshall be liabilities of the Bangko Sentral and may be issued only against, and in amounts not exceeding,the assets of the Bangko Sentral. Said notes and coins shall be a first and paramount lien on all assetsof the Bangko Sentral.The Bangko Sentral's holdings of its own notes and coins shall not be considered as part of itscurrency issue and, accordingly, shall not form part of the assets or liabilities of the Bangko Sentral.

Legal Tender Power

SEC 53. Characteristics of the Currency. — The Monetary Board, with the approval of

the President of the Philippines, shall prescribe the denominations, dimensions, designs, inscriptionsand other characteristics of notes issued by the Bangko Sentral: Provided, however, That said notesshall state that they are liabilities of the Bangko Sentral and are fully guaranteed by the Government ofthe Republic of the Philippines. Said notes shall bear the signatures, in facsimile, of the President of thePhilippines and of the Governor of the Bangko Sentral.

Similarly, the Monetary Board, with the approval of the President of the Philippines, shallprescribe the weight, fineness, designs, denominations and other characteristics of the coins issued bythe Bangko Sentral. In the minting of coins, the Monetary Board shall give full consideration to theavailability of suitable metals and to their relative prices and cost of minting.

Instruments of action

Setting of bank reserve requirements

SEC 94. Reserve Requirements. — In order to control the volume of money created bythe credit operations of the banking system, all banks operating in the Philippines shall be required tomaintain reserves against their deposit liabilities: Provided, That the Monetary Board may, at itsdiscretion, also require all banks and/or quasi-banks to maintain reserves against funds held in trust andliabilities for deposit substitutes as defined in this Act. The required reserves of each bank shall beproportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in theBangko Sentral. Reserve requirements shall be applied to all banks of the same category uniformly andwithout discrimination.


Reserves against deposit substitutes, if imposed, shall be determined in the same manner asprovided for reserve requirements against regular bank deposits, with respect to the imposition,increase, and computation of reserves.

The Monetary Board may exempt from reserve requirements deposits and deposit substituteswith remaining maturities of two (2) years or more, as well as interbank borrowings.Since the requirement to maintain bank reserves is imposed primarily to control the volume ofmoney, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the MonetaryBoard decides otherwise as warranted by circumstances.

SEC 95. Definition of Deposit Substitutes. — The term "deposit substitutes" is definedas an alternative form of obtaining funds from the public, other than deposits, through the issuance,endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose ofrelending or purchasing of receivables and other obligations. These instruments may include, but neednot be limited to, bankers acceptances, promissory notes, participations, certificates of assignment andsimilar instruments with recourse, and repurchase agreements. The Monetary Board shall determinewhat specific instruments shall be considered as deposit substitutes for the purposes of SEC 94 ofthis Act: Provided, however, That deposit substitutes of commercial, industrial and other non-financialcompanies for the limited purpose of financing their own needs or the needs of their agents or dealersshall not be covered by the provisions of SEC 94 of this Act.

SEC 96. Required Reserves Against Peso Deposits. — The Monetary Board may fixand, when it deems necessary, alter the minimum reserve ratios to peso deposits, as well as to depositsubstitutes, which each bank and/or quasi-bank may maintain, and such ratio shall be applied uniformlyto all banks of the same category as well as to quasi-banks.

SEC 97. Required Reserves Against Foreign Currency Deposits. — The MonetaryBoard is similarly authorized to prescribe and modify the minimum reserve ratios applicable to depositsdenominated in foreign currencies.

SEC 98. Reserves Against Unused Balances of Overdraft Lines. — In order tofacilitate Bangko Sentral control over the volume of bank credit, the Monetary Board may establishminimum reserve requirements for unused balances of overdraft lines.The powers of the Monetary Board to prescribe and modify reserve requirements againstunused balances of overdraft lines shall be the same as its powers with respect to reserve requirementsagainst demand deposits.

SEC 99. Increase in Reserve Requirements. — Whenever in the opinion of theMonetary Board it becomes necessary to increase reserve requirements against existing liabilities, theincrease shall be made in a gradual manner and shall not exceed four percentage points in any thirtydayperiod. Banks and other affected financial institutions shall be notified reasonably in advance of thedate on which such increase is to become effective.

SEC 100. Computation on Reserves. — The reserve position of each bank or quasibankshall be calculated daily on the basis of the amount, at the close of business for the day, of theinstitution's reserves and the amount of its liability accounts against which reserves are required to bemaintained: Provided, That with reference to holidays or non-banking days, the reserve position ascalculated at the close of the business day immediately preceding such holidays and non-banking daysshall apply on such days.For the purpose of computing the reserve position of each bank or quasi-bank, its principaloffice in the Philippines and all its branches and agencies located therein shall be considered as asingle unit.

SEC 101. Reserve Deficiencies. — Whenever the reserve position of any bank or quasibank,computed in the manner specified in the preceding SEC of this Act, is below the required


minimum, the bank or quasi-bank shall pay the Bangko Sentral one-tenth of one percent (1/10 of 1%)per day on the amount of the deficiency or the prevailing ninety-one-day treasury bill rate plus threepercentage points, whichever is higher: Provided, however, That banks and quasi-banks shall ordinarilybe permitted to offset any reserve deficiency occurring on one or more days of the week with anyexcess reserves which they may hold on other days of the same week and shall be required to pay thepenalty only on the average daily deficiency during the week. In cases of abuse, the Monetary Boardmay deny any bank or quasi-bank the privilege of offsetting reserve deficiencies in the aforesaidmanner.

If a bank or quasi-bank chronically has a reserve deficiency, the Monetary Board may limit orprohibit the making of new loans or investments by the institution and may require that part or all of thenet profits of the institution be assigned to surplus.

The Monetary Board may modify or set aside the reserve deficiency penalties provided in thisSEC, for part or the entire period of a strike or lockout affecting a bank or a quasi-bank as defined inthe Labor Code, or of a national emergency affecting operations of banks or quasi-banks. TheMonetary Board may also modify or set aside reserved deficiency penalties for rehabilitation program ofa bank.

SEC 102. Interbank Settlement. — The Bangko Sentral shall establish facilities forinterbank clearing under such rules and regulations as the Monetary Board may prescribe: Provided,That the Bangko Sentral may charge administrative and other fees for the maintenance of suchfacilities.

The deposit reserves maintained by the banks in the Bangko Sentral in accordance with theprovisions of SEC 94 of this Act shall serve as basis for the clearing of checks and the settlement of

interbank balances, subject to such rules and regulations as the Monetary Board may issue with respectto such operations: Provided, That any bank which incurs on overdrawing in its deposit account with theBangko Sentral shall fully cover said overdraft, including interest thereon at a rate equivalent to onetenthof one percent (1/10 of 1%) per day or the prevailing ninety-one-day treasury bill rate plus threepercentage points, whichever is higher, not later than the next clearing day: Provided, further, Thatsettlement of clearing balances shall not be effected for any account which continues to be overdrawnfor five (5) consecutive banking days until such time as the overdrawing is fully covered or otherwiseconverted into an emergency loan or advance pursuant to the provisions of SEC 84 of this Act:Provided, finally, That the appropriate clearing office shall be officially notified of banks with overdrawnbalances. Banks with existing overdrafts with the Bangko Sentral as of the effectivity of this Act shall,within such period as may be prescribed by the Monetary Board, either convert the overdraft into anemergency loan or advance with a plan of payment, or settle such overdrafts, and that, upon failure toso comply herewith, the Bangko Sentral shall take such action against the bank as may be warrantedunder this Act.

SEC 103. Exemption from Attachment and Other Purposes. — Deposits maintainedby banks with the Bangko Sentral as part of their reserve requirements shall be exempt fromattachment, garnishments, or any other order or process of any court, government agency or any otheradministrative body issued to satisfy the claim of a party other than the Government, or its politicalsubdivisions or instrumentalities.

Control of bank credit

SEC 104. Guiding Principle. — The Monetary Board shall use the powers granted to itunder this Act to ensure that the supply, availability and cost of money are in accord with the needs of


the Philippine economy and that bank credit is not granted for speculative purposes prejudicial to thenational interests. Regulations on bank operations shall be applied to all banks of the same categoryuniformly and without discrimination.

SEC 105. Margin Requirements Against Letters of Credit. — The Monetary Boardmay at any time prescribe minimum cash margins for the opening of letters of credit, and may relate thesize of the required margin to the nature of the transaction to be financed.

SEC 106. Required Security Against Bank Loans. — In order to promote liquidity andsolvency of the banking system, the Monetary Board may issue such regulations as it may deemnecessary with respect to the maximum permissible maturities of the loans and investments which thebanks may make, and the kind and amount of security to be required against the various types of creditoperations of the banks.

SEC 107. Portfolio Ceilings. — Whenever the Monetary Board considers it advisable toprevent or check an expansion of bank credit, the Board may place an upper limit on the amount ofloans and investments which the banks may hold, or may place a limit on the rate of increase of suchassets within specified periods of time. The Monetary Board may apply such limits to the loans andinvestments of each bank or to specific categories thereof.In no case shall the Monetary Board establish limits which are below the value of the loans orinvestments of the banks on the date on which they are notified of such restrictions. The restrictionsshall be applied to all banks uniformly and without discrimination.

SEC 108. Minimum Capital Ratios. — The Monetary Board may prescribe minimumratios which the capital and surplus of the banks must bear to the volume of their assets, or to specificcategories thereof, and may alter said ratios whenever it deems necessary.

SEC 37. Loans and Other Credit Accommodations Against Real Estate. — Except as

the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estateshall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security,plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may bemade to the owner of the real estate or to his assignees. (78a)

SEC 38. Loans and Other Credit Accommodations on Security of Chattels andIntangible Properties. — Except as the Monetary Board may otherwise prescribe, loans and other creditaccommodations on security of chattels and intangible properties, such as, but not limited to, patents,trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraisedvalue of the security, and such loans and other credit accommodations may be made to the title-holder ofthe chattels and intangible properties or his assignees. (78a)

SEC 43. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations. — The Monetary Board may, similarly, in accordance with the authority granted to itin SEC 106 of the New Central Bank Act, and taking into account the requirements of the economy forthe effective utilization of long-term funds, prescribe the maturities, as well as related terms andconditions for various types of bank loans and other credit accommodations. Any change by the Board inthe maximum maturities shall apply only to loans and other credit accommodations made after the date ofsuch action.The Monetary Board shall regulate the interest imposed on microfinance borrowers by lendinginvestors and similar lenders, such as, but not limited to, the unconscionable rates of interest collected onsalary loans and similar credit accommodations. (78a)

Moral Influence

SEC 68. Means of Action. — In order to achieve the primary objective of price stability,


the Monetary Board shall rely on its moral influence and the powers granted to it under this Act for themanagement of monetary aggregates.

CASES:

No Need For Prior Hearing

RURAL BANK OF BUHI vs. CAG.R. No. L-6168920 June 1988

Facts:Buhi is a rural bank that started its operations only on 26 Dec 1975In 1980, an examination of the books and affairs of Buhi was ordered conducted by the Rural Banks and Savings and Loan Association (DRBSLA), Central Bank of the Philippineswhich by law, has charge of the supervision and examination of rural banks and savings and loan associations in the PhilippinesBuhi refusedFinancial assistance was suspendedDRBSLA (through Odra) conducted a general examination of Buhi’s affairs and operationsIt found , among others, massive irregularities in its operations consisting of loans to unknown and fictitious borrowersThe money due in favor of Central Bank amounted to almost P3MPromissory notes evidencing these loans were rediscounted by CB for cashBuhi became insolvent and prejudiced its depositors and creditorsOdra recommended the placing of Buhi under receivershipThe Monetary Board placed Buhi under under receivership with Odra as the receiverOdra authorized deputied to take control, possession and charge of BuhiRosario, manager of Buhi, filed a petition for injunction against Odra and the deputiesShe is assailing the action of Odra in recommending receivership as against the Rural Banks Act and done with gadalejCB Monetary Board ordered the liquidation of BuhiOSG filed a petition for Assistance in the Liquidation of BuhiCB filed MTD on the complaint submitted by RosarioReceivership is now moot and academic since the bank is already in liquidationJudge denied MTD and issued a TRO enjoining CB from further managing and administering Buhi and to deliver the possession and control thereof to Buhi under the same conditions and

with the same financial status as when the same was taken over, upon filing of bondBond was filed, Judge issued writ of execution was made directing the sheriff to implement court’s orderSheriff went to the premises of Buhi but the vault was locked and no inventory was madeBuhi filed petitions to:Force open bank vault(later) order manager of City Trust to allow Buhi to withdraw rural bank depositsOrder manager of Metrobank to release deposits of BuhiAll granted by court (wow accommodating court…)CB, Odra et al filed a petition for certiorari and prohibition with CACA issued a resolution restraining Judge from enforcing his orderBuhi did not comply with order of CA and file MR. MR deniedCB et al filed a motion with CA to cite Buhi in contemptCA gave show cause order to Buhi and directed Ministry of National Defense to cause the return of the possession and management of Buhi to CB and OdraBuhi filed objection to bothAlleging that the properties were already in the possession of Buhi who is the lawful owner and the return could no longer be doneCA rendered its decision setting aside the order of lower court and dismissing the petition of Buhi. MR deniedBuhi agreed and promised in open court to restore and return to CB the possession and control of the bank within 3 daysAfter 3 days, manager of the bank adamantly refused to surrender the premisesManager placed under arrest since she still refused to obey the CABuhi filed petition for review on certiorari with preliminary injunctionanager also filed a petition for the issuance of writ of habeas corpusManager released

Issue: WON Monetary Board may place Buhi under receivership without prior notice

Held: YesRatio:Relevant provision: SEC 29, Republic Act No. 265SEC. 29. Proceedings upon insolvency. Whenever, upon examination by the head of the appropriate supervising and examining department or his examiners or agents into the condition of any banking institution, it shall be disclosed that the condition of the same is one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the department head concerned forthwith, in writing, to inform the Monetary Board of the facts, and the Board may, upon finding the statements of the department head to be true, forbid the institution to do business in the Philippines and shall designate an official of the Central Bank, or a person of recognized competence in banking, as receiver to immediately take charge of its assets and


liabilities, as expeditiously as possible collect and gather all the assets and administer the same for the benefit of its creditors, exercising all the powers necessary for these purposes including, but not limited to, bringing suits and foreclosing mortgages in the name of the banking institution.The Monetary Board shall thereupon determine within sixty days whether the institution may be recognized or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public and shall prescribe the conditions under which such redemption of business shall take place as the time for fulfillment of such conditions. In such case, the expenses and fees in the collection and administration of the assets of the institution shall be determined by the Board and shall be paid to the Central Bank out of the assets of such banking institution.If the Monetary Board shall determine and confirm within the said period that the banking institution is insolvent or cannot resume business with safety to its depositors, creditors and the general public, it shall, if the public interest requires, order its liquidation, indicate the manner of its liquidation and approve a liquidation plan. The Central Bank shall, by the Solicitor General, file a petition in the Court of First Instance reciting the proceedings which have been taken and praying the assistance of the court in the liquidation of the banking institution. The Court shall have jurisdiction in the same proceedings to adjudicate disputed claims against the bank and enforce individual liabilities of the stockholders and do all that is necessary to preserve the assets of the banking institution and to implement the liquidation plan approved by the Monetary Board. The Monetary Board shall designate an official of the Central Bank or a person of recognized competence in banking, as liquidator who shall take over the functions of the receiver previously appointed by the Monetary Board under this SEC. The liquidator shall, with all convenient speed, convert the assets of the banking institution to money or sell, assign or otherwise dispose of the same to creditors and other parties for the purpose of paying the debts of such bank and he may, in the name of the banking institution, institute such actions as may be necessary in the appropriate court to collect and recover accounts and assets of the banking institution.The provisions of any law to the contrary notwithstanding the actions of the Monetary Board under this SEC and the second paragraph of SEC 34 of this Act shall be final and executory, and can be set aside by the court only if there is convincing proof that the action is plainly arbitrary and made in bad faith. No restraining order or injunction shall be issued by the court enjoining the Central Bank from implementing its actions under this SEC and the second paragraph of SEC 34 of this Act, unless there is convincing proof that the action of the Monetary Board is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond executed in favor of the Central Bank, in an amount to be fixed by the court. The restraining order or injunction shall be refused or, if granted, shall be dissolved upon filing by the Central Bank of a bond, which shall be in the form of cash or Central Bank cashier's check, in an amount twice the amount of the bond of the petitioner, or plaintiff conditioned that it will pay the damages which the petitioner or plaintiff may suffer by the refusal or the dissolution of the injunction. The provisions of Rule 58 of the New Rules of Court insofar as they are applicable and not inconsistent with the provisions of this SEC shall govern the issuance and dissolution of the restraining order or injunction contemplated in this SEC.Insolvency, under this Act, shall be understood to mean the inability of a banking institution to pay its liabilities as they fall due in the usual and ordinary course of business: Provided, however, that this shall not include the inability to pay of an otherwise non-insolvent bank caused by extraordinary demands induced by financial panic commonly evidenced by a run on the banks in the banking community. The appointment of a conservator under SEC 28-A of this Act or the appointment of receiver under this SEC shall be vested exclusively with the Monetary Board, the provision of any law, general or special, to the contrary notwithstanding.

• There is no requirement whether express or implied, that a hearing be first conducted before a banking institution may be placed under receivership. » Conditions prerequisite to the action of the Monetary Board to forbid the institution to do business in the Philippines and to appoint a receiver to immediately take charge of the bank's assets and liabilities.An examination made by the examining department of the Central Bank;

Report by said department to the Monetary Board; and Prima facie showing that the bank is in a condition of insolvency or so situated that its continuance in business would involve probable loss to its depositors or creditors. Whenever it shall appear prima facie that a banking institution is in "a condition of insolvency" or so situated "that its continuance in business would involved probable loss to its depositors or creditors," the Monetary Board has authority:To forbid the institution to do business and appoint a receiver therefor; andTo determine, within 60 days, whether or not: The institution may be reorganized and rehabilitated to such an extent as to be permitted to resume business with safety to depositors, creditors and the general public; orIt is indeed insolvent or cannot resume business with safety to depositors, creditors and the general public, and public interest requires that it be liquidated. If the bank can no longer resume business with safety to depositors, creditors and the public, etc., its liquidation will be ordered and a liquidator appointed by the Monetary Board. The Central Bank shall thereafter file a petition in the Regional Trial Court praying for the Court's assistance in the liquidation of the bank.Buhi argues that there is also that constitutional guarantee that no property shall be taken without due process of lawThe contention is without merit. It has long been established and recognized in this jurisdiction that the closure and liquidation of a bank may be considered as an exercise of police power. Exercise may, however, be subject to judicial inquiry and could be set aside if found to be capricious, discriminatory, whimsical, arbitrary, unjust or a denial of the due process and equal protection clauses of the Constitution Courts may interfere with the Central Bank's exercise of discretion in determining whether or not a distressed bank shall be supported or liquidated.A hearing or an opportunity to be heard may be subsequent to the closure. One can just imagine the dire consequences of a prior hearing: bank runs would be the order of the day, resulting in panic and hysteria. In the process, fortunes may be wiped out, and disillusionment will run the gamut of the entire banking community.Courts may appoint receivers without prior presentation of evidence and solely on the basis of the averments of the pleadings. Rule 59 of the Revised Rules of Court allows the appointment of a receiver upon an ex parte application.


Decisions of CB regarding receivership, etc are final and executoryOnly one ground to set aside: convincing proof that the action is plainly arbitrary and done with bad faith

Nature Of Liquidation Proceedings

PACIFIC BANKING CORPORATION EMPLOYEES ORGANIZATION, et al vs. CAG.R. No. 10937320 March 1995

Held:Distinction Between an Ordinary Action and a Special Proceeding:It was necessary in this case to classify what was filed-- whether it was an ordinary action or a special proceeding—because the two have different periods for appeal.Action is the act by which one sues another in a court of justice for the enforcement or protection of a right, or the prevention or redress of the wrong; while special proceeding is the act by which one seeks to establish the status or right of a party, or a particular fact.

A petition for liquidation of an insolvent corporation is a special proceeding.It does not seek the enforcement or protection of a right nor the prevention or redress of a wrong against a party.It does not pray for affirmative relief for an injury arising from a party’s wrongful act or omission nor state a cause of action that can be enforced against any person.The petition only seeks a declaration of the corporation’s state of insolvency and the concomitant right of creditors and the order of payment of their claims in the disposition of the corpo’s assets.Different from an InterpleaderAn Interpleader involves claims on a subject matter against a person who has no interest therein.Not the case in liquidation proceedings where the Liquidator, as representative of the corporation, takes charge of its assets and liabilities for the benefit of the creditors.AppealAs in settlement of the estate of the deceased, multiple appeals are allowed. The several claims of the creditors are separate ones and a decision or final order with respect to any claim can be appealed.In special proceedings, unlike in ordinary actions, a record on appeal must be filed in order for the appeal to be perfected. This is because the original record of the case must

remain in the trial court where other claims may still be pendingIn this case of corporate liquidation, there was failure to file record on appeal. Hence, it being a special proceeding, the appeal was not perfected.

AUTHORITY OF CONSERVATOR TO REVOKE CONTRACTS

FIRST PHILIPPINE INTERNATIONAL BANK vs. CAG.R. No. 11584924 January 1996

Facts:The defendant Producer Bank of the Philippines acquired six parcels of land with a total area of 101 hectares located at Don Jose, Sta. Rose, Laguna. The original plaintiffs, Demetrio Demetria and Jose O. Janolo, wanted to purchase the property and thus initiated negotiations for that purpose.In the early part of August 1987 said plaintiffs, upon the suggestion of BYME (previous owner of lands who mortgaged it to Producer Bank) investment's legal counsel, Jose Fajardo, met with defendant Mercurio Rivera, Manager of the Property Management Department of the defendant bank. After the meeting, plaintiff Janolo, following the advice of defendant Rivera, made a formal purchase offer to the bank through a letter.Rivera replied and made a counter offer of P 5.5 M. Janolo amended his offer to 4.250 M. There was no reply to Janolo's last offer. What took place was a meeting on September 28, 1987 between the plaintiffs and Luis Co, the Senior Vice-President of defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the meeting. Janolo wrote again saying that they are accepting the 5.5 offer. On October 12, 1987, the conservator of the bank (which has been placed under conservatorship by the Central Bank since 1984) was replaced by an Acting Conservator in the person of defendant Leonida T. Encarnacion. Rivera wrote back to say the proposal is under consideration. What thereafter transpired was a series of demands by the plaintiffs for compliance by the bank with what plaintiff considered as a perfected contract of sale, which demands were in one form or another refused by the bank. As detailed by the trial court in its decision, on November 17, 1987, plaintiffs through a letter to defendant Rivera (Exhibit "G") tendered payment of the amount of P5.5 million "pursuant to (our) perfected sale agreement." Defendants refused to receive both the payment and the letter. Plaintiffs demanded the execution by the bank of the documents on


what was considered as a "perfected agreement." However, no response came from the Acting Conservator. On December 14, 1987, Janolo and Demetria made a second tender of payment this time through the Acting Conservator, defendant Encarnacion. The letter contained checks and an acknowledgment of the receipt of payment. The foregoing letter drew no response for more than four months. Then, on May 3, 1988, plaintiff, through counsel, made a final demand for compliance by the bank with its obligations under the considered perfected contract of sale. Defendants through Acting Conservator Encarnacion repudiated the authority of defendant Rivera and claimed that his dealings with the plaintiffs, particularly his counter-offer of P5.5 Million are unauthorized or illegal. Plaintiffs filed a suit for specific performance with damages against the bank, its Manager Rivers and Acting Conservator Encarnacion. In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in place of Demetria and Janolo, in view of the assignment of the latters' rights.

Issue1: WON the Contract PerfectedHeld: YesRatio:There is no dispute that the object of the transaction is that property owned by the defendant bank as acquired assets consisting of six (6) parcels of land. It is likewise beyond cavil that the bank intended to sell the property. The procedure in the sale of acquired assets as well as the nature and scope of the authority of Rivera on the matter is clearly delineated in the testimony of Rivera himself.The plaintiffs, therefore, at that meeting of August 1987 regarding their purpose of buying the property, dealt with and talked to the right person. Necessarily, it being inherent in his authority, Rivera is the officer from whom official information regarding the price, as determined by the Committee and approved by the Conservator, can be had. And Rivera confirmed his authority when he talked with the plaintiff in August 1987. What transpired after the meeting of early August 1987 are consistent with the authority and the duties of Rivera and the bank's internal procedure in the matter of the sale of bank's assets. Considering an aspect of the official duty of Rivera as some sort of intermediary between the plaintiffs-buyers with their proposed buying price on one hand, and the bank Committee, the Conservator and ultimately the bank itself with the set price on the other, and considering further the discussion of price at the meeting of August resulting in a formal offer of P3.5 Million in cash,

there can be no other logical conclusion than that when, on September 1, 1987, Rivera informed plaintiffs by letter that "the bank's counter-offer is at P5.5 Million for more than 101 hectares on lot basis," such counter-offer price had been determined by the Past Due Committee and approved by the Conservator after Rivera had duly presented plaintiffs' offer for discussion by the Committee of such matters as original loan of borrower, bid price during foreclosure, total claim of the bank, and market value. Article 1318 of the Civil Code enumerates the requisites of a valid and perfected contract as follows: "(1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established."There is no dispute on requisite no. 2. There is, however, a dispute on the first and third requisites.Petitioners allege that "there is no counter-offer made by the Bank, and any supposed counter-offer which Rivera (or Co) may have made is unauthorized. Since there was no counter-offer by the Bank, there was nothing for Ejercito (in substitution of Demetria and Janolo) to accept." From the evidence found by respondent Court, it is obvious that petitioner Rivera has apparent or implied authority to act for the Bank in the matter of selling its acquired assets. (evidence: letters, meetings, etc)In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals, et. al. 32, the Court, through Justice Jose A. R. Melo, affirmed the doctrine of apparent authority as it held that the apparent authority of the officer of the Bank of P.I. in charge of acquired assets is borne out by similar circumstances surrounding his dealings with buyers.To be sure, petitioners attempted to repudiate Rivera's apparent authority through documents and testimony which seek to establish Rivera's actual authority. These pieces of evidence, however, are inherently weak as they consist of Rivera's self-serving testimony and various inter-office memoranda that purport to show his limited actual authority, of which private respondent cannot be charged with knowledge. In any event, since the issue is apparent authority, the existence of which is borne out by the respondent Court's findings, the evidence of actual authority is immaterial insofar as the liability of a corporation is concerned Petitioners also alleged that Demetria's and Janolo's P4.25 million counter-offer in the letter dated September 17, 1987 extinguished the Bank's offer of P5.5 million 34 .They disputed the respondent Court's finding that "there was a meeting of minds when on 30 September 1987 Demetria and Janolo through Annex "L" (letter dated September 30, 1987) "accepted" Rivera's


counter offer of P5.5 million under Annex "J" (letter dated September 17, 1987).”However, the above-cited authorities and precedents cannot apply in the instant case because, as found by the respondent Court which reviewed the testimonies on this point, what was "accepted" by Janolo in his letter dated September 30, 1987 was the Bank's offer of P5.5 million as confirmed and reiterated to Demetria and Atty. Jose Fajardo by Rivera and Co during their meeting on September 28, 1987. Note that the said letter of September 30, 1987 begins with"(p)ursuant to our discussion last 28 September 1987 . . .We note that the Bank's repudiation, through Conservator Encarnacion, of Rivera's authority and action, particularly the latter's counter-offer of P5.5 million, as being "unauthorized and illegal" came only on May 12, 1988 or more than seven (7) months after Janolo' acceptance. Such delay, and the absence of any circumstance which might have justifiably prevented the Bank from acting earlier, clearly characterizes the repudiation as nothing more than a last-minute attempt on the Bank's part to get out of a binding contractual obligation.

Issue2: Is the Contract Enforceable? Held: YesRatio:The bank's letter of September 1, 1987 (together with the other letters including Janolo’s first offer) on the official price and the plaintiffs' acceptance of the price on September 30, 1987, are not, in themselves, formal contracts of sale. They are however clear embodiments of the fact that a contract of sale was perfected between the parties, such contract being binding in whatever form it may have been entered into (case citations omitted). But let it be assumed arguendo that the counter-offer during the meeting on September 28, 1987 did constitute a "new" offer which was accepted by Janolo on September 30, 1987. Still, the statute of frauds will not apply by reason of the failure of petitioners to object to oral testimony proving petitioner Bank's counter-offer of P5.5 million. Hence, petitioners by such utter failure to object are deemed to have waived any defects of the contract under the statute of frauds, pursuant to Article 1405 of the Civil Code.

Issue3: May the Conservator Revoke the Perfected and Enforceable Contract?Held: NoRatio:It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank of the Philippines during the time that the negotiation and perfection of the contract of sale took place. Petitioners energetically

contended that the conservator has the power to revoke or overrule actions of the management or the board of directors of a bank, under SEC 28-A of Republic Act No. 265 (otherwise known as the Central Bank Act) as follows:Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a non-bank financial intermediary performing quasi-banking functions is in a state of continuing inability or unwillingness to maintain a state of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator to take charge of the assets, liabilities, and the management of that institution, collect all monies and debts due said institution and exercise all powers necessary to preserve the assets of the institution, reorganize the management thereof, and restore its viability. He shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or non-bank financial intermediary performing quasi-banking functions, any provision of law to the contrary notwithstanding, and such other powers as the Monetary Board shall deem necessary.In the first place, this issue of the Conservator's alleged authority to revoke or repudiate the perfected contract of sale was raised for the first time in this Petition as this was not litigated in the trial court or CA. It cannot be raised for the first time on appealIn the second place, there is absolutely no evidence that the Conservator, at the time of the contract was perfected, actually repudiated or overruled said contract of sale. The Bank's acting conservator at the time, Rodolfo Romey, never objected to the sale of the property to Demetria and Janolo. What petitioners are really referring to is the letter of Conservator Encarnacion, who took over from Romey after the sale was perfected on September 30, 1987 (Annex V, petition) which unilaterally repudiated not the contract but the authority of Rivera to make a binding offer and which unarguably came months after the perfection of the contract. It denied the counter offer. It said that only only the Board of Directors/Conservator may authorize the sale of any property of the corportion/bank..In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to the conservator of a bank, it must be pointed out that such powers must be related to the "(preservation of) the assets of the bank, (the reorganization of) the management thereof and (the restoration of) its viability." Such powers, enormous and extensive as they are, cannot extend to the post-facto repudiation of


perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution. If the legislature itself cannot revoke an existing valid contract, how can it delegate such non-existent powers to the conservator under SEC 28-A of said law?Obviously, therefore, SEC 28-A merely gives the conservator power to revoke contracts that are, under existing law, deemed to be defective i.e., void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a bank's board of directors. What the said board cannot do such as repudiating a contract validly entered into under the doctrine of implied authority the conservator cannot do either. Ineluctably, his power is not unilateral and he cannot simply repudiate valid obligations of the Bank. His authority would be only to bring court actions to assail such contracts as he has already done so in the instant case. A contrary understanding of the law would simply not be permitted by the Constitution. Neither by common sense. To rule otherwise would be to enable a failing bank to become solvent, at the expense of third parties, by simply getting the conservator to unilaterally revoke all previous dealings which had one way or another or come to be considered unfavorable to the Bank, yielding nothing to perfected contractual rights nor vested interests of the third parties who had dealt with the Bank.

ADDITIONAL MATERIAL:

CIRCULAR NO. 537Series of 2006

Pursuant to SEC 52 of Republic Act No. 7653 and Monetary Board Resolution No. 862 dated 6 July 2006, the maximum amount of coins to be considered as legal tender is adjusted as follows:

1. One thousand pesos (P1,000.00) for denominations of 1-Piso, 5-Piso and 10-Piso coins; and

2. One hundred pesos (P100.00) for denominations of 1-sentimo, 5-sentimo, 10-sentimo, and 25-sentimo coins.

This Circular shall take effect after fifteen (15) days following its publication in the Official Gazette or in a newspaper of general circulation.

VII. THE GENERAL BANKING LAW OF 2000

7.1 Topics

State Policy

Concept of IntermediationDistinction between banks and quasibanks

SEC 2. Declaration of Policy. — The State recognizes the vital role of banks in providingan environment conducive to the sustained development of the national economy and the fiduciary natureof banking that requires high standards of integrity and performance. In furtherance thereof, the Stateshall promote and maintain a stable and efficient banking and financial system that is globallycompetitive, dynamic and responsive to the demands of a developing economy. (n)

SEC 4. Supervisory Powers. — The operations and activities of banks shall be subject tosupervision of the Bangko Sentral. "Supervision" shall include the following:4.1. The issuance of rules of conduct or the establishment of standards of operation for uniformapplication to all institutions or functions covered, taking into consideration the distinctivecharacter of the operations of institutions and the substantive similarities of specific functionsto which such rules, modes or standards are to be applied;4.2. The conduct of examination to determine compliance with laws and regulations if thecircumstances so warrant as determined by the Monetary Board;4.3. Overseeing to ascertain that laws and regulations are complied with;4.4. Regular investigation which shall not be oftener than once a year from the last date ofexamination to determine whether an institution is conducting its business on a safe orsound basis: Provided, That the deficiencies/irregularities found by or discovered by an auditshall be immediately addressed;4.5. Inquiring into the solvency and liquidity of the institution (2-D); or4.6. Enforcing prompt corrective action. (n)

The Bangko Sentral shall also have supervision over the operations of and exercise regulatorypowers over quasi-banks, trust entities and other financial institutions which under special laws aresubject to Bangko Sentral supervision. (2-Ca)

For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of


funds through the issuance, endorsement or assignment with recourse or acceptance of depositsubstitutes as defined in SEC 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") forpurposes of relending or purchasing of receivables and other obligations. (2-Da)

Classification of banks

3.2. Banks shall be classified into:(a) Universal banks;(b) Commercial banks;(c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loanassociations, and (iii) Private development banks, as defined in Republic Act No. 7906(hereafter the "Thrift Banks Act");(d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act");(e) Cooperative banks, as defined in Republic Act No. 6938 (hereafter the "Cooperative Code");(f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of AlAmanah Islamic Investment Bank of the Philippines"; and(g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentralng Pilipinas. (6-Aa)

SEC 71. Other Banking Laws. — The organization, ownership and capital requirements,powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banksshall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the CooperativeCode, respectively.The organization, ownership and capital requirements, powers, supervision and general conductof business of Islamic banks shall be governed by special laws.The provisions of this Act, however, insofar as they are not in conflict with the provisions of theThrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, ruralbanks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratiowhich the net worth of a thrift bank must bear to its total risk assets, the provisions of SEC 33 of thisAct shall govern. (n)

Distinction between universal banks and commercial banks

SEC 23. Powers of a Universal Bank. — A universal bank shall have the authority toexercise, in addition to the powers authorized for a commercial bank in SEC 29, the powers of aninvestment house as provided in existing laws and the power to invest in non-allied enterprises asprovided in this Act. (21-B)

SEC 24. Equity Investments of a Universal Bank. — A universal bank may, subject tothe conditions stated in the succeeding paragraph, invest in the equities of allied and non-alliedenterprises as may be determined by the Monetary Board. Allied enterprises may either be financial ornon-financial.Except as the Monetary Board may otherwise prescribe:24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fiftypercent (50%) of the net worth of the bank; and24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceedtwenty-five percent (25%) of the net worth of the bank.As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital includingpaid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments asmay be required by the Bangko Sentral.The acquisition of such equity or equities is subject to the prior approval of the Monetary Boardwhich shall promulgate appropriate guidelines to govern such investments. (21-Ba)

SEC 30. Equity Investments of a Commercial Bank. — A commercial bank may, subjectto the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises asmay be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.Except as the Monetary Board may otherwise prescribe:30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent(35%) of the net worth of the bank; and30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of the


net worth of the bank.The acquisition of such equity or equities is subject to the prior approval of the Monetary Boardwhich shall promulgate appropriate guidelines to govern such investments. (21A-a; 21-Ca)

Distinction between universal banks or commercial banks and other banks

SEC 33. Acceptance of Demand Deposits. — A bank other than a universal orcommercial bank cannot accept or create demand deposits except upon prior approval of, and subject tosuch conditions and rules as may be prescribed by the Monetary Board. (72-Aa)

Distinction between allied and non-allied enterprises


Institutions subject to BSP supervisory and regulatory powers

SEC 4. Supervisory Powers. — The operations and activities of banks shall be subject tosupervision of the Bangko Sentral. "Supervision" shall include the following:4.1. The issuance of rules of conduct or the establishment of standards of operation for uniformapplication to all institutions or functions covered, taking into consideration the distinctivecharacter of the operations of institutions and the substantive similarities of specific functionsto which such rules, modes or standards are to be applied;4.2. The conduct of examination to determine compliance with laws and regulations if thecircumstances so warrant as determined by the Monetary Board;4.3. Overseeing to ascertain that laws and regulations are complied with;

4.4. Regular investigation which shall not be oftener than once a year from the last date ofexamination to determine whether an institution is conducting its business on a safe orsound basis: Provided, That the deficiencies/irregularities found by or discovered by an auditshall be immediately addressed;4.5. Inquiring into the solvency and liquidity of the institution (2-D); or4.6. Enforcing prompt corrective action. (n)

The Bangko Sentral shall also have supervision over the operations of and exercise regulatorypowers over quasi-banks, trust entities and other financial institutions which under special laws aresubject to Bangko Sentral supervision. (2-Ca)

For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing offunds through the issuance, endorsement or assignment with recourse or acceptance of depositsubstitutes as defined in SEC 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") forpurposes of relending or purchasing of receivables and other obligations. (2-Da)

R.A.7653SEC 25. Supervision and Examination. — The Bangko Sentral shall have supervisionover, and conduct periodic or special examinations of, banking institutions and quasi-banks, includingtheir subsidiaries and affiliates engaged in allied activities.For purposes of this SEC, a subsidiary means a corporation more than fifty percent (50%) ofthe voting stock of which is owned by a bank or quasi-bank and an affiliate means a corporation thevoting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank or quasi-bank orwhich is related or linked to such institution or intermediary through common stockholders or such otherfactors as may be determined by the Monetary Board.The department heads and the examiners of the supervising and/or examining departments arehereby authorized to administer oaths to any director, officer, or employee of any institution under theirrespective supervision or subject to their examination and to compel the presentation of all books,


documents, papers or records necessary in their judgment to ascertain the facts relative to the truecondition of any institution as well as the books and records of persons and entities relative to or inconnection with the operations, activities or transactions of the institution under examination, subject tothe provision of existing laws protecting or safeguarding the secrecy or confidentiality of bank depositsas well as investments of private persons, natural or juridical, in debt instruments issued by theGovernment.No restraining order or injunction shall be issued by the court enjoining the Bangko Sentral fromexamining any institution subject to supervision or examination by the Bangko Sentral, unless there isconvincing proof that the action of the Bangko Sentral is plainly arbitrary and made in bad faith and thepetitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bondexecuted in favor of the Bangko Sentral, in an amount to be fixed by the court. The provisions of Rule58 of the New Rules of Court insofar as they are applicable and not inconsistent with the provisions ofthis SEC shall govern the issuance and dissolution of the restraining order or injunction contemplatedin this SEC.

Authority to engage in banking institutions

SEC 6. Authority to Engage in Banking and Quasi-Banking Functions. — No person orentity shall engage in banking operations or quasi-banking functions without authority from the BangkoSentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal orcommercial banking functions shall likewise have the authority to engage in quasi-banking functions.The determination of whether a person or entity is performing banking or quasi-banking functionswithout Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, theMonetary Board may, through the appropriate supervising and examining department of the Bangko

Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance ofthis authority, such person or entity may commence to engage in banking operations or quasi-bankingfunctions and shall continue to do so unless such authority is sooner surrendered, revoked, suspended orannulled by the Bangko Sentral in accordance with this Act or other special laws.The department head and the examiners of the appropriate supervising and examiningdepartment are hereby authorized to administer oaths to any such person, employee, officer, or directorof any such entity and to compel the presentation or production of such books, documents, papers orrecords that are reasonably necessary to ascertain the facts relative to the true functions and operationsof such person or entity. Failure or refusal to comply with the required presentation or production of suchbooks, documents, papers or records within a reasonable time shall subject the persons responsibletherefore to the penal sanctions provided under the New Central Bank Act.Persons or entities found to be performing banking or quasi-banking functions without authorityfrom the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act andother applicable laws. (4a)

Stock corporation

SEC 8. Organization. — The Monetary Board may authorize the organization of a bank orquasi-bank subject to the following conditions:8.1. That the entity is a stock corporation (7);8.2. That its funds are obtained from the public, which shall mean twenty (20) or more persons(2-Da); and8.3. That the minimum capital requirements prescribed by the Monetary Board for each categoryof banks are satisfied. (n)No new commercial bank shall be established within three (3) years from the effectivity of this Act. In theexercise of the authority granted herein, the Monetary Board shall take into consideration their capabilityin terms of their financial resources and technical expertise and integrity. The bank licensing process shall


incorporate an assessment of the bank's ownership structure, directors and senior management, itsoperating plan and internal controls as well as its projected financial condition and capital base.

Not a close corporationPar value stock

SEC 9. Issuance of Stocks. — The Monetary Board may prescribe rules and regulationson the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto todetermine compliance with laws and regulations governing capital and equity structure of banks:Provided, That banks shall issue par value stocks only.

Ownership of shares

SEC 11. Foreign Stockholdings. — Foreign individuals and non-bank corporations mayown or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply toFilipinos and domestic non-bank corporations. (12a; 12-Aa)The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship ofthe individual stockholders in that bank. The citizenship of the corporation which is a stockholder in abank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the placeof incorporation. (n)

MB Certificate of authorityPower of a universal bank


SEC 24. Equity Investments of a Universal Bank. — A universal bank may, subject tothe conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied

enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial ornon-financial.

Except as the Monetary Board may otherwise prescribe:24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fiftypercent (50%) of the net worth of the bank; and24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceedtwenty-five percent (25%) of the net worth of the bank.As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital includingpaid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments asmay be required by the Bangko Sentral.The acquisition of such equity or equities is subject to the prior approval of the Monetary Boardwhich shall promulgate appropriate guidelines to govern such investments. (21-Ba)

SEC 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. — Auniversal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or afinancial allied enterprise.

A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of thevoting stock of only one other universal or commercial bank. (21-B; 21-Ca)

SEC 26. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises.— A universal bank may own up to one hundred percent (100%) of the equity in a non-financial alliedenterprise. (21-Ba)

SEC 27. Equity Investments of a Universal Bank in Non-Allied Enterprises. — Theequity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single nonalliedenterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall itexceed thirty-five percent (35%) of the voting stock in that enterprise. (21-B)

SEC 28. Equity Investments in Quasi-Banks. — To promote competitive conditions in


financial markets, the Monetary Board may further limit to forty percent (40%) equity investments ofuniversal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (12-E)

SEC 29. Powers of a Commercial Bank. — A commercial bank shall have, in addition tothe general powers incident to corporations, all such powers as may be necessary to carry on thebusiness of commercial banking, such as accepting drafts and issuing letters of credit; discounting andnegotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creatingdemand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreignexchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extendingcredit, subject to such rules as the Monetary Board may promulgate. These rules may include thedetermination of bonds and other debt securities eligible for investment, the maturities and aggregateamount of such investment. (21a)

SEC 53. Other Banking Services. — In addition to the operations specifically authorized in this Act, a bank may perform the following services:53.1. Receive in custody funds, documents and valuable objects;53.2. Act as financial agent and buy and sell, by order of and for the account of their customers,shares, evidences of indebtedness and all types of securities;53.3. Make collections and payments for the account of others and perform such other services fortheir customers as are not incompatible with banking business;53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant oradministrator of investment management/advisory/consultancy accounts; and53.5. Rent out safety deposit boxes.

The bank shall perform the services permitted under SubSECs 53.1, 53.2, 53.3 and 53.4 asdepositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which itreceives duly separate from the bank's own assets and liabilities.

The Monetary Board may regulate the operations authorized by this SEC in order to ensurethat such operations do not endanger the interests of the depositors and other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, orin any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days,the Monetary Board may summarily and without need for prior hearing close such banking institution andplace it under receivership of the Philippine Deposit Insurance Corporation. (72a)

Powers of a commercial bank

SEC 29. Powers of a Commercial Bank. — A commercial bank shall have, in addition tothe general powers incident to corporations, all such powers as may be necessary to carry on thebusiness of commercial banking, such as accepting drafts and issuing letters of credit; discounting andnegotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creatingdemand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreignexchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extendingcredit, subject to such rules as the Monetary Board may promulgate. These rules may include thedetermination of bonds and other debt securities eligible for investment, the maturities and aggregateamount of such investment. (21a)

SEC 30. Equity Investments of a Commercial Bank. — A commercial bank may, subjectto the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises asmay be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.

Except as the Monetary Board may otherwise prescribe:30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent


(35%) of the net worth of the bank; and30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of thenet worth of the bank.The acquisition of such equity or equities is subject to the prior approval of the Monetary Boardwhich shall promulgate appropriate guidelines to govern such investments. (21A-a; 21-Ca)

SEC 31. Equity Investments of a Commercial Bank in Financial Allied Enterprises. —A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a ruralbank.Where the equity investment of a commercial bank is in other financial allied enterprises,including another commercial bank, such investment shall remain a minority holding in that enterprise.(21-Aa; 21-Ca)

SEC 32. Equity Investments of a Commercial Bank in Non-Financial AlliedEnterprises. — A commercial bank may own up to one hundred percent (100%) of the equity in a nonfinancial allied enterprise. (21-Aa)

SEC 53. Other Banking Services. — In addition to the operations specifically authorizedin this Act, a bank may perform the following services:53.1. Receive in custody funds, documents and valuable objects;53.2. Act as financial agent and buy and sell, by order of and for the account of their customers,shares, evidences of indebtedness and all types of securities;53.3. Make collections and payments for the account of others and perform such other services fortheir customers as are not incompatible with banking business;53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant oradministrator of investment management/advisory/consultancy accounts; and53.5. Rent out safety deposit boxes.The bank shall perform the services permitted under SubSECs 53.1, 53.2, 53.3 and 53.4 asdepositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which itreceives duly separate from the bank's own assets and liabilities.

The Monetary Board may regulate the operations authorized by this SEC in order to ensurethat such operations do not endanger the interests of the depositors and other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, orin any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days,the Monetary Board may summarily and without need for prior hearing close such banking institution andplace it under receivership of the Philippine Deposit Insurance Corporation. (72a)

Areas of supervision and regulation of banksExamination and investigation of banks

SEC 4. Supervisory Powers. — The operations and activities of banks shall be subject tosupervision of the Bangko Sentral. "Supervision" shall include the following:4.1. The issuance of rules of conduct or the establishment of standards of operation for uniformapplication to all institutions or functions covered, taking into consideration the distinctivecharacter of the operations of institutions and the substantive similarities of specific functionsto which such rules, modes or standards are to be applied;4.2. The conduct of examination to determine compliance with laws and regulations if thecircumstances so warrant as determined by the Monetary Board;4.3. Overseeing to ascertain that laws and regulations are complied with;4.4. Regular investigation which shall not be oftener than once a year from the last date ofexamination to determine whether an institution is conducting its business on a safe orsound basis: Provided, That the deficiencies/irregularities found by or discovered by an auditshall be immediately addressed;4.5. Inquiring into the solvency and liquidity of the institution (2-D); or4.6. Enforcing prompt corrective action. (n)The Bangko Sentral shall also have supervision over the operations of and exercise regulatorypowers over quasi-banks, trust entities and other financial institutions which under special laws aresubject to Bangko Sentral supervision. (2-Ca)


For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing offunds through the issuance, endorsement or assignment with recourse or acceptance of depositsubstitutes as defined in SEC 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") forpurposes of relending or purchasing of receivables and other obligations. (2-Da)

R.A. 7653 SEC 28. Examination and Fees. — The supervising and examining department head,personally or by deputy, shall examine the books of every banking institution once in every twelve (12)months, and at such other times as the Monetary Board by an affirmative vote of five (5) members, maydeem expedient and to make a report on the same to the Monetary Board: Provided, That there shall bean interval of at least twelve (12) months between annual examinations.

The bank concerned shall afford to the head of the appropriate supervising and examiningdepartments and to his authorized deputies full opportunity to examine its books, cash and availableassets and general condition at any time during banking hours when requested to do so by the BangkoSentral: Provided, however, That none of the reports and other papers relative to such examinationsshall be open to inspection by the public except insofar as such publicity is incidental to the proceedingshereinafter authorized or is necessary for the prosecution of violations in connection with the businessof such institutions.

Banking and quasi-banking institutions which are subject to examination by the Bangko Sentralshall pay to the Bangko Sentral, within the first thirty (30) days of each year, an annual fee in an amountequal to a percentage as may be prescribed by the Monetary Board of its average total assets duringthe preceding year as shown on its end-of-month balance sheets, after deducting cash on hand andamounts due from banks, including the Bangko Sentral and banks abroad.

Acquisition by banks of own shares

SEC 10. Treasury Stocks. — No bank shall purchase or acquire shares of its own capitalstock or accept its own shares as a security for a loan, except when authorized by the Monetary Board:Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the timeof its purchase or acquisition, be sold or disposed of at a public or private sale. (24a)

Stockholdings of family groups and related interests

SEC 12. Stockholdings of Family Groups or Related Interests. — Stockholdings ofindividuals related to each other within the fourth degree of consanguinity or affinity, legitimate orcommon-law, shall be considered family groups or related interests and must be fully disclosed in alltransactions by such an individual with the bank. (12-Da)

SEC 13. Corporate Stockholdings. — Two or more corporations owned or controlled bythe same family group or same group of persons shall be considered related interests and must be fullydisclosed in all transactions by such corporations or related groups of persons with the bank. (12-Ba)

Independent directors

SEC 15. Board of Directors. — The provisions of the Corporation Code to the contrarynotwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board ofdirectors of bank, two (2) of whom shall be independent directors. An "independent director" shall mean aperson other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. (n)Non-Filipino citizens may become members of the board of directors of a bank to the extent of theforeign participation in the equity of said bank. (Sec. 7, RA 7721)The meetings of the board of directors may be conducted through modern technologies such as,but not limited to, teleconferencing and video-conferencing. (n)


Qualifications of directors and officers: the fit and proper rule

SEC 16. Fit and Proper Rule. — To maintain the quality of bank management and affordbetter protection to depositors and the public in general, the Monetary Board shall prescribe, pass uponand review the qualifications and disqualifications of individuals elected or appointed bank directors orofficers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify,suspend or remove any bank director or officer who commits or omits an act which render him unfit for theposition.

In determining whether an individual is fit and proper to hold the position of a director or officer ofa bank, regard shall be given to his integrity, experience, education, training, and competence. (9-Aa)

Prohibition on public officials

SEC 19. Prohibition on Public Officials. — Except as otherwise provided in the RuralBanks Act, no appointive or elective public official, whether full-time or part-time shall at the same timeserve as officer of any private bank, save in cases where such service is incident to financial assistanceprovided by the government or a government-owned or controlled corporation to the bank or unlessotherwise provided under existing laws. (13)

Compensation and other benefits of directors and officers

SEC 18. Compensation and Other Benefits of Directors and Officers. — To protect thefunds of depositors and creditors, the Monetary Board may regulate the payment by the bank to itsdirectors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringebenefits only in exceptional cases and when the circumstances warrant, such as but not limited to thefollowing:18.1. When a bank is under comptrollership or conservatorship; or18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe orunsound manner; or

18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition.(n)

Ratio of net worth to total risk assets

SEC 34. Risk-Based Capital. — The Monetary Board shall prescribe the minimum ratiowhich the net worth of a bank must bear to its total risk assets which may include contingent accounts.For purposes of this SEC, the Monetary Board may require that such ratio be determined onthe basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well asprescribe the composition and the manner of determining the net worth and total risk assets of banks andtheir subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extentfeasible, conform to internationally accepted standards, including those of the Bank for InternationalSettlements (BIS), relating to risk-based capital requirements: Provided, further, That it may alter orsuspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided,finally, That such ratio shall be applied uniformly to banks of the same category.In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limitor prohibit the distribution of net profits by such bank and may require that part or all of the net profits beused to increase the capital accounts of the bank until the minimum requirement has been met. TheMonetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making ofnew investments by the bank, with the exception of purchases of readily marketable evidences ofindebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences ofindebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic ofthe Philippines, until the minimum required capital ratio has been restored.

In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program


approved by the Bangko Sentral, the Monetary Board may temporarily relieve the surviving bank,consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with therequired capital ratio under such conditions as it may prescribe.

Before the effectivity of the rules which the Monetary Board is authorized to prescribe under thisprovision, SEC 22 of the General Banking Act, as amended, SEC 9 of the Thrift Banks Act, and allpertinent rules issued pursuant thereto, shall continue to be in force. (22a)

BASLE ACCORDLimits on loans, the SBL rules

SEC 35. Limit on Loans, Credit Accommodations and Guarantees. —35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, thetotal amount of loans, credit accommodations and guarantees as may be defined by theMonetary Board that may be extended by a bank to any person, partnership, association,corporation or other entity shall at no time exceed twenty percent (20%) of the net worth ofsuch bank. The basis for determining compliance with single-borrower limit is the total creditcommitment of the bank to the borrower.35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, creditaccommodations and guarantees prescribed in the preceding paragraph may be increasedby an additional ten percent (10%) of the net worth of such bank provided the additionalliabilities of any borrower are adequately secured by trust receipts, shipping documents,warehouse receipts or other similar documents transferring or securing title covering readilymarketable, non-perishable goods which must be fully covered by insurance.35.3. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor ofpaper discounted with or sold to such bank and the liability of a general indorser, drawer orguarantor who obtains a loan or other credit accommodation from or discounts paper with orsells papers to such bank; (b) in the case of an individual who owns or controls a majorityinterest in a corporation, partnership, association or any other entity, the liabilities of saidentities to such bank; (c) in the case of a corporation, all liabilities to such bank of all

subsidiaries in which such corporation owns or controls a majority interest; and (d) in thecase of a partnership, association or other entity, the liabilities of the members thereof tosuch bank.35.4. Even if a parent corporation, partnership, association, entity or an individual who owns orcontrols a majority interest in such entities has no liability to the bank, the Monetary Boardmay prescribe the combination of the liabilities of subsidiary corporations or members of thepartnership, association, entity or such individual under certain circumstances, including butnot limited to any of the following situations: (a) the parent corporation, partnership,association, entity or individual guarantees the repayment of the liabilities; (b) the liabilitieswere incurred for the accommodation of the parent corporation or another subsidiary or ofthe partnership or association or entity or such individual; or (c) the subsidiaries thoughseparate entities operate merely as departments or divisions of a single entity.35.5. For purposes of this SEC, loans, other credit accommodations and guarantees shallexclude:(a) loans and other credit accommodations secured by obligations of the Bangko Sentral orof the Philippine Government; (b) loans and other credit accommodations fully guaranteed by thegovernment as to the payment of principal and interest; (c) loans and other credit accommodationscovered by assignment of deposits maintained in the lending bank and held in the Philippines; (d)loans, credit accommodations and acceptances under letters of credit to the extent covered bymargin deposits; and (e) other loans or credit accommodations which the Monetary Board may fromtime to time, specify as non-risk items.35.6. Loans and other credit accommodations, deposits maintained with, and usual guarantees bya bank to any other bank or non-bank entity, whether locally or abroad, shall be subject tothe limits as herein prescribed.35.7. Certain types of contingent accounts of borrowers may be included among those subject tothese prescribed limits as may be determined by the Monetary Board. (23a)

Restrictions on bank exposure; the DOSRI rules

SEC 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their


Related Interests. — No director or officer of any bank shall, directly or indirectly, for himself or as therepresentative or agent of others, borrow from such bank nor shall he become a guarantor, indorser orsurety for loans from such bank to others, or in any manner be an obligor or incur any contractual liabilityto the bank except with the written approval of the majority of all the directors of the bank, excluding thedirector concerned: Provided, That such written approval shall not be required for loans, other creditaccommodations and advances granted to officers under a fringe benefit plan approved by the BangkoSentral. The required approval shall be entered upon the records of the bank and a copy of such entryshall be transmitted forthwith to the appropriate supervising and examining department of the BangkoSentral.Dealings of a bank with any of its directors, officers or stockholders and their related interestsshall be upon terms not less favorable to the bank than those offered to others.After due notice to the board of directors of the bank, the office of any bank director or officer whoviolates the provisions of this SEC may be declared vacant and the director or officer shall be subjectto the penal provisions of the New Central Bank Act.The Monetary Board may regulate the amount of loans, credit accommodations and guaranteesthat may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and theirrelated interests, as well as investments of such bank in enterprises owned or controlled by said directors,officers, stockholders and their related interests. However, the outstanding loans, credit accommodationsand guarantees which a bank may extend to each of its stockholders, directors, or officers and theirrelated interests, shall be limited to an amount equivalent to their respective unencumbered deposits andbook value of their paid-in capital contribution in the bank: Provided, however, That loans, creditaccommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall

be excluded from such limit: Provided, further, That loans, credit accommodations and advances toofficers in the form of fringe benefits granted in accordance with rules as may be prescribed by theMonetary Board shall not be subject to the individual limit.The Monetary Board shall define the term "related interests."The limit on loans, credit accommodations and guarantees prescribed herein shall not apply toloans, credit accommodations and guarantees extended by a cooperative bank to its cooperativeshareholders. (83a)

Microfinancing

SEC 40. Requirement for Grant of Loans or Other Credit Accommodations. — Beforegranting a loan or other credit accommodation, a bank must ascertain that the debtor is capable offulfilling his commitments to the bank.Toward this end, a bank may demand from its credit applicants a statement of their assets andliabilities and of their income and expenditures and such information as may be prescribed by law or byrules and regulations of Monetary Board to enable the bank to properly evaluate the credit applicationwhich includes the corresponding financial statements submitted for taxation purposes to the Bureau ofInternal Revenue. Should such statements prove to be false or incorrect in any material detail, the bankmay terminate any loan or other credit accommodation granted on the basis of said statements and shallhave the right to demand immediate repayment or liquidation of the obligation.In formulating rules and regulations under this SEC, the Monetary Board shall recognize thepeculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors that arenot covered by traditional collateral. (76a)

SEC 43. Authority to Prescribe Terms and Conditions of Loans and Other CreditAccommodations. — The Monetary Board may, similarly, in accordance with the authority granted to itin SEC 106 of the New Central Bank Act, and taking into account the requirements of the economy for


the effective utilization of long-term funds, prescribe the maturities, as well as related terms andconditions for various types of bank loans and other credit accommodations. Any change by the Board inthe maximum maturities shall apply only to loans and other credit accommodations made after the date ofsuch action.The Monetary Board shall regulate the interest imposed on microfinance borrowers by lendinginvestors and similar lenders, such as, but not limited to, the unconscionable rates of interest collected onsalary loans and similar credit accommodations. (78a)

SEC 44. Amortization on Loans and Other Credit Accommodations. — Theamortization schedule of bank loans and other credit accommodations shall be adapted to the nature ofthe operations to be financed.In case of loans and other credit accommodations with maturities of more than five (5) years,provisions must be made for periodic amortization payments, but such payments must be made at leastannually: Provided, however, That when the borrowed funds are to be used for purposes which do notinitially produce revenues adequate for regular amortization payments therefrom, the bank may permit theinitial amortization payment to be deferred until such time as said revenues are sufficient for suchpurpose, but in no case shall the initial amortization date be later than five (5) years from the date onwhich the loan or other credit accommodation is granted. (79a)In case of loans and other credit accommodations to microfinance sectors, the schedule of loanamortization shall take into consideration the projected cash flow of the borrower and adopt this into theterms and conditions formulated by banks. (n)

Prepayment of loans

SEC 45. Prepayment of Loans and Other Credit Accommodations. — A borrower mayat any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bankloan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed

upon between the bank and its borrower. (80a)

Real Estate investments and acquisitions

SEC 51. Ceiling on Investments in Certain Assets. — Any bank may acquire real estateas shall be necessary for its own use in the conduct of its business: Provided, however, That the totalinvestment in such real estate and improvements thereof, including bank equipment, shall not exceed fiftypercent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank inanother corporation engaged primarily in real estate shall be considered as part of the bank's totalinvestment in real estate, unless otherwise provided by the Monetary Board. (25a)

SEC 52. Acquisition of Real Estate by Way of Satisfaction of Claims. —Notwithstanding the limitations of the preceding SEC, a bank may acquire, hold or convey realproperty under the following circumstances:52.1. Such as shall be mortgaged to it in good faith by way of security for debts;52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course ofits dealings; or52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds heldby it and such as it shall purchase to secure debts due it.Any real property acquired or held under the circumstances enumerated in the above paragraphshall be disposed of by the bank within a period of five (5) years or as may be prescribed by theMonetary Board: Provided, however, That the bank may, after said period, continue to hold the propertyfor its own use, subject to the limitations of the preceding SEC. (25a)

Outsourcing of bank functions

SEC 55. Prohibited Transactions. —55.1. No director, officer, employee, or agent of any bank shall —(e) Outsource inherent banking functions.

Employment of casual and probationary personnel


SEC 55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the BanksSecrecy Law, no bank shall employ casual or nonregular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits.

Declaration of dividends

SEC 57. Prohibition on Dividend Declaration. — No bank or quasi-bank shall declaredividends greater than its accumulated net profits then on hand, deducting therefrom its losses and baddebts. Neither shall the bank nor quasi-bank declare dividends, if at the time of declaration:57.1 Its clearing account with the Bangko Sentral is overdrawn; or57.2 It is deficient in the required liquidity floor for government deposits for five (5) or moreconsecutive days; or57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral forpurposes of determining funds available for dividend declaration; or57.4 It has committed a major violation as may be determined by the Bangko Sentral. (84a)

Authority to engage in trust businessTrust Receipt

SEC 79. Authority to Engage in Trust Business. — Only a stock corporation or aperson duly authorized by the Monetary Board to engage in trust business shall act as a trustee oradminister any trust or hold property in trust or on deposit for the use, benefit, or behoof of others. Forpurposes of this Act, such a corporation shall be referred to as a trust entity. (56a; 57a)

Diligence required

SEC 80. Conduct of Trust Business. — A trust entity shall administer the funds orproperty under its custody with the diligence that a prudent man would exercise in the conduct of anenterprise of a like character and with similar aims.No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase oracquire property from, or sell, transfer, assign or lend money or property to, or purchase debt instruments

of, any of the departments, directors, officers, stockholders, or employees of the trust entity, relativeswithin the first degree of consanguinity or affinity, or the related interests, of such directors, officers andstockholders, unless the transaction is specifically authorized by the trustor and the relationship of thetrustee and the other party involved in the transaction is fully disclosed to the trustor or beneficiary of thetrust prior to the transaction.The Monetary Board shall promulgate such rules and regulations as may be necessary to preventcircumvention of this prohibition or the evasion of the responsibility herein imposed on a trust entity. (56)

Deposit required as security for faithful performance of trust duties

SEC 84. Deposit for the Faithful Performance of Trust Duties. — Before transactingtrust business, every trust entity shall deposit with the Bangko Sentral as security for the faithfulperformance of its trust duties, cash or securities approved by the Monetary Board in an amount equal tonot less than Five hundred thousand pesos (P500,000.00) or such higher amount as may be fixed by theMonetary Board: Provided, however, That the Monetary Board shall require every trust entity to increasethe amount of its cash or securities on deposit with the Bangko Sentral whenever in its judgment suchincrease is necessary by reason of the trust business of such entity: Provided, further, That the paid-incapital and surplus of such entity must be at least equal to the amount required to be deposited with theBangko Sentral in accordance with the provisions of this paragraph. Should the capital and surplus fallbelow said amount, the Monetary Board shall have the same authority as that granted to it under theprovisions of the fifth paragraph of SEC 34 of this Act.A trust entity so long as it shall continue to be solvent and comply with laws or regulations shallhave the right to collect the interest earned on such securities deposited with the Bangko Sentral and,


from time to time, with the approval of the Bangko Sentral, to exchange the securities for others. If thetrust entity fails to comply with any law or regulation, the Bangko Sentral shall retain such interest on thesecurities deposited with it for the benefit of rightful claimants. All claims arising out of the trust businessof a trust entity shall have priority over all other claims as regards the cash or securities deposited asabove provided. The Monetary Board may not permit the cash or securities deposited in accordance withthe provisions of this SEC to be reduced below the prescribed minimum amount until the depositingentity shall discontinue its trust business and shall satisfy the Monetary Board that it has complied with allits obligations in connection with such business. (65a)

Separation of trust business from general business

SEC 87. Separation of Trust Business from General Business. — The trust businessand all funds, properties or securities received by any trust entity as executor, administrator, guardian,trustee, receiver, or depositary shall be kept separate and distinct from the general business including allother funds, properties, and assets of such trust entity. The accounts of all such funds, properties, orsecurities shall likewise be kept separate and distinct from the accounts of the general business of thetrust entity. (61)

Exemption of trust assets from claims

SEC 92. Exemption of Trust Assets from Claims. — No assets held by a trust entity inits capacity as trustee shall be subject to any claims other than those of the parties interested in thespecific trusts. (65)

Penalties for violationsFine, imprisonment, etc.

R.A. 7653 SEC 34. Refusal to Make Reports or Permit Examination. — Any officer, owner, agent,manager, director or officer-in-charge of any institution subject to the supervision or examination by the

Bangko Sentral within the purview of this Act who, being required in writing by the Monetary Board or bythe head of the supervising and examining department willfully refuses to file the required report orpermit any lawful examination into the affairs of such institution shall be punished by a fine of not lessthan Fifty thousand pesos (P50,000) nor more than One hundred thousand pesos (P100,000) or byimprisonment of not less than one (1) year nor more than five (5) years, or both, in the discretion of thecourt.

R.A. 7653 SEC 35. False Statement. — The willful making of a false or misleading statement on amaterial fact to the Monetary Board or to the examiners of the Bangko Sentral shall be punished by afine of not less than One hundred thousand pesos (P100,000) nor more than Two hundred thousandpesos (P200,000), or by imprisonment of not more than (5) years, or both, at the discretion of the court.

R.A. 7653 SEC 36. Proceedings Upon Violation of This Act and Other Banking Laws, Rules,Regulations, Orders or Instructions. — Whenever a bank or quasi-bank, or whenever any person orentity willfully violates this Act or other pertinent banking laws being enforced or implemented by theBangko Sentral or any order, instruction, rule or regulation issued by the Monetary Board, the person orpersons responsible for such violation shall unless otherwise provided in this Act be punished by a fineof not less than Fifty thousand pesos (P50,000) nor more than Two hundred thousand pesos(P200,000) or by imprisonment of not less than two (2) years nor more than ten (10) years, or both, atthe discretion of the court.Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafemanner, the Board may, without prejudice to the penalties provided in the preceding paragraph of thisSEC and the administrative sanctions provided in SEC 37 of this Act, take action under SEC 30of this Act.

R.A. 7653


SEC 37. Administrative Sanctions on Banks and Quasi-banks. — Without prejudice tothe criminal sanctions against the culpable persons provided in SECs 34, 35, and 36 of this Act, theMonetary Board may, at its discretion, impose upon any bank or quasi-bank, their directors and/orofficers, for any willful violation of its charter or by-laws, willful delay in the submission of reports orpublications thereof as required by law, rules and regulations; any refusal to permit examination into theaffairs of the institution; any willful making of a false or misleading statement to the Board or theappropriate supervising and examining department or its examiners; any willful failure or refusal tocomply with, or violation of, any banking law or any order, instruction or regulation issued by theMonetary Board, or any order, instruction or ruling by the Governor; or any commission of irregularities,and/or conducting business in an unsafe or unsound manner as may be determined by the MonetaryBoard, the following administrative sanctions, whenever applicable:(a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in nocase to exceed Thirty thousand pesos (P30,000) a day for each violation, taking intoconsideration the attendant circumstances, such as the nature and gravity of the violation orirregularity and the size of the bank or quasi-bank;(b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities;(c) suspension of lending or foreign exchange operations or authority to accept new deposits ormake new investments;(d) suspension of interbank clearing privileges; and/or(e) revocation of quasi-banking license.Resignation or termination from office shall not exempt such director or officer fromadministrative or criminal sanctions.The Monetary Board may, whenever warranted by circumstances, preventively suspend anydirector or officer of a bank or quasi-bank pending an investigation: Provided, That should the case benot finally decided by the Bangko Sentral within a period of one hundred twenty (120) days after the

date of suspension, said director or officer shall be reinstated in his position: Provided, further, Thatwhen the delay in the disposition of the case is due to the fault, negligence or petition of the director orofficer, the period of delay shall not be counted in computing the period of suspension herein provided.The above administrative sanctions need not be applied in the order of their severity.Whether or not there is an administrative proceeding, if the institution and/or the directors and/orofficers concerned continue with or otherwise persist in the commission of the indicated practice orviolation, the Monetary Board may issue an order requiring the institution and/or the directors and/orofficers concerned to cease and desist from the indicated practice or violation, and may further orderthat immediate action be taken to correct the conditions resulting from such practice or violation. Thecease and desist order shall be immediately effective upon service on the respondents.The respondents shall be afforded an opportunity to defend their action in a hearing before theMonetary Board or any committee chaired by any Monetary Board member created for the purpose,upon request made by the respondents within five (5) days from their receipt of the order. If no suchhearing is requested within said period, the order shall be final. If a hearing is conducted, all issuesshall be determined on the basis of records, after which the Monetary Board may either reconsider ormake final its order.The Governor is hereby authorized, at his discretion, to impose upon banking institutions, forany failure to comply with the requirements of law, Monetary Board regulations and policies, and/orinstructions issued by the Monetary Board or by the Governor, fines not in excess of Ten thousandpesos (P10,000) a day for each violation, the imposition of which shall be final and executory untilreversed, modified or lifted by the Monetary Board on appeal.


Suspension or removal of director or officer

SEC 66. Penalty for Violation of this Act. — Unless otherwise herein provided, theviolation of any of the provisions of this Act shall be subject to SECs 34, 35, 36 and 37 of the NewCentral Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the MonetaryBoard may also suspend or remove such director or officer. If the violation is committed by a corporation,such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General. (87)

Dissolution of bank

SEC 66. Penalty for Violation of this Act. — Unless otherwise herein provided, theviolation of any of the provisions of this Act shall be subject to SECs 34, 35, 36 and 37 of the NewCentral Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the MonetaryBoard may also suspend or remove such director or officer. If the violation is committed by a corporation,such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General. (87)

ADDITIONAL MATERIALSBSP CIRCULARS

BSP CIRCULAR NOS. 488, 493, 543, 548, 642Re: FUNCTIONS THAT BANKS COULD OUTSOURCE

SEC 1. Subsec. X169.3 Outsourcing of other banking functions of the MORB is hereby amended to read, as follows: “Subject to prior approval of the Monetary Board, banks may outsource the following functions, services or activities:

1. data imaging, storage, retrieval and other related systems;

2. clearing and processing of checks not included in the Philippine Clearing House System;

3. printing of bank deposit statements; 4. credit card services; 5. credit investigation and collection; 6. processing of export, import and other

trading transactions; 7. property appraisal; 8. property management services;

9. internal audit, subject to the following conditions:

a) the board of directors and senior management of the regulated entity remain responsible for maintaining an effective system of internal control and for providing active oversight of the outsourced internal audit activities/functions; b) the external service provider shall be an independent external auditor included in the list of BSP selected external auditors or a parent company which owns or controls more than fifty percent (50%) of the subscribed capital stock of the outsourcing entity: provided, that item “b.” of the general requirements under SEC 2 of Circular no.410, series of 2003 shall apply to the parent company while items “b.”, “d.”, “e.”, and “f.” shall apply to the independent external auditor. c) the contract/service agreement with the external service provider shall not be entered into for a period longer than five (5) years; d) There shall be a contingency plan to mitigate any significant disruption, discontinuity or gap in audit coverage, particularly for high-risk areas; e) The written engagement contract or service agreement with the external service provider shall, as a minimum: i. Define the rights, expectations and responsibilities of both parties; ii. Set the scope and frequency of, and the fees to be paid for, the work to be performed by the external service provider; iii. State that the outsourced internal audit services are subject to regulatory review and that BSP examiners shall be granted full and timely access to internal audit reports and related working papers; iv. State that the external service provider will not perform management functions, make management decisions, or act or appear to act in a capacity equivalent to that of a member of management or an employee of the institution, and will comply with professional and regulatory independence guidelines; v. Specify that the external service provider must maintain the audit reports and related working papers/files for at least five (5) years; vi. State that internal audit reports are the property of the institution, that the institution will be provided with copies of related working papers/files it deems necessary, and any information pertaining to the institution must be kept confidential; and vii. Establish a protocol for changing the terms of the service contract and stipulations for default and termination of the contract;

10. marketing loans, deposits and other bank products and services, provided it does not involve the actual opening of deposit accounts;


11. general bookkeeping and accounting services, provided that these activities do not include servicing bank deposits or other inherent banking functions;

12. offsite records storage services; 13. front/back office functions, i.e., trade

support services and downstream processing activities, by parent to a subsidiary or vice-versa, subject to the following conditions:

a) The bank intending to outsource the aforementioned functions shall certify that the front office functions to be done by its parent/subsidiary (service provider) shall be limited to trade support services; b) The bank shall remain a parent/subsidiary of its subsidiary/ parent (service provider) and such service provider shall service only entities belonging to its business group; c) The bank shall certify that no inherent banking functions involving deposit transactions shall be outsourced to its parent/subsidiary (service provider); d) The bank shall submit a Service Level Agreement duly signed by the concerned parties and any amendments thereto, detailing the functions to be outsourced, the respective responsibilities of the bank and its parent/ subsidiary (service provider), and a confidentiality clause; and e) Any breach in any of the above conditions shall subject the outsourcing of the aforementioned banking functions to all the requirements of this SEC; and 14. back-up and data recovery operations; (as amended by BSP CIR# 493) and15. Call center operations for credit card and bank services provided that such bank services do not involve inherent banking functions; (as amended by BSP CIR#543) and16. 16. Such other activities as may be determined by the Monetary Board."The bank concerned must submit the same documentary requirements listed in Subsec. X169.2b hereof, except where they exclusively pertain to information technology operations. Without need of prior Monetary Board approval, banks may outsource the following functions, services or activities: 1. printing of bank loan statements and other non-deposit records, bank forms and promotional materials; 2. transfer agent services for debt and equity securities; 3. messenger, courier and postal services; 4. security guard services; 5. vehicle service contracts; 6. janitorial services; 7. public relations services, procurement services, and temporary staffing, provided that these activities do not include servicing bank deposits or other inherent banking functions;

8. sorting and bagging of notes and coins; 9. maintenance of computer hardware, e.g., disk drives, printers, monitors, UPS, network cabling systems; 10. payroll of bank employees; 11. telephone operator/receptionist services; 12. sale/disposal of acquired assets (ROPOA); 13. Human-resource related services (such as personnel training and development, background investigation and salary benchmarking service) (as amended by BSP CIR#642);14. building, ground and other facilities maintenance; and 15. legal services from local legal counsel (amended by BSP CIR#493); 16. compliance risk assessment and testing; (amended by BSP CIR#493)17. tax compliance services, provided that the service provider is not also the external auditor of the bank; (as amended by BSP CIR#548)18. such other activities as may be determined by the Monetary Board."

SEC 2. The provisions on outsourcing of SEC X169 and Subsecs. X169.1 to X169.5 of the Manual of Regulations for Banks (MORB) in so far as they are applicable to quasi-banks and other non-bank financial institutions are hereby incorporated in the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI).This Circular shall take effect fifteen (15) days following its publication either in the Official Gazette or in a newspaper of general circulation.

BSP CIRCULAR NO. 341Series of 2002RE: UNSAFE AND UNSOUND BANKING PRACTICES

Pursuant to Monetary Board Resolution No. 1055 dated 25 July 2002, the following guidelines shall be observed in implementing SEC 56 of the General Banking Law of 2000 or Republic Act No. 8791:

SEC 1. Whether a particular activity may be considered as conducting business in an unsafe or unsound manner, all relevant facts must be considered. An analysis of the impact thereof on the banks/quasi-banks/trust entities' operations and financial conditions must be undertaken, including evaluation of capital position, asset condition, management, earnings posture and liquidity position.

In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as


conducting business in an unsafe or unsound manner, the Monetary Board, upon report of the head of the supervising or examining department based on findings in an examination or a complaint, shall consider any of the following circumstances:a. The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the' institution;b. The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the pubiic in general;c The act or omission has caused any undue injury, or has given unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; ord. The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby.

Attached for guidance is a list of activities which may be considered unsafe and unsound. (Annex A) The Monetary Board may consider any other acts/omissions as unsafe and unsound practices.

SEC 2. The Monetary Board may, at its discretion and based on the seriousness and materiality of the acts or omissions, impose any or all of the following sanctions provided under SEC 37 of Republic Act No. 7653 and SEC 56 of Republic Act No. 8791, whenever a bank, quasi-bank or trust entity conducts business in an unsafe and unsound manner:a. Issue an order requiring the institution to cease and desist from conducting business in an unsafe and unsound manner and may further order that immediate action be taken to correct the conditions resulting from such unsafe or unsound practice;b. Fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to exceed Thirty Thousand pesos(P30,000.00) a day on a per transaction basis taking into consideration the attendant circumstances, such the gravity of the act or omission and the size of the bank, quasi-bank or trust entity, to be imposed on the bank, quasi-banks or trust entities, their directors and/or responsible officers;c. Suspension of interbank clearing privileges/immediate exclusion from clearing;d. Suspension of rediscounting privileges or access to Bangko Sentral credit facilities;

e. Suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments;f. Suspension of responsible directors and/or officers;g. Revocation of quasi-banking ¡¡cense; and/orh. Receivership and liquidation under SEC 30 of RA 7653.

All other provisions of SECs 30 and 37 of R.A. 7653 whenever appropriate shall also be applicable on the conduct of business in an unsafe or unsound manner.

The imposition of the above sanctions is without prejudice to the filing of appropriate criminal charges against culpable persons as provided in SECs 34, 35 and 36 of R.A. 7653.

This Circular shall take effect immediately.

Annex A

List of Activities Which May Be Considered Unsafe and Unsound Banking Practices

“The activities enumerated herein are considered only as guidelines and are not irrebutably presumed to be unsafe or unsound. Conversely, not all practices which might under the circumstances be termed unsafe or unsound are mentioned here. The Monetary Board may NOW AND THEN consider any other acts/omissions as unsafe or unsound practices.(opening par. As amended by BSP CIR#640)”

a. Operating with management whose policies and practices are detrimental to the bank, quasi bank or trust entity and jeopardize the safety of its deposits/deposit substitutes/trust accounts.b. Operating with total adjusted capital and reserves that are inadequate in relation to the kind and quality of the assets of the bank, quasi-bank or trust entity.c. Operating in a way that produces a deficit in net operating income WITHOUT ADEQUATE MEASURES TO ENSURE A SURPLUS IN NET OPERATING INCOME IN THE FUTURE. (as amended by BSP CIR#640)d. Operating with a serious lack of liquidity, especially in view of the asset and deposit/deposit substitute/liability structure of the bank, quasi-bank or trust entity.e. Engaging in speculative and hazardous investment policies.f. Paying excessive cash dividends in relation to the capital position, earnings capacity and asset quality of the bank, quasi-bank or trust entity.g. Excessive reliance on large, high-COST or volatile deposits/ borrowings TO FUND AGGRESSIVE GROWTH THAT MAY BE UNSUSTAINABLE.


FOR THIS PURPOSE, A BANK IS CONSIDERED OFFERING HIGH-COST DEPOSITS/ BORROWINGS IF THE EFFECTIVE INTEREST RATE PAID ON SAID DEPOSITS/ BORROWINGS AND/OR NON-CASH INCENTIVES IS 50% OVER THE PREVAILING COMPARABLE MARKET MEDIAN RATE FOR SIMILAR BANK CATEGORIES, MATURITIES AND CURRENCY DENOMINATION AND ACCOMPANIED BY OTHER CIRCUMSTANCE/S SUCH AS:“1. UNDUE RELIANCE ON SOLICITATION AND ACCEPTANCE OF BROKERED DEPOSITS; “2. BANK INCURS LARGE SUM OF DEPOSIT GENERATION EXPENSES IN THE FORM OF COMMISSIONS, REFERRAL AND SOLICITATION FEES AND RELATED EXPENSES AND/OR PAYMENT OF ADVANCE INTEREST ON DEPOSITS; “3. DEFERRAL OF THE ABOVE DEPOSIT GENERATION EXPENSES INCURRED TO DELAY RECORDING OF EXPENSES AND/OR INACCURATE AMORTIZATION OF ADVANCE INTEREST PAID ON DEPOSITS; “4. DEPOSIT PACKAGES OFFERED INCLUDE NON-CASH INCENTIVES DISPROPORTIONATE TO THE AMOUNT OF DEPOSITS SOUGHT WHICH GIVE UNDUE OR UNWARRANTED ADVANTAGE OR PREFERENCE FOR THE BANK; AND “5. BANK MARKETS, SOLICITS AND ACCEPTS DEPOSITS OUTSIDE THE BANK PREMISES INCLUDING BRANCHES, UNLESS OTHERWISE AUTHORIZED BY THE BSP UNDER SECS X213 (SERVICING DEPOSITS OUTSIDE BANK PREMISES) OR X621 (ELECTRONIC BANKING SERVICES) OF THE MANUAL OF REGULATIONS FOR BANKS.” (As amended by BSP CIR#640)

h. Excessive reliance on letters of credit either issued by the bank or accepted as collateral to loans advanced.i. Excessive amounts of loan participations sold,j. Paying interest on participations without advising participating institution that ths course of interest was not from the borrower,k. Selling participations without disclosing to the purchasers of those participations materia!, non-public information known to the banki. Failure to limit, control and document contingent liabilities,m. Engaging in hazardous lending and lax collection policies and practices, as evidenced by:1 ) An excessive volume of loans subject to adverse classification;2) An excessive volume of loans without adequate documentation,including credit information;3) Excessive net loan losses;4) An excessive volume of loans in relation to the total assets and deposits/deposit substitutes/trust liabilities of the bank, quasi-bank or trust entity;5) An excessive volume of weak and self-serving loans to persons connected with the

bank, quasi-bank or trust entity, especially if a significant portion of these loans are adversely classified;6) excessive concentrations of credit, especially if a substantial portion of this credit is adversely classified;7) indiscriminate participation in weak and undocumented loans originated by other institutions;8) failing to adopt written loan policies;9) an excessive volume of past due or non-performing loans;10) failure to diversify the loan portfolio/asset mix of the institution11) failure to make provision for an adequate reserve for possible loan lossesn. Permitting officers to engage in lending practices beyond the scope of their position,o. Operating the bank, quasi-bank or trust entity with inadequate internal controls,p. Failure to keep accurate and updated books and records.q. Operating the institution with excessive volume of out-of-territory loans,r. Excessive volume of non-earning assets.s. Failure to heed warnings and admonitions of the supervisory authorities of the institution.t. Continued and flagrant violation of any laws, rules, regulations or written agreements between the institution and the Bangko Sentral ng Pilipinas.u. Any action likely to cause insolvency or substantial dissipation of assetsor earnings of the institution or likely to seriously weaken its condition or otherwise seriously prejudice the interest of its depositors/investors/clients.

BSP CIRCULAR NO. 650Series of 2009RE: AUTHORITY OF THRIFT BANKS TO ISSUE FOREIGN LETTERS OF CREDITSubject : Authority of Thrift Banks to Issue Foreign Letters of Credit (LCs) and Pay/Accept/Negotiate Import/Export Drafts/Bills of ExchangePursuant to Monetary Board Resolution No. 283 dated 19 February 2009, the Manual of Regulations for Banks (MORB) is hereby amended, as follows: SEC 1. Subsec. 2101.7 on authority of thrift banks to issue foreign letters of credit (LCs) and pay/accept/negotiate import/export drafts/bills of exchange is hereby added and shall read, as follows: “Subsec. X2101.7 Authority of thrift banks to issue foreign letters of credit (LCs) and pay/accept/negotiate import/export drafts/bills of exchange. With prior Monetary Board approval, thrift banks may be authorized to issue foreign letters of credit (LCs) and pay/accept/negotiate import/export drafts/bills of exchange, subject to compliance with the


following conditions (at the time of application unless otherwise indicated): a) Minimum capital requirement of P= 1.0 billion;b) Ten percent (10%) risk-based capital adequacy ratio (CAR); c) CAMELS composite rating not lower than “3”, with Management component score not lower than “3” in the latest examination of the bank;d) Risk management system appropriate to its operations, characterized by clear delineation of responsibility for risk management, adequate risk measurement system, appropriately structured risk limits, effective internal control system and complete, timely and efficient risk reporting system; e) Articles of incorporation which shall include among its powers or purposes, the issuance of foreign LCs and payment/acceptance/negotiation of import/export drafts/bills of exchange (which may be submitted any time prior to engaging in said activities);f) Correspondent banking relationship or arrangement with reputable foreign banks (which should be in place prior to engaging in said activities);g) Appointment of the officer with actual experience of at least two (2) years as in-charge or at least as assistant in-charge of import and export financing operations in a universal/ commercial bank who will be in-charge of the said operations (prior to engaging in said activities);h) Appointment of bank personnel with actual experience and/or training of at least six (6) months in import and export financing operations in a universal/commercial bank who will handle the said operations (prior to engaging in said activities);i) No net weekly regular and liquidity reserve deficiencies during the twelve (12) week period immediately preceding the date of application; j) No deficiency in asset and liquid asset cover for FCDU liabilities for three (3) months immediately preceding the date of application;k) No deficiency in liquidity floor requirement for government funds held during the twelve (12) week period immediately preceding the date of application;l) No float items outstanding for more than sixty (60) calendar days in the “Due From/To Head Office/Branches/Offices” and “Due from BSP” accounts exceeding 1% of the total resources as of end of month preceding the date of application;m) No unbooked valuation reserves;n) Compliant with ceilings on loans, other credit accommodations and guarantees to directors, officers, stockholders, and their related interests (DOSRI) for the quarter immediately preceding the date of application;

o) Compliant with the single borrower’s loan limit (SBL);p) Compliant with the limit on real estate and improvements, including bank equipment;q) No uncorrected findings of unsafe and unsound banking practices; r) Generally compliant with banking laws, rules and regulations, orders or instructions of the Monetary Board and/or BSP Management; ands) No past due obligations with the BSP or with any financial institution.SEC 2. Subsec. 2101.8 on application for authority to issue foreign letters of credit and pay/accept/negotiate import/export drafts/bills of exchange is hereby added, and shall read as follows: “Subsec. 2101.8 Application for authority to issue foreign letters of credit (LCs) and pay/accept/negotiate import/export drafts/bills of exchange. An application for authority to issue foreign LCs and pay/accept/negotiate import/export drafts/bills of exchange shall be signed by the president of the bank or officer of equivalent rank and shall be accompanied by a certified true copy of the resolution of the bank’s board of directors authorizing the application.”

This Circular shall take effect fifteen (15) days following its publication either in the Official Gazette or in a newspaper of general circulation.

CASES

PHILIPPINE BANKING CORPORATION vs. CAG.R. No. 12746915 January 2004

Facts:On 30 August 1989, Leonilo Marcos (“Marcos”) filed with the trial court a Complaint for Sum of Money with Damages[3] against petitioner Philippine Banking Corporation (“BANK”).Marcos alleged that sometime in 1982, the BANK through Florencio B. Pagsaligan (“Pagsaligan”), one of the officials of the BANK and a close friend of Marcos, persuaded him to deposit money with the BANK. Marcos yielded to Pagsaligan’s persuasion and claimed he made a time deposit with the BANK on two occasions. The first was on 11 March 1982 for P664,897.67. On 12 March 1982, Marcos claimed he again made a time deposit with the BANK for P764,897.67. The BANK did not issue an official receipt for the second deposit but it acknowledged a deposit of this amount through a letter-certification Pagsaligan issued. The time deposits earned interest at 17% per annum and had a maturity period of 90 days.


Marcos alleged that Pagsaligan kept the various time deposit certificates on the assurance that the BANK would take care of the certificates, interests and renewals. Marcos claimed that from the time of the deposit, he had not received the principal amount or its interest.Sometime in March 1983, Marcos wanted to withdraw from the BANK his time deposits and the accumulated interests to buy materials for his construction business. However, the BANK through Pagsaligan convinced Marcos to keep his time deposits intact and instead to open several domestic letters of credit. The BANK required Marcos to give a marginal deposit of 30% of the total amount of the letters of credit. The time deposits of Marcos would secure 70% of the letters of credit. Since Marcos trusted the BANK and Pagsaligan, he signed blank printed forms of the application for the domestic letters of credit, trust receipt agreements and promissory notes.Marcos executed three Trust Receipt Agreements totalling P851,250, broken down as follows: (1) Trust Receipt No. CD 83.7 dated 8 March 1983 for P300,000; (2) Trust Receipt No. CD 83.9 dated 15 March 1983 for P300,000; and (3) Trust Receipt No. CD 83.10 dated 15 March 1983 for P251,250. Marcos deposited the required 30% marginal deposit for the trust receipt agreements. Marcos claimed that his obligation to the BANK was therefore only P595,875 representing 70% of the letters of credit.Marcos believed that he and the BANK became creditors and debtors of each other. Marcos expected the BANK to offset automatically a portion of his time deposits and the accumulated interest with the amount covered by the three trust receipts totalling P851,250 less the 30% marginal deposit that he had paid. Marcos argued that if only the BANK applied his time deposits and the accumulated interest to his remaining obligation, which is 70% of the total amount of the letters of credit, he would have paid completely his debt. Marcos further pointed out that since he did not apply for a renewal of the trust receipt agreements, the BANK had no right to renew the same.Marcos accused the BANK of unjustly demanding payment for the total amount of the trust receipt agreements without deducting the 30% marginal deposit that he had already made. He decried the BANK’s unlawful charging of accumulated interest because he claimed there was no agreement as to the payment of interest. The interest arose from numerous alleged extensions and penalties. Marcos reiterated that there was no agreement to this effect because his time deposits served as the collateral for his remaining obligation.Marcos also denied that he obtained another loan from the BANK for P500,000 with interest

at 25% per annum supposedly covered by Promissory Note No. 20-979-83 dated 24 October 1983. Marcos bewailed the BANK’s belated claim that his time deposits were applied to this void promissory note on 12 March 1985.In sum, Marcos claimed that:His time deposit with the BANK “in the total sum of P1,428,795.34[5] has earned accumulated interest since March 1982 up to the present in the total amount of P1,727,305.45 at the rate of 17% per annum so his total money with defendant (the BANK) is P3,156,100.79 less the amount of P595,875 representing the 70% balance of the marginal deposit and/or balance of the trust agreements;” andHis indebtedness was only P851,250 less the 30% paid as marginal deposit or a balance of P595,875, which the BANK should have automatically deducted from his time deposits and accumulated interest, leaving the BANK’s indebtedness to him at P2,560,025.79.Marcos prayed the trial court to declare Promissory Note No. 20-979-83 void and to order the BANK to pay the amount of his time deposits with interest. He also sought the award of moral and exemplary damages as well as attorney’s fees for P200,000 plus 25% of the amount due.On 9 October 1989, the BANK filed its Answer with Counterclaim. The BANK denied the allegations in the complaint. The BANK believed that the suit was Marcos’ desperate attempt to avoid liability under several trust receipt agreements that were the subject of a criminal complaint.The BANK alleged that as of 12 March 1982, the total amount of the various time deposits of Marcos was only P764,897.67 and not P1,428,795.35 as alleged in the complaint. The P764,897.67 included the P664,897.67 that Marcos deposited on 11 March 1982.

The BANK pointed out that Marcos delivered to the BANK the time deposit certificates by virtue of the Deed of Assignment dated 2 June 1989. Marcos executed the Deed of Assignment to secure his various loan obligations. The BANK claimed that these loans are covered by Promissory Note No. 20-756-82 dated 2 June 1982 for P420,000 and Promissory Note No. 20-979-83 dated 24 October 1983 for P500,000. The BANK stressed that these obligations are separate and distinct from the trust receipt agreements.When Marcos defaulted in the payment of Promissory Note No. 20-979-83, the BANK debited his time deposits and applied the same to the obligation that is now considered fully paid. The BANK insisted that the Deed of Assignment authorized it to apply the time


deposits in payment of Promissory Note No. 20-979-83.In March 1982, the wife of Marcos, Consolacion Marcos, sought the advice of Pagsaligan. Consolacion informed Pagsaligan that she and her husband needed to finance the purchase of construction materials for their business, L.A. Marcos Construction Company. Pagsaligan suggested the opening of the letters of credit and the execution of trust receipts, whereby the BANK would agree to purchase the goods needed by the client through the letters of credit. The BANK would then entrust the goods to the client, as entrustee, who would undertake to deliver the proceeds of the sale or the goods themselves to the entrustor within a specified time.The BANK claimed that Marcos freely entered into the trust receipt agreements. When Marcos failed to account for the goods delivered or for the proceeds of the sale, the BANK filed a complaint for violation of Presidential Decree No. 115 or the Trust Receipts Law. Instead of initiating negotiations for the settlement of the account, Marcos filed this suit.The BANK denied falsifying Promissory Note No. 20-979-83. The BANK claimed that the promissory note is supported by documentary evidence such as Marcos’ application for this loan and the microfilm of the cashier’s check issued for the loan. The BANK insisted that Marcos could not deny the agreement for the payment of interest and penalties under the trust receipt agreements. The BANK prayed for the dismissal of the complaint, payment of damages, attorney’s fees and cost of suit.The trial court rendered its decision in favor of Marcos. Aggrieved, the BANK appealed to the Court of Appeals.On 10 December 1996, the Court of Appeals modified the decision of the trial court by reducing the amount of actual damages and deleting the attorney’s fees awarded to Marcos.

Issue: WON the bank is liable for offsetting his time depositsHeld: YesRatio:The BANK is liable to Marcos for offsetting his time deposits with a fictitious promissory note. The existence of Promissory Note No. 20-979-83 could have been easily proven had the BANK presented the original copies of the promissory note and its supporting evidence. In lieu of the original copies, the BANK presented the “machine copies of the duplicate” of the documents. These substitute documents have no evidentiary value. The BANK’s failure to explain the absence of the original documents and to maintain a record of the offsetting of this loan with the time deposits bring to fore the

BANK’s dismal failure to fulfill its fiduciary duty to Marcos.SEC 2 of Republic Act No. 8791 (General Banking Law of 2000) expressly imposes this fiduciary duty on banks when it declares that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.” This statutory declaration merely echoes the earlier pronouncement of the Supreme Court in Simex International (Manila) Inc. v. Court of Appeals requiring banks to “treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.” The Court reiterated this fiduciary duty of banks in subsequent cases.Although RA No. 8791 took effect only in the year 2000, at the time that the BANK transacted with Marcos, jurisprudence had already imposed on banks the same high standard of diligence required under RA No. 8791. This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor.The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Thus, the BANK’s fiduciary duty imposes upon it a higher level of accountability than that expected of Marcos, a businessman, who negligently signed blank forms and entrusted his certificates of time deposits to Pagsaligan without retaining copies of the certificates.The business of banking is imbued with public interest. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. In Simex International (Manila) Inc. v. Court of Appeals[36] we pointed out the depositor’s reasonable expectations from a bank and the bank’s corresponding duty to its depositor, as follows:In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs.As the BANK’s depositor, Marcos had the right to expect that the BANK was accurately recording his transactions with it. Upon the maturity of his time deposits, Marcos also had the right to withdraw the amount due him after the BANK had correctly debited his outstanding obligations from his time deposits.


By the very nature of its business, the BANK should have had in its possession the original copies of the disputed promissory note and the records and ledgers evidencing the offsetting of the loan with the time deposits of Marcos. The BANK inexplicably failed to produce the original copies of these documents. Clearly, the BANK failed to treat the account of Marcos with meticulous care.The BANK claims that it is a reputable banking institution and that it has no reason to forge Promissory Note No. 20-979-83. The trial court and appellate court did not rule that it was the bank that forged the promissory note. It was Pagsaligan, the BANK’s branch manager and a close friend of Marcos, whom the trial court categorically blamed for the fictitious loan agreements. The trial court held that Pagsaligan made up the loan agreement to cover up his inability to account for the time deposits of Marcos.Whether it was the BANK’s negligence and inefficiency or Pagsaligan’s misdeed that deprived Marcos of the amount due him will not excuse the BANK from its obligation to return to Marcos the correct amount of his time deposits with interest. The duty to observe “high standards of integrity and performance” imposes on the BANK that obligation. The BANK cannot also unjustly enrich itself by keeping Marcos’ money.Assuming Pagsaligan was behind the spurious promissory note, the BANK would still be accountable to Marcos. We have held that a bank is liable for the wrongful acts of its officers done in the interest of the bank or in their dealings as bank representatives but not for acts outside the scope of their authority. Thus, we held:A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114). Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit.Note: The promissory note was considered as forged as the bank did not show the original. Applying the Best Evidence Rule, the original should have been shown not the machine print-out, which was what was given by the Bank.

VIII. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT

Basic Policy (Sec.1)To promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits.

Main Functions1. Insurance of Banks (Sec.5)

To insure the deposit liabilities of any bank or banking institution engaged in the business of receiving deposits or which thereafter may engage in the business of receiving deposits.

2. Examination of Banks (Sec. 8 and 9)To conduct examination of banks with prior approval of the Monetary Board. No examination can be conducted within twelve months from the last examination date. The Board of Directors shall appoint examiners who shall have power, on behalf of the PDIC to examine any insured bank. Such examiner shall have the power to make a thorough examination of all the affairs of the bank and in doing so, he shall have the power to administer oaths, to examine and take and preserve the testimony of any of the officers and agents thereof, and, to compel the presentation of books, documents, papers, or records necessary in his judgment to ascertain the facts relative to the condition of the bank; and shall make a full and detailed report of the condition of the bank to the PDIC. The Board of Directors shall appoint claim agents who shall have the power to investigate and examine all claims for insured deposits and transferred deposits. Each claim agent shall have the power to administer oaths and to examine under oath and take and preserve testimony of any person relating to such claim

3. Rehabilitation of Banks (Sec.17)Money of the PDIC not otherwise employed shall be invested in obligations of the Republic of the Philippines or in obligations guaranteed as to principal and interest by the Republic of the Philippines.The banking or checking accounts of the PDIC shall be kept with the Bangko Sentral ng Pilipinas, with the Philippine National Bank, or with any other bank designated as depository or fiscal agent of the Philippine government.

4. Receivership of Closed Banks (Sec.10)The PDIC as receiver shall control, manage and administer the affairs of the closed bank. Effective immediately upon takeover as receiver of such bank, the powers, functions and duties, as well as all allowances, remunerations and perquisites of the directors, officers, and stockholders of such bank are suspended, and the relevant provisions of the


Articles of InPDIC and By-laws of the closed bank are likewise deemed suspended.The assets of the closed bank under receivership shall be deemed in custodia legis in the hands of the receiver. From the time the closed bank is placed under such receivership, its assets shall not be subject to attachment, garnishment, execution, levy or any other court processes.

5. Liquidation of Closed Banks (Sec.30, R.A.7653)

Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasi-bank: (a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or (c) cannot continue in business without involving probable losses to its depositors or creditors; or (d) has willfully violated a cease and desist order under SEC 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance PDIC as receiver of the banking institution. For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver.The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in non-speculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board. If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding

paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall: (1) file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance PDIC for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the institution. (2) convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. The actions of the Monetary Board taken under this SEC or under SEC 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship.

Insured Deposits (Sec.4(g))The amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as of date of closure, but not to exceed P500,000.00.


Liability to Depositors1. Deposit Liabilities Required to be Insured

(Sec.5)The deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits or which thereafter may engage in the business of receiving deposits, shall be insured with the PDIC.

2. Commencement of Liability (Sec.14)Whenever an insured bank shall have been closed by the Monetary Board, payment of the insured deposits on such closed bank shall be made by the PDIC as soon as possible either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor.The PDIC, in its discretion, may require proof of claims to be filed before paying the insured deposits, and that in any case where the PDIC is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of competent jurisdiction before paying such claim.Failure to settle the claim, within six (6) months from the date of filing of claim for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction, subject the directors, officers or employees of the PDIC responsible for the delay, to imprisonment from six (6) months to one (1) year. The period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by the PDIC together with such other office, body or agency.

3. Deposit Accounts Not Entitled to Payment (Sec.4(f))

Any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit or included as part of the total deposits or of insured deposit.Subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch.

4. Liability for Contents of Safety BoxNot liable – the Bank has no way of knowing what a depositor places in his security deposit box (Catindig).

5. Determination of Insured Deposits (Sec.16)

The PDIC shall commence the determination of insured deposits due the depositors of a closed bank upon its actual takeover of the closed bank.

6. Calculation of Liability (Sec. 4(g))Per Depositor, Per Capacity

In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefit either in his own name or in the name of others.Joint AccountsA joint account regardless of whether the conjunction "and," "or," "and/or" is used, shall be insured separately from any individually-owned deposit account.If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit.If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity.The aggregate of the interests of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of P250,000.00.Mode of Payments (Sec.14)Payment shall be made by cash or transferred deposit.Transferred Deposit. Deposit in another insured bank in an amount equal to insured deposit of such depositor.

Effect of Payment (Secc. 15, 16(b))Payment (a) of an insured deposit to any person by the PDIC and (b) payment of a transferred deposit to any person by the new bank or by an insured bank in which a transferred deposit has been made available shall discharge the PDIC.

Payment as Preferred Credit (Art.2244, Civil Code)

Failure to Settle Claim of an Insured Depositor (Sec. 14)The PDIC, in its discretion, may require proof of claims to be filed before paying the insured deposits, and that in any case where the PDIC is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of competent jurisdiction before paying such claim.Failure to settle the claim, within six (6) months from the date of filing of claim for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction, subject the directors, officers or employees of the PDIC responsible for the delay, to imprisonment from six (6) months to one (1) year.


The period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by the Corporation together with such other office, body or agency.

Failure of Depositor to Claim Insured Deposit (Sec.16(e))If the depositor in the closed bank shall fail to claim his insured deposits with the Corporation within two (2) years from actual takeover of the closed bank by the receiver, or does not enforce his claim filed with the corporation within two (2) years after the two-year period to file a claim as mentioned hereinabove, all rights of the depositor against the Corporation with respect to the insured deposit shall be barred; however, all rights of the depositor against the closed bank and its shareholders or the receivership estate to which the Corporation may have become subrogated, shall thereupon revert to the depositor. Thereafter, the Corporation shall be discharged from any liability on the insured deposit.

Other Powers of the PDIC1. To adopt and use a corporate seal; 2. To have succession until dissolved by

an Act of Congress;3. To make contracts4. To sue and be sued, complain and

defend, in any court of law in the Philippines

5. To appoint its Board of Directors, officers and employees

6. To prescribe its by-laws7. To exercise all powers granted8. To prescribe rules and regulations9. To establish its own provident fund10. To compromise, condone, release

any claim or settled liability11. To underwrite or advance litigation

costs or expenses

Prohibition against the Splitting of Deposits (Sec.21(f)(5))Splitting of deposits occurs whenever a deposit account with an outstanding balance of more than the statutory maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down and transferred into two or more accounts in the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names within thirty (30) days immediately preceding or during a bank-declared bank holiday, or immediately preceding a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance coverage.

Prohibition against Issuance of TROs (Sec.22)No court, except the Court of Appeals, shall issue any temporary restraining order, preliminary injunction or preliminary mandatory injunction against the PDIC for any action under the PDIC Act. This prohibition shall apply in all cases, disputes or controversies instituted by a private party, the insured bank, or any shareholder of the insured bank. The Supreme Court may issue a restraining order or injunction when the matter is of extreme urgency involving a constitutional issue, such that unless a temporary restraining order is issued, grave injustice and irreparable injury will arise. The party applying for the issuance of a restraining order or injunction shall file a bond in an amount to be fixed by the Supreme Court, which bond shall accrue in favor of the Corporation if the court should finally decide that the applicant was not entitled to the relief sought. Any restraining order or injunction issued in violation of this is void and of no force and effect and any judge who has issued the same shall suffer the penalty of suspension of at least sixty (60) days without pay.

IX. LAW ON SECRECY OF BANK DEPOSITS

PurposeTo encourage people to deposit their money in banks and thereby discourage private hoarding so that the banks may lend out the money and assist in the economic development of the country.

Prohibited Acts1. The examination and inquiry or looking

into all deposits of whatever nature with banks in the Philippines (including investments in bonds issued by the Government) by any person, government, bureau or office.

2. The disclosure by any official or employee of any bank to any unauthorized person of any information concerning said deposits.

Exceptions1. Upon written permission of the depositor2. In cases of impeachment3. Upon order of a competent court in

cases of bribery or dereliction of duty of a public official

4. In cases where the money deposited or invested is the subject matter of the litigation


5. Upon court order in cases of unexplained wealth (RA3019)

6. Upon order of the Commissioner of Internal Revenue in respect of bank deposits of a decedent for the purpose of determining gross estate

7. Upon order of the Commissioner of Internal Revenue in respect of bank deposits of a taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity

8. Upon court order in cases filed by the Ombudsman

a. In case of unclaimed balancesb. Without court order if the Anti-

Money Laundering Council determines that a particular deposit or investment is related to any one of the following unlawful activities:

i. Kidnapping for ransomii. Violations of the

Comprehensive Dangerous Drugs Act

iii. Hijacking, destructive arson, murder

c. Upon court order if the Anti-Money Laundering Council determines that a particular deposit or investment is related to a money laundering offense

d. Inquiry into or examination when made by the Bangko Sentral

Garnishment of Deposit

China Banking Corporation v. Ortega

FACTS Judgment by default was rendered against Bautista Logging Co., Inc., B&B Forest Development Corporation and Marino Bautista in an action for the collection of a sum of money. To satisfy the judgment, Tan Kim Liong sought the garnishment of a bank deposit of B&B Forest with China Banking Corporation.ISSUE Whether or not a banking institution may validly refuse to comply with a court process garnishing the bank deposit of a judgment debtor, by invoking the provisions of Republic Act No. 1405.

HELD No. It was not the intention of the legislature to place bank deposits beyond the reach of execution to satisfy a final judgment. There is no real inquiry in an order for garnishment and if the existence of the deposit were disclosed, the disclosure was purely incidental to the execution process.

PCIB v. CA

FACTS An action was filed by a group of laborers, who obtained a favorable judgment for the payment of backwages against Marinduque Mining Corporation (MMC). The NLRC issued a writ of execution. The Sheriff of Negros Occidental then prepared a Notice of Garnishment addressed to six banks directing the banks concerned to immediately issue a check in the name of the Deputy Provincial Sheriff of Negros Occidental in an amount equivalent to the amount of the garnishment and that proper receipt would be issued therefor. PCIB Bank Manager Jose Henares issued a debit memo for the full balance of MMC’s account and allowed its encashment.

ISSUE Whether or not PCIB violated Republic Act No. 1405 when it allowed the sheriff to garnish the deposit of MMC pursuant to a writ of execution issued by the NLRC.

HELD No. Garnishment is considered as a specie of attachment for reaching credits belonging to the judgment debtor and owing to him from a stranger to the litigation. Under the above-cited rule, the garnishee is obliged to deliver the credits to the proper officer issuing the writ. The law exempts from liability the person having in his possession or under his control any credits or other personal property belonging to the defendant if such property be delivered or transferred to the clerk, sheriff, or other officer of the court in which the action is pending. Since there is no evidence that PCIB divulged the information that the MMC had an account with it, and it is undisputed that the said account was properly the object of the notice of garnishment and writ of execution carried out by the deputy sheriff, a duly authorized officer of the court, PCIB is not liable.

Concealment of Illegally Acquired PropertyBanco Filipino v. PurisimaFACTS A complaint was filed by the Bureau of Internal Revenue against Manuel Caturla. In the course of the preliminary investigation thereof, the Tanodbayan issued a subpoena duces tecum to the Banco Filipino Savings & Mortgage Bank, commanding its representative to to furnish the Tanodbayan with duly certified copies of the records in all its branches of the loans, savings and time deposits and other banking transactions appearing in the names of Caturla, his wife and their children.

ISSUE Whether or not such an inquiry is allowed as regards public officials under investigation for a violation of the Anti-Graft & Corrupt Practices Act

HELD Yes. while Republic Act No. 1405 provides that bank deposits are absolutely confidential


and therefore may not be examined, inquired or looked into, except in those cases enumerated therein, the Anti-Graft Law directs in mandatory terms that bank deposits shall be taken into consideration in the enforcement of this SEC, notwithstanding any provision of law to the contrary. The only conclusion possible is that the Anti-Graft Law is intended to amend Republic Act No. 1405 by providing an additional exception to the rule against the disclosure of bank desposits. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential. The policy as to one cannot be different from the policy as to the other. This policy expresses the notion that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny. The inquiry into illegally acquired property extends to cases where such property is concealed by being held by or recorded in the name of other persons. This proposition is made clear by R.A. No. 3019 which quite categorically states that the term, legitimately acquired property of a public officer or employee shall not include property unlawfully acquired by the respondent, but its ownership is concealed by its being recorded in the name of, or held by, respondent's spouse, ascendants, descendants, relatives or any other persons.

Mellon Bank v. Magsino

FACTS Dolores Ventosa requested the transfer of $1,000 from the First National Bank of Moundsville, West Virginia, U.S.A. to Victoria Javier in Manila through the Prudential Bank. First National Bank requested Mellon Bank, to effect the transfer. Unfortunately the wire sent by Mellon Bank to Manufacturers Hanover Bank, a correspondent of Prudential Bank, indicated the amount transferred as US$1,000,000.00 instead of US$1,000.00. Javier’s husband used the money to purchase real property from Honorio Poblador, Jr.

ISSUE Whether or not the accounts of third parties can be looked into.

HELD Yes. Republic Act No. 1405 allows the disclosure of bank deposits in cases where the money deposited is the subject matter of the litigation. Inasmuch as the case is aimed at recovering the amount converted by the Javiers for their own benefit, necessarily, an inquiry into the whereabouts of the illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons

other than the one responsible for the illegal acquisition.

Case Pending in Court Required Before Ombudsman Can Examine Bank Accounts

Marquez v. Desierto

FACTS The Ombudsman attempted to inspect certain deposit accounts maintained at the Julia Vargas Branch of Union Bank involved in a case pending with the Ombudsman.

ISSUE Whether or not the power of the Ombudsman to examine and have access to bak accounts and records holds notwithstanding the provisions of Republic Act No. 1405.

HELD No. Before an in camera inspection may be allowed, there must first be a pending case before a court of competent jurisdiction. The account must be clearly identified, the inspection limited to the subject matter of the pending case, and the bank personnel as well as the account holder must be notified to be present during the inspection.

Foreign Currency Deposit Act

Salvacion v. Central BankFACTS Karen Salvacion was detained and raped by Greg Bartelli, an American citizen. Bartelli was arrested but was able to escape from jail. The civil case for damages continued, and judgment was rendered against Bartelli. ISSUE Whether or not Bartelli’s deposits with China Banking Corporation can be garnished.HELD Yes. Republic Act No. 6426 does not protect and would not apply to the foreign currency deposit of a transient alien depositor under the peculiar circumstances of this case.

Anti-Money Laundering Act

Common Stages of Money LaunderingPlacement, layering, integration

Covered Institutions1. Banks, non-banks, quasi-banks, trust

entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP)

2. Insurance companies and all other institutions supervised or regulated by the Insurance Commission

3. (i) Securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or


consultant, (ii) mutual funds, close and investment companies, common trust funds, pre-need companies and other similar entities, (iii) foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities, and (iv) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by Securities and Exchange Commission

Covered Transactions'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of P500,000.00 within one banking day.

Suspicious TransactionsTransactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist:1. There is no underlying legal or trade

obligation, purpose or economic justification

2. The client is not properly identified3. The amount involved is not

commensurate with the business or financial capacity of the client

4. Taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid being the subject of reporting requirements under the Act

5. Any circumstances relating to the transaction which is observed to deviate from the profile of the client and/or the client's past transactions with the covered institution

6. The transactions is in a way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed

7. Any transactions that is similar or analogous to any of the foregoing

Unlawful Activities or Predicate Crimes'Unlawful activity' refers to any act or omission or series or combination thereof involving or having direct relation to following:1. Kidnapping for ransom2. Violations of the Comprehensive Drugs

Act of 20023. Violations of the Anti-Graft and Corrupt

Practices Act4. Plunder under Republic Act No. 70805. Robbery and extortion

6. Jueteng and Masiao7. Piracy on the high seas8. Qualified theft9. Swindling10. Smuggling11. Violations of the Electronic Commerce

Act12. Hijacking, destructive arson and murder13. Fraudulent Practices under the Securities

Regulation Code14. Felonies or offenses of a similar nature

that are punishable under the penal laws of other countries

Money Laundering OffensesMoney laundering is a crime whereby the proceeds of an unlawful activity as herein defined are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following:

1. Any person knowing that any monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to transacts said monetary instrument or property.

2. Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he falicitates the offense of money laundering referred to in paragraph (a) above.

3. Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so.

Anti-Money Laundering CouncilThe Anti-Money Laundering Council is hereby created and shall be composed of the Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner of the Insurance Commission and the Chairman of the Securities and Exchange Commission as member. The AMLC shall shall act unanimously in the discharge of its functions as defined hereunder:1. To require and receive covered or

suspicious transaction reports from covered institutions

2. To issue orders addressed to the appropriate Supervising Authority or the covered institutions to determine the true identity of the owner of any monetary instrument or preperty subject of a covered transaction or suspicious transaction report or request for assistance from a foreign State, or believed by the Council, on the basis fo substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to directly or


indirectly, in any manner or by any means, the proceeds of an unlawful activitity

3. To institute civil forfeiture proceedings and all other remedial proceedings through the Office of th Solicitor General

4. To cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses

5. To investigate suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC, money laundering activities and other violations of this Act

6. To apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity

7. To implement such measures as may be necessary and justified under this Act to counteract money laundering

8. To receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations

9. To develop educational programs on the pernicious effects of money laundering, the methods and techniques used in the money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders

10. To impose administrative sanctions for the violation of laws, rules, regulations, and orders and resolutions issued pursuant thereto

Basic Activities Required of Covered Institutions to Prevent Money LaunderingCovered institutions shall report to the AMLC all covered transactions and suspicious transactions within five(5) working days from occurrences thereof, unless the Supervising Authority prescribes a longer period not exceeding ten working days. Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be required to report the same as a suspicious transaction.

Freezing of Monetary Instrument or PropertyThe Court of Appeals, upon application ex parte by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity, may issue a freeze order which shall be effective immediately. The freeze order shall be for a period of twenty days unless extended by the court.

Authority to Inquire Into Bank Deposits

The AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of the Anti-Money Laundering Act, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering except that no court order shall be required in cases involving kidnapping for ransom, violations of the Comprehensive Dangerous Drugs act, hijacking, destructive arson, and murder.

Penal Provisions1. Malicious Reporting . Any person who,

with malice, or in bad faith, reports or files a completely unwarranted or false information relative to money laundering transaction against any person shall be subject to a penalty to six (6) months to four (4) years imprisonment and a fine of not less than P100,000.00 but not more than P500,000.00, at the discretion of the court: Provided, That the offender is not entitled to avail the benefits of the Probation Law.

2. Breach of Confidentiality . The punishment of imprisonment ranging from three (3) to eight (8) years and a fine of not less than P500,000.00 but not more than P1,000,000.00 shall be imposed. In the case of a breach of confidentiality that is published or reported by media, the responsible reporter, writer, president, publisher, manager and editor-in-chief shall be liable.

Prohibitions Against Political HarrassmentAct shall not be used for political prosecution or harassment or as an instrument to hamper competition in trade and commerce.No case for money laundering may be filed against and no assets shall be frozen, attached or forfeited to the prejudice of a candidate for an electoral office during an election period.

Human Security Act

Judicial Authorization to Examine Bank Deposits, Accounts and RecordsThe provisions of Republic Act No. 1405 as amended, to the contrary notwithstanding, the justices of the Court of Appeals designated as a special court to handle anti-terrorism cases after satisfying themselves of the existence of probable cause in a hearing called for that purpose that: (1) a person charged with or suspected of the crime of terrorism or, conspiracy to commit terrorism, (2) of a judicially declared and outlawed terrorist


organization, association, or group of persons; and (3) of a member of such judicially declared and outlawed organization, association, or group of persons, may authorize in writing any police or law enforcement officer and the members of his/her team duly authorized in writing by the anti-terrorism council to: (a) examine, or cause the examination of, the deposits, placements, trust accounts, assets and records in a bank or financial institution; and (b) gather or cause the gathering of any relevant information about such deposits, placements, trust accounts, assets, and records from a bank or financial institution. The bank or financial institution concerned, shall not refuse to allow such examination or to provide the desired information, when so, ordered by and served with the written order of the Court of Appeals.

Application to Examine Bank Deposits, Accounts and RecordsThe written order of the Court of Appeals authorizing the examination of bank deposits, placements, trust accounts, assets, and records: (1) of a person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism; (2) of any judicially declared and outlawed terrorist organization, association, or group of persons, or (3) of any member of such organization, association, or group of persons in a bank or financial institution, and the gathering of any relevant information about the same from said bank or financial institution, shall only be granted by the authorizing division of the Court of Appeals upon an ex parte application to that effect of a police or of a law enforcement official who has been duly authorized in writing to file such ex parte application by the Anti-Terrorism Council created in SEC 53 of this Act to file such ex parte application, and upon examination under oath or affirmation of the applicant and, the witnesses he may produce to establish the facts that will justify the need and urgency of examining and freezing the bank deposits, placements, trust accounts, assets, and records: (1) of the person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism; (2) of a judicially declared and outlawed terrorist organization, association or group of persons; or (3) of any member of such organization, association, or group of persons.

Effective Period of Court AuthorizationThe authorization issued or granted by the authorizing division of the Court of Appeals to examine or cause the examination of and to freeze bank deposits, placements, trust accounts, assets, and records, or to gather information about the same, shall be effective

for the length of time specified in the written order of the authorizing division of the Court of Appeals, which shall not exceed a period of thirty (30) days from the date of receipt of the written order of the authorizing division of the Court of Appeals by the applicant police or law enforcement official.The authorizing division of the Court of Appeals may extend or renew the said authorization for another period, which shall not exceed thirty (30) days renewable to another thirty (30) days from the expiration of the original period: Provided, That the authorizing division of the Court of Appeals is satisfied that such extension or renewal is in the public interest: and, Provided, further, That the application for extension or renewal, which must be filed by the original applicant, has been duly authorized in writing by the Anti-Terrorism Council.In case of death of the original applicant or in case he is physically disabled to file the application for extension or renewal, the one next in rank to the original applicant among the members of the ream named in the original written order of the authorizing division of the Court of Appeals shall file the application for extension or renewal: Provided, That, without prejudice to the liability of the police or law enforcement personnel under SEC 19 hereof, the applicant police or law enforcement official shall have thirty (30) days after the termination of the period granted by the Court of Appeals as provided in the preceding paragraphs within which to file the appropriate case before the Public Prosecutor's Office for any violation of this Act.If no case is filed within the thirty (30)-day period, the applicant police or law enforcement official shall immediately notify in writing the person subject of the bank examination and freezing of bank deposits, placements, trust accounts, assets and records. The penalty of ten (10) years and one day to twelve (12) years of imprisonment shall be imposed upon the applicant police or law enforcement official who fails to notify in writing the person subject of the bank examination and freezing of bank deposits, placements, trust accounts, assets and records.

X. TRUTH IN LENDING ACTRA 3765 (1963)

10.1 TopicsPurpose

SEC 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full


disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.

Obligation of creditors

SEC 3. As used in this Act, the term(4) "Creditor" means any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge.SEC 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information:(1) the cash price or delivered price of the property or service to be acquired;(2) the amounts, if any, to be credited as down payment and/or trade-in;(3) the difference between the amounts set forth under clauses (1) and (2);(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit;(5) the total amount to be financed;(6) the finance charge expressed in terms of pesos and centavos; and(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

Covered and excluded transactionsCovered transactions

SEC 3. As used in this Act, the term(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect.

Sec. 3, CB Circular No. 158 implementing RA 3765

a) Any loans, mortgages, deeds of trust, advances and discounts;

b) Any conditional sales contracts, any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract;

c) Any rental-purchase contract;d) Any contract for the hire, bailment or

leasing of property;e) Any option, demand, lien, pledge or

other claim against or for delivery of, property or money;

f) Any purchase, or other acquisition of, or any credit upon the security of, any obligation or claim arising out of any of the foregoing; and

g) Any transaction or series of transactions having a similar purpose or effect.

Excluded transactions Sec. 3, CB Circular 158

a) Those that do not involve the payment of any finance charge by the debtor; and

b) Those in which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance contracts, sale of bonds, etc.

Finance and non-finance charges Finance charges

SEC 3. As used in this Act, the term(3) "Finance charge" includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Board may be regulation prescribe.Sec. 2 (h), CB Circular 158Finance charges are the amounts to be paid by the debtor incident to the extension of credit such as interests, discounts, collection fees, credit investigation fees and attorney’s fees.

Non-finance chargesSec. 2(f), CB Circular 158

Non-finance charges are the amounts advanced by a creditor for items normally associated with the ownership of property or the availment of the services purchased which are not incident to the extension of credit. For example, when a debtor purchases a car on credit, the creditor may advance the insurance premium as well as the registration fee for the account of the debtor.


Consequences of non-compliance with obligation

SEC 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subSEC in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court costs as determined by the court.(b) Except as specified in subSEC (a) of this SEC, nothing contained in this Act or any regulation contained in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or transactions.(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both.(d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof.(e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto.

10.2 CasesExcessive interests, penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending Act

New Sampaguita Builders Construction, Inc., et al. v. PNB

No penalty charges or increases thereof appear either in the Disclosure Statements or in any of the clauses in the second and the third Credit Agreements earlier discussed. While a standard penalty charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory Notes still

remaining unpaid or unrenewed when they fell due, there is no stipulation therein that would justify any increase in that charges. The effect, therefore, when the borrower is not clearly informed of the Disclosure Statements -- prior to the consummation of the availment or drawdown -- is that the lender will have no right to collect upon such charge or increases thereof, even if stipulated in the Notes. The time is now ripe to give teeth to the often ignored forty-one-year old “Truth in Lending Act” and thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless borrowers.

Failure to disclose required information in disclosure statement cured by disclosure thereof in loan transaction documents

DBP v. Arcilla Issue: WON DBP complied with the disclosure requirement of RA 3765 and CB Circular 158?Held: Yes. Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be included in the contract covering the credit transaction or any other document to be acknowledged and signed by the debtor. If the borrower is not duly informed of the data required by the law prior to the consummation of the availment or drawdown, the lender will have no right to collect such charge or increases thereof, even if stipulated in the promissory note. However, such failure shall not affect the validity or enforceability of any contract or transaction. In the present case, DBP failed to disclose the requisite information in the disclosure statement form authorized by the Central Bank, but did so in the loan transaction documents between it and Arcilla. Contrary to appellee's claim that he was not sufficiently informed of the details of the loan, the records disclose that the required informations were readily available in the three (3) promissory notes he executed. Thus, DBP substantially complied with RA 3765 and CB Circular 158.

10.3 Additional Materialsa) Implementing Rules: CB Circular No.

158-63b) Additional Implementing Rules: CB

Circular No. 431-74

10.4 Related Statute

Access Devices Regulation Act of 1998 (RA 8484)a) Disclosure required upon credit card application or solicitation


SEC 4. Credit Card Application and Solicitation. – Any application to open a credit card account for any person under an open-end credit plan or a solicitation to open such an account, either by mail, telephone or other means, shall disclose in writing or orally, as the case may be, the following information:(a) Annual Percentage Rate

1) Each annual percentage rate of interest on the amount of credit obtained by the credit card holder under such credit plan. Where an extension of credit is subject to a variable rate, the fact that the rate is variable, and the annual percentage rate in effect at the time of the mailing.

2) Where more than one rate applies, the range of balances to which each rate applies.

(b) Annual and other Fees

1) Any annual fee, other periodic fee, or membership fee imposed for the issuance or availability of a credit card, including any account maintenance fee or any other charge imposed based on activity or inactivity for the account during the billing cycle.

2) Any minimum finance charge imposed for each period during which any extension of credit which is subject to a finance charge is outstanding.

3) Any transaction charge imposed in connection with use of the card to purchase goods or services.

4) Any fee, penalty or surcharge imposed for the delay in payment of an account.

(c) Balance Calculation Method – the name or a detailed explanation of the balance calculation method used in determining the balance upon which the finance charge is computed.(d) Cash Advance Fee – any fee imposed for an extension of credit in the form of cash.(e) Over-the-Limit-Fee – any fee imposed in connection with an extension of credit in excess of the amount of credit authorized to be extended with respect to such amount: Provided, however, That in case the application or solicitation to open a credit card account for any person under an open-end consumer credit plan be made through catalogs, magazines, or other publications, the following additional information shall be disclosed:

1) A statement, in a conspicuous and prominent location on the application or solicitation, that:

i. the information is accurate as of the date the application or solicitation was printed;

ii. the information contained in the application or solicitation is subject to change after such date;

iii. the applicant should contact the creditor for information on any change in the information contained in the application or solicitation since it was printed;

2) The date the application or solicitation was printed; and

3) In a conspicuous and prominent location on the application or solicitation, a toll free telephone number or mailing address which the applicant may contact to obtain any change in the information provided in the application or solicitation since it was printed.

b) Detailed explanation and clear illustration of computation of charges and fees

SEC 5. Computations. – In addition to the foregoing, a credit card issuer must, to the extent practicable, provide a detailed explanation and a clear illustration of the manner by which all charges and fees are computed.

c) Exceptions to the disclosure requirement

SEC 6. Exceptions. – The disclosures required under SEC 4 of this Act may be omitted in any telephone solicitation or application if the credit card issuer:(a) does not impose any fee in connection with paragraph (b)(1), SEC 4 of this Act;(b) does not impose any fee in connection with telephone solicitation unless the consumer signifies acceptance by using the card;(c) discloses clearly the information described in SEC 4 of this Act in writing within thirty (30) days after the consumer requests the card, but in no event later than the date of delivery of the card; and(d) discloses clearly that the consumer is not obligated to accept the card or account and the


consumer will not be obligated to pay any fees or charges disclosed unless the consumer elects to accept the card or account by using the card.

d) Disclosure required prior to renewal

SEC 7. Disclosure Prior to Renewal. – Except in telephone solicitations a card issuer that imposes any fee described in SEC 4 shall transmit to a consumer's credit card account a clear and conspicuous disclosure of:(a) the date by which, the month by which, or the billing period at the close of which, the account will expire if not renewed;(b) the information described in SEC 4 which shall be transmitted to a consumer at least thirty (30) days prior to the scheduled renewal date of the consumer's credit card account;(c) the information described in SEC 4 (a) (1) which shall be transmitted to a consumer's credit card account; and(d) the method by which the consumer may terminate continued credit availability under the account: Provided, That the disclosures required by this SEC must be made prior to posting a fee described in SEC 4 (b) (1) to the account, or with the periodic billing statement first disclosing that the fee has been posted to the account subject to the condition that the consumer is given thirty (30) day period to avoid payment of the fee or to have the fee recredited to the account in any case where the consumer does not wish to continue the availability of the credit.

e) Penalty for failure to disclose

SEC 8. Failure to Disclose. – Credit card companies which shall fail to disclose the information required under SECs 4, 5 and 7 of this Act, after due notice and hearing, shall be subject to suspension or cancellation of their authority to issue credit cards by the Bangko Sentral ng Pilipinas, Securities and Exchange Commission and such other government agencies.

XI. LETTERS OF CREDITART 567-572 CODE OF COMMERCE

11.1 Topics

Governing Law1. Articles 567-572 of the Code of Commerce, which provides a skeletal introduction to the subject of letters of credit2. The Uniform Customs and Practice for Documentary Credits issued by the International Chamber of Commerce, which

reflects accepted commercial usage and practice on the subject of letters of credit and the application of which in the Philippines has been acknowledged by the Supreme Court based on Article 2 of the Code of Commerce which provides that in the absence of any applicable provision in the Code of Commerce, commercial transactions shall be governed by usages generally observed. (See BPI v. De Reny Fabric Industries; Feati Bank v. CA; and Bank of America, NT & SA v. CA)

Concept and nature

ARTICLE 567. Letters of credit are those issued by one merchant to another or for the purpose of attending to a commercial transaction.

Essential conditions

ARTICLE 568. The essential conditions of letters of credit shall be: 1. To be issued in favor of a definite person and not to order. 2. To be limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of which has to be stated exactly.Those which do not have any of these last circumstances shall be considered as mere letters of recommendation.

Period of validity

ARTICLE 572. If the bearer of a letter of credit does not make use thereof within the period agreed upon with the drawer, or, in default of a period fixed, within six months, counted from its date in any point in the Philippines, and within twelve months anywhere outside thereof, it shall be void in fact and in law.

Basic parties and governing contractsBasic parties of a letter of credit

a) The buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title;

b) The bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and

c) The seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. (See Bank of America v. NT & SA)


Governing contractsa) Issuing bank and

applicant/buyer/importer – Their relationship is governed by the terms of the application and agreement for the issuance of the letter of credit by the bank

b) Issuing bank and beneficiary/seller/exporter – Their relationship is governed by the terms of the letter of credit issued by the bank

c) Applicant and beneficiary – Their relationship is governed by the sales contract. (See Reliance Commodities v. Deawoo Industrial)

Opening bank – buyer’s bank which issues the letter of creditNotifying bank – corresponding bank of the opening bank through which it advises the beneficiary of the existence of the letter of creditNegotiating bank – any bank in the city of the beneficiary Paying bank - buys or discounts the drafts if such draft is drawn on the opening bank or on another designated bank not in the city of the beneficiary Confirming bank – upon the request of the beneficiary confirms the letter of credit issued by the opening bank

Independence principleThe independence principle in a letter of credit transactions means that a bank, in determining compliance with the terms of a letter of credit is required to examine only the shipping documents presented by the seller and is precluded from determining whether the main contract is actually accomplished or not. This arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. (See Bank of America NT & SA).

Rule of strict complianceThe rule of strict compliance in a letter of credit transaction means that the documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit, i.e., they must include all documents required by the letter of credit. Thus, a correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank, as the case may be; the money thus paid to the beneficiary. (See Feati Bank)

Documents associated with letters of credit transactions

a) Draft – sometimes called a bill of exchange, it is an order written by an exporter/seller instructing an importer/buyer or its agent to pay a specified amount of money at a specified time.

b) Bill of lading – document issued to the exporter by a common carrier transporting the merchandise. It serves three purposes: as a receipt, a contract and a document of title.

c) Commercial invoice – a document signed and issued by the seller and contains a precise description of the merchandise and the terms of the sale such as unit prices, amount due from the buyer and shipping conditions related to charges.

d) Consular invoice – a document issued by the consulate of the importing country to provide customs information and statistics for that country and to help prevent false declarations of value.

e) Certificate of analysis – a document that may be required to ascertain that certain specifications of weight, purity, sanitation, etc. have been met.

f) Packing list – an enumeration of the contents of containers so that they can be identified, either for customs purposes or for importer identification of the contents of separate containers.

g) Export declaration – a document prepared by the exporter to assist the government to prepare export statistics.

11.2 CasesNature of letters of credit

Prudential Bank v. IAC

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. Bank of America v. CA

A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interest of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have


control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents of title over the goods only after reimbursing the bank.

Process1. Once the credit is established, the seller ships the goods to the buyer and in the process secures the shipping documents or DOT2. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank3. The issuing bank redeems the draft and pays cash to the seller if it finds the documents submitted by the seller conform with what the letter of credit requires4. The bank obtains possession of the documents upon paying the seller5. Transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods.

Lee v. CA

Modern letters of credit are usually not made between natural persons. They involve bank-to-bank transactions. Historically, letters of credit was developed to facilitate the sale of goods between distant and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was acceptable to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller, provided that certain documents are presented such as bills of lading accompanied the corresponding drafts.

Parties to a commercial letter of credit 1. Buyer or importer2. Seller or the beneficiary3. Opening bank – buyer’s bank which issues the letter of credit4. Notifying bank – corresponding bank of the opening bank through which it advises the beneficiary of the existence of the letter of credit

5. Negotiating bank – any bank in the city of the beneficiary 6. Paying bank – buys or discounts the drafts if such draft is drawn on the opening bank or on another designated bank not in the city of the beneficiary 7. Confirming bank – upon the request of the beneficiary confirms the letter of credit issued by the opening bank

Standby letters of credit

Transfield Philippines, Inc. v. Luzon Hydro CorporationFacts: Transfield Philippines and LHC entered into a turnkey contract whereby the former undertook to construct a hydro-electric power station by June 1, 2000. To secure performance of the obligation on or before the target completion date, Transfield opened in favor of LHC 2 standby letters of credit. Transfeild failed to complete the project by the target date. Transfield filed a Complaint for Injunction to restrain LHC from calling on the securities. Issue: WON the banks should dispose of the securities upon application by LHC? Yes.Held: Concept of Standby letters of credit – The use of credits in commercial transactions serves to reduce the risk of non-payment of the purchase price under the contract of sale of goods. Standby credits however are used in non-sale settings where they serve to reduce the risk of non-performance.Commercial credit v. standby credit

1. Commercial credit involve of payment of money under a contract of sale.

2. Commercial credits become payable upon the presentation by the seller of documents that show he has taken affirmative steps to comply with the sales agreement. Standby credits is payable upon certification of a party’s nonperformance of the agreement.

3. Beneficiary of commercial credit must present documents that he has performed his contract. While beneficiary of standby credit must certify that his obligor has not performed the contract.

Independence principle

BPI v. De Reny Fabric IndustriesFacts: De Reny Fabric obtained letters of credit from BPI covering the purchase by the corporation of dyestuffs from its American supplier. Upon presentment of the bills of lading and drafts covering the goods to the corresponding bank of BPI in the US the supplier


was paid. De Reny refused to pay BPI on the ground that the goods delivered were defective. Issue: WON the foreign corresponding banks of BPI had the duty to take the necessary precaution to insure that the goods shipped conformed with the item appearing of the letters of credit?Held: No.Under the terms of their commercial letter of credit agreements with the bank, De Reny agreed that the Bank shall not be responsible or liable for any defect or loss of the goods. But even without such stipulation, the burden of loss still cannot be shifted to the Bank on account of the seller breach of its obligation. Under Uniform Customs and Practice for Commercial Documentary Credits, banks in providing financing in international business transactions, do not deal with the property to be exported or shipped to the importer but only deal with the documents. Custom in international banking and financing circles negate any duty on the part of a bank to verify whether what has been described in letters of credit or drafts or shipping documents actually tallies with what was loaded abroad ship.

Rule of strict compliance

Feati Bank v. CAFacts: The letter of credit provided that the draft should be presented to the issuing bank with the following documents: commercial invoice, tally sheets, bills of lading and a certification from Han-Axel Christiansen (consignor). The latter refused to issue the certification. Feati Bank, a corresponding bank of the issuing bank in the Philippines, refused to honor the drafts without the certification.Issue: WON a correspondent bank can be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof. Held: It is as settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank the money thus paid to the beneficiary. Thus the rule of strict compliance. Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit are material or superfluous. There mere fact that the document was specified therein readily

means that the document is of vital importance to the buyer.

XII. TRUST RECEIPTS LAWPD 115 (1973)

12.1 Topics

OriginThe Trust Receipts Law has no legislative history to speak of as it was a presidential issuance. It was closely patterned after the Uniform Trust Receipts Act promulgated in 1993 by the US National Conference of Commissioners on Uniform State Laws and adopted by roughly two-thirds of the states. The UTRA was replaced in 1952 by the Uniform Commercial Code. The UTRA, just like the Trust Receipts Law, contemplated a tripartite arrangement under which a buyer, called an entrustee, purchased goods from a seller, with the financing being provided by a lender called the entruster.

Nature and tripartite character of trust receipts transaction

SEC 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall


retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments,a) to sell or procure their sale or exchange; orb) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their presentation, collection or renewalThe sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree.

Distinguish from pledge, conditional sale, chattel mortgage and consignment

PledgeIn a pledge, the person doing the financing has possession of the property; in a trust receipt, the property is in the possession of the person financed.

Conditional SaleIn a conditional sale, there is a sale of the property from the seller to the buyer; in a trust receipt, there is no sale of the property from the entruster to the entrustee.

Chattel MortgageA chattel mortgage involves the creation of a lien on the property; a trust receipt does not involve the creation of a lien.

ConsignmentIn a consignment, the consignor retains title to the property to secure the indebtedness due from the consignee; in a trust receipt, the seller does not retain title to the property but transfers such title to the entruster.

Rights of entruster

SEC 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments

released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree. The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address.

Obligations of entrustee

SEC 9. Obligations of the entrustee. The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

Non-liability of entruster for sale of goods made by entrustee


SEC 8. Entruster not responsible on sale by entrustee. The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee.

Risk of loss of goods borne by entrustee

SEC 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, 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.

Acquisition by purchaser of goods free from entruster’s security interest

SEC 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.

Security interest of entruster valid against all creditors of entrustee

SEC 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

12.2 Cases

Liability of entrustee not extinguished by return of goods to entruster

Vintola v. IBAA

Facts: Vintolas were granted a letter of credit by IBAA to cover its purchase of seashells. Thereafter, the Vintolas received the seashells from the seller. Vintolas then executed a trust receipt agreement with IBAA. The Vintolas defaulted on their obligation as they were unable to sell the seashells. After IBAA demanded payment from them, they returned the seashells to IBAA. The Vintolas claim that

their obligation to IBAA has been extinguished inasmuch as they have relinquished possession thereof to IBAA, as owner of the goods.

Issue: WON the obligation of the Vintolas under the trust receipt agreement was extinguished? No

Held: IBAA did not become the real owner of the goods. It was merely the holder of a security of title for the advances it had made to the Vintolas. The goods remain the property of the Vintolas and they hold it at their own risk. The trust receipt agreement did not convert IBAA in to an investor, the latter remained a lender and creditor. Since the IBAA is not the factual owner of the goods, the Vintolas cannot claim that because they have surrendered the goods to IBAA they are absolutely relieved of their obligation to pay their loan because of their inability to dispose of the goods.

Trust receipts law deemed to cover capital goods

Allied Banking v. Ordones

Facts: PBM was given letter of credit by Allied Banking to cover the purchase of Dolomites and Nozzle Bricks (insulating materials which do not form part of the steel products). The drafts drawn against the letter of credit was honored and paid by Allied Banking. A trust receipt agreement was entered into between PBM and Allied Banking. PBM failed to turn over the proceeds of the sale of the goods or to return the goods themselves. Allied Banking filed a criminal case against PBM for violation of PD 115. The DOJ held that PD 115 covers only goods or components of goods which are ultimately destined for sale.

Issue: WON PD 115 also covers goods that do not form part of the finished product which are ultimately sold but are instead used up in the operation of the equipment and machineries of the entrustee-manufacturer? Yes

Held: The Court takes judicial notice of customary banking and business practices where trust receipts are used for importation of heavy equipment, machineries and supplies used in manufacturing operations. A construction should be avoided when it affords an opportunity to defeat compliance with the terms of a statute. The penal provision of PD 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions in goods which are to be sold, reshipped, stored or processed as a component of a product ultimately sold. To


uphold the DOJ’s ruling would contravene not only the letter but the spirit of PD 115.

Bipartite transaction deemed covered by trust receipts law

Robles v. CA

Facts: Ng entrusted to Robles office equipment which were all covered by delivery trust receipts. For all these items, Robles agreed to sell them and remit the proceeds of the sales to Ng or to return the items if unsold. When Robles failed to comply with his obligation, Ng filed a case for estafa against him. Robles claims that the trust receipts were merely intended to evidence the fact that the articles listed therein were delivered to and received by him. He claims that these transactions were in fact sales on a trial basis for a period of 2 days. Thus, when he failed to return the pieces of equipment within the 2 day period he was deemed to have purchased the same and his liability should therefore only be civil i.e. to pay the purchase price.

Held: The provisions of the trust receipts clearly show that (1) Ng retained ownership of the office equipment covered by the receipts; (2) that possession of the goods were conveyed to Robles subject to the fiduciary obligation either to return them within a specified period of time or to pay or account for the price of proceeds thereof. Surrounding circumstances also showed that the transactions were not ordinary sales on trial basis. There were 6 transactions and each transaction involved the delivery of several equipment indicating that Robles was not an ordinary buyer who would himself use the articles bought but rather a commission merchant.

Violation of trust receipts law offense against public order, not against property

People v. Nitafan

Facts: Allied Banking Corporation charged Ang with estafa under PD 115. Judge Nitafan dismissed the cased on the ground that the penal clause of PD 115 is inoperative because it does actually punish an offense mala prohibita. Nitafan also asserts that PD 115 is unconstitutional as it violates the constitutional prohibition against imprisonment for non-payment of a debt.Issue: WON an entrustee in a trust receipt agreement who fails to deliver the proceeds of the sale or to return the goods if not sold to the entruster bank is liable for the crime of estafa? Yes

Held: The Trusts Receipts Law punishes dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner or not. The law does not seek to enforce payment of the loan. Thus, there can be no violation of a right against imprisonment for non-payment of a debt. PD 115 like BP 22 punished the act “not as an offense against property, but as an offense against public order.” It is in the context of upholding public interest that the law now specifically designates a breach of a trust receipt agreement to be an act that “shall” make one liable for estafa.

Transaction a simple loan, not a trust receipt transaction

Colinares v. CA

Facts: Colinares obtained materials from CM Builders to renovate the Carmelite Sisters’ Convent. The next day, Colinares applied for a letter of credit from PBC in favor of the CM Builders. PBC approved the letter of credit to cover the full invoice value of the goods. Colinares signed a pro-forma trust receipt as security. Colinares was charged for violation of PD 115.

Issue: WON the transaction was an ordinary loan and not a trust receipt agreement under the Trust Receipts Law?

Held: The transaction intended by the parties was a simple loan not a trust receipt agreement. Colinares received the merchandise from CM Builders on October 30. On that day, ownership over the merchandise was already transferred to Colinares who was to use the materials for his construction project. It was only a day later that Colinares went to the bank to apply for a loan to pay for the merchandise.This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a “security interest” in the goods as holder of a security title for the advances it had made to the entrustee. The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. To secure that the bank will be paid it takes full title to the goods at the very beginning and continues to hold that title as his indispensible security until the goods are sold and the vendee is called upon to pay for them. Hence the importer has never owned the


goods and is not able to deliver possession. In a certain manner, trust receipts partake the nature of a conditional sale where the importer becomes the absolute owner of the merchandise as soon as he has paid its price.

Acquittal in criminal case for estafa under Sec. 13 of PD 115 does not extinguish civil liability arising from breach of trust receipts contract

Tupaz IV v. CA

Facts: BPI charged Tupaz with estafa under Sec. 13 PD 115. The trial court rendered judgment acquitting Tupaz of estafa on reasonable doubt. However, the trial court found Tupaz solidarily liable for the balance of the principle debt under the trust receipts.Issue: WON Tupaz’s acquittal of estafa under Sec. 13 PD 115 extinguished their civil liability?

Held: The rule is that where the civil action is impliedly instituted with criminal action, the civil liability is not extinguished by acquittal:

1. where the acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases;

2. where the court expressly declares that the liability of the accused is not criminal but civil in nature and

3. where the civil liability does not arise from or is not based upon the criminal act of which the accused was acquitted.

Although the trial court aquitted Tupaz his acquittal did not extinguish his civil liability. His liability arose not from the criminal act of which he was acquitted but from the trust receipt contract (ex contractu) which he signed in his personal capacity.

Entrustee has no authority to mortgage goods covered by trust receipts

DBP v. Prudential Bank

Facts: Litex opened a letter of credit from Prudential Bank to cover the importation of spindles etc. Prudential Bank released the spindles to Litex under a trust receipt agreement. Subsequently, Litex obtained a loan from DBP which was secured by real estate and chattel mortgages over its plant and machineries including the goods covered by the trust receipts. When Litex failed to pay its loan, DBP foreclose the mortgages. Prudential filed a case for damages against DBP.Issue: WON Litex as entrustee could mortgage the goods covered by the trust receipts?

Held: The articles were owned by Prudential Bank and they were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means. Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale.

XIII. MERCHANTS AND COMMERCIAL TRANSACTIONSCODE OF COMMERCE (1888)

Who are merchants?

ARTICLE 1. For purposes of this Code, merchants are: 1. Those who, having legal capacity to engage in commerce, habitually devote themselves to it; 2. The commercial or industrial companies which may be created in accordance with [this Code] existing legislation.

ARTICLE 2. Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not, should be governed by the provisions contained in it, in their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by those of the civil law.

Those acts contained in this Code and all others of analogous character shall be deemed acts of commerce.


ARTICLE 3. The legal presumption of habitually engaging in commerce shall exist from the moment the person who intends to engage therein announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever, an establishment which has for its object some commercial operation.

ARTICLE 4. Persons who possess the following qualifications shall have legal capacity to habitually engage in commerce: 1. Having completed the age of twenty-one years. 2. Not being subject to the authority of the father or of the mother nor to marital authority. 3. Having the free disposition of their property.

ARTICLE 5. Those under twenty-one years of age and those incapacitated may continue, through their guardians, the business engaged in by their parents or their predecessors. If the guardians do not have legal capacity to trade or are under some disqualifications, they shall be obliged to appoint one or more factors having the legal qualifications who shall substitute them in conduct of the business.

ARTICLE 6. (Repealed) 1ARTICLE 7. (Repealed) 2

ARTICLE 8. The husband may freely revoke the authorization impliedly or expressly granted to his wife to trade, stating the revocation in a public instrument which shall also be recorded in the commercial registry, published in the official periodical of the town, if there be one, or otherwise in that of the town, if there be one, or otherwise in that of the province, and announced to her correspondents by means of circulars. The publication may also be made, if the husband so demands, by proclamations and common criers.

This revocation may, in no case, prejudice rights acquired before its publication in the official periodical.

ARTICLE 9. (Repealed) 3ARTICLE 10. (Repealed) 4ARTICLE 11. (Repealed) 5ARTICLE 12. (Repealed) 6

Who may NOT engage in commerce?

ARTICLE 13. The following may not engage in commerce nor hold office or have any direct administrative or financial intervention in commercial or industrial companies: 1. Those sentenced to the penalty of civil interdiction, while they have not served their sentence or have not been amnestied or pardoned.

2. Those declared bankrupt, while they have not obtained their discharge [or have not been authorized, by virtue of an agreement accepted at a general meeting of creditors and approved by judicial authority, to continue at the head of the establishment, the authority being understood in such case as limited to that expressed in the agreement.] 3. Those who on account of special laws or provisions can not trade.

ARTICLE 14. The following cannot engage in the mercantile profession, in person or through another, nor hold office or have any direct administrative or financial intervention in commercial or industrial associations, within the limits of the districts, provinces or towns in which they discharge their duties: 1. Justices, judges and officials of the fiscals’ office in active service.This provision shall not be applicable to the municipal mayors, judges and prosecuting attorneys, nor to those who may temporarily discharge judicial or prosecution duties. 2. Administrative, economic or military heads of districts, provinces, or posts. 3. Those employed in the collection and administration of funds of the State, appointed by the Government.Those who administer and collect under contract and their representative are excepted. 4. Stock and commercial brokers of whatever class they may be. 5. Those who, under special laws and provisions, cannot trade in specified territory.

ARTICLE 15. Foreigners and companies created abroad may engage in commerce in the Philippines, subject to the laws of their country with respect to their capacity to contract, and to the provisions of this Code as regard the creation of their establishments in Philippine territory, their mercantile operations, and the jurisdiction of the courts of the nation.

The provisions of the article shall be understood to be without prejudice to what, in particular cases, may be established by treaties or agreements with other powers.

Title II - Commercial RegistriesARTICLE 16. In all the capitals of provinces shall be opened a mercantile registry composed of two independent books in which shall be inscribed: 1. Individual merchants. 2. Associations.In the coastal provinces and in the interior ones where it is considered convenient because of the presence of navigation, the registry shall include a third book for the registration of vessels.

http://www.openlexproject.com/commercial/code-of-commerce/book-one/title-ii-commercial-registries/


ARTICLE 17. Registration in the mercantile registry shall be optional for individual merchants and compulsory for associations which are created in accordance with this Code or with special laws, and for vessels.

ARTICLE 18. The unregistered merchant cannot request the inscription of any document in the mercantile registry, nor take advantage of its legal effects.

ARTICLE 19. The register shall keep the books necessary for registration, stamped, folioed and with a memorandum on the first page of the number of pages which each book contains, signed by the justice of the peace.Where there are several justices of the peace, any one of them may sign the memorandum.

ARTICLE 20. The registrar shall enter in chronological order in the registry and general index all the merchants and companies which are registered, giving each sheet the correlative number which corresponds to it.

ARTICLE 21. On the record sheet of each merchant or company shall be entered: 1. The name, firm name, or title. cd 2. The class of commerce or transactions in which engaged. 3. The date on which the transactions shall commence or have commenced. 4. The domicile, with a specification of the branches which may have been established, without prejudice to the registration of the branches in the registry of the province in which they may be domiciled. 5. Instruments for the creation of commercial associations, whatever their object or denomination may be, as well as those for the modification, rescission or dissolution of such associations. 6. [General powers of attorney, and the revocation of the same, should there be any, given to managers, factors, employees and any other agents.] 7. [The authorization of the husband for his wife to engage in commerce and the legal or judicial authority of the wife to administer her property on account of the absence or incapacity of the husband.] 8. [The revocation of the permission given to the wife to trade.] 9. [Dotal instruments], marriage settlement and the title which prove the ownership of the paraphernal property of the wives of merchants. 10. The issue of shares, certificates, and bonds of railroads and of all classes of associations, be they associations for public works, credit companies, or others, stating the series and number of the certificates of each issue, their participation, interest, payment and

premium, should they have one or the other, the total amount of the issue, and the property, works, rights or mortgages, should there be any, by which their payment is secured. The issues which may be made by individuals shall also be recorded in accordance with the provisions of the preceding paragraph. 11. [The issues of bank notes, stating the date, class, series, quantity and value of each issue.] 12. [The titles of industrial property, patents, and trademarks, in the form and manner established by law.]Foreign associations which desire to establish themselves or create branches in the Philippines shall present and record in the registry, besides their by-laws and the documents required of Filipinos, a certificate issued by the Philippine consul that they are constituted and authorized in accordance with the laws of their respective countries.

ARTICLE 22. [In the registry of vessels there shall be stated: 1. The name of the vessel, kind of equipment, system or power of the engines, if it is a steamer, stating whether they are nominal or indicated horsepower; place of construction of the hull and engines; year thereof, material of the hull, stating whether it is of wood, iron, steel, or mixed; principal dimensions of length, breadth of beam, and depth of hold; the gross and net tonnage; distinctive signal which it bears in the International Code of Signals; finally, the names and domiciles of the owners or part owners of the same. 2. The changes in the ownership of vessels, in their name, or in any of the other conditions enumerated in the foregoing paragraph. 3. The imposition, modification or cancellation of liens of any class whatsoever which encumber vessels.]

ARTICLE 23. As a general rule, the registration shall be made by virtue of notarial copies of the documents which the interested party may present.

The registration of notes, bonds, or order and bearer instruments which do not carry mortgages of immovable property shall be made upon presentation of the certified minutes where in appears the resolution of the person or persons who made the issue, and the conditions, requisites and guaranties thereof.When these guaranties consist of mortgage of immovables, the corresponding instrument shall be presented for annotation in the mercantile registry.

ARTICLE 24. Unregistered articles of association shall produce effect among the members who execute them, but they shall not


prejudice third person who, however, may make use thereof in so far as favorable.

ARTICLE 25. All the resolutions or acts which effect an increase or reduction in the capital of commercial associations, whatever their denomination may be, and those which modify or alter the conditions of recorded instruments, shall also be recorded in the mercantile registry. The omission of this requisite shall produce the effects mentioned in the preceding article.

ARTICLE 26. Registered documents shall produce legal effect to the prejudice of third persons only from the date of their registration, and cannot be invalidated by prior or subsequent unregistered documents.

ARTICLE 27. [Dotal] instruments [and those] referring to paraphernal property of the merchant’s wife, not registered in the mercantile registry, shall have no right of preference over other credits.

Immovable property and real rights over them, acquired by the wife prior to the creation of the concurrent credits, shall be excepted.

ARTICLE 28. If a merchant should fail to make in the registry the inscription of the [dotal or] paraphernal property of his wife, the latter herself may request it or it may be done for her by her parents, by others or uncles by consanguinity, as well as by those who discharge or may have discharged the duties of guardians or curators of the wife, [or who constitute or may have constituted the dowry.]

ARTICLE 29. [Unregistered powers of attorney shall give rise to actions between the principal and the agent, but they cannot be used to the prejudice of third persons, who, however, may rely thereon in so far as they may be favorable.]

ARTICLE 30. The mercantile registry shall be public. The registrar shall furnish those who may request it any data referring to what may appear on the registration sheet of each merchant, association or vessel. Likewise, he shall issue true copies of the whole or part of said sheet to anyone who may ask for it in a signed request.

ARTICLE 31. [The commercial registrar shall have under his charge, where there is an exchange, copies of the daily quotations of the properties negotiated and the exchanges fixed therein.

The copies shall serve as original instruments in all cases of investigation and verfication of exchanges and quotations on determined dates.]

ARTICLE 32. [The office of commercial registrar shall be filled by the government after a competitive examination.]

TITLE III - BOOKS AND BOOKKEEPING OF COMMERCE

ARTICLE 33. Merchants shall necessarily keep: 1. A book of inventories and balances. 2. A journal. 3. A ledger. 4. A book or books for copies of letters and telegrams. 5. Other books which may be required by special laws.

Associations and companies shall also keep a book or books of minutes, in which shall be entered all resolutions referring to the progress and operations of the entities, approved at general meetings or at those of managing boards.

ARTICLE 34. They may also keep other books which they may deem convenient, according to the system of bookkeeping they may adopt.

These books shall not be subject to the provisions of Article 36; but they may legalize those which they may consider proper.

ARTICLE 35. Merchants may keep their books personally or through persons whom they authorize for the purpose. If a merchant does not keep his books personally, authorization shall be presumed granted to him who keeps them unless there is proof to the contrary.

ARTICLE 36. Merchants shall present the books referred to in Article 33, bound, ruled, and folioed, to the justice of the peace of the municipality in which they have their commercial establishments in order that he may put on the first page of each one a signed memorandum of the number of pages which the book contains. The seal of the justice of the peace legalizing it shall, furthermore, be stamped on all the pages of each book.

ARTICLE 37. The book of inventories and balance shall begin with the inventory which the merchant must prepare at the time he starts his operations, and shall contain: 1. An exact statement of the money, securities, credits, notes receivable, movable and immovable property, merchandise and goods of all kinds, appraised at their true value, and which constitute his assets. 2. An exact statement of the debts and all kinds of pending obligations, should there be any, and which form his liabilities. 3. He shall determine, in proper cases, the exact difference between the assets and the liabilities, which shall be the capital with which he begins his operations.

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The merchant shall, furthermore, prepare annually and enter in the same book the general balance of his business, with the details mentioned in this article, and in accordance with the entries in the journal, without any reservations or omissions, under his signature and responsibility.

ARTICLE 38. In the journal shall be entered as the first item the result of the inventory mentioned in the preceding article, divided into one or various consecutive accounts, according to the system of bookkeeping adopted.

Thereafter, all his operations shall follow day by day, each entry stating the credit and debit of the respective accounts.

When the operations are numerous, whatever their importance may be, or when they have taken place outside the domicile, those referring to each account and which have taken place in each day may be included in a single entry, but observing in their statement, if itemized, the same order in which they took place.

Likewise, the amounts which the merchant uses for his household expenses shall be entered on the date on which they are withdrawn from the funds, and they shall be carried into a special account to be opened for that purpose in the ledger.

ARTICLE 39. The accounts referring to each object or person in particular shall, furthermore, be opened with Debit and Credit in the ledger, and to each of these accounts shall be transferred, in strict order of dates, the entries in the journal referring to them.

ARTICLE 40. In the book of minutes which each association shall carry shall be entered verbatim the resolutions agreed upon at its meetings or at those of its managers, stating the date of each one, those present in them, the votes cast, and other matters conducive to an exact knowledge of what as agreed upon, authenticated with the signatures of the managers, directors or administrators charged with the management of the association or designated by the by-laws or regulations by which it is governed.

ARTICLE 41. All the letters which a merchant may write regarding his business and the telegraphic dispatches which he may send shall be transferred, either by hand or by any mechanical means, to the book for copies., fully and successively by order of dates, including the subscribing clause and the signatures.

ARTICLE 42. Merchants shall carefully keep, in bundles and in proper order, the letters and telegraphic dispatches which they may receive relative to their transactions.

ARTICLE 43. Besides complying with and fulfilling the conditions and formalities prescribed in this title, merchants must keep their books with clearness, in the order of dates, without blanks, interpolations, erasures or blots, and without showing signs of having been altered by substituting or tearing out folios, or in any other manner whatsoever.

ARTICLE 44. Merchants shall correct the errors or omissions which they may make in entering in their books, immediately upon noticing them, explaining clearly in what they consisted, and writing the entry as it should have been written.

If some time should have elapsed since the error was committed or since the omission was incurred, they shall make the proper entry of correction, adding on the margin of the erroneous entry a memorandum indicating the correction.

ARTICLE 45. No judge or court or authority may, on his own initiative, make an inquiry to ascertain if merchants keep their books in accordance with the provisions of this Code, nor make a general investigation or examination of the bookkeeping in the offices or counting-houses of merchants.

ARTICLE 46. [Neither may the communication, delivery or general examination of the books, correspondence and other documents of merchants, be decreed at the instance of a party, except in the cases of liquidation, universal succession or bankruptcy.]

ARTICLE 47. [Outside of the cases mentioned in the preceding article, the exhibition of the books and documents of merchants may be decreed at the instance of a party or at the initiative of the court, only when the person to whom they belong has an interest or responsibility in the case in which the exhibition is made.

The examination shall be made in the counting-house of the merchant, in his presence or in that of the person whom he commissions, and shall be limited to the points related to the question at issue; these being the only ones that may be verified.]

ARTICLE 48. In order to measure the probative force of the books of merchants, the following rules shall be observed: 1. The books of merchants shall be evidence against themselves, no proof to the contrary being admissible; but the adverse party cannot accept the entries which may be favorable to him and reject those which may prejudice him, but having accepted this means of proof, he shall be bound by the result which it may show


in its entirety, taking into equal consideration all the entries relative to the question in litigation. 2. If there should be a conflict in the entries of the books kept by two merchant, and those of one should have been kept with all the formalities mentioned in this title, and those of the other should suffer from any defect or should lack the requisites prescribed by this Code, the entries of the books properly kept shall be admitted against those of the defective one. unless the contrary is shown by means of other evidence admissible in law. 3. If one of the merchants should not present his books or should manifest that he does not have them, those of his adversary, kept with all the legal formalities, shall be admitted against him, unless it is shown that the absence of such books is due to force majeure, and always saving proof by other means admissible in suits against the entries exhibited. 4. If the books of the merchants should have all the legal requisites and should be contradictory, the court shall decide by the other proofs, weighing them according to the general rules of law.

ARTICLE 49. Merchants and their heirs or successors shall keep the books, telegrams, and correspondence of their business in general, during all the time that this may last and for five years after the liquidation of all their business and commercial affairs.

Documents which specially concern specific acts or transactions may be rendered useless or destroyed upon the laps of the prescriptive period of the actions which may arise therefrom, unless some questions referring directly or indirectly to them should be pending, in which case, they must be kept until the conclusion thereof.

TITLE IV - GENERAL PROVISIONS RELATING TO COMMERCIAL CONTRACTS

ARTICLE 50. Commercial contracts, in everything relative to their requisites, modifications, exceptions, interpretations and extinction and to the capacity of the contracting parties, shall be governed in all matters not expressly provided for in this Code or in special laws, by the general rules of the civil law.[Telegraphic correspondence shall only be the basis of an obligation between contracting parties who have previously admitted this medium in a written contract, and provided the telegrams fulfill the conventional conditions or conventional signs which may have been previously fixed and agreed to by the contracting parties.]

ARTICLE 51. Commercial contracts shall be valid and shall give rise to obligations and

causes of action in suits, whatever the form and language in which they may be executed, the class to which they may belong, and the amount they may involve, provided their existence is shown by any means established by the civil law. However, the testimony of witness alone shall not be sufficient to prove the existence of a contract which involves an amount exceeding 1,500 pesetas unless supported by some other evidence.

ARTICLE 52. From the provisions of the preceding article shall be excepted: 1. Contracts which, in accordance with this Code or with special laws, must be reduced to writing or require forms or formalities necessary for their efficacy. 2. Contracts executed in a foreign country in which the law requires certain instruments, forms or formalities for their validity, although Philippine law does not require them.In either case, contracts which do not satisfy the circumstances respectively required shall not give rise to obligations or causes of action.

ARTICLE 53. Illicit agreements do not give rise to obligations or causes of action even should they refer to commercial transaction.

ARTICLE 54. Contracts entered into by correspondence shall be perfected from the moment an answer is made accepting the offer or the conditions by which the latter may be modified.

ARTICLE 55. Contracts in which an agent or broker intervenes shall be perfected when the contracting parties shall have accepted his offer.

ARTICLE 56. In a commercial contract in which a penalty for indemnification against the party failing to comply therewith is fixed, the injured party may demand through legal means the fulfillment of the contract or the penalty stipulated; but the recourse to one of these actions shall extinguish the other unless the contrary is stipulated.

ARTICLE 57. Commercial contracts shall be executed and complied with in good faith, according to the terms in which they were made and drawn up, without evading through arbitrary interpretations the plain, proper and usual meaning of the spoken or written words, or limiting the effects which are naturally derived from the manner in which the contracting parties may have expressed their will and contracted their obligations.

ARTICLE 58. If a discrepancy should appear between the copies of a contract which the contracting parties present, and, in its

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execution, an agent or broker should have intervened, that which appears in the books of the latter shall prevail provided they are kept in accordance with law.

ARTICLE 59. If doubts which cannot be decided in accordance with what is provided in Article 2 of this Code should arise, the question shall be decided in favor of the debtor.

ARTICLE 60. In all computations of days, months and years, it shall be understood that a day has twenty four hours, the months as designated in the Gregorian calendar, and the year has three hundred sixty-five days.Bills of exchange, promissory notes, and loans, with respect to which that specially provided for them by this Code shall govern, are excepted.

ARTICLE 61. Days of grace, courtesy or others which under any name whatsoever defer the fulfillment of commercial obligations, shall not be recognized, except those which the parties may have previously fixed in the contract or which are based on a definite provision of law.

ARTICLE 62. Obligations which do not have a period previously fixed by the parties or by the provisions of this Code, shall be demandable ten days after having been contracted if they give rise only to an ordinary action, and on the next day if they involve immediate execution.

ARTICLE 63. The effect of default in the performance of commercial obligations shall commence: 1. In contracts with a day for performance fixed by the will of the parties or by the law, on the day following their maturity. 2. In those which do not have such day fixed, from the day on which the creditor makes a judicial demand on the debtor or notifies him of the protest for loss and damages made against him before a judge, notary or other public official authorized to admit the same.

TITLE II - JOINT ACCOUNTS

ARTICLE 239. Merchants may interest themselves in the transaction of other merchants, contributing thereto the amount of capital they may agree upon, and participating in the favorable or unfavorable results thereof in the proportion they may determine.

ARTICLE 240. With regard to their formation, joint accounts shall not be subjected to any formality, and may be privately contracted orally or in writing, and their existence may be proved by any of the means accepted by law, in accordance with the provisions of Article 51.

ARTICLE 241. In the transactions treated of in the foregoing articles, no commercial name common to all the participants can be adopted, nor can any further direct credit be made use of except that of the merchant who transacts and manages the business in his own name and under his individual liability.

ARTICLE 242. Persons transacting business with the merchant carrying on the joint business shall only have a right of action against the latter and not against the other persons interested, and the latter, on the other hand, shall have no right of action against the third person who made the transaction with the manager unless said manager formally cedes his rights to them.

ARTICLE 243. The liquidation shall be effected by the manager, and after the transactions have been concluded, he shall render a proper account of its results.

Commerce (definition) – It is the exchange of goods, productions, or property of any kind. It is intercourse by way of trade and traffic between different peoples or states and the citizens or inhabitants thereof, including not only the purchase, sale, exchange of commodities, but also the instrumentalities and agencies by which it is promoted and the means and appliances by which it is carried on, and transportation of persons as well as goods.

Law merchant – is an old translation of the Latin lex mercatoria: an old international law of merchants and mariners growing out of their customary practices. It was a law practiced and enforced by businessmen and shipowners in their own courts, without professional judges or lawyers.

Who are merchants under the Commercial Code? (Art. 1)

1. those who having capacity engage in commerce, habitually devote themselves thereto; and

2. commercial or industrial associations organized in accordance with the Code

NOTE: The legal presumption of habitually engaging in commerce shall exist from the time the person who intends to engage therein gives announcement by means of circulars, newspapers, handbills, posters, etc. for the purpose of conducting any commercial transaction.

What are commercial transactions? Commercial transactions refer to those acts covered by the Code of Commerce and all others of analogous character. They are

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governed by the provisions of the Code of Commerce; in default of such provisions, by the commercial usages observed in each place; and in the absence of both, by the rules of civil law.

Who cannot engage in commerce?The following cannot engage in commerce:

1. persons sentenced to civil interdiction;2. persons declared bankrupt3. persons who, on account of laws or

special provisions, may not engage in commerce.

For some of the rules to be observed in respect of commercial contracts, see Articles 50-57 above (important parts are already underlined).

Joint Accounts / cuentas en participacion – is an arrangement among merchants who interest themselves in the transactions of other merchants, contributing thereto the part of the capital they may agree upon, and who participate in the favorable or unfavorable results thereof in the proportion they may determine (Art. 239). (see Articles 240-243 above for rules governing joint accounts)

Joint Accounts vs. PartnershipsJoint Accounts Partnership1. has no separate juridical personality; can sue and be sued only in the name of the ostensible partner

1. has juridical personality and may sue and be sued under the partnership name

2. prohibited from having a commercial name (thus, business is conducted in the name of the ostensible partner)

2. has a firm name

3. business is managed by the ostensible partner

3. general partners have the right of management

4. liquidation shall be made by the ostensible partner

4. liquidation may, by agreement, be entrusted to a partner or partners

Case:

Bourns vs. Carman G.R. L-2800

Facts:The plaintiff in this action seeks to

recover the sum of $437.50, balance due on a contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. Lo-Chim-Lim and his codefendants alleged that at the time the contract was made, they were the joint proprietors and operators of the said lumber yard engaged in the purchase and sale of lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to show that

the other defendants were the partners of Lo-Chim-Lim in the said lumber yard business.

Held:As far as the evidence shows it seems

that the business was conducted by Lo-Chim-Lim in his own name, although he gave to the appellants a share of the earnings of the business; but what that share was has not been shown with certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim individually in his own name, and there is no evidence that the partnership ever contracted in any other form. Under such circumstances we find nothing upon which to consider this partnership other than as a partnership of cuentas en participacion. It may be that, as a matter of fact, it is something different, but the uncertain and scant evidence introduced by the parties does not permit of any other designation of this partnership. We see nothing, according to the evidence, but a simple business conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons interested in the profits and losses of the business nowhere appearing.

A partnership constituted in such a manner, the existence of which was only known to those who had an interest in the same, there being no mutual agreements between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, is exactly the accidental partnership of cuentas en participacion defined in article 239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against the third person who contracted with the manager unless such manager formally transfers his right to them. (Art 242 of the code Of Commerce.) It follows, therefore that the plaintiff has no right to demand from the appellants the payment of the amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted with him. the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly dismissed.


XIV. THE INSOLVENCY LAWACT 1956 (1909), AS AMENDED BY ACT 3544 (1929), ACT 3616 (1929), AND ACT 3692 (1932)

14.1 PurposeThe purpose of the law is to provide for

an orderly mechanism by which the assets of the insolvent debtor could be converted into money for distribution among his creditors and thereby relieve the debtor from the weight of his debts and permit him to start anew free from such debts.

14.2 Sources

(Spanish Code of Commerce as to suspension of payments)

Mitsui Bussan Kaisha vs. Hongkong & Shanghai Banking Corp. G.R. 11079Held:(Actually, this is only narrates the history of Philippine Insolvency Law)

In 1908 two bills (Assembly Bill No. 126 and Commission Bill No. 87) were introduced in the Philippine Legislature and both were rejected. The committee of the Commission, in reporting upon the Assembly bill, stated in its report of June 12, 1908, that "The law seeks to blend the American laws of insolvency and bankruptcy with the Spanish law of bankruptcy. Such a policy is sure to result in complications and to bring about a system so cumbersome and unwieldly as to make it impracticable and uneconomical."

Later a joint conference committee was appointed from the two houses and it prepared a bill which was designated Assembly Bill No. 576. This bill was passed without any material changes and became Act No. 1956. By comparing the Commission Bill No. 87 with Act No. 1956, it will be seen that every SEC of the former is embodied in the latter. The only apparent exception is SEC 41 of the Commission Bill, but the substantial provisions of that SEC appear in subSEC 9 of SEC 48 of the Act. Furthermore, there is little in the Act from SEC 14 which is not in the Commission Bill. SubSEC 3 of SEC 71 of the Act contains penal provisions which relate to the suspension of payments and which are not in the Commission Bill. SEC 48 of the Act has no counterpart in the Commission Bill. Again, a comparison of Commission Bill No. 87 with the Insolvency Act of California, enacted in 1895, SEC by SEC and clause by clause, shows that the former is, in a great many respects, a copy of the latter. The Commission Bill omits one of the acts of bankruptcy named in SEC 9 of the California

Act. Also SEC 15 and 26, subSEC 5 of SEC 25, and subSEC 3 of SEC 1, and several minor portions of the other SECs of the California Act are omitted. These relate to procedure in the main and are substantially governed by other provisions in the Commission Bill. The concluding SECs of the Commission Bill and of the California Act are different. The most important difference is the inclusion in the Commission Bill of SEC 34, which is wholly lacking in the California Act. This SEC deals with preferred claims and has its counterpart in SEC 48b of the United States Bankruptcy Act of 1898. Another addition is chapter 7 of the Commission Bill entitled "Compositions." This chapter corresponds closely to SEC 12 and 13 of the United States Bankruptcy Act of 1898. The result is that the only provisions in Act No. 1956, which tend to show that the Legislature did not intend to adopt in this jurisdiction the American theory of bankruptcy, are found in SEC 48. This SEC, by its nine subdivisions, specifies what property in the hands of the insolvent may not be taken by the assignee. These provisions are found neither in the United States Bankruptcy Act of 1898 nor in the California Act of 1895. They are found, however, in Assembly Bill No. 126 and were inserted for the purpose of avoiding a conflict between Act No. 1956 and certain well defined provisions of the Civil Code.

Act No. 1956 deals with three principal subjects, namely, suspension of payments, voluntary insolvency, and involuntary insolvency. That part of the Act referring to the first appears to have been taken from the Spanish Code of Commerce , as amended by the law of June 10, 1897. Formerly there were in England and America marked distinctions between bankruptcy laws and insolvency laws. The two principal distinctions, which have been given by various authors, between these laws are: First, bankruptcy laws applied only to traders and merchants, while insolvency laws applied to all classes of persons; second, the former discharged absolutely the debts of the honest debtor, while the latter discharged only the person of the debtor from arrest and imprisonment, but left the property subsequently acquired by the debtor liable to the demands of his creditors. More recently in some jurisdictions no attempt has been made to distinguish between them. A bankruptcy law may contain those regulations which are generally found in insolvency laws, and an insolvency law may deal with those which are common in bankruptcy laws. Whether these distinctions were recognized and maintained in the Spanish system is of no importance. It is sufficient to say that the Act, in so far as it relates to voluntary and involuntary insolvency, is essentially a


bankruptcy law because it discharges the honest debtor.

Insolvency Act of California of 1895, as to voluntary and involuntary insolvency

Sun Life Assurance vs. Ingersoll G.R. 16475

Held: (again, historical background lang to ng

Insolvency Law) Now, it is a well-known fact in our legislative history that the Insolvency Law (Act No. 1956) is in great part a copy of the Insolvency Act of California, enacted in 1895, though it contains a few provisions from the American Bankruptcy Law of 1898 (see observation of Justice Trent in Mitsui Bussan Kaisha vs. Hongkong and Shanghai Banking Corporation, 36 Phil., 27, 37). Again, upon comparing the California Insolvency Law of 1895 with the American Bankruptcy Act of 1867, it will be found that the former contains much in common with the latter; and among the provisions common to the Bankruptcy Act of 1867, the California Insolvency Law of 1895, and the Insolvency Law in force in these Islands (Act No. 1956), is precisely the provision which appears as SEC 32 of our Act, defining the property which passes as assets to the assignee in insolvency. (Bankruptcy Act of 1867, sec. 14; California Insolvency Law of 1895, sec. 21; Philippine Insolvency Law, sec. 32.)

Under each of said laws the assignee acquires all the real and personal property, estate, and effects of the debtor, not exempt by law from execution, with all deeds, books and papers relating thereto; and while this language is broad, it nevertheless lacks the comprehensiveness of SEC 70 (a) of the American Bankruptcy Law of 1898 in the least two particulars; for under subSEC 3 of SEC 70 (a) of the last mentioned law, the trustee in bankruptcy acquires the right to exercise any powers which the insolvent might have exercised for his own benefit, and under subSEC 5 the trustee acquires any property of the insolvent which the latter could by any means have assigned to another. The Insolvency Law here in force, in common with the predecessor laws above-mentioned, contains nothing similar to these provisions.

14.3 Applicability to banks, quasi banks, and insurance companiesThe Insolvency law is NOT applicable to banks, quasi-banks, and insurance companies.

SUSPENSION OF PAYMENTSNatureWho could file petition

SEC 2. The debtor who, possessing sufficient property to cover all his debts, be it an individual person, be it a sociedad or corporation, foresees the impossibility of meeting them when they respectively fall due, may petition that he be declared in the state of suspension of payments by the court, or the judge thereof in vacation, of the province or of the city in which he has resided for six months next preceding the filing of his petition.He shall necessarily annex to his petition a schedule and inventory in the form provided in SECs fifteen, sixteen, and seventeen of this Act, in addition to the statement of his assets and liabilities and the proposed agreement he requests of his creditors.

Differentiate from insolvency proceedingSuspension of payments vs. Insolvency proceedingSuspension of Payments

Insolvency Proceeding

1. object of suspension of payments is the deferment of the payment of debts until such time as the debtor, who possesses sufficient property to cover all his debts, is able to convert such assets into cash or otherwise acquires the cash necessary to pay his debts

1. object is to compel presentment of all debts, due or not due, and secure a complete discharge from such debts

2. amount of debts is not affected although their payment is postponed

2. the creditors receive less than what they are entitled to; in some cases, where preferences are proper, some creditors may not receive any amount at all

Effect of filing of petitionOn execution pending against

debtorOn execution against property

specially mortgagedOn action to collect sum of money

still to be filed against debtorOn other actions

SEC 6. If any execution be pending against the debtor it shall not be consolidated with this proceeding, but the course thereof shall be suspended before sale of property is made thereunder, provided the debtor makes a request therefor to the court before which the proceeding for suspension of payments is pending, unless the execution be against property especially mortgaged which is hereby


exempted from the provisions of this SEC. The suspension ordered by virtue of this SEC shall lapse when three months shall have passed without the proposed agreement being accepted by the creditors or as soon as it is denied. No creditor other than those mentioned in SEC nine shall sue or institute proceedings to collect his claim from the debtor from the moment that suspension of payments is applied for and while the proceedings are pending.

Procedure (a) filing of petition by the debtor(b) issuance by the court of an order calling

for a meeting of the creditors(c) publication of the order and service

thereof on the creditors(d)meeting of creditors for approval or

disapproval of the debtor’s proposition(e)objection, if any and if justified, to the

decision of the meeting of creditors

Issuance, publication and delivery of order calling creditors to meeting (Secs. 3 and 5)

SEC 3. Upon receiving and filing the petition with the schedule and documents mentioned in the next preceding SEC, the court, or the judge thereof in vacation, shall make an order calling a meeting of creditors to take place in not less than two weeks nor more than eight weeks from the date of such order. Said order shall designate the day, hour, and place of meeting of said creditors as well as a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the judgment of the judge, will best give notice to the creditors of the said debtor, and in the newspaper so designated said order shall be published as often as may be prescribed by the court or the judge thereof.

Said order shall further contain an absolute injunction forbidding the petitioning debtor from disposing in any manner of his property, except in so far as concerns the ordinary operations of commerce or of industry in which the petitioner is engaged, and, furthermore, from making any payments outside of the necessary or legitimate expenses of his business or industry, so long as the proceedings relative to the suspension of payments are pending, and said proceedings for the purposes of this Act shall be considered to have been instituted from the date of the filing of the petition.

SEC 5. Only creditors included in the schedule filed by the debtor shall be cited to appear and take part in the meeting mentioned in SEC three, and they shall be notified upon delivery or transmission to them of a copy of the order calling the meeting to appear at same with the written evidences of their respective claims, without which they shall not be admitted.

Required quorum for holding of meetingRequired vote for approval of debtor’s proposal

SEC 8. The presence of the creditors representing at least three-fifths of the liabilities shall be necessary for holding a meeting. The meeting shall be held on the day and at the hour and place designated, the judge, or commissioner deputized by him when he is absent from the province where the meeting is held, acting as president and the clerk as secretary thereof, subject to the following rules: (a) The clerk shall prepare for insertion in the minutes of the meeting a statement of the persons present and their claims; the judge, or, in default thereof, the commissioner, shall examine the written evidences of the claims and the powers of attorney, if any. If the persons present who have complied with the foregoing rules represent at least three-fifths of the liabilities, the judge or commissioner shall declare the meeting open for business. (b) The petition of the debtor, the schedule of debts and of property, the statement of assets and liabilities, and the proposed agreement filed therewith shall be read forthwith by the clerk, and the discussion shall be opened. (c) The debtor may modify his proposition or propositions in view of the result of the debate, or insist upon the ones already made, and the judge or commissioner, without further discussion, shall clearly and succinctly place these several propositions before the meeting for a vote thereupon. (d) The vote shall be taken by a call of names and shall be inserted in and the minutes; a majority vote shall rule. (e) To form a majority it is necessary — 1. That two-thirds of the creditors voting unite upon the same proposition. 2. That the claims represented by said majority vote amount to at least three-fifths of the total liabilities of the debtor mentioned in the petition. (f) After the result of the voting has been announced, all protests made against the majority vote shall be admitted and stated in the record, and the meeting shall be closed.


(g) The minutes of the meeting, containing a succinct statement of all proceedings had therein, shall be drawn up, and there shall be inserted therein the proposition or propositions voted upon, which, after having been read and approved, shall be signed by the judge or commissioner together with all persons taking part in the voting; if any such persons shall be unable to write, any person present shall sign, at their request, and the clerk shall certify to all of the above.

Persons not bound by agreement on debtor’s proposal

SEC 9. Persons having claims for personal labor, maintenance, expenses of last illness and funeral of the wife or children of the debtor, incurred in the sixty days immediately preceding the filing of the petition, and persons having legal or contractual mortgages, may refrain from attending the meeting and from voting therein. Such persons shall not be bound by any agreement determined upon at such meeting, but if they should join in the voting they shall be bound in the same manner as are the other creditors.

Termination of proceedings

SEC 11. If the decision of the meeting be negative as regards the proposed agreement or if no decision is had in default of such number or of such majorities, the proceeding shall be terminated without recourse and the parties concerned shall be at liberty to enforce the rights which may correspond to them. If the decision is favorable to the debtor it may be objected to within ten days following the date of the meeting by any creditor who attended the meeting and who dissented from and protested against the vote of the majority. The opposition or objection to the decision of the majority favorable to the debtor shall be proceeded with as in any other incidental motion, the debtor and the creditors who shall appear declaring their purpose to sustain the decision of the meeting being the defendants. The court shall hear and pass upon such objection as soon as possible and in a summary manner, and in its order, which shall be final, it shall declare whether or not the decision of the meeting is valid. In case that the decision of the meeting is held to be null, the court shall declare the proceeding terminated and the parties concerned at liberty to exercise the rights which may correspond to them; and in case the decision of the meeting is declared valid, or when no opposition or objection to said decision has been presented, the court shall order that the agreement be carried out and the persons concerned shall be bound by the decision of the

meeting. The court may also issue all orders which may be proper to enforce the agreement on motion of any of the parties litigant. The order directing the agreement to be made effective shall be binding upon all creditors included in the schedule of the debtor who may have been properly summoned, but not upon creditors mentioned in SEC nine who failed to attend the meeting or refrained from voting therein, and their rights shall not be affected by the agreement unless they may have expressly or impliedly consented thereto.

Consequences of debtor’s failure to perform agreement

SEC 13. If the debtor fails wholly or in part to perform the agreement decided upon at the meeting of the creditors, all the rights which the creditors had against the debtor before the agreement shall revest in them. In such case the debtor may be made subject to the bankruptcy and insolvency proceedings in the manner established by the following chapters of this Act.

VOLUNTARY INSOLVENCY

14.5 NatureWho could file petition

Schedule of debts and liabilitiesInventory of property

Differentiate from involuntary insolvencyVoluntary vs. Involuntary Insolvency

In voluntary insolvency, a debtor is deemed insolvent upon his filing of a petition for voluntary insolvency; while in involuntary insolvency, the debtor is considered insolvent upon the issuance by the court of an order declaring him insolvent.

Procedurea. filing of petition by the debtorb. issuance by the court of an

order declaring, among other things, that the petitioner is insolvent

c. publication of order and service thereof on the creditors

d. meeting of creditors for election of assignee in insolvency

e. conveyance of debtor’s property to assignee in insolvency


f. liquidation of assets and payment of debts

g. discharge of the debtorh. objections to discharge, if anyi. appeal to the Supreme Court

in certain cases.

Filing of petition an act of insolvency

SEC 14. An insolvent debtor, owing debts exceeding in amount the sum of one thousand pesos, may apply to be discharged from his debts and liabilities by petition to the Court of First Instance of the province or city in which he has resided for six months next preceding the filing of such petition. In his petition he shall set forth his place of residence, the period of his residence therein immediately prior to filing said petition, his inability to pay all his debts in full, his willingness to surrender all his property, estate, and effects not exempt from execution for the benefit of his creditors, and an application to be adjudged an insolvent. He shall annex to his petition a schedule and inventory in the form hereinafter provided. The filing of such petition shall be an act of insolvency.SEC 15. Said schedule must contain a full and true statement of all his debts and liabilities, together with a list of all those to whom, to the best of his knowledge and belief, said debts or liabilities are due, the place of residence of his creditors and the sum due each, the nature of the indebtedness or liability and whether founded on written security, obligation, contract or otherwise, the true cause and consideration thereof, the time and place when and where such indebtedness or liability accrued, a declaration of any existing pledge, lien, mortgage, judgment, or other security for the payment of the debt or liability, and an outline of the facts giving rise or which might give rise to a cause of action against such insolvent debtor.SEC 16. Said inventory must contain, besides the creditors, an accurate description of all the real and personal property, estate, and effects of the petitioner, including his homestead, if any, together with a statement of the value of each item of said property, estate, and effects and its location, and a statement of the incumbrances thereon. All property exempt by law from execution shall be set out in said inventory with a statement of its valuation, location, and the incumbrances thereon, if any. The inventory shall contain an outline of the facts giving rise, or which might give rise, to a right of action in favor of the insolvent debtor.

SEC 17. The petition, schedule, and inventory must be verified by the affidavit of the petitioner, annexed thereto, and shall be in form substantially as follows: “I, _______________, do solemnly swear that the schedule and inventory now delivered by me contain a full, correct, and true discovery of all my debts and liabilities and of all goods, effects, estate, and property of whatever kind or class to me in any way belonging. The inventory also contains a full, true and correct statement of all debts owing or due to me, or to any person or persons in trust for me and of all securities and contracts whereby any money may hereafter become due or payable to me or by or through which any benefit or advantage whatever may accrue to me or to my use, or to any other person or persons in trust for me. The schedule contains a clear outline of the facts giving rise, or which might give rise, to a cause of action against me, and the inventory contains an outline of the facts giving rise, or which might give rise, to any cause of action in my favor. I have no lands, money, stock, or estate, reversion, or expectancy, or property of any kind, except that set forth in said inventory. I have in no instance created or acknowledged a debt for a greater sum than I honestly and truly owe. I have not, directly or indirectly, concealed, fraudulently sold, or otherwise fraudulently disposed of, any part of my real or personal property, estate, effects, or rights of action, and I have not in any way compounded with any of my creditors in order to secure such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to whom I am indebted. So help me God.”SEC 18. Upon receiving and filing said petition, schedule, and inventory, the court, or the judge thereof in vacation, shall make an order declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition is filed to take possession of, and safely keep, until the appointment of a receiver or assignee, all the deeds, vouchers, books of account, papers, notes, bonds, bills, and securities of the debtor, and all his real and personal property, estate, and effects, except such as may be by law exempt from execution. Said order shall further forbid the payment to the debtor of any debts due to him and the delivery to the debtor, or to any person for him, of any property belonging to him, and the transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order shall designate a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion of the judge, will best give


notice to the creditors of the said insolvent, and in the newspaper so designated said order shall be published as often as may be prescribed by the court or the judge thereof. The time appointed for the election of an assignee shall not be less than two, nor more than eight, weeks from the date of the order of adjudication. Upon the granting of said order all civil proceedings pending against the said insolvent shall be stayed. When a receiver is appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to such receiver or assignee, as the case may be, all the property, assets, and belongings of the insolvent which have come into his possession, and he shall be allowed and paid as compensation for his services the same expenses and fees as would by law be collectible if the property had been levied upon and safely kept under attachment.SEC 19. A copy of said order shall immediately be published by the clerk of said court, in the newspaper designated therein, for the number of times and as prescribed by the court or the judge thereof, and a copy of said order shall be delivered personally or sent by the clerk forthwith by registered mail, postage prepaid, to all creditors named in the schedule. There shall be deposited, in addition to twenty-four pesos, which shall be received by the clerk on commencing such proceedings, a sum of money sufficient to defray the expense of the publication ordered by the court, necessary postage, and ten centavos for each copy, to be delivered personally or mailed to the creditors, which last-named sum is hereby constituted the legal fee of the clerk for the personal delivery or mailing required by this SEC.

INVOLUNTARY INSOLVENCY

NatureWho could file petition

Must be accompanied by bondActs of insolvency

SEC 20. An adjudication of insolvency may be made on the petition of three or more creditors, residents of the Philippine Islands, whose credits or demands accrued in the Philippine Islands, and the amount of which credits or demands are in the aggregate not less than one thousand pesos: Provided, That none of said creditors has become a creditor by assignment, however made, within thirty days prior to the filing of said petition. Such petition must be filed in the Court of First Instance of the province or city in which the debtor resides or has his principal place of business, and must be verified by at least three of the petitioners.

The following shall be considered acts of insolvency, and the petition for insolvency shall set forth one or more of such acts: (1) That such person is about to depart or has departed from the Philippine Islands, with intent to defraud his creditors; (2) that being absent from the Philippine Islands, with intent to defraud his creditors, he remains absent; (3) that he conceals himself to avoid the service of legal process for the purpose of hindering or delaying or defrauding his creditors; (4) that he conceals, or is removing, any of his property to avoid its being attached or taken on legal process; (5) that he has suffered his property to remain under attachment or legal process for three days for the purpose of hindering or delaying or defrauding his creditors; (6) that he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying or defrauding any creditor or claimant; (7) that he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying or defrauding his creditors; (8) that he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder, delay, or defraud any one of his creditors; (9) that he has made any assignment, gift, sale, conveyance, or transfer of his estate, property, rights, or credits with intent to delay, defraud, or hinder his creditors; (10) that he has, in contemplation of insolvency, made any payment, gift, grant, sale conveyance, or transfer of his estate, property, rights, or credits; (11) that being a merchant or tradesman he has generally defaulted in the payment of his current obligations for a period of thirty days; (12) that for a period of thirty days he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; and (13) that an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment. The petitioners may, from time to time, by leave of the court, amend and correct the petition, so that the same shall conform to the facts, such amendment or amendments to relate back to and be received as embraced in the original petition. The said petition shall be accompanied by a bond, approved by the court, with at least two sureties, in such penal sum as the court shall direct, conditioned that if the petition in insolvency be dismissed by the court, or withdrawn by the petitioner, or if the debtor shall not be declared an insolvent, the petitioners will pay to the debtor alleged in the petition to be insolvent all costs, expenses, and damages occasioned by the proceedings in insolvency, together with a reasonable counsel


fee to be fixed by the court. The court may, upon motion, direct the filing of an additional bond, with different sureties, when deemed necessary

Determination of solvency or insolvency of debtorSEC 23. At the time fixed for the hearing of said order to show cause, or at another time to which such hearing may be adjourned, the debtor must answer the petition, or may demur for the same causes as are provided for demurrer in other cases by the Code of Civil Procedure. If he demur and the demurrer be overruled, the debtor shall immediately answer the petition. Such answer shall contain a specific denial of the material allegations of the petition controverted by him, and shall be sworn to; and the issues raised thereon shall be promptly tried and disposed of. If, upon such trial, the issues are found in favor of the respondent, the proceedings shall be dismissed, and the respondent shall be allowed all costs, counsel fees, expenses, and damages sustained by reason of the proceedings therein. Counsel fees, costs, expenses, and damages shall be fixed and allowed by the court.

PROVISIONS COMMON TO VOLUNTARY AND INVOLUNTARY INSOLVENCIES

14.7 Procedure if debtor defaults or is found insolvent

Debtor to file schedule of debts and liabilities and inventory of property

SEC 24. If the respondent shall make default, or if, after trial, the issues are found in favor of the petitioners, the court shall make an order adjudging that said respondent is and was, at the time of filing the petition, an insolvent debtor and that the debtor was guilty of the acts and things charged in the petition, or such of them as the court may find to be true; and shall require said debtor, within such time as the court may designate, not to exceed three days, to file in court the schedule and inventory provided for in SECs fifteen and sixteen of this Act, duly verified as required of a petitioning debtor: Provided, That in the affidavit of the insolvent, touching his property and its disposition, he shall not be required to swear that he has not made any fraudulent preference or committed any other act in conflict with the provisions of this Act; but he may do so if he desires. Said order shall further direct the sheriff of the province or city where the insolvency petition is filed, or the receiver, if one has been theretofore appointed, to take possession of and safely keep, until the appointment of an assignee, all the deeds,

vouchers, books of account, papers, notes, bills, bonds and securities of the debtor, and all his real and personal property, estate and effects, except such as may be by law exempt from execution. Said order shall further forbid the payment to the debtor of any debts due to him, and the delivery to the debtor, or to any person for him, of any property belonging to him, and the transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order shall designate a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion of the judge, will best give notice to the creditors of the said insolvent, and in the newspaper so designated said order shall be published as often as may be prescribed by the court or the judge thereof. The time appointed for the election of an assignee shall not be less than two nor more than eight weeks from the date of the order of adjudication. Upon the granting of said order, all civil proceedings pending against the said insolvent shall be stayed. When an assignee is chosen as provided in this Act, the sheriff or receiver, if there be one, shall thereupon deliver to such assignee all the property, estate, and belongings of the insolvent, which have come into his possession, and he shall be allowed and paid as compensation for his services the same expenses and fees as would by law be collectible if the property had been levied upon and safely kept under attachment.

Sheriff to take possession of insolvent’s property

SEC 26. In all cases where the debtor resides out of the Philippine Islands; or has departed from the Philippine Islands; or can not, after due diligence, be found within the Philippine Islands; or conceals himself to avoid service of the order to show cause, or any other preliminary process or orders in the matter; or is a foreign corporation having no managing or business agent, cashier, or secretary within the Philippine Islands upon whom service or orders and process can be made, and it therefore becomes necessary to obtain service of process and order to show cause, as provided in SEC twenty-two of this Act, then the petitioning creditors, upon submitting the affidavits requisite to procure an order of publication, and presenting a bond in double the amount of the aggregate sum of their claims against the debtor, shall be entitled to an order of the court directing the sheriff of the province or city in which the matter is pending to take into his custody a sufficient amount of property of the debtor to


satisfy the demands of the petitioning creditors and the costs of the proceedings. Upon receiving such order of the court to take into custody property of the debtor, it shall be the duty of the sheriff to take possession of the property and effects of the debtor, not exempt from execution, to an extent sufficient to cover the amount provided for, and to prepare, within three days from the time of taking such possession, a complete inventory of all the property so taken, and to return it to the court as soon as completed. The time for taking the inventory and making return thereof may be extended for good cause shown to the court or a judge thereof. The sheriff shall also prepare a schedule of the names and residences of the creditors, and the amount due each, from the books of the debtor, or from such other papers or data of the debtor available as may come to his possession, and shall file such schedule list of creditors and inventory with the clerk of the court

Meeting of creditors for election of assignee in insolvency

Filing of claims by creditors prior to election

SEC 29. No creditor shall be entitled to vote for the election of an assignee unless he shall have filed his claim in the office of the clerk of the court in which the proceedings are pending at least two days prior to the time appointed for such election. All claims shall contain a statement showing the amount and nature of the claim and security, if any. The claim shall be verified by the claimant, or his duly authorized agent or attorney. No claim barred by the statute of limitations shall be proved or allowed against the estate of an insolvent debtor for any purpose. Any person interested in the estate of the insolvent may file exceptions to the legality or good faith of any claim, by setting forth specifically in writing his interest in the estate, and the grounds of his objection to such claim. Such exceptions shall be verified by the affidavit of the party objecting, or his duly authorized agent or attorney, and the affidavit shall set out that such exceptions are not made for the purpose of delay and are made in good faith in the best interests of said estate. Exceptions to any claim must be filed with the clerk of the court at least one day before the time appointed for the election of an assignee, and such exceptions shall be heard and disposed of by the court, on affidavit or other evidence, in a summary manner, before the election of an assignee. No creditor or claimant who holds any mortgage, pledge, or lien of any kind whatever as security for the payment of his claim or attachment or execution on property of

the debtor duly recorded and not dissolved under this Act shall be permitted to vote at the election of the assignee any part of his secured claim unless he shall first have the value of such security fixed as provided in SEC fifty-nine of this Act, or shall surrender to the sheriff or receiver of the estate of the insolvent, if there be a receiver, all such property, or assign such lien to such sheriff or receiver. The surrender or assignment of such security or lien shall be for the benefit of all creditors of the estate of the insolvent. The value of such security, if fixed by the court, shall be so fixed at least one day before the day appointed for the election of an assignee, in which event the claimant may prove his demand as provided in this SEC for any unsecured balance, subject to the filing of exceptions as in all other claims.

Conveyance of insolvent’s property to assignee

SEC 32. As soon as an assignee is elected or appointed and qualified, the clerk of the court shall, by an instrument under his hand and seal of the court, assign and convey to the assignee all the real and personal property, estate, and effects of the debtor with all his deeds, books, and papers relating thereto, and such assignment shall relate back to the commencement of the proceedings in insolvency, and shall relate back to the acts upon which the adjudication was founded, and by operation of law shall vest the title to all such property, estate, and effects in the assignee, although the same is then attached on mesne process, as the property of the debtor. Such assignment shall operate to vest in the assignee all of the estate of the insolvent debtor not exempt by law from execution. It shall also dissolve any attachment levied within one month next preceding the commencement of the insolvency proceedings and vacate and set aside any judgment entered in any action commenced within thirty days immediately prior to the commencement of insolvency proceedings and shall vacate and set aside any execution issued thereon and shall vacate and set aside any judgment entered by default or consent of the debtor within thirty days immediately prior to the commencement of the insolvency proceedings.

Assignee’s right to recover insolvent’s property to assignee, etc.

SEC 33. The assignee shall have the right to recover all the estate debts, and effects of said insolvent. If, at the time of the commencement of proceedings in insolvency, an action is pending in the name of the debtor, for the


recovery of a debt or other thing which might or ought to pass to the assignee by the assignment, the assignee shall be allowed and admitted to prosecute the action, in like manner and with like effect as if it had been originally commenced by him. If there are any rights of action in favor of the insolvent for damages, on any account, for which an action is not pending, the assignee shall have the right to prosecute the same with the same effect as the insolvent might have done himself if no proceedings in insolvency had been instituted. If any action or proceeding in which the insolvent is defendant is pending at the time of the adjudication, the assignee may defend the same in the same manner and with like effect as it might have been defended by the insolvent. In a suit prosecuted or defended by the assignee, a certified copy of the assignment made to him shall be conclusive evidence of his authority to sue or defend.

Powers of assignee

SEC 36. The said assignee shall have power: 1. To sue and recover all the estate, assets, debts, and claims, belonging to or due to such debtor; and no set-off or counterclaim shall be allowed in any such for debts contracted by the insolvent within thirty days immediately preceding the filing of the petition of insolvency except in case of creditors specified in SEC fifty of this Act. 2. To take into his possession all the estate of such debtor except property exempt by law from execution, whether attached or delivered to him, or afterwards discovered, and all books, vouchers, evidence of indebtedness, and securities belonging to the same. 3. In case of a non-resident or absconding or concealed debtor, to demand and receive of every sheriff who shall have attached any of the property of such debtor, or who shall have in his possession any moneys arising from the sale of such property, all such property and moneys, on paying him his lawful costs and charges for attaching and keeping the same. 4. From time to time to sell at public auction after advertisement in the manner provided by subSECs (1), (2), and (3) of SEC four hundred and fifty-four of the Code of Civil Procedure, upon order of the court, any of the estate, real and personal, which has come into his possession, and which is vested in him as such assignee, and on such sales to execute the necessary conveyances and bills of sale. 5. To redeem all valid mortgages and conditional contracts, and all valid pledges of personal property, and to satisfy any judgments which may be an incumbrance on any property sold by him; or to sell such property, subject to

such mortgage, contracts, pledges, judgments, or liens. 6. To settle all matters and accounts between such debtor and his creditors, subject to the approval of the court. 7. Under the order of the court or judge appointing him, to compound with any person indebted to such debtor, and thereupon discharge all demands against such person. 8. To recover from any person receiving a conveyance, gift, transfer, payment, or assignment, made contrary to any provision of this Act, the property thereby transferred or assigned; or in case a re-delivery of the property can not be had, to recover the value thereof, with damages for the detention.

Conversion of insolvent’s property into money

SEC 39. The assignee shall as speedily as possible convert the estate, real and personal, into money. He shall keep a regular account of all moneys received by him as assignee, to which every creditor or other person interested therein may, at all reasonable times, have access. No private sale of any property of the estate of any insolvent debtor shall be valid unless made under the order of the court, upon a petition in writing, which shall set forth the facts showing the sale to be necessary. Upon filing the petition, notice of the hearing thereof of at least ten days shall be given by publication and mailing, in the same manner as is provided in SEC nineteen of this Act. If it appears that a private sale is for the best interests of the estate, the court shall order it to be made.

Proof of debts (SECs 53-62)

SEC 53. All debts due and payable from the debtor at the time of the adjudication of insolvency, and all debts then existing but not payable until a future time, a discount being made if no interest is payable by the terms of the contract, may be proved against the estate of the debtor.

SEC 54. If the debtor is bound as indorser, surety, bail, or guarantor, upon any bill, bond, note, or other specialty or contract, or for any debt of any person, and his liability shall not have become absolute until after the adjudication of insolvency, the creditor may prove the same after such liability shall have become fixed, and before the final dividend shall have been declared.


SEC 55. In all cases of contingent debts and contingent liabilities, contracted by the debtor, and not herein otherwise provided for, the creditor may make claim therefor and have his claim allowed, with the right to share in the dividends, if the contingency shall happen before the order of the final dividend; or he may, at any time, apply to the court to have the present value of the debt or liability ascertained and liquidated, which shall be done in such manner as the court shall order, and it shall be allowed for the amount so ascertained.

SEC 56. Any person liable as bail, surety, or guarantor, or otherwise, for the debtor, who shall have paid the debt, or any part thereof, in discharge of the whole, shall be entitled to prove such debt, or to stand in the place of the creditor, if he shall have proved the same, although such payments shall have been made after the proceedings in insolvency were commenced; and any person so liable for the debtor, and who has not paid the whole of said debt, but is still liable for the same, or any part thereof, may, if the creditor shall fail or omit to prove such debt, prove the same in the name of the creditor.

SEC 57. Where the debtor is liable to pay rent, or other debt falling due at fixed and stated periods, the creditor may prove for a proportionate part thereof up to the time of the insolvency, as if the same became due from day to day, and not at such fixed and stated periods.

SEC 58. In all cases of mutual debts and mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed and paid. But no set-off or counterclaim shall be allowed of a claim in its nature not provable against the estate: Provided, That no set-off or counterclaim shall be allowed in favor of any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty days immediately preceding the filing, or after the filing of the petition by or against the insolvent.

SEC 59. When a creditor has a mortgage, or pledge of real or personal property of the debtor, or a lien thereon, for securing the payment of a debt owing to him from the debtor, or an attachment or execution on property of the debtor duly recorded and not dissolved under this Act, he shall be admitted as a creditor for the balance of the debt only, after deducting the value of such property, such value to be ascertained by agreement between him and the receiver, if any, and if no receiver, then upon such sum as the court or a judge thereof may decide to be fair and reasonable,

before the election of an assignee, or by a sale thereof, to be made in such manner as the court or judge thereof shall direct; or the creditor may release or convey his claim to the receiver, if any, or if no receiver then to the sheriff, before the election of an assignee, or to the assignee if an assignee has been elected, upon such property, and be admitted to prove his whole debt. If the value of the property exceeds the sum for which it is so held as security, the assignee may release to the creditor the debtor’s right of redemption thereon on receiving such excess; or he may sell the property, subject to the claim of the creditor thereon, and in either case the assignee and creditor, respectively, shall execute all deeds and writings necessary or proper to consummate the transaction. If the property is not sold or released, and delivered up, or its value fixed, the creditor shall not be allowed to prove any part of his debt, but the assignee shall deliver to the creditor all such property upon which the creditor holds a mortgage, pledge, or lien, or upon which he has an attachment or execution.

SEC 60. No creditor, proving his debt or claim, shall be allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived all right of action and suit against him, and all proceedings already commenced, or any unsatisfied judgment already obtained thereon, shall be deemed to be discharged and surrendered thereby; and after the debtor’s discharge, upon proper application and proof to the court having jurisdiction, all such proceedings shall be dismissed, and such unsatisfied judgments satisfied of record: Provided, That no valid lien existing in good faith thereunder shall be thereby affected. A creditor proving his debt or claim shall not be held to have waived his right of action or suit against the debtor when a discharge has have been refused or the proceedings have been determined without a discharge. No creditor whose debt is provable under this Act shall be allowed, after the commencement of proceedings in insolvency, to prosecute to final judgment any action therefor against the debtor until the question of the debtor’s discharge shall have been determined, and any such suit or proceeding shall, upon the application of the debtor or of any creditor, or the assignee, be stayed to await the determination of the court on the question of discharge: Provided, That if the amount due the creditor is in dispute, the suit, by leave of the court in insolvency, may proceed to judgment for the purpose of ascertaining the amount due, which amount, when adjudged, may be allowed in the insolvency proceedings, but execution shall be stayed as aforesaid.


SEC 61. Any person who shall have accepted any preference, having reasonable cause to believe that the same was made or given by the debtor contrary to any provision of this Act, shall not be allowed to prove the debt or claim on account of which the preference was made or given, nor shall he receive any dividend thereon, until he shall have surrendered to the assignee all property, money, benefit, or advantage received by him under such preference.

SEC 62. The court may, upon the application of the assignee, or of any creditor, or without any application, before or after adjudication in insolvency, examine upon oath the debtor in relation to his property and his estate and may examine any other person tendering or making proof of claims, and may subpoena witnesses to give evidence relating to such matters. All examinations of witnesses shall be had and depositions shall be taken in accordance with and in the same manner as is provided by the Code of Civil Procedure.

Discharge (SECs 64-69)When debtor may apply for discharge

SEC 64. At any time after the expiration of three months from the adjudication of insolvency, but not later than one year from such adjudication, unless the property of the insolvent has not been converted into money, the debtor may apply to the court for a discharge from his debts, and the court shall thereupon order notice to be given to all creditors who have proved their debts to appear on a day appointed for that purpose and show cause why a discharge should not be granted to the debtor; said notice shall be given by registered mail and by publication at least once a week, for six weeks, in a newspaper published in the province or city, or, if there be none, in a newspaper which, in the opinion of the judge, will best give notice to the creditors of the said insolvent: Provided, That if no debts have been proven, such notice shall not be required.

When discharge may not be granted

SEC 65. No discharge shall be granted, or if granted shall be valid, (1) if the debtor shall have sworn falsely in his affidavit annexed to his petition, schedule, or inventory, or upon any examination in the course of the proceedings in insolvency, in relation to any material fact concerning his estate or his debts or to any other material fact; or (2) if he has concealed any part of his estate or effects, or any books or

writing relating thereto; or (3) if he has been guilty of fraud or willful neglect in the care or custody of his property or in the delivery to the assignee of the property belonging to him at the time of the presentation of his petition and inventory, excepting such property as he is permitted to retain under the provisions of this Act; or (4) if, within one month before the commencement of such proceedings, he has procured his real estate, goods, moneys, or chattels to be attached or seized on execution; or (5) if he has destroyed, mutilated, altered, or falsified any of his books, documents, papers, writings, or securities, or has made, or been privy to the making of, any false or fraudulent entry in any book of account or other document with intent to defraud his creditors; or (6) if he has given any fraudulent preference, contrary to the provisions of this Act, or has made any fraudulent payment, gift, transfer, conveyance, or assignment of any part of his property, or has admitted a false or fictitious debt against his estate; or (7) if, having knowledge that any person has proven such false or fictitious debt, he has not disclosed the same to his assignee within one month after such knowledge; or (8) if, being a merchant or tradesman, he has not kept proper books of account in Arabic numerals and in accordance with the provisions of the Code of Commerce; or (9) if he, or any other person on his account, or in his behalf, has influenced the action of any creditor, at any stage of the proceedings, by any pecuniary consideration or obligation; or (10) if he has, in contemplation of becoming insolvent, made any pledge, payment, transfer, assignment, or conveyance of any part of his property, directly or indirectly, absolutely or conditionally, for the purpose of preferring any creditor or person having a claim against him, or who is, or may be, under liability for him, or for the purpose of preventing the property from coming into the hands of the assignee, or of being distributed under this Act in satisfaction of his debts; or (11) if he has been convicted of any misdemeanor under this Act, or has been guilty of fraud contrary to the true intent of this Act; or (12) in case of voluntary insolvency, has received the benefit of this or any other Act of insolvency or bankruptcy within six years next preceding his application for discharge; or (13) if insolvency proceedings in which he could have applied for a discharge are pending by or against him in the Court of First Instance of any other province or city in the Philippine Islands. Before any discharge is granted, the debtor shall take and subscribe an oath to the effect that he has not done, suffered, or been privy to any act, matter, or thing specified in this Act as grounds for withholding such discharge or as invalidating such discharge, if granted.


SEC 66. Any creditor opposing the discharge of a debtor shall file his objections thereto, specifying the grounds of his opposition, and after the debtor has filed and served his answer thereto, which pleadings shall be verified, the court shall try the issue or issues raised, according to the practice provided by law in civil actions.

SEC 67. If it shall appear to the court that the debtor has in all things conformed to his duty under this Act, and that he is entitled under the provisions thereof to receive a discharge, the court shall grant him a discharge from all his debts, except as hereinafter provided, and shall give him a certificate thereof, under the seal of the court, in substance as follows: “In the Court of First Instance of the _____________, Philippine Islands. Whereas, ______________, has been duly adjudged an insolvent under the Insolvency Law of the Philippine Islands, and appears to have conformed to all the requirements of law in that behalf, it is therefore ordered by the court that said _______________ be forever discharged from all debts and claims, which by said Insolvency Law are made provable against his estate, and which existed on the _______ day of _________, on which the petition of adjudication was filed by (or against) him, excepting such debts, if any, as are by said Insolvency Law excepted from the operation of a discharge in insolvency. Given under my hand, and the seal of the court, this ____ day of ______________, Anno Domini ______________ Attest: ____________, clerk. (Seal) _____________, judge.”

Debts not discharged

SEC 68. No tax or assessment due to the Insular Government or any provincial or municipal government, whether proved or not as provided for in this Act, shall be discharged. Nor shall any debt created by the fraud or embezzlement of the debtor, or by his defalcation as a public officer or while acting in a fiduciary capacity, be discharged under this Act, but the debt may be proved, and the dividend thereon shall be a payment on account of said debt. No discharge granted under this Act shall release, discharge or affect any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise.

SEC 69. A discharge, duly granted under this Act, shall, with the exceptions aforesaid, release the debtor from all claims, debts, liabilities, and demands set forth in his schedule, or which were or might have been proved against his estate in insolvency, and may be pleaded by a simple averment that on the day of its date

such discharge was granted to him, setting forth the same in full, and the same shall be a complete bar to all suits brought on any such debts, claims, liabilities, or demands, and the certificate shall be prima facie evidence in favor of such fact and of the regularity of such discharge: Provided, however, That any creditor whose debt was proved or provable against the estate in insolvency who shall see fit to contest the validity of such discharge on the ground that it was fraudulently obtained and who has discovered the facts constituting the fraud subsequent to the discharge, may, at any time within one year after the date thereof, apply to the court which granted it to set it aside and annul the same.

Commissions due assignee

SEC 42. Assignees shall be allowed all necessary expenses in the care, management, and settlement of the estate, and shall be entitled to charge and receive for their services commissions upon all sums of money coming to their hands and accounted for by them, as follows: For the first thousand pesos, at the rate of seven per centum; for all above that sum and not exceeding ten thousand pesos, at the rate of five per centum; and for all above that sum, at the rate of four per centum: Provided, however, That if the person acting as assignee was receiver of the property of the estate pending the election of an assignee, any compensation allowed him as such receiver shall be deducted from the compensation to which he otherwise would be entitled as such assignee: And provided further, That if there should be two or more assignees the court shall order an equitable division of the compensation herein provided, and if for any reason an assignee’s term is completed before the final settlement of the estate and a successor is appointed the court shall not allow to any such assignee prior to the settlement of the estate an amount exceeding four per centum of the sums of money coming into his hands. Upon the final settlement of the estate an equitable distribution of the compensation of the assignee shall be made.

Composition

SEC 63. An insolvent may offer terms of composition to his creditors after , but not before, he has filed in court a schedule of his property and list of his creditors as provided in this Act. An application for the confirmation of a composition may be filed in the insolvency court after, but not before, it has been accepted in writing by a majority in number of all creditors whose claims have been allowed,


which number must represent a majority in amount of such claims and after the consideration to be paid by the insolvent to his creditors and the money necessary to pay all debts which have priority and the costs of proceedings have been deposited in such place as shall be designated by and subject to the order of the court. A time shall be fixed by the court for the hearing upon an application for the confirmation of a composition, and for the hearing of such objections as may be made to its confirmation. The court shall confirm a composition if satisfied that (1) it is for the best interest of the creditors; (2) that the insolvent has not been guilty of any of the acts, or of a failure to perform any of the duties, which would create a bar to his discharge; and (3) that the offer and its acceptance are in good faith, and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden. Upon the confirmation of a composition the consideration shall be distributed as the judge shall direct, and the case dismissed, and the title to the insolvent’s property shall revest in him. Whenever a composition is not confirmed, the estate in insolvency shall be administered as herein provided. The court may, upon application of a party in interest, filed at any time within six months after the composition has been confirmed, set the same aside, and reinstate the case if it shall be made to appear upon a trial that fraud was practiced in the procuring of such composition, and that the knowledge thereof has come to the petitioner since the confirmation of such composition.

Fraudulent preferences and transfers

SEC 70. If any debtor, being insolvent, or in contemplation of insolvency, within thirty days before the filing of a petition by or against him, with a view to giving a preference to any creditor or person having a claim against him or who is under any liability for him, procures any part of his property to be attached, sequestered, or seized on execution, or makes any payment, pledge, mortgage, assignment, transfer, sale, or conveyance of any part of his property, either directly or indirectly, absolutely or conditionally, to any one, the person receiving such payment, pledge, mortgage, assignment, transfer, sale, or conveyance, or to be benefited thereby, or by such attachment or seizure, having reasonable cause to believe that such debtor is insolvent, and that such attachment, sequestration, seizure, payment, pledge, mortgage, conveyance, transfer, sale, or assignment is made with a view to prevent his property from coming to his assignee in insolvency, or to prevent the same from being

distributed ratably among his creditors, or to defeat the object of, or in any way hinder, impede, or delay the operation of or to evade any of the provisions of this Act, such attachment, sequestration, seizure, payment, pledge, mortgage, transfer, sale, assignment, or conveyance is void, and the assignee, or the receiver, may recover the property, or the value thereof, as assets of such insolvent debtor. If such payment, pledge, mortgage, conveyance, sale, assignment, or transfer is not made in the usual and ordinary course of business of the debtor, or if such seizure is made under a judgment which the debtor has confessed or offered to allow, that fact shall be prima facie evidence of fraud. Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of whatever character made by the insolvent within one month before the filing of a petition in insolvency by or against him, except for a valuable pecuniary consideration made in good faith, shall be void. All assignments, transfers, conveyances, mortgages, or incumbrances of real estate shall be deemed, under this SEC, to have been made at the time the instrument conveying or affecting such realty was filed for record in the office of the register of deeds of the province or city where the same is situated.

Dividends in insolvency

SEC 45. Whenever any dividend has been duly declared, the distribution of it shall not be stayed or affected by reason of debts being subsequently proved, but any creditor proving such a debt shall be entitled to a dividend equal to those already received by the other creditors before any further dividend is made to the latter, if the failure to prove such claim shall not have resulted from his own neglect.Articles 2236-2251 of Civil Code Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (1911a) Art. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n) Art. 2238. So long as the conjugal partnership or absolute community subsists, its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations, except insofar as the latter have redounded to the benefit of the family. If it is the husband who is insolvent, the administration of the conjugal partnership of absolute community may, by order of the court, be transferred to the wife or to a third person other than the assignee. (n)


Art. 2239. If there is property, other than that mentioned in the preceding article, owned by two or more persons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations. (n) Art. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings. (n) CHAPTER 2CLASSIFICATION OF CREDITS Art. 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred: (1) Duties, taxes and fees due thereon to the State or any subdivision thereof; (2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them; (3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; (5) Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed; (6) Claims for laborers' wages, on the goods manufactured or the work done; (7) For expenses of salvage, upon the goods salvaged; (8) Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share of each in the fruits or harvest; (9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter; (10) Credits for lodging and supplies usually furnished to travellers by hotel keepers, on the movables belonging to the guest as long as

such movables are in the hotel, but not for money loaned to the guests; (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested; (12) Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit; (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale. In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure. (1922a)Art. 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real right: (1) Taxes due upon the land or building; (2) For the unpaid price of real property sold, upon the immovable sold; (3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works; (5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged; (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved; (7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits; (8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided; (9) Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated; (10) Credits of insurers, upon the property insured, for the insurance premium for two years. (1923a)Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first be satisfied. (n)


Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: (1) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; (2) Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency; (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own; (4) Compensation due the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the nature of the employment; (5) Credits and advancements made to the debtor for support of himself or herself, and family, during the last year preceding the insolvency; (6) Support during the insolvency proceedings, and for three months thereafter; (7) Fines and civil indemnification arising from a criminal offense; (8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors, when properly authorized and approved by the court; (9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1; (10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1; (11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1; (12) Damages for death or personal injuries caused by a quasi-delict; (13) Gifts due to public and private institutions of charity or beneficence; (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a)Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference. (1925) CHAPTER 3ORDER OF PREFERENCE OF CREDITS Art. 2246. Those credits which enjoy preference with respect to specific movables, exclude all

others to the extent of the value of the personal property to which the preference refers. Art. 2247. If there are two or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof. (1926a) Art. 2248. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers. Art. 2249. If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right. (1927a) Art. 2250. The excess, if any, after the payment of the credits which enjoy preference with respect to specific property, real or personal, shall be added to the free property which the debtor may have, for the payment of the other credits. (1928a) Art. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules: (1) In the order established in Article 2244; (2) Common credits referred to in Article 2245 shall be paid pro rata regardless of dates. (1929a)

14.8 Cases

Application of Civil Code provisions on concurrence and preference of credits

De Barreto vs. Villanueva G.R. L-14938Facts:

Cruzado sold land (which was foreclosed by RFC but later resold to Cruzado) to Villanueva with a stipulation that Villanueva will continue payment to RFC (for the reselling price). Villanueva mortgaged the land to De Barreto when it obtained a loan from the latter. Villanueva failed to pay both Cruzado and De Barreto. On the one hand, De Barreto sued for foreclosure and won. On the other hand, Cruzado filed a motion in that foreclosure proceeding for the recognition of his “vendor’s lien.”

RTC: granted Cruzado’s motion that his lien be satisfied by the foreclosure proceeds.

SC: affirmed RTC. But on MFR, reversed RTC ruling.

Held:


The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by Article 2243, Civil Code. The preferences named in Articles 2241 and 2242 are to be enforced in accordance with the Involvency Law.

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise enjoying preference under Article 2242 can not be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and appellee, is incorrect and must be reversed.

In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate), the conflict between the parties now before us must be decided pursuant to the well established principle concerning register lands; that a purchaser in good faith and for value (as the appellant concededly is) takes registered property free from liens and encumbrances other than statutory liens and those recorded in the certificate of title. There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not acquire the character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter.

No lien on specific property created by Art. 110 of the Labor Code

DBP vs. Secretary of Labor G.R. 79351Facts:

Difontorum and other co-employees obtained a favorable judgment against RMC for illegal dismissal, ULP, etc. A writ of execution was not satisfied (in 1984). In 1983, DBP foreclosed RMC’s premises. Thus, Difontorum et al. filed with the Minister of Labor and Employment a “motion for delivery of properties of RMC in possession of DBP to MOLE for proper disposition” pursuant to Art. 110 of the Labor Code which gives employees 1st

preference over properties of the employer.

Held:SC: Difontorum et al. are fools!!! It is

clear from the wording of the law that the preferential right accorded to employees and workers under Article 110 may be invoked only during bankruptcy or judicial liquidation proceedings against the employer. The law is unequivocal and admits of no other construction.

There is no “first automatic lien.” What Article 110 of the Labor Code establishes is not a lien, but a preference of credit in favor of employees. This simply means that during bankruptcy, insolvency or liquidation proceedings involving the existing properties of the employer, the employees have the advantage of having their unpaid wages satisfied ahead of certain claims which may be proved therein.

Contractor’s claim not entitled to preference in the absence of insolvency proceeding

J.L. Bernardo Construction, et al. vs. CA G.R. 105827Facts:

The Municipality of San Antonio failed to pay petitioners for the latter’s construction of the public market of San Antonio. Petitioners then sued the municipality for breach of contract, specific performance, etc. with a prayer for the enforcement of contractor’s lien (based on Art. 2242 of the Civil Code).

RTC granted petitioners’ motion and awarded possession and use of the building to them. CA reversed RTC.

SC: affirmed CA

Held:Article 2242 only finds application

when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.

This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241 and 2242 shall be


considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency.

The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically for specific performance and damages. Thus, even if it is finally adjudicated that petitioners herein actually stand in the position of unpaid contractors and are entitled to invoke the contractor's lien granted under Article 2242, such lien cannot be enforced in the present action for there is no way of determining whether or not there exist other preferred creditors with claims over the San Antonio Public Market. The records do not contain any allegation that petitioners are the only creditors with respect to such property. The fact that no third party claims have been filed in the trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property involved.

Transfers made within a month after date of cleavage

Union Bank of the Philippines vs. Spouses Ong G.R. 152347Facts:

BMC (a corporation 70% of which is owned by Spouses Ong) obtained a Php 40M credit line facility from Union Bank wherein the Ongs assumed a solidary liability undertaking. On Oct. 22, 1991, Spouses Ong sold to Lee their house and lot in Greenhills. On Nov. 22, 1991, BMC filed a petition for rehabilitation with the SEC.

Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent transfer and is null and void in contemplation of the aforequoted provision, the sale having occurred on October 22, 1991 or within thirty (30) days before BMC filed a petition for suspension of payments on November 22, 1991.

Held:Petitioner's reliance on the afore-quoted

provision is misplaced for the following reasons: First, SEC 70 of the Insolvency Law

specifically makes reference to conveyance of properties made by a “debtor” or by an “insolvent” who filed a petition, or against whom a petition for insolvency has been filed. Respondent spouses Ong have doubtlessly not filed a petition for a declaration of their own insolvency. Neither has one been filed against them. It was never proven that respondent spouses are likewise insolvent.

It may be that BMC had filed a petition for rehabilitation and suspension of payments with the SEC. The nagging fact, however is that BMC is a different juridical person from the respondent spouses. Accordingly, the alleged insolvency of BMC cannot, as petitioner postulates, extend to the respondent spouses such that transaction of the latter comes within the purview of SEC 70 of the Insolvency Law.

Second, the real debtor of petitioner bank in this case is BMC. The fact that the respondent spouses bound themselves to answer for BMC’s indebtedness under the surety agreement referred to at the outset is not reason enough to conclude that the spouses are themselves debtors of petitioner bank. Third, SEC 70 of the Insolvency Law considers transfers made within a month after the date of cleavage void, except those made in good faith and for valuable pecuniary consideration. The twin elements of good faith and valuable and sufficient consideration have been duly established. Given the validity and the basic legitimacy of the sale in question, there is simply no occasion to apply SEC 70 of the Insolvency Law to nullify the transaction subject of the instant case.

Additional materials

Articles 29-33 RA 7653

SEC 29. Appointment of Conservator. — Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed one (1) year. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of


the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any time within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board, on the basis of the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case the provisions of SEC 30 shall apply.

SEC 30. Proceedings in Receivership and Liquidation. — Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasi-bank: (a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or (c) cannot continue in business without involving probable losses to its depositors or creditors; or (d) has willfully violated a cease and desist order under SEC 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution.For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver. The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit

of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in non-speculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board. If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall: (1) file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the institution. (2) convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution.

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The actions of the Monetary Board taken under this SEC or under SEC 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator under SEC 29 of this Act or the appointment of a receiver under this SEC shall be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is not a precondition to the designation of a receiver. SEC 31. Distribution of Assets. — In case of liquidation of a bank or quasi-bank, after payment of the cost of proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay the debts of such institution, under order of the court, in accordance with the rules on concurrence and preference of credit as provided in the Civil Code. SEC 32. Disposition of Revenues and Earnings. — All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasi-bank within the purview of this Act shall be used to pay the costs, fees and expenses mentioned in the preceding SEC, salaries of such personnel whose employment is rendered necessary in the discharge of the liquidation together with other additional expenses caused thereby. The balance of revenues and earnings, after the payment of all said expenses, shall form part of the assets available for payment to creditors. SEC 33. Disposition of Banking Franchise. — The Bangko Sentral may, if public interest so requires, award to an institution, upon such terms and conditions as the Monetary Board may approve, the banking franchise of a bank under liquidation to operate in the area where said bank or its branches were previously operating: Provided, That whatever proceeds may be realized from such award shall be subject to the appropriate exclusive disposition of the Monetary Board.

Insurance Code

Title 13 SUSPENSION OR REVOCATION OF AUTHORITYSec. 247. If the Commissioner is of the opinion upon examination of other evidence that any domestic or foreign insurance company is in an unsound condition, or that it has failed to comply with the provisions of law or regulations obligatory upon it, or that its condition or method of business is such as to render its proceedings hazardous to the public or to its policyholders, or that its paid-up capital stock, in the case of a domestic stock company, or its available cash assets, in the case of a domestic mutual company, or its security deposits, in the case of a foreign company, is impaired or deficient, or that the margin of solvency required of such company is deficient, the Commissioner is authorized to suspend or revoke all certificates of authority granted to such insurance company, its officers and agents, and no new business shall thereafter be done by such company or for such company by its agent in the Philippines while such suspension, revocation or disability continues or until its authority to do business is restored by the Commissioner. Before restoring such authority, the Commissioner shall require the company concerned to submit to him a business plan showing the company's estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three years. (As amended by Presidential Decree No. 1455).

Title 14 APPOINTMENT OF CONSERVATORSec. 248. If at any time before, or after, the suspension or revocation of the certificate of authority of an insurance company as provided in the preceding title, the Commissioner finds that such company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity deemed adequate to protect the interest of policy holders and creditors, he may appoint a conservator to take charge the assets, liabilities, and the management of such company, collect all moneys and debts due said company and exercise all powers necessary to preserve the assets of said company, reorganize the management thereof, and restore its viability. The said conservator shall have the power to overrule or revoke the actions of the previous management and board of directors of the said company, any provision of law, or of the articles of incorporation or by-laws of the company, to the contrary notwithstanding, and such other powers as the Commissioner shall deem necessary.

The conservator may be another insurance company doing business in the Philippines, by officer or officers of such company, or any other competent and qualified

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person, firm or corporation. The remuneration of the conservator and other expenses attendant to the conservation shall be borne by the insurance company concerned.

The conservator shall not be subject to any action, claim or demand by, or liability to, any person in respect of anything done or omitted to be done in good faith in the exercise, or in connection with the exercise, of the powers conferred on the conservator.

The conservator appointed shall report and be responsible to the Commissioner until such time as the Commissioner is satisfied that the insurance company can continue to operate on its own and the conservatorship shall likewise be terminated should be Commissioner, on the basis of the report of the conservator or of his own findings, determine that the continuance in business of the insurance company would be hazardous to policy holders and creditors, in which case the provisions of Title 15 shall apply.

Title 15 PROCEEDINGS UPON INSOLVENCYSec. 249. Whenever, upon examination or other evidence, it shall be disclosed that the condition of any insurance company doing business in the Philippines is one of insolvency, or that its continuance in business would be hazardous to its policyholders and creditors, the Commissioner shall forthwith order the company to cease and desist from transacting business in the Philippines and shall designate a receiver to immediately take charge of its assets and liabilities, as expeditiously as possible collect and gather all the assets and administer the same for the benefit of its policyholders and creditors, and exercise all the powers necessary for these purposes including, but not limited to, bringing suits and foreclosing mortgages in the name of the insurance company.

The Commissioner shall thereupon determine within thirty days whether the insurance company may be reorganized or otherwise placed in such condition so that it may be permitted to resume business with safety to its policyholders and creditors and shall prescribe the conditions under which such resumption of business shall take place as well as the time for fulfillment of such conditions. In such case, the expenses and fees in the collection and administration of the insurance company shall be determined by the Commissioner and shall be paid out of the assets of such company.

If the Commissioner shall determine and confirm within the said period that the insurance company is solvent, as defined hereunder, or cannot resume business with safety to its policyholders and creditors, he

shall, if the public interest requires, order its liquidation, indicate the manner of its liquidation and approve a liquidation plan and implement it immediately. The Commissioner shall designate a competent and qualified person as liquidator who shall take over the functions of the receiver previously designated and, with all convenient speed, reinsure all its outstanding policies, convert the assets of the insurance company to cash, or sell, assign or otherwise dispose of the same to the policyholders, creditors and other parties for the purpose of settling the liabilities or paying the debts of such company and he may, in the name of the company, institute such actions as may be necessary in the appropriate Court to collect and recover accounts and assets of the insurance company, and to do such other acts as may be necessary to complete the liquidation as ordered by the Commissioner.

The provisions of any law to the contrary notwithstanding, the actions of the Commissioner under this SEC shall be final and executory, and can be set aside by the Court upon petition by the company and only if there is convincing proof that the action is plainly arbitrary and made in bad faith. The Commissioner, through the Solicitor General, shall then file the corresponding answer reciting the proceeding taken and praying the assistance of the Court in the liquidation of the company. No restraining order or injunction shall be issued by the Court enjoining the Commissioner from implementing his actions under this SEC, unless there is convincing proof that the action of the Commissioner is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the Clerk or Judge of the Court in which the action is pending a bond executed in favor of the Commissioner in an amount to be fixed by the Court. The restraining order or injunction shall be refused or, if granted, shall be dissolved upon filing by the Commissioner, if he so desires, of a bond in an amount twice the amount of the bond of the petitioner or plaintiff conditioned that it will pay the damages which the petition or plaintiff may suffer by the refusal or the dissolution of the injunction. The provisions of Rule 58 of the New Rules of Court insofar as they are applicable shall govern the issuance and dissolution of the restraining order or injunction contemplated in this SEC.

All proceedings under this Title shall be given preference in the Courts. The Commissioner shall not be required to pay any fee to any public officer for filing, recording, or in any manner authenticating any paper or instrument relating to the proceedings.

As used in this Title, the term "Insolvency" shall mean the inability of an insurance company to pay its lawful obligations

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as they fall due in the usual and ordinary course of business as may be shown by its failure to maintain the margin of solvency required under SEC 194 of this Code. (As amended by Presidential Decree No. 1141 and further amended by Presidential Decree No. 1455).

Sec. 250. In case of liquidation of an insurance company, after payment of the cost of the proceedings, including reasonable expenses and fees incurred in the liquidation to be allowed by the Court, the Commissioner shall pay all allowed claims against such company, under order of the Court, in accordance with their legal priority.

Sec. 251. The receiver or the liquidator, as the case may be, designated under the provisions of this title shall not be subject to any action, claim or demand by, or liability to, any person in respect of anything done or omitted to be done in good faith in the exercise, or in connection with the exercise, of the powers conferred on such receiver or liquidator.

P.D. 1529

SEC 83. Notice of insolvency. Whenever proceeding in bankruptcy or insolvency, or analogous proceedings, are instituted against a debtor who owns registered land, it shall be the duty of the officer serving the notice of the institution of such proceedings on the debtor to file a copy thereof with the office of the Register of Deeds for the province or city where the land of the debtor lies. The assignee or trustee appointed by the court in such proceedings shall be entitled to the entry of a new certificate of the registered land of the debtor or bankrupt, upon presenting and filing a certified copy of the assignment in insolvency or order or adjudication in bankruptcy with the insolvent's or bankrupt's duplicate certificate of title; but the new certificate shall state that it is entered to him as assignee in insolvency or trustee in bankruptcy or other proceedings, as the case may be.

SEC 84. Judgment or order vacating insolvency proceedings. Whenever any of the proceedings of the character named in the preceding SEC against a registered owner, of which notice has been registered, is vacated by judgment, a certified copy of the judgment or order may be registered. Where a new certificate has been entered in the name of the assignee or trustee, such certificate shall be surrendered for cancellation and forthwith the debtor shall be entitled to the entry of a new certificate to him.

CORPORATE REHABILITATIONSC Rules Procedure on Corporate Rehabilitation (AM No. 00-8-10-SC)

Coverage (Rule 1)These Rules shall apply to petitions for rehabilitation of corporations, partnerships and associations pursuant to Presidential Decree No. 902-A.

Definitions of terms and construction (Rule 2)

“Administrative Expenses”(a) Reasonable and necessary expenses that are incurred in connection with the filing of the petition; (b) Expenses incurred in the ordinary course of business after the issuance of the stay order- excluding interest payable to the creditors for loans and credit accommodations existing at the time of the issuance of the stay order; and (c) Other expenses that are authorized under this Rules.

"Claim" Include all claims or demands of whatever nature or charter against a debtor or its property, whether for money or otherwise

"Control" Power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

Control is presumed to exit when:a. parent owns, directly or indirectly though subsidiaries, more than one - half (½) of the voting power of the voting power of an enterprise unless, such ownership does not constitute control.b. parents owns one-half (1/2) or less of the voting power of an enterprise when there is power.

a. Over more than one-half (½) of agreement with investors; b. To direct or govern the financial and operating policies of the enterprise under a statute or agreement;


c. To appoint or remove the majority of the member of the board of directors or equivalent governing body; ord. To cast the majority votes at meeting of the board of directors or equivalent governing body.

"Foreign proceeding"Collective judicial or administrative proceeding in a foreign State, pursuant to a law regarding solvency where the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of rehabilitation or re-organization.

"Group of companies" Can cover only, corporations that are financially related to one another as parent corporation, subsidiaries and affiliates.

"Parent"A corporation directly or indirectly in control over another company. (author’s own meeting)

"Rehabilitation" Restoration of the debtor to a position of successful operation and solvency, if it is shown that it’s continuance of operation is economically feasible and its creditors can recover more if the corporation continues operation.

"Secured claim"Any clan whose payment or fulfillment is secured by contract or by law, including any clam or credit enumerated under Articles 2241 and 2242 of the civil Code and Article 110, as amended, of the Labor code of the Philippines.

"Subsidiary" A corporation where more than fifty percent (50%) of its voting stock is owned or controlled directly or indirectly by another corporation.

General Provision (Rule 3)

Nature of Proceeding (Sec 1) - In Rem. - Jurisdiction over all persons considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper or general circulation. -The proceedings shall also be summary and non-adversarial in nature. - The following pleading are prohibited:(a) Motion to dismiss;(b) Motion for a bill of particulars:(c) Petition for relief;(d) Motion for extension;(e) Motion for postponement(f) Third-party complaint;(g) Intervention;(h) Motion to hear affirmative defenses; and

(I) Any pleading or motion which is similar to or of like effect as any of the foregoing.

Service of pleadings and documents (Sec 3)-Any pleading and/or document required by these Rules may be filed with the court and/or served upon the other parties by fax or e-mail. -Date of transmission shall be deemed to be the date of service. -Where the pleading or document is voluminous, the court may, upon motion, waive the requirement of service; provided that a copy thereof together with all its attachments is duly filed with the court and is made available for examination and reproduction by any party, and provided, further, that a notice of such filing and availability is duly served on the parties.

Executory nature of orders (Sec 5) -Any order issued by the court under these Rules is immediately executory.-A petition to review the order shall not stay the execution of the order unless restrained or enjoined by the appellate court.

Nullification of Illegal Transfers and Preferences (Sec 6)Upon motion the court may nullify any transfer of property or any other conveyance, sale, payment or agreement made in violation of its stay order or in violation of these Rules.

Stay Order (Sec 7)

If the court finds the petition to be sufficient in form and substance, it shall; not later than five (5) working days from the filing of the petition, issue an order:

Stay of enforcement of claims (Sec 7.b) -staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor; -stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor's obligations; -stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; -where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor;


Prohibition against disposition and encumbrances of property (Sec 7.c)-the debtor cannot sell, encumber, transfer, or dispose in any manner any of its properties except in the ordinary course of business;

Prohibition against payment of pre-petition liabilities (Sec 7.d)-the debtor cannot make any payment on its liabilities except as provided in items (e), (f) and (g) of this SEC or when ordered by the court pursuant to SEC 10 of Rule 3;

Prohibition against withholding of goods and services (Sec 7.e)-the debtor's suppliers of goods or services cannot withhold supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order;

Payment of post-petition administrative expenses (Sec 7.f) -payment in full of all administrative expenses incurred after the issuance of the stay order;

Payment of post-petition credits (Sec 7.g)direct the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior court approval;

Preservation of claims against debtor (Sec 7 last par)The issuance of a stay order does not affect the right to commence actions or proceedings insofar as it is necessary to preserve a claim against the debtor.

Concept of Adequate Protection of Property (Sec 10)the creditor lacks adequate protection if it can be shown that:(1) The debtor fails or refuses to honor a pre-existing agreement with the to keep the property insured;(2) The debtor fails or refuses to take commercially reasonable steps to maintain the property; or(3) The property has depreciated to an extent that the creditor is undersecured

Qualifications and Disqualification of Rehabilitation Receiver (Sec 11)Qualifications:(1) Expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor;(2) Knowledge in management, finance and rehabilitation of distressed companies;

(3) General familiarity with the rights of creditors in suspension of payments or rehabilitation and general understanding of the duties and obligations of a rehabilitation receiver;(4) Good moral character, independence and integrity;(5) Lack of conflict of interest as defined in this SEC; and(6) Willingness and ability to file a bond in such amount as may be determined by the court.

Disqualifications:(1) He is creditor or stockholder of the debtor;(2) He is engaged in a line of business which competes with the debtor;(3) He is, or was within two (2) years from the filing of the petition, a director, officer, or employee or the auditor or accountant of the debtor;(4) He is or was within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor;(5) He is related by consanguinity or affinity within the fourth civil degree to any creditor, stockholder, director, officer, employee, or underwriter of the debtor; or(6) He has any other direct or indirect material interest in the debtor or any creditor.

Powers and Functions of Rehabilitation Receiver (Sec 12)

- Not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings.

For this purpose, the rehabilitation receiver shall have the powers, duties and functions of a receiver under Presidential Decree No. 902-A1. considered as an officer of the court. 2. He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor's property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated, as well as 3.implement the rehabilitation plan after its approval.

Accordingly, he shall have the following powers and functions:

(a) To verify the accuracy of the petition, including its annexes such as the Schedule of Debts and Liabilities and the Inventory of Assets submitted in support to the petition;(b) To accept and incorporate, when justified, amendments to the Schedule of Debts and Liabilities;


(c) To recommend to the court the disallowance of claims and rejection of amendments t the Schedule of Debts and Liabilities that lack sufficient proof and justification;(d) To submit to the court and make available for review by the creditors, a revised Schedule of Debts and Liabilities;(e) To investigate the acts, conduct, properties, liabilities and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof; and, any other matter relevant to the proceeding or to the formulation of a rehabilitation plan;(f) To examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate;(g) To make available to the creditors documents and notices necessary for them to follow and participate in the proceedings;(h) To report to the court any fact ascertained by him pertaining to the causes of the debtor's problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement and irregularities committed by the stockholders, directors, management,, or any other person against the debtor;(i) To employ such person or persons such as lawyers, accountants, appraisers and staff are necessary in performing his functions and duties as rehabilitation receiver;(j) To monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor's business;(k) To evaluate the existing assets and liabilities, earnings and operations of the debtor;(l) To determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders and the general public;(m) To study the rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the proceedings, together with any comments made thereon;(n) To prohibit and report to the court any encumbrance, transfer or disposition of the debtor's property outside of the ordinary course of business or what is allowed by the court;(o) To prohibit and report to the court any payments outside of the ordinary course of business;(p) To have unlimited access to the debtor's employees, premises, books, records and financial documents during business hours;(q) To inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the debtor or other persons;(r) To gain entry into any property for the purpose of inspecting, measuring, surveying or photographing it or any designated relevant object or operation thereon;

(s) To take possession, control and custody of the debtor's assets;(t) To notify counterparties and the court as to contracts that the debtor has decided to continue to perform the breach;(u) To be notified of and to attend all meetings of the board of directors and stockholder of the debtor;(v) To recommend any modification of an approved rehabilitation plan as he may deem appropriate;(w) To bring to the attention of the court any material change affecting the debtor's ability to meet the obligations under the rehabilitation plan;(x) To recommend the appointment of a management committee in the cases provided for under Presidential Decree No. 902-A, as amended;(y) To recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public;(z) To apply to the court for any order or directive that he may deem necessary or desirable to aid him in the exercise of his powers and performance of his duties and functions; and(aa) To exercise such other powers as may from time to time be conferred upon him by the court.

Contents of Rehabilitation Plan (Sec 18)(a) desired business targets or goals and the duration and coverage of the rehabilitation; (b) terms and conditions of such rehabilitation which shall include the manner of its implementation, giving due regard to the interests of secured creditors such as, but not limited, to the non-impairment of their security liens or interests; (c) material financial commitments to support the rehabilitation plan; (d) means for the execution of the rehabilitation plan;(e) a liquidation analysis; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.

Effects of Rehabilitation (Sec 20) (a) The plan and its provisions shall be binding upon the debtor and all persons who may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings or


opposed the plan or whether or not their claims have been scheduled; (b) The debtor shall comply with the provisions of the plan and shall take all actions necessary to carry out the plan; (c) Payments shall be made to the creditors in accordance with the provisions of the plan; (d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the plan; and (e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the plan is successfully implemented.

Termination of Rehabilitation Proceeding (Sec 21)-Upon motion, within ninety (90) days from the approval of the rehabilitation plan, and after notice and hearing, the court may revoke the approval thereof on the ground that the same was secured through fraud.

Sec 23 (not in outline)(a) Dismissal of the petition;(b) Failure of the debtor to submit the rehabilitation plan;(c) Disapproval of the rehabilitation plan by the court;(d) Failure to achieve the desired targets or goals as set forth in the rehabilitation plan;(e) Failure of the debtor to perform its obligations under the plan;(f) Determination that the rehabilitation plan may no longer be implemented in accordance with its terms, conditions, restrictions or assumptions; or(g) Successful implementation of the rehabilitation plan.Debtor-Initiated Rehabilitation (Rule 4) Who may petition (Sec 1)-Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, may petition the proper regional trial court for rehabilitation.- A group of companies may jointly file a petition for rehabilitation when one or more of its constituent corporations foresee the impossibility of meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/or operations of the other member companies of the group is essential under the terms and conditions of the proposed rehabilitation plan.

Opposition to or Comment on the Petition (Sec 4)-Every creditor of the debtor or any interested party shall file his verified opposition to or comment on the petition not later than fifteen (15) days before the date of the initial hearing fixed in the stay order. -After such time, no creditor or interested party shall be allowed to file any comment thereon or opposition thereto without leave of court.-If the Schedule of Debts and Liabilities omits a claim or liability, the creditor concerned shall attach to its comment or opposition a verified statement of the obligations allegedly due it. Approval of Rehabilitation PlanBy Court (Sec 7.b)The court shall approve the new rehabilitation plan not later than ninety (90) days from the date of the last initial hearing.

By Creditors (Sec 7.b.1) Approval or endorsement of creditors holding at least two-thirds (2/3) of the total liabilities of the debtor including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor;

Cram Down (Sec 11)The court may approve a rehabilitation plan even over the opposition of creditors of the debtor, if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable if the following are present: (a) The rehabilitation plan complies with the requirements specified in SEC 18 of Rule 3; (b) The rehabilitation plan would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a six (6)-month period from the date of filing of the petition; and (c) The rehabilitation receiver has recommended approval of the plan.

In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors are not impaired.

Creditor-initiated rehabilitation (Rule 5)

Who May Petition (Sec 1) Any creditor or creditors holding at least twenty percent (20%) of the debtor's total


liabilities may file a petition with the proper regional trial court for rehabilitation of a debtor that cannot meet its debts as they respectively fall due.

Requirements (Sec 2)The petition is accompanied by:1. rehabilitation plan 2. list of at least three (3) nominees to the position of rehabilitation receiver and 3. verified by a sworn statement that the affiant has read the petition and that its contents are true and correct of his personal knowledge or based on authentic records and that the petition is being filed to protect the interests of the debtor, the stockholders, the investors and the creditors of the debtor.

Pre-negotiated rehabilitation (Rule 6)

Requirements (Sec 1)1. A debtor that foresees the impossibility of meeting its debts as they fall due may, by itself or jointly with any of its creditors, 2. file a verified petition for the approval of a pre-negotiated rehabilitation plan. 3. The petition shall comply with SEC 2 of Rule 4 and be supported by an affidavit showing the written approval or endorsement of creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor.

Recognition of Foreign Proceedings (Rule 7)

Scope (Sec 1) This Rule applies where: (a) assistance is sought in a Philippine court by a foreign court or a foreign representative in connection with a foreign proceeding; (b) assistance is sought in a foreign State in connection with a domestic proceeding governed by these Rules; or (c) a foreign proceeding and a domestic proceeding are concurrently taking place.

The sole fact that a petition is filed pursuant to this Rule does not subject the foreign representative or the foreign assets and affairs of the debtor to the jurisdiction of the local courts for any purpose other than the petition.

Period for Recognition (Sec 5)

-Petition for recognition of a foreign proceeding shall be decided within thirty (30) days from the filing thereof.

Effect of recognition of foreign procedure (Sec 8)Upon recognition of a foreign proceeding:(a) Commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed; provided, that such stay does not affect the right to commence individual actions or proceedings to the extent necessary to preserve a claim against the debtor. (b) Execution against the debtor's assets is stayed; and (c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.

Procedural remedies (Rule 8)

Motion for recognition (Sec 1)a. Prior to the approval of the rehabilitation plan. -No relief can be extended to the party aggrieved by the court's order on the motion through a special civil action for certiorari under Rule 65 of the rules of Court. Such order can only be elevated to the Court of Appeals as an assigned error in the petition for review of the decision or order approving or disapproving the rehabilitation plan.b. After the approval of rehabilitation plan.-An order issued after the approval of the rehabilitation plan can be reviewed only through a special civil action for certiorari under Rule 65 of the Rules of Court.

Review of decision or order on rehabilitation plan (Sec 2)-an order approving or disapproving a rehabilitation plan can only be reviewed through a petition for review to the Court of Appeals under Rule 43 of the Rules of Court within fifteen (15) days from notice of the decision or order.

Concept of debtor-in-place-The rehabilitation receiver does not take over the management and control of the debtor but simply oversees and monitors closely the operations of the debtor during the pendency of the proceedings

Appointment of management committee (Rule 9, Sec 1, SC Interim Rules of Procedure for Intra-corporate Controversies)


The appointment of a management committee for a corporation, partnership or association may be applied for as incident to any of the cases that may be filed under the Rules or the Interim Rules on Corporate Rehabilitation when there is imminent danger of:a. dissipation, loss, wastage or destruction of assets or other properties; andb. paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, parties-litigants or the general public.

Cases:

“Equality is Equity”

Alemar’s Sibal & Sons, Inc. vs. Elbinias, et.al.,

During rehabilitation, assets are held in trust for the equal benefit of all creditors. As between creditors, equality is equity. All creditors should stand on equal footing.

Suspension of money claim

PAL vs. Spouses Kurangkang, et.al.,

The stay order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. The interim rules must likewise be read and applied along with SEC 6(c) of P.D. 902-A, as so amended, directing that upon the appointment of a management committee, rehabilitation receiver, board or body pursuant to the decree, “all actions” for claims against the distressed corporation “pending before any court, tribunal, board or body shall be suspended accordingly.” A “claim” is said to be “a right to payment, whether or not It is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured.” In Finasia Investments and Finance Corporation this Court has defined the word “claim,” contemplated in SEC 6(c) of P.D. 902-A, as referring to debts or demands of a pecuniary nature and the assertion of a right to have money paid as well. Verily, the claim of private respondents against petitioner PAL is a money claim for the missing luggages, a financial demand, that the law requires to be suspended pending the rehabilitation proceedings.

Non-suspension of claims against guarantors and sureties solidarily liable with debtor

MWSS vs. Hon. Daway

Except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein. Being a solidary obligation, the letter of credit here is excluded from the jurisdiction of the rehabilitation court.

Purpose of Suspension of actions for claims against the corporation

Sobrejuanite, et.al., vs. ASB Development Corp

The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an advantage or preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors. Such suspension is intended to give enough breathing space for the management committee or rehabilitation receiver to make the business viable again, without having to divert attention and resources to litigations in various fora. The suspension would enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the “rescue” of the debtor company.

“Serious Situation Test”

Pryce Corporation vs. CA.

Receivers will be appointed whenever:1. necessary in order to preserve the rights of the litigants; and/or2. necessary in order to protect the interest of the public- clear and imminent danger of losing corporation assets if a receiver is not appointed.

XV. SEC REORGANIZATION DECREEPD 902-A AS AMENDED

Organization

Sec 4, RA 8799


Administrative Agency.4.1. - This Code is administered by SEC as collegial body composed of Chairperson and 4 Commissioners- appointed by Pres for term of 7y ea - who serve as such until successor is appointed & qualified- Commissioner appointed to fill vacancy prior to expiration of term for w/c his / her predecessor was appointed, serves only for unexpired portion of term. - Unless context indicates otherwise, “Commissioner” incl Chairperson. 4.2. - Commissioners must be - natural-born citizens - at least 40y for Chairperson and at least 35y for Commissioners- of good moral character- of unquestionable integrity- of known probity & patriotism- w/ recognized competence in social & economic disciplines- Majority of Commissioners, incl Chairperson, shall be members of Phil Bar.4.3. - Chairperson is CEO of the Commission. - Chairperson shall - execute & administer policies, decisions, orders, resolutions approved by Commission AND- have gen executive direction & supervision of work & operation of Commission and its members, bodies, boards, offices, personnel, and all admin biz 4.4. - Salary of Chairperson & Commissioners shall be - fixed by Pres - based on objective classification system- at a sum comparable to members of Monetary Board and commensurate to importance attached to position4.5. - Commission holds mtgs at least once a wk OR as often as necessary upon call of Chairperson or upon request of 3 Commissioners.- Notice of mtg is given to all Commissioners and presence of 3 Commissioners constitutes quorum. In absence of Chairperson, the most senior Commissioner acts as presiding officer.4.6. - Commission may delegate any of its fcns to any dept / ofc of the Commission, an individual Commissioner or staff member of Commission except its - rvw / appellate authority AND- power to adopt, alter, supplement any rule - Commission may rvw upon own initiative or upon petition of party any action of dept / ofc,

individual Commissioner, or staff member of Commission.

Sec 6, RA 8799Indemnification and Responsibilities of Commissioners.6.1. - Commission shall indemnify ea Commissioner and officials of Commission, incl personnel performing supervision & exam fcns for all costs & expenses reasonably incurred in connection w/ any civil / criminal actions, suits, proceedings to w/c they may be or made party by reason of their fcns / duties, unless they’re finally adjudged to be liable for gross negligence / misconduct.- In settlement / compromise, indemnification is provided only in connection w/ such matters covered by settlement as to w/c Commission is advised by external counsel that persons to be indemnified didn’t commit any gross negligence / misconduct.- Costs & expenses in defending action, suit, proceeding may be pd by Commission in advance of final disposition upon receipt of undertaking by or on behalf of Commissioner, officer, employee to repay amt advanced shld it be determined by Commission that he / she isn’t entitled.6.2. - Commissioners, officers, employees of Commission who willfully violate this Code OR are guilty of negligence, abuse, malfeasance or fail to exercise extraordinary diligence in performance of duties shall be held liable. - Similar responsibility applies to Commissioners, officers, employees of Commission for 1. disclosure of info, discussion, resolution of Commission of confidential nature OR abt confidential operations of Commission, unless disclosure is - in connection w/ official fcns w/ Commission OR- w/ prior authorization of Commissioners2. use of such info for personal gain or to detriment of gov’t, the Commission, 3rd parties- Data / info required to be submitted to Pres and / or Congress or its committee OR to be published shall not be confidential.

Sec 7, RA 8799Reorganization.7.1. - Commission is authorized to provide for its reorganization, to streamline structure & operations, upgrade HR component and enable it to more efficiently & effectively perform fcns & exercise powers.7.2. - All positions of Commission are governed by compensation & position classification systems


& qualification standards approved by Commission based on comprehensive job analysis & audit of actual duties & responsibilities. - Compensation plan shall be - comparable w/ prevailing plan in Bangko Sentral and other gov’t financial institutions AND- subject to periodic rvw by Commission no more than once every 2y w/o prejudice to yearly merit rvws / increases based on productivity & efficiency. - Commission shall be exempt fr laws, rules, regulations on compensation, position classification, qualification standards. - Commission shall endeavor to make its system conform as closely as possible w/ Compensation & Position Classification Act of 1989.

Sec 76, RA 8799Repealing Clause. - Revised Securities Act (BP 178) in its entirety AND Sec 2, 4, 8 of PD 902A as amended, are repealed. - All other laws, orders, rules, regulations, or parts thereof, inconsistent w/ this Code are repealed or modified.

Powers and Functions

Sec 3. - Commission has absolute jurisdiction, supervision, control over all corps, partnerships, assns, who are grantees of primary franchise and / or license or permit issued by gov’t to operate in Phils - It has power to enlist aid of any and all enforcement agencies of gov’t, civil or military.

Sec 6.- Commission has ff powers:a. issue prelim / permanent injunctions, prohibitory / mandatory, where it has jurisdiction (RoC shall apply)b. punish for contempt of Commission, direct & indirect, in accordance w/ RoC c. compel officers of corp / assn registered by it to call mtgs of stockholders / members under its supervisiond. pass upon validity of issuance & use of proxies & voting trust agreements for absent stockholders / memberse. issue subpoena duces tecum and summon witnesses to appear in proceedings of Commission; in appropriate cases order search & seizure or cause search & seizure of docs, papers, files, records, books of accts of entity under investigation f. impose fines and / or penalties for violation of this Decree, laws implemented by Commission, rules, etcg. authorize establishment of stock exchanges,

commodity exchanges, other similar orgs AND supervise & regulate the same; incl authority to determine their number, size, location h. pass upon, refuse, deny, after consultation w/ BoI, Dept of Industry, NEDA or other gov’t agency, the application for registration of corp, partnership, assn, org w/in its jurisdiction, if not consistent w/ nat’l economic policiesi. suspend, revoke, after notice & hearing, the franchise / cert of registration of corp, partnership, assn, upon any of grounds provided by law, incl: 1. fraud in procuring cert of registration2. serious misrepresentation as to what corp can do or is doing 3. refusal to comply / defiance of lawful order of Commission restraining commission of acts w/c would amt to grave violation of franchise4. continuous inoperation for at least 5y 5. failure to file by-laws w/in required period6. failure to file reports in forms determined by Commission w/in periodj. exercise other powers as implied, necessary, incidental to express powers - Hearings are conducted by Commission OR by Commissioner OR other bodies, boards, committees and / or officer created / designated by Commission for the purpose. Decision, ruling, order may be appealed to Commission en banc w/in 30d after receipt by appellant of notice of decision, ruling, order. - Commission shall promulgate rules of procedures to govern proceedings, hearings, appeals. - Aggrieved party may appeal order, decision, ruling of Commission en banc to SC by petition for rvw.

Sec 5, RA 8799Powers and Functions of the Commission.5.1. - Commission shall act w/ transparency and have powers & fcns provided by this Code, PD 902A, Corp Code, Investment Houses Law, Financing Company Act, other laws. - Commission, powers & fcns:a. have jurisdiction & supervision over corp, partnership, assn who are grantees of primary franchises and / or license / permit issued by gov’t b. formulate policies & recommendations on issues re securities market, advise Congress & gov’t agencies on securities market, propose legislation and amendments c. approve, reject, suspend, revoke, require amendments to registration statements, registration & licensing applicationsd. regulate, investigate, supervise activities of persons to ensure compliancee. supervise, monitor, suspend, take over activities of exchanges, clearing agencies, other SROs

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f. impose sanctions g. prepare, approve, amend, repeal rules, regulations, orders; issue opinions, provide guidance on and supervise compliance w/ such rules h. enlist aid of and / or deputize enforcement agencies of gov’t, civil or military as well as pvt institution, corp, firm, assn or person in implementation i. issue cease & desist orders j. punish for contempt of Commission, direct & indirect, in accordance w/ RoC k. compel officers of corp or assn to call mtgs of stockholders / members under its supervisionl. issue subpoena duces tecum, summon witnesses to appear in proceedings of Commission, order exam, search, seizure of docs, papers, files, records, tax returns, books of accts of entity under investigation m. suspend, revoke, after notice & hearing the franchise / cert of registration of corp, partnership, assn, upon grounds provided by lawn. exercise other powers provided by law as well as those implied fr, or w/c are necessary / incidental to express powers XXX

Jurisdiction

Sec 5, RA 8799Powers and Functions of the Commission.XXX5.2. - Commission’s jurisdiction over cases under Sec 5 PD 902A is transferred to Courts of gen jurisdiction OR RTC.- SC may designate RTC branches that exercise jurisdiction over these cases.

Cases

Prof Catindig:Read Espino and Easycall cases together. Read Cualoping and Provident cases together. Compare and contrast.

REMOVAL FROM EMPLOYMENT OF CORPORATE OFFICERS NOT WITHIN JURISDICTION OF NLRC

Espino v. NLRC- A corporate officer's dismissal is always corporate act and / or intra-corporate controversy. That nature isn’t altered by reason / wisdom w/c Board may have in taking such action.- That Espino sought payment of backwages, other benefits, moral & exemplary damages, atty's fees in complaint for illegal dismissal will

not prevent SEC fr exercising jurisdiction under PD 902A.

NLRC HAS JURISDICTION OVER CASE INVOLVING “OFFICER” WHOSE POSITION IS NOT PROVIDED FOR IN THE BY-LAWS AND WHO WAS NOT ELECTED BY THE BOARD OF DIRECTORS

Easycall Communications Phils Inc v. King- It had to be first established that the person removed / dismissed was a corporate officer before removal / dismissal could properly fall w/in jurisdiction of SEC and not NLRC.- “Corporate officers” in context of PD 902A are those officers of corp who are given that character either by Corp Code or by by-laws. Under Sec 25 of Corp Code, the “corporate officers” are the pres, sec, treas and such other officers as provided for in by-laws.- An “office” is created by charter of the corp; the officer is elected by directors / stockholders. On the other hand, an employee occupies no ofc and generally is employed not by action of directors / stockholders but by managing officer who also determines compensation to be pd.

REGULATORY AND ADJUDICATORY FUNCTIONS OF SEC DISTINGUISHED

SEC v. CA, Cualoping Securities and Fidelity Transfers- SEC has both regulatory AND adjudicative functions.- Under its regulatory responsibilities, SEC may- pass upon applications for, suspend, revoke (after notice & hearing), certificates of registration of corps, partnerships, assn (excl cooperatives, homeowners' assn, labor unions) - compel legal & regulatory compliances- conduct inspections- impose fines / penalties for violations of Revised Securities Act, implementing rules & directives of SEC - Justiciable controversy such as can occasion exercise of SEC's exclusive jurisdiction would require assertion of right by proper party against another who, in turn, contests it. It is one instituted by & against parties having interest in subject matter appropriate for judicial determination predicated on given state of facts. That controversy must be raised by party entitled to maintain action. He’s the person to whom right to seek judicial redress / relief belongs w/c can be enforced against party charged w/ having been responsible for, or to have given rise to, the cause of action. A person / entity tasked w/ power to adjudicate stands neutral & impartial and acts on basis of admissible representations of parties.



- In this case, the proper parties that can bring the controversy & can cause exercise by SEC of its orig & exclusive jurisdiction would be all or any of those who are adversely affected by transfer of pilfered certificates of stock. Any peremptory judgment by SEC, w/o such proceedings having first been initiated, would be precipitate.

DETERMINATION OF WHICH OF TWO STOCK AND TRANSFER BOOKS IS VALID NOT AN INTRA-CORPORATE DISPUTE

Provident International Resources Corp v. Joaquin T. Venus- SEC’s regulatory authority over pvt corps encompasses a wide margin of areas, touching nearly all of corp’s concerns. - Under its regulatory responsibilities, SEC may- pass upon applications for, suspend, revoke (after notice & hearing), certificates of registration of corps, partnerships, assn (excl cooperatives, homeowners' assn, labor unions) - compel legal & regulatory compliances- conduct inspections- impose fines / penalties for violations of Revised Securities Act, implementing rules & directives of SEC - Considering that the SEC, after notice & hearing, has regulatory power to revoke corporate franchise – fr w/c a corp owes its legal existence, SEC must likewise have lesser power of merely recalling and canceling STB that was erroneously registered.- As regulatory body, it is SEC’s duty to ensure that there’s only one set of STB for ea corp.

NLRC HAS NO JURISDICTION OVER CASE INVOLVING NON-REELECTION OF DIRECTOR ETC.

Pearson and George (SE Asia) Inc v. NLRC- Any question relating or incident to election of new Board of Directors, non-reelection of Llorente as Director, his loss of position of Managing Director, or abolition of said ofc are intra-corporate matters. Disputes arising therefrom are intra-corporate disputes w/c, if unresolved w/in corporate structure, may be resolved in appropriate action only by SEC pursuant to its authority under Sec 5 of PD 902A. - This isn’t a case of dismissal. The matter of whom to elect is a prerogative that belongs to Board, and involves exercise of deliberate choice and faculty of discriminative selection. Generally, the relationship of person to a corp, whether as officer or as agent or employee, isn’t determined by nature of the svcs performed, but by incidents of relationship as they actually exist.

INTRA-CORPORATE CONTROVERSIES (AM NO. 01-2-04-SC)

Cases Covered (Rule 1)

Sec 1. a. Cases covered. - These Rules govern in civil cases involving: 1. devices / schemes employed by OR act of board of directors, biz associates, officers, partners, amounting to fraud / misrepresentation w/c may be detrimental to public and / or stockholders, partners, members of corp, partnership, assn2. controversies - out of intra-corporate, partnership, assn relations- between & among stockholders, members, associates- between any or all of them and the corp, partnership, assn of w/c they’re stockholders, members, associates 3. controversies in election / appointment of directors, trustees, officers, managers of corp, partnership, assn4. derivative suits5. inspection of corp booksb. Prohibition against nuisance and harassment suits. - Nuisance & harassment suits are prohibited. In determining whether suit is nuisance / harassment suit, court considers: 1. extent of shareholding / interest of initiating stockholder / member2. subject matter of suit3. legal & factual basis 4. availability of appraisal rights 5. prejudice to corp, partnership, assn in relation to relief sought- In case of nuisance / harassment suits, court may, motu proprio or upon motion, dismiss the case.

Distinguish from SC Interim Rules of Procedure on Corporate Rehabilitation

Modes of Discovery (Rule 3)

Sec 1. In general.- A party can only avail of any of modes of discovery not later than 15d fr joinder of issues.

Sec 2. Objections.- Any mode of discovery may be objected to


- w/in 10d fr receipt of discovery device AND - only on ground that the matter requested is patently incompetent, immaterial, irrelevant, privileged- Court shall rule on objections not later than 15d fr filing.

Sec 3. Compliance. - Compliance w/ mode of discovery shall be made w/in 10d fr receipt of discovery device OR if there are objections, fr receipt of ruling of court.

Sec 4. Sanctions. - Sanctions in RoC for failure to avail of, or refusal to comply w/ modes of discovery apply. - In addition, court may upon motion, declare party non-suited or as in default, as case may be, if refusal to comply w/ mode of discovery is patently unjustified.

Pre-trial (Rule 4)

Sec 1. Pre-trial conference; mandatory nature. - W/in 5d after period for availment of, and compliance w/ modes of discovery, whichever comes later, court issues & serves order - setting the case for pre-trial conference AND- directing parties to submit pre-trial briefs- Parties shall file w/ court and furnish ea other copies of pre-trial brief to ensure receipt by court & other party at least 5d before date set for pre-trial. - Parties set forth in pre-trial briefs ff: 1. brief statement of nature of case; summarize theory of party in clear & concise language2. allegations expressly admitted by either / both parties3. allegations deemed admitted by either / both parties4. docs not specifically denied under oath by either / both parties5. amendments to pleadings6. statement of issues, w/c separately summarizes factual & legal issues 7. names of witnesses to be presented; summary of their testimony as contained in affidavits 8. other pcs of evidence 9. specific proposals for amicable settlement10. possibility of referral to mediation or other alternative modes of dispute resolution11. proposed schedule of hearings12. other matters

Sec 2. Nature and purpose of pre-trial conference.- During pre-trial conference, court shall ensure that parties consider ff: 1. possibility of amicable settlement2. referral to mediation / other forms of dispute resolution

3. facts that need not be proven, bec they’re of judicial notice or expressly / deemed admitted4. amendments to pleadings5. possibility of obtaining stipulations & admission of facts & docs 6. objections to admissibility of testimonial, documentary, other evidence7. objections to form / substance of affidavit, or part thereof8. simplification of issues9. possibility of submitting case for decision on basis of position papers, affidavits, documentary & real evidence10. schedule of hearing dates11. other matters

Sec 3. Termination. - Prelim conference is terminated not later than 10d after commencement, WON parties agreed to settle amicably.

Sec 4. Judgment before pre-trial.- If, after submission of pre-trial briefs, court determines that upon consideration of pleadings, affidavits, other evidence submitted, a judgment may be rendered, court may order parties to file simultaneously respective memoranda w/in non-extendible 20d fr receipt of order. - Court renders judgment, full or otherwise, not later than 90d fr expiration of period to file memoranda.

Sec 5. Pre-trial order; judgment after pre-trial. - Proceedings in pre-trial are recorded. - W/in 10d after termination of pre-trial, court issues order w/c recites - matters taken up in conference- actions taken - amendments allowed in pleadings- agreements / admissions made by parties - Court shall rule on objections to or comments on admissibility of documentary / other evidence, incl affidavit or part thereof. - Shld action proceed to trial, order defines & limits issues and shall strictly follow form in Annex "A". - Contents of order control subsequent course of action, unless modified before trial to prevent manifest injustice. - After pre-trial, court may render judgment, full or partial, as evidence presented during pre-trial may warrant.

Election Contests (Rule 6)

Sec 2. Definition. - Election contests – any controversy / dispute involving title / claim to any elective ofc in stock / non-stock corp, validation of proxies, manner & validity of elections, qualifications of candidates, incl proclamation of winners to ofc

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of director, trustee, other officer directly elected by stockholders in close corp or by members of non-stock corp where article of incorporation or by-laws so provide.

Inspection of Corporate Books and Records (Rule 7)

Sec 1. Cases covered. - This Rule applies to disputes exclusively involving rights of stockholders / members to inspect books & records and / or to be furnished w/ financial statements of corp under Corp Code.

Sec 2. Complaint. - In addition to requirements in Sec 4 Rule 2, complaint must state ff: 1. case is for enforcement of plaintiff's right of inspection of corporate orders / records and / or to be furnished w/ financial statements 2. demand for inspection & copying of books & records and / or to be furnished w/ financial statements 3. refusal of defendant to grant demands of plaintiff and reasons given 4. reasons why refusal to grant demands of plaintiff is unjustified & illegal, stating law & jurisprudence

Sec 7. Decision. - Court renders decision based on pleadings, affidavits, documentary & other evidence attached w/in 15d fr receipt of last pleading. - Decision ordering defendants to allow inspection and / or to furnish copies shall also - order plaintiff to deposit estimated cost of manpower necessary to produce books & records and cost of copying AND- state limitations & conditions to exercise of right

Derivative Suits (Rule 8)

Sec 1. Derivative action. - Stockholder / member may bring action in the name of corp / assn provided that: 1. he was stockholder / member at time the acts / transactions occurred and the time the action was filed2. he exerted all reasonable efforts, and alleges the same w/ particularity in complaint, to exhaust all remedies available under articles of incorporation, by-laws, laws / rules governing the corp / partnership to obtain relief he desires3. no appraisal rights are available for acts complained of 4. suit isn’t nuisance or harassment suit- in nuisance / harassment suit, court shall dismiss case.

Sec 2. Discontinuance.

- Derivative action shall not be discontinued, compromised, settled w/o approval of court. - During pendency of action, any sale of shares of complaining stockholders shall be approved by court. - If court determines that interest of stockholders / members are substantially affected by discontinuance, compromise, settlement, the court may direct that notice, by publication or otherwise, be given to stockholders / members whose interest will be affected.

Management Committee (Rule 9)

Sec 1. Creation of a management committee. - As incident to cases filed under these Rules OR Interim Rules Corporate Rehabilitation, party may apply for appointment of mgmt committee for corp, partnership, assn, when there’s imminent danger of: 1. dissipation, loss, wastage, destruction of assets / props2. paralyzation of biz w/c may be prejudicial to minority stockholders, parties-litigants, public

Sec 2. Receiver. - If court finds application to be sufficient in form & substance, court issues ordera. appointing rcver of known probity, integrity, competence and w/o conflict of interest to take over corp, partnership, assn, specifying such powers it deems appropriate b. fixing bond of rcverc. directing rcver to make report w/in 60d fr time he assumes ofcd. prohibiting incumbent mgmt fr selling, encumbering, transferring, disposing any of its props except in ordinary course of biz e. directing payment in full of admin expenses incurred after issuance of order

Sec 4. Composition of the management committee. - After notice & hearing, court may appoint mgmt committee composed of 3 members chosen by court. - In appointment, ff qualifications are considered 1. expertise & acumen to manage biz similar in size & complexity as the corp, assn, partnership to be put under mgmt committee2. knowledge in mgmt & finance3. good moral character, independence, integrity4. lack of conflict of interest 5. willingness & ability to file bond in amt determined by court- W/o limiting generality of ff, member of mgmt committee may be deemed to have conflict of interest if he is

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1. engaged in line of biz w/c competes w/ corp, assn, partnership sought to be placed under mgmt2. director, officer, stockholder charged w/ mismgmt, dissipation, wastage of prop of entity under mgmt 3. related by consanguinity / affinity w/in 4th civil degree to director, officer, stockholder charged w/ mismgmt, dissipation, wastage of props

Sec 5. Powers and functions of the management committee. - Upon assumption to ofc of mgmt committee, rcver renders report AND turns over mgmt & control of entity to mgmt committee. - Mgmt committee has power to take custody of & control assets & properties owned / possessed by entity. - It shall take place of mgmt and board of directors, assume their rights & responsibilities, and preserve assets & properties in possession. - W/o limiting generality of foregoing, mgmt committee exercises powers & fcns: 1. investigate acts, conduct, props, liabilities, financial condition of corp, assn, partnership 2. examine under oath the directors & officers, other witnesses 3. report to court any fact ascertained by it pertaining to causes of problems, fraud, misconduct, mismgmt, irregularities 4. employ person/s such as lawyers, accountants, auditors, appraisers, staff as necessary 5. report to court material adverse change in biz 6. evaluate existing assets & liabilities, earnings, operations of corp, assn, partnership 7. determine & recommend to court the best way to salvage & protect interest of creditors, stockholders, public, incl rehab of the corp, assn, partnership 8. prohibit & report to court encumbrance, transfer, disposition of debtor's prop outside of ordinary course of biz or what’s allowed by court9. prohibit & report to court payments made outside of ordinary course of biz 10. have unltd access to employees, premises, books, records, financial docs during biz hrs11. inspect, copy, photocopy, photograph any doc, paper, book, acct, letter, whether in possession of corp, assn, partnership, other persons12. gain entry into prop for purposes of inspecting, measuring, surveying, photographing it or any relevant object / operation thereon13. bring to attn of court any material change affecting entity's ability to meet obligations14. revoke resolutions passed by Executive Committee or Board of Directors / Trustees or

governing body of entity under mgmt and pass resolution in substitution of the same 15. modify, nullify, revoke transactions w/c it deems detrimental / prejudicial 16. recommend termination of proceedings & dissolution of entity if continuance in biz is no longer feasible / profitable or no longer works to best interest of stockholders, parties-litigants, creditors, public17. apply to court for order / directive to aid it in exercise of powers & performance of duties 18. exercise other powers conferred upon it by court

Sec 7. Transactions deemed to be in bad faith. - Transactions made by previous mgmt and directors are deemed fraudulent & rescissible if made - w/in 30d prior to appointment of rcver / mgmt committee OR- during their incumbency as rcver / mgmt committee

Sec 9. Immunity from suit. - Rcver & members of mgmt committee and persons employed by them shall not be subject to action, claim, demand in connection w/ act done / omitted by them in good faith in exercise of their fcns & powers. - Official acts & transactions of rcver / mgmt committee approved / ratified by court render them immune fr suit in connection w/ such act / transaction.

Sec 12. Discharge of the management committee. - Mgmt committee is discharged & dissolved under ff: 1. court, on motion or motu proprio, determined that necessity for mgmt committee no longer exists2. by agreement of parties3. upon termination of proceedings- Upon discharge & dissolution, mgmt committee submits final report & renders acctg.

Cases

PURPOSE AND NATURE OF DERIVATIVE SUITS

Chua v. CA- Under Sec 36 of Corp Code in relation to Sec 23, where corp is injured party, its power to sue is lodged w/ board of directors / trustees. An individual stockholder is permitted to institute derivative suit on behalf of corp where he holds stocks to protect / vindicate corporate rights, when officials refuse to sue, or are the ones to be sued, or hold control of the corp. In such actions, suing stockholder is nominal party, w/ the corp as real party in interest.


- Derivative action is suit by shareholder to enforce corporate cause of action. The corp is necessary party to the suit. The relief granted is judgment against 3rd person in favor of corp. Similarly, if corp has defense to action against it and isn’t asserting it, stockholder may intervene & defend on behalf of corp.- Not every suit filed in behalf of corp is derivative suit. For derivative suit to prosper, it’s required that minority stockholder suing for and on behalf of corp must allege in his complaint that he’s suing on derivative cause of action on behalf of corp and other stockholders similarly situated who may wish to join him.- It’s condition sine qua non that the corp be impleaded as party bec not only is the corp an indispensable party, but it’s also the present rule that it must be served w/ process. Judgment must be made binding upon corp in order that the corp may get the benefit of suit and may not bring subsequent suit against same defendants for same cause of action. The corp must be joined as party bec it is its cause of action that’s being litigated and bec judgment must be a res judicata against it.

NOT ALL STOCKHOLDERS / MEMBERS ARE INDISPENSABLE PARTIES IN DERIVATIVE SUIT

Symaco Trading Corp v. Santos- One of the requisites of derivative suit is that the party bringing suit shld be stockholder / member at the time of action / transaction complained of. - The right to sue derivatively is an attribute of corporate ownership w/c requires that the injury alleged be indirect as far as stockholders / members are concerned, and direct only insofar as corp is concerned. - The whole purpose of law authorizing derivative suit is to allow stockholder / member to enforce rights w/c are derivative (secondary) in nature. A derivative action is suit by shareholder / member to enforce corporate cause of action.- Not all MFBAI members are indispensable parties in derivative suit. It’s enough that a member or minority of members file derivative suit for and in behalf of corp. After all, members / stockholders who filed derivative suit are merely nominal parties, the real party-in-interest being the corp for and in whose behalf the suit is filed. Any monetary benefits under the decision shall pertain to the corp.

APPOINTMENT OF MANAGEMENT COMMITTEE VALID

Jacinto v. First Women’s Credit Corp

- For minority stockholder to obtain appointment of interim mgmt committee, he must do more than merely make prima facie showing of denial of his right to share in concerns of the corp. He must show that the corporate prop is in danger of being wasted & destroyed and the biz of the corp is being diverted fr the purpose for w/c it has been organized and there is serious paralization of operations all to his detriment. - It’s only in strong case where there’s showing that the majority are clearly violating chartered rights of minority and putting their interests in imminent danger that mgmt committee may be created. Mere disagreement among stockholders as to affairs of corp wouldn’t in itself suffice as ground for appointment of mgmt committee. - At least where there’s no imminent danger of loss of corporate prop or of any other injury to stockholders, mgmt of corporate biz shldn’t be wrested away fr duly elected officers, who are prima facie entitled to administer affairs of corp and placed in the hands of mgmt committee. - However, where dissension among stockholders is such that the corp can’t successfully carry on corporate fcns the appointment of mgmt committee becomes imperative.

APPOINTMENT OF MANAGEMENT COMMITTEE NOT VALID

Sy Chim v. Sy Siy Ho & Sons Inc- For minority stockholder to obtain appointment of interim mgmt committee, he must do more than merely make prima facie showing of denial of his right to share in concerns of the corp. He must show that the corporate prop is in danger of being wasted & destroyed and the biz of the corp is being diverted fr the purpose for w/c it has been organized and there is serious paralization of operations all to his detriment.- The rationale for the need to establish confluence of the 2 requisites under Sec 1 Rule 9 by applicant for appointment of mgmt committee is primarily based upon fact that such committee & rcver appointed by court will immediately take over mgmt of the corp, partnership, assn incl such power as appropriate, and any of powers in Sec 5 of the Rule.- Upon appointment of rcver, the elected / appointed officers of corp are divested of mgmt of corp in favor of mgmt committee / rcver. Such transference of mgmt will certainly have negative, if not crippling effect, on operations / affairs of corp not only w/ banks & other biz institutions including those abroad w/c it deals with. A wall of uncertainty is erected; the short & long-term plans are disrupted, if not derailed.


- The creation & appointment of mgmt committee & rcver is an extraordinary & drastic remedy to be exercised w/ care; and only when requirements under Interim Rules are shown. It’s a drastic course for benefit of minority stockholders, the parties-litigants or gen public are allowed only under pressing circumstances and, when there’s inadequate / ineffectual legal or other remedies or when they have been exhausted.- Neither PD 902A and RA 8799 nor the Interim Rules of Procedure define "imminent danger." "Danger" is a gen term, incl peril, jeopardy, hazard, risk; as used in the Rule, it refers to exposure / liability to injury. "Imminent" refers to something w/c is threatening to happen at once, something close at hand, something to happen upon the instant, close although not yet happening, and on the verge of happening.- In the absence of strong showing of imminent danger of dissipation, loss, wastage, destruction of assets / props of corp and paralysis of biz operations, the mere apprehension of future misconduct based upon prior mismanagement will not authorize appointment of mgmt committee / rcver.

Ao-As v. CA- Appointment of mgmt committee inevitably results in drastic summary removal of all directors & officers.- Where the corp is solvent, rcver will not be appointed bec of past misconduct and subsequent mere apprehension of future misdoing, where present situation and prospects for the future are not such as to warrant receivership.- Gen rule: Rcver or mgmt committee will not be appointed unless necessary either to prevent fraud, or to save prop fr fraud / threatened destruction, or at least in case of solvent corporation. The burden of proof is heavy one w/c requires clear showing that emergency exists. Similarly, rcver / mgmt committee shldn’t be appointed in action by minority stockholder against corporate officers for accounting where corp is solvent and going concern and rcver isn’t necessary to preserve corporate prop pending accounting.- Mgmt committee shldn’t be created when there was adequate remedy available to pvt respondents for liquidation of unaccounted funds. Appointment of rcver for going corp is last resort remedy, and shldn’t be employed when another remedy is available.

POWER TO CREATE MANAGEMENT COMMITTEE INCLUDES POWER TO REORGANIZE THE SAME

Punongbayan v. Punongbayan- A mgmt committee is tasked to manage, take custody of and control existing assets, funds, records of corp AND to determine the best way to protect interest of stockholders & creditors.- Having the power to create mgmt committee, it follows that RTC can order reorganization of existing mgmt committee. Such appointment of new members doesn’t mean creation of new mgmt committee. Existing mgmt committee wasn’t abolished.

XVI. THE SECURITIES REGULATION CODE

RA 8799 (2000)

LICENSING OF BROKERS

NICOLAS vs. CAG.R. No. 12285727 March 1998

RTC granted. CA dismissed.

February 19, 1987 Nicolas and Buan entered into a Portfolio Management Agreement g Nicolas will manage Buan’s stock transactions for 3 months, with an automatic renewal clause. August 19, 1987 Buan sought termination of the Agreement and requested an accounting from Nicolas.Three weeks after, Nicolas demanded management fees of P68,263.67 for June 30, July 31 and August 19, 1987 as stated in the Agreement. g Ignored.

Nicolas filed in RTC a complaint for collection of sum of money.Buan’s answer: Not entitled – Nicolas mismanaged his transactions resulting in losses.RTC: Granted – Buan should pay Nicolas’ management fees.

CA reversed and dismissed: Sweeping statement [that profits were generated by Nicolas’ transactions] were unsubstantiated [Nicolas’ profit and loss statements were relevant and admissible, but they are not credible because self-serving].Anchor Hocking Glass Corp. vs. White Cap.: The statements simply tabulate the number of shares acquired from each company, a column for profit and the last column for loss. The statements were not authenticated by an auditor, nor by the person who caused the preparation of the same.


Sample Statement submitted by Nicolas:“Profit & Loss Statement of Atty. Blesilo Buan for the Period Ended June 30, 1987Shares Issue Profit Loss1,500 PLDT P 7,265.62”

“The ledger of accounts as proof of the transactions entered into only shows the following data: (1) dates in which the stocks were acquired; (2) classified the acquired stocks to be in long or short term trading; (3) the price of each stock; (4) which company's stocks were acquired; and, (5) the total amount paid for each stock. It does not show how much profit was realized from each transaction."

SC: CA affirmed.Portfolio Management Agreement states that Buan would pay Nicolas 20% of all realized profits every end of the month as his management fees. "Profits" = "excess of return over expenditure in a transaction or series of transactions" or "series of an amount received over the amount paid for goods and services." Nicolas bears burden of proving that the transaction realized gains or profits.

Yes, stock brokers are entitled to commercial fees or compensation:"Revised Securities Act Rule 19-13. Charges for Services Performed.Charges by brokers or dealers…shall be reasonable and not unfairly discriminatory between customers." Bauer & Cie vs. O'Donnel: Any fee or commission must be with due regard to relevant circumstances.

But here, the statements are incomplete, yielding easily to the inclusion or deletion of certain matters.. There are no concrete bases or specifics as to the method of arriving at the amounts indicated. It does not state when the stocks were purchased, the type of stocks (whether Class "A" or "B" or common or preferred) bought, when the stocks were sold, the acquisition and selling price of each stock, when the profits, if any, were delivered to the private respondent, the cost of safekeeping or custody of the stocks, as well as the taxes paid for each transaction. Bauer & Cie vs. O'Donne: Where a profit or loss statement shows a loss, the statement must show income and items of expense to explain the method of determining such loss.

There were no credible documentary evidence (e.g. receipts of the transactions, order ticket,

certificate of deposit; whether the stock certificates were deposited in a bank or professional custodian, and others) to support his claim that profits were indeed realized.

Nicolas's complaint is similar to an action for damages. The recoverable damage not only be capable of proof but must actually be proved with a reasonable degree of certainty. The awarding court must posit specific facts as sufficient basis for measuring compensatory or actual damages.

Lastly, Nicolas can’t recover because he traded securities for the account of others without the necessary license from the Securities and Exchange Commission (SEC), violating SEC 19 of the Revised Securities Act. Agbayani: Purpose = protect the public and strengthen the securities mechanism.

Am Jur: ". . ., an unlicensed person may not recover compensation for services as a broker where a statute or ordinance requiring a license is applicable and such statute or ordinance is of a regulatory nature, was enacted in the exercise of the police power for the purpose of protecting the public, requires a license as evidence of qualification and fitness, and expressly precludes an unlicensed person from recovering compensation by suit, or at least manifests an intent to prohibit and render unlawful the transaction of business by an unlicensed person."

WHERE BOTH PARTIES ARE EQUALLY AT FAULT, NEITHER ONE COULD HAVE RECOURSE AGAINST THE OTHER

ABACUS SECURITIES CORPORATION vs. AMPILG.R. No. 16001627 February 2006

Facts:Abacus is engaged in business as a broker and dealer of securities of listed companies at the Philippine Stock Exchange Center.On April 8, 1997, Ampil opened a cash account with Abacus for his transactions in securities;Ampil’s purchases were consistently unpaid from April 10 to 30, 1997; Ampil failed to pay in full, or even just his deficiency, for the transactions on April 10 and 11, 1997; Despite Ampil’s failure to cover his initial deficiency, Abacus subsequently purchased and sold securities for Ampil’s account on April 25 and 29;Abacus did not cancel or liquidate a substantial amount of Ampil’s stock transactions until May 6, 1997.


RTC RULING: RTC held that Abacus violated SECs 23 and 25 of the Revised Securities Act (RSA) and Rule 25-1 of the Rules Implementing the Act (RSA Rules) when it failed to: 1) require the Ampil to pay for his stock purchases within three or four days from trading; and 2) request from the appropriate authority an extension of time for the payment of Ampil’s cash purchases. RTC noted that despite Ampil’s non-payment within the required period, Abacus did not cancel the purchases of Ampil. Neither did it require him to deposit cash payments before it executed the buy and/or sell orders subsequent to the first unsettled transaction. According to the RTC, by allowing Ampil to trade his account actively without cash, Abacus effectively induced him to purchase securities thereby incurring excessive credits. RTC also found Ampil to be equally at fault, by incurring excessive credits and waiting to see how his investments turned out before deciding to invoke the RSA. Thus, the RTC concluded that Abacus and Ampil were in pari delicto and therefore without recourse against each other.CA RULING: CA upheld the lower court’s finding that the parties were in pari delicto. It castigated Abacus for allowing Ampil to keep on trading despite the latter’s failure to pay his outstanding obligations. It explained that “the reason [behind Abacus’s act] is elemental in its simplicity. And it is not exactly altruistic. Because whether [Ampil’s] trading transaction would result in a surplus or deficit, he would still be liable to pay Abacus its commission. [Abacus’s] cash register will keep on ringing to the sound of incoming money, no matter what happened to Ampil.” Hence, this Petition.

Issue: WON the pari delicto rule is applicable in the present case. Held: In Pari Delicto rule applies only to transactions entered into AFTER the initial trades made on April 10 and 11, 1997. Ratio:The provisions governing the above transactions are SECs 23 and 25 of the RSA and Rule 25-1 of the RSA Rules, which state as follows: SEC. 23. Margin Requirements. –

xxx(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer – (1) On any security other than an exempted security, in contravention of the rules and regulations which the Commission shall prescribe under subSEC (a) of this SEC;(2) Without collateral or on any collateral other than securities, except (i) to maintain a

credit initially extended in conformity with the rules and regulations of the Commission and (ii) in cases where the extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of evading or circumventing the provisions of subparagraph (1) of this subSEC.

xxx

SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent indirect violations of the margin requirements under SEC 23 hereof, the broker or dealer shall require the customer in nonmargin transactions to pay the price of the security purchased for his account within such period as the Commission may prescribe, which shall in no case exceed three trading days; otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond ten trading days following the last day for the customer to pay such purchase price, unless such sale cannot be effected within said period for justifiable reasons. The sale shall be without prejudice to the right of the broker or dealer to recover any deficiency from the customer. x x x.”

RSA RULE 25-1Purchases and Sales in Cash Account(a) Purchases by a customer in a cash account shall be paid in full within three (3) business days after the trade date.(b) If full payment is not received within the required time period, the broker or dealer shall cancel or otherwise liquidate the transaction, or the unsettled portion thereof, starting on the next business day but not beyond ten (10) business days following the last day for the customer to pay, unless such sale cannot be effected within said period for justifiable reasons.(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by the customer, prior to any subsequent purchase during the next ninety (90) days, the customer shall be required to deposit sufficient funds in the account to cover each purchase transaction prior to execution.x x x x x x x x x(f) Written application for an extension of the period of time required for payment under paragraph (a) be made by the broker or dealer to the Philippine Stock Exchange, in the case of a member of the Exchange, or to the Commission, in the case of a non-member of the Exchange. Applications for the extension must be based upon exceptional circumstances and must be filed and acted upon before the expiration of the original payment period or the expiration of any subsequent extension.”


SEC 23(b) above -- the alleged violation of Abacus which provides the basis for Ampil’s defense -- makes it unlawful for a broker to extend or maintain credit on any securities other than in conformity with the rules and regulations issued by Securities and Exchange Commission (SEC). SEC 25 lays down the rules to prevent indirect violations of SEC 23 by brokers or dealers. RSA Rule 25-1 prescribes in detail the regulations governing cash accounts. The margin requirements set out in the RSA are primarily intended to achieve a macroeconomic purpose -- the protection of the overall economy from excessive speculation in securities. Their recognized secondary purpose is to protect small investors. The law places the burden of compliance with margin requirements primarily upon the brokers and dealers. SECs 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,” clearly vest upon Abacus the obligation, not just the right, to cancel or otherwise liquidate a customer’s order, if payment is not received within three days from the date of purchase. Ampil is liable for the first, but not for the subsequent tradesNonetheless, these margin requirements are applicable only to transactions entered into by the present parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that Abacus can still collect from Ampil to the extent of the difference between the latter’s outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of the shares pursuant to the RSA Rules. Abacus’s right to collect is justified under the general law on obligations and contracts.The right to collect cannot be denied to Abacus as the initial transactions were entered pursuant to the instructions of Ampil. The obligation of Ampil for stock transactions made and entered into on April 10 and 11, 1997 remains outstanding. These transactions were valid and the obligations incurred by Ampil concerning his stock purchases on these dates subsist. At that time, there was no violation of the RSA yet. Abacus’s fault arose only when it failed to: 1) liquidate the transactions on the fourth day following the stock purchases, or on April 14 and 15, 1997; and 2) complete its liquidation no later than ten days thereafter, applying the proceeds thereof as payment for Ampil’s outstanding obligation. Elucidating further, since the buyer was not able to pay for the transactions that took place on April 10 and 11,, the broker was duty-bound to advance the payment to the settlement banks without prejudice to the right of the broker to collect later from the client.In securities trading, the brokers are essentially the counterparties to the stock transactions at

the Exchange. Since the principals of the broker are generally undisclosed, the broker is personally liable for the contracts thus made. Hence, Abacus had to advance the payments for Ampil’s trades. Brokers have a right to be reimbursed for sums advanced by them with the express or implied authorization of the principal (in this case, Ampil). In the present case, Abacus obviously failed to enforce the terms and conditions of its Agreement with Ampil, purportedly acting on the plea of Ampil to give him time to raise funds therefor. By failing to ensure Ampil’s payment of his first purchase transaction within the period prescribed by law, thereby allowing him to make subsequent purchases, Abacus effectively converted Ampil’s cash account into a credit account. However, extension or maintenance of credits on nonmargin transactions, are specifically prohibited under SEC 23(b). Thus, Abacus was remiss in its duty and cannot be said to have come to court with “clean hands” insofar as it intended to collect on transactions subsequent to the initial trades of April 10 and 11, 1997.Ampil is equally guilty for subsequent tradesOn the other hand, we find Ampil equally guilty in entering into the transactions in violation of the RSA and RSA Rules. We are not prepared to accept his self-serving assertions of being an “innocent victim” in all the transactions. Rather, he is an experienced and knowledgeable trader who is well versed in the securities market and who made his own investment decisions. We note that it was Ampil who repeatedly asked for some time to pay his obligations for his stock transactions. Abacus acceded to his requests. It is only when sued upon his indebtedness that Ampil raised as a defense the invalidity of the transactions due to alleged violations of the RSA. It was Ampil’s privilege to gamble or speculate, as he apparently did so by asking for extensions of time and refraining from giving orders to his broker to sell, in the hope that the prices would rise. Sustaining his argument now would amount to relieving him of the risk and consequences of his own speculation and saddling them on the Abacus after the result was known to be unfavorable. In the final analysis, both parties acted in violation of the law and did not come to court with clean hands with regard to transactions subsequent to the initial trades made on April 10 and 11, 1997. Thus, the peculiar facts of the present case bar the application of the pari delicto rule -- expressed in the maxims “Ex dolo malo non oritur action” and “In pari delicto potior est conditio defendentis” -- to all the transactions entered into by the parties. The pari delecto rule refuses legal remedy to


either party to an illegal agreement and leaves them where they were.In this case, the pari delicto rule applies only to transactions entered into AFTER the initial trades made on April 10 and 11, 1997.Since the INITIAL trades are valid and subsisting obligations, Ampil is liable for them. Dispositive: WHEREFORE, CA Decision and Resolution are MODIFIED. Ampil is ordered to pay Abacus the difference between the former’s outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of shares pursuant to the RSA Rules, with interest thereon at the legal rate until fully paid.

TENDER OFFER RULES APPLY TO INDIRECT ACQUISITION OF SHARES

CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE COMPANYG.R. 1718157 August 2007

Facts:Union Cement or “UCC” (publicly listed) has 2 principal SH (stockholders) – UCHC (non-listed) owning 60.51% and Cemco owning 17.03%.Majority of UCHC’s stocks were owned by BCI (21.31%) and ACC (29.69%). Cemco owned 9% of UCHC’s stocks. 5 July 2004: BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco all of the stocks of BCI and ACC in UCHC.8 July 2004: In PSE Circular for Brokers No. 3146-2004 it was stated that as a result of Cemco’s acquisition of BCI and ACC’s shares in UCHC, its total beneficial ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC.15 July 2004: As a consequence of this disclosure, the PSE, in a letter to the SEC inquired as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is not applicable to Cemco’s purchase of the majority of shares of UCC. 16 July 2004: Director Justina Callangan of the SEC’s Corporate Finance Department replied that it was the stance of the department that the tender offer rule was not applicable. However, the matter must still have to be confirmed by the SEC en banc.27 July 2004: In a subsequent letter, Director Callangan confirmed that the SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule.28 July 2004, feeling aggrieved by the transaction, respondent National Life Insurance

Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer. Cemco, however, refused. 5 August 2004: a Share Purchase Agreement was executed by ACC and BCI, as sellers, and Cemco, as buyer.19 August 2004: Respondent National Life filed a complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares. Cemco, UCC, UCHC, BCI and ACC (all impleaded) filed their comments: COMMON POINT: the tender offer rule applied only to a direct acquisition of the shares of the listed company and did not extend to an indirect acquisition arising from the purchase of the shares of a holding company of the listed firm.CEMCO: while the SEC can take cognizance of respondent’s complaint on the alleged violation by petitioner Cemco of the mandatory tender offer requirement under SEC 19 of Republic Act No. 8799, the same statute does not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of the parties since, under the same statute, the SEC’s authority is purely administrative. Having been vested with purely administrative authority, the SEC can only impose administrative sanctions such as the imposition of administrative fines, the suspension or revocation of registrations with the SEC, and the like. Nothing in the statute authorizes the SEC to issue orders granting affirmative reliefs. Since the SEC’s order commanding it to make a tender offer is an affirmative relief fixing the respective rights and obligations of parties, such order is void.In the absence of any specific grant of jurisdiction by Congress, the SEC cannot, by mere administrative regulation, confer on itself that jurisdiction.ALSO, the ruling on mandatory tender offer rule by the SEC and the Court of Appeals should not have retroactive effect or be made to apply to its purchase of the UCHC shares as it relied in good faith on the letter dated 27 July 2004 of the SEC which opined that the proposed acquisition of the UCHC shares was not covered by the mandatory offer rule.14 Feb 2005: SEC ruled in favor of the respondent – reversed and set aside its 27 July 2004 Resolution and directed petitioner Cemco to make a tender offer for UCC shares to respondent and other holders of UCC shares similar to the class held by UCHC in accordance


with SEC 9(E), Rule 19 of the Securities Regulation Code. The CA affirmed: It ruled that the SEC has jurisdiction to render the questioned decision and, in any event, Cemco was barred by estoppel from questioning the SEC’s jurisdiction. It, likewise, held that the tender offer requirement under the Securities Regulation Code and its Implementing Rules applies to Cemco’s purchase of UCHC stocks.

Issue/s & Held:WON the SEC has jurisdiction over respondent’s complaint and to require Cemco to make a tender offer for respondent’s UCC shares - YESWON the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through its purchase of the shares in UCHC, a non-listed company - YESWON the questioned ruling of the SEC can be applied retroactively to Cemco’s transaction which was consummated under the authority of the SEC’s prior resolution - YES

Ratio:

First Issue - JurisdictionSEC was acting pursuant to Rule 19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code, to wit: 13. Violation: If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be without prejudice to the imposition of other sanctions under the Code.The foregoing rule emanates from the SEC’s power and authority to regulate, investigate or supervise the activities of persons to ensure compliance with the Securities Regulation Code, more specifically the provision on mandatory tender offer under SEC 19 thereof.Another provision of the statute, which provides the basis of Rule 19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code, is SEC 5.1(n):The Commission shall have, among others, the following powers and functions:(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these lawsThe foregoing provision bestows upon the SEC the general adjudicative power which is implied from the express powers of the Commission or which is incidental to, or reasonably necessary

to carry out, the performance of the administrative duties entrusted to it.As a regulatory agency, it has the incidental power to conduct hearings and render decisions fixing the rights and obligations of the parties. In fact, to deprive the SEC of this power would render the agency inutile, because it would become powerless to regulate and implement the law.Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that petitioner had participated in all the proceedings before the SEC and had prayed for affirmative relief. In fact, petitioner defended the jurisdiction of the SEC in its Comment dated 15 September 2004. Petitioner did not question the jurisdiction of the SEC when it rendered an opinion favorable to it, such as the 27 July 2004 Resolution, where the SEC opined that the Cemco transaction was not covered by the mandatory tender offer rule.

Second Issue – applicability of the mandatory tender offer ruleTender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. A public company is defined as a corporation which is listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company.Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders.See text of Sec 19.1, SRC: “(a) Any person or group of persons acting in concert who intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in SEC 17 of this Code as the Commission may prescribe.


Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders.”Under existing SEC Rules, the 15% and 30% threshold acquisition of shares under the foregoing provision was increased to thirty-five percent (35%). It is further provided therein that mandatory tender offer is still applicable even if the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total outstanding equity securities of the public company.The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule. This interpretation given by the SEC and the Court of Appeals must be sustained.The rule in this jurisdiction is that the construction given to a statute by an administrative agency charged with the interpretation and application of that statute is entitled to great weight by the courts, unless such construction is clearly shown to be in sharp contrast with the governing law or statute.The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute.The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or "any type of acquisition." This is clear from the discussions of the Bicameral Conference Committee on the Securities Act of 2000, on 17 July 2000:SEN. S. OSMEÃ‘A. Eto ang mangyayari diyan, eh. Somebody controls 67% of the Company. Of course, he will pay a premium for the first 67%. Control yan, eh. Eh, kawawa yung mga maiiwan, ang 33% because the value of the stock market could go down, could go down after that, because there will be no more market. Wala nang gustong bumenta. Wala nang... I mean maraming gustong bumenta,

walang gustong bumili kung hindi yung majority owner. And they will not buy. They already have 67%. They already have control. And this protects the minority. And we have had a case in Cebu wherein Ayala A who already owned 40% of Ayala B made an offer for another 40% of Ayala B without offering the 20%. Kawawa naman yung nakahawak ngayon ng 20%. Ang baba ng share sa market. But we did not have a law protecting them at that time.CHAIRMAN ROCO. So what is it that you want to achieve?SEN. S. OSMEÃ‘A. That if a certain group achieves a certain amount of ownership in a corporation, yeah, he is obligated to buy anybody who wants to sell.CHAIRMAN ROCO. Pro-rata lang.REP. TEODORO. As long as it reaches 30, ayan na. Any type of acquisition just as long as it will result in 30... (p.50)... reaches 30, ayan na. Any type of acquisition just as long as it will result in 30, general tender, pro-rata.Petitioner counters that the legislator's reference to "any type of acquisition" during the deliberations on the Securities Regulation Code does not indicate that congress meant to include the "indirect" acquisition of shares of a public corporation to be covered by the tender offer rule. Petitioner also avers that it did not directly acquire the shares in UCC and the incidental benefit of having acquired the control of the said public company must not be taken against it.These arguments are not convincing. The legislative intent of SEC 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies.The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance, as a result of the transaction, it became an indirect owner of UCC. We are constrained, however, to construe ownership acquisition to mean both direct and indirect. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur.The bottomline of the law is to give the shareholder of the listed company the


opportunity to decide whether or not to sell in connection with a transfer of control.

Third Issue – retroactive application of SEC rulingThe action of the SEC on the PSE request for opinion on the Cemco transaction cannot be construed as passing merits or giving approval to the questioned transaction. The letter dated 27 July 2004 of the SEC was nothing but an approval of the draft letter prepared by Director Callanga. There was no public hearing where interested parties could have been heard. Hence, it was not issued upon a definite and concrete controversy affecting the legal relations of parties thereby making it a judgment conclusive on all the parties. Said letter was merely advisory.Jurisprudence has it that an advisory opinion of an agency may be stricken down if it deviates from the provision of the statute. Since the letter dated 27 July 2004 runs counter to the Securities Regulation Code, the same may be disregarded as what the SEC has done in its decision dated 14 February 2005.Moreover, the implementing rules and regulations of the Code are sufficient to inform and guide the parties on how to proceed with the mandatory tender offer.

XVII. INTELLECTUAL PROPERTY CODERA 8923 (1997), AS AMENDED BY RA 9150 (2001)

THE TRIPS AGREEMENT

17.1 Topics

International Agreements on Intellectual Property

a. Paris Convention (1883) – Protection of Industrial Property

b. Berne Convention (1896) – Protection of Literary and Artistic Works

c. Madrid Agreement (1891) – Repression of False or Deceptive Indications of Source of Goods

d. Madrid Agreement (1891) – International Registration of Marks

e. Hague Agreement (1925) – International Deposit of Industrial Designs

f. Nice Agreement (1957) – International Classification of Goods and Services for the Purposes of the Registration of Marks

g. Lisbon Agreement (1958) – Protection of Appellations of Origin and their International Registration

h. Rome Convention (1961) – Protection of Performers, Producers of Phonograms and Broadcasting Organizations

i. Locarno Agreement (1968) – International Classifications of Industrial Designs

j. Patent Cooperation Treaty (1970) – simultaneous filing of “international” patent application

k. Geneva Convention (1971) – Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms

l. Strasbourg Agreement (1971) – International Patent Application

m. Vienna Agreement (1973) – International Classification of the Figurative Elements of Marks

n. Brussels Convention (1974) – Distribution of Programme-Carrying Signals Transmitted by Satellite

o. Budapest Treaty (1977) – deposit of microorganisms for purposes of patent procedure

p. Nairobi Treaty (1981) – Protection of Olympic Symbol

q. Washington Treaty (1989) – Intellectual Property in Respect of Integrated Circuits

r. Protocol on Madrid Agreement (1989) – International Registration of Marks

s. Trademark Law Treaty (1994) – make registration systems

t. WIPO Copyright Treaty (1996) – computer program and databases,

u. WIPO Performances and Phonogram Treaty (1996)

The WTO and TRIPS Agreements

Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement - binding on all members of WTOa) National Treatment – each WTO member shall accord to the nationals of other members treatment no less favorable than that which it accords to its own nationals with regard to the protection of intellectual property (subject to certain exceptions provided in the Paris, Berne and Rome conventions and in the Treaty on Intellectual Property in respect of Integrated Circuits)b) Most-Favored Nation Treatment – with regard to the protection of intellectual property, any advantage, favor, privilege or immunity granted by a member to the nationals of any other country shall be accorded immediately and unconditionally to the nationals of all other members

17.2 Case


WTO Agreement not unconstitutional

TAÑADA vs. ANGARA272 SCRA 181997

Facts:After WWII, the GATT (General Agreement on Tariffs and Trade) was born. Later, the WTO (World Trade Organization) was constituted to be the treaty’s administering body.The WTO was signed in Morocco by its founding members, one of which was the Philippines. The President of the Philippines (Ramos) ratified the WTO. The Senate concurred in this ratification.The senate ratification is the subject of this petition for certiorari, mandamus, and prohibition, which questions the constitutionality of the WTO.The WTO “Final Act” signed by the Philippines includes various agreements and associated legal instruments, among which is the TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights)The petition questions the constitutionality of certain provisions in the WTO Agreement. Among those questioned are provisions of the TRIPS on evidence

Issue: WON certain provisions of the Agreement impair the exercise of judicial power by this Honorable Court in promulgating the rules of evidence.Held: NoRatio:Petitioners aver that paragraph 1, Article 34 of the General Provisions and Basic Principles of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) intrudes on the power of the Supreme Court to promulgate rules concerning pleading, practice and procedures.Article 34 Process Patents: Burden of Proof1. For the purposes of civil proceedings in respect of the infringement of the rights of the owner referred to in paragraph 1(b) of Article 28, if the subject matter of a patent is a process for obtaining a product, the judicial authorities shall have the authority to order the defendant to prove that the process to obtain an identical product is different from the patented process. Therefore, Members shall provide, in at least one of the following circumstances, that any identical product when produced without the consent of the patent owner shall, in the absence of proof to the contrary, be deemed to have been obtained by the patented process:(a) if the product obtained by the patented process is new;

(b) if there is a substantial likelihood that the identical product was made by the process and the owner of the patent has been unable through reasonable efforts to determine the process actually used.2. Any Member shall be free to provide that the burden of proof indicated in paragraph 1 shall be on the alleged infringer only if the condition referred to in subparagraph (a) is fulfilled or only if the condition referred to in subparagraph (b) is fulfilled.3. In the adduction of proof to the contrary, the legitimate interests of defendants in protecting their manufacturing and business secrets shall be taken into account.From the above, a WTO Member is required to provide a rule of disputable (note the words “in the absence of proof to the contrary”) presumption that a product shown to be identical to one produced with the use of a patented process shall be deemed to have been obtained by the (illegal) use of the said patented process, (1) where such product obtained by the patented product is new, or (2) where there is “substantial likelihood” that the identical product was made with the use of the said patented process but the owner of the patent could not determine the exact process used in obtaining such identical product. Hence, the “burden of proof” contemplated by Article 34 should actually be understood as the duty of the alleged patent infringer to overthrow such presumption. Such burden, properly understood, actually refers to the “burden of evidence” (burden of going forward) placed on the producer of the identical (or fake) product to show that his product was produced without the use of the patented process. The foregoing notwithstanding, the patent owner still has the “burden of proof” since, regardless of the presumption provided under paragraph 1 of Article 34, such owner still has to introduce evidence of the existence of the alleged identical product, the fact that it is “identical” to the genuine one produced by the patented process and the fact of “newness” of the genuine product or the fact of “substantial likelihood” that the identical product was made by the patented process.The foregoing should really present no problem in changing the rules of evidence as the present law on the subject, Republic Act No. 165, as amended, otherwise known as the Patent Law, provides a similar presumption in cases of infringement of patented design or utility model, thus:SEC. 60. Infringement. - Infringement of a design patent or of a patent for utility model shall consist in unauthorized copying of the patented design or utility model for the purpose of trade or industry in the article or product and in the making, using or selling of the article or


product copying the patented design or utility model. Identity or substantial identity with the patented design or utility model shall constitute evidence of copying. Moreover, it should be noted that the requirement of Article 34 to provide a disputable presumption applies only if (1) the product obtained by the patented process is NEW or (2) there is a substantial likelihood that the identical product was made by the process and the process owner has not been able through reasonable effort to determine the process used. Where either of these two provisos does not obtain, members shall be free to determine the appropriate method of implementing the provisions of TRIPS within their own internal systems and processes.Suffice it to say that the reciprocity clause more than justifies such intrusion, if any actually exists. Besides, Article 34 does not contain an unreasonable burden, consistent as it is with due process and the concept of adversarial dispute settlement inherent in our judicial system.So too, since the Philippine is a signatory to most international conventions on patents, trademarks and copyrights, the adjustment in legislation and rules of procedure will not be substantial.

INTELLECTUAL PROPERTY OFFICE17.3 Topics

Structure and Functions

SEC 5. Functions of the Intellectual Property Office (IPO). - 5.1. To administer and implement the State policies declared in this Act, there is hereby created the Intellectual Property Office (IPO) which shall have the following functions:a) Examine applications for grant of letters patent for inventions and register utility models and industrial designs;b) Examine applications for the registration of marks, geographic indication, integrated circuits;c) Register technology transfer arrangements and settle disputes involving technology transfer payments covered by the provisions of Part II, Chapter IX on Voluntary Licensing and develop and implement strategies to promote and facilitate technology transfer;d) Promote the use of patent information as a tool for technology development;e) Publish regularly in its own publication the patents, marks, utility models and industrial designs, issued and approved, and the technology transfer arrangements registered;f) Administratively adjudicate contested proceedings affecting intellectual property rights; and

g) Coordinate with other government agencies and the private sector efforts to formulate and implement plans and policies to strengthen the protection of intellectual property rights in the country.5.2. The Office shall have custody of all records, books, drawings, specifications, documents, and other papers and things relating to intellectual property rights applications filed with the Office. (n)SEC 6. The Organizational Structure of the IPO. - 6.1. The Office shall be headed by a Director General who shall be assisted by two (2) Deputies Director General.6.2. The Office shall be divided into six (6) Bureaus, each of which shall be headed by a Director and assisted by an Assistant Director. These Bureaus are:a) The Bureau of Patents;b) The Bureau of Trademarks;c) The Bureau of Legal Affairs;d) The Documentation, Information and Technology Transfer Bureau;e) The Management Information System and EDP Bureau; andf) The Administrative, Financial and Personnel Services Bureau.6.3. The Director General, Deputies Director General, Directors and Assistant Directors shall be appointed by the President, and the other officers and employees of the Office by the Secretary of Trade and Industry, conformably with and under the Civil Service Law. (n)SEC 7. The Director General and Deputies Director General. - 7.1. Functions. - The Director General shall exercise the following powers and functions:a) Manage and direct all functions and activities of the Office, including the promulgation of rules and regulations to implement the objectives, policies, plans, programs and projects of the Office: Provided, That in the exercise of the authority to propose policies and standards in relation to the following: (1) the effective, efficient, and economical operations of the Office requiring statutory enactment; (2) coordination with other agencies of government in relation to the enforcement of intellectual property rights; (3) the recognition of attorneys, agents, or other persons representing applicants or other parties before the Office; and (4) the establishment of fees for the filing and processing of an application for a patent, utility model or industrial design or mark or a collective mark, geographic indication and other marks of ownership, and for all other services performed and materials furnished by the Office, the Director General shall be subject to the supervision of the Secretary of Trade and Industry;b) Exercise exclusive appellate jurisdiction over all decisions rendered by the Director of Legal


Affairs, the Director of Patents, the Director of Trademarks, and the Director of the Documentation, Information and Technology Transfer Bureau. The decisions of the Director General in the exercise of his appellate jurisdiction in respect of the decisions of the Director of Patents, and the Director of Trademarks shall be appealable to the Court of Appeals in accordance with the Rules of Court; and those in respect of the decisions of the Director of Documentation, Information and Technology Transfer Bureau shall be appealable to the Secretary of Trade and Industry; andc) Exercise original jurisdiction to resolve disputes relating to the terms of a license involving the author's right to public performance or other communication of his work. The decisions of the Director General in these cases shall be appealable to the Secretary of Trade and Industry.7.2. Qualifications. - The Director General and the Deputies Director General must be natural born citizens of the Philippines, at least thirty-five (35) years of age on the day of their appointment, holders of a college degree, and of proven competence, integrity, probity and independence: Provided, That the Director General and at least one (1) Deputy Director General shall be members of the Philippine Bar who have engaged in the practice of law for at least ten (10) years: Provided further, That in the selection of the Director General and the Deputies Director General, consideration shall be given to such qualifications as would result, as far as practicable, in the balanced representation in the Directorate General of the various fields of intellectual property.7.3. Term of Office. - The Director General and the Deputies Director General shall be appointed by the President for a term of five (5) years and shall be eligible for reappointment only once: Provided, That the first Director General shall have a first term of seven (7) years. Appointment to any vacancy shall be only for the unexpired term of the predecessor.7.4. The Office of the Director General. - The Office of the Director General shall consist of the Director General and the Deputies Director General, their immediate staff and such Offices and Services that the Director General will set up to support directly the Office of the Director General. (n)SEC 8. The Bureau of Patents. - The Bureau of Patents shall have the following functions:8.1. Search and examination of patent applications and the grant of patents;8.2. Registration of utility models, industrial designs, and integrated circuits; and8.3. Conduct studies and researches in the field of patents in order to assist the Director General in formulating policies on the administration and examination of patents. (n)

SEC 9. The Bureau of Trademarks. - The Bureau of Trademarks shall have the following functions:9.1. Search and examination of the applications for the registration of marks, geographic indications and other marks of ownership and the issuance of the certificates of registration; and9.2. Conduct studies and researches in the field of trademarks in order to assist the Director General in formulating policies on the administration and examination of trademarks. (n)SEC 10. The Bureau of Legal Affairs. - The Bureau of Legal Affairs shall have the following functions:10.1. Hear and decide opposition to the application for registration of marks; cancellation of trademarks; subject to the provisions of SEC 64, cancellation of patents, utility models, and industrial designs; and petitions for compulsory licensing of patents;10.2. (a) Exercise original jurisdiction in administrative complaints for violations of laws involving intellectual property rights: Provided, That its jurisdiction is limited to complaints where the total damages claimed are not less than Two hundred thousand pesos (P200,000): Provided further, That availment of the provisional remedies may be granted in accordance with the Rules of Court. The Director of Legal Affairs shall have the power to hold and punish for contempt all those who disregard orders or writs issued in the course of the proceedings. (n)(b) After formal investigation, the Director for Legal Affairs may impose one (1) or more of the following administrative penalties:(i) The issuance of a cease and desist order which shall specify the acts that the respondent shall cease and desist from and shall require him to submit a compliance report within a reasonable time which shall be fixed in the order;(ii) The acceptance of a voluntary assurance of compliance or discontinuance as may be imposed. Such voluntary assurance may include one or more of the following:(1) An assurance to comply with the provisions of the intellectual property law violated;(2) An assurance to refrain from engaging in unlawful and unfair acts and practices subject of the formal investigation;(3) An assurance to recall, replace, repair, or refund the money value of defective goods distributed in commerce; and(4) An assurance to reimburse the complainant the expenses and costs incurred in prosecuting the case in the Bureau of Legal Affairs.The Director of Legal Affairs may also require the respondent to submit periodic compliance


reports and file a bond to guarantee compliance of his undertaking;(iii) The condemnation or seizure of products which are subject of the offense. The goods seized hereunder shall be disposed of in such manner as may be deemed appropriate by the Director of Legal Affairs, such as by sale, donation to distressed local governments or to charitable or relief institutions, exportation, recycling into other goods, or any combination thereof, under such guidelines as he may provide;(iv) The forfeiture of paraphernalia and all real and personal properties which have been used in the commission of the offense;(v) The imposition of administrative fines in such amount as deemed reasonable by the Director of Legal Affairs, which shall in no case be less than Five thousand pesos (P5,000) nor more than One hundred fifty thousand pesos (P150,000). In addition, an additional fine of not more than One thousand pesos (P1,000) shall be imposed for each day of continuing violation;(vi) The cancellation of any permit, license, authority, or registration which may have been granted by the Office, or the suspension of the validity thereof for such period of time as the Director of Legal Affairs may deem reasonable which shall not exceed one (1) year;(vii) The withholding of any permit, license, authority, or registration which is being secured by the respondent from the Office;(viii) The assessment of damages;(ix) Censure; and(x) Other analogous penalties or sanctions. (Secs. 6, 7, 8, and 9, Executive Order No. 913 [1983]a)10.3. The Director General may by Regulations establish the procedure to govern the implementation of this SEC. (n)SEC 11. The Documentation, Information and Technology Transfer Bureau. - The Documentation, Information and Technology Transfer Bureau shall have the following functions:11.1. Support the search and examination activities of the Office through the following activities:(a) Maintain and upkeep classification systems whether they be national or international such as the International Patent Classification (IPC) system;(b) Provide advisory services for the determination of search patterns;(c) Maintain search files and search rooms and reference libraries; and(d) Adapt and package industrial property information.11.2. Establish networks or intermediaries or regional representatives;11.3. Educate the public and build awareness on intellectual property through the conduct of

seminars and lectures, and other similar activities;11.4. Establish working relations with research and development institutions as well as with local and international intellectual property professional groups and the like;11.5. Perform state-of-the-art searches;11.6. Promote the use of patent information as an effective tool to facilitate the development of technology in the country;11.7. Provide technical, advisory, and other services relating to the licensing and promotion of technology, and carry out an efficient and effective program for technology transfer; and11.8. Register technology transfer arrangements, and settle disputes involving technology transfer payments. (n) SEC 12. The Management Information Services and EDP Bureau. - The Management Information Services and EDP Bureau shall:12.1. Conduct automation planning, research and development, testing of systems, contracts with firms, contracting, purchase and maintenance of equipment, design and maintenance of systems, user consultation, and the like; and12.2. Provide management information support and service to the Office. (n)SEC 13. The Administrative, Financial and Human Resource Development Service Bureau. - 13.1. The Administrative Service shall: (a) Provide services relative to procurement and allocation of supplies and equipment, transportation, messengerial work, cashiering, payment of salaries and other Office's obligations, office maintenance, proper safety and security, and other utility services; and comply with government regulatory requirements in the areas of performance appraisal, compensation and benefits, employment records and reports;(b) Receive all applications filed with the Office and collect fees therefor, and(c) Publish patent applications and grants, trademark applications, and registration of marks, industrial designs, utility models, geographic indication, and lay-out-designs of integrated circuits registrations.13.2. The Patent and Trademark Administration Services shall perform the following functions among others:(a) Maintain registers of assignments, mergings, licenses, and bibliographic on patents and trademarks;(b) Collect maintenance fees, issue certified copies of documents in its custody and perform similar other activities; and(c) Hold in custody all the applications filed with the office, and all patent grants, certificate of registrations issued by the office, and the like.13.3. The Financial Service shall formulate and manage a financial program to ensure


availability and proper utilization of funds; provide for an effective monitoring system of the financial operations of the Office; and13.4. The Human Resource Development Service shall design and implement human resource development plans and programs for the personnel of the Office; provide for present and future manpower needs of the organization; maintain high morale and favorable employee attitudes towards the organization through the continuing design and implementation of employee development programs. (n)SEC 14. Use of Intellectual Property Rights Fees by the IPO. - 14.1. For a more effective and expeditious implementation of this Act, the Director General shall be authorized to retain, without need of a separate approval from any government agency, and subject only to the existing accounting and auditing rules and regulations, all the fees, fines, royalties and other charges, collected by the Office under this Act and the other laws that the Office will be mandated to administer, for use in its operations, like upgrading of its facilities, equipment outlay, human resource development, and the acquisition of the appropriate office space, among others, to improve the delivery of its services to the public. This amount, which shall be in addition to the Office's annual budget, shall be deposited and maintained in a separate account or fund, which may be used or disbursed directly by the Director General.14.2. After five (5) years from the coming into force of this Act, the Director General shall, subject to the approval of the Secretary of Trade and Industry, determine if the fees and charges mentioned in SubSEC 14.1 hereof that the Office shall collect are sufficient to meet its budgetary requirements. If so, it shall retain all the fees and charges it shall collect under the same conditions indicated in said SubSEC 14.1 but shall forthwith, cease to receive any funds from the annual budget of the National Government; if not, the provisions of said SubSEC 14.1 shall continue to apply until such time when the Director General, subject to the approval of the Secretary of Trade and Industry, certifies that the above-stated fees and charges the Office shall collect are enough to fund its operations. (n)SEC 15. Special Technical and Scientific Assistance. - The Director General is empowered to obtain the assistance of technical, scientific or other qualified officers and employees of other departments, bureaus, offices, agencies and instrumentalities of the Government, including corporations owned, controlled or operated by the Government, when deemed necessary in the consideration of any matter submitted to the Office relative to

the enforcement of the provisions of this Act. (Sec. 3, R.A. No. 165a)SEC 16. Seal of Office. - The Office shall have a seal, the form and design of which shall be approved by the Director General. (Sec. 4, R.A. No. 165a)SEC 17. Publication of Laws and Regulations. - The Director General shall cause to be printed and make available for distribution, pamphlet copies of this Act, other pertinent laws, executive orders and information circulars relating to matters within the jurisdiction of the Office. (Sec. 5, R.A. No. 165a)SEC 18. The IPO Gazette. - All matters required to be published under this Act shall be published in the Office's own publication to be known as the IPO Gazette. (n)SEC 19. Disqualification of Officers and Employees of the Office. - All officers and employees of the Office shall not apply or act as an attorney or patent agent of an application for a grant of patent, for the registration of a utility model, industrial design or mark nor acquire, except by hereditary succession, any patent or utility model, design registration, or mark or any right, title or interest therein during their employment and for one (1) year thereafter. (Sec. 77, R.A. No. 165a)

Jurisdiction over IP disputes and AppealsSEC 7. The Director General and Deputies Director General. - 7.1. Functions. - The Director General shall exercise the following powers and functions:b) Exercise exclusive appellate jurisdiction over all decisions rendered by the Director of Legal Affairs, the Director of Patents, the Director of Trademarks, and the Director of the Documentation, Information and Technology Transfer Bureau. The decisions of the Director General in the exercise of his appellate jurisdiction in respect of the decisions of the Director of Patents, and the Director of Trademarks shall be appealable to the Court of Appeals in accordance with the Rules of Court; and those in respect of the decisions of the Director of Documentation, Information and Technology Transfer Bureau shall be appealable to the Secretary of Trade and Industry; andc) Exercise original jurisdiction to resolve disputes relating to the terms of a license involving the author's right to public performance or other communication of his work. The decisions of the Director General in these cases shall be appealable to the Secretary of Trade and Industry.

SEC 10. The Bureau of Legal Affairs. - The Bureau of Legal Affairs shall have the following functions:10.1. Hear and decide opposition to the application for registration of marks;


cancellation of trademarks; subject to the provisions of SEC 64, cancellation of patents, utility models, and industrial designs; and petitions for compulsory licensing of patents;10.2. (a) Exercise original jurisdiction in administrative complaints for violations of laws involving intellectual property rights: Provided, That its jurisdiction is limited to complaints where the total damages claimed are not less than Two hundred thousand pesos (P200,000): Provided further, That availment of the provisional remedies may be granted in accordance with the Rules of Court. The Director of Legal Affairs shall have the power to hold and punish for contempt all those who disregard orders or writs issued in the course of the proceedings. (n)(b) After formal investigation, the Director for Legal Affairs may impose one (1) or more of the following administrative penalties:(i) The issuance of a cease and desist order which shall specify the acts that the respondent shall cease and desist from and shall require him to submit a compliance report within a reasonable time which shall be fixed in the order;(ii) The acceptance of a voluntary assurance of compliance or discontinuance as may be imposed. Such voluntary assurance may include one or more of the following:(1) An assurance to comply with the provisions of the intellectual property law violated;(2) An assurance to refrain from engaging in unlawful and unfair acts and practices subject of the formal investigation;(3) An assurance to recall, replace, repair, or refund the money value of defective goods distributed in commerce; and(4) An assurance to reimburse the complainant the expenses and costs incurred in prosecuting the case in the Bureau of Legal Affairs.The Director of Legal Affairs may also require the respondent to submit periodic compliance reports and file a bond to guarantee compliance of his undertaking;(iii) The condemnation or seizure of products which are subject of the offense. The goods seized hereunder shall be disposed of in such manner as may be deemed appropriate by the Director of Legal Affairs, such as by sale, donation to distressed local governments or to charitable or relief institutions, exportation, recycling into other goods, or any combination thereof, under such guidelines as he may provide;(iv) The forfeiture of paraphernalia and all real and personal properties which have been used in the commission of the offense;(v) The imposition of administrative fines in such amount as deemed reasonable by the Director of Legal Affairs, which shall in no case be less than Five thousand pesos (P5,000) nor

more than One hundred fifty thousand pesos (P150,000). In addition, an additional fine of not more than One thousand pesos (P1,000) shall be imposed for each day of continuing violation;(vi) The cancellation of any permit, license, authority, or registration which may have been granted by the Office, or the suspension of the validity thereof for such period of time as the Director of Legal Affairs may deem reasonable which shall not exceed one (1) year;(vii) The withholding of any permit, license, authority, or registration which is being secured by the respondent from the Office;(viii) The assessment of damages;(ix) Censure; and(x) Other analogous penalties or sanctions. (Secs. 6, 7, 8, and 9, Executive Order No. 913 [1983]a)10.3. The Director General may by Regulations establish the procedure to govern the implementation of this SEC. (n)SEC 11. The Documentation, Information and Technology Transfer Bureau. - The Documentation, Information and Technology Transfer Bureau shall have the following functions:11.1. Support the search and examination activities of the Office through the following activities:(a) Maintain and upkeep classification systems whether they be national or international such as the International Patent Classification (IPC) system;(b) Provide advisory services for the determination of search patterns;(c) Maintain search files and search rooms and reference libraries; and(d) Adapt and package industrial property information.11.2. Establish networks or intermediaries or regional representatives;11.3. Educate the public and build awareness on intellectual property through the conduct of seminars and lectures, and other similar activities;11.4. Establish working relations with research and development institutions as well as with local and international intellectual property professional groups and the like;11.5. Perform state-of-the-art searches;11.6. Promote the use of patent information as an effective tool to facilitate the development of technology in the country;11.7. Provide technical, advisory, and other services relating to the licensing and promotion of technology, and carry out an efficient and effective program for technology transfer; and11.8. Register technology transfer arrangements, and settle disputes involving technology transfer payments. (n)

Administrative Penalties


SEC 10.2 (b) After formal investigation, the Director for Legal Affairs may impose one (1) or more of the following administrative penalties:(i) The issuance of a cease and desist order which shall specify the acts that the respondent shall cease and desist from and shall require him to submit a compliance report within a reasonable time which shall be fixed in the order;(ii) The acceptance of a voluntary assurance of compliance or discontinuance as may be imposed. Such voluntary assurance may include one or more of the following:(1) An assurance to comply with the provisions of the intellectual property law violated;(2) An assurance to refrain from engaging in unlawful and unfair acts and practices subject of the formal investigation;(3) An assurance to recall, replace, repair, or refund the money value of defective goods distributed in commerce; and(4) An assurance to reimburse the complainant the expenses and costs incurred in prosecuting the case in the Bureau of Legal Affairs.The Director of Legal Affairs may also require the respondent to submit periodic compliance reports and file a bond to guarantee compliance of his undertaking;(iii) The condemnation or seizure of products which are subject of the offense. The goods seized hereunder shall be disposed of in such manner as may be deemed appropriate by the Director of Legal Affairs, such as by sale, donation to distressed local governments or to charitable or relief institutions, exportation, recycling into other goods, or any combination thereof, under such guidelines as he may provide;(iv) The forfeiture of paraphernalia and all real and personal properties which have been used in the commission of the offense;(v) The imposition of administrative fines in such amount as deemed reasonable by the Director of Legal Affairs, which shall in no case be less than Five thousand pesos (P5,000) nor more than One hundred fifty thousand pesos (P150,000). In addition, an additional fine of not more than One thousand pesos (P1,000) shall be imposed for each day of continuing violation;(vi) The cancellation of any permit, license, authority, or registration which may have been granted by the Office, or the suspension of the validity thereof for such period of time as the Director of Legal Affairs may deem reasonable which shall not exceed one (1) year;(vii) The withholding of any permit, license, authority, or registration which is being secured by the respondent from the Office;(viii) The assessment of damages;(ix) Censure; and

(x) Other analogous penalties or sanctions. (Secs. 6, 7, 8, and 9, Executive Order No. 913 [1983]a)

Prescriptive Period of Actions for Damages

SEC 79. Limitation of Action for Damages. - No damages can be recovered for acts of infringement committed more than four (4) years before the institution of the action for infringement.

SEC 226. Damages. - No damages may be recovered under this Act after four (4) years from the time the cause of action arose.

INTELLECTUAL PROPERTY RIGHTS IN GENERAL

PATENTS

17.5 Topics

Patentable Inventions

SEC 21. Patentable Inventions. - Any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable shall be Patentable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing. (Sec. 7, R.A. No. 165a)

Novelty

SEC 23. Novelty. . - An invention shall not be considered new if it forms part of a prior art. (Sec. 9, R.A. No. 165a)

Prior Art

SEC 24. Prior Art. - Prior art shall consist of:24.1. Everything which has been made available to the public anywhere in the world, before the filing date or the priority date of the application claiming the invention; and24.2. The whole contents of an application for a patent, utility model, or industrial design registration, published in accordance with this Act, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application: Provided, That the application which has validly claimed the filing date of an earlier application under SEC 31 of this Act, shall be prior art with effect as of the filing date of such earlier application: Provided further, That the applicant or the inventor identified in both applications


are not one and the same. (Sec. 9, R.A. No. 165a)

Inventive Step or Non-Obviousness

SEC 26. Inventive Step. - An invention involves an inventive step if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. (n)

Industrial Applicability

SEC 27. Industrial Applicability. - An invention that can be produced and used in any industry shall be industrially applicable. (n)

Non-Patentable Inventions

SEC 22. Non-Patentable Inventions. - The following shall be excluded from patent protection:[DMTPAP]22.1. Discoveries, scientific theories and mathematical methods;22.2. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers;22.3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods;22.4. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes.Provisions under this subSEC shall not preclude Congress to consider the enactment of a law providing sui generis protection of plant varieties and animal breeds and a system of community intellectual rights protection:22.5. Aesthetic creations; and22.6. Anything which is contrary to public order or morality. (Sec. 8, R.A. No. 165a)

Right to a Patent[IHA]

SEC 28. Right to a Patent. - The right to a patent belongs to the inventor, his heirs, or assigns. When two (2) or more persons have jointly made an invention, the right to a patent shall belong to them jointly. (Sec. 10, R.A. No. 165a)

First-to-File Rule

SEC 29. First to File Rule. - If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant who has the earliest filing date or, the earliest priority date. (3rd sentence, Sec. 10, R.A. No. 165a.)

Right of Priority[CTS]

SEC 31. Right of Priority. . - An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application: Provided, That: (a) the local application expressly claims priority; (b) it is filed within twelve (12) months from the date the earliest foreign application was filed; and (c) a certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. (Sec. 15, R.A. No. 165a)

Contents of Application[RRDCA]

SEC 33. Appointment of Agent or Representative. - An applicant who is not a resident of the Philippines must appoint and maintain a resident agent or representative in the Philippines upon whom notice or process for judicial or administrative procedure relating to the application for patent or the patent may be served. (Sec. 11, R.A. No. 165a)SEC 34. The Request. - The request shall contain a petition for the grant of the patent, the name and other data of the applicant, the inventor and the agent and the title of the invention. (n) [PNT]SEC 35. Disclosure and Description of the Invention. - 35.1. Disclosure. - The application shall disclose the invention in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art. Where the application concerns a microbiological process or the product thereof and involves the use of a micro-organism which cannot be sufficiently disclosed in the application in such a way as to enable the invention to be carried out by a person skilled in the art, and such material is not available to the public, the application shall be supplemented by a deposit of such material with an international depository institution. [SCC-PSA-MDM]35.2. Description. - The Regulations shall prescribe the contents of the description and


the order of presentation. (Sec. 14, R.A. No. 165a)SEC 36. The Claims. - 36.1. The application shall contain one (1) or more claims which shall define the matter for which protection is sought. Each claim shall be clear and concise, and shall be supported by the description. [ODCC]36.2. The Regulations shall prescribe the manner of the presentation of claims. (n)SEC 37. The Abstract. - The abstract shall consist of a concise summary of the disclosure of the invention as contained in the description, claims and drawings in preferably not more than one hundred fifty (150) words. It must be drafted in a way which allows the clear understanding of the technical problem, the gist of the solution of that problem through the invention, and the principal use or uses of the invention. The abstract shall merely serve for technical information. (n) [CCD]

Procedure of Grant of Patent

SEC 40. Filing Date Requirements. - 40.1. The filing date of a patent application shall be the date of receipt by the Office of at least the following elements: [EID](a) An express or implicit indication that a Philippine patent is sought;(b) Information identifying the applicant; and(c) Description of the invention and one (1) or more claims in Filipino or English.40.2. If any of these elements is not submitted within the period set by the Regulations, the application shall be considered withdrawn. (n)

SEC 41. According a Filing Date. - The Office shall examine whether the patent application satisfies the requirements for the grant of date of filing as provided in SEC 40 hereof. If the date of filing cannot be accorded, the applicant shall be given an opportunity to correct the deficiencies in accordance with the implementing Regulations. If the application does not contain all the elements indicated in SEC 40, the filing date should be that date when all the elements are received. If the deficiencies are not remedied within the prescribed time limit, the application shall be considered withdrawn. (n)

SEC 42. Formality Examination. - 42.1. After the patent application has been accorded a filing date and the required fees have been paid on time in accordance with the Regulations, the applicant shall comply with the formal requirements specified by SEC 32 and the Regulations within the prescribed period, otherwise the application shall be considered withdrawn.

42.2. The Regulations shall determine the procedure for the re-examination and revival of an application as well as the appeal to the Director of Patents from any final action by the examiner. (Sec. 16, R.A. No. 165a)

SEC 43. Classification and Search. - An application that has complied with the formal requirements shall be classified and a search conducted to determine the prior art. (n)

SEC 44. Publication of Patent Application. - 44.1. The patent application shall be published in the IPO Gazette together with a search document established by or on behalf of the Office citing any documents that reflect prior art, after the expiration of eighteen (18) months from the filing date or priority date.44.2. After publication of a patent application, any interested party may inspect the application documents filed with the Office.44.3. The Director General subject to the approval of the Secretary of Trade and Industry, may prohibit or restrict the publication of an application, if in his opinion, to do so would be prejudicial to the national security and interests of the Republic of the Philippines. (n)

SEC 45. Confidentiality Before Publication. - A patent application, which has not yet been published, and all related documents, shall not be made available for inspection without the consent of the applicant. (n)

SEC 46. Rights Conferred by a Patent Application After Publication. - The applicant shall have all the rights of a patentee under SEC 76 against any person who, without his authorization, exercised any of the rights conferred under SEC 71 of this Act in relation to the invention claimed in the published patent application, as if a patent had been granted for that invention: Provided, That the said person had: [AK-RWN]46.1. Actual knowledge that the invention that he was using was the subject matter of a published application; or46.2. Received written notice that the invention that he was using was the subject matter of a published application being identified in the said notice by its serial number: Provided, That the action may not be filed until after the grant of a patent on the published application and within four (4) years from the commission of the acts complained of. (n)

SEC 47. Observation by Third Parties. - Following the publication of the patent application, any person may present observations in writing concerning the patentability of the invention. Such observations shall be communicated to the


applicant who may comment on them. The Office shall acknowledge and put such observations and comment in the file of the application to which it relates. (n)

SEC 48. Request for Substantive Examination. - 48.1. The application shall be deemed withdrawn unless within six (6) months from the date of publication under SEC 41, a written request to determine whether a patent application meets the requirements of SECs 21 to 27 and SECs 32 to 39 and the fees have been paid on time.48.2. Withdrawal of the request for examination shall be irrevocable and shall not authorize the refund of any fee. (n)

SEC 49. Amendment of Application. - An applicant may amend the patent application during examination: Provided, That such amendment shall not include new matter outside the scope of the disclosure contained in the application as filed. (n)

SEC 50. Grant of Patent. - 50.1. If the application meets the requirements of this Act, the Office shall grant the patent: Provided, That all the fees are paid on time.50.2. If the required fees for grant and printing are not paid in due time, the application shall be deemed to be withdrawn. 50.3. A patent shall take effect on the date of the publication of the grant of the patent in the IPO Gazette. (Sec. 18, R.A. No. 165a)

SEC 51. Refusal of the Application. - 51.1. The final order of refusal of the examiner to grant the patent shall be appealable to the Director in accordance with this Act.51.2. The Regulations shall provide for the procedure by which an appeal from the order of refusal from the Director shall be undertaken. (n)

SEC 52. Publication Upon Grant of Patent. - 52.1. The grant of the patent together with other related information shall be published in the IPO Gazette within the time prescribed by the Regulations.52.2. Any interested party may inspect the complete description, claims, and drawings of the patent on file with the Office. (Sec. 18, R.A. No. 165a)

SEC 53. Contents of Patent. - The patent shall be issued in the name of the Republic of the Philippines under the seal of the Office and shall be signed by the Director, and registered together with the description, claims, and drawings, if any, in books and records of the Office. (Secs. 19 and 20, R.A. No. 165a)

SEC 54. Term of Patent. - The term of a patent shall be twenty (20) years from the filing date of the application. (Sec. 21, R.A. No. 165a)

SEC 55. Annual Fees. - 55.1. To maintain the patent application or patent, an annual fee shall be paid upon the expiration of four (4) years from the date the application was published pursuant to SEC 44 hereof, and on each subsequent anniversary of such date. Payment may be made within three (3) months before the due date. The obligation to pay the annual fees shall terminate should the application be withdrawn, refused, or cancelled.55.2. If the annual fee is not paid, the patent application shall be deemed withdrawn or the patent considered as lapsed from the day following the expiration of the period within which the annual fees were due. A notice that the application is deemed withdrawn or the lapse of a patent for non-payment of any annual fee shall be published in the IPO Gazette and the lapse shall be recorded in the Register of the Office.55.3. A grace period of six (6) months shall be granted for the payment of the annual fee, upon payment of the prescribed surcharge for delayed payment. (Sec. 22, R.A. No. 165a)

SEC 56. Surrender of Patent. - 56.1. The owner of the patent, with the consent of all persons having grants or licenses or other right, title or interest in and to the patent and the invention covered thereby, which have been recorded in the Office, may surrender his patent or any claim or claims forming part thereof to the Office for cancellation.56.2. A person may give notice to the Office of his opposition to the surrender of a patent under this SEC, and if he does so, the Bureau shall notify the proprietor of the patent and determine the question.56.3. If the Office is satisfied that the patent may properly be surrendered, he may accept the offer and, as from the day when notice of his acceptance is published in the IPO Gazette, the patent shall cease to have effect, but no action for infringement shall lie and no right compensation shall accrue for any use of the patented invention before that day for the services of the government. (Sec. 24, R.A. No. 165a)

SEC 57. Correction of Mistakes of the Office. - The Director shall have the power to correct, without fee, any mistake in a patent incurred through the fault of the Office when clearly disclosed in the records thereof, to make the patent conform to the records. (Sec. 25, R.A. No. 165)


SEC 58. Correction of Mistake in the Application. - On request of any interested person and payment of the prescribed fee, the Director is authorized to correct any mistake in a patent of a formal and clerical nature, not incurred through the fault of the Office. (Sec. 26, R.A. No. 165a)

SEC 59. Changes in Patents. - 59.1. The owner of a patent shall have the right to request the Bureau to make the changes in the patent in order to:(a) Limit the extent of the protection conferred by it;(b) Correct obvious mistakes or to correct clerical errors; and(c) Correct mistakes or errors, other than those referred to in letter (b), made in good faith: Provided, That where the change would result in a broadening of the extent of protection conferred by the patent, no request may be made after the expiration of two (2) years from the grant of a patent and the change shall not affect the rights of any third party which has relied on the patent, as published.59.2. No change in the patent shall be permitted under this SEC, where the change would result in the disclosure contained in the patent going beyond the disclosure contained in the application filed.59.3. If, and to the extent to which the Office changes the patent according to this SEC, it shall publish the same. (n)

SEC 60. Form and Publication of Amendment. - An amendment or correction of a patent shall be accomplished by a certificate of such amendment or correction, authenticated by the seal of the Office and signed by the Director, which certificate shall be attached to the patent. Notice of such amendment or correction shall be published in the IPO Gazette and copies of the patent kept or furnished by the Office shall include a copy of the certificate of amendment or correction. (Sec. 27, R.A. No. 165)

Rights Conferred by a Patent

SEC 71. Rights Conferred by Patent. - 71.1. A patent shall confer on its owner the following exclusive rights:[RPP-MUSI-MDUSOSI-ATL](a) Where the subject matter of a patent is a product, to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product;(b) Where the subject matter of a patent is a process, to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in,

using, selling or offering for sale, or importing any product obtained directly or indirectly from such process.71.2. Patent owners shall also have the right to assign, or transfer by succession the patent, and to conclude licensing contracts for the same. (Sec. 37, R.A. No. 165a)

Term

SEC 54. Term of Patent. - The term of a patent shall be twenty (20) years from the filing date of the application. (Sec. 21, R.A. No. 165a)

Cancellation of Patents

SEC 61. Cancellation of Patents. - 61.1. Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds:[NN-ND-CP](a) That what is claimed as the invention is not new or Patentable;(b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or(c) That the patent is contrary to public order or morality.61.2. Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only. (Secs. 28 and 29, R.A. No. 165a)

Remedies of True and Actual Inventor

SEC 68. Remedies of the True and Actual Inventor. - If a person, who was deprived of the patent without his consent or through fraud is declared by final court order or decision to be the true and actual inventor, the court shall order for his substitution as patentee, or at the option of the true inventor, cancel the patent, and award actual and other damages in his favor if warranted by the circumstances. (Sec. 33, R.A. No. 165a)

Limitations on the Rights of Patentees

SEC 72. Limitations of Patent Rights. - The owner of a patent has no right to prevent third parties from performing, without his authorization, the acts referred to in SEC 71 hereof in the following circumstances: [APEIS]72.1. Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after


that product has been so put on the said market;72.2. Where the act is done privately and on a non-commercial scale or for a non-commercial purpose: Provided, That it does not significantly prejudice the economic interests of the owner of the patent;72.3. Where the act consists of making or using exclusively for the purpose of experiments that relate to the subject matter of the patented invention;72.4. Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical prescription or acts concerning the medicine so prepared;72.5. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the Philippines temporarily or accidentally: Provided, That such invention is used exclusively for the needs of the ship, vessel, aircraft, or land vehicle and not used for the manufacturing of anything to be sold within the Philippines. (Secs. 38 and 39, R.A. No. 165a)

SEC 73. Prior User. - 73.1. Notwithstanding SEC 72 hereof, any prior user, who, in good faith was using the invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to continue the use thereof as envisaged in such preparations within the territory where the patent produces its effect.73.2. The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his enterprise or business in which the use or preparations for use have been made. (Sec. 40, R.A. No. 165a)

SEC 74. Use of Invention by Government. - 74.1. A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where:[PI-JAAC](a) The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; or(b) A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee is anti-competitive.74.2. The use by the Government, or third person authorized by the Government shall be subject, mutatis mutandis, to the conditions set forth in SECs 95 to 97 and 100 to 102. (Sec. 41, R.A. No. 165a)

Patent Infringement

SEC 76. Civil Action for Infringement. - 76.1. The making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee constitutes patent infringement. [MUOSIUWA]

Civil Action

SEC 76. Civil Action for Infringement. - 76.1. The making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee constitutes patent infringement.[DAIDC]76.2. Any patentee, or anyone possessing any right, title or interest in and to the patented invention, whose rights have been infringed, may bring a civil action before a court of competent jurisdiction, to recover from the infringer such damages sustained thereby, plus attorney's fees and other expenses of litigation, and to secure an injunction for the protection of his rights. 76.3. If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty.76.4. The court may, according to the circumstances of the case, award damages in a sum above the amount found as actual damages sustained: Provided, That the award does not exceed three (3) times the amount of such actual damages.76.5. The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce or destroyed, without compensation.76.6. Anyone who actively induces the infringement of a patent or provides the infringer with a component of a patented product or of a product produced because of a patented process knowing it to be especially adopted for infringing the patented invention and not suitable for substantial non-infringing use shall be liable as a contributory infringer and shall be jointly and severally liable with the infringer. (Sec. 42, R.A. No. 165a)

Defenses[FKI]

SEC 79. Limitation of Action for Damages. - No damages can be recovered for acts of


infringement committed more than four (4) years before the institution of the action for infringement. (Sec. 43, R.A. No. 165)SEC 80. Damages, Requirement of Notice. - Damages cannot be recovered for acts of infringement committed before the infringer had known, or had reasonable grounds to know of the patent. It is presumed that the infringer had known of the patent if on the patented product, or on the container or package in which the article is supplied to the public, or on the advertising material relating to the patented product or process, are placed the words "Philippine Patent" with the number of the patent. (Sec. 44, R.A. No. 165a)SEC 81. Defenses in Action for Infringement. - In an action for infringement, the defendant, in addition to other defenses available to him, may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition of cancellation can be brought under SEC 61 hereof. (Sec. 45, R.A. No. 165)

Burden of Proof in Infringement Process

SEC 78. Process Patents; Burden of Proof . - If the subject matter of a patent is a process for obtaining a product, any identical product shall be presumed to have been obtained through the use of the patented process if the product is new or there is substantial likelihood that the identical product was made by the process and the owner of the patent has been unable despite reasonable efforts, to determine the process actually used. In ordering the defendant to prove that the process to obtain the identical product is different from the patented process, the court shall adopt measures to protect, as far as practicable, his manufacturing and business secrets. (n)

Criminal ActionIMP – 6MOS-3 YRSFINE – 100K-300K3 YRS

SEC 84. Criminal Action for Repetition of Infringement. - If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders shall, without prejudice to the institution of a civil action for damages, be criminally liable therefor and, upon conviction, shall suffer imprisonment for the period of not less than six (6) months but not more than three (3) years and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court. The criminal action herein provided shall prescribe in three (3) years from date of

the commission of the crime. (Sec. 48, R.A. No. 165a)

Voluntary Licensing

Prohibited Clauses

SEC 87. Prohibited Clauses. - Except in cases under SEC 91, the following provisions shall be deemed prima facie to have an adverse effect on competition and trade:[SPVCP TREUP CRALE]87.1. Those which impose upon the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor;87.2. Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the products manufactured on the basis of the license;87.3. Those that contain restrictions regarding the volume and structure of production;87.4. Those that prohibit the use of competitive technologies in a non-exclusive technology transfer agreement;87.5. Those that establish a full or partial purchase option in favor of the licensor;87.6. Those that obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology;87.7. Those that require payment of royalties to the owners of patents for patents which are not used;87.8. Those that prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted;87.9. Those which restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee;87.10. Those which require payments for patents and other industrial property rights after their expiration, termination arrangement;87.11. Those which require that the technology recipient shall not contest the validity of any of the patents of the technology supplier;87.12. Those which restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment;


87.13. Those which prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor;87.14. Those which exempt the licensor for liability for non-fulfilment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology; and87.15. Other clauses with equivalent effects. (Sec. 33-C (2), R.A 165a)

Mandatory Provisions

SEC 88. Mandatory Provisions. - The following provisions shall be included in voluntary license contracts:[PCAT]88.1. That the laws of the Philippines shall govern the interpretation of the same and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office;88.2. Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement;88.3. In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; and88.4. The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor. (n)

Unenforceability of Non-Complying Technology Transfer Agreement

SEC 92. Non-Registration with the Documentation, Information and Technology Transfer Bureau. - Technology transfer arrangements that conform with the provisions of SECs 86 and 87 need not be registered with the Documentation, Information and Technology Transfer Bureau. Non-conformance with any of the provisions of SECs 87 and 88, however, shall automatically render the technology transfer arrangement unenforceable, unless said technology transfer arrangement is approved and registered with the Documentation, Information and Technology Transfer Bureau under the provisions of SEC 91 on exceptional cases. (n)

Compulsory Licensing

Ground for Grant of Compulsory LicenseSEC 93. Grounds for Compulsory Licensing. - The Director of Legal Affairs may grant a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention, under any of the following circumstances:[NPJPN]93.1. National emergency or other circumstances of extreme urgency;93.2. Where the public interest, in particular, national security, nutrition, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the Government, so requires; or93.3. Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive; or93.4. In case of public non-commercial use of the patent by the patentee, without satisfactory reason;93.5. If the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, without satisfactory reason: Provided, That the importation of the patented article shall constitute working or using the patent. (Secs. 34, 34-A, 34-B, R.A. No. 165a)

Terms and Conditions of Grant

SEC 100. Terms and Conditions of Compulsory License. - The basic terms and conditions including the rate of royalties of a compulsory license shall be fixed by the Director of Legal Affairs subject to the following conditions:[SNNPTP]100.1. The scope and duration of such license shall be limited to the purpose for which it was authorized;100.2. The license shall be non-exclusive;100.3. The license shall be non-assignable, except with that part of the enterprise or business with which the invention is being exploited;100.4. Use of the subject matter of the license shall be devoted predominantly for the supply of the Philippine market: Provided, That this limitation shall not apply where the grant of the license is based on the ground that the patentee's manner of exploiting the patent is determined by judicial or administrative process, to be anti-competitive.100.5. The license may be terminated upon proper showing that circumstances which led to its grant have ceased to exist and are unlikely to recur: Provided, That adequate protection


shall be afforded to the legitimate interest of the licensee; and100.6. The patentee shall be paid adequate remuneration taking into account the economic value of the grant or authorization, except that in cases where the license was granted to remedy a practice which was determined after judicial or administrative process, to be anti-competitive, the need to correct the anti-competitive practice may be taken into account in fixing the amount of remuneration. (Sec. 35-B, R.A. No. 165a)

Licensee’s Exemption from Liability

SEC 102. Licensee's Exemption from Liability. - Any person who works a patented product, substance and/or process under a license granted under this Chapter, shall be free from any liability for infringement: Provided however, That in the case of voluntary licensing, no collusion with the licensor is proven. This is without prejudice to the right of the rightful owner of the patent to recover from the licensor whatever he may have received as royalties under the license. (Sec. 35-E, R.A. No. 165a)

Assignment or Transfer of Patent

Form

SEC 105. Form of Assignment. - The assignment must be in writing, acknowledged before a notary public or other officer authorized to administer oath or perform notarial acts, and certified under the hand and official seal of the notary or such other officer. (Sec. 52, R.A. No. 165) [WAC]

Need for Recording to Bind Third Parties

SEC 106. Recording. - 106.1. The Office shall record assignments, licenses and other instruments relating to the transmission of any right, title or interest in and to inventions, and patents or application for patents or inventions to which they relate, which are presented in due form to the Office for registration, in books and records kept for the purpose. The original documents together with a signed duplicate thereof shall be filed, and the contents thereof should be kept confidential. If the original is not available, an authenticated copy thereof in duplicate may be filed. Upon recording, the Office shall retain the duplicate, return the original or the authenticated copy to the party who filed the same and notice of the recording shall be published in the IPO Gazette.106.2. Such instruments shall be void as against any subsequent purchaser or mortgagee for valuable consideration and

without notice, unless, it is so recorded in the Office, within three (3) months from the date of said instrument, or prior to the subsequent purchase or mortgage. (Sec. 53, R.A. No. 165a)

Utility Models

SEC 109. Special Provisions Relating to Utility Models. - 109.1. (a) An invention qualifies for registration as a utility model if it is new and industrially applicable.

Term

109.3. A utility model registration shall expire, without any possibility of renewal, at the end of the seventh year after the date of the filing of the application.

17.6 Cases

Test of Infringement

GODINES V CAFacts:The patent involved in this case is Letters Patent No. UM-2236 issued by the Philippine Patent Office to one Magdalena S. Villaruz on July 15, 1976. It covers a utility model for a hand tractor or power tiller. The above mentioned patent was acquired by SV-Agro Industries Enterprises, Inc., herein private respondent, from Magdalena Villaruz, its chairman and president, by virtue of a Deed of Assignment executed by the latter in its favor. On October 31, 1979. In 1979, SV-Agro Industries suffered a decline of more than 50% in sales in its Molave, Zamboanga del Sur branch. Upon investigation, it discovered that power tillers similar to those patented by private respondent were being manufactured and sold by petitioner herein. Consequently, private respondent notified Pascual Godines about the existing patent and demanded that the latter stop selling and manufacturing similar power tillers. Upon petitioner's failure to comply with the demand, SV-Agro Industries filed before the Regional Trial Court a complaint for infringement of patent and unfair competition.RTC: held Pascual Godines liable for infringement of patent and unfair competition. CA: decision was affirmed by the appellate court.

Issue: WON Petitioner is guilty of Patent Infringement. Held: YesRatio: We find no merit in his arguments. The question of whether petitioner was manufacturing and selling power tillers is a question of fact better


addressed to the lower courts. In dismissing the first argument of petitioner herein, the Court of Appeals quoted the findings of the court, to wit:It is the contention of defendant that he did not manufacture or make imitations or copies of plaintiff's turtle power tiller as what he merely did was to fabricate his floating power tiller upon specifications and designs of those who ordered them. However, this contention appears untenable in the light of the following circumstances: he admits in his Answer that he has been manufacturing power tillers or hand tractors, selling and distributing them long before plaintiff started selling its turtle power tiller in Zamboanga del Sur and Misamis Occidental, meaning that defendant is principally a manufacturer of power tillers, not upon specification and design of buyers, but upon his own specification and design; it would be unbelievable that defendant would fabricate power tillers similar to the turtle power tillers of plaintiff upon specifications of buyers without requiring a job order where the specification and designs of those ordered are specified. No document was (sic) ever been presented showing such job orders, and it is rather unusual for defendant to manufacture something without the specification and designs, considering that he is an engineer by profession and proprietor of the Ozamis Engineering shop. On the other hand, it is also highly unusual for buyers to order the fabrication of a power tiller or hand tractor and allow defendant to manufacture them merely based on their verbal instructions. This is contrary to the usual business and manufacturing practice. This is not only time consuming, but costly because it involves a trial and error method, repeat jobs and material wastage. Defendant judicially admitted two (2) units of the turtle power tiller sold by him to Policarpio Berondo.Tests used in the case: - Tests have been established to determine infringement. These are :LITERAL INFRINGEMENT: in using literal infringement as a test, ". . . resort must be had, in the first instance, to the words of the claim. If accused matter clearly falls within the claim, infringement is made out and that is the end of it." To determine whether the particular item falls within the literal meaning of the patent claims, the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exact identity of all material elements.

In appearance and form, both the floating power tillers of the defendant and the turtle power tiller of the plaintiff are virtually the same.Viewed from any perspective or angle, the power tiller of the defendant is identical and similar to that of the turtle power tiller of plaintiff in form, configuration, design and appearance. The parts or components thereof are virtually the same.Moreover, it is also observed that petitioner also called his power tiller as a floating power tiller.(b) the DOCTRINE OF EQUIVALENTS: according to this doctrine, “(a)n infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and, albeit with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result.”The reason for the doctrine of equivalents is that to permit the imitation of a patented invention which does not copy any literal detail would be to convert the protection of the patent grant into a hollow and useless thing.A careful examination between the two power tillers will show that they will operate on the same fundamental principles.More specifically, it is necessary and sufficient to constitute equivalency that the same function can be performed in substantially the same way or manner, or by the same or substantially the same, principle or mode of operation; but where these tests are satisfied, mere differences of form or name are immaterial.

Compulsory Licensing

SMITH KLINE & FRENCH LABORATORIES V CAFacts:Petitioner is a foreign corporation with principal office at Welwyn Garden City, England. It owns Philippine Letters Patent No. 12207 issued by the Bureau of Patents, Trademarks and Technology Transfer (BPTTT) for the patent of the drug Cimetidine.Private respondent is a domestic corporation engaged in the business of manufacturing and distributing pharmaceutical products. On 30 March 1987, it filed a petition for compulsory licensing[3] with the BPTTT for authorization to manufacture its own brand of medicine from the drug Cimetidine and to market the resulting product in the Philippines. The petition was filed pursuant to the provisions of SEC 34 of Republic Act No. 165 (An Act Creating a Patent Office Prescribing Its Powers and Duties, Regulating the Issuance of Patents, and Appropriating Funds Therefor), which provides for the compulsory licensing of a particular patent after the expiration of two years from


the grant of the latter if the patented invention relates to, inter alia, medicine or that which is necessary for public health or public safety. Private respondent alleged that the grant of Philippine Letters Patent No. 12207 was issued on 29 November 1978; that the petition was filed beyond the two-year protective period provided in SEC 34 of R.A. No. 165; and that it had the capability to work the patented product or make use of it in its manufacture of medicine.Petitioner opposed, arguing that private respondent had no cause of action and lacked the capability to work the patented product; the petition failed to specifically divulge how private respondent would use or improve the patented product; and that private respondent was motivated by the pecuniary gain attendant to the grant of a compulsory license. Petitioner also maintained that it was capable of satisfying the demand of the local market in the manufacture and marketing of the medicines covered by the patented product.BPTTT decided for the Private Respondent approving the application for a license. This was affirmed by the CA.

Issue: WON the grant of the license was properHeld: YesRatio:Article 5 of the Paris Convention for the Protection of Industrial Property,[8] or “Paris Convention,” for short, of which the Philippines became a party thereto only in 1965.[9] Pertinent portions of said Article 5, SEC A, provide:A. x x x(2) Each country of the union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work.x x x(4) A compulsory license may not be applied for on the ground of failure to work or insufficient working before the expiration of a period of four years from the date of filing of the patent application or three years from the date of the grant of the patent, whichever period expires last; it shall be refused if the patentee justifies his inaction by legitimate reasons. Such a compulsory license shall be non-exclusive and shall not be transferable, even in the form of the grant of a sub-license, except with that part of the enterprise or goodwill which exploits such license.It is thus clear that SEC A(2) of Article 5 above unequivocally and explicitly respects the right of member countries to adopt legislative measures to provide for the grant of

compulsory licenses to prevent abuses which might result from the exercise of the exclusive rights conferred by the patent. An example provided of possible abuses is "failure to work;" however, as such is merely supplied by way of an example, it is plain that the treaty does not preclude the inclusion of other forms or categories of abuses.Also Article 34 of R.A. No. 165 states:EC. 34. Grounds for Compulsory Licensing. -- (1) Any person may apply to the Director for the grant of a license under a particular patent at any time after the expiration of two years from the date of the grant of the patent, under any of the following circumstances: (e) If the patented invention or article relates to food or medicine or manufactured products or substances which can be used as food or medicine, or is necessary for public health or public safety.Parenthetically, it must be noted that paragraph (4) of SEC A, Article 5 of the Paris Convention setting time limitations in the application for a compulsory license refers only to an instance where the ground therefor is "failure to work or insufficient working," and not to any ground or circumstance as the treaty signatories may reasonably determine.Neither may petitioner validly invoke what it designates as the GATT Treaty, Uruguay Round. This act is better known as the Uruguay Final Act signed for the Philippines on 15 April 1994 by Trade and Industry Secretary Rizalino Navarro. Forming integral parts thereof are the Agreement Establishing the World Trade Organization, the Ministerial Declarations and Decisions, and the Understanding on Commitments in Financial Services. The Agreement establishing the World Trade Organization includes various agreements and associated legal instruments. It was only on 14 December 1994 that the Philippine Senate, in the exercise of its power under SEC 21 of Article VII of the Constitution, adopted Senate Resolution No. 97 concurring in the ratification by the President of the Agreement. The President signed the instrument of ratification on 16 December 1994. But plainly, this treaty has no retroactive effect. Accordingly, since the challenged BPTTT decision was rendered on 14 February 1994, petitioner cannot avail of the provisions of the GATT treaty.It cannot likewise be claimed that petitioner was unduly deprived of its property rights, as R.A. No. 165 not only grants the patent holder a protective period of two years to enjoy his exclusive rights thereto; but subsequently, the law recognizes just compensation in the form of royalties.In Parke, Davies & Co. v. Doctors' Pharmaceuticals, Inc., we held:


The right to exclude others from the manufacturing, using, or vending an invention relating to, food or medicine should be conditioned to allowing any person to manufacture, use, or vend the same after a period of three [now two] years from the date of the grant of the letters patent. After all, the patentee is not entirely deprived of any proprietary right. In fact, he has been given the period of three years [now two years] of complete monopoly over the patent. Compulsory licensing of a patent on food or medicine without regard to the other conditions imposed in SEC 34 [now SEC 35] is not an undue deprivation of proprietary interests over a patent right because the law sees to it that even after three years of complete monopoly something is awarded to the inventor in the form of bilateral and workable licensing agreement and a reasonable royalty to be agreed upon by the parties and in default of such an agreement, the Director of Patents may fix the terms and conditions of the license.

Patent Infringement

CRESER PRECISION SYSTEMS V CA

Facts:Floro International Corp. (Floro) is a domestic corporation engaged in the manufacture, production, distribution and sale of military armaments, munitions, airmunitions and other similar materials.January 23, 1990 Floro – granted a Patent by Bureau of Patents, Trademarks and Technology Transfer (BPTTT) covering an aerial fuze, duly published in the September-October-1990 issue of the Bureau of Patent's Official Gazette.November 1993 Floro’s president, Mr. Gregory Floro, Jr., discovered that Creser Precision Systems, Inc. (Creser):submitted samples Floro’s patented aerial fuze to the AFP for testing. was claiming the aerial fuze as its own was planning to bid and commercially manufacture it without license or authority from Floro. December 3, 1993 Floro sent a letter to Creser advising it of its existing patent and its rights thereunder, warning Creser of a possible court action and/or application for injunction, should it proceed with the scheduled testing by the military on December 7, 1993.December 8, 1993 Creser filed in the RTC a complaint for injunction and damages arising from the alleged infringement, alleging that: Creser is the first, true and actual inventor of an aerial fuze denominated as "Fuze, PDR 77 CB4" developed as early as December 1981 under the Self-Reliance Defense Posture Program (SRDP) of the AFP;

sometime in 1986, Creser began supplying the AFP with the said aerial fuze; Floro's aerial fuze is identical in every respect to the Creser's fuze; only difference: are miniscule and merely cosmetic in nature. Creser prays for the issuance of TRO/injunction be issued enjoining Floro from manufacturing, marketing and/or profiting therefrom, and/or from performing any other act in connection therewith or tending to prejudice and deprive it of any rights, privileges and benefits to which it is duly entitled as the first, true and actual inventor of the aerial fuze. g TRO granted.Floro’s defense: Creser has no patent g no cause of action for infringement; Creser's available remedy = petition for cancellation. RTC: Granted. Floro enjoined.RTC MFR: Affirmed.Creser developed its aerial fuze way back in 1981 while Floro began manufacturing only in 1987. g Creser's aerial fuze was PRESUMABLY copied or imitated.Floro's assertion that an action for infringement may only be brought by "anyone possessing right, title or interest to the patented invention," (SEC 42, RA 165) qualified by Sec. 10, RA 165 to include only "the first true and actual inventor, his heirs, legal representatives or assignees, " g untenable. Sec. 10 merely enumerates the persons who may have an invention patented BUT does not necessarily limit to these persons the right to institute an action for infringement. Floro will not suffer irreparable injury. Floro's claim is primarily hinged on its patent the validity of which is being questioned in this case.Floro’s grounds before CA:Creser has no patent;In an action for cancellation or invalidation of Floro's Letters Patent g proper venue = Office of the Director of Patents;CA: Granted, RTC Reversed.Creser: I can file, under SEC 42 of the Patent Law (R.A. 165), an action for infringement, not as a patentee BUT as an entity in possession of a right, title or interest in and to the patented invention. Absence of a patent DOES NOT:prevent one from lawfully suing another for infringement of said patent, bar the first true and actual inventor of the patented invention from suing another who was granted a patent in a suit for declaratory or injunctive relief g a remedy likened to a civil action for infringement under SEC 42.

Issue: Can a non-patentee as the true inventor sue for patent infringement?Held: No, CA affirmedRatio:


R.A. 165 SEC. 42. Civil action for infringement. Any patentee, or anyone possessing any right, title or interest in and to the patented invention, whose rights have been infringed, may bring a civil action before the proper CFI (now RTC), to recover from the infringer damages sustained by reason of the infringement and to secure an injunction for the protection of his right...Only the patentee or his successors-in-interest may file an action for infringement. "anyone possessing any right, title or interest in and to the patented invention" = refers only to the patentee's successors-in-interest, assignees or grantees g Moore vs. Marsh: since actions for infringement of patent may be brought in the name of the person or persons interested, whether as patentee, assignees, or as grantees, of the exclusive right. no infringement of a patent until a patent has been issued g Anchor Hocking Glass Corp. vs. White Cap.: since whatever right one has to the invention covered by the patent arises alone from the grant of patent. Peck vs. Collins: a person or entity who has not been granted letters patent over an invention and has not acquired any right or title thereto either as assignee or as licensee, has no cause of action for infringement because the right to maintain an infringement suit depends on the existence of the patent. Creser admits it has no patent over its aerial fuze g no legal basis or cause of action for injunction and damages arising from Floro’s alleged infringement. While Creser = FIRST INVENTOR g STILL it has NO RIGHT of property upon which it can maintain a suit unless it obtains a patent. Bauer & Cie vs. O'Donnel: An inventor has no common-law right to a monopoly of his invention. He has the right to make, use and vend his own invention, but if he voluntarily discloses it, such as by offering it for sale, the world is free to copy and use it with impunity. A patent, however, gives the inventor the right to exclude all others. As a patentee, he has the exclusive right of making, using or selling the invention. Remedy of declaratory judgment or injunctive suit on patent ≠ similar to civil action for infringement under SEC 42 of the Patent Law. Infringement = available only to the patent holder or his successors-in-interest. BUT Creser still has a remedy g he can, under SEC 28:file a petition for cancellation of the patent within three (3) years from the publication of said patent with the Director of Patents ANDraise as ground that patentee Floro is not the true and actual inventor. Creser however failed to do so g cannot now assail validity of Floro's patent. Floro’s patent when issued is presumably valid, and NOW he is

legally and factually the first and true inventor of the invention.Aguas vs. De Leon: "The validity of the patent and the question over the investments, novelty and usefulness of the improved process therein specified and described are matters better determined by the Philippines Patent Office. The technical Staff of the Philippines Patent Office, composed of experts in their field, have, by the issuance of the patent in question, accepted the thinness of the respondent's new tiles as a discovery. There is a presumption that the Philippine Patent Office has correctly determined the patentability of the improvement by the respondent of the process in question."

INDUSTRIAL DESIGNS AND LAYOUT DESIGNS (TOPOGRAPHIES) OF INTEGRATED CIRCUITS

17.7 Topics

Definitions of Industrial Design, Integrated Circuits and Layout Design

SEC. 112. Definition of Terms:" "1. An Industrial Design is any composition of lines or colors or any three-dimensional form, whether or not associated with lines or colors: Provided, That such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft; "2. Integrated Circuit means a product, in its final form, or an intermediate form, in which the elements, at least one of which is an active element and some or all of the interconnections are integrally formed in and/or on a piece of material, and which is intended to perform an electronic function; and "3. Layout-Design is synonymous With 'Topography' and means the three-dimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all of the interconnections of an integrated circuit, or such a three-dimensional disposition prepared for an integrated circuit intended for manufacture.

Substantive Conditions for Protection


SEC. 113. Substantive Conditions/or Protection. - 113.1. Only industrial designs that are new or ornamental shall benefit from protection under this Act. "113.2. Industrial designs dictated essentially by technical or functional considerations to obtain a technical result or those that are contrary to public order, health or morals shall not be protected. "113.3. Only layout -designs of integrated circuits that are original shall benefit from protection under this Act. A layout-design shall be considered original if it is the result of its creator's own intellectual effort and is not commonplace among creators of layout-designs and manufacturers of integrated circuits at the time of its creation. "113.4. A layout-design consisting of a combination of elements and interconnections that are commonplace shall be protected only if the combination, taken as a whole, is original.

Term

SEC. 118. The Term of Industrial Design or Layout-Design Registration. - 118.1. The registration of an industrial design shall be for a period of five (5) years from the filing date of the application. " 118.2. The registration of an industrial design may be renewed for not more than two (2) consecutive periods of five (5) years each, by paying the renewal fee. "118.3. The renewal fee shall be paid within twelve (12) months preceding the expiration of the period of registration. However, a grace period of six (6) months shall be granted for payment of the fees after such expiration, upon payment of a surcharge. "118.4. The Regulations shall fix the amount of renewal fee, the surcharge and other requirements regarding the recording of renewals of registration. " 118.5. Registration of a layout-design shall be valid for a period often (10) years, without renewal, and such validity to be counted from the date of commencement of the protection accorded to the layout-design. The protection of a layout-design under this Act shall commence: "a) on the date of the first commercial exploitation, anywhere in the world, of the layout-design by or with the consent of the right holder: Provided, That an application for registration is filed with the Intellectual Property Office within two (2) years from such date of first commercial exploitation; or "b) on the filing date accorded to the application for the registration of the layout-design if the layout-design has not been previously exploited commercially anywhere in the world."

Rights Conferred on Registered Owner of Layout Design

119.4. Rights Conferred to the Owner of a Layout-Design Registration. - The owner of a layout-design registration shall enjoy the following rights: "(1) to reproduce, whether by incorporation in an integrated circuit or otherwise, the registered layout-design in its entirety or any part thereof, except the act of reproducing any part that does not comply with the requirement of originality; and "(2) to sell or otherwise distribute for commercial purposes the registered layout design, an article or an integrated circuit in which the registered layout-design is incorporated.

TRADEMARKS

Definitions of marks, collective marks, and trade names

SEC. 121. Definitions-- As used in Part III, the following terms have the following meanings: 121.1. "Mark" means any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods; (Sec. 38, R.A. No. 166a)

121.2. "Collective mark" means any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark; (Sec. 40, R.A. No. 166a)

121.3. "Trade name" means the name or designation identifying or distinguishing an enterprise; (Sec. 38, R.A. No. 166a)

Notes:- A mark may be a word mark such as a

full name (Pierre Cardin), a first name (Paloma), a surname (Honda), or a composite mark (i.e., a combination of a word or letter and a device such as the mark Caltex which has the word Caltex written across the representation of a star, all of which are enclosed by a circle device.

- A mark could also be a device mark which may be a geometrical figure (Olympic rings), a stylized rendering of the Alphabet (M of McDonald’s), or a representation of any object (IBM World).


Acquisition of ownership of mark

SEC. 122. How Marks are Acquired—The rights in a mark shall be acquired through registration made validly in accordance with the provisions of this law. (Sec. 2-A, R.A. No. 166a)

Notes:How Ownership AcquiredMark Trade nameAcquired solely through registration

Acquired through adoption and use. Registration is not required.

- Any person may apply for registration who is domiciled or has a real and effective industrial establishment in a country—

o Which is a party to any convention, treaty or agreement relating to IPR or the repression of unfair competition, to which the Philippines is also a party; OR

o Extends reciprocal rights to nationals of the Philippines.

Acquisition of trade names

Sec. 165. Trade Names or Business Names165.1. A name or designation may not be used as a trade name if by its nature or the use to which such name or designation may be put, it is contrary to public order or morals and if, in particular, it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name.

165.2. (a) Notwithstanding any laws or regulations providing for any obligation to register trade names, such names shall be protected, even prior to or without registration, against any unlawful act committed by third parties. (b) In particular, any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public, shall be deemed unlawful.

165.3. The remedies provided for in SECs 153 to 156 and SECs 166 and 167 shall apply mutatis mutandis.

165.4. Any change in the ownership of a trade name shall be made with the transfer of the enterprise or part thereof identified by that name. The provisions of SubSECs 149.2 to 149.4 shall apply mutatis mutandis.

Non-registrable marks

123.1. A mark cannot be registered if it: (a) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute;(b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation, or any simulation thereof;(c) Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by written consent of the widow;(d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: (i) The same goods or services, or (ii) Closely related goods or services, or (iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion; (e) Is identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services: Provided, That in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark; (f) Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided, That use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use; (g) Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; (h) Consists exclusively of signs that are generic for the goods or services that they seek to identify; (i) Consists exclusively of signs or of indications that have become customary or usual to


designate the goods or services in everyday language or in bona fide and established trade practice; (j) Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; (k) Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; (l) Consists of color alone, unless defined by a given form; or (m) Is contrary to public order or morality.

Notes:- If a component of an otherwise

registrable mark is not registrable, the applicant could disclaim the unregistrable component.

Use of mark as a requirement

124.2. The applicant or the registrant shall file a declaration of actual use of the mark with evidence to that effect, as prescribed by the Regulations within three (3) years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register by the Director.

Notes:- Prior use is no longer a condition of

filing. However, the applicant shall file a declaration of actual use of the mark, with evidence to that effect, within three years from the filing date of the application; otherwise, the application shall be refused or the mark removed from the register.

- AFTER FILING: The registrant is required to file a declaration of actual use, and evidence to that effect, within 1 year from the 5th anniversary of the date of registration of the mark; otherwise the mark shall be removed from the register (SEC 145)

- AFTER FILING: Non-use of a mark may be excused if caused by circumstances arising independently of the will of the trademark owner. Lack of funds is not an excuse (SEC 152)

- AFTER FILING; USE OF OTHER ENTITY: Use of another entity may be considered use of the owner if—

o the company is related to the registrant; or

o if the use of the mark by such unrelated person in respect of the

nature and and quality of the goods or services is controlled by the registrant (i.e. franchise)

Tests to determine confusing similarity between marks

123.1 (d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of:

(i) The same goods or services, or (ii) Closely related goods or services, or (iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion;

Notes: - How to determine if there is confusing

similarity between the markso The labels, packages or

containers are presented for examination and comparison.

o Where they are not presented, then the spelling, sound or pronunciation of the marks may be resorted to. Similarity of sound or pronunciation may be sufficient to make two marks confusingly similar.

- TEST OF DOMINANCY: Focuses not simply on similarities in size, form or color but on the main or essential features of each mark, taken together. The test requires that if the competing trademark contains the main or essential features of another and confusion and deception is likely to result, infringement takes place. Duplication or imitation is not necessary.

- HOLISTIC TEST: Considers the mark as a whole and not as dissected. If the buyer is deceived, it is attributable to the mark as a totality, not usually to any part of it.

- RELATED GOODS PRINCIPLE: Goods are related when they belong to the same class or have the same descriptive properties or physical attributes, or they serve the same purpose or flow through the same channel of trade. It is held that the use of identical marks on non-competing and unrelated goods is not likely to cause confusion.

Cases:

Holistic Test

Del Monte Corporation et. al. vs. CA and Sunshine Sauce Manufacturing Industry (1990)


FACTS: Del Monte authorized Philpack to register with the Patent Office the Del Monte bottle configuration for which it was granted trademark registration. It also obtained registration certificates for its trademark DEL MONTE and its logo. Respondent Sunshine Sauce Manufacturing was issued a Certificate of Registration by the Bureau of Domestic Trade to engage in manufacturing, packing, distributing and sale of various kinds of sauce, identified by the Sushine Fruit Catsup logo. This was registered in the supplemental registered. The product was contained in various kinds of bottle including the Del Monte bottle which it bought from junk shops.Philpack, after making a demand upon Sunshine to desist from using the Del Monte bottles filed a complaint against the latter for infringement of trademark and unfair competition. Sunshine contended that it has ceased to use the said bottles and that its logo was substantially different from the Del Monte logo and would not confuse the buying public to the detriment of petitioners.RTC dismissed the complaint holding that there were substantial differences between the logos or trademarks of the parties; that the defendant ceased to use petitioners’ bottles and that in any case, it became owner thereof upon purchase from junk yards. It further held that complainants failed to establish bad faith which was an essential element of infringement of trademark or unfair competition. The said decision was affirmed by the CA.HELD: (Note that this case was decided under SEC 22 and 29 of R.A. No. 166 or the Trademark Law)The Supreme Court disagrees with the conclusion that there was no infringement or unfair competition.As correctly held by the lower court, side-by-side comparison is not the final test of similarity.The question is not whether the two articles are distinguishable by their label when set side by side but whether the general confusion made by the article upon the eye of the casual purchaser who is unsuspicious and off his guard, is such as to likely result in his confounding it with the original. A number of courts have held that to determine whether a trademark has been infringed, we must consider the mark as a whole and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not usually to any part of it. The court therefore should be guided by its first impression, for a buyer acts quickly and is governed by a casual glance, the value of which may be dissipated as soon as the court assumes to analyze carefully the respective features of the mark.

At that, even if the labels were analyzed together it is not difficult to see that the Sunshine label is a colorable imitation of the Del Monte trademark. The predominant colors used in the Del Monte label are green and red-orange, the same with Sunshine. The word "catsup" in both bottles is printed in white and the style of the print/letter is the same. Although the logo of Sunshine is not a tomato, the figure nevertheless approximates that of a tomato.As previously stated, the person who infringes a trade mark does not normally copy out but only makes colorable changes, employing enough points of similarity to confuse the public with enough points of differences to confuse the courts. When as in this case, Sunshine chose, without a reasonable explanation, to use the same colors and letters as those used by Del Monte though the field of its selection was so broad, the inevitable conclusion is that it was done deliberately to deceive .

Test of Dominancy

Asia Brewery vs. CA and San Migue (1993)FACTS: San Miguel Corporation (SMC) filed a complaint against Asia Brewery Inc. (ABI) for infringement of trademark and unfair competition on account of the latter’s Beer Pale Pilsen or Beer na Beer product which has been competing with SMC’s San Miguel Pale Pilsen.The RTC dismissed the complaint holding that ABI has not committed trademark infringement or unfair competition against SMC. The CA reversed the ruling of the RTC holding that the bottles used by ABI are substantially identical with the bottles of SMC and that this is calculated to deceive purchasers and consumers into the belief that the beer is the product of the plaintiff. ABI was therefore found guilty of infringement of trademark and unfair competition.ISSUE: The lone issue is whether ABI infringes SMC’s trademark: San Miguel Pale Pilsen with rectangular hops and malt design and thereby commits unfair competition against the latter.HELD: ABI’s Beer Pale Pilsen Labor or design does not infringe on SMC’s San Miguel Pale Pilsen design. Infringement is determined by the "test of dominancy" rather than by differences or variations in the details of one trademark and of another. Similarity in size, form and color, while relevant, is not conclusive. If the competing trademark contains the main or essential or dominant features of another, and confusion and deception is likely to result, infringement takes place. Duplication or imitation is not necessary; nor it is necessary that the infringing label should suggest an effort to imitate (Co Tiong Sa vs. Director of Patents).


There is hardly any dispute that the dominant feature of SMC's trademark is the name of the product: SAN MIGUEL PALE PILSEN, written in white Gothic letters with elaborate serifs at the beginning and end of the letters "S" and "M" on an amber background across the upper portion of the rectangular design.On the other hand, the dominant feature of ABI's trademark is the name: BEER PALE PILSEN, with the word "Beer" written in large amber letters, larger than any of the letters found in the SMC label.The trial court perceptively observed that the word "BEER" does not appear in SMC's trademark, just as the words "SAN MIGUEL" do not appear in ABI's trademark. Hence, there is absolutely no similarity in the dominant features of both trademarks.The use of ABI of the steinie bottle, similar but not identical to the SAN MIGUEL PALE PILSEN bottle, is not unlawful. As pointed out by ABI's counsel, SMC did not invent but merely borrowed the steinie bottle from abroad and it claims neither patent nor trademark protection for that bottle shape and design. SMC's being the first to use the steinie bottle does not give SMC a vested right to use it to the exclusion of everyone else. Being of functional or common use, and not the exclusive invention of any one, it is available to all who might need to use it within the industry. ABI makes its own steinie bottle which has a fat bulging neck to differentiate it from SMC's bottle.Neither in sound, spelling or appearance can BEER PALE PILSEN be said to be confusingly similar to SAN MIGUEL PALE PILSEN. No one who purchases BEER PALE PILSEN can possibly be deceived that it is SAN MIGUEL PALE PILSEN. No evidence whatsoever was presented by SMC proving otherwise.The Court likewise found several dissimilarities in the trade dress or appearance of the competing products.The fact that the words “pale pilsen” are part of ABI’s trademark does not constitute an infringement of SMC’s trademark for those words are generic words descriptive of color and of the type of beer thus, those words may not be appropriated by SMC for its exclusive use even if they are part of their registered trademark.

McDonald’s Corporation vs. Macjoy Fastfood Corporation (2007)FACTS: MacJoy Fastfood Corporation filed with the Bureau of Patents, Trademarks and Technology Trasfer (now IPO) an application for registration of the trademark Macjoy & Device for fried chicken, chicken barbeque, burgers, fries, spaghetti, palabok, tacos, sandwiches, halo-halo and steaks. McDonald’s corporation

filed a verified Notice of Opposition against respondent’s application claiming that the trademark MacJoy and Device so resembles its corporate logo otherwise known as the Golden Arches and its marks (“Mc”) such that, when used on identical or related goods, the trademark applied for would confuse or deceive purchasers into believing that the goods originate from the same source or origin. It further alleged that the use of MacJOy and device falsely tends to suggest a connection or affiliation with McDonald’s. The IPO held that the predominance of the letter M and the prefixes Mac/Mc in both marks lead to the conclusion that there is confusing similarity between them especially since both are used on almost the same products. The CA reversed the decision finding no confusing similarity between the two holding that the IPO unreasonably overlooked the differences in the device, letters and marks. HELD: Petition is impressed with merit.In determining similarity and likelihood of confusion, jurisprudence has developed two tests, the dominancy test and the holistic test. The dominancy test focuses on the similarity of the prevalent features of the competing trademarks that might cause confusion or deception. In contrast, the holistic test requires the court to consider the entirety of the marks as applied to the products, including the labels and packaging, in determining confusing similarity. Under the latter test, a comparison of the words is not the only determinant factor.The IPO used the dominancy test in concluding that there was confusing similarity between the two trademarks. In reversing the IPO, the CA while seemingly applying the dominancy test, in fact actually applied the holistic test.The Court finds that the dominancy test is more suitable. Under the dominancy test, courts give greater weight to the similarity of the appearance of the product arising from the adoption of the dominant features of the registered mark, disregarding minor differences. Courts will consider more the aural and visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales outlets and market segments. The totality or holistic test only relies on visual comparisons between two trademarks whereas the dominancy test relies not only on the visual but also on the aural and connotative comparisons and overall impressions between the two trademarks.The court noted the use of the corporate M design logo and the prefixes Mc/Mac. It also noted that both trademarks are used in the sale of fastfood products. The differences and variations in styles as the device depicting a head of chicken with cap and bowtie and wings sprouting on both sides of the chicken head, the


heart-shaped "M," and the stylistic letters in "MACJOY & DEVICE;" in contrast to the arch-like "M" and the one-styled gothic letters in McDonald’s marks are of no moment. These minuscule variations are overshadowed by the appearance of the predominant features mentioned hereinabove.

Well-known marks

123.1 (e) Is identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services: Provided, That in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark; (f) Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided, That use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use;

Notes:- A well known mark is one which a

competent authority of the Philippines has designated to be well-known internationally and in the Philippines.

- TEST: Account shall be taken of the knowledge of the relevant sector of the public, rather than the public at large, including knowledge in the Philippines obtained by promotion of the mark.

- EFFECT: The general rule that the exclusive right to use a trademark shall extend only to goods and services similar to those in respect of which said trademark is registered does not apply. When it comes to a well known mark, the exclusive right shall extend to those good which are not similar provided that:

o The use of the mark in relation to those goods or services would indicate a connection between those goods or services and the owner of a registered mark, and

o The interests of the owner of the registered mark are likely to be damaged by such use.

Also, an owner of a well-known mark may sue in the Philippines for acts committed prior to the date the said mark was registered in the Philippines (Sec. 131.3)

147.2. The exclusive right of the owner of a well-known mark defined in SubSEC 123.1(e) which is registered in the Philippines, shall extend to goods and services which are not similar to those in respect of which the mark is registered: Provided, That use of that mark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use. (n)

Application requirements and procedure(SECs 124-144)

Notes:- The mark must not be one of those

considered as non-registrable- FORMAL REQUIREMENTS OF AN

APPLICATION FOR REGISTRATION OF A MARK:a. Application must be in Filipino or

Englishb. Appointment of an agent or

representative if applicant is not domiciled in the Philippines

c. Additional requirements to be satisfied if the applicant claims the priority of an earlier applicationo If the applicant is claiming priority

right, his application for registration of a mark in the Philippines will not be granted until such mark has been registered in the country of origin og the applicant.

d. Classification of the goods or servicese. Signature of the applicant

- PROCEDURE FOR REGISTRATIONa. Examination of requirements

for the grant of a filing date (SEC 132)

b. Examination to determine if mark is registrable (SEC 133)

c. Denial of the application or amendment thereof or publication (SEC 133.3)

d. Opposition, notice, hearing, decision, appeal to the Director of Bureau of Trademarks, appeal to the IPO


Director General, appeal to the CA

e. Issuance of certificate of registration (SEC 136)

f. Publication in the IPO Gazette of the fact of registration (SEC 136)

Classification of goods and services

124.1 (k) The names of the goods or services for which the registration is sought, grouped according to the classes of the Nice Classification, together with the number of the class of the said Classification to which each group of goods or services belongs; and

Sec. 144. Classification of Goods and Services144.1. Each registration, and any publication of the Office which concerns an application or registration effected by the Office shall indicate the goods or services by their names, grouped according to the classes of the Nice Classification, and each group shall be preceded by the number of the class of that Classification to which that group of goods or services belongs, presented in the order of the classes of the said Classification.

144.2. Goods or services may not be considered as being similar or dissimilar to each other on the ground that, in any registration or publication by the Office, they appear in different classes of the Nice Classification. (Sec. 6, R.A. No. 166a)

Disclaimer

SEC. 126. Disclaimers—The Office may allow or require the applicant to disclaim an unregistrable component of an otherwise registrable mark but such disclaimer shall not prejudice or affect the applicant’s or owner’s rights then existing or thereafter arising in the disclaimed matter, nor such shall disclaimer prejudice or affect the applicant’s or owner’s right on another application of later date if the disclaimed matter became distinctive of the applicant’s or owner’s goods, business or services. (Sec. 13, R.A. No. 166a)

Priority Right

Sec. 131. Priority Right131.1. An application for registration of a mark filed in the Philippines by a person referred to in SEC 3, and who previously duly filed an application for registration of the same mark in one of those countries, shall be considered as

filed as of the day the application was first filed in the foreign country.

131.2. No registration of a mark in the Philippines by a person described in this SEC shall be granted until such mark has been registered in the country of origin of the applicant.

131.3. Nothing in this SEC shall entitle the owner of a registration granted under this SEC to sue for acts committed prior to the date on which his mark was registered in this country: Provided, That, notwithstanding the foregoing, the owner of a well-known mark as defined in SEC 123.1(e) of this Act, that is not registered in the Philippines, may, against an identical or confusingly similar mark, oppose its registration, or petition the cancellation of its registration or sue for unfair competition, without prejudice to availing himself of other remedies provided for under the law.

131.4. In like manner and subject to the same conditions and requirements, the right provided in this SEC may be based upon a subsequent regularly filed application in the same foreign country: Provided, That any foreign application filed prior to such subsequent application has been withdrawn, abandoned, or otherwise disposed of, without having been laid open to public inspection and without leaving any rights outstanding, and has not served, nor thereafter shall serve, as a basis for claiming a right of priority. (Sec. 37, R.A. No. 166a)

Notes:- An owner of a registered mark cannot

sue in the Philippines for acts committed prior to the date on which the mark was registered in the Philippines, except in the case of a well-known mark (SEC 131.3)

Term

Sec. 145. Duration—A certificate of registration shall remain in force for ten (10) years: Provided, That the registrant shall file a declaration of actual use and evidence to that effect, or shall show valid reasons based on the existence of obstacles to such use, as prescribed by the Regulations, within one (1) year from the fifth anniversary of the date of the registration of the mark. Otherwise, the mark shall be removed from the Register by the Office. (Sec. 12, R.A. No. 166a)

Rights conferred by registration

Sec. 147. Rights Conferred


147.1. The owner of a registered mark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use, of an identical sign for identical goods or services, a likelihood of confusion shall be presumed.

147.2. The exclusive right of the owner of a well-known mark defined in SubSEC 123.1(e) which is registered in the Philippines, shall extend to goods and services which are not similar to those in respect of which the mark is registered: Provided, That use of that mark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use. (n)

Notes:- A certificate of registration is evidence of

the ff:o Validity of registrationo Registrant’s ownership of the

mark, ando Registrant’s exclusive right to use

the mark in connection with the goods or services and those that are related thereto as specified in the certificate

- LIMITATIONS ON SUCH RIGHT:o Durationo Territorial (except for well-known

marks)

Cases:- Protection Limited to goods specified in

registration certificate

Faberge Inc. vs. IAC and Co Beng Kay (1992)

FACTS: The Director of Patents authorized Co Beng Kay to register the trademark “Brute” for briefs manufactured and sold by his corporation. Petitioner Faberge opposed on the ground of similarity of said trademark with petitioner’s own symbol “Brut” which it registered for after shave lotion, shaving cream, deodorant, talcum powder and toilet soap. The CA ruled in favor of respondents holding that the identical trademark can be used by different manufacturers for products that are non-competing and unrelated.HELD: (Note that this case was decided under the old law)

Private Respondent may be permitted to register the trademark “Brute” for briefs produced by it. In as much as petitioner has not ventured in the production of briefs, an item which is not listed in its certificate of registration, petitioner cannot and should not be allowed to feign that private respondent had invaded petitioner’s exclusive domain. The certificate of registration issued by the Director of Patents can confer upon petitioner the exclusive right to use its own symbol only to those goods specified in the certificate, subject to any conditions and limitations stated therein. One who has adopted and used a trademark on his goods does not prevent the adoption and use of the same trademark by other for products which are of different description.

Canon Kabushiki Kaisha vs. CA and NSR Rubber Corporation (2000)

FACTS: NSR Rubber Corporation filed an application for registration of the mark CANON for sandals with the Bureau of Patents, Trademarks and Technology Transfer. A verified notice of opposition was filed by petitioner, a foreign corporation duly organized and existing under the laws of Japan, alleging that it will be damaged by the said registration. Petitioner presented evidence showing registration for the mark CANON in various countries covering goods such as paints, chemical products, toner, and dye stuff. It also showed a trademark registration in the Philippines.The BPTTT dismissed the opposition and said decision was affirmed by the CA.HELD: Petitioner’s arguments lack merit.Ordinarily, the ownership of a trademark or tradename is a property right that the owner is entitled to protect as mandated by the Trademark Law. However, when a trademark is used by a party for a product in which the other party does not deal, the sue of the same trademark on the latter’s product cannot be validly objected to. There is a world of difference between the paints, chemical products, toner, and dyestuff of petitioner and the sandals of private respondent.The certificate of registration confers upon the trademark owner the exclusive right to use its own symbol only to those goods specified in the certificate, subject to the conditions and limitations stated therein.11 Thus, the exclusive right of petitioner in this case to use the trademark CANON is limited to the products covered by its certificate of registration.In cases of confusion of business or origin, the question that usually arises is whether the respective goods or services of the senior user and the junior user are so related as to likely cause confusion of business or origin, and


thereby render the trademark or tradenames confusingly similar. Goods are related when they belong to the same class or have the same descriptive properties; when they possess the same physical attributes or essential characteristics with reference to their form, composition, texture or quality. They may also be related because they serve the same purpose or are sold in grocery stores.

Use by third parties of names, etc. similar to registered mark

Sec. 148. Use of Indications by Third Parties for Purposes Other than those for which the Mark is Used--Registration of the mark shall not confer on the registered owner the right to preclude third parties from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the kind, quality, quantity, destination, value, place of origin, or time of production or of supply, of their goods or services: Provided, That such use is confined to the purposes of mere identification or information and cannot mislead the public as to the source of the goods or services. (n)

Assignment and transfer of mark

Sec. 149. Assignment and Transfer of Application and Registration

149.1. An application for registration of a mark, or its registration, may be assigned or transferred with or without the transfer of the business using the mark. (n)

149.2. Such assignment or transfer shall, however, be null and void if it is liable to mislead the public, particularly as regards the nature, source, manufacturing process, characteristics, or suitability for their purpose, of the goods or services to which the mark is applied.

149.3. The assignment of the application for registration of a mark, or of its registration, shall be in writing and require the signatures of the contracting parties. Transfers by mergers or other forms of succession may be made by any document supporting such transfer.

149.4. Assignments and transfers of registration of marks shall be recorded at the Office on payment of the prescribed fee; assignment and transfers of applications for registration shall, on payment of the same fee, be provisionally recorded, and the mark, when registered, shall be in the name of the assignee or transferee.

149.5. Assignments and transfers shall have no effect against third parties until they are recorded at the Office. (Sec. 31, R.A. No. 166a)

Cancellation of registration

Sec. 151. Cancellation

151.1. A petition to cancel a registration of a mark under this Act may be filed with the Bureau of Legal Affairs by any person who believes that he is or will be damaged by the registration of a mark under this Act as follows: (a) Within five (5) years from the date of the registration of the mark under this Act. (b) At any time, if the registered mark becomes the generic name for the goods or services, or a portion thereof, for which it is registered, or has been abandoned, or its registration was obtained fraudulently or contrary to the provisions of this Act, or if the registered mark is being used by, or with the permission of, the registrant so as to misrepresent the source of the goods or services on or in connection with which the mark is used. If the registered mark becomes the generic name for less than all of the goods or services for which it is registered, a petition to cancel the registration for only those goods or services may be filed. A registered mark shall not be deemed to be the generic name of goods or services solely because such mark is also used as a name of or to identify a unique product or service. The primary significance of the registered mark to the relevant public rather than purchaser motivation shall be the test for determining whether the registered mark has become the generic name of goods or services on or in connection with which it has been used. (n) (c) At any time, if the registered owner of the mark without legitimate reason fails to use the mark within the Philippines, or to cause it to be used in the Philippines by virtue of a license during an uninterrupted period of three (3) years or longer.

151.2. Notwithstanding the foregoing provisions, the court or the administrative agency vested with jurisdiction to hear and adjudicate any action to enforce the rights to a registered mark shall likewise exercise jurisdiction to determine whether the registration of said mark may be cancelled in accordance with this Act. The filing of a suit to enforce the registered mark with the proper court or agency shall exclude any other court or agency from assuming jurisdiction over a subsequently filed petition to cancel the same mark. On the other hand, the earlier filing of petition to cancel the mark with the Bureau of


Legal Affairs shall not constitute a prejudicial question that must be resolved before an action to enforce the rights to same registered mark may be decided. (Sec. 17, R.A. No. 166a)

Notes:- When registration of a mark could be

cancelled—(a) Within 5 years from the date of

registration of the mark;(b) at any time if the registered mark—

a. becomes generic for the goods for which it was registered;

b. has been abandonedc. registration was obtained

fraudulentlyd. is being used by, or with the

permission of the registrant to misrepresent the source of goods or services

(c) If the registered owner of the mark without legitimate reason, fails to use the mark within the Philippines, or to cause it to be used by virtue of a license, for an uninterrupted period of at least 3 years.

Infringement and Remedies(Sec. 155-160)

What constitutes infringementNotes:

- There is infringement if a registered mark is used in commerce by a person without the consent of the registered owner thereof.

- REMEDIES:o Damages (156.1)o Impounding of infringing goods

(156.2)o Double damages (156.3)o Injunction (156.4)o Disposal of infringing goods

outside the channels of commerce (157.1)

o Destruction of infringing goods (157.1)

o Criminal Action (170)o Administrative Sanctions

- LIMITATIONSo No action for infringement can be

taken against a— person who, in good faith, before filing date or

priority date, was using the mark for the

purposes of his business or enterprise.

Note: Such person may assign or transfer his right to use the registered mark only together with his business or enterprise.

o Only injunction for future printing against an innocent infringing printer

o Only an injunction against presentation of infringing advertising matter in future issues against innocent infringing advertisers.

Sec. 155. Remedies; Infringement—Any person who shall, without the consent of the owner of the registered mark: 155.1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; or

155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive, shall be liable in a civil action for infringement by the registrant for the remedies hereinafter set forth: Provided, That the infringement takes place at the moment any of the acts stated in SubSEC 155.1 or this subSEC are committed regardless of whether there is actual sale of goods or services using the infringing material. (Sec. 22, R.A. No 166a)

DamagesNotes:

- To bring a civil action for infringement, it is not required that there be an actual sale of the goods or services using the infringing material. Infringement takes place upon the mere use or reproduction of the registered mark.

Sec. 156. Actions, and Damages and Injunction for Infringement

156.1. The owner of a registered mark may recover damages from any person who infringes his rights, and the measure of the damages suffered shall be either the reasonable profit which the complaining party would have made,


had the defendant not infringed his rights, or the profit which the defendant actually made out of the infringement, or in the event such measure of damages cannot be readily ascertained with reasonable certainty, then the court may award as damages a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party. (Sec. 23, first par., R.A. No. 166a)

156.2. On application of the complainant, the court may impound during the pendency of the action, sales invoices and other documents evidencing sales. (n)

156.3. In cases where actual intent to mislead the public or to defraud the complainant is shown, in the discretion of the court, the damages may be doubled. (Sec. 23, first par., R.A. No. 166)

156.4. The complainant, upon proper showing, may also be granted injunction. (Sec. 23, second par., R.A. No. 166a)

Notice Requirement

Sec. 158. Damages; Requirement of Notice—In any suit for infringement, the owner of the registered mark shall not be entitled to recover profits or damages unless the acts have been committed with knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive. Such knowledge is presumed if the registrant gives notice that his mark is registered by displaying with the mark the words "Registered Mark" or the letter R within a circle or if the defendant had otherwise actual notice of the registration. (Sec. 21, R.A. No. 166a)

Unfair competition or passing off

Notes:- Colorable imitation is a form of unfair

competition whereby an article is made to look or sound like the real thing but it is not.

Notes:- UNFAIR COMPETITION is the use by a

person of a deception or other means in bad faith by which he passes of the goods manufactured by him or in which he deals, or his business or services, for those of another person who has established goodwill in the goods such person manufactures or deals in, or his

business or services, who shall commit any acts calculated to produce said result.

Infringement of Trademark

Unfair Competition

Nature of offense

Unauthorized use of a trademark

Passing off one’s goods as that of another

Fraudulent Intent

Not necessary Essential element

Need for Registration

Prior registration is a pre-requisite

Registration is not necessary

SEC. 168. Unfair Competition, Rights, Regulation and Remedies

168.1. A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights.

168.2. Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition, and shall be subject to an action therefor.

168.3. In particular, and without in any way limiting the scope of protection against unfair competition, the following shall be deemed guilty of unfair competition: (a) Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose; (b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who


has identified such services in the mind of the public; or (c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another. 168.4. The remedies provided by SECs 156, 157 and 161 shall apply mutatis mutandis. (Sec. 29, R.A. No. 166a)

Cases:- Trademark infringement, unfair

competition and well known marks

Mighty Corporation and La Campana Fabreca de Tobaco vs. E.J. Gallo Winery, et al and Andersen Group Inc. (2004)FACTS: Gallo Winery is a foreign corporation not doing business in the Philippines but organized under the laws of America where all its wineries are located. It produces different kinds of wines and brandy and sells them under different registered trademarks including the GALLO and ERNEST & JULIO GALLO Trademarks.Respondent domestic corporation is the distributor of Gallo Winery in the Philippines. Gallo Winery’s GALLO wine trademark and Ernest and Julio Gallo wine trademark were registered in the Philippine Patent Office (now IPO). Petitioners Mighty Corporation and La Campana are engaged in the cultivation, manufacture, distribution and sale of tobacco products for which they have been using the Gallo Cigarette Trademark since 1973.Respondent sued petitioners for trademark and trade name infringement and unfair competition. The CA ruled in favor of respondents holding that Gallo cigarettes and Gallo wines were identical, similar or related goods for the reason that they are forms of vice and that the goods passed through the same channels of trade.HELD: The Court reversed the ruling of the CA, finding that there was no trademark infringement or unfair competition.Although the laws on trademark infringement and unfair competition have a common conception at their root, that is, a person shall not be permitted to misrepresent his goods or his business as the goods or business of another, the law on unfair competition is broader and more inclusive than the law on trademark infringement. The latter is more limited but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. The law on trademarks is thus a specialized subject distinct from the law on unfair competition, although the two subjects are entwined with each other

and are dealt with together in the Trademark Law (now, both are covered by the IP Code). Hence, even if one fails to establish his exclusive property right to a trademark, he may still obtain relief on the ground of his competitor’s unfairness or fraud. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as the goods of another. It is not necessary that any particular means should be used to this end. The Paris Convention protects well-known trademarks only (to be determined by domestic authorities), while the Trademark Law protects all trademarks, whether well-known or not, provided that they have been registered and are in actual commercial use in the Philippines.A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or deceit as to the identity, source or origin of the goods or identity of the business as a consequence of using a certain mark. Likelihood of confusion is admittedly a relative term, to be determined rigidly according to the particular (and sometimes peculiar) circumstances of each case. Thus, in trademark cases, more than in other kinds of litigation, precedents must be studied in the light of each particular case.In this case, the differences especially in the goods to which the trademark is registered for defeats respondents’ claims.There are two types of confusion in trademark infringement. The first is "confusion of goods" when an otherwise prudent purchaser is induced to purchase one product in the belief that he is purchasing another, in which case defendant’s goods are then bought as the plaintiff’s and its poor quality reflects badly on the plaintiff’s reputation. The other is "confusion of business" wherein the goods of the parties are different but the defendant’s product can reasonably (though mistakenly) be assumed to originate from the plaintiff, thus deceiving the public into believing that there is some connection between the plaintiff and defendant which, in fact, does not exist. In determining the likelihood of confusion, the Court must consider: [a] the resemblance between the trademarks; [b] the similarity of the goods to which the trademarks are attached; [c] the likely effect on the purchaser and [d] the registrant’s express or implied consent and other fair and equitable considerations.

McDonald’s Corporation, et al. vs. L.C. Big Mak Burger, Inc. (2004)FACTS: McDonlad’s owns a family of marks including the Big Mac mark for its double-decker hamburger sandwich which has been registered under Philippine laws. Respondent LC Big Mak Burger Inc. operates fast food outlets


and snack vans. It includes in its menu hamburger sandwiches and other food items. When it applied for registration of its mark, McDonald’s opposed respondent’s application on the ground that Big Mak was a colorable imitation of its registered mark. Thereafter, petitioner sued respondent for trademark infringement and unfair competition.RTC found respondent corporation liable. Said finding however, was reversed by the CA.HELD: (Note that this case was decided under RA No. 166 or the old Trademark Law)Respondent’s use of Big Mak results in the likelihood of confusion.To establish trademark infringement, the following elements must be shown: (1) the validity of plaintiff's mark; (2) the plaintiff's ownership of the mark; and (3) the use of the mark or its colorable imitation by the alleged infringer results in "likelihood of confusion." Of these, the likelihood of confusion is the gravamen of trademark infringement. SEC 22 covers two types of confusion arising from the use of similar or colorable imitation marks, namely, confusion of goods (product confusion) and confusion of business (source or origin confusion).Under the Law, while there is confusion of goods when the products are competing, confusion of business exists when the products are non-competing but related enough to produce confusion of affiliation. The registered trademark owner may use his mark on the same or similar products, in different segments of the market, and at different price levels depending on variations of the products for specific segments of the market. The Court has recognized that the registered trademark owner enjoys protection in product and market areas that are the normal potential expansion of his business.Applying the dominancy test, the Court finds that respondents' use of the "Big Mak" mark results in likelihood of confusion. First, "Big Mak" sounds exactly the same as "Big Mac." Second, the first word in "Big Mak" is exactly the same as the first word in "Big Mac." Third, the first two letters in "Mak" are the same as the first two letters in "Mac." Fourth, the last letter in "Mak" while a "k" sounds the same as "c" when the word "Mak" is pronounced. Fifth, in Filipino, the letter "k" replaces "c" in spelling, thus "Caloocan" is spelled "Kalookan." In short, aurally the two marks are the same, with the first word of both marks phonetically the same, and the second word of both marks also phonetically the same. Visually, the two marks have both two words and six letters, with the first word of both marks having the same letters and the second word having the same first two letters. In spelling, considering the

Filipino language, even the last letters of both marks are the same.The essential elements of an action for unfair competition are (1) confusing similarity in the general appearance of the goods, and (2) intent to deceive the public and defraud a competitor.The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity of the appearance of the goods as offered for sale to the public.Actual fraudulent intent need not be shown.Unfair competition is broader than trademark infringement and includes passing off goods with or without trademark infringement. Trademark infringement is a form of unfair competition.Trademark infringement constitutes unfair competition when there is not merely likelihood of confusion, but also actual or probable deception on the public because of the general appearance of the goods. There can be trademark infringement without unfair competition as when the infringer discloses on the labels containing the mark that he manufactures the goods, thus preventing the public from being deceived that the goods originate from the trademark owner. Passing off (or palming off) takes place where the defendant, by imitative devices on the general appearance of the goods, misleads prospective purchasers into buying his merchandise under the impression that they are buying that of his competitors.

Tradenames or business names (see Sec. 165 supra)Notes:

- Tradenames are protected even if they are not registered because they are not, in the first place, required to be registered.

Collective marks

Sec. 167. Collective Marks

167.1. Subject to SubSECs 167.2 and 167.3, SECs 122 to 164 and 166 shall apply to collective marks, except that references therein to "mark" shall be read as "collective mark."

167.2 (a) An application for registration of a collective mark shall designate the mark as a collective mark and shall be accompanied by a copy of the agreement, if any, governing the use of the collective mark.


(b) The registered owner of a collective mark shall notify the Director of any changes made in respect of the agreement referred to in paragraph (a).

167.3. In addition to the grounds provided in SEC 149, the Court shall cancel the registration of a collective mark if the person requesting the cancellation proves that only the registered owner uses the mark, or that he uses or permits its use in contravention of the agreements referred to in SubSEC 166.2 or that he uses or permits its use in a manner liable to deceive trade circles or the public as to the origin or any other common characteristics of the goods or services concerned.

167.4. The registration of a collective mark, or an application therefor shall not be the subject of a license contract. (Sec. 40, R.A. No. 166a)

Cross-border protection of marks and trade namesSec. 166. Goods Bearing Infringing Marks or Trade Names—No article of imported merchandise which shall copy or simulate the name of any domestic product, or manufacturer, or dealer, or which shall copy or simulate a mark registered in accordance with the provisions of this Act, or shall bear a mark or trade name calculated to induce the public to believe that the article is manufactured in the Philippines, or that it is manufactured in any foreign country or locality other than the country or locality where it is in fact manufactured, shall be admitted to entry at any customhouse of the Philippines. In order to aid the officers of the customs service in enforcing this prohibition, any person who is entitled to the benefits of this Act, may require that his name and residence, and the name of the locality in which his goods are manufactured, a copy of the certificate of registration of his mark or trade name, to be recorded in books which shall be kept for this purpose in the Bureau of Customs, under such regulations as the Collector of Customs with the approval of the Secretary of Finance shall prescribe, and may furnish to the said Bureau facsimiles of his name, the name of the locality in which his goods are manufactured, or his registered mark or trade name, and thereupon the Collector of Customs shall cause one (1) or more copies of the same to be transmitted to each collector or to other proper officer of the Bureau of Customs. (Sec. 35, R.A. No. 166)

169.2. Any goods marked or labeled in contravention of the provisions of this SEC shall not be imported into the Philippines or admitted entry at any customhouse of the Philippines. The owner, importer, or consignee of goods

refused entry at any customhouse under this SEC may have any recourse under the customs revenue laws or may have the remedy given by this Act in cases involving goods refused entry or seized. (Sec. 30, R.A. No. 166a)

Criminal penalties for infringement, unfair competition, false designation, origin, and false description or misrepresentation

SEC. 170. Penalties—Independent of the civil and administrative sanctions imposed by law, a criminal penalty of imprisonment from two (2) years to five (5) years and a fine ranging from Fifty thousand pesos (P50,000) to Two hundred thousand pesos (P200,000), shall be imposed on any person who is found guilty of committing any of the acts mentioned in SEC 155, SEC 168 and SubSEC 169.1. (Arts. 188 and 189, Revised Penal Code)

COPYRIGHTS

Basic Principles of copyright

172.2. Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose. (Sec. 2, P.D. No. 49a)

SEC. 175. Unprotected Subject Matter—Notwithstanding the provisions of SEC 172 and 173, no protection shall extend, under this law, to any idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work; news of the day and other miscellaneous facts having the character of mere items of press information; or any official text of a legislative, administrative or legal nature, as well as any official translation thereof. (n)

SEC. 181. Copyright and Material Object—The copyright is distinct from the property in the material object subject to it. Consequently, the transfer or assignment of the copyright shall not itself constitute a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer or assignment of the copyright. (Sec. 16, P.D. No. 49)

Notes:- PRINCIPLE OF AUTOMATICE

PROTECTION- The Berne Convention provides that the enjoyment and exercise of copyright, including moral rights, shall not be subject of any formality

Cases:


- Format of a show not copyrightable

Joaquin Jr., et al. vs. Drilon, et al. (1999) (as discussed in the textbook)FACTS: BJ Productions Inc. (BJPI) is the holder of a Certificate of copyright issued by the National Laibrary for the TV dating game show called Rhoda and me. While watching television, petitioner Francisco Joaquin Jr. president of BJPI, saw on RPN Channel 9 an episode of It’s a Date, which was produced by IXL Productions, Inc. He wrote a letter to private respondent Gabriel Zosa that BJPI had a copyright to Rhoda and Me and demanding that it discontinue airing It’s a Date. HELD: The format of a show is not copyrightable. IN enumerating what are subject to copyright, the law refers to finished works and not concepts. The format or mechanics of a TV show is not copyrightable as copyright does not extend to ideas, procedures, processes, systems, methods of operation, concepts, principles or discoveries regardless of the form in which they are described, explained, illustrated or embodied. Moreover, the format of a television show is not included in the list of protected works and for this reason, the protection afforded by law cannot be extended to cover the same.Finally, the subject matter of BJ Production’s copyright is audiovisual recordings of each episode of Rhoda and Me which falls under the category of cinematographic works and works produced by a process analogous to cinematography or any processes for making audio-visual recordings.

COMMENTS: The list provided in the law is not intended to be exhaustive. At the end of the provision there is a catch all clause “ other literary, scholarly, scientific and artistic works.” In other words, the copyrightability of a work is not dependent on its being mentioned in the list of works as it may fall in the catchall category.

- Name and container of beauty cream product not proper subjects of copyright and patent

Kho vs. CA (2002)FACTS: Elidad Kho is doing business under the name and style of KEC Cosmetics and was the registered owner of the copyrights Chin Chun Cu and Oval Facial Cream Container/Case. She also has patent rights for medicated cream. Respondent Summerville advertised and sold petitioner’s cream products under the brand Chin Chun Su in similar containers allegedly misleading the public. Respondents argue that they are the exclusive and authorized importer of the products manufactured from Taiwan.

ISSUE: WON the copyright and patent over the name and container of a beauty cream product would entitle the registrant to the use and ownership over the same to the exclusion of others.HELD: NO.Trademark, copyright and patents are different intellectual property rights that cannot be interchanged with one another. A trademark is any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. In relation thereto, a trade name means the name or designation identifying or distinguishing an enterprise. Meanwhile, the scope of a copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. Patentable inventions, on the other hand, refer to any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable.Petitioner has no right to support her claim for the exclusive use of the subject trade name and its container. The name and container of a beauty cream product are proper subjects of a trademark inasmuch as the same falls squarely within its definition. In order to be entitled to exclusively use the same in the sale of the beauty cream product, the user must sufficiently prove that she registered or used it before anybody else did. The petitioner's copyright and patent registration of the name and container would not guarantee her the right to the exclusive use of the same for the reason that they are not appropriate subjects of the said intellectual rights.

Copyrightable works Original works

SEC. 172. Literary and Artistic Works172.1 Literary and artistic works, hereinafter referred to as "works", are original intellectual creations in the literary and artistic domain protected from the moment of their creation and shall include in particular: (a) Books, pamphlets, articles and other writings; (b) Periodicals and newspapers; (c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form; (d) Letters;


(e) Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows; (f) Musical compositions, with or without words; (g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art; (h) Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art; (i) Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science; (j) Drawings or plastic works of a scientific or technical character; (k) Photographic works including works produced by a process analogous to photography; lantern slides; (l) Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; (m) Pictorial illustrations and advertisements; (n) Computer programs; and (o) Other literary, scholarly, scientific and artistic works.

Cases:- Meaning of originality of copyrighted

material; proof of copying; no copyright protection for works of applied art or industrial design.

Jessie G. Ching vs. William Salinas, et. al., (2005)FACTS: Jessie Ching is the owner and general manager of Jeschicris Manufacturing Co., the maker and manufacturer of a Utility Model, described as “Leaf Spring Eye Bushing for Automobile” made up of plastic.Ching and Joseph Yu were issued National Library Certificates of Copyright Registration and Deposit for the said work. Ching requested the NBI to investigate and apprehend alleged illegal manufacturers and distributers of his work. After investigation, NBI filed applications for search warrants against Salinas and company, allegedly, for reproducing and distributing the works of Ching and Yu.Respondents argued that the works covered by the certificates are not artistic in nature and are considered automotive spare parts and pertain to technology. Moreover, they alleged that the models are not original and as such, are the proper subject of patent and not of copyright.HELD: The petition has no merit. Ownership of copyrighted material is shown by proof of originality and copyrightability. By

originality is meant that the material was not copied, and evidences at least minimal creativity; that it was independently created by the author and that it possesses at least same minimal degree of creativity. Copying is shown by proof of access to copyrighted material and substantial similarity between the two works. The applicant must thus demonstrate the existence and the validity of his copyright because in the absence of copyright protection, even original creation may be freely copied.It is worthy to state that the works protected under the Law on Copyright are: Literary or artistic works and derivative works. The Leaf Spring Eye Bushing and Vehicle Bearing Cushion fall on neither classification. Accordingly, if in the first place, the item subject of the petition is not entitled to be protected by the law on copyright, how can there be any violation?A Certificate of Registration creates no rebuttable presumption of copyright validity where other evidence in the record casts doubt on the question. In such case, the validity will not be presumed. Plainly, these are not literary or artistic works. They are not intellectual creations in the literary and artistic domain, or works of applied art. They are certainly not ornamental designs or one having decorative quality or value.It bears stressing that the focus of copyright is the usefulness of the artistic design, and not its marketability. The central inquiry is whether the article is a work of art. Works for applied art include all original pictorials, graphics, and sculptural works that are intended to be or have been embodied in useful article regardless of factors such as mass production, commercial exploitation, and the potential availability of design patent protection. A useful article may be copyrightable only if and only to the extent that such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of the utilitarian aspects of the article.It bears stressing that there is no copyright protection for works of applied art or industrial design which have aesthetic or artistic features that cannot be identified separately from the utilitarian aspects of the article.

Derivative works

SEC. 173. Derivative Works173.1. The following derivative works shall also be protected by copyright: (a) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and


(b) Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents. (Sec. 2, [P] and [Q], P.D. No. 49)

173.2. The works referred to in paragraphs (a) and (b) of SubSEC 173.1 shall be protected as a new works: Provided however, That such new work shall not affect the force of any subsisting copyright upon the original works employed or any part thereof, or be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works. (Sec. 8, P.D. 49; Art. 10, TRIPS)

Non-Copyrightable works

SEC. 175. Unprotected Subject Matter—Notwithstanding the provisions of SEC 172 and 173, no protection shall extend, under this law, to any idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work; news of the day and other miscellaneous facts having the character of mere items of press information; or any official text of a legislative, administrative or legal nature, as well as any official translation thereof. (n)

SEC. 176. Works of the Government176.1. No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. No prior approval or conditions shall be required for the use of any purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in courts of justice, before administrative agencies, in deliberative assemblies and in meetings of public character. (Sec. 9, first par., P.D. No. 49)

176.2. The Author of speeches, lectures, sermons, addresses, and dissertations mentioned in the preceding paragraphs shall have the exclusive right of making a collection of his works. (n)

176.3. Notwithstanding the foregoing provisions, the Government is not precluded from receiving and holding copyrights transferred to it by assignment, bequest or otherwise; nor shall publication or republication by the government in a public document of any work in which copy right is subsisting be taken to cause any abridgment or annulment of the

copyright or to authorize any use or appropriation of such work without the consent of the copyright owners. (Sec. 9, third par., P.D. No. 49)

Rights of copyright owner

- Generally, the rights of an author are as follows—

1. Economic rightsa. to reproduceb. to create derivative worksc. to first public distributiond. to rent oute. to public displayf. to public performanceg. to other communication of the

work to the public2. Moral Rights

a. of attribution or paternity rightb. of alteration or non publicationc. to preservation of integrityd. not to be identified with work of

others or with distorted work

3. Droit de suite

copyright or economic rights

SEC. 177. Copy or Economic Rights—Subject to the provisions of Chapter VIII, copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts:

177.1. Reproduction of the work or substantial portion of the work;

177.2 Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work;

177.3. The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership;

177.4. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental; (n)

177.5. Public display of the original or a copy of the work;

177.6. Public performance of the work; and

177.7. Other communication to the public of the work (Sec. 5, P.D. No. 49a)


Right to proceeds of subsequent transfers or droite de suite

SEC. 200. Sale or Lease of Work—In every sale or lease of an original work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have an inalienable right to participate in the gross proceeds of the sale or lease to the extent of five percent (5%). This right shall exist during the lifetime of the author and for fifty (50) years after his death. (Sec. 31, P.D. No. 49)

SEC. 201. Works Not Covered—The provisions of this Chapter shall not apply to prints, etchings, engravings, works of applied art, or works of similar kind wherein the author primarily derives gain from the proceeds of reproductions. (Sec. 33, P.D. No. 49)

Moral Rights

SEC. 193. Scope of Moral Rights—The author of a work shall, independently of the economic rights in SEC 177 or the grant of an assignment or license with respect to such right, have the right:

193.1. To require that the authorship of the works be attributed to him, in particular, the right that his name, as far as practicable, be indicated in a prominent way on the copies, and in connection with the public use of his work;

193.2. To make any alterations of his work prior to, or to withhold it from publication;

193.3. To object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which would be prejudicial to his honor or reputation; and

193.4. To restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work. (Sec. 34, P.D. No. 49)

SEC. 194. Breach of Contract—An author cannot be compelled to perform his contract to create a work or for the publication of his work already in existence. However, he may be held liable for damages for breach of such contract. (Sec. 35, P.D. No. 49)

SEC. 195. Waiver of Moral Rights—An author may waive his rights mentioned in SEC 193 by a written instrument, but no such waiver shall be valid where its effects is to permit another:

195.1. To use the name of the author, or the title of his work, or otherwise to make use of his reputation with respect to any version or adaptation of his work which, because of alterations therein, would substantially tend to injure the literary or artistic reputation of another author; or

195.2. To use the name of the author with respect to a work he did not create. (Sec. 36, P.D. No. 49)

SEC. 196. Contribution to Collective Work—When an author contributes to a collective work, his right to have his contribution attributed to him is deemed waived unless he expressly reserves it. (Sec. 37. P.D. No. 49)

SEC. 197. Editing, Arranging and Adaptation of Work—In the absence of a contrary stipulation at the time an author licenses or permits another to use his work, the necessary editing, arranging or adaptation of such work, for publication, broadcast, use in a motion picture, dramatization, or mechanical or electrical reproduction in accordance with the reasonable and customary standards or requirements of the medium in which the work is to be used, shall not be deemed to contravene the author's rights secured by this chapter. Nor shall complete destruction of a work unconditionally tranferred by the author be deemed to violate such rights. (Sec. 38, P.D. No. 49)

SEC. 198. Term of Moral Rights

198.1. The rights of an author under this chapter shall last during the lifetime of the author and for fifty (50) years after his death and shall not be assignable or subject to license. The person or persons to be charged with the posthumous enforcement of these rights shall be named in writing to be filed with the National Library. In default of such person or persons, such enforcement shall devolve upon either the author's heirs, and in default of the heirs, the Director of the National Library.

198.2. For purposes of this SEC, "Person" shall mean any individual, partnership, corporation, association, or society. The Director of the National Library may prescribe reasonable fees to be charged for his services in the application of provisions of this SEC. (Sec. 39, P.D. No. 49)

SEC. 199. Enforcement Remedies—Violation of any of the rights conferred by this Chapter shall entitle those charged with their enforcement to the same rights and remedies available to a copyright owner. In addition, damages which may be availed of under the


Civil Code may also be recovered. Any damage recovered after the creator's death shall be held in trust for and remitted to his heirs, and in default of the heirs, shall belong to the government. (Sec. 40, P.D. No. 49)

Notes:- COPYRIGHT TO A WORK OF

ARCHITECTURE- shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work but not the right to control the reconstruction or rehabilitation of the building.

Rules of ownership of copyright

SEC. 178. Rules on Copyright Ownership—Copyright ownership shall be governed by the following rules:

178.1. Subject to the provisions of this SEC, in the case of original literary and artistic works, copyright shall belong to the author of the work;

178.2. In the case of works of joint authorship, the co-authors shall be the original owners of the copyright and in the absence of agreement, their rights shall be governed by the rules on co-ownership. If, however, a work of joint authorship consists of parts that can be used separately and the author of each part can be identified, the author of each part shall be the original owner of the copyright in the part that he has created;

178.3. In the case of work created by an author during and in the course of his employment, the copyright shall belong to: (a) The employee, if the creation of the object of copyright is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. (b) The employer, if the work is the result of the performance of his regularly-assigned duties, unless there is an agreement, express or implied, to the contrary.

178.4. In the case of a work-commissioned by a person other than an employer of the author and who pays for it and the work is made in pursuance of the commission, the person who so commissioned the work shall have ownership of work, but the copyright thereto shall remain with the creator, unless there is a written stipulation to the contrary;

178.5. In the case of audiovisual work, the copyright shall belong to the producer, the author of the scenario, the composer of the music, the film director, and the author of the work so adapted. However, subject to contrary

or other stipulations among the creators, the producers shall exercise the copyright to an extent required for the exhibition of the work in any manner, except for the right to collect performing license fees for the performance of musical compositions, with or without words, which are incorporated into the work; and

178.6. In respect of letters, the copyright shall belong to the writer subject to the provisions of Article 723 of the Civil Code. (Sec. 6, P.D. No. 49a)

SEC. 179. Anonymous and Pseudonymous Works—For purposes of this Act, the publishers shall be deemed to represent the authors of articles and other writings published without the names of the authors or under pseudonyms, unless the contrary appears, or the pseudonyms or adopted name leaves no doubts as to the author’s identity, or if the author of the anonymous works discloses his identity. (Sec. 7, P.D. 49)

Notes: - RULES ON OWNERSHIP: Who owns the

copyright in a piece of work?o In general, the author (178.1)o In case of co-authors, both unless

there is a contrary agreement or unless the work constitutes parts which may be attributed separately

o In case of work created in the course of employment, the employee or employer (178.3)

o In case of commissioned work, the creator unless there is contrary stipulation (178.4)

o In case of audio-visual work, all who contributed, with the producer exercising copyright to the extent necessary to exhibit the work

o In case of a letter, the writero In case of anonymous work the

author with the publisher as representative

Transfer or assignment of copyright

SEC. 180. Rights of Assignee

180.1. The copyright may be assigned in whole or in part. Within the scope of the assignment, the assignee is entitled to all the rights and remedies which the assignor had with respect to the copyright.


180.2. The copyright is not deemed assigned inter vivos in whole or in part unless there is a written indication of such intention.

180.3. The submission of a literary, photographic or artistic work to a newspaper, magazine or periodical for publication shall constitute only a license to make a single publication unless a greater right is expressly granted. If two (2) or more persons jointly own a copyright or any part thereof, neither of the owners shall be entitled to grant licenses without the prior written consent of the other owner or owners. (Sec. 15, P.D. No. 49a)

SEC. 181. Copyright and Material Object—The copyright is distinct from the property in the material object subject to it. Consequently, the transfer or assignment of the copyright shall not itself constitute a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer or assignment of the copyright. (Sec. 16, P.D. No. 49)

SEC. 182. Filing of Assignment of License—An assignment or exclusive license may be filed in duplicate with the National Library upon payment of the prescribed fee for registration in books and records kept for the purpose. Upon recording, a copy of the instrument shall be, returned to the sender with a notation of the fact of record. Notice of the record shall be published in the IPO Gazette. (Sec. 19, P.D. No. 49a)

SEC 183. Designation of Society—The copyright owners or their heirs may designate a society of artists, writers or composers to enforce their economic rights and moral rights on their behalf. (Sec. 32, P.D. No. 49a)

Limitations on copyright

SEC. 184. Limitations on Copyright184.1. Notwithstanding the provisions of Chapter V, the following acts shall not constitute infringement of copyright: (a) the recitation or performance of a work, once it has been lawfully made accessible to the public, if done privately and free of charge or if made strictly for a charitable or religious institution or society; (Sec. 10(1), P.D. No.49) (b) The making of quotations from a published work if they are compatible with fair use and only to the extent justified for the purpose, including quotations from newspaper articles and periodicals in the form of press summaries: Provided, That the source and the name of the author, if appearing on the work, are mentioned; (Sec. 11, third par., P.D. No. 49)

(c) The reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works of the same nature, which are delivered in public if such use is for information purposes and has not been expressly reserved: Provided, That the source is clearly indicated; (Sec. 11, P.D. No. 49) (d) The reproduction and communication to the public of literary, scientific or artistic works as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose; (Sec. 12, P.D. No. 49) (e) The inclusion of a work in a publication, broadcast, or other communication to the public, sound recording or film, if such inclusion is made by way of illustration for teaching purposes and is compatible with fair use: Provided, That the source and of the name of the author, if appearing in the work, are mentioned; (f) The recording made in schools, universities, or educational institutions of a work included in a broadcast for the use of such schools, universities or educational institutions: Provided, That such recording must be deleted within a reasonable period after they were first broadcast: Provided, further, That such recording may not be made from audiovisual works which are part of the general cinema repertoire of feature films except for brief excerpts of the work; (g) The making of ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own broadcast; (h) The use made of a work by or under the direction or control of the Government, by the National Library or by educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use; (i) The public performance or the communication to the public of a work, in a place where no admission fee is charged in respect of such public performance or communication, by a club or institution for charitable or educational purpose only, whose aim is not profit making, subject to such other limitations as may be provided in the Regulations; (n) (j) Public display of the original or a copy of the work not made by means of a film, slide, television image or otherwise on screen or by means of any other device or process: Provided, That either the work has been published, or, that original or the copy displayed has been sold, given away or otherwise transferred to another person by the author or his successor in title; and


(k) Any use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal practitioner.

184.2. The provisions of this SEC shall be interpreted in such a way as to allow the work to be used in a manner which does not conflict with the normal exploitation of the work and does not unreasonably prejudice the right holder's legitimate interest.

SEC. 185. Fair Use of a Copyrighted Work185.1. The fair use of a copyrighted work for criticism, comment, news reporting, teaching including multiple copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright. Decompilation, which is understood here to be the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs may also constitute fair use. In determining whether the use made of a work in any particular case is fair use, the factors to be considered shall include: (a) The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit education purposes; (b) The nature of the copyrighted work; (c) The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (d) The effect of the use upon the potential market for or value of the copyrighted work.

185.2 The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

SEC. 186. Work of Architecture—Copyright in a work of architecture shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived from the original; Provided, That the copyright in any such work shall not include the right to control the reconstruction or rehabilitation in the same style as the original of a building to which the copyright relates. (n)

SEC. 187. Reproduction of Published Work187.1. Notwithstanding the provision of SEC 177, and subject to the provisions of SubSEC 187.2, the private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for

research and private study, shall be permitted, without the authorization of the owner of copyright in the work.

187.2. The permission granted under SubSEC 187.1 shall not extend to the reproduction of: (a) A work of architecture in form of building or other construction; (b) An entire book, or a substantial past thereof, or of a musical work in which graphics form by reprographic means; (c) A compilation of data and other materials; (d) A computer program except as provided in SEC 189; and (e) Any work in cases where reproduction would unreasonably conflict with a normal exploitation of the work or would otherwise unreasonably prejudice the legitimate interests of the author.(n)

SEC. 188. Reprographic Reproduction by Libraries188.1. Notwithstanding the provisions of SubSEC 177.6, any library or archive whose activities are not for profit may, without the authorization of the author of copyright owner, make a single copy of the work by reprographic reproduction: (a) Where the work by reason of its fragile character or rarity cannot be lent to user in its original form; (b) Where the works are isolated articles contained in composite works or brief portions of other published works and the reproduction is necessary to supply them; when this is considered expedient, to person requesting their loan for purposes of research or study instead of lending the volumes or booklets which contain them; and (c) Where the making of such a copy is in order to preserve and, if necessary in the event that it is lost, destroyed or rendered unusable, replace a copy, or to replace, in the permanent collection of another similar library or archive, a copy which has been lost, destroyed or rendered unusable and copies are not available with the publisher.

188.2. Notwithstanding the above provisions, it shall not be permissible to produce a volume of a work published in several volumes or to produce missing tomes or pages of magazines or similar works, unless the volume, tome or part is out of stock; Provided, That every library which, by law, is entitled to receive copies of a printed work, shall be entitled, when special reasons so require, to reproduce a copy of a published work which is considered necessary for the collection of the library but which is out of stock. (Sec. 13, P.D. 49a)


SEC. 189. Reproduction of Computer Program

189.1. Notwithstanding the provisions of SEC 177, the reproduction in one (1) back-up copy or adaptation of a computer program shall be permitted, without the authorization of the author of, or other owner of copyright in, a computer program, by the lawful owner of that computer program: Provided, That the copy or adaptation is necessary for: (a) The use of the computer program in conjunction with a computer for the purpose, and to the extent, for which the computer program has been obtained; and (b) Archival purposes, and, for the replacement of the lawfully owned copy of the computer program in the event that the lawfully obtained copy of the computer program is lost, destroyed or rendered unusable.

189.2. No copy or adaptation mentioned in this SEC shall be used for any purpose other than the ones determined in this SEC, and any such copy or adaptation shall be destroyed in the event that continued possession of the copy of the computer program ceases to be lawful.

189.3. This provision shall be without prejudice to the application of SEC 185 whenever appropriate. (n)

SEC. 190. Importation for Personal Purposes190.1. Notwithstanding the provision of SubSEC 177.6, but subject to the limitation under the SubSEC 185.2, the importation of a copy of a work by an individual for his personal purposes shall be permitted without the authorization of the author of, or other owner of copyright in, the work under the following circumstances: (a) When copies of the work are not available in the Philippines and: (i) Not more than one (1) copy at one time is imported for strictly individual use only; or (ii) The importation is by authority of and for the use of the Philippine Government; or (iii) The importation, consisting of not more than three (3) such copies or likenesses in any one invoice, is not for sale but for the use only of any religious, charitable, or educational society or institution duly incorporated or registered, or is for the encouragement of the fine arts, or for any state school, college, university, or free public library in the Philippines. (b) When such copies form parts of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale:

Provided, That such copies do not exceed three (3).

190.2. Copies imported as allowed by this SEC may not lawfully be used in any way to violate the rights of owner the copyright or annul or limit the protection secured by this Act, and such unlawful use shall be deemed an infringement and shall be punishable as such without prejudice to the proprietor’s right of action.

190.3. Subject to the approval of the Secretary of Finance, the Commissioner of Customs is hereby empowered to make rules and regulations for preventing the importation of articles the importation of which is prohibited under this SEC and under treaties and conventions to which the Philippines may be a party and for seizing and condemning and disposing of the same in case they are discovered after they have been imported. (Sec. 30, P.D. No. 49)

Doctrine of Fair Use (see Sec. 185)

Cases:

- Copyright infringement

Habana, et al. vs. Robles, et al., (1999)(As discussed in the textbook)Facts: Habana, Cinco, and Fernando are the authors of a book entitled College English for Today, while Robles is the author of a book on the same subject entitled Developing English Proficiency. In the course of revising their book, Habana came upon the book of Robles and Found that it was strikingly similar to their own book. Habana thereafter filed a complaint for infringement and/or unfair competition, with damages, against Robles and her publisher Goodwill Trading Co., Inc.The lower court dismissed the complaint of Habana on the ground that there was no infringement of copyright committed by Robles. Upon appeal the CA affirmed the decision of the lower court. HELD: The decision of the CA is reversed.A perusal of the records yields several pages of the book DEP that are similar if not identical with the text of CET. A pirate cannot claim that copied portions of copyrighted book are also found in foreign books and other grammar books and that the similarity between styled and that of other authors cannot be avoided since they come from the same background and orientation.Under SEC 184 of RA 8293, the making of quotations from a published work if they are compatible with fair use and only to the extent justified for the purpose, must provide for the


source and name of the author. A copy of a piracy is an infringement of the original and it is no defense that a pirate, in such cases, did not know whether or not he was infringing any copyright; he at least knew that what he was copying was not his, and he copied at his peril.To determine whether there is a substantial reproduction of a book, it does not necessarily require that the entire copyrighted work, or even a large portion of it, be copied. If so much is taken that the value of the original work is substantially diminished, there is an infringement of copyright and to an injurious extent, the work is appropriated. The amount of matter copied from the copyrighted work is an important consideration. It is not necessary that the whole or even a large portion shall have been copied. Copying alone is not what is prohibited. The copying must likewise produce an injurious effect. Here, the injury consists in that respondent Robles lifted from petitioner’s book materials that were the result of the latter’s research work and compilation and misrepresented them as her own. Hence, there is a clear case of appropriation of copyrighted work for her benefit.

COMMENTS: Sir takes exception to the fact that the Court did not provide a justification for overturning the findings of fact of both the RTC and the CA. Moreover, he agrees with Justice Davide that there was no copying and therefore, no question of fair or unfair use arises.

Notes:- Factors considered

a. PURPOSE and CHARACTER of the use- whether commercial, educational, non-profit, etc.

b. NATURE OF THE COPYRIGHTED WORK- implies that certain types of copyrighted material are more amenable to fair use than others

c. AMOUNT or SUBSTANTIALITY of the portion used- In general, the bigger or more important the greater the adverse effect. Note the DE MINIMIS RULE—every copying of copyrighted material is not necessarily an infringement if what was copied was trivial or negligible.

d. EFFECT OF THE USE upon the potential market for or value of the copyrighted work

- DECOMPILATION- reproduction of the code and translation of the forms of the computer program to achieve the inter-

operability of an independently created program with other programs (Sec. 185)

Notice of copyright

SEC. 192. Notice of Copyright—Each copy of a work published or offered for sale may contain a notice bearing the name of the copyright owner, and the year of its first publication, and, in copies produced after the creator’s death, the year of such death. (Sec. 27, P.D. No. 49a)

Neighboring or related rights

SEC. 202. Definitions—For the purpose of this Act, the following terms shall have the following meanings:

202.1. "Performers" are actors, singers, musicians, dancers, and other persons who act, sing, declaim, play in, interpret, or otherwise perform literary and artistic work;

202.2. "Sound recording" means the fixation of the sounds of a performance or of other sounds, or representation of sound, other than in the form of a fixation incorporated in a cinematographic or other audiovisual work;

202.3. An "audiovisual work or fixation" is a work that consists of a series of related images which impart the impression of motion, with or without accompanying sounds, susceptible of being made visible and, where accompanied by sounds, susceptible of being made audible;

202.4. "Fixation" means the embodiment of sounds, or of the representations thereof, from which they can be perceived, reproduced or communicated through a device;

202.5. "Producer of a sound recording" means the person, or the legal entity, who or which takes the initiative and has the responsibility for the first fixation of the sounds of a performance or other sounds, or the representation of sounds;

202.6. "Publication of a fixed performance or a sound recording" means the offering of copies of the fixed performance or the sound recording to the public, with the consent of the right holder: Provided, That copies are offered to the public in reasonable quality;

202.7. "Broadcasting" means the transmission by wireless means for the public reception of sounds or of images or of representations thereof; such transmission by satellite is also "broadcasting" where the means for decrypting


are provided to the public by the broadcasting organization or with its consent; 202.8. "Broadcasting organization" shall include a natural person or a juridical entity duly authorized to engage in broadcasting; and

202.9. "Communication to the public of a performance or a sound recording" means the transmission to the public, by any medium, otherwise than by broadcasting, of sounds of a performance or the representations of sounds fixed in a sound recording. For purposes of SEC 209, "communication to the public" includes making the sounds or representations of sounds fixed in a sound recording audible to the public.

SEC. 203. Scope of Performers' Rights—Subject to the provisions of SEC 212, performers shall enjoy the following exclusive rights:

203.1. As regards their performances, the right of authorizing: (a) The broadcasting and other communication to the public of their performance; and (b) The fixation of their unfixed performance.

203.2. The right of authorizing the direct or indirect reproduction of their performances fixed in sound recordings, in any manner or form; 203.3. Subject to the provisions of SEC 206, the right of authorizing the first public distribution of the original and copies of their performance fixed in the sound recording through sale or rental or other forms of transfer of ownership;

203.4. The right of authorizing the commercial rental to the public of the original and copies of their performances fixed in sound recordings, even after distribution of them by, or pursuant to the authorization by the performer; and

203.5. The right of authorizing the making available to the public of their performances fixed in sound recordings, by wire or wireless means, in such a way that members of the public may access them from a place and time individually chosen by them. (Sec. 42, P.D. No. 49a)

SEC. 204. Moral Rights of Performers204.1. Independently of a performer's economic rights, the performer, shall, as regards his live aural performances or performances fixed in sound recordings, have the right to claim to be identified as the performer of his performances, except where the omission is dictated by the manner of the use of the performance, and to object to any distortion, mutilation or other

modification of his performances that would be prejudicial to his reputation.

204.2. The rights granted to a performer in accordance with SubSEC 203.1 shall be maintained and exercised fifty (50) years after his death, by his heirs, and in default of heirs, the government, where protection is claimed. (Sec. 43, P.D. no. 49)

SEC. 205. Limitation on Right205.1. Subject to the provisions of SEC 206, once the performer has authorized the broadcasting or fixation of his performance, the provisions of SECs 203 shall have no further application.

205.2. The provisions of SEC 184 and SEC 185 shall apply mutatis mutandis to performers. (n)

SEC. 206. Additional Remuneration for Subsequent Communications or Broadcasts—Unless otherwise provided in the contract, in every communication to the public or broadcast of a performance subsequent to the first communication or broadcast thereof by the broadcasting organization, the performer shall be entitled to an additional remuneration equivalent to at least five percent (5%) of the original compensation he or she received for the first communication or broadcast. (n)

SEC. 207. Contract Terms—Nothing in this Chapter shall be construed to deprive performers of the right to agree by contracts on terms and conditions more favorable for them in respect of any use of their performance. (n)

SEC. 208. Scope of Right—Subject to the provisions of SEC 212, producers of sound recordings shall enjoy the following exclusive rights:

208.1. The right to authorize the direct or indirect reproduction of their sound recordings, in any manner or form; the placing of these reproductions in the market and the right of rental or lending;

208.2. The right to authorize the first public distribution of the original and copies of their sound recordings through sale or rental or other forms of transferring ownership; and

208.3. The right to authorize the commercial rental to the public of the original and copies of their sound recordings, even after distribution by them by or pursuant to authorization by the producer. (Sec. 46, P.D. No. 49a)

SEC. 209. Communication to the Public—If a sound recording published for commercial


purposes, or a reproduction of such sound recording, is used directly for broadcasting or for other communication to the public, or is publicly performed with the intention of making and enhancing profit, a single equitable remuneration for the performer or performers, and the producer of the sound recording shall be paid by the user to both the performers and the producer, who, in the absence of any agreement shall share equally. (Sec. 47, P.D. No. 49a)

SEC. 210. Limitation of Right—SECs 184 and 185 shall apply mutatis mutandis to the producer of sound recordings. (Sec. 48, P.D. No. 49a)

SEC. 211. Scope of Right—Subject to the provisions of SEC 212, broadcasting organizations shall enjoy the exclusive right to carry out, authorize or prevent any of the following acts:

211.1. The rebroadcasting of their broadcasts;

211.2. The recording in any manner, including the making of films or the use of video tape, of their broadcasts for the purpose of communication to the public of television broadcasts of the same; and

211.3. The use of such records for fresh transmissions or for fresh recording. (Sec. 52, P.D. No. 49)

Sec. 212. Limitations on Rights—SECs 203, 208 and 209 shall not apply where the acts referred to in those SECs are related to: 212.1. The use by a natural person exclusively for his own personal purposes;

212.2. Using short excerpts for reporting current events;

212.3. Use solely for the purpose of teaching or for scientific research; and

212.4. Fair use of the broadcast subject to the conditions under SEC 185. (Sec. 44, P.D. no. 49a)

Term

SEC. 213. Term of Protection213.1. Subject to the provisions of SubSECs 213.2 to 213.5, the copyright in works under SECs 172 and 173 shall be protected during the life of the author and for fifty (50 years after his death. This rule also applies to posthumous works. (Sec. 21, first sentence, P.D. No. 49a)

213.2. In case of works of joint authorship, the economic rights shall be protected during the life of the last surviving author and for fifty (50) years after his death. (Sec. 21, second sentence, P.D. no. 49)

213.3. In case of anonymous or pseudonymous works, the copyright shall be protected for fifty (50) years from the date on which the work was first lawfully published: Provided, That where, before the expiration of the said period, the author's identity is revealed or is no longer in doubt, the provisions of SubSECs 213.1 and 213.2 shall apply, as the case may be: Provided, further, That such works if not published before shall be protected for fifty (50) years counted from the making of the work. (Sec. 23, P.D. No. 49)

213.4. In case of works of applied art the protection shall be for a period of twenty-five (25) years from the date of making. (Sec. 24(B), P.D. No. 49a)

213.5. In case of photographic works, the protection shall be for fifty (50) years from publication of the work and, if unpublished, fifty (50) years from the making. (Sec. 24(C), P.D. 49a)

213.6. In case of audio-visual works including those produced by process analogous to photography or any process for making audio-visual recordings, the term shall be fifty (50) years from date of publication and, if unpublished, from the date of making. (Sec. 24(C), P.D. No. 49a)

SEC. 214. Calculation of Term—The term of protection subsequent to the death of the author provided in the preceding SEC shall run from the date of his death or of publication, but such terms shall always be deemed to begin on the first day of January of the year following the event which gave rise to them. (Sec. 25, P.D. No. 49)

SEC. 215. Term of Protection for Performers, Producers and Broadcasting Organizations215.1. The rights granted to performers and producers of sound recordings under this law shall expire:(a) For performances not incorporated in recordings, fifty (50) years from the end of the year in which the performance took place; and (b) For sound or image and sound recordings and for performances incorporated therein, fifty (50) years from the end of the year in which the recording took place.


215.2. In case of broadcasts, the term shall be twenty (20) years from the date the broadcast took place. The extended term shall be applied only to old works with subsisting protection under the prior law. (Sec. 55, P.D. No. 49a)

Notes:- Terms shall always be deemed to begin

on the first day of January of the year following the event which gave rise to them.

Concept of copying or infringement of copyright[Insert notes]

Remedies for infringement

SEC. 216. Remedies for Infringement216.1. Any person infringing a right protected under this law shall be liable: (a) To an injunction restraining such infringement. The court may also order the defendant to desist from an infringement, among others, to prevent the entry into the channels of commerce of imported goods that involve an infringement, immediately after customs clearance of such goods. (b) Pay to the copyright proprietor or his assigns or heirs such actual damages, including legal costs and other expenses, as he may have incurred due to the infringement as well as the profits the infringer may have made due to such infringement, and in proving profits the plaintiff shall be required to prove sales only and the defendant shall be required to prove every element of cost which he claims, or, in lieu of actual damages and profits, such damages which to the court shall appear to be just and shall not be regarded as penalty. (c) Deliver under oath, for impounding during the pendency of the action, upon such terms and conditions as the court may prescribe, sales invoices and other documents evidencing sales, all articles and their packaging alleged to infringe a copyright and implements for making them. (d) Deliver under oath for destruction without any compensation all infringing copies or devices, as well as all plates, molds, or other means for making such infringing copies as the court may order. (e) Such other terms and conditions, including the payment of moral and exemplary damages, which the court may deem proper, wise and equitable and the destruction of infringing copies of the work even in the event of acquittal in a criminal case.

216. 2. In an infringement action, the court shall also have the power to order the seizure and impounding of any article which may serve as

evidence in the court proceedings. (Sec. 28, P.D. No. 49a)

SEC. 217. Criminal Penalties217.1. Any person infringing any right secured by provisions of Part IV of this Act or aiding or abetting such infringement shall be guilty of a crime punishable by: (a) Imprisonment of one (1) year to three (3) years plus a fine ranging from Fifty thousand pesos (P50,000) to One hundred fifty thousand pesos (P150,000) for the first offense. (b) Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging from One hundred fifty thousand pesos (P150,000) to Five hundred thousand pesos (P500,000) for the second offense. (c) Imprisonment of six (6) years and one (1) day to nine (9) years plus a fine ranging from Five hundred thousand pesos (P500,000) to One million five hundred thousand pesos (P1,500,000) for the third and subsequent offenses. (d) In all cases, subsidiary imprisonment in cases of insolvency.

217.2. In determining the number of years of imprisonment and the amount of fine, the court shall consider the value of the infringing materials that the defendant has produced or manufactured and the damage that the copyright owner has suffered by reason of the infringement.

217.3. Any person who at the time when copyright subsists in a work has in his possession an article which he knows, or ought to know, to be an infringing copy of the work for the purpose of: (a) Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article; (b) Distributing the article for purpose of trade, or for any other purpose to an extent that will prejudice the rights of the copyright owner in the work; or (c) Trade exhibit of the article in public, shall be guilty of an offense and shall be liable on conviction to imprisonment and fine as above mentioned. (Sec. 29, P.D. No. 49a)

GEOGRAPHICAL INDICATIONS

Article 22 (TRIPS AGREEMENT)Protection of Geographical Indications1. Geographical indications are, for the purposes of this Agreement, indications which identify a good as originating in the territory of a Member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin.


2. In respect of geographical indications, Members shall provide the legal means for interested parties to prevent: (a) the use of any means in the designation or presentation of a good that indicates or suggests that the good in question originates in a geographical area other than the true place of origin in a manner which misleads the public as to the geographical origin of the good; (b) any use which constitutes an act of unfair competition within the meaning of Article 10bis of the Paris Convention (1967).3. A Member shall, ex officio if its legislation so permits or at the request of an interested party, refuse or invalidate the registration of a trademark which contains or consists of a geographical indication with respect to goods not originating in the territory indicated, if use of the indication in the trademark for such goods in that Member is of such a nature as to mislead the public as to the true place of origin.4. The protection under paragraphs 1, 2 and 3 shall be applicable against a geographical indication which, although literally true as to the territory, region or locality in which the goods originate, falsely represents to the public that the goods originate in another territory.

UNDISCLOSED INFORMATION

RULE 1 (o), IPO Rules and Regulations on Voluntary Licensingo) “Undisclosed Information” shall mean information which: (i) Is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (ii) has commercial value because it is secret; and (iii) has been subject to reasonable steps under the circumstances to keep it secret, by the person lawfully in control of the information.