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2007 Supplement to the Notes on Selected Commercial Lawsby Atty. Tristan A. Catindig • June 12, 2007• All rights reserved.

CHAPTER I: BANGKO SENTRAL NG PILIPINAS LAW

SUPPLEMENT TO PARAGRAPH 1.17 (A), PP. 12-13

On account of the issuance by the BSP of new coins in higher denominations after the affectivity

of the BSP Law in 1993, the BSP, pursuant to Section 52 of the BSP Law and Monetary Board

Resolution No. 862, dated July 6, 2006, issued Circular No. 537, dated July 18, 2006, which

adjusted the maximum amount of coins to be considered as legal tender as follows:

1. One Thousand Pesos (P1,000) for denominations of 1-Piso, 5-Piso and 10-Piso coins;

and

2. One Hundred Pesos (P100) for denominations of 1-sentimo, 5-sentimo, 10-sentimo,

and 25-sentimo coins.

CHAPTER II: GENERAL BANKING LAW OF 2000

SUPPLEMENT TO PARAGRAPH 2.31, PP. 32-33

Under BSP Circular No. 488, dated June 21, 2005, and BSP Circular No. 493, dated September

16, 2005, the BSP added the following functions, services or activities that banks could outsource

subject to prior approval of the Monetary Board:

1. Internal audit (subject to a number of conditions);

2. Marketing loans, deposits and other bank products and services, provided it does not

involve the actual opening of deposit accounts;

3. General bookkeeping and accounting services, provided that these activities do not

include servicing bank deposits or other inherent banking functions;

4. Offsite record storage services;

5. Back-up and data recovery 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;

10. Payroll of banking employees;

11. Telephone operator/receptionist services;

12. Sales/disposal of acquired assets;

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13. Personnel training and development;

14. Building, ground and other facilities maintenance;

15. legal services from local legal counsel; and

16. compliance risk assessment and testing.

ADDITIONAL SUPREME COURT CASE

Banks are required to assume a degree of diligence higher than that of a good father of a family

(Philippine Banking Corporation vs. CA, G.R. No. 127469, January 15, 2004)

The Court held that Section 2 of the General Banking Law of 2000 expressly imposes a fiduciary

duty on banks when it declares that the State recognizes the “fiduciary nature of banking that

requires high standards of integrity and performance.” For this reason, the fiduciary nature of

banking requires a bank to assume a degree of diligence higher than that of a good father of a

family. Thus, the Court ruled:

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.

CHAPTER IV: PHILIPPINE DEPOSIT INSURANCE CORPORATION

REVISED CHAPTER IV, PP. 53-56

4.1 What is the purpose of the law? (Sec. 1)

The purpose of the law is to create a government-owned and controlled entity, the Philippine

Deposit Insurance Corporation, which shall insure the deposit liabilities of all banks entitled to the

benefits of insurance under the Act. Such insurance is intended to protect depositors from

situations that prevent banks from paying out deposits, as in bank failures or closures, and to

encourage people to deposit in banks.

4.2 What are the main functions of the PDIC?

(a) Insurance of banks (Sec. 5, et seq.) – The PDIC insures the deposit liabilities of

banks. For this purpose, it assesses and collects insurance assessments from

member-banks. Whenever an insured bank is closed, the PDIC processes and

services claims of insured deposits.

(b) Examination of banks (Secs. 8 and 9) – The PDIC may examine a bank with the

prior approval of the Monetary Board of the Bangko Sentral ng Pilipinas. Such

examination may extend to all the affairs of the bank and includes the authority to

investigate frauds, irregularities and anomalies committed in the bank.

(c) Rehabilitation of banks (Sec. 17) – Upon determination by the PDIC that (i) abank is in danger of closing, (ii) the continued operation of such bank is essential

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to provide adequate banking service in the community or maintain financial

stability in the economy, and (iii) the actual liquidation and payoff of the bank will

be more expensive than the extension of financial assistance to the bank, the PDIC

may make loans to, purchase the assets or assume the liabilities of, or make

deposits in, the said bank in order to prevent its closing. The foregoing authoritymay also be exercised by the PDIC in respect of a closed bank.

(d) Receivership of closed banks (Secs. 8 and 10; see also Sec. 30, RA 7653) – As

receiver, the PDIC shall control, manage and administer the affairs of the closed

bank for the purpose of preserving its assets for the benefit of the creditors of the

bank.

(e) Liquidation of closed banks (Sec. 30, RA 7653) – If the closed bank cannot be

rehabilitated, the PDIC would proceed with its liquidation. This would involve the

conversion of the assets of the bank into cash for distribution to the creditors in

accordance with the provisions of the Civil Code on concurrence and preference

of credits.

Insurance Coverage

4.3 Whose deposit liabilities are required to be insured with the PDIC? (Sec. 5)

The deposit liabilities of any bank, including the branches in the Philippines of foreign banks,

engaged in the business of receiving deposits are required to be insured with the PDIC.

4.4 Is PDIC insurance coverage required of foreign currency deposits maintained in

Philippine banks?

Yes. Section 9 of the Foreign Currency Deposit Act (RA 6426, as amended) and Section 79 of CB

Circular No. 1389, dated August 13, 1993, require foreign currency deposits to be insured under

the PDIC Law. Foreign currency depositors are entitled to receive payment in the same currency in

which the insured deposit is denominated.

4.5 Are the deposit liabilities of a local bank payable in its branch located abroad

covered by PDIC insurance? (Sec. 4[f])

No, they would not be covered by PDIC insurance. However, subject to PDIC approval, a local

bank that maintains a branch outside the Philippines may elect to include for insurance its deposit

obligations payable only at such branch.

4.6 When does the PDIC become liable to pay the insured deposits? (Sec. 14)

The PDIC becomes liable to pay the insured deposits in a bank when the bank is closed by the

Monetary Board of the Bangko Sentral ng Pilipinas, that is, prohibited from doing further business

in the Philippines, on account of insolvency and other grounds under the law (see Paragraph 1.10).

4.7 Does PDIC insurance cover risks other than bank closure?

No, PDIC insurance covers only the risk of bank closure ordered by the Monetary Board. Losses

that a bank may suffer due to natural calamities, theft, war, strike, etc. would not be covered by

PDIC insurance.

4.8 What is the extent of the PDIC’s liability to a bank depositor? (Sec. 4[g])The PDIC’s liability is up to P250,000 per depositor per capacity.

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4.9 What is an insured deposit? (Sec. 4[g]; see also PDIC Bulletin No. 2004-04, August 12,

2004)

An insured deposit is the amount due any depositor for deposits in an insured bank net of any

matured or unmatured obligation of the depositor to the insured bank as of the date of closure butnot to exceed P250,000. In determining s depositor’s insured deposit, the PDIC shall add together

all deposits in the bank maintained by the depositor in the same right and capacity for his benefit

either in his own name or in the name of others. The outstanding balance of each account would

also be adjusted to take into account any interest earned by the account as of the date of closure of

the bank less any withholding tax due on such interest.

4.10 How would joint accounts be insured and what rules would apply in the payment of

PDIC insurance to such accounts? (Sec. 4[g]; see also PDIC Bulletin No. 2004-04,

August 12, 2004)

(a) A joint account, regardless of whether the conjunction “and”, “or”, or “and/or” is used,shall be insured separately from any individually-owned deposit account. The maximum insured

deposit of P250,000 shall be divided into as many equal shares as there are depositors unless a

different sharing is stipulated in the document of deposit.

Example: Pedro and Mario have P400,000 in a joint savings account with ABC

Bank. Pedro also has P300,000 in another savings account that he maintains with

the same bank solely in his name. Mario’s total deposit is P200,000 while that of

Pedro is P500,000. If ABC Bank were closed, Mario could claim P125,000 from

PDIC (representing his 50% share of the maximum insured deposit of the joint

account with Pedro) while Pedro could claim a total of P250,000 (P125,000,

representing his 50% share of the maximum insured deposit of the joint account

with Mario), plus P125,000 out of the savings account solely in his name.(b) If the account were held by a juridical person jointly with one or more natural persons, the

maximum insured deposit shall be presumed to belong entirely to such juridical person or entity.

Example: XYZ Corporation and Pedro have P250,000 in a joint savings account

with ABC Bank. Pedro also has P250,000 in another savings account that he

maintains with the same bank solely in his name. If ABC Bank were closed, XYZ

Corporation could claim P250,000 from PDIC. The P250,000 in the joint account

would be presumed to belong entirely to XYZ Corporation.

(c) In case one of the co-depositors in a joint “and/or” or “or” account has an obligation to the

closed bank covered by a hold-out agreement (i.e., a security arrangement whereby the obligation

is secured by the account), the obligation secured by the said agreement shall be deducted from thebalance of the joint account regardless of the fact that only one of the co-depositors is indebted to

the closed bank.

Example: Pedro and Mario have P200,000 in a joint “and/or” savings account

with ABC Bank. Pedro borrowed P50,000 from the bank and secured it with a

hold-out on the joint “and/or” savings account. If ABC Bank were closed, Pedro

and Mario could each claim only P75,000 from the PDIC.

(d) In case the deposit is a joint “and” account, the obligation shall be deducted only from the

share of the indebted co-depositor unless the other co-depositor is himself a co-signatory to the

hold-out agreement.

Example: If the account in the immediately preceding problem were a joint “and”account, Pedro could claim only P50,000 from the PDIC. Mario could claim

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P100,000.

(e) Where the deposit is not covered by a hold-out agreement, the obligation shall be deducted

only from the share of the indebted co-depositor regardless of whether the deposit is a joint “and”,

“or”, or “and/or” account.

Payment of Insured Deposits

4.11 Is the PDIC required to notify the depositors of a closed bank of the fact of such

closure and the need to file their claims? (Sec. 16)

Yes, The PDIC shall publish the notice to depositors once a week for three (3) consecutive weeks

in a newspaper of general circulation or, when appropriate, in a newspaper circulated in the

community or communities where the closed bank or its branches are located.

4.12 Is there a prescriptive period for the filing of claims with the PDIC by the depositors

of a closed bank? (Sec. 16[e])Yes. A depositor of a closed bank must file his claim with the PDIC within 2 years from actual

takeover of the closed bank by PDIC. If he does not, all his rights against the PDIC in respect of

the insured deposits shall be barred. However, all the rights of the depositor against the closed

bank and its shareholders or the receivership estate to which PDIC may have become subrogated

shall thereupon revert to the depositor.

4.13 When is the PDIC required to settle a claim for an insured deposit? (Sec. 14)

The PDIC is required to settle the claim within 6 months from the date of filing thereof provided

that the claim was filed within 2 years from actual takeover of the closed bank by PDIC. The 6-

month period shall not apply if the documents of the claimant are incomplete or the validity of theclaim requires the resolution of issues of facts or law by another office, body or agency,

independently or in coordination with the PDIC.

4.14 When an insured bank is closed, how will payment of the insured deposits in such

bank be made by the PDIC? (Sec. 14)

The PDIC shall pay either (i) in cash or (ii) by making available to each depositor a transferred

deposit in another insured bank in an amount equal to the insured deposit of such depositor.

4.15 What is a transferred deposit? (Sec. 4[h])

It is a deposit in an insured bank made available to a depositor by the PDIC as payment of the

insured deposit of such depositor in a closed bank and assumed by another insured bank. By

paying its liabilities to depositors in this manner, the PDIC hopes to persuade these depositors to

keep their savings in banks where such funds could be lent out, rather than hoarded and kept out of

the banking system.

4.16 What is the effect of payment to the depositor of his insured deposit?

(Sec. 16[b])

It (i) discharges the PDIC from any further liability to the depositor, and (ii) subrogates the PDIC

to all the rights of the depositor against the closed bank to the extent of such payment.

4.17 What is the nature of the payments of insured deposits made by the PDIC and dothey enjoy any preference under Article 2244 of the Civil Code? (Sec. 15)

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All payments by the PDIC of insured deposits in closed banks partake of the nature of public

funds, and as such, must be considered a preferred credit similar to taxes due to the National

Government in the order of preference under Article 2244 of the New Civil Code.

4.18 If the deposit account in a closed bank were more than P250,000, would it still bepossible for the depositor to recover the excess?

Yes. Assuming that the bank is not rehabilitated or taken over by another bank, the depositor could

claim the excess amount from the liquidator of the closed bank. However, the liquidator might not

be able to pay the claim if the final liquidation of the remaining assets of the closed bank does not

generate enough cash to pay such claim. Such claim would also be subject to the provisions of the

Civil Code on concurrence and preference of credits. If the bank is rehabilitated or taken over by

another bank, the rehabilitator or the bank taking over the closed bank would usually assume the

liability for the payment of the excess deposits.

Powers of the PDIC

4.19 What is the extent of the power of the PDIC to examine banks? (Sec. 8)

The PDIC may examine a bank with the prior approval of the Monetary Board. However, no

examination can be conducted within 12 months from the last examination date.

4.20 Could the PDIC provide legal assistance to its directors, officers, employees or

agents? (Sec. 9[f])

Yes. The PDIC shall underwrite or advance the litigation expenses of, including legal fees and

other expenses of external counsel, or provide legal assistance to, its directors, officers, employees

or agents in connection with any civil, criminal, administrative or any other action or proceeding

to which such directors, officers, employees or agents are made a party by reason of, or inconnection with, their exercise of authority or performance of functions and duties under the PDIC

Law.

4.21 As receiver, does the PDIC take over the powers, functions and duties of the

directors, officers and stockholders of the closed bank? (Sec. 10[b], 1st paragraph)

Yes. The PDIC as receiver shall control, manage and administer the affairs of the closed bank.

Effective immediately upon its 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 Incorporation and By-

laws of the closed bank are likewise deemed suspended.

4.22 What is the status of the assets of the closed bank under receivership? (Sec. 10[b], 2nd

paragraph)

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.

4.23 What are some of the additional powers of the PDIC as a receiver? (Sec. 10[c])

(a) suspend or terminate the employment of officers and employees of the closed bank;

provided, that payment of separation pay or benefits shall be made only after the closed bank has

been placed under liquidation pursuant to the order of the Monetary Board under Section 30 of R.A. 7653, and that such payment shall be made from available funds of the bank after deducting

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reasonable expenses for receivership and liquidation;

(b) hire or retain private counsels as may be necessary;

(c) if the stipulated interest on deposits is unusually high compared with the prevailing

applicable interest rate, the PDIC as receiver may exercise such powers that may include areduction of the interest rate to a reasonable rate; provided, that any modification or reduction shall

apply only to unpaid interest.

4.24 Is the PDIC required to pay docket and other court fees in the cases it might file as

receiver for the recovery, or involving any asset, of the closed bank? (Sec. 11)

Yes. However, payment of docket and other court fees shall be deferred until the action is

terminated with finality. Any such fees shall be a first lien on any judgment in favor of the closed

bank or, in case of unfavorable judgment, such fees shall be paid as administrative expenses during

the distribution of the assets of the closed bank.

CHAPTER V: TRUTH IN LENDING ACT

ADDITIONAL SUPREME COURT CASES

1. Excessive interests, penalties and other charges not revealed in disclosure statementsissued 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. vs.

Philippine National Bank , G.R. No. 148753, July 30, 2004)

The Court ruled in this case that “excessive 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.” The Court further said:

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 unrenewedwhen 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 sniveling paper

tiger to a growling financial watchdog of hapless borrowers.

2. Failure to disclose required information in disclosure statement cured by disclosure

thereof in loan transaction documents ( DBP vs. Arcilla, G.R. No. 161397, June 30,

2005)

The Court ruled that the failure of the DBP to disclose the required information in the disclosure

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statement form authorized by the BSP was cured by the DBP’s disclosure of such information in

the loan transaction documents (i.e., the deed of conditional sale and the supplement thereto, the

promissory notes, and the release sheet) between the DBP and Arcilla.

CHAPTER VI: LETTERS OF CREDIT


1. Possible parties to a letter of credit transaction; nature of letter of credit-trust receipt

arrangement ( Lee, et al. vs. CA and Philippine Bank of Communications, G.R. No.

117913, February 1, 2002)

The pertinent parts of the Court’s decision are set out below:

Modern letters of credit are usually not made between natural persons. They involve bank to bank

transactions. Historically, the letter 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. Expansion in the use of letters of credit was a natural development in

commercial banking. Parties to a commercial letter of credit include (a) the buyer or the importer,

(b) the seller, also referred to as beneficiary, (c) the opening bank which is usually the buyer’s

bank which actually issues the letter of credit, (d) the notifying bank which is the correspondent

bank of the opening bank through which it advises the beneficiary of the letter of credit, (e)

negotiating bank which is usually any bank in the city of the beneficiary. The services of the

notifying bank must always be utilized if the letter of credit is to be advised to the beneficiary

through cable, (f) the paying bank which buys or discounts the drafts contemplated by the letterof credit, if such draft is to be drawn on the opening bank or on another designated bank not in the

city of the beneficiary. As a rule, whenever the facilities of the opening bank are used, the

beneficiary is supposed to present his drafts to the notifying bank for negotiation and (g) the

confirming bank which, upon the request of the beneficiary, confirms the letter of credit issued

by the opening bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions,

involve more than just one bank. Consequently, there is nothing unusual in the fact that the drafts

presented in evidence by respondent bank were not made payable to PBCom. As explained by

respondent bank, a draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of

Taiwan, supplier of the goods covered by the foreign letter of credit. Having paid the supplier, the

Bank of Taiwan then presented the bank draft for reimbursement by PBCom’s correspondent bank in Taiwan, the Irving Trust Company — which explains the reason why on its face, the draft was

made payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft to

PBCom. The draft was later transmitted to PBCom to support the latter’s claim for payment from

MICO. MICO accepted the draft upon presentment and negotiated it to PBCom.

- o -

A trust receipt is considered as a security transaction intended to aid in financing importers and

retail dealers who do not have sufficient funds or resources to finance the importation or purchase

of merchandise, and who may not be able to acquire credit except through utilization, as collateral

of the merchandise imported or purchased. A trust receipt, therefor, is a document of security

pursuant to which a bank acquires a “security interest” in the goods under trust receipt. Under a

letter of credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit, with

the trust receipt as a security for the loan. The transaction involves a loan feature represented by a

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letter of credit, and a security feature which is in the covering trust receipt which secures an

indebtedness.

2. Commercial and standby letters of credit; independence principle; fraud exception rule

(Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717,November 22, 2004)

The relevant parts of the Court’s decision are set out below:

At the core of the present controversy is the applicability of the “independence principle” and

“fraud exception rule” in letters of credit. Thus, a discussion of the nature and use of letters of

credit, also referred to simply as “credits,” would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets

is to recognize that it is an entity unto itself. The relationship between the beneficiary and the

issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the

minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-

party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank’s customer cannot draw

on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if

properly used, is it a contract of suretyship or guarantee, because it entails a primary liability

following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to

order or bearer and is generally conditional, yet the draft presented under it is often negotiable.

In commercial transactions, a letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly

irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a

buyer, who wants to have control of the goods before paying. The use of credits in commercial

transactions serves to reduce the risk of nonpayment of the purchase price under the contract for

the sale of goods. However, credits are also used in non-sale settings where they serve to reducethe risk of nonperformance. Generally, credits in the non-sale settings have come to be known as

standby credits.

There are three significant differences between commercial and standby credits. First, commercial

credits involve the payment of money under a contract of sale. Such credits become payable upon

the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to

comply with the sales agreement. In the standby type, the credit is payable upon certification of a

party's nonperformance of the agreement. The documents that accompany the beneficiary's draft

tend to show that the applicant has not performed. The beneficiary of a commercial credit must

demonstrate by documents that he has performed his contract. The beneficiary of the standby

credit must certify that his obligor has not performed the contract. [Underscoring supplied]

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the

addressee to pay money or deliver goods to a third person and assumes responsibility for payment

of debt therefor to the addressee. A letter of credit, however, changes its nature as different

transactions occur and if carried through to completion ends up as a binding contract between the

issuing and honoring banks without any regard or relation to the underlying contract or disputes

between the parties thereto.

Since letters of credit have gained general acceptability in international trade transactions, the ICC

has published from time to time updates on the Uniform Customs and Practice (UCP) for

Documentary Credits to standardize practices in the letter of credit area. The vast majority of

letters of credit incorporate the UCP. First published in 1933, the UCP for Documentary Credits

has undergone several revisions, the latest of which was in 1993.In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc. this Court ruled that the

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observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in

the absence of any particular provision in the Code of Commerce, commercial transactions shall

be governed by usages and customs generally observed. More recently, in Bank of America, NT &

SA v. Court of Appeals, this Court ruled that there being no specific provisions which govern the

legal complexities arising from transactions involving letters of credit, not only between or amongbanks themselves but also between banks and the seller or the buyer, as the case may be, the

applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales

or other contract(s) on which they may be based and banks are in no way concerned with or bound

by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit.

Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill

any other obligation under the credit is not subject to claims or defenses by the applicant resulting

from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail

himself of the contractual relationships existing between the banks or between the applicant and

the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the

draft and the required documents are presented to it. The so-called “independence principle”

assures the seller or the beneficiary of prompt payment independent of any breach of the main

contract and precludes the issuing bank from determining whether the main contract is actually

accomplished or not. Under this principle, banks assume no liability or responsibility for the form,

sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the

general and/or particular conditions stipulated in the documents or superimposed thereon, nor do

they assume any liability or responsibility for the description, quantity, weight, quality, condition,

packing, delivery, value or existence of the goods represented by any documents, or for the good

faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or

the insurers of the goods, or any other person whomsoever.

The independent nature of the letter of credit may be: (a) independence in toto where the credit is

independent from the justification aspect and is a separate obligation from the underlying

agreement like for instance a typical standby; or (b) independence may be only as to the

justification aspect like in a commercial letter of credit or repayment standby, which is identical

with the same obligations under the underlying agreement. In both cases the payment may be

enjoined if in the light of the purpose of the credit the payment of the credit would constitute

fraudulent abuse of the credit.

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the instant case and assuming it

is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it

would be contrary to common sense to deny the benefit of an independent contract to the veryparty for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is

entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is

stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary

provided that the stipulated documents are presented and the conditions of the credit are complied

with. Precisely, the independence principle liberates the issuing bank from the duty of ascertaining

compliance by the parties in the main contract. As the principle’s nomenclature clearly suggests,

the obligation under the letter of credit is independent of the related and originating contract. In

brief, the letter of credit is separate and distinct from the underlying transaction.

Given the nature of letters of credit, petitioner’s argument—that it is only the issuing bank thatmay invoke the independence principle on letters of credit—does not impress this Court. To say

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that the independence principle may only be invoked by the issuing banks would render nugatory

the purpose for which the letters of credit are used in commercial transactions. As it is, the

independence doctrine works to the benefit of both the issuing bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for

the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions.With the letter of credit from the issuing bank, the party who applied for and obtained it may

confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to

enter into the business transaction. On the other hand, the other party to the business transaction,

i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the

letter of credit as a security in case the commercial transaction does not push through, or the

applicant fails to perform his part of the transaction. It is for this reason that the party who is

entitled to the proceeds of the letter of credit is appropriately called “beneficiary.”

Petitioner’s argument that any dispute must first be resolved by the parties, whether through

negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence

would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear

distinction between a letter of credit and a guarantee in that the settlement of a dispute between the

parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the

argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable

only after settlement of the dispute on the contract entered into by the applicant and the

beneficiary, there would be no practical and beneficial use for letters of credit in commercial

transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same

reasons that commercial credits are attractive. Essentially, these credits are

inexpensive and efficient. Often they replace surety contracts, which tend to

generate higher costs than credits do and are usually triggered by a factualdetermination rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety

contract on the one hand and the standby credit on the other, the distinction

between surety contracts and credits merits some reflection. The two commercial

devices share a common purpose. Both ensure against the obligor’s

nonperformance. They function, however, in distinctly different ways.

Traditionally, upon the obligor’s default, the surety undertakes to complete the

obligor’s performance, usually by hiring someone to complete that performance.

Surety contracts, then, often involve costs of determining whether the obligor

defaulted (a matter over which the surety and the beneficiary often litigate) plus

the cost of performance. The benefit of the surety contract to the beneficiary is

obvious. He knows that the surety, often an insurance company, is a strong

financial institution that will perform if the obligor does not. The beneficiary also

should understand that such performance must await the sometimes lengthy and

costly determination that the obligor has defaulted. In addition, the surety’s

performance takes time.

The standby credit has different expectations. He reasonably expects that he will

receive cash in the event of nonperformance, that he will receive it promptly, and

that he will receive it before any litigation with the obligor (the applicant) over the

nature of the applicant’s performance takes place. The standby credit has this

opposite effect of the surety contract: it reverses the financial burden of partiesduring litigation.

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In the surety contract setting, there is no duty to indemnify the beneficiary until

the beneficiary establishes the fact of the obligor’s performance. The beneficiary

may have to establish that fact in litigation. During the litigation, the surety holds

the money and the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burdenand receives his money promptly upon presentation of the required documents. It

may be that the applicant has, in fact, performed and that the beneficiary’s

presentation of those documents is not rightful. In that case, the applicant may sue

the beneficiary in tort, in contract, or in breach of warranty; but, during the

litigation to determine whether the applicant has in fact breached the obligation to

perform, the beneficiary, not the applicant, holds the money. Parties that use a

standby credit and courts construing such a credit should understand this

allocation of burdens. There is a tendency in some quarters to overlook this

distinction between surety contracts and standby credits and to reallocate burdens

by permitting the obligor or the issuer to litigate the performance question before

payment to the beneficiary.

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to

ask the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates

petitioner’s posture that LHC cannot invoke the independence principle and highlights its

puerility, more so in this case where the banks concerned were impleaded as parties by petitioner

itself.

Respondent banks had squarely raised the independence principle to justify their releases of the

amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit,

this Court rules that the respondent banks were left with little or no alternative but to honor the

credit and both of them in fact submitted that it was “ministerial” for them to honor the call for

payment.

- o -

Next, petitioner invokes the “fraud exception” principle. It avers that LHC’s call on the Securities

is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a

breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral

tribunals. It asserts that the “fraud exception” exists when the beneficiary, for the purpose of

drawing on the credit, fraudulently presents to the confirming bank, documents that contain,

expressly or by implication, material representations of fact that to his knowledge are untrue. In

such a situation, petitioner insists, injunction is recognized as a remedy available to it.

[Underscoring supplied]

Citing Dolan’s treatise on letters of credit, petitioner argues that the independence principle is not

without limits and it is important to fashion those limits in light of the principle’s purpose, which

is to serve the commercial function of the credit. If it does not serve those functions, application

of the principle is not warranted, and the common law principles of contract should apply.

It is worthy of note that the propriety of LHC’s call on the Securities is largely intertwined with

the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To

be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve,

among others, whether petitioner was in fact guilty of delay in the performance of its obligation.

Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default—such

issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to

the terms embodied in their agreement.

Would injunction then be the proper remedy to restrain the alleged wrongful draws on theSecurities?

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Most writers agree that fraud is an exception to the independence principle. Professor Dolan

opines that the untruthfulness of a certificate accompanying a demand for payment under a

standby credit may qualify as fraud sufficient to support an injunction against payment. The

remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless:

(a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independentpurpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable

injury might follow if injunction is not granted or the recovery of damages would be seriously

damaged.

- o -

The pendency of the arbitration proceedings would not per se make LHC’s draws on the Securities

wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties

intended that all disputes regarding delay should first be settled through arbitration before LHC

would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that

the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not

ruled with finality on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court,

did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.

What petitioner did assert before the courts below was the fact that LHC’s draws on the Securities

would be premature and without basis in view of the pending disputes between them. Petitioner

should not be allowed in this instance to bring into play the fraud exception rule to sustain its

claim for the issuance of an injunctive relief.

- o -

With respect to the issue of whether the respondent banks were justified in releasing the amounts

due under the Securities, this Court reiterates that pursuant to the independence principle the banks

were under no obligation to determine the veracity of LHC’s certification that default has occurred

Neither were they bound by petitioner’s declaration that LHC’s call thereon was wrongful. Torepeat, respondent banks’ undertaking was simply to pay once the required documents are

presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC’s

draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to

seek indemnification for damages it suffered would not normally be foreclosed pursuant to general

principles of law.

CHAPTER VII: TRUST RECEIPTS


1. An entrustee does not have authority to mortgage goods covered by trust receipts ( DBP vs.

Prudential Bank , G.R. No. 143772, November 22, 2005)

In 1973, Lirag Textile Mills, Inc. (“Litex”) opened an irrevocable commercial letter of credit with

Prudential Bank (Prudential”) for the importation of 5,000 spindles and various accessories and

spare parts (the “Articles”) for use with spinning machinery. These Articles were released to Litex

under covering trust receipts it executed in favor of Prudential. Litex installed and used the

Articles in its textile mill located in Montalban, Rizal.

In 1980, DBP granted a foreign currency loan to Litex. To secure the loan, Litex executed real

estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and otherimprovements, machineries and equipments there. Among the machineries and equipments

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mortgaged in favor of DBP were the Articles.

In 1982, Prudential informed DBP that it was the absolute and juridical owner of the Articles and

they were thus not part of the mortgaged assets that could be legally ceded to DBP.

In 1983, DBP extra-judicially foreclosed on the real estate and chattel mortgages, including theArticles, and acquired the foreclosed properties as the highest bidder.

In 1987, over the objections of Prudential, DBP sold the Litex properties it acquired at the

foreclosure sale, including the Articles. to Lyon Textile Mills, Inc. (“Lyon”).

In 1988, Prudential filed a complaint for a sum of money with damages against DBP. The trial

court decided in favor of Prudential and its decision was affirmed in toto by the Court of Appeals

to which DBP appealed. DBP thereafter filed a petition for review on certiorari with the Supreme

Court.

The Court held that the Articles were owned by Prudential and Litex only held them 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. Thus, 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. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good

faith.

DBP merely stepped into the shoes of Litex as trustee of the Articles with an obligation to pay

their value or to return them on Prudential’s demand. By its failure to pay or return them despite

Prudential’s repeated demands and by selling them to Lyon without Prudential’s knowledge and

conformity, DBP became a trustee ex maleficio [i.e., one who acquires title to property through

actual fraud].

2. Acquittal in criminal case for estafa under Section 13 of the Trust Receipts Law does notextinguish civil liability arising from breach of trust receipt contract (Tupaz IV, et al. vs.

CA and BPI , G.R. No. 145578, November 18, 2005

The relevant portion of the Court’s decision is as follows:

The rule is that where the civil action is impliedly instituted with the criminal action, the civil

liability is not extinguished by acquittal -

[w]here the acquittal is based on reasonable doubt xxx as only preponderance of

evidence is required in civil cases; where the court expressly declares that the

liability of the accused is not criminal but only civil in nature xxx as, for instance,

in the felonies of estafa, theft, and malicious mischief committed by certain

relatives who thereby incur only civil liability (See Art. 332, Revised Penal Code);and, where the civil liability does not arise from or is not based upon the criminal

act of which the accused was acquitted xxx. (Emphasis supplied)

Here, respondent bank chose not to file a separate civil action to recover payment under the trust

receipts. Instead, respondent bank sought to recover payment in Criminal Case Nos. 8848 and

8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not extinguish his

civil liability. As the Court of Appeals correctly held, his liability arose not from the criminal act

of which he was acquitted (ex delito) but from the trust receipt contract (ex contractu) of 30

September 1981. Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his

personal capacity.

CHAPTER XI: CHATTEL MORTGAGE LAW

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1. Loss of vessel before foreclosure borne by mortgagors ( Allied Banking Corporation vs.

Cheng Yong, et al., G.R. N0. 154109, October 6, 2005)

The loss of the mortgaged chattel brought about by its sinking must be borne not by Allied Bank

but by the spouses Cheng. As owners of the fishing vessel, it was incumbent upon the spouses to

insure it against loss. Thus, when the vessel sank before the chattel mortgage could be foreclosed,

uninsured as it is, its loss must be borne by the spouses Cheng.

2. Creditor not obliged to foreclose chattel mortgage constituted to secure credit (Spouses

Rosario vs. PCI Leasing and Finance, Inc., G.R., No. 139233, November 11, 2005)

Instead of foreclosing on the chattel mortgage on a motor vehicle constituted by the spouses

Rosario to secure the loan obtained by them from PCI Leasing, the latter filed a case for “Sum of

Money with Damages with a Prayer for a Writ of Replevin.”

The Court ruled that even if Article 1484 of the New Civil Code were to be applied, the chattel

mortgage had not been foreclosed; hence, PCI Leasing was not precluded from collecting the

balance of the account of the spouses Rosario. It held that the remedy of the unpaid seller under

Article 1484 of the New Civil Code is alternative and not cumulative. A creditor is not obliged to

foreclose a chattel mortgage even if there is one.

3. Entrustee, not being owner of articles covered by trust receipts and without authority from

owner, cannot mortgage said articles ( DBP vs. Prudential Bank , G.R. No. 143772,

November 22, 2005)

Citing Article 2085 of the Civil Code (which requires that, in a contract of pledge or mortgage, the

pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged), the Courtruled that Lirag Textile Mills, Inc. as the entrustee of the 5,000 spindles and related accessories in

question, had neither absolute ownership, free disposal nor the authority to freely dispose of the

said articles and could not have subjected them to a chattel mortgage inasmuch as the title to the

said articles belongs to the entruster, Prudential Bank. The inclusion of the articles in the real

estate and chattel mortgages constituted by Lirag Textile on its plant site in Montalban, Rizal to

secure the foreign currency loan it obtained from the DBP was void and had no legal effect. There

being no valid mortgage, there could also be no valid foreclosure or valid auction sale of such

articles.

4. Invalidity of loan invalidates mortgage intended to secure it (Spouses Saguid vs. Security

Finance, Inc., G.R. No. 159467, December 9, 2005)The Court ruled that since it has been sufficiently established that there was no cause or

consideration for the promissory note, it follows that the chattel mortgage constituted on the

subject vehicle to secure the said promissory note cannot have any legal effect on the spouses

Saguid. It stated that “a mortgage is a mere accessory contract and its validity would depend on the

validity of the loan secured by it. The chattel mortgage constituted over the subject vehicle is an

accessory contract to the loan obligation as embodied in the promissory note. It cannot exist as an

independent contract since its consideration is the same as that of the principal contract. A

principal obligation is an indispensable condition for the existence of an accessory contract.

5. Suing for collection of unpaid amortizations and at the same time suing for replevin not

allowed under Art. 1484, Civil Code ( Magna Financial Services Group, Inc. vs. Colarina,G.R. No. 158635, December 9, 2005)

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Colarina bought on installment from Magna Financial Services a Suzuki Multicab and constituted

a chattel mortgage thereon to secure the unpaid balance of the purchase price thereof. On account

of Colarina’s failure to pay the requisite installments, Magna filed against Colarina a Complaint

for Foreclosure of Chattel Mortgage with Replevin before the Municipal Trial Court in Cities

(MTCC). In its Complaint, Magna made the following prayer:WHEREFORE, it is respectfully prayed that judgment render ordering defendant:

1. To pay the principal sum of P131,607.00 with penalty charges at 4.5% per

month from January 1999 until paid plus liquidated damages.

2. Ordering defendant to reimburse the plaintiff for attorney’s fee at 25% of the

amount due plus expenses of litigation at not less than P10,000.00.

3. Ordering defendant to surrender to the plaintiff the possession of the Multicab

described in paragraph 2 of the complaint.

4. Plaintiff prays for other reliefs just and equitable in the premises.

It is further prayed that pendent lite, an Order of Replevin issue commanding theProvincial Sheriff at Legazpi City or any of his deputies to take such multicab into

his custody and, after judgment, upon default in the payment of the amount

adjudged due to the plaintiff, to sell said chattel at public auction in accordance

with the chattel mortgage law.

The MTCC decided in favor of Magna as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna Financial

Services Group, Inc. and against the defendant Elias Colarina, ordering the latter:

(a) to pay plaintiff the principal sum of one hundred thirty one thousand six

hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per month

computed from January, 1999 until fully paid;(b) to pay plaintiff P10,000.00 for attorney’s fees; and

(c) to pay the costs.

The foregoing money judgment shall be paid within ninety (90) days from the entry

of judgment. In case of default in such payment, the one (1) unit of Suzuki

Multicab, subject of the writ of replevin and chattel mortgage, shall be sold at

public auction to satisfy the said judgment

Colarina appealed to the Regional Trial Court but the latter affirmed the MTCC decision. Colarina

then filed a petition for review with the Court of Appeals. The CA ruled as follows:

We find merit in petitioners’ assertion that the MTC and the RTC erred in ordering

the defendant to pay the unpaid balance of the purchase price of the subject vehicleirrespective of the fact that the instant complaint was for the foreclosure of its

chattel mortgage. The principal error committed by the said courts was their

immediate grant, however erroneous, of relief in favor of the respondent for the

payment of the unpaid balance without considering the fact that the very prayer it

had sought was inconsistent with its allegation in the complaint.

Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of the

chattel mortgage. The fact that the respondent had unconscionably sought the

payment of the unpaid balance regardless of its complaint for the foreclosure of the

said mortgage is glaring proof that it intentionally devised the same to deprive the

defendant of his rights. A judgment in its favor will in effect allow it to retain the

possession and ownership of the subject vehicle and at the same time claim againstthe defendant for the unpaid balance of its purchase price. In such a case, the

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respondent would luckily have its cake and eat it too. Unfortunately for the

defendant, the lower courts had readily, probably unwittingly, made themselves

abettors to respondent’s devise to the detriment of the defendant.

WHEREFORE, finding error in the assailed decision, the instant petition is hereby

GRANTED and the assailed decision is hereby REVERSED AND SET ASIDE.Let the records be remanded to the court of origin. Accordingly, the foreclosure of

the chattel mortgage over the subject vehicle as prayed for by the respondent in its

complaint without any right to seek the payment of the unpaid balance of the

purchase price or any deficiency judgment against the petitioners pursuant to

Article 1484 of the Civil Code of the Philippines, is hereby ORDERED

Having lost in the CA, Magna then filed a petition for review on certiorari with the Supreme Court

based on the sole issue: “What is the true nature of a foreclosure of chattel mortgage, extrajudicial

or judicial, as an exercise of the 3 rd option under Article 1484, paragraph 3 of the Civil Code?”

In its Memorandum, petitioner assails the decision of the Court of Appeals and

asserts that a mortgage is only an accessory obligation, the principal one being theundertaking to pay the amounts scheduled in the promissory note. To secure the

payment of the note, a chattel mortgage is constituted on the thing sold. It argues

that an action for foreclosure of mortgage is actually in the nature of an action for

sum of money instituted to enforce the payment of the promissory note, with

execution of the security. In case of an extrajudicial foreclosure of chattel

mortgage, the petition must state the amount due on the obligation and the sheriff,

after the sale, shall apply the proceeds to the unpaid debt. This, according to

petitioner, is the true nature of a foreclosure proceeding as provided under Rule 68,

Section 2 of the Rules of Court.[13]

On the other hand, respondent countered that the Court of Appeals correctly

set aside the trial court’s decision due to the inconsistency of the remedies or reliefs

sought by the petitioner 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.[14]

Article 1484 of the Civil Code explicitly provides:

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 or 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.

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan [15] held:“Undoubtedly the principal object of the above amendment (referring to Act 4122

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http://www.supremecourt.gov.ph/jurisprudence/2005/dec2005/158635.htm#_ftn13









amending Art. 1454, Civil Code of 1889) was to remedy the abuses committed in

connection with the foreclosure of chattel mortgages. This amendment prevents

mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a

low price and then bringing the suit against the mortgagor for a deficiency

judgment. The almost invariable result of this procedure was that the mortgagorfound himself minus the property and still owing practically the full amount of his

original indebtedness.”

x x x

In its Memorandum before us, petitioner resolutely declared that it has opted for

the remedy provided under Article 1484(3) of the Civil Code,[17] that is, to

foreclose the chattel mortgage.

It is, however, unmistakable from the Complaint that petitioner preferred to

avail itself of the first and third remedies under Article 1484, at the same time

suing for replevin. For this reason, the Court of Appeals justifiably set aside the

decision of the RTC. Perusing the Complaint, the petitioner, under its prayernumber 1, sought for the payment of the unpaid amortizations which is a remedy

that is provided under Article 1484(1) of the Civil Code, allowing an unpaid

vendee to exact fulfillment of the obligation. At the same time, petitioner prayed

that Colarina be ordered to surrender possession of the vehicle so that it may

ultimately be sold at public auction, which remedy is contained under Article

1484(3). Such a scheme is not only irregular but is a flagrant circumvention of the

prohibition of the law. By praying for the foreclosure of the chattel, Magna

Financial Services Group, Inc. renounced whatever claim it may have under the

promissory note.[18]

Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, “he shall have no further action against

the purchaser to recover any unpaid balance of the purchase price. Any agreement

to the contrary shall be void.” In other words, in all proceedings for the foreclosure

of chattel mortgages executed on chattels which have been sold on the installment

plan, the mortgagee is limited to the property included in the mortgage.[19]

Contrary to petitioner’s claim, a contract of chattel mortgage, which is the

transaction involved in the present case, 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.[20] 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.[21] 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. It may be

effected by the usual methods, including sale of goods at public auction. [22]

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 Section 14 of Act No. 1508, or

the Chattel Mortgage Law.[23] This rule governs extrajudicial foreclosure of

chattel mortgage.

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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 nor to ask for more. On this point,

the Court of Appeals correctly set aside the trial court’s decision and insteadrendered a judgment of foreclosure as prayed for by the petitioner.

The next issue of consequence is whether or not there has been an actual

foreclosure of the subject vehicle.

In the case at bar, there is no dispute that the subject vehicle is already in the

possession of the petitioner, Magna Financial Services Group, Inc. However,

actual foreclosure has not been pursued, commenced or concluded by it.

Where the mortgagee elects a remedy of foreclosure, the law requires the

actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.Fernandez,[24] our Supreme Court said that 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.[25] 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.[26]

That there should be actual foreclosure of the mortgaged vehicle was

reiterated in the case of De la Cruz v. Asian Consumer and Industrial Finance

Corporation:[27]

It is thus clear that while ASIAN eventually succeeded in taking possession

of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage as

shown by the fact that no auction sale of the vehicle was ever conducted. As we

ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No. 50449, 30

January 1982, 111 SCRA 421) –

Under the law, the delivery of possession of the mortgaged property to the

mortgagee, the herein appellee, can only operate to extinguish appellant’s liability

if the appellee had actually caused the foreclosure sale of the mortgaged property

when it recovered possession thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA

356 [1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila

Motors Co., Inc. v. Fernandez, 99 Phil. 782 [1956]).

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 Financial Services Group, Inc. and it has persistently and consistently

avowed that it elects the remedy of foreclosure, the Court of Appeals, thus, ruled

correctly in directing the foreclosure of the said vehicle without more.

WHEREFORE, premises considered, the instant petition is DENIED for lack

of merit and the decision of the Court of Appeals dated 21 January 2003 is

AFFIRMED. Costs against petitioner.

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The Court ruled that it is unmistakable from the Complaint that Magna preferred to avail itself of

the first and third remedies under Article 1484, at the same time suing for replevin. Perusing theComplaint, Magna, under its prayer number 1, sought for the payment of the unpaid amortizations

which is a remedy that is provided under Article 1484(1) of the Civil Code, allowing an unpaid

vendee to exact fulfillment of the obligation. At the same time, Magna prayed that Colarina be

ordered to surrender possession of the vehicle so that it may ultimately be sold at public auction,

which remedy is contained under Article 1484(3). Such a scheme is not only irregular but is a

flagrant circumvention of the prohibition of the law. By praying for the foreclosure of the chattel,

Magna renounced whatever claim it may have under the promissory note. Article 1484, paragraph

3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, “he

shall have no further action against the purchaser to recover any unpaid balance of the purchase

price. Any agreement to the contrary shall be void.” In other words, in all proceedings for the

foreclosure of chattel mortgages executed on chattels which have been sold on the installment

plan, the mortgagee is limited to the property included in the mortgage.

The Court also ruled that it is the actual sale of the mortgaged chattel in accordance with Sec. 14

of the Chattel Mortgage Law (Act No. 1508) that would bar the creditor who chooses to foreclose

from recovering any unpaid balance. 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. In the case at bar, there is no dispute that the subject vehicle is already in the

possession of Magna Financial Services. However, actual foreclosure has not been pursued,

commenced or concluded by it. As it has persistently and consistently avowed that it elects the

remedy of foreclosure, the Court ruled that the Court of Appeals has correctly directed Magna to

proceed with the foreclosure of the said vehicle without more.

CHAPTER XII: EXTRAJUDICIAL FORECLOSURE OF MORTGAGE LAW

Issues Prior to Foreclosure Sale

1. Blanket mortgage clause or dragnet clause (Spouses Cuyco vs. Spouses Cuyco, G.R. No.

168736, April 19, 2006)

According to the Court, the general rule is that a mortgage liability is usually limited to the amount

mentioned in the contract. However, the amounts named as consideration in a contract of mortgage

do not limit the amount for which the mortgage may stand as security if from the four corners of

the instrument the intent to secure future and other indebtedness can be gathered. This stipulationis valid and binding between the parties and is known in American Jurisprudence as the “blanket

mortgage clause,” also known as a “dragnet clause.”

A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes

available additional funds without their having to execute additional security documents, thereby

saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.

While a real estate mortgage may exceptionally secure future loans or advancements, these future

debts must be sufficiently described in the mortgage contract. An obligation is not secured by a

mortgage unless it comes fairly within the terms of the mortgage contract.

The pertinent provisions of the November 26, 1991 real estate mortgage reads:

That the MORTGAGOR is indebted unto the MORTGAGEE in the sum of ONEMILLION FIVE THOUSAND PESOS (sic) (1,500,000.00) Philippine Currency,

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receipt whereof is hereby acknowledged and confessed, payable within a period of

one year, with interest at the rate of eighteen percent (18%) per annum;

That for and in consideration of said indebtedness, the MORTGAGOR does hereby

convey and deliver by way of MORTGAGE unto said MORTGAGEE, the latter’s

heirs and assigns, the following realty together with all the improvements thereonand situated at Cubao, Quezon City, and described as follows:

x x x x

PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be

paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of

ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00),

Philippine Currency, together with the agreed interest thereon, within the agreed

term of one year on a monthly basis then this MORTGAGE shall be discharged,

and rendered of no force and effect, otherwise it shall subsist and be subject to

foreclosure in the manner and form provided by law.

It is clear from a perusal of the aforequoted real estate mortgage that there is no stipulation that themortgaged realty shall also secure future loans and advancements. Thus, what applies is the

general rule above stated.

Even if the parties intended the additional loans of P150,000.00 obtained on May 30, 1992,

P150,000.00 obtained on July 1, 1992, and P500,00.00 obtained on September 5, 1992 to be

secured by the same real estate mortgage, as shown in the acknowledgement receipts, it is not

sufficient in law to bind the realty for it was not made substantially in the form prescribed by law.

In order to constitute a legal mortgage, it must be executed in a public document, besides being

recorded. A provision in a private document, although denominating the agreement as one of

mortgage, cannot be considered as it is not susceptible of inscription in the property registry. A

mortgage in legal form is not constituted by a private document, even if such mortgage beaccompanied with delivery of possession of the mortgage property. Besides, by express provisions

of Section 127 of Act No. 496, a mortgage affecting land, whether registered under said Act or not

registered at all, is not deemed to be sufficient in law nor may it be effective to encumber or bind

the land unless made substantially in the form therein prescribed. It is required, among other

things, that the document be signed by the mortgagor executing the same, in the presence of two

witnesses, and acknowledged as his free act and deed before a notary public. A mortgage

constituted by means of a private document obviously does not comply with such legal

requirements.

What the parties could have done in order to bind the realty for the additional loans was to execute

a new real estate mortgage or to amend the old mortgage conformably with the form prescribed by

the law. Failing to do so, the realty cannot be bound by such additional loans, which may berecovered by the respondents in an ordinary action for collection of sums of money.

2. Debtor’s default; liquidated debt (Selegna Management and Development Corporation, et

al. vs. UCPB, G.R. No. 165662, May 3, 2006)

In the words of the Court, it is a settled rule of law that foreclosure is proper when the debtors are

in default of the payment of their obligation. In fact, the parties stipulated in their credit

agreements, mortgage contracts and promissory notes that respondent was authorized to foreclose

on the mortgages, in case of a default by petitioners. That this authority was granted is not

disputed.

Mora solvendi, or debtor’s default, is defined as a delay in the fulfillment of an obligation, by

reason of a cause imputable to the debtor. There are three requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the debtor delays performance;

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third, the creditor judicially or extrajudicially requires the debtor’s performance.

The Court also stated that a debt is liquidated when the amount is known or is determinable by

inspection of the terms and conditions of the relevant promissory notes and related documentation.

Failure to furnish a debtor a detailed statement of account does not ipso facto result in an

unliquidated obligation.

3. Remedies of mortgage creditor alternative, not successive or cumulative (Suico Rattan &

Buri Interiors, Inc., et al. vs. CA, et al., G.R. No. 138145, June 15, 2006; see also Caltex

Phils. Vs. IAC, et al., G.R. 74730, August 25, 1989)

The Court ruled that it is settled that a mortgage creditor may, in the recovery of a debt secured by

a real estate mortgage, institute against the mortgage debtor either a personal action for debt or a

real action to foreclose the mortgage. These remedies available to the mortgage creditor are

deemed alternative and not cumulative. An election of one remedy operates as a waiver of the

other. In sustaining the rule that prohibits mortgage creditors from pursuing both the remedies of a

personal action for debt or a real action to foreclose the mortgage, the Court held in the case of

Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a rule which would authorize theplaintiff to bring a personal action against the debtor and simultaneously or successively another

action against the mortgaged property, would result not only in multiplicity of suits so offensive to

justice and obnoxious to law and equity, but also in subjecting the defendant to the vexation of

being sued in the place of his residence or of the residence of the plaintiff, and then again in the

place where the property lies. Hence, 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 provisions of Rule 68 of the Rules of Court. 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.

4. Mortgage invalid if mortgagor not the property owner; doctrine of mortgagee in good faithnot applicable ( Ereña vs. Querrer-Kaufman, G.R. No. 165853, June 22, 2006)

The Court explained the doctrine of mortgagee in good faith by citing its decision in Cavite

Development Bank v. Lim, 381 Phil. 355 (2000) as follows:

There is, however, a situation where, despite the fact that the mortgagor is not the owner

of the mortgaged property, his title being fraudulent, the mortgage contract and any

foreclosure sale arising therefrom are given effect by reason of public policy. This is the

doctrine of “mortgagee in good faith” based on the rule that all persons dealing with the

property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not

required to go beyond what appears on the face of the title. The public interest in

upholding the indefeasibility of a certificate of title, as evidence of lawful ownership of

the land or of any encumbrance thereon, protects a buyer or mortgagee who, in goodfaith, relied upon what appears on the face of the certificate of title.

Indeed, a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of

the property given as security and in the absence of any sign that might arouse suspicion, has no

obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful

owner of, or does not have a valid title to, the mortgaged property, the mortgagee in good faith is

nonetheless entitled to protection. This doctrine presupposes, however, that the mortgagor, who is

not the rightful owner of the property, has already succeeded in obtaining a Torrens title over the

property in his name and that, after obtaining the said title, he succeeds in mortgaging the property

to another who relies on what appears on the said title. The innocent purchaser (mortgagee in this

case) for value protected by law is one who purchases a titled land by virtue of a deed executed by

the registered owner himself, not by a forged deed, as the law expressly states. Such is not thesituation of petitioner, who has been the victim of impostors pretending to be the registered owners

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but who are not said owners. The doctrine of mortgagee in good faith does not apply to a situation

where the title is still in the name of the rightful owner and the mortgagor is a different person

pretending to be the owner. In such a case, the mortgagee is not an innocent mortgagee for value

and the registered owner will generally not lose his title. We thus agree with the following

discussion of the CA:The trial court wrongly applied in this case the doctrine of “mortgagee in good faith”

which has been allowed in many instances but in a milieu dissimilar from this case. This

doctrine is based on the rule that persons dealing with properties covered by a Torrens

certificate of title 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 otherwise 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 by virtue of a deed executed by the registered owner

himself not a forged deed.

5. Foreclosure of mortgage arising out of a settlement of estate not covered by Act 3135 but

by Section 7 of Rule 86 of the Revised Rules of Court (Philippine National Bank vs. CA,

et al., G.R. 121597, June 29, 2001)

This case 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 Court ruled that Section 7 of Rule 86 of the Revised

Rules of Court, rather than Act 3135, is the applicable law. Section 7 of Rule 86 grants to themortgagee three distinct, independent and mutually exclusive remedies that can be alternatively

pursued by the mortgage 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 any deficiency.

In Perez v. Philippine National Bank , 124 Phil. 260 (1966), the Court recognized that the third

remedy includes extrajudicial foreclosures.

6. Newspaper of general circulation (Perez, et al. vs. Perez, et al., G.R. No. 143768, March

28, 2005)

To be a 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 so long as it is of general

circulation.

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7. Waiver by parties of publication requirement void (Ouano vs. CA, et al., G.R. 129279,

March 4, 2003; see also PNB vs. Nepomuceno Productions, Inc., et al. , G.R. 139479,

December 27, 2002)

The general rule is that everyone has a right to waive, and agree to waive, the advantage of a law

or rule made solely for the benefit and protection of the individual in his private capacity, if it can

be dispensed with and relinquished without infringing on any public right, and without detriment

to the community at large.

However, a waiver in derogation of a statutory right is not favored, and a waiver will be

inoperative and void if it infringes on the rights of others, or would be against public policy or

morals and the public interest may be waived.

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 aremandated, 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.

More importantly, the waiver being void for being contrary to the express mandate of Act No.

3135, such cannot be ratified by estoppel. Estoppel cannot give validity to an act that is prohibited

by law or one that is against public policy. Neither can the defense of illegality be waived.8. Republication of notice of sale ( DBP vs. CA and Emerald Resorts Hotel, G.R. No.

125838, June 10, 2003)

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The rule enunciated by the Supreme Court in previous cases is that the publication of

the notice of extrajudicial sale is indispensable to the validity of an extrajudicial

foreclosure sale of real property under Act 3135. If the sale could not be held on the

scheduled date, then a republication of the notice of extrajudicial sale would be

necessary. This is true even if the mortgagor and the mortgagee should agree to the

rescheduling of the date of sale. Failure to publish the notice of auction sale on the new

date would constitute a jurisdictional defect which would invalidate the sale ( Ouano vs.

CA , G.R. 129279, March 4, 2003; DBP vs. Aguirre, et al. , G.R. No. 144877, September

7, 2001; Masantol Rural Bank vs. CA (204 SCRA 752 [1991]). In this case, the public

auction sale of the real properties originally scheduled on August 12, 1986 was

postponed to September 11, 1986 upon the request of the mortgagor with the agreement

of DBP, the mortgagee. Neither the DBP nor the mortgagor republished the notice of

the rescheduled auction sale and, thus, the Supreme Court ruled that the extrajudicial

foreclosure of the real estate mortgage by DBP was not valid.

Obviously, republication of the notice would increase the expenses of the mortgagee. It

would also encourage the practice of some mortgagors in requesting postponement of the auction

sale and then later attacking the validity of the sale for lack of republication.

These circumstances have not escaped the attention of the Supreme Court and a remedy was provided inprovided in the form of the Notice of Extra-Judicial Sale now prescribed in Circular No. 7-2002

issued by the Office of the Court Administrator on January 22, 2002. Section 4(a) of Circular No.

7-2002 provides that:

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 Mortgagor/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

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held on _______________ without further notice.

_____________(date)

SHERIFF

The last paragraph of the prescribed Notice of Extra-Judicial Sale allows the holding of a

rescheduled auction sale without reposting or republication of the notice. However, the

rescheduled auction sale will only be valid if the rescheduled date of auction is clearly specified in

the prior notice of sale. The absence of this information in the prior notice of sale will render the

rescheduled auction sale void for lack of reposting or republication. If the notice of auction sale

contains this particular information, whether or not the parties agreed to such rescheduled date,

there is no more need for the reposting or republication of the notice of the rescheduled auction

sale.

CHAPTER XIV: SUPREME COURT INTERIM RULES OF PROCEDURE ON

CORPORATE REHABILITATION


1. Claim for missing luggage is a money claim and is suspended pending rehabilitation

proceedings (Philippine Airlines vs. Spouses Kurangking, et al., G.R. No. 146698,

September 24, 2002)

This case involved the interpretation of Section 6 of Rule 4 of the SC Interim Rules of Procedure

on Corporate Rehabilitation. The said provision requires the trial court, if it finds the petition for

corporate rehabilitation to be sufficient in form and substance, to issue, among other things, an

Order “staying enforcement of all claims, whether for money or otherwise and whether suchenforcement is by court action or otherwise, against the debtor, its guarantors and sureties not

solidarily liable with the debtor.” The stay order is effective from the date of its issuance until the

dismissal of the petition or the termination of the rehabilitation proceedings.

According to the Court, the interim rules must be read and applied along with Section 6(c) of P.D.

902-A, as 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.

The Court pointed out that a “claim” is “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.” The claim of private respondents againstpetitioner PAL for their missing luggage is a money claim or financial demand that the law

requires to be suspended pending the rehabilitation proceedings. Quoting its earlier decision in the

case of B.F. Homes, Inc. vs. Court of Appeals, the Court stated that -.

“...(T)he reason for suspending actions for claims against the corporation

should not be difficult to discover. It is not really to enable the management

committee or the rehabilitation receiver to substitute the defendant in any pending

action against it before any court, tribunal, board or body. Obviously, the real

justification is to 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. To allow such other action to continue would only add to the burden of

the management committee or rehabilitation receiver, whose time, effort and

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resources would be wasted in defending claims against the corporation instead of

being directed toward its restructuring and rehabilitation.”

2. Non-suspension of claims against guarantors and sureties solidarily liable with debtor

( Metropolitan Waterworks and Sewerage System vs. Hon. Renaldo B. Daway, et al., G.R.No. 160732, June 21, 2004)

In 1997, MWSS granted Maynilad Water Services, Inc. under a Concession Agreement a 20-year

period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery

and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the

corresponding concession fees on the dates agreed upon. The fees, among other things, are

intended to pay off MWSS’s mostly foreign loans absorbed by Maynilad. To secure the

performance of its obligations under the Concession Agreement, Maynilad arranged for the

issuance of an Irrevocable Standby Letter of Credit (“ISLC”) in the amount of US$120 million in

favor of MWSS.

Maynilad subsequently defaulted in the payment of its concession fees. On November 24, 2003,

MWSS gave notice to the consortium of foreign banks that it was drawing on the ISLC and

demanded payment in the amount of US$98,923,640.15. Earlier, however, specifically on

November 13, 2003, Maynilad had filed a petition for rehabilitation and the court (the Regional

Trial Court of Quezon City, Branch 90) issued the requisite Stay Order on November 17, 2003. It

also issued an order, dated November 27, 2003, declaring the attempt of MWSS to draw on the

ISLC as violative of the court’s stay order and ordering MWSS to withdraw its demand to the

consortium for payment under the ISLC.

The main issue, according to the Supreme Court, is whether or not the rehabilitation court acted in

excess of its authority or jurisdiction when it enjoined MWSS from seeking the payment of the

concession fees.

(a) The rehabilitation court relied on Section 1 of Rule 3 of the Interim Rules on CorporateRehabilitation (“IRCR”) to support its jurisdiction over the ISLC and the banks that issued it. The

said Section reads in part “that jurisdiction over those affected by the proceedings is considered

acquired upon the publication of the notice of commencement of proceedings in a newspaper of

general circulation.” According to the Court, the reference to “those affected by the proceedings”

covers creditors or such other persons or entities holding assets belonging to the debtor under

rehabilitation that should be reflected in the audited financial statements. The Court, however, held

that the banks do not hold any assets of Maynilad that would be material to the rehabilitation

proceedings. Maynilad’s financial statements do not show the ISLC as part of its assets or

liabilities and Maynilad has admitted it is not. In enjoining MWSS from claiming an asset that did

not belong to Maynilad and over which it did not acquire jurisdiction, the rehabilitation court acted

in excess of its jurisdiction.(b) Maynilad alleged, however, that it is Section 6(b) of Rule 4 of the IRCR that support its

claim that the commencement of the process to draw on the ISLC is an enforcement of claim

prohibited by the IRCR and the order of the rehabilitation court. In other words, Maynilad is

claiming that MWSS’s action constitutes a “claim against the debtor, its guarantors and sureties

not solidarily liable with the debtor.” According to the Court, Section 6(b), Rule 4 of the IRCR

does not enjoin the enforcement of all claims against guarantors and sureties but only those claims

against guarantors and sureties who are not solidarily liable with the debtor. The Court concluded

that the banks are solidarily liable with Maynilad because the undertaking of the banks under the

ISLC is a primary, direct, definite and absolute undertaking to pay and is not conditioned on the

prior exhaustion of Maynilad’s assets. Being solidary, the claims against them can be pursued

separately from and independently of the rehabilitation case.

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3. Purpose of suspension of actions for claims against the corporation (Spouses Sobrejuanite,

et al. vs. ASB Development Corporation, G.R. No. 165675, September 30, 2005)

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 enoughbreathing 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. To allow such other action to continue

would only add to the burden of the management committee or rehabilitation receiver, whose time,

effort and resources would be wasted in defending claims against the corporation instead of being

directed toward its restructuring and rehabilitation.

CHAPTER XV: SUPREME COURT INTERIM RULES OF PROCEDURE FOR INTRA-

CORPORATE CONTROVERSIES


1. Appointment of Interim Management Committee justified; Section 6(d) of PD 902-A

interpreted ( Jacinto, et al. vs. First Women’s Credit Corporation, G.R. No. 154049,

August 28, 2003)

Petitioners, in the main, argue that the drastic relief of appointing an interim management

committee must be granted only after much serious thought; in other words, they posit that the

creation of a management committee for a solvent and going corporation should be a last-resort

remedy considering that it would deprive the Board of Directors of its power over the corporation.

Further, petitioners aver that the IMC was created on the unfounded allegation that they diverted

corporate funds to RJ Group of Companies. They deny the charge and assert that RJ Group of

Companies had settled its obligations with FWCC through an off-setting agreement which was

consented to by Katayama himself. Besides, petitioner Jacinto’s financial exposure as surety to

FWCC’s creditor-banks far exceeds the amounts loaned to RJ Group of Companies. Jacinto claims

that he acted as surety for FWCC in the latter’s obligations with Land Bank and PNB amounting

to almost a billion pesos. If on this account alone, the IMC should be dissolved and management

of FWCC should be given back to the Board of Directors headed by petitioner Jacinto.

In exercising the discretion to appoint a management committee, the officer or tribunal before

whom the application was made must take into account all the circumstances and facts of the case,the presence of conditions and grounds justifying the relief, the ends of justice, the rights of all the

parties interested in the controversy and the adequacy and effectiveness of other available

remedies. The discretion must be exercised with great caution and circumspection and only for a

reason strongly appealing to the tribunal or officer exercising jurisdiction. At any rate, once the

discretion has been exercised, the presumption to be considered is that the officer or tribunal has

fairly weighed and appraised the evidence submitted by the parties.

In determining whether Hearing Officer Palmares correctly exercised his judgment when he

ordered the creation of the IMC, it is necessary to refer to Sec. 6, par. (d), of PD 902-A -

Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall

possess the following powers: x x x x (d) To create and appoint a management

committee, board, or body upon petition or motu propio when there is imminent

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danger of dissipation, loss, wastage or destruction of assets or other

properties or paralization of business operations of such corporations or

entities which may be prejudicial to the interest of minority stockholders,

parties-litigants or the general public (emphasis supplied).

A reading of the aforecited legal provision reveals that for a minority stockholder to obtain the

appointment of an interim management committee, he must do more than merely make a prima

facie showing of a denial of his right to share in the concerns of the corporation; he must show that

the corporate property is in danger of being wasted and destroyed; that the business of the

corporation is being diverted from the purpose for which it has been organized; and that there is

serious paralization of operations all to his detriment. It is only in a strong case where there is a

showing that the majority are clearly violating the chartered rights of the minority and putting their

interests in imminent danger that a management committee may be created.

In this regard, mere disagreement among stockholders as to the affairs of the corporation would

not in itself suffice as a ground for the appointment of a management committee. At least where

there is no imminent danger of loss of corporate property or of any other injury to stockholders,management of corporate business should not be wrested away from duly elected officers, who are

prima facie entitled to administer the affairs of the corporation, and placed in the hands of the

management committee. However, where the dissension among stockholders is such that the

corporation cannot successfully carry on its corporate functions the appointment of a management

committee becomes imperative.

After a review of the records, we are convinced that the appointment of the Interim Management

Committee is fully warranted by the circumstances. The findings of Hearing Officer Palmares

relative to the transfer of funds from FWCC to RJ Group of Companies without the corresponding

Board resolutions, the drastic reduction of the number of FWCC branch offices all over the

country, the suspension of lending operations, the limitation of FWCC’s operations to mere

collection of receivables as well as the inability of FWCC to pay its pressing obligations amplysupport the conclusion that there is “imminent danger of dissipation, loss, wastage or destruction

of corporate assets.”

The word “imminent” has been defined as “impending or on the point of happening;” while

“danger” means “peril or exposure to loss or injury.” The findings of FWCC’s external auditor,

which were embodied in an audit report the accuracy of which was not questioned by petitioners,

support the conclusion that petitioners’ unrestricted and continuous management of FWCC poses

an impending peril to corporate assets. For one, petitioners allowed the release of loans to

companies associated with petitioner Jacinto without the corresponding Board resolutions.

Petitioners’ argument that Katayama knew of the practice does not justify the impropriety of their

dealings inasmuch as a corporate act inherently illegal does not cease to be illegal simply because

the questioning stockholder is aware of the illegal practice and hence cannot claim that he wasdeceived. Also, petitioners’ contention that there is no need for the IMC to oversee corporate

operations since FWCC had collected on the obligations of RJ Group of Companies through the 30

July 1997 Deed of Assignment is flawed. Petitioners need to be reminded that FWCC has not

consummated the contract, that is, collect the assigned receivables, and there is still the danger that

these receivables may turn out to be bad loans much to the detriment of FWCC as assignee.

Additionally, as admitted by the parties and borne out by the evidence on record, the prevailing

internal dispute and feud between petitioners and Katayama have resulted in the total paralization

of FWCC’s business operations and adversely affected its collection efforts. In view of these facts,

Hearing Officer Palmares was clearly justified in ordering the appointment of the IMC to oversee

the operation of FWCC and preserve its assets pending resolution of the parties’ dispute.

With regard to petitioners’ argument that the appointment of the IMC caused them injuries which

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far outweigh the benefits granted to Katayama, suffice it to state that a management committee is

not the representative or agent of the stockholder upon whose instance the committee has been

appointed; rather, it is for the time being a ministerial officer and representative of the court

hearing the derivative suit. Since its appointment is for the benefit of all interested parties, it holds

and manages the property for the benefit of those ultimately entitled to, and not primarily for thebenefit of the party at whose instance the appointment has been made.

2. Purpose and nature of derivative suit (Chua vs. Court of Appeals, et al., G.R. No. 150793,

November 19, 2004)

Under Section 36 of the Corporation Code, read in relation to Section 23, where a corporation is

an injured party, its power to sue is lodged with its board of directors or trustees. An individual

stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds

stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation

refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the

suing stockholder is regarded as a nominal party, with the corporation as the real party in interest.

A derivative action is a suit by a shareholder to enforce a corporate cause of action. The

corporation is a necessary party to the suit. And the relief that is granted is a judgment against a

third person in favor of the corporation. Similarly, if a corporation has a defense to an action

against it and is not asserting it, a stockholder may intervene and defend on behalf of the

corporation.

3. Not all stockholders/members are indispensable parties in derivative suit ( R.N. Symaco

Trading Corporation vs. Santos, et al., G.R. No. 142474, August 18, 2005)

The Court ruled that, in a derivative suit, it is enough that a stockholder/member or a minority of

the stockholders/members files the derivative suit for and in behalf of the corporation. After all,

the stockholders/members who file a derivative suit are merely nominal parties, the real party-in-

interest being the corporation itself for and in whose behalf the suit is filed. Any monetary benefits

under the decision of the court shall pertain to the corporation.

4. Appointment of management committee not valid ( Ao-As, et al. vs. CA, et al., G.R. No.

128464, June 20, 2006)

The relevant portion of the Court’s decision is as follows:

Refusal to allow stockholders (or members of a non-stock corporation) to examine books of the

company is not a ground for appointing a receiver (or creating a management committee) since

there are other adequate remedies, such as a writ of mandamus. Misconduct of corporate directors

or other officers is not a ground for the appointment of a receiver where there are one or more

adequate legal action against the officers, where they are solvent, or other remedies.

The appointment of a receiver for a going corporation is a last resort remedy, and should not be

employed when another remedy is available. Relief by receivership is an extraordinary remedy and

is never exercised if there is an adequate remedy at law or if the harm can be prevented by an

injunction or a restraining order. Bad judgment by directors, or even unauthorized use and

misapplication of the company’s funds, will not justify the appointment of a receiver for the

corporation if appropriate relief can otherwise be had.

The fact that the President of the LCP needs the concurrence of only two other directors to

authorize the release of surplus funds plainly contradicts the conclusion of conspiracy among the

presently 11-man board. Neither does the fact that the Board of Directors of the LCP prepares the

annual budget and the annual auditing of properties of the LCP justify the conclusion that thealleged acts of respondent Batong was done in concert with the other directors. There should have

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been evidence that such dissipation took place with the knowledge and express or implied consent

of most or the entire board. Good faith is always presumed. As it is the obligation of one who

alleges bad faith to prove it, so should he prove that such bad faith was shared by all persons to

whom he attributes the same. The last resort remedy of replacing the entire board, therefore, with a

management committee, is uncalled for. [See also Sy Chim, et al. vs. Sy Siy Ho & Sons, Inc ., G.R.No. 164958, January 27, 2006

5. Power to create management committee includes power to reorganize the same

(Punongbayan vs. Punongbayan, et al., G.R. No. 157671, June 20, 2006)

The decision of the Court stated in part:

Having the power to create a management committee, it follows that the RTC can order the

reorganization of the existing management committee. Here, knowing that the deadlock among the

members of the committee (appointed by the SEC) may lead to the paralyzation of the school’s

business operations, the RTC removed the said members and appointed new members. This is

pursuant to Section 11, Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate

Controversies which provides:

A member of the management committee is deemed removed upon appointment by the

court of his replacement chosen in accordance with Section 4 of this Rule.

Such appointment of new members does not mean the creation of a new management committee.

The existing management committee was not abolished. The RTC merely reorganized it by

appointing new members. The management committee created by the SEC continues to exist.

However, when it failed to function due to the division among the members, the RTC replaced

them. Clearly, there was no revocation of the final Order of the SEC.

Significantly, in appointing new members of the management committee, chosen from the lists of

nominees submitted by both petitioner and respondents, the RTC did not deprive respondents

herein of their representation in the committee.

CHAPTER XVI: SECURITIES REGULATION CODE

REVISED PARAGRAPHS 16.14 AND 16.15 ON TENDER OFFERS, CHAPTER XVI, PP. 185-186

16.14 Under what circumstances is a tender offer mandatory? (Sec. 19; SRC Rule 19,

paragraph 2)

Except when the mandatory tender offer requirement does not apply pursuant to SRC Rule 19,

paragraph 3 –

(a) Any person or group of persons acting in concert who intends to acquire thirty-five percent

(35%) or more of equity shares in a public company shall disclose such intention and

contemporaneously make a tender offer for the percent sought to all holders of such class, subject

to paragraph (9)(E) of Rule 19, i.e., if the tender offer shall be for less than the total outstanding

securities of a class but a greater number of securities is tendered pursuant thereto, the bidder shall

be bound to take up and pay for the securities on a pro rata basis, disregarding fractions, according

to the number of securities tendered by each security holder during the period such offer remains

open.

In the event that the tender offer is oversubscribed, the aggregate amount of securities to be

acquired at the close of such tender offer shall be proportionately distributed across both selling

shareholder with whom the acquirer may have been in private negotiations and minority

shareholders.

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(b) Any person or group of persons acting in concert who intends to acquire thirty-five percent

(35%) or more of equity shares in a public company in one or more transactions within a period of

twelve (12) months shall be required to make a tender offer to all holders of such class for the

number of shares so acquired within the said period. This is somet6imes referred to as a “creeping

tender offer.”(c) If any acquisition of even less than thirty-five percent (35%) would result in ownership of over

fifty-one percent (51%) of the total outstanding equity securities of a public company, the acquirer

shall be required to make a tender offer under Rule 19 for all the outstanding equity securities to

all remaining stockholders of the said company at a price supported by a fairness opinion provided

by an independent financial advisor or equivalent third party. The acquirer in such a tender offer

shall be required to accept any and all securities thus tendered.

A “public company” is any corporation with a class of equity securities listed on an exchange or

with assets in excess of Fifty Million Pesos (P50,000,000) and having two hundred (200) or more

holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a

class of its equity securities. (SRC Rule 3, paragraph 2.B)

16.15 What transactions are exempt from the mandatory tender offer requirement? (Sec.

19; SRC Rule 19, paragraph 3)

The mandatory tender offer requirement shall not apply to the following:

(a) any purchase of shares from the unissued capital stock, provided that the acquisition will not

result to a fifty percent (50%) or more ownership of shares by the purchaser;

(b) any purchase of shares from an increase in authorized capital stock;

(c) any purchase of shares in connection with foreclosure proceedings involving a duly

constituted pledge or security arrangement where the acquisition is made by the debtor or

creditor;(d) any purchase of shares in connection with privatization undertaken by the government of the

Philippines;

(e) any purchase of shares in connection with corporate rehabilitation under court supervision;

(f) any purchase of shares through an open market at the prevailing market price;

(g) merger or consolidation.

ADDITIONAL SUPREME COURT CASE

Where both parties are equally at fault, neither one could have recourse against the other

( Abacus Securities Corporation vs. Ampil, G.R. No. 160016, February 27, 2006)

In the present controversy, the following pertinent facts are undisputed: (1) on April 8, 1997,

respondent opened a cash account with petitioner for his transactions in securities; (2)

respondent’s purchases were consistently unpaid from April 10 to 30, 1997; (3) respondent failed

to pay in full, or even just his deficiency, for the transactions on April 10 and 11, 1997; (4) despite

respondent’s failure to cover his initial deficiency, petitioner subsequently purchased and sold

securities for respondent’s account on April 25 and 29; (5) petitioner did not cancel or liquidate a

substantial amount of respondent’s stock transactions until May 6, 1997.

Stock market transactions affect the general public and the national economy. The rise and fall of

stock market indices reflect to a considerable degree the state of the economy. Trends in stock

prices tend to herald changes in business conditions. Consequently, securities transactions areimpressed with public interest, and are thus subject to public regulation. In particular, the laws and

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regulations requiring payment of traded shares within specified periods are meant to protect the

economy from excessive stock market speculations, and are thus mandatory. In the present case,

respondent cannot escape payment of stocks validly traded by petitioner on his behalf (i.e., the

transactions on April 10 and 11, 1997). These transactions took place before both parties violated

the trading law and rules. Hence, they fall outside the purview of the pari delicto rule. The paridelicto rule applies only to transactions entered into after the initial trades made on April 10 and

11, 1997 (i.e., the transactions on April 25 and 29).

CHAPTER XVII: INTELLECTUAL PROPERTY CODE


1. Copyright: Name and container of beauty cream product not proper subjects of copyright

and patent (Kho vs. CA, G. R. No. 115758, March 19, 2002)

In the case at bar, the petitioner applied for the issuance of a preliminary injunctive order on theground that she is entitled to the use of the trademark on Chin Chun Su and its container based on

her copyright and patent over the same. We first find it appropriate to rule on whether 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.

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 that 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 that 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. Consequently, a

preliminary injunction order cannot be issued for the reason that the petitioner has not proven thatshe has a clear right over the said name and container to the exclusion of others, not having proven

that she has registered a trademark thereto or used the same before anyone did.

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2. Trademarks: Action for infringement or unfair competition could proceed independently

or simultaneously with administrative action for cancellation of registered trademark ( Levi

Strauss [Phils.], Inc. vs. Vogue Traders Clothing Company, G.R. No. 132993, June 29,

2005)

An action for infringement or unfair competition, including the available remedies of injunctionand damages, can proceed independently or simultaneously with an action for the

administrative cancellation of a registered trademark.

3. Copyright: Proof of ownership of copyrighted material; proof of copying; no copyright

protection for works of applied art or industrial design (Ching vs. Salinas, Sr., et al., G.R.

No. 161295, June 29, 2005)

An applicant for a search warrant for infringement under R.A. No. 8293 must demonstrate the

existence and the validity of his copyright. 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 some minimal degree of creativity. Copying is shown by proof of access tocopyrighted material and substantial similarity between the two works.

- o -

To discharge his burden, the applicant may present the certificate of registration covering the work

or, in its absence, other evidence. A copyright certificate provides prima facie evidence of

originality that is one element of copyright validity. It constitutes prima facie evidence of both

validity and ownership and the validity of the facts stated in the certificate.

- o -

There is no copyright protection for works of applied art or industrial design that have aesthetic or

artistic features that cannot be identified separately from the utilitarian aspects of the article.

Functional components of useful articles, no matter how artistically designed, have generally beendenied copyright protection unless they are separable from the useful article.

ANTI-MONEY LAUNDERING ACT

RA 9160 (2001), as amended by RA 9194 (2003)

1. What is money laundering?

Money laundering, according to the definition adopted by the International Criminal Police

Organization or Interpol, denotes any act or attempted act to conceal or disguise the identity of

illegally obtained proceeds so that they appear to have originated from legitimate sources.

1

Thepurpose of laundering is to disguise illegal profits without compromising the criminals who wish

to benefit from the proceeds of their activities. Section 4 of Republic Act No. 9160, otherwise

known as the Anti-Money Laundering Act (“AMLA”), defines money laundering as “a crime

whereby the proceeds of an unlawful activity are transacted thereby making them appear to have

originated from legitimate sources.” In plain language, money laundering is the conversion of dirty

money into clean money.

2. How is money laundered?

There are 3 common stages of money laundering, namely, placement or the physical disposal of

1

Introduction to the Model Legislation on Laundering, Confiscation and International Cooperationin Relation to the Proceeds of Crime prepared by the United Nations Office for Drug Control and Crime

Prevention (1999).

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the criminal proceeds, layering or the separation of the criminal proceeds from their source by

creating layers of financial transactions to disguise the audit trail, and integration or the provision

of apparent legitimacy to the criminal proceeds.

The placement stage is intended to sever any direct association between the money and the crime

generating it. At this stage, the launderer introduces his illegal profits into the financial system.

This might be done by breaking up large amounts of cash into less conspicuous smaller sums.

These sums may then be deposited directly into one or more bank accounts, or used to purchase

monetary instruments, such as checks, money orders, securities, etc., that are afterwards deposited

into other accounts at other places.

After the funds have entered the financial system, the layering stage takes place. The object here is

to obscure the money trail to foil pursuit. At this stage, the launderer engages in a series of

conversions or movements of the funds to distance them from their source. The funds might be

used to purchase investment instruments that are subsequently sold, or they might simply be wired

to accounts in other banks in other countries. Sometimes, the transfers might be disguised as

payments for goods or services, thus giving them a legitimate appearance.

Once the manner of its acquisition and its source can no longer be traced, the money may now be

available to the criminal again. This is the integration stage when the funds re-enter the legitimate

economy. The launderer could then invest the laundered funds into any asset or business venture.2

3. What are “covered institutions”?

These are the persons, corporations and other entities subject to the provisions of the AMLA.

Specifically, the term refers to -

(a) 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);

(b) insurance companies and all other institutions supervised or regulated by the InsuranceCommission; and

(c) (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-end 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 and Exchange Commission.

(Sec. 3[a], AMLA)

4. What is a “covered transaction”?

It is a transaction with a covered institution in cash or other equivalent monetary instrument

involving a total amount in excess of P500,000 within one banking day (Sec. 3[b], AMLA). This

means that if the amount involved is less than P500,000 then the covered institution need not make

a report to the AMLA unless the transaction is a suspicious transaction.

5. What is a “suspicious transaction”?

It is a transaction with a covered institution, regardless of the amount involved, where any of the

following circumstances exist:

2 See Basic Facts About Money Laundering, http://www.fatf-gafi.org/Mlaundering_en.htm, as of

August 14, 2002.

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http://www.fatf-gafi.org/Mlaundering_en.htm






(a) there is no underlying legal or trade obligation, purpose or economic justification;

(b) the client is not properly identified;

(c) the amount involved is not commensurate with the business or financial capacity of the client;

(d) taking into account all known circumstances, it may be perceived that the client's transactionis structured in order to avoid being the subject of reporting requirements under the Act;

(e) any circumstance 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;

(f) the transaction is in any way related to an unlawful activity or offense under this Act that is

about to be, is being or has been committed; or

(g) any transaction that is similar or analogous to any of the foregoing. (Sec. 3[b-1], AMLA).

A transaction may be both a covered and suspicious transaction.

6. What is an “unlawful activity”?

It is any act or omission or series or combination of acts or omissions involving or having relation

to any of the crimes and offenses enumerated in Section 3(i) of the AMLA such as kidnapping for

ransom, plunder, robbery and extortion, jueteng and masiao, piracy on the high seas, qualified

theft, swindling, smuggling, hijacking, destructive arson, murder, and violations of certain

provisions of the Anti-Graft and Corrupt Practices Act, Comprehensive Dangerous Drugs Act of

2002, Electronic Commerce Act of 2000, and Securities Regulation Code of 2000. Tax evasion

and other violations of the National Internal Revenue Code are not included in the list of unlawful

activities. In other countries, the term “predicate crime” is used instead of “unlawful activity.”

7. What are the money laundering offenses penalized under the AMLA?

(a) The transaction of any monetary instrument or property, or the attempt to transact the same,by any person knowing that such monetary instrument or property represents, involves, or relates

to, the proceeds of any unlawful activity;

(b) The performance of, or failure to perform, any act by any person, knowing that any monetary

instrument or property involves the proceeds of any unlawful activity, as a result of which

performance or failure to perform he facilitates the offense of money laundering referred to in

paragraph (a) above;

(c) The failure by any person, knowing that any monetary instrument or property is required

under the AMLA to be disclosed and filed with the AMLC, to make such disclosure and filing.

(Sec. 4, AMLA)

8. What is the Anti-Money Laundering Council?

The Anti-Money Laundering Council is the government entity that administers the AMLA. It is

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

members. The AMLC shall act unanimously in the discharge of its functions.

9. What are the covered institutions required to do to under the AMLA to prevent

money laundering?

There are three basic activities covered institutions are required to do to prevent money laundering

(Sec. 9, AMLA):

(a) Identify customers – A covered institution shall establish and record the true identity of its

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clients based on official documents. It shall maintain a system of verifying the true identity of its

clients and, in case of corporate clients, require a system of verifying their legal existence and

organizational structure, as well as the authority and identification of all persons purporting to act

on their behalf. Anonymous accounts, accounts under fictitious names, and all other similar

account are prohibited by the AMLA. However, Peso and foreign currency non-checkingnumbered accounts are allowed.

(b) Keep records – Covered institutions are required to maintain and safely store all records of

all transactions for a period of five years from the dates of the transactions. With respect to closed

accounts, the records on customer identification, account files and business correspondence are

required to be preserved and safely stored for at least five years from the dates when they were

closed.

(c) Report covered and suspicious transactions - Covered institutions shall report to the AMLC

all covered and suspicious transactions within five working days from occurrence thereof, unless

the Supervising Authority concerned (i.e., the BSP, SEC or OIC) prescribes a longer period not

exceeding 10 working days.

10. What is a “freeze order”?

It is the order that the Court of Appeals may issue, 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, to block, suspend or otherwise place under the control of the

covered institution concerned the monetary instrument or property subject thereof. A freeze order

takes effect immediately and lasts for a period of 20 days unless extended by the Court of Appeals,

- end -

from sir catindig revised 2007 noscl supplement 7-7-08 copy

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