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NOTES ON SPECIAL COMMERCIAL LAWS

Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________


Facultad de Derecho Civil 1
UNIVERSITY OF SANTO TOMAS
UNIVERSITY OF SANTO TOMAS
Faculty of Civil Law
A.Y. 2012-2013
First Semester



SPECIAL COMMERCIAL LAWS



LETTERS OF CREDIT

Definition

Q: What are letters of credit?

A: Any arrangement however named of described, whereby a
bank acting upon the request of its client or in its own behalf,
agrees to pay another, against a stipulated documents
provided that the terms of the credit are complied with.

Q: What is the duration of LC?

A:

1. Upon the period fixed by the parties; or
2. If none is fixed:
a. 6 months from its date if used in the Philippines;
b. 12 months if used abroad

Governing law

Q: What laws govern commercial transactions?

A: In the absence of any particular provision in the Code of
Commerce, commercial transaction shall be governed by
usage and customs genereally observed.

Letter of credit as an independent contract

Q: Is a letter of credit an accessory contract?

A: Letters of credit are in effect an absolute undertaking to
pay the money advanced or the amount for which credit is
given on the faith of the instrument. They are primary
obligations and not accessory contracts.

NOTE: A letter of credit by itself does not come into
operation without a contract supporting it. It is not a contract
that can stand on its own, it needs a supporting contract. In a
commercial letter of credit it is a sale; in standby letter of
credit, it is a non-sale transaction.

Q: Describe the liability of the bank which issued the letter
of credit.

A: It is neither a surety nor a guarantor. The liability of the
issuing bank is primary and solidary. It is also not entitled to
the benefit of excussion.

Q: What is the purpose of the letters of credit?

A: To ensure certainty of payment. The seller is assured of
payment because the bank intervenes and makes the
commitment to pay. This addresses problems arising from the
sellers refusal to part with his goods before being paid and
the buyers refusal to part with his money before acquiring
the goods, thus, facilitating commercial transactions.

NOTE: The issuing bank should pay the beneficiary upon the
latters submission of the stipulated documents and
compliance with the terms of the credit even though there is
a pending issue on whether or not the main contract
underlying the letter of credit has been paid or fulfilled or
not.

Q: What are the 2 kinds of letters of credit?

A:

COMMERCIAL STANDBY
Involves contracts of sale Involves non-sale
transactions
Payable only upon
presentation by the seller-
beneficiary of documents
that show he has performed
his contract
Payable upon certification by
the beneficiary of the
applicants non-performance
of the agreement.

Q: What are the other kinds of letters of credit?

A:
1. Irrevocable letter of credit A letter of credit
wherein the terms and the undertakings of the
issuing bank cannot be amended or altered or
revoked without the consent of the beneficiary
2. Revocable letter of credit can be amended,
altered or revoked even without the consent of the
beneficiary
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 26
UNIVERSITY OF SANTO TOMAS
3. Confirmed letter of credit - the liability of the
confirming bank is primary
4. Non-confirmed letter of credit

Irrevocable letter of credit

Q: Is irrevocable letter of credit and confirmed letter of
credit synonymous?

A: An irrevocable letter of credit is not synonymous with a
confirmed letter of credit. In an irrevocable letter of credit,
the issuing bank may not, without the consent of the
beneficiary and the applicant, revoke its undertaking under
the letter, whereas, in a confirmed letter of credit, the
correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing banks obligation
as its own according to the terms and condition of the credit.

IRREVOCABLE LETTER OF
CREDIT
CONFIRMED LETTER OF
CREDIT
The issuing bank may not,
without the consent of the
beneficiary and the
applicant, revoke its
undertaking under the letter
The correspondent bank
gives an absolute assurance
to the beneficiary that it will
undertake the issuing banks
obligation as its own
according to the terms and
conditions of the credit

Q: Can the irrevocable nature of letter of credit be changed?

A: The terms of an irrevocable letter of credit cannot be
changed without the consent of the parties, particularly the
beneficiary thereof (Philippine Virginia Tobacco
Administration v. De Los Angeles, 164 SCRA 543, 1988).

Q: Can a court order the release to the applicant the
proceeds of an irrevocable letter of credit without the
consent of the beneficiary?

A: No, such order violates the irrevocable nature of the letter
of credit. The terms of an irrevocable letter of credit cannot
be changed without the consent of the parties, particularly
the beneficiary thereof.

Parties to a letter of credit

Q: Who are the parties to the letter of credit?

A:
1. Applicant
2. Beneficiary
3. Issuing bank

Q: Who is the applicant?

A: He may be a buyer, importer or obligor. The person who
procures the opening of letter of credit and who agrees to
reimburse the issuing bank any and all amount should be paid
under the letter of credit once the issuing bank is compelled
to pay because the beneficiary is able to submit the
document stipulated.

He agrees to pay the bank that issued the letter of credit. The
applicant has no obligation to reimburse the issuing bank if
the latter pays without the stipulated amounts duly paid
under the letter of credit.

Q: Who is the beneficiary?

A: The one entitled to payment from the issuing bank upon
his submission of the document stipulated and compliance
with the terms of the credit.

Q: What is the effect of the failure of the beneficiary to
fulfill his obligation under the main contract?

A: It does not negate his right to payment from the issuing
bank as long as he is able to submit the required documents
and comply with the terms of the credit, without prejudice to
his liability against the account party under the law on
contract and damages

Q: Who is the issuing bank?

A: The one that undertakes to pay the beneficiary upon
submission of the beneficiary of these stipulated documents
and compliance with the terms of the credit.

Q: Enumerate the other parties.

A:

Advising or
Notifying bank
Not liable to pay the beneficiary; it does not
have any contractual relations with the
beneficiary. Its only obligation is to determine
the apparent authenticity of the letter of credit;
to check if at first glance that the same is
genuine or valid:
a. If valid, the advising/notifying bank
notifies the beneficiary of the letter of
credit; transmit the letter of credit in
favor of the beneficiary so that the
beneficiary can cause shipment of the
equipment
Paying bank An agent of the issuing bank for the purpose of
making payment to the beneficiary.
He can also be the advising bank
Confirming bank It lends credence to a letter of credit issued by a
lesser known bank as if it is the one who issued
the letter of credit.
Its obligation is similar to an issuing bank. Thus,
beneficiary may tender documents to the
confirming bank and collect payment
Negotiating
bank
The bank in the city of the beneficiary which
buys or discounts the drafts contemplated by
the LC, if such draft is to be drawn on the
opening bank not in the city of the beneficiary
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 27
UNIVERSITY OF SANTO TOMAS
Correspondent
bank of issuing
bank
If the account party is in the Philippines and the
beneficiary is abroad, the beneficiary will be
notified and consequently will be paid through
the correspondent bank

Q: Describe the duty of the advising bank?

A: It determines the apparent authenticity of the letter of
credit and notifies the beneficiary of the letter of credit.

He does not guarantee the genuineness or due execution of
the letter of credit. It is not liable for damages even if it turns
out to be spurious provided the spurious character is not
apparent on the face of the instrument.

Q: Does the advising bank have the obligation to pay the
beneficiary?

A:
GR: No

XPN: When the advising bank is also the confirming or
paying bank

Three distinct relationships arising from a letter of credit

Q: Explain the three (3) distinct but intertwined contract
relationships that are indispensable in a letter of credit
transaction.

1. Between the applicant/buyer/importer and the
beneficiary/seller/exporterThe applicant/ buyer/
importer is the one who procures the letter of credit
while the beneficiary/seller/exporter is the one who in
compliance with the contract of sale ships the goods to
the buyer and delivers the documents of title and draft
to the issuing bank to recover payment for the goods.
Their relationship is governed by the contract of sale.
2. Between the issuing bank and the
beneficiary/seller/exporter The issuing bank is the one
that issues the letter of credit and undertakes to pay the
seller upon receipt of the draft and proper documents of
title. On the other hand, the beneficiary/seller/exporter
surrenders document of title to the bank in compliance
with the terms of the LC. Their relationship is governed
by the terms of the LC.
3. Between the issuing bank and the
applicant/buyer/importer The applicant/buyer/
importer obliges himself to reimburse the issuing bank
upon receipt of the documents of title. Their relationship
is governed by the terms of the application for the
issuance of the letter of credit by the bank.

NOTE: These relationships while interrelated are distinct and
separate from each other.

Q: When is the bank entitled to reimbursement?

A: Once the issuing bank shall have paid the beneficiary after
the latters compliance with the terms of the LC. Presentment
for acceptance to the customer/applicant is not a condition
sine qua non for reimbursement.

Q: Is presentment a condition prior to reimbursement?

A: Presentment for acceptance to the customer or applicant
of the drafts drawn by the beneficiary is not a condition sine
qua non for reimbursement (Prudential Bank & Trust Co. v.
IAC, 216 SCRA 257, 1992)

Q: What is the consequence of payment upon an expired
LC?

A: An issuing bank which paid the beneficiary of an expired
letter of credit can recover the payment from the applicant
which obtained the goods from the beneficiary to prevent
unjust enrichment.

Q: Should the marginal deposit made by the customer, in
possession of the bank be first deducted from the principal
indebtedness before computing the interest?

A: Yes, since it is supposed to be returned upon compliance
with his obligation. Indeed, it would be onerous to compute
interest and other charges on the face value of the letter of
credit which the issuing bank issued, without first crediting or
setting off the marginal deposit which the importer paid to it.
Requiring the importer to pay the interest on the entire letter
of credit without deducting first his marginal deposit would
be a clear case of unjust enrichment by the bank.

NOTE: The applicant has the right to have the marginal
deposit deducted from the principal obligation under the
letter of credit and to have the interest computed only on the
balance and not on the face value thereof.

Doctrine of Independence

Q: What is the doctrine of independence?

A: Under this doctrine, the obligation of the issuing bank to
pay the beneficiary does not depend on the fulfillment or
non-fulfillment of the contract supporting the letter of credit.
If it is a commercial letter of credit, the obligation if the
issuing bank to pay the beneficiary is not affected by any
breach of contract by the seller to the buyer because the
contract between the issuing bank and beneficiary is separate
and distinct from the contract between the seller and the
buyer.

Q: Does the issuing bank have the obligation to determine
whether or not the main contract has been fulfilled or not?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 28
UNIVERSITY OF SANTO TOMAS
A: No. The issuing bank is liable to pay the beneficiary upon
the latters submission of the stipulated documents and
compliance with the terms of the credit regardless of any
breach of contract by the beneficiary to the applicant of the
letter of credit.

The SC held that banks deals with documents, they dont deal
with goods. The issuing bank has no obligation to check the
object, the quantity or quality of the goods. The bank needs
not to verify or go beyond the four corners of the document.
The issuing bank will determine the documents to be
submitted, where the stipulated documents tendered
faithfully. If the documents were submitted, the issuing pays
the seller.

Q: What is the exception to the doctrine of independence?

A: Fraud exception principle

Fraud exception Principle

Q: What is the Fraud exception principle?

A: The beneficiary may be enjoined from collecting on the
letter of credit if the following elements are present:
a. There is fraud on the part of the beneficiary
b. Fraud must be in relation to the independent
purpose or character of the credit
c. Unless the beneficiary is restrained, the applicant
shall suffer grave and irreparable injury.

NOTE: To be an exception, the fraud must NOT be in relation
to the performance of the main contract but in relation to the
independent purpose or character of the credit.

Q: What is the remedy for a fraudulent abuse?

A: Injunction.

Doctrine of Strict Compliance

Q: How should commercial transaction involving letter of
credit be complied?

A: Commercial transaction involving letters of credit are
governed by the rule on strict compliance.

Q: What is the so-called doctrine of strict compliance?

A: The documents that the beneficiary should submit to the
issuing bank or confirming bank must strictly conform to the
documents stipulated. If there is discrepancy, the issuing
bank is not liable to pay. If it pays, it pays at its own risk and
cannot obtain reimbursement from the applicant.

It matters not that the submission of the documents are
unfair, unjust or inequitable, the point is, it requires that the
document stipulated must be the document to be submitted,
otherwise, the issuing bank is not liable or the beneficiary is
not entitled to payment.



TRUST RECEIPT

Definition

Q: What is a trust receipt transaction?

A: It is any transaction between the entruster and entrustee
whereby the entruster who owns or holds absolute title or
security interests over certain specified goods, documents or
instrument, releases the same to the possession of entrustee
upon the latters execution of a TR agreement.

It is a transaction wherein the entrustee binds himself to hold
the designated goods in trust for the entruster and, in case of
default, to sell such goods, documents or instrument with the
obligation to turn over to the entruster the proceeds to the
extent of the amount owing to it or to turn over the goods,
documents or instrument itself if not sold.

NOTE: To be in the nature of a trust receipt, the entruster
should have financed the acquisition or importation of the
goods. The funds should have been delivered before or
simultaneously with delivery of the goods.

Q: What is a trust receipt (TR)?

A: It is the written or printed document signed by the
entrustee in favor of the entruster containing terms and
conditions substantially complying with the provisions of PD
115.

Q: What is the consequence where the execution of the
trust receipt agreement was made only after the goods
covered by it had been purchased by and delivered to the
entrustee and the latter as a consequence acquired
ownership over the goods?

A: In such case, the transaction does not involve a trust
receipt but a simple loan even though the parties
denominated the transaction as one of trust receipt
(Colinares v. CA, 339 SCRA 609, 2000; Consolidated Bank and
Trust Corp., v. CA, 356 SCRA 671, 2001.)

Parties to a trust receipt agreement

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

A:
1. Entruster
2. Entrustee

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 29
UNIVERSITY OF SANTO TOMAS
Q: Who is an entruster?

A: A lender, financer or creditor. Person holding title over the
goods documents or instruments (GDI) subject of a trust
receipt transaction; releases possession of the goods upon
execution of trust receipt.

Q: Who is an entrustee?

A: A borrower, buyer, importer or debtor. Person to whom
the goods are delivered for sale or processing in trust, with
the obligation to return the proceeds of sale of the goods or
the goods themselves to the entruster

LCs and TRs, not negotiable instruments

Q: Are letters of credit and trust receipt considered as
negotiable instruments?

A: No, but drafts in connection with the former are
negotiable instruments (Lee v. CA 375 SCRA 579, 2002).

2 features of a trust receipt agreement

a. Loan feature
b. Security feature

Q: Discuss the dual features of a trust receipt agreement.

A: A trust receipt has a loan and security features. The
entruster (bank) extends loan to the entrustee (importer and
retail dealers) to finance the importation of goods or
instruments in favor of the entrustee who may not be able to
obtain credit except thru utilization of the merchandise
imported or purchased.

The security feature is in the covering trust receipt which
secures the indebtedness.

Effect of failure on the part of entrustee to comply with its
obligations

Q: What is the effect of payment of the loan or delivery of
the sale proceeds equivalent to the full amount?

A: It extinguishes both criminal and civil liabilities of the
entrustee.

Section 13. Penalty clause. The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and fifteen, paragraph one (b)
of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising
from the criminal offense.

P.D 115 is not violative of the constitutional provision
against imprisonment for the non-payment of debt

Q: Is PD 115 violative of the constitutional provision against
imprisonment for the non-payment of debt?

A: No because what is sought to be penalized is not the non-
payment of debt but the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of
another. It punishes the act not as an offense against
property but against public order (People v. Nitafan, 207
SCRA 726, 1992).

NOTE: The penal sanction covers:
1. Criminal liability
2. Civil liability

Estafa

Q: What is the effect of the failure of the entrustee to
deliver the proceeds of the sale of the goods or instruments
subject to the trust receipt or return the goods?

A: It will constitute estafa.

Q: May the civil action for the collection of the loan be
instituted independently of the criminal action?

A: Yes.

Q: What is the effect of the acquittal of the entrustee in the
criminal case as a result of the surrender or consignation of
the goods?

A: The acquittal of the entrustee in the criminal case as a
result of the surrender or consignation of the goods is not a
bar to the filing of a separate civil action to enforce payment
of the loan (Vintola v. Insular Bank of Asia and America, 150
SCRA 140, 1987).

Q: What is the effect of compromise of estafa case arising
from trust receipt transaction, after the case has been filed
in court?

A: Compromise of estafa case arising from trust receipt
transaction, after the case has been filed in court does not
amount to novation and does not erase the criminal liability
of the accused (Ong v. CA, 124 SCRA 578, 1983).

Penalty in case of corporation

Q: What if the entrustee is a corporation?

A: In such case, the law makes the officers or employees or
other persons responsible for the offense liable to suffer the
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Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 30
UNIVERSITY OF SANTO TOMAS
penalty of imprisonment. The criminal liability falls on the
human agent responsible for the violation of the Trust
Receipt Law.

A person who admits being the agent of the entrustee
corporation is a person responsible for the offense if he is the
signatory of the trust receipts and if he cannot explain why he
is not responsible for the failure to turn over the proceeds of
the sale or account for the goods covered by the trust receipt.

Q: Why are the officers, employees, etc. of a corporation
responsible for the offense?

A: It is because they are vested with the authority and
responsibility to devise means necessary to ensure
compliance with the law, and if they fail to do so, are held
criminally accountable. Yet, a corporation may be charged
and prosecuted for a crime if the imposable penalty is fine
(Ching v. Sec. of Justice, 481 SCRA 609, 2006)

Q: Is the person signing the trust receipt for the corporation
solidarily liable with the entrustee-corporation for the civil
liability arising from the criminal offense?

A: No. He may however be personally liable if he bound
himself to pay the debt of the corporation under a separate
contract of surety or guarantee (Ong v. CA, 401 SCRA 649,
2003).

Q: Can we file a criminal case against the corporation?

A: It depends, if the penalty is imprisonment, we cannot file a
criminal case, but if the penalty is a fine or forfeiture or
revocation of the corporations franchise, then we can.

Civil obligation remains as long as loan is not paid

Q: What is the effect of non-payment of the loan?

A: The civil obligation still remains.

Q: What is the effect of the loss of the goods subject of the
trust receipt?

A: Loss of the goods subject of the trust receipt, regardless of
the cause does not extinguish the civil liability of the
entrustee.

Q: What is the effect of return of goods?

A: If the loan is not yet paid, the return of the goods may
extinguish the criminal liability but not the civil liability of the
entrustee unless the goods are sold and the proceeds thereof
applied in full payment of the loan.

Penal sanction applies to goods intended for sale only

Q: When does the penal sanction under the trust receipts
law apply?

A: Jurisprudence provides that the penal sanction does not
apply in case the goods are not intended for sale or resale as
when they are for actual use.

Cases where no criminal liability despite execution of
TR agreement

1. Compliance with the terms of the trust receipt either
by:
a. payment,
b. return of the proceeds or
c. return of the goods.

2. The transaction is not a trust receipt within the
contemplation of the trust receipts law
3. Surrender of the goods to the entruster
4. Non-delivery of the goods to entrustee
5. Compromise agreement before the filing of the
criminal information for violation of the TR law
6. Cancellation of the trust and taking possession by
the entruster

NOTE: Mere repossession of the goods will
extinguish criminal liability.

7. Loss of the goods due to force majeure
8. Consignment

Entrustee, owner of the articles subject of the TR

Q: Who is the owner of the articles subject of the TR?

A: The entrustee. A trust receipt has two features, the loan
and security features. The loan is brought about by the fact
that the entruster financed the importation or purchase of
the goods under TR. Until and unless this loan is paid, the
obligation to pay subsists. If the entrustee is made to appear
as the owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could dispose of the
goods in any manner that it wants, which it cannot do. To
consider the entrustee as the true owner from the inception
of the transaction would be to disregard the loan feature
thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings
and Trust Company, 2005)

Q: Can the entrustee mortgage or pledge the articles in
trust?

A: The articles covered by the trust receipts are owned by the
entruster and they were only held by the entrustee in trust.
While it was allowed to sell the items, the entrustee had no
opportunity to dispose of them or any part thereof or their
proceeds through conditional sale, pledge or any other
means. Accordingly, the entrustee has neither ownership,
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Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 31
UNIVERSITY OF SANTO TOMAS
free disposal nor the authority to freely dispose of the
articles. Hence, the entrustee could not have subjected them
to a chattel mortgage (DBP v. Prudential Bank, 475 SCRA 623,
2005).

NOTE: The entrustee cannot mortgage the goods because
one of the requisites of a valid mortgage is that the
mortgagor must be the absolute owner of the property
mortgaged or must have free disposal thereof. Entrustee is
not the absolute owner of the goods nor has the free disposal
thereof.

Receipt of bank of sum of money without reference to trust
receipt obligation

Q: What is the effect of the receipt of the bank of a sum of
money without reference to the trust receipt obligation to
which the same pertains?

A: It does not obligate the bank to apply the money received
against the trust receipt obligation.

Q: Does it have the effect of compensation?

A: No since compensation is not proper when one of the
debts consist in civil liability when one of the debts consists in
civil liability arising from a criminal offense (Metropolitan
Bank and Trust Company v. Tonda, 338 SCRA 254, 2000).

Rights of the entruster

Q: What are the right of an entuster?

A:
1. To be entitled to the proceeds of the sale of the
goods under trust receipt to the extent of the
amount owing to him or to return the goods in case
of non-sale
2. To cancel the trust and take possession of the goods
or of the proceeds realized therefrom at any time
upon default by the entrustee
3. To sell the goods with at least 5-day notice to the
entrustee and apply the proceeds in payment of the
obligation. Entrustee is liable to pay deficiency, if
any.

Validity of the security interest as against creditors of the
entrustee/innocent purchasers for value

Q: As between the entruster and the creditors of the
entrustee, who has a better right over the goods?

A: The entruster. His security interest in goods, documents,
or instruments pursuant to the written terms of a trust
receipt shall be valid as against all creditors of the entrustee
for the duration of the trust receipt agreement.

Q: Who can defeat the rights of the entruster over the
goods?

A: A purchaser in good faith. He acquires goods, documents
or instruments free from the entruster's security interest.

Goods covered by TR not subject to levy

Q: Are the goods covered by a trust receipt subject to levy?

A:
GR: No, the law warrants the validity of entrusters security
interest as against creditors of the trust receipt agreement
during the duration of the trust receipt agreement.

XPN: When the properties are in the hands of an innocent
purchaser for value and in good faith (Prudential Bank v.
NLRC, 251 SCRA 421, 1995).

Obligations or liability of the entrustee

Q: What are the obligations and liabilitites of the entrustee?
A:
1. To hold good, documents and instruments (GDI) in
trust for the entruster and to dispose of them strictly
in accordance with the terms of TR;
2. To receive the proceeds of the sale for the entruster
and to turn over the same to the entruster to the
extent of amount owing to the entruster;
3. To insure GDI against loss from fire, theft, pilferage
or other casualties.
4. To keep GDI or the proceeds thereof, whether in
money or whatever form, separate and capable of
identification as property of the entruster;
5. To return GDI to the entruster in case they could not
be sold or upon demand of the entruster; and
6. To observe all other conditions of the trust receipts.
(Sec. 9, P.D. 115)


Order for application of proceeds

Q: What is the order in the application of proceeds of
the TR transactions?

A:
1. Expenses of the sale
2. Expenses derived from storing the goods
3. Principal obligation

Q: Is the entrustee liable for the deficiency?

A: Yes, but any excess shall likewise belong to him.



NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 32
UNIVERSITY OF SANTO TOMAS

Liability for loss of goods, documents or instruments

Q: Who shall bear the loss of goods which are the subject of
TR?
A: The entrustee. Loss of goods, documents or instruments
which are the subject of a TR, pending their disposition,
irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his obligation
to the entruster for the value thereof. (Sec. 10, P.D. 115)
NOTE: The principle of res perit domino will not apply against
the entruster

Remedies

Q: What are the remedies available to the entruster?

A:
1. File a criminal action for estafa in case of failure of
the entrustee to deliver the proceeds of the sale of
the goods under the trust receipt up to the extent of
his obligation to the entruster.

NOTE: The civil action may be instituted:

a. In the criminal action
b. Separately filed independently of the criminal action

CRIMINAL ACTION CIVIL ACTION
Based on ex-delicto Based on ex-contracto

2. Cancel the trust and take possession of the goods at
any time upon default of the entrustee
3. After the repossession, the entruster may sell the
goods upon at least 5-day notice to the entrustee
and apply the proceeds in payment of the obligation.
The entrustee is liable for deficiency or entitled to
excess, if any.
4. If a surety secures the obligation of the entrustee in
addition to the trust receipt, the law does not
obligate the entruster to cancel the trust or take
possession of the goods. He can proceed against the
surety. The options belong to the entruster.

Q: In the event of default, is it mandatory or compulsory for
the entruster to cancel the trust and take possession of the
goods to be able to enforce his rights?

A: No, the law uses the word may in granting to the
entruster the right to cancel the trust and take possession of
the goods. Thus, he has the discretion to avail itself of such
right to sue or seek alternative actions, such as third party
claim or a separate civil action which it deems bets to protect
its right, at any time upon default or failure of the entrustee
to comply with any of the terms and conditions of the
agreement (South City Homes, Inc. v. BA Finance Corporation,
371 SCRA 603, 2001).



CHATTEL MORTGAGE

Q: What is a chattel mortgage?

A: An accessory contract whereby a personal property is
recorded in the Chattel Mortgage Register to secure the
performance of a principal obligation.

NOTE: The concept of a chattel mortgage as a conditional sale
under the old chattel mortgage law has been supplanted by
the definition of chattel mortgage under Art 2140 of the Civil
Code. It is now an accessory contract, no longer a conditional
sale.

CHARACTERISTICS OF CHATTEL MORTGAGE

1. An accessory contract because it is for the purpose of
securing the performance of a principal obligation;
2. A formal contract because of its enforceability,
registration in the Chattel Mortgage Register is
indispensable;
3. A unilateral contract because it produces only
obligations on the part of the creditor to free the thing
from encumbrance on the fulfillment of the obligation.

NOTE: The extinguishment of the accessory contract does not
extinguish the principal contract; the extinguishment of the
principal contract extinguishes the accessory contract.

ESSENTIAL REQUISITES

Q: What are the essential requisites for a valid chattel
mortgage?

A:

1. Constituted to secure fulfillment of the principal
obligation
2. Mortgagor is the absolute owner of the property
3. Mortgagor has free disposal of the property, in the
absence thereof, that he be legally authorized for
such purpose
4. That it involves a personal property. (Sec. 2085,NCC)

FORMAL REQUISITES

Q: What are the formal requisites for a valid chattel
mortgage?

A:

1. Affidavit of good faith
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 33
UNIVERSITY OF SANTO TOMAS
2. Registration with the Chattel Mortgage Registry
3. If necessary, additional registration with the proper
government agency

Affidavit of Good Faith

Q: What is an affidavit of good faith?

A: A certificate included in the chattel mortgage contract
executed by both mortgagor and mortgagee stating that:

1. The obligation is valid, just and subsisting; and
2. It is not one entered into for purposes of fraud.

Q: What is the effect of absence of affidavit of good faith?

A: It does not affect the validity of the chattel mortgage but
the same will be unenforceable against third persons.

Q: What is the status of an unrecorded CM?

A: The mortgage is valid and binding between the parties.
Registration is necessary only for the purpose of binding third
person.

NOTE: In an action for collection, the non-registration of the
chattel mortgage which ordinarily does not bind third persons
is not critical. The rule is different when the remedy resorted
to is foreclosure.

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

A: It is nevertheless binding between the parties.

Q: What is the period within which the registration should
be made?

A: The law does not provide any specific time. Yet, the law is
substantially and sufficiently complied with:
a. where the registration is made by the mortgagee
before the mortgagor has complied with his principal
obligation and;
b. no right of innocent third persons Is prejudiced.

Q: What is the effect of registration?

A: It creates real rightit is an effective and binding notice to
the other creditors of its existence and creates a real right or
lien which follows the chattel wherever it goes.

The registration gives the mortgagee symbolical possession.
The efficacy of the act of recording a chattel mortgage
consists in the fact that it operates as a constructive notice of
the existence of the contract.

Dual Registration rule

Q: Explain the Dual registration rule?

A: The property must be registered:

a. Place where the mortgagor resides
b. In the place where the property is situated

XPN:

a. If the mortgagor resides in the same place where the
property is located; or
b. If the amount of the loan is more than P500,000.00,
registration should be made in the city or
municipality where the property is situated (P.D.
1159, Sec. 113 & 114)

RULES:

Private motor
vehicle
Land Transportation Office (LTO)
Public motor
vehicle
Land Transportation Franchise &
Regulatory Board (LTFRB)
Vessels Maritime Industry Authority (MARINA)
Aircrafts Civil Aviation Authority of the
Philippines (CAAP)

Chattel mortgage vs. Pledge

Q: Distinguish chattel mortgage from pledge.

A:
CHATTEL MORTGAGE PLEDGE

Delivery
Delivery is not necessary Delivery is necessary
Registration
Registration in the Chattel
Mortgage register is
necessary for its
enforceability
Registration in the Registry
Property is not necessary.

Security
Cannot secure future
obligations
Can secure future obligations
Law governing the sale
Procedure for the sale of the
thing given as security is
governed by Sec. 14, Act No.
1508
Art. 2112, NCC

Excess
If the property is foreclosed,
the excess goes to the debtor

If the property is sold, the
debtor is not entitled to the
excess unless otherwise
agreed.
Recovery of deficiency
The creditor is entitled to
recover the deficiency from
the debtor except if the
The creditor is not entitled to
recover the deficiency
notwithstanding any
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 34
UNIVERSITY OF SANTO TOMAS
chattel mortgage is a security
for the purchase of property
in installments

stipulation to the contrary.

Possession
Possession remains with the
debtor
Possession is vested in the
creditor
Contract
Formal contract Real contract
Recording in a public instrument
Must be recorded in a public
instrument to bind third
persons

Must be in a public
instrument containing
description of the thing
pledged and the date thereof
to bind third persons

SUBJECT MATTER OF CHATTEL MORTGAGE

Q: What is the subject matter of chattel mortgage?

A: It must always be personal or movable property.

Q: What are the properties mortgageable under the law?

A:

1. Shares of stock in a corporation- If the owner of the
shares is not domiciled in the same province where the
corporation is domiciled, the registration must be made
in both provinces.
2. An interest in business, for its personal proper capable of
appropriation;
3. Machinery treated by the parties as personal property
subsequently installed on leased land;
4. Vessels but it is essential that the mortgage is recorded
in the office of the MARINA (Maritime Industry
Authority) to be effective as to third persons. It is not
necessary that it be recorded in the office of the register
of deeds;
5. Motor vehicles-which must be registered with the Land
Transportation Commission (LTO) and with respect to
vehicles used for public services, it must also be
approved by the Public Service Commission (LTFRB);
6. House of mixed materials;
7. House intended to be demolished for what are really
mortgaged in this case are the materials thereof;
8. House built on rented land since it did not form part of
the land;
It is settled that an object placed on land by one who had
only a temporary right to it does not become
immobilized by attachment;
9. A house of strong materials- as long as the parties to the
contract so agree and no innocent third party will be
prejudiced thereby.

Q: What is the effect if a chattel mortgage is constituted on
machinery permanently attached on the ground?

A: It is to be considered as personal property and the chattel
mortgage constituted thereon is null and void, regardless of
who owns the land. However, the chattel mortgage is binding
on the contracting parties but cannot prejudice innocent
third parties (Makati Leasing and Finance Corp. v. Wearever
Textile Mills, Inc. 122 SCRA 296, 1983).

In accordance with Art. 2125 of the Civil Code, an
unregistered chattel mortgage is valid and binding between
the parties because registration is necessary only for the
purpose of binding third persons (Filipinas Marble Corp. v.
IAC, 142 SCRA 180, 1986).

Q: What is the appropriate remedy to unbolt the machinery
preparatory to the extra-judicial foreclosure?

A:
1. Action for replevin preparatory to extra-judicial
foreclosure
2. Simply, judicially foreclose

Mortgagee vs. Innocent purchaser for value

In one case, the court held that chattel mortgage over a
house is valid between the contracting parties even
though it is a real property. Since it is a valid mortgage,
the mortgagee can foreclose in case of default.

But, even if he has foreclosed the chattel mortgage, it
does not bind the judgment creditor of D because it
does not affect innocent 3rd parties. That conclusion
will not change even if the mortgagee sold the house to
a 3rd party, an innocent purchaser for value.

That innocent purchaser for value has a right inferior
compared to the rights of the judgment creditors of D
for the simple reason that the innocent purchaser for
value simply steps into the shoes of the original
mortgagee and acquires only whatever rights, title, or
interest that the mortgagee originally had over the
house and subject to the same limitations.

If the right of the right of the original mortgagee is
enforceable only against the mortgagor, the right of the
innocent purchaser for value, the assignee of the
original mortgagee is also valid and enforceable only
against the mortgagor. But, that does not prejudice or
affect innocent 3
rd
parties, like judgment creditors of
the mortgagor.

After-Acquired Property

Q: Can the CM cover afteracquired properties?
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 35
UNIVERSITY OF SANTO TOMAS

A:

GR: No, because Section 7 of Act 1508 provides: A chattel
mortgage shall be deemed to cover only the property
described therein and not like or substituted property
thereafter acquired by the mortgagor and placed in the same
depository as the property originally mortgage.

XPN: Where the afteracquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of
such goods.

NOTE: While pledge, real estate mortgage, or anti-chresis
may secure after-incurred obligations so long as these future
debts are accurately described, a chattel mortgage can only
cover obligations existing at the time the mortgage is
constituted.

Although the promise expressed in the chattel mortgage to
include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted
debt is executed either by:
a. concluding a fresh chattel mortgage or
b. by amending the old contract conformably with the
form prescribed by the Chattel Mortgage Law

Q: Does the law require a minute and specific description of
every chattel mortgage in the deed of mortgage?

A: No, it only requires that the description of the mortgaged
property be such as to enable the parties to the mortgage or
any other person to identify the same after a reasonable
investigation and inquiry.

After-Incurred Obligation

Q: Can the CM cover afterincurred obligations?

A: No, the affidavit of good faith in a CM makes it obvious
that the debt referred to in the law is current, not an
obligation that is yet merely contemplated. (Acme Shoe v. CA,
G.R. No. 103576, Aug. 22, 1996)

Q: What then is the consequence of a CM covering
afterincurred obligations?

A: A promise expressed in a CM to include debts that are yet
to be contracted can be a binding commitment that can be
compelled upon. The security itself, however, does not come
into existence or arise until after a CM agreement covering
newly contracted debt is executed either by concluding a
fresh CM or by amending the old contract conformably with
the form prescribed by the CM law. The remedy of
foreclosure can only cover the debts extant at the time of
constitution and during the life of the CM sought to be
foreclosed.

Dragnet clause

Q: What is a dragnet clause?

A: It is a clause which operates as a convenience and
accommodation to the barrowers as it makes available
additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing
costs, costs of extra legal services, recording fees etc.

It subsumes all debts of past or future origin.

Q: How do you construe such clause?

A: It must be carefully scrutinized and strictly construed
particularly where the mortgage contract is one of adhesion.

NOTE: A mortgage given to secure future advancements is a
continuing security and is not discharged by the repayment of
the amount named in the mortgage, until the full amount of
the advancements is paid. It permitted the mortgagor to take
the money as it is needed and thus avoid the necessity of
paying interest until the necessity for its use actually arises.

Remedies available in case of simple loan

Q: What does the word default cover?

A:
1. non-payment
2. violation of the terms of the agreement

Q: What is the effect of stipulation prohibiting the
mortgagor from exercising acts of ownership?

A: Such agreement is void. Since the mortgagor remains the
owner of the chattel, he can sell it even if the chattel
mortgage agreement prohibits the mortgagor from selling the
chattel without the consent of the mortgagee.

The sale, however, is without prejudice to:
a. his criminal prosecution under the permanent
provisions of the RPC
b. the sale can be considered as violation of the terms
of the chattel mortgage

Q: What are the remedies in case of default?

A:
1. action for collection
2. foreclosure

NOTE: There is no rescission in case of simple loan.
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 36
UNIVERSITY OF SANTO TOMAS

Q: What is the nature of these remedies?

A: They are alternative remedies. The election of one bars the
other remedies.

NOTE: The mere filing of the collection case bars the
foreclosure, regardless of the venue (whether here or
abroad).

Foreclosure

Q: What is foreclosure?

A: It is the remedy available to the mortgagee by which he
subjects the mortgaged property to the satisfaction of the
obligation to secure which the mortgage was given through
the sale of the property at public auction and the application
of the proceeds thereof to the payment of his claim.

Q: State the essence of a contract of mortgage?

A: The essence of a contract of mortgage indebtedness is that
a property has been identified or set apart from the mass of
the property of the debtor-mortgagor as security for the
payment of money or the fulfillment of an obligation to
answer the amount of indebtedness in case of default of
payment.

Q: What are the kinds of foreclosure?

A:
1. judicial foreclosure
2. extra-judicial foreclosure

Judicial foreclosure

Q: What is judicial foreclosure?

A: By bringing an action for that purpose in the RTC of the
province or city where the real property or any part therof
lies.

The proceeds of the sale shall be applied to the payment of
the:

a. Costs of the sale;
b. Amount due to the mortgagee;
c. Claims of persons holding subsequent
mortgages in the order of their priority; and
d. Balance if any shall be paid to the mortgagor.

Extra-judicial foreclosure

Q: What is Extra-judicial foreclosure?

A: A mortgage may be foreclosed extra judicially where there
is inserted in the contract, a clause giving the mortgagee the
power, upon default of the debtor, to foreclose the mortgage
by an extrajudicial sale of the mortgaged property.

Q: What is the remedy if the mortgagee cannot obtain
possession of mortgaged property?

A: If a mortgagee cannot obtain possession of a mortgaged
property for its sale on foreclosure, the mortgagee cannot
take the property by force but must institute the appropriate
action in the court.
a. He must bring a civil action for replevin either to
recover such possession as preliminary step on the
extra-judicial foreclosure of the chattel mortgage or
b. judicial foreclosure.

NOTE: Foreclosure can be:
1. public sale
2. private sale, if stipulated by the parties

Two-bidder Rule

Q: What is the so-called Two-bidder rule?

A: There must be at least 2 participating bidders for the
auction sale to be valid.

Q: Does the two-bidder rule apply to chattel mortgage?

A: No, it only applies to pledge.

Twin Periods Rule

Q: What is the twin periods rule?

A: In case of the equity of redemption, the mortgagor has the
right to prevent the sale by paying the debt within 30 days
from default. So it is a grace period that the law affords in
favor of the mortgagor. Within the 30 days grace period there
must be a Notice of sale given to the mortgagor.

Also, there must be a 10-day notice to the mortgagor prior to
the sale.

Claim of deficiency

Q: Can the mortgagee claim in case of deficiency?

A:

GR: Yes, mortgagee is entitled to recover deficiency.

XPNS:

1. Contrary stipulation
2. Transactions covered by Recto Law (Art. 1484, NCC)
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 37
UNIVERSITY OF SANTO TOMAS
3. In accommodation mortgages, the accommodation
mortgagor is liable only to the extent of the value of
the mortgaged property;
4. Due to death of mortgagor.

Q: In case of pledge, is a stipulation to recover deficiency
valid?

A: No, it is void.

Q: Does the claim for deficiency prescribe?

A: A mortgage action prescribes in 10 years from the time the
right of action accrues, that is, from the time the mortgagor
defaults in the payment of his obligation to the mortgagee
and not from the date of the execution of the mortgage
contract.

Accommodation mortgagor

Q: Who is an accommodation party?

A: He is a person who has signed the instrument as maker,
drawer, acceptor, or indoser without receiving value therefor,
and for the purpose of lending his name to some other
persons. He is liable on the instrument notwithstanding that
such holder at the time of taking the instrument knew such
person to be only an accommodation party. The
accommodation party has right, after paying the holder, to
obtain reimbursement from the party accommodated since
the relation between them is in effect that of principal and
surety, the accommodation party being the surety.

NOTE: Ordinarily, the debtor is also the mortgagor, but it is
also possible that a 3
rd
party may constitute a mortgage in
favor of the mortgagor. This arrangement is valid even if the
accommodating party does not receive anything.

Q: What is the extent of the liability of the accommodation
mortgagor?

A: His liability is limited only to the value of the property he
secured for another.

Death of mortgagor

Q: What is the remedy in case of death of the mortgagor?

A:
1. File a money claim against the estate (whether real
property or personal property). If the mortgagee
chose this remedy, he is deemed to have abandoned
the mortgage and he lost priority.
2. To foreclose the mortgage by ordinary action in
court and recover any deficiency against the estate
in administration; and,
3. To foreclose without action at any time within the
period allowed by the statute of limitations

Transactions covered by Recto Law
(Articles 1484 & 1485 of the civil code Civil Code)

ART. 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following
remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to
pay;
(2) Cancel the sale, should the vendee's failure to pay cover two
or more installments;
(3) Foreclose the chattel mortgage on the thing sold if one has
been constituted, should the vendee's failure to pay cover two or
more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.

Q: When does the Recto Law apply?

A:
1. Sale of personal property, the price of which is
payable in two or more installments
2. Contracts purporting to be leases of personal
property with option to buy (Art. 1485, NCC)

Q: What are the requisites for the sale to be covered under
the Recto Law?

A:

1. Sale of personal property
2. Payable in installments
3. CM constituted over the same property

Q: Under the Recto Law, what are the remedies of the
unpaid seller?

A:

1. Exact fulfillment of the obligation, should the vendee
fail to pay (action for specific performance)
2. Cancel the sale, should the vendees failure to pay
cover two or more installments (rescission); or
3. Foreclose the chattel mortgage on the thing sold,
should the vendees failure to pay cover 2 or more
installments.

Q: Can the unpaid seller avail of all remedies?

A: No, the remedies are alternative.

The three remedies under this article, available to the vendor
who has sold personal property on the installment plan, are
alternative, not cumulative. In other words, if the vendor has
elected to avail himself of any of the remedies, he is deemed
to have renounced the others (Tolentino, Vol.V).

Q: What is the reason for this rule?
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 38
UNIVERSITY OF SANTO TOMAS

A: According to Sen. Tolentino, in case the vendor
elects to foreclose the mortgage, if one has been given
on the property, he is not obliged to return to the
purchaser the amount of the installment already paid
should there be an agreement to that effect, and it is
not unconscionable.

NOTE: In all proceedings for the foreclosure of chattel
mortgages, executed on the chattels, which have been
sold on the installment plan, the mortgagee is limited to
the property only in the mortgage.

Thus, the principal object of Article 1484 was to remedy
the abuses committed in connection with the
foreclosure of chattel mortgages. This prevents
mortgagees from seizing the engaged property, buying
it at foreclosure for a low price and then bringing suit
against the mortgagor for the deficiency judgment. The
almost invariable result of this procedure was that the
mortgagor found himself minus the property and still
owing practically the full amount of the original
indebtedness.

NOTE: According to Dean Divina, the reason for this rule is to
encourage the mortgagee/creditor to make a reasonable
bid. If he bids at a low price, the company will record on its
book of accounts the deficiency as a loss. To prevent this
situation, the mortgagee will bid at a reasonable amount.

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

Q: Does Article 1484 apply as against a mortgagee who is
not the venodor of the chattel mortgaged?

A: Art. 1484 of the NCC does not apply as against a
mortgagee who is not the vendor of the chattel mortgaged.
Thus, a suit for replevin is not equivalent to an exercise of the
remedy of foreclosure under Art. 1484 of the NCC. Hence, a
vendor-mortgagee is not barred from making a claim for
specific performance against the buyer-mortgagor, by the
mere fact that the former was already able to secure a writ of
replevin.

Rescission

NOTE: In rescission, there should be mutual restitution
except in case of stipulation of forfeiture of prior payments.

Replevin

Q: What is replevin?

A: It is the appropriate action to recover possession
preliminary to the extra-judicial foreclosure of a chattel
mortgage.

Q: Who can institute replevin suit?

A: It is not only the owner but also a person entitled to the
possession of the property can institute a replevin suit.

Q: In case of recovery of property through replevin
preparatory to foreclosure, is it a bar to avail of other
remedies?

A: Recovery of property through a replevin case preparatory
to foreclosure will not bar the other remedies if there was no
actual foreclosure. If sellermortgagee opts to file an action
for specific performance, he shall be deemed to have waived
his right as a mortgagee but may still levy on the mortgaged
property (on execution).

REPLEVIN
VOUNTARY INVOLUNTARY
Not akin to foreclosure

Ex: surrender of the property

Not a bar to avail of other
remedies

XPN: if possession is in view
of dacion en pago
Akin to foreclosure; a bar to
other remedies which are
alternative

Q: Is the mortgagees letter informing the mortgagor of his
intent to foreclose is already considered a foreclosure of the
chattel?

A: No. A mere offer by the mortgagor to surrender the
chattel, not accepted by the mortgagee, does not preclude
the mortgagee from bringing suit to recover the balance of
the purchase price.

Q: Is mere demand sufficient to foreclose the object?

A: A mere demad to surrender the object which is not heeded
by the mortgagor will not amount to foreclosure, but the
repossession thereof by the vendor-mortgagee would have
the effect of foreclosure (Borbon II v. Servicewide Specialist,
258 SCRA 634, 1996).

Q: Is a mortgagee of a personal property sold on
installments, after taking possession of the property, legally
obligated to foreclose the chattel mortgage and sell it at
public auction?

A: Having opted to foreclose the chattel mortgage, GAMI can
no longer cancel the sale. The three remedies of the vendor
in case the vendee defaults, in a contract of sale of personal
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 39
UNIVERSITY OF SANTO TOMAS
property the price of which is payable in installment under
Article 1484 of the Civil Code, are alternative and cannot be
exercised simultaneously or cumulatively by the vendor-
creditor (Esguerra v. CA, 1989).

Q: What are included in the term debt which are
extinguished under the Recto Law?

A:
1. Principal
2. Interest
3. Cost of collection

Q: Who bears the necessary expenses incurred in the
prosecution by the mortgagee of the action for replevin to
regain possession of the chattel?

A: It is the mortgagor who bears such expenses.

Q: What does recoverable expense include?

A: It includes expenses properly incurred in affecting seizure
of the chattel and reasonable attorneys fees in prosecuting
the action for replevin (Agustin v. CA, 271 SCRA 463, 1997).

NOTE: The cost of repossession which is brought by the
unjustified refusal of the mortgagor can still be recovered and
is not deemed extinguished.

Additional security

Q: What is the effect of the foreclosure as regards the
personal property which are not subject of the sale but are
given as additional security?

A: Under Art. 1484 of the NCC, the vendor of personal
property sold on installment who chooses the remedy of
foreclosure of the chattel mortgage is limited to the
foreclosure of the items sold only and not to the other items
not subject of the sale although also given as additional
securitty. The foreclosure of the latter is null and void (Ridad
v. Filipinas Investment and Finance Corporation, 120 SCRA
246, 1983).

All other additional securities are barred once the mortgagee
chose to foreclose. This also bars him from going against the
surety or guarantor.

Ridad v. Filipinas Investment and Finance Corporation

Having chosen to foreclose the chattel mortgage, and
bought the purchased vehicles at the public auction as
the highest bidder, it submitted itself to the
consequences of the law as specifically mentioned, by
which it is deemed to have renounced any and all rights
which it might otherwise have under the promissory
note and the chattel mortgage as well as the payment
of the unpaid balance.

Under the law, should the vendor choose to foreclose
the mortgage, he has to content himself with the
proceeds of the sale at the public auction of the chattels
which were sold on installment and mortgaged to him
and having chosen the remedy of foreclosure, he
cannot nor should he be allowed to insist on the sale of
the house and lot of the vendees, for to do so would be
equivalent to obtaining a writ of execution against them
concerning other properties which are separate and
distinct from those which were sold on installment. This
would indeed be contrary to public policy and the very
spirit and purpose of the law, limiting the vendor's right
to foreclose the chattel mortgage only on the thing
sold.

IMPORTANT: SIMPLE LOAN v. RECTO LAW

SIMPLE LOAN RECTO LAW
Taking of property through replevin
The taking of possession by
replevin is not equivalent to
foreclosure
The taking of possession by
replevin is tantamount to
foreclosure which bars the
action for specific
performance
Remedies
1. Foreclosure
2. Action for specific
performance
1. Action for specific
performance;
2. Cancellation or
rescission; or
3. Foreclose the
chattel mortgage on
the thing sold
Suggested remedy
Foreclose! Dont even think
about it because you have a
lien in such case
Weigh the options
Recovery of deficiency
You can recover for
deficiency. And the right to
recover deficiency may be
enforced against any one of
the solidary co-debtors, if
any, and is not limited to the
mortgagor for the reason
that the chattel mortgage is
just a security, not a mode of
payment.
Precludes the mortgagee to
recover the deficiency
Effect of election of action for collection
Election of action for
collection is a bar to the
other remedy
If it is a transaction falling
under the Recto Law, its only
when the mortgagee actually
forecloses or elects the
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 40
UNIVERSITY OF SANTO TOMAS
remedy of foreclosure that
he is subject to the rule that
he cannot recover any
unpaid claims.

So if he files an action for
collection and obtained
judgment then he can levy
any and all properties of the
mortgagor until the debt is
paid or satisfied.

NOTE: In case of transactions under the Recto Law, it is only
when there has been a foreclosure of the chattel mortgage
that the vendee-mortgagor would be permitted to escape
from deficiency liability. Hence, if the case is one for specific
performance, even when this action is selected after the
vendee has refused to surrender the mortgaged property to
permit n extra-judicial foreclosure, the property may still be
levied on execution.

Equity of redemption

Q: Is there a right of redemption in case of personal
properties?

A: None.

Q: When is equity of redemption may be exercised?

A: Equity of redemption may be exercised by the mortgagor
after his default in the performance of his obligation but
before the sale of the mortgaged property or confirmation of
sale.

Q: When is the right of redemption available?

A: The SC said that there are only 3 cases where there is a
right of redemption. And they do not involve personal
property. They only pertain to real property. There are only 3:
1. Extrajudicial foreclosure of Real Estate Mortgage
under Act 3135
2. Execution sale of a real property under the Rule 39
of Rules of Court
3. Judicial foreclosure of a real estate mortgage, if the
mortgagee is a bank or a credit institution

NOTE: So the mortgagee cannot foreclose right away after
default. He has to give the mortgagor 30 days grace period.
That is what you call equity of redemption. The right of the
mortgagor to prevent the sale by paying the debt within 30
days from default. It is only when he failed the debt that
there can be actual foreclosure of chattel mortgage.





BANKING LAWS:
GENERAL BANKING ACT

BANK

Q: What are banks?

A: Entities engaged in the lending of funds obtained through
deposits from public.

Elements

Q: What are the elements determinative of a bank?

A:

1. Must be authorized by law;
2. Accepts fund, in the form of a deposit, from the
public; and (there are at least 20 despositors)
3. Lends money to the public.

NOTE: The fourth element under the old code, habituality,
has been deleted.

Q: Is a transaction involving purchase of receivables
considered as banking transaction?

A: If it is a transaction not involving a loan but purchase
of receivables at a discount, it is well within the purview
of "investing, reinvesting or trading in securities" which an
investment company is authorized to perform and does not
constitute a violation of the General Banking Act.

This transaction is known as a deposit substitute.

NOTE: What is prohibited by law is for investment companies
to lend funds obtained from the public through receipts of
deposit, which is a function of banking institutions. But here,
the funds supposedly "lent" to petitioners have not been
shown to have been obtained from the public by way of
deposits, hence, the inapplicability of banking laws (Baas v.
Asia Pacific Finance Corp., 2000).

Paluwagan

Q: Describe the concept of paluwagan?

A: Even if there are more than 20 members, such is not
considered as banks: the funds are not obtained in the form
of deposits. It is for savings among its members.

Deposit-taking activity

Q: What is a deposit-taking activity?

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Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 41
UNIVERSITY OF SANTO TOMAS
A: The funds given to the bank gives rise to a creditor-debtor
relationship. The ownership of the funds is thus transferred
to the banks and the latter are free to use the funds as it
pleases.

Deposit substitutes

Q: What are deposit substitutes?

A: It is an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or
acceptance of debt instruments, for the borrower's own
account, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may
include, but need not be limited to, bankers acceptances,
promissory notes, participations, certificates of assignment
and similar instruments with recourse, and repurchase
agreements.

Quasi-banks

Q: What are quasi-banks?

A: These are entities engaged in the borrowing of funds
through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes for purposes of
re-lending or purchasing of receivables and other obligations.

NOTE: Quasi-banks are also under BSP. They have to secure a
license from the BSP.

Banks vs. Quasi-Banks

BANKS QUASI-BANKS
Obtains funds from the
public in the form of deposit
Refer to entities engaged in
the borrowing of funds
through the issuance,
endorsement or assignment
with recourse or acceptance
of deposit substitutes for
purposes of relending or
purchasing of receivables and
other obligations
Deposits are insured with
PDIC
Not insured with PDIC
There is creditor-debtor
relationship
No creditor-debtor
relationship
Must secure from the Bangko Sentral ng Pilipinas (BSP)

Quo Warranto proceedings

Q: What is the appropriate proceeding to question a
corporation who performs functions of a bank without the
license from BSP?

A: Any corporation who does these functions and activities
without a corresponding license or approval from the SEC can
be ousted by way of quo warranto proceedings (Republic of
the Philippines v. Security Credit and Acceptance Corp, et al.,
1967).

Classification of Banks

1. Universal banks can exercise the powers of an
investment house and invest in nonallied enterprises
and have the highest capitalization requirement.

Capital: 4.950 billion

2. Commercial banks Ordinary banks governed by the GBL
which have a lower capitalization requirement than
universal banks and can neither exercise the powers of
an investment house nor invest in nonallied enterprises.

Capital: 2.4 billion

3. Thrift banks These are:
a) Savings and mortgage banks;
b) Stock savings and loan associations;
c) Private development banks, which are primarily
governed by the Thrift Banks Act (R.A. 7906).

4. Rural banks
5. Cooperative banks
6. Islamic banks
7. Other classification of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas.

Bank power and liabilities

Universal
bank
a. Powers of a commercial bank
b. Power of an investment house
c. Power to invest in the equities of
allied enterprises
d. Power to invest in the equities of
non-allied enterprises
Commercial
bank
a. General power incident to a
corporation
b. All such powers as may be
necessary to carry on the business
of commercial banking such as
(ADD EBC):
1. Accepting drafts and issuing LCs
2. Discounting and negotiating
promissory notes, drafts, bills
of exchange, and other
evidence of indebtedness
3. Accepting or creating demand
deposits
4. Receiving other types of
deposit and deposit substitute
5. Buying and selling foreign
exchange and gold or silver
bullion
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 42
UNIVERSITY OF SANTO TOMAS
6. Acquiring marketable bonds
and other debt securities and
extending credit
c. Power to invest in the equities of
allied enterprises

NOTE: Whatever a commercial bank can do, a universal bank
can also perform

Allied and non-allied transactions

Q: What do you mean by to invest in equity?

A: It means to be a stockholder of another corporation

Q: What are allied or related undertakings?

A: Any undertaking which is about money such as:
a. Foreign exchange
b. Leasing
c. Investment company
d. Insurance company
e. Warehousing

NOTE: An example of non-allied undertaking is cargo
operations.

Q: What are the kinds of underwriting agreements?

A:

FIRM COMMITMENT BEST EFFORTS
Those which are considered
as sold
underwriter does not
guarantee that it will sell the
entire
The underwriter purchases
outright the securities and
then resells the same
The underwriter merely sells
for commission


Banking and incidental powers

Q: What are the other services that a bank may offer?

A:
1. receive in custody funds, documents, and other
valuable objects
2. act as financial agent and buy and sell for the
account securities
3. make collections and payments for the account of
others
4. perform such other services not incompatible with
banking business and;
5. upon prior approval of the BSP, act as manager
adviser of investment management accounts
6. rent out safety deposit box

Renting out of deposit box

Q: Is a safety deposit box a form of deposit or lease?

A: The contract for the use of a safe deposit box should be
governed by the law on lease.

Under the old banking law, a safety deposit box is a special
deposit. However, the new General Banking Law, while
retaining the renting of safe deposit box as one of the
services that the bank may render, deleted reference to
depository function.

Sia v. Court of appeals

Justice Edgardo Paras was of the opinion that the contract for
the use of safety deposit box is governed by the law on lease.
The Supreme Court did not agree with him and said that
contract for the use of safety deposit box is a special kind of
deposit. In other words the bank must exercise the due
diligence required of depository in safekeeping or preserving
of the object inside the safety deposit box.

The basis for this is that under the Old General Banking Act, it
provided that in renting out safety deposit boxes the bank
shall act as a depositary. Because the law itself provides for
this SC concluded that the contract for the use of safety
deposit box is governed by deposits.

New Law retains the authority of the Bank to rent out safety
deposit box but silent on being a depositary.

Power to acquire real properties

Q: Can the bank acquire real property in settlement of a civil
liability arising from a crime?

A: Generally, no.

XPNS: It can only acquire real property when:
a. it is needed for business (Business)
b. as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its
dealings (Dacion en pago)
c. as shall be mortgaged to it in good faith by way
of security of debts (foreclosure)
d. as it shall purchase at sales under judgments,,
decrees, mortgages, or trust deeds (execution
sale to satisfy judgment)

NOTE: Any property acquired under b-d should be disposed
of within 5 years from the acquisition because the bank is not
a realty company.

Q: Can banks acquire ownership of real property by virtue of
the deed of transfer executed by its former employee in
satisfaction of a civil liability arising from the criminal
offense?
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 43
UNIVERSITY OF SANTO TOMAS

A: A bank cannot acquire ownership of real property by virtue
of the deed of transfer executed by its former employee in
satisfaction of a civil liability arising from the criminal offense
since debts referred to in the law are only those resulting
from previous loans and similar transactions made or entered
into by a bank in the ordinary course of its business.

Diligence required of banks

Q: What is the degree of diligence required of banks in
handling deposits?

A: Extraordinary diligence. The appropriate standard of
diligence must be very high, if not the highest, degree of
diligence; highest degree of care (PCI Bank vs. CA, 350 SCRA
446, PBCom vs. CA, 2001)

Q: Does the bank need to exercise extraordinary diligence
in all commercial transactions?

A: No, the degree of diligence required of banks, is more than
that of a good father of the family where the fiduciary nature
of their relationship with their depositors is concerned, that
is, depositary of deposits. But the same higher degree of
diligence is not expected to be exerted by banks in
commercial transactions that do not involve their fiduciary
relationship with their depositors, such as sale and issuance
of foreign exchange demand draft. (Reyes v. CA, 2001)

Q: In what transactions this highest degree of care or
diligence is applied?

A: This applies only to cases where banks are acting in their
fiduciary capacity, that is, as depository of the deposits of
their depositors. (Reyes v. CA, G.R. No. 118492, 2001)

NOTE: The General Banking Law of 2000 requires banks the
highest degree of standards of integrity and performance.
Hence, a bank is under obligation to treat the accounts of its
depositors with meticulous care (Philippine Savings Bank v.
Chowking Food Corporation, 2008).

Q: What is the effect when the teller gave the passbook to a
wrong person?

A: If the teller gives the passbook to the wrong person, they
would be clothing that person presumptive ownership of the
passbook, facilitating unauthorized withdrawals by that
person. For failing to return the passbook to authorized
representative of the depositor, the bank presumptively
failed to observe such high degree of diligence in
safeguarding the passbook and insuring its return to the party
authorized to receive the same. The banks liability, however,
is mitigated by the depositors contributory negligence in
allowing a withdrawal slip signed by authorized signatories to
fall into the hands of an impostor. (Consolidated Bank and
Trust Corporation vs. CA, 2003).

Q: Did a bank exercise the diligence required when the
pretermination of the account is allowed despite
discrepancies in the signature and photograph of the person
claiming to be the depositor and failure to surrender the
original certificate of time deposit?

A: No. The bank is negligent because the depositor did not
present the certificate of deposit

Q: Is the bank liable when an employee encashed a check
without the requisite of endorsement?

A: Yes. The fiduciary nature of the relationship between the
bank and the depositors must always be of paramount
concern. (Philippine Savings Bank vs. Chowking, 2008).

NOTE: In a checking transaction, the drawee bank has the
duty to verify the genuineness of the signature of the drawer
and to pay the checks strictly in accordance with the drawers
instructionsto the named payee in the check. Otherwise,
the drawee will be violating the instructions of the drawer
and it shall be liable for the amount charged to the drawers
account. The drawee bank had the responsibility to ascertain
the regularity of the endorsements, and the genuineness of
the signatures on the checks before accepting them for
deposit. Thus, banks are minded to treat their customers
accounts with utmost care, confidence, and dishonesty (PNB
v. Rodriguez, et al., 566 SCRA 513, 2008).

Nature of bank funds and bank deposits

Q: What law governs bank deposits?

A: The law on loans. Creditor and debtor relationship is
created between the Bank and the depositors.

Q: What is the nature of a bank deposit?

A: All kinds of bank deposits are loan. The bank can make use
as its own the money deposited. Said amount is not being
held in trust for the depositor nor is it being kept for
safekeeping.

Bank not a trustee

Q: Is a bank a trustee?

A: No, the fiduciary nature of a bank-depositor relationship
does not convert the contract between the bank and its
depositors from a simple loan to trust agreement. Failure by
the bank to pay the depositor is failure to pay a simple loan,
and not a breach of trust.


NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 44
UNIVERSITY OF SANTO TOMAS

Mandamus will not lie

Q: In the enforcement of obligations concerning deposit, will
the remedy of mandamus lie?

A: No, because all kinds of deposit are loans. Thus, the
relationship being contractual in nature, mandamus cannot
be availed of because mandamus will not lie to enforce the
performance of contractual obligations.

Q: After procuring a checking account, the depositor issued
several checks. He was surprised to learn later that they had
been dishonored for insufficient funds. Investigation
disclosed that deposits made by the depositor were not
credited to its account. Is the bank liable for damages?

A: Yes, the depositor expects the bank to treat his account
with utmost fidelity, whether such account consist only of a
few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and
as promptly as possible. This has to be done if the account is
to reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that the
bank will deliver it as and to whomever he directs. A blunder
on the part of the bank, such as the dishonor of the check
without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even
civil and criminal litigation.

Stipulation of interest

NOTE: Circular 905 suspended the Usury Law, but it has
not been repealed.

Circular 905 lifted the ceiling on the interest rate. The
bank and its depositors are therefore free to stipulate
on the rate of interest for loans. Nevertheless, if the
interest is unconscionable, it may be nullified on the
grounds of equity.

Limitations with respect to banks loan functions

Q: What are the limitations imposed upon the banks
with respect to its loan function?

A:
1. Single borrowers limit
2. Loans against real estate
3. Loans against personal property
4. DOSRI regulation

Single borrowers limit

Q: Discuss the single-borrowers limit?

A: Unless otherwise prescribed by the Monetary Board,
the total amount of loans, credit accommodations and
guarantees that may be extended by a bank to a single
borrower shall not exceed 25% of the net worth of such
bank.

NOTE: The amount may be increased by an additional
10% of the banks net worth provided that the
additional liabilities are adequately secured by
documents of title covering readily marketable and non-
perishable goods.

Q: What is the purpose of the rule?

A: To diversify the banks loan portfolio.

Q: Let us say the bank has 10 Billion, can the bank lend the
entire 10 Billion to Henry Sy?

A: No, because the law provides for a single borrowers limit.
There is a maximum amount of loan a bank may grant to 1
borrower. That is not to exceed 25% of the banks net worth

NOTE: Branches from part of the Bank. It has no separate
legal personality from the bank.

Loans against real estate

Q: What is the limitation regarding loans against real
estate?

A: Except as the Monetary Board may otherwise
prescribe, loans and credit accommodations against real
estate shall not exceed 75% of the appraised value of
the respective real estate security plus 60% of the
appraised value of the insured improvements

Loans against personal property

Q: What is the limitation regarding loans against
personal property?

A: Loans on the security of chattels and intangible
properties shall not exceed 75% of the appraised value
of the security.

DOSRI regulation

Q: State the so-called Dorsi Regulation.

A: No director or officer of any bank shall, directly or
indirectly, for himself, or as the representative agent of
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 45
UNIVERSITY OF SANTO TOMAS
others:

a. borrow from such bank
b. nor shall become a guarantor,
c. indorser
d. surety for loans from such bank to others
e. or in any be an obligor
f. or incur any contractual liability to the bank

Except with the written approval of at least majority of all the
directors of the bank excluding the director concerned. The
required approval shall be entered upon the records of the
bank and a copy of such entry shall be submitted forthwith to
the appropriate supervising and examining department of
BSP.

The outstanding loans, credit accommodations and
guarantees which a bank may extend to the DOSRI shall be
limited to an amount equivalent to their respective
unencumbered deposits and book value of their pre-paid
contribution to the bank.
Q: What are excluded from the limits?

A: Non-risk loans such as:

1. Loans secured by obligations of the Bangko Sentral
ng Pilipinas or the Philippine Government
2. Loans fully guaranteed by the Government
3. Loans covered by assignment of deposits maintained
in the lending bank and held in the Philippines
4. Loans, credit accommodations and acceptances
under letters of credit to the extent covered by
margin deposits
5. Other loans or credit accommodations which the MB
may specify as nonrisk items.

Q: Who are covered by the DOSRI Regulation?

A:

a. Director those who are directly elected by the
stockholders including those who represent
themselves as director
b. Officer including those who advertises themselves
c. Stockholder, which should at least 1% (if below 1%
not anymore covered)
d. Related Interests, such as DOSs spouses, their
relatives within the first degree whether by
consanguinity or affinity, partnership whereby DOS
is a partner or a corporation where DOS owns at
least 20%

Q: Who are included under the first degree?

A:

1. Parents
2. Parents-in-law
3. Children
4. Children-in-law
5. Spouse

NOTE: Common-law or illegitimate spouse is not included

Requirements under the DOSRI Accounts

Q: In case of DOSRI accounts, what are the requirements
that must be complied with?

A:

1. Procedural requirements

a. Loan must be approved by the majority of all
the directors not including the director
concerned (not merely majority of the quorum)
b. CB approval is not necessary; however, there is
a need to inform them prior to the transaction.
c. Loan must be entered in the books of the
corporation. (Sec. 36)

2. Substantive requirement or ceiling requirement
Loan must not exceed the paid in contribution and
unencumbered deposits. (Not to exceed 15% of the
portfolio or 100% of the net worth, whichever is
lower.) (Sec. 36 [4])

Q: What is the effect of noncompliance with the foregoing
requirements?

A: Violation of DOSRI is a crime and carries with it penal
sanction.

Q: What are the transactions covered by the DOSRI
regulation?

A: The transactions covered are loan and credit
accommodation. Not being a loan, the ceiling will not apply to
lease and sale. However, it should still comply with the
procedural requirement.

NOTE: Each and every requirement constitutes a separate
violation or offense.

Ex: no board approval

Q: What is the effect of the non-comppliance with the
requirements such as the single borrowers limit with regard
the loan?

A: The same is valid without prejudice to criminal
prosecution. In the case of Republic v. Sandiganbayan,
Cojuangco (12 April 2011, G.R. No. 166859), the Supreme
Court held that the loans, assuming that they were of a DOSRI
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 46
UNIVERSITY OF SANTO TOMAS
nature or without the benefit of the required approvals or in
excess of the Single Borrowers Limit, would not be void for
that reason. Instead, the bank or the officers responsible for
the approval and grant of the DOSRI loan would be subject
only to sanctions under the law.

NOTE: Despite such pronouncement, the crime has already
prescribed. Violation of special penal laws has a prescriptive
period of 10 years.

Q: What is the armslength rule?

A: It provides that any dealings of a bank with any of its
DOSRI shall be upon terms not less favorable to the bank than
those offered to others.

NOTE: The arms-length rule is the basis. Loans of directors,
etc. should be beyond question. They should be above board.

Penalties for violation of the limitations

Q: What are the penalties for the violations?

A:

1. Fines in amounts as the MB may determine but not
exceed P30,000 a day for each violation
2. Suspension of privileges:
a. Quasi-banking function
b. Clearing operation
c. Foreign exchange
d. Rediscounting facility with BSP

3. Dissolution of the bank through a quo warranto
proceeding
4. If the offender is a director or officer, the MB may
also remove or suspend such director or officer
5. Penal sanction

Structure of bank

Q: What is the nature of a bank?

A: It is only organized as a stock corporation. They cannot be
organized as a non-stock corporation, because a non-stock is
not organized for profit.

Q: What are the KINDS OF SHARE-HOLDERS/stock-holders?

1. Natural persons
a. Filipino
b. Foreigner

2. Juridical persons
a. corporation or
i. may be owned by a Filipino (domestic
corporations)
ii. or by Foreigners (as in foreign banks)
b. partnership

NOTE: The new law allows any natural person to own up to
40% of the capital stocks of a bank.

Q: Can one group of persons or an entire family, under the
new law, own the entire bank?

A: Yes, for as long as not one of them own more than 40%
(maximum) of the capital shares/stock of the Bank.

Q: What about a foreigner? Is there a limit on the number of
share a foreigner can own in bank?

A: Only up to 40%. Foreigners can only own 40% of the bank.
This is because a bank is a nationalized activity.

Q: What does NATIONALIZED ACTIVITY mean?

A: It is an activity either wholly or partly reserved for
Filipinos.

NOTE: A bank is partly reserved for Filipinos, because
Foreigners are allowed to be stock-holders of a bank but not
to exceed 40% of the Banks capital stocks.

Q: What about DOMESTIC CORPORATION?

A: 40%

Q: What about FOREIGN BANK/corporation owned by
foreigners?

A: 40%

Q: How do you distinguish the 40% share ownership limit of
a natural person who is a Filipino and 40% share limit of a
foreigner?

A:
FILIPINO FOREIGNER
Individual Aggregate which means that
shares held by foreigners and
corporations owned by
foreigners shall not exceed 40%
of the banks capital stocks.

So foreign held stocks whether
owned by natural persons or
corporation cannot exceed 40%
of the bank.

Q: What about domestic corporations?

A:

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 47
UNIVERSITY OF SANTO TOMAS
GR: A corporation may only own 40% of the bank

XPNS:
1. In case of wholly owned thrift bank subsidiary of a
universal bank This is because a universal bank can
own up to 100% of a thrift bank
2. If the shares of a corporation are listed in the stock
exchange - it can own up to 60% of the bank. This
privilege can be exercised only once. In other words
a corporation whose shares are listed can own 60%
of 1 bank only. As to the other banks the maximum
is still 40%.
3. If the corporation is in existence for 10 years it can
own up to 60% of the bank. This privilege can only
exercised once

Q: How many directors are allowed for a bank?

A: Not less than 5 not more than 15 (min of 5, maximum of
15) and 2 of whom must be independent directors.

Q: Who are INDEPENDENT DIRECTORS?

A: Directors not part of management

Q: Is there an EXCEPTION? (allowable directors)

A: In case of MERGER or CONSOLIDATION law allows 21
directors.

Q: Can you have foreigners as officer of a Bank? Can you
appoint foreign officers in your Bank?

A: No. Under the Anti-Dummy Law, foreigners cannot be
appointed to any executive possession of any corporation
engaged in nationalized activity. Since a bank is nationalized
you cannot have foreigner occupying executive positions in a
bank.

You can only appoint them as consultants, advisers but they
cannot occupy executive positions.

Bangko Sentral ng Pilipinas

Q: Who has supervisory power over the banks?

A:
1. Bangko Sentral ng Pilipinas (for ultra vires act)
2. Securities and Exchange Commission (for banking
functions)

Q: What is Bangko Sentral ng Pilipinas (BSP)?

A: The states central monetary authority; it is the
government agency charged with the responsibility of
administering the monetary, banking and credit system of the
country and is granted the power of supervision and
examination over bank and nonbank financial institutions
performing quasibanking functions, including savings and
loan associations.

Q: Does it enjoy fiscal and administrative authority?

A: Yes.

NOTE: Amando M. Tetangco, Jr. assumed office as Governor
of the Bangko Sentral ng Pilipinas in July 2005.

Q: What are the objectives of BSP?

1. It shall provide policy directions in the areas if
money, banking and credit
2. It shall have supervision over banks and exercise
regulatory powers over finance companies and non-
bank financial institutions performing quasi-banking
functions
3. It is mandated to maintain price stability conducive
to a balance and sustainable growth of the economy
4. It shall promote and maintain monetary stability and
the convertability of the peso

Monetary Board

Q: What is the Monetary Board?

A: The powers and function of Bangko Sentral are exercised
by its Monetary Board, which has seven members.

Q: Who are the members of the Monetary Board?

A:

Chairman Amando M. Tetangco, Jr.
Members Cesar V. Purisima
Alfredo C. Antonio
Ignacio R. Bunye
Peter B. Favila
Felipe M. Medalla
Armando L. Suratos

Legal tender

Q: What is Legal Tender?

A: All notes and coins issued by the Bangko Sentral are fully
guaranteed by the Republic and shall be legal tender in the
Philippines for all debts, both public and private (Sec. 52)

Q: What is the legal tender power of coins?

A:
1. 1Peso, 5Peso and 10Peso coins: In amounts not
exceeding P1,000.00
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 48
UNIVERSITY OF SANTO TOMAS
2. .25 centavo coin or less: In amounts not exceeding
P100.00 (Circular No. 537, 2006)

Q: What are the rules on BSPs Authority to replace legal
tender?

A:

1. Notes and coins called in for replacement shall
remain legal tender for a period of one year from the
date of call.
2. After that period, they shall cease to be legal tender
during the following year or for such longer period as
MB may determine.
3. After the expiration of this latter period, the notes
and coins which have not been exchanged shall
cease to be a liability of BSP and shall be
demonetized.



REMEDIES OF BSP IN CASE OF BANKS IN DISTRESS

Q: What are the remedies of the Bangko Sentral ng Pilipinas
in case of banks in distress?

A: Place the bank in:
1. Conservatorship
2. Receivership
3. Closure of the bank

Conservatorship

Q: What is conservatorship?

A: Whenever on the basis of the report of appropriate
supervising and examining department, the Monetary Board
finds that a bank or quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition of liquidity
deemed adequate to protect its depositors and creditors, the
Monetary Board may appoint a conservator to take charge of
the assets, liabilities and management thereof.

Q: Who is a conservator?

A: One appointed if the bank is in the state of illiquidity or the
bank fails or refuses to maintain a state of liquidity adequate
to protect its depositors and creditors. The bank still has
more assets than its liabilities but its assets are not liquid or
not in cash thus it cannot pay its obligation when it falls due.
The bank, not the Central Bank, pays for fees.

Q: What do you mean by illiquidity?

A: The bank still has more assets than its liabilities but its
assets are not liquid or not in cash thus it cannot pay its
obligation when it falls due.

Q: What are the assets of the banks?

A:
1. Cash
2. Properties (real or personal)
3. Receivables
4. Collectibles

Q: What are the liabilities?

A:
1. Deposits
2. Deposit Substitutes
3. Standing Letter of Credits
4. Obligations Due to Credits

Q: What are the powers of a conservator?

A:

1. To take charge of the assets, liabilities, and the
management thereof
2. Recognize the management
3. collect all monies and debts due said bank
4. Exercise all powers necessary to restore its viability with
the power to overrule or revoke the actions of the
previous management and board of directors of the bank
or quasibank

Q: Can the power to overrule or revoke the actions of the
previous management and board of directors extend to
perfected transactions?

A: Such powers cannot extend to post facto repudiation of
perfected transactions. Thus, the law merely gives contracts
that are deemed to be defective void, voidable,
unenforceable or rescissible. Hence, the conservator merely
takes the place of the banks board.

5. To bring court actions to assail or repudiate contracts
entered into by the bank.

Q: When is conservatorship terminated?

A:

1. When Monetary Board is satisfied that the
institution can continue to operate on its own and
the conservatorship is no longer necessary.
2. When the Monetary Board, on the basis of the
report of the conservator or of its own findings,
determine that the continuance in business of the
institution would involve probable losses to its
depositors or creditors, the bank will go under
receivership.

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 49
UNIVERSITY OF SANTO TOMAS
Receivership

Q: What is receivership?

A: The Monetary Board may appoint a receiver if the MB
finds that a bank or quasi-bank:
a. is unable to pay its liabilities as they come due in the
ordinary course of business provided that this sahll
not include inability to pay caused by extra-ordinary
demands induced by financial panic in the banking
community
b. has insufficient realizable assets, as determined by
the BSP, to meet its liabilities; or
c. cannot continue in business without involving
probable loss to its depositors and creditors; or
d. has willfully violated a cease and desist order that
has become final involving transactions which
amount to fraud or dissipation of bank assets, the
Monetary Board may summarily and without need
for prior hearing forbid the institution from doing
business in the Philippines and designate the PDIC as
the receiver of the bank

Q: Who is a receiver?

A: One appointed if bank is already insolvent which means
that its liabilities are greater than its assets.

Q: Is the receiver authorized to transact business in
connection with the banks assets and property?

A: No, the receiver only has authority to administer the same
for the benefit of its creditors.

NOTE: Once the bank is placed under receivership, its officers
can no longer authorized to transact business in connection
with the banks assets and property.

Q: Can the court appoint a receiver for a bank?

A: No. The power belongs to the BSP.

Q: Should the issue of whether or not the Monetary Boards
resolution is arbitrary be only raised in a separate action?

A: No. While resolutions of the Monetary Board forbidding a
bank to do business on account of a condition of insolvency
and appointing a receiver to take charge of the banks assets
or determining whether the bank may be rehabilitated or
should be liquidated are by law final and executory.
However, they can be set aside by the court on one specific
ground if the action is plainly arbitrary and made in bad
faith. Such contention can be asserted as an affirmative
defense of a counterclaim in the proceeding for assistance in
liquidation.

Q: Does the filing of an intra-corporate case before the RTC
and a complaint with the BSP (to compel a bank to disclose
its stockholdings) innvoking BSPs superviory powers over
banking corporations amount to judicial proceeding and
thus, constitute forum shopping?

A: No, it does not constitute judicial proceeding. Much more,
it does not constitute forum shopping. The 2 proceedings are
of different relief. The complaint filed with the BSP was an
invocation of its supervisory powers over banking operations
which does not amount to a judicial proceeding (Suan v.
Gonzales, 518 SCRA 82, 2007).

Q: What are the similarities between conservatorship and
receivership?

A:

CONSERVATORSHIP RECEIVERSHIP
1. Both can only perform acts of administration and not
acts of dominion.
2. While they have the power to revoke the actions of the
previous management and the Board of Directors, they
cannot invoke a valid contract.
3. Neither can approve an option to purchase real property

Q: Do conservators or receivers have powers of dominion?

A: No, they only have acts of administration, they cannot sell
properties of banks, they cannot approved option to
purchase properties, just purely acts of administration.

Closure

Q: Can the BSP close a bank without prior hearing?

A: Yes, because if prior hearing is required then bank run will
be the order of the day. The power of BSP to close a bank is a
valid exercise of police power. If there is showing of bad faith
or grave abuse of discretion, it can be set aside and subject to
judicial scrutiny.

Q: Can BSP close a bank on the strength of a report by the
supervising and examining department without complete
notice of such bank?

A: Yes

CLOSE NOWHEAR LATER DOCTRINE

Q: What is the close nowhear later doctrine?

A: The law does not contemplate prior notice and hearing
before the bank may be directed to stop operations and
placed under receivership. The purpose is to prevent
unwarranted dissipation of the banks assets and as a valid
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 50
UNIVERSITY OF SANTO TOMAS
exercise of police power to protect the depositors, creditors,
stockholders and the general public.

Promissory estoppel

Q: What is the rule of promissory estoppel?

A: When the Central Bank made express representations that
it would support the bank and avoid its liquidation if its
majority stockholders would execute a voting trust
agreement turning over the management of the bank to the
CB or its nominees and mortgage or assign their properties
to CB to cover the overdraft balance of the bank, the CB may
not thereafter renege on its representation and liquidate the
bank after the majority stockholders of the bank complied
with the conditions and parted with value to the profit of CB,
which thus acquired additional security for its own advances
to the detriment of the banks stockholders, depositors and
other creditors under the rule of promissory estoppel (Ramos
v. Central Bank of the Philippines, 41 SCRA 565, 1971).

Valid exercise of police power

Q: Can the closure and liquidation of a bank, which is
considered an exercise of police power, be the subject of
judicial inquiry?

A: Yes. While the closure and liquidation of a bank may be
considered an exercise of police power, the validity of such
exercise of police power is subject to judicial inquiry and
could be set aside if it is either capricious, discriminatory,
whimsical, arbitrary, unjust or a denial or due process and
equal protection clauses of the Constitution

Q: Upon maturity of the time deposit, the bank failed to
remit. By reason of punitive action taken by Central Bank,
the bank has been prevented from performing banking
operations. Is the bank still obligated to pay the time
deposits despite the fact that its operations were suspended
by the Central Bank?

A: The suspension of operations of a bank cannot excuse
noncompliance with the obligation to remit the time
deposits of depositors which matured before the banks
closure.

Assailing the order of conservatoship, receivership or
closure

Q: How can the order of conservatoship, receivership or
closure be assailed?

A:
1. By the stockholders representing at least majority of
the outstanding capital stock
2. Within 10 days from receipt by the board of
directors of the order
3. Thru a petition for certiorari on the ground that the
action taken by the BSP was in excess of jurisdiction
or with grave abuse of discretion as to amount to
lack of jurisdiction

Q: Should the issue of whether or not the MBs resolution is
arbitrary be only raised in a separate action?

A: No. While the resolutions of the MB forbidding a bank to
do business on account of a condition of insolvency and
appointing a receiver to take charge of the banks assets or
determining whether the bank may be rehabilitated or should
be liquidated by law final and executory. However, they can
be set aside by the ground if the action is plainly arbitrary and
made in good faith. Such actions can be asserted as an
affirmative defense of a counterclaim in the proceeding for
assistance in liquidation.

NOTE: The Court perceives no reason whatever why a
banking institutions claim that a resolution of the Monetary
Board under Section 29 of the Central Bank Act should be set
aside as plainly arbitrary and made in bad faith cannot be
asserted as an affirmative defense or a counterclaim in the
proceeding for assistance in liquidation, but only as a cause of
action in a separate and distinct action. There is no provision
of law which expressly or even by implication imposes the
requirement for a separate proceeding exclusively occupied
with adjudicating this issue. Moreover, to declare the issue as
beyond the scope of matters cognizable in a proceeding for
assistance in liquidation would be to engender that
multiplicity of proceedings which the law abhors (Salud v.
Central Bank, G.R. No. L-17620, 1986).

Q: Can a bank be held liable to pay interest on deposit once
it closed and ceased operations?

A: Generally, no.

NOTES


















NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 51
UNIVERSITY OF SANTO TOMAS

CONSERVATORSHIP RECEIVERSHIP LIQUIDATION
Grounds
1. Continuing inability
2. Unwillingness to maintain condition
of liquidity
1. Inability to pay liabilities as they fall
due
e.g: bank run, rumors, etc.
2. Assets are less than its liabilities
3. Cannot continue business
4. without causing damage;
5. Violation of a cease and desist
6. Bank holiday for more than 30
days.
1. Insolvency
2. Bank cannot be rehabilitated

Effects
1. Juridical personality is retained.
2. Perfected transactions cannot be
repudiated;
1. Juridical personality is retained
2. Suspension of operation /stoppage
of business
3. Assets deemed in custodia legis
1. Juridical personality is retained.
Perfected transactions cannot be
repudiated;

Liquidation

Q: When can there be liquidation?

A: If the bank cannot be restored to its financial health upon
the recommendation of the conservator or receiver or head
of the supervising and examining department, BSP shall file
the petition with the RTC for assistance in liquidation.

NOTE: Once the liquidation proceedings have been initiated,
the majority stockholders of the bank can no longer file a
separate action or petition to assail the order of closure.
Instead, issues on validity of closure should be raised as
affirmative defenses in the liquidation proceeding. This is
necessary to prevent multiplicity of suits or conflicting
resolutions.

Lack of tax clearance; effect

Q: Can the liquidation of bank be carried out despite lack of
tax clearance?

A:

GR: Dissolution of a CORPORATION cannot be approved
unless there is payment of taxes

XPN: Closure and liquidation of banks which is governed by a
special law. The authority of the BSP to close cannot be
impaired.

NOTEl Unlike in the voluntary dissolution of a corporation
under the Corporation Code. There are substantial
differences in the procedure for involuntary dissolution and
liquidation of a corporation under the Corporation Code and
that of a bank under the New Central Bank Act so that the
requirements in one cannot simply be imposed in the other
(In Re: Petition for Assistance in the Liquidation in the Rural
Bank of Bokod (Benguet), PDIC v. Bureau of Internal Revenue,
511 SCRA 123, 2006).

Claims against the insolvent bank

Q: Where should the claims against insolvent bank be filed?

A: All claims against the insolvent bank should be filed in the
liquidation proceeding. It is not necessary that a claim be
initially disputed in a court or agency before it is filed with the
liquidation court (Ong v. CA, 253 SCRA 105, 1996).

Q: What is the exception to this rule?

A: It does not apply to a petition for the issuance of a writ of
possession for foreclosed property filed by the bank.

Q: All claims against the insolvent bank should be filed in
the liquidation proceeding. What is the purpose of such
rule?

A: The requirement that all claims against the bank be
pursued in the liquidation proceedings is intended:
a. to prevent multiplicity of actions against the insolvent
bank, and;
b. designed to establish due process and orderliness in the
liquidation bank

Q: What is the nature of a petition for the Issuance of a Writ
of Possession?

A: It is not in the nature of a disputed claim against the bank.
On the contrary, it is an action instituted by the bank itself for
the preservation of its asset and protection of its property.

Bank deposits, not preferred credits

Q: What is the nature of bank deposits?

A:

GR: Not preferred credits
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 52
UNIVERSITY OF SANTO TOMAS

XPN: When the deoposits are covered by a cashiers check
purchased from the bank when the bank officers knew or
ought to have known that the bank is insolvent.

NOTE: In a situation involving the element of fraud, where a
cashiers check is purchased from a bank at a time when it is
insolvent, as its officers know or are bound to know by the
exercise of reasonable diligence, the purchase is entitled to
preference in the assets of the bank on its liquidation
(Miranda v. PDIC, 501 SCRA 288, 2006).

Effect of final judgment against the bank

Q: What is the effect of final judgment against the bank?

A: Any final judgment against the bank which has been
ordered or closed should be stayed as to execute the
judgment would unduly deplete the assets of the bank to the
prejudice of other creditors. After the Monetary Board has
declared that a bank is insolvent and has ordered it to cease
operations, the Board becomes the trustee of its assets for
the equal benefit of all the creditors, including depositors.
The assets of the insolvent banking institution are held in
trust for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a preference
over another by an attachment, execution or otherwise.

Q: Will the suspension of the operations of a bank excuse
non-compliance with its obligation to remit the deposit of
depositors?

A: No, the suspension of operations of a bank cannot excuse
non-compliance with the obligation to remit the time
deposits of depositors which matured before the banks
closure (Overseas Bank of Manila v. CA, 172 SCRA 521, 1989).

Q: What is the effect of the closure of a bank as regards the
collection and foreclosure of mortgages?

A: Even if the bank is questioning the vlidity of its closure,
during the pendency of the case the liquidator can continue
prosecution suits for collection and foreclosure of mortgages,
as they are acts done in the usual course of administration of
the bank.



LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405)

Q: What is the purpose?

A:
1. To encourage deposit in banking institutions; and
2. To discourage private hoarding so that banks may
lend such funds and assist in the economic
development of the country.

Prohibited acts

Q: What are the prohibited acts?

A:
1. It shall be unlawful for any official or employee of a
bank to disclose to any person other than those
excepted by law any information concerning deposit
2. Non-bank official or employee is not covered by the
prohibition
3. Disclosure by a bank official or employee of
information about a bank deposit in favor of a co-
employee in the course of the performance of his
duties is not covered by the prohibition

Q: What are the kinds of deposits covered?

A:
1. All deposits of whatever nature with banks or
banking institutions found in the Philippines; or
Investments in bonds issued by the Philippine
government, its branches, and institutions
2. Trust funds and any sum of money invested in the
bank which the bank may use for loans and similar
transaction are now included in the term deposits
3. Deposits are thus no longer limited to those
governed by law on loans giving rise to creditor-
debtor relationship

Q: What do you mean by Bank Deposits in this context?

A: This means funds given to the bank giving to a creditor-
debtor relationship.

Q: What are the requisites?

A:

1. Funds given to the banks
2. Ownership over the funds is transferred to the bank
3. The bank is free to use the funds as he pleases
4. The bank has the obligation to return the money
upon demand by the depositor under Art 1980 Civil
Code.
5. Bank Deposits shall be governed by the Law on
Loans (Art 1980 Civil Code).

Q: What does investment in government securities mean?

A: Any investment in security issued or guaranteed by the
government is covered. Government securities are
Instruments issued or guaranteed by the government.
Meaning the payment shall be made or guaranteed by the
government.

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 53
UNIVERSITY OF SANTO TOMAS
Examples: Treasury Bills, Erap Bonds, Maharlika Bonds
(during the FVRs time), GSIS Civil Trade Treasury Bonds and
any obligation of the government evidenced by a debt
instrument is covered by 1405.

Trust funds

Q: Are trust funds covered by the term deposit?

A: Yes, the money deposited under the trust agreement is
intended not merely to remain with the bank but to be
invested by it elsewhere. To hold that this type of account is
not protected by R.A. 1405 would encourage private hoarding
of funds that could otherwise be invested by banks in other
ventures, contrary to the policy behind the law. (Ejercito v.
Sandiganbayan, G.R. No. 15729495, Nov. 30, 2006)

NOTE: Despite such pronouncement that trust funds are
considered deposits, trust funds remain not covered by PDIC.

Exceptions

Q: When may deposits be disclosed, examined or looked
into?

A:
1. Written permission of the depositor
2. Impeachment
3. Order of competent court in:
a. Bribery or dereliction of duty of public officials
b. Subject matter of litigation is the money
deposited
c. Unexplained wealth (plunder is akin to
unexplained wealth)
d. Violation of Anti-Graft and Corrupt Practices
Act
e. Prima facie violation of the Anti-Money
Laundering Law
NOTE: Disclousre can only be made to the Anti-
Money Laundering Council. Bank inquiry order is
not necessary if the predicate crime is:
i. kidnapping,
ii. hijacking
iii. arson
iv. murder
v. violation of dangerous drugs act
f. violation of the Human Security Act
g. garnishment of bank deposits

4. Upon order of the Commissioner of Internal
Revenue in respect of the bank deposits of a
decedent for the purpose of determining such
decedents gross estate.
NOTE: The bank cannot disclose to the heirs of the
deceased depositor but only to the BIR
5. Upon the order of the Commissioner of Internal
Revenue in respect of bank deposits of a taxpayer
who has filed an application for compromise of his
tax liability by reason of financial incapacity to pay
his tax liability.
6. Under the Unclaimed Balances Law, the bank may
disclose to the National Treasurer information
concerning dormant deposits for the purpose of
initiating escheat proceedings
7. In case the law is repealed, superseded or modified
by any law to the contrary.

Q: Let say the Senate Blue Ribbon Committee is conducting
an investigation on the extent of jueteng activities in
Pampanga. In aid of legislation, the Senate Blue Ribbon
Committee invited persons suspected to be involved in
jueteng and subpoenad various banks in Metro Manila,
directing such banks to produce documents or records of
the person suspected to be involved in jueteng activities.
Supposedly, it is in aid of legislation, can the bank comply
without violating Republic Act 1405 (Law on Secrecy of Bank
Deposits)?

A: No, because the Senate Blue Ribbon Committee is not a
court, it may be a very powerful committee but the fact
remain that it is not a court.

Q: The Fiscal is conducting an investigation on Violation of
B.P 22, to complete the investigation, the Fiscal issued a
subpoena to the bank where the check was drawn against
to produce related documents and records of the
respondent in a criminal case, can the Bank comply without
violating the law?

A: No, because the Fiscal is not a court, it has to be a court
order.

Q: Can the bank disclose the name of the depositor? Is it
protected by RA 1405?

A: Still debatable. According to Dean Divina, this should be
covered because of Section 3 of RA 1405?

Section 3. It shall be unlawful for any official or
employee of a banking institution to disclose to any
person other than those mentioned in Section two
hereof any information concerning said deposits.

Money deposited as the subject matter of litigation

Q: A one transfer for $1000, and ended up being remitted to
the account paying in the Philippines for $1000,000. So the
teller must have overlooked, she misread the instrument, so
the account of that the payee was credited was $1000,000.
He consulted his lawyer and such lawyer advised to
withdraw, spend such money. The payee withdrew the
funds, and he deposited such withdrawn amounts to various
banks. Thereafter, the Bank discovered the error and filed
an action for the reimbursement or return of the money.
They ask the court to subpoena ad tefistificandum to
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 54
UNIVERSITY OF SANTO TOMAS
compel the bank managers who have certain accounts
suspected to be depository of the funds. When one of the
Bank managers is suppose to testify, he was opposed by the
lawyer of the payee arguing such testimony by invoking
Republic Act 1405. Does the testimony violate Republic Act
1405?

A: No, because the subject matter of litigation is the money
deposited, the subpoena ad tefistificandum is a court order
directing the person involved to testify. Being a court order
and being the subject matter of litigation of the money
deposited falls within the exception. Therefore the bank
manager can testify without violating the law.

Q: A issued a check for Php1000,000, it was drawn against
Allied Bank and such check was deposited with Union Bank.
Union Bank undecoded the charged slip. Union Bank only
recovers Php1000 from Allied Bank when it should have
recovered Php1000,000 for the amount for which the
account of A was debited. After 1 year, it was discovered, so
Union Bank filed a petition to examine the account of A.
Allied Bank opposed the action of the ground that it will
violate the right of A under Republic act 1405, which the
Union Bank counter-argue that it will not because the
subject matter of litigation is the account where the money
is deposited. Is the money found in the account of A is the
subject matter of the litigation?

A: No, because the cause of action of the Union bank is to
recover the difference between Php1000,000 and Php1000, it
paid Php1000,000 to payee depositor but only got P1000.
Union Bank is a collecting Bank, it collects the amount
covered by a check from the drawee bank so it can credit the
account of the depositor. So the cause of action of the Union
bank is to recover the difference between Php1000,000 and
Php1000, and not necessarily the funds in the account of A,
so it is any money that falls under the difference between
Php1000,000 and Php1000. The right to privacy is a right
guaranteed by the constitution and if it examines the account
of the depositor which do not fall under the exception
violates such right to privacy.

Bribery, dereliction of duty, prosecution for unexplained
wealth, prosecution for Anti-graft and Corrupt Practices Act

Q: A special prosecutor was conducting an investigation for
violation of unexplained wealth law involving a public
official suspected to have an ill-gotten wealth. In the course
of the investigation, the special prosecutor issued a
subpoena were such public official maintained an account.
The Bank opposed citing the R.A 1405. Decide.

A: The SC said that when it comes to investigation of
unexplained wealth under anti-graft and corrupt practices
act, the prosecutor may have access to bank deposits.
Although a special prosecutor is not a court, but the SC
allowed the examination under the exception on the
accounts, documents or records.

The SC relied on the Anti-graft and Corrupt Practices Act and
unexplained wealth law, in both laws it provided that Bank
deposits shall be taken into account in the enforcement of
these laws. So, when it comes to anti-graft and corrupt
practices act, bribery or dereliction of duty and the
unexplained wealth law, even a prosecutor may have access
to bank deposits.

Ombudsmans Authority

Q: What are the requisites before the Ombudsman may
examine deposits?

A:
1. There is a pending case before court of competent
jurisdiction
2. The account must be clearly identified
3. There is notice upon the account holder and bank
personnel of their presence during inspection
4. The same must be limited to the account

NOTE: The inspection must cover only the account identified
in the pending case (Marquez v. Desierto, G.R. No. 138569,
Sept. 11, 2003).

Q: Can a bank be compelled to disclose the records of the
accounts of a depositor under the investigation for
unexplained wealth?

A: Since cases of unexplained wealth are similar to cases of
bribery, dereliction of duty, no reason is seen why it cannot
be excepted from the rule making bank deposits confidential.
In this connection, inquiry into illegally acquired property in
antigraft cases extends to cases where such property is
concealed by being held or recorded in the name of other
persons. This is also because the AntiGraft and Corrupt
Practices Act, bank deposits shall be taken into consideration
in determining whether or not a public officer has acquired
property manifestly out of proportion with his lawful income.
(PNB v. Gancayco, G.R. No. L18343, Sept. 30, 1965).

Garnishment

Q: Does garnishment of a bank deposit violate the law?

A: No, the prohibition against examination does not preclude
its being garnished for satisfaction of judgment. The
disclosure is purely incidental to the execution process and it
was not the intention of the legislature to place bank deposits
beyond the reach of judgment creditor.

Q: How about foreign currency deposits, can they be subject
to garnishment?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 55
UNIVERSITY OF SANTO TOMAS
A:

GR: Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of
any court, legislative body, government agency or any
administrative body whatsoever. (Sec 8. R.A. 6426)

XPN: The application of Section 8 of R.A. 6426 depends on
the extent of its justice. The garnishment of a foreign
currency deposit should be allowed to prevent injustice and
for equitable grounds, otherwise, it would negate Article 10
of the New Civil Code which provides that in case of doubt in
the interpretation or application of laws, it is presumed that
the lawmaking body intended right and justice to prevail

Unlclaimed Deposits Law

Q: Under the Unclaimed Balances Law, the bank may
disclose to the National Treasurer information concerning
dormant deposits for the purpose of initiating escheat
proceedings. What is the exception?

A: In case of automatic roll-over clause.

Q: What is an automatic roll-over clause?

A: This refers to whether your term deposit will automatically
roll over into a new fixed term once it reaches maturity.
Before your account reaches maturity, you have to notify
your institution of what you wish to do with your money,
whether you decide to collect or transfer it to another term
deposit.

NOTE: Deposits with Automatic roll-over clause are not
subject to prescription. They cannot be escheated.

Foreign currency deposits not covered

Q: Are foreign currency deposits covered by the Secrecy in
Bank Deposits (R.A. 1405)?

A:

GR: No. Foreign currency deposits are covered by R.A. 6426
otherwise known as the Foreign Currency Act. Under the
same law, all authorized foreign currency deposits are
considered of an absolutely confidential nature and, except
upon the written permission of the depositors, in no instance
shall be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or
administrative private.

Q: Can the foreign currency deposit of a transient foreigner
who illegally detained and raped a minor Filipina, be
garnished to satisfy the award for damages to the victim?

A: The exemption from garnishment of foreign currency
deposits under R.A. 6426 cannot be invoked to escape liability
for the damages to the victim. The garnishment of the
transient foreigners foreign currency deposit should be
allowed to prevent injustice and for equitable grounds. The
law was enacted to encourage foreign currency deposit and
not to benefit a wrongdoer (Salvacion vs. Central Bank of the
Philippines, G.R. 94723, August 21, 1997).

RA 1405 AND RA 6426 COMPARED

Q: What are the exceptions to the rule that foreign deposits
are privilged and confidential?

A:
1. Written permission of the depositor
2. Impeachment
3. Court order
a. Violation of the Anti-Money Laundering Law
b. Human Security
4. Equittable consideration
5. One invoking is not the owner or a co-owner
6. The BIR under the tax Code may inquire into the
deposits for the purpose of computing the tax due of
the estate of a deceased depositor. Because foreign
currency are not exempt for estate tax
7. The BIR under the Tax code may inquire into the
bank deposits of a taxpayer who has filed an
application for compromise of his tax liability on the
ground of financial incapacity
8. The PCGG under its mandate may have access to
bank deposit for the purpose of recovering illegally
acquired funds
9. In case a law is passed repealing or amending RA
6426

Q: How about escheat proceedinggs?

A: According to the Secretary of Justice, foreign currency
deposits are exempt from escheat proceedings because
escheat is akin to garnishment, since foreign currency
deposits are exempt from garnishment and escheat is a form
or specie of garnishment, therefore foreign currency deposits
are exempt from escheat proceedings. Being exempt from
escheat proceedings, the bank has no authority to disclose to
the National Treasurer any information about foreign
currency dormant accounts.

Filing of the comlaint for violation of RA 1405 does not toll
the running of the prescriptive period to file the appropriate
complaint for violation of R.A. 6426

Q: Does the filing of the comlaint for violation of RA 1405
toll the running of the prescriptive period to file the
appropriate complaint for violation of R.A. 6426?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 56
UNIVERSITY OF SANTO TOMAS
A: No, it did not toll the running of the prescriptive period to
file the appropriate complaint for violation of R.A. 6426
(Intengan v. CA, 377 SCRA 63, 2002).

GENERAL BANKING LAW: Provisions of secrecy

NOTE: General Banking Law prohibits disclosure of any
information among funds other than deposits as well as
properties in the banks possession belonging in the private
entity. It covers funds other than deposits. Prior to the case
of Ejercito vs Sandiganbayan, trust funds are confidential not
because of RA 705 but because of RA 8791, but now TRUST
FUNDS ARE COVERED BY RA 1405 hence funds other than
deposits for as long as the banks may use the same for loans
or similar transactions.

Q: What law governs trust funds?

A: They are now governed by 2 laws:
1. RA 8791 and
2. RA 1405.

The Supreme Court did not go beyond explaining what
exceptions will apply because under RA 8791 there are 2
exceptions (written permission and court order). There are
funds which are not covered by RA 1405, these funds that the
bank cannot be use for loans and other similar transactions.

Q: When are funds considered as deposited?

A: Funds which are deposited or invested with the bank
which the bank can use for loans and similar transactions if
the bank can use it for loans and similar transactions then it is
not covered by RA 1405 but it is governed by RA 8791.

Examples of these are funds obtained by the bank for strict
deposit meaning for safe keeping. Since the bank cannot use
these funds for loans, it is not covered by RA 1405 but they
are covered by RA 8791.

NOTE: Whether 1405 or 8791 both laws say that it cannot be
inquired or looked in to but the problem lies on which
exception would apply.

Q: Can the bank disclose information about the contents of
the safety deposit box?

A: No, because it will violate RA 8791.

Q: What if the depositor did not pay rents on the safety
deposit box?

A: If the depositor is not paying rents, then the Bank will
force open the safety deposit box. In case of force opening,
the Bank will know the contents of the box, so every time the
bank will force open the Box it engages with the services of
the notary public to make sure that the owner of the safety
deposit box will not put a tag on the contents of Safety
deposit box way beyond human imagination.

Q: Can the bank disclose the whereabouts of a client, let say
that a bank has 2 clients and one is indebted to the other,
can the bank upon the request of the creditor disclose
information on the whereabouts of the debtor?

A: This information is not covered by 1405, 6426 or 8791
because it is not funds, but it is covered by the Constitution
the right to privacy.

NOTE: Bottom line is that whatever information we give to
the bank is confidential or privilege and can only be disclose
in those cases provided by law



ANTI-MONEY LAUNDERING LAW (R.A. 9160, a amended)

Q: What is the policy of the law?

A: To protect and preserve the integrity and confidentiality of
bank accounts and to ensure that the Philippines shall not be
used as a money laundering site for the proceeds of any
unlawful activity.

Q: What is money laundering?

A: Money laundering is a crime whereby the proceeds of an
unlawful activity as defined in the AMLA are transacted or
attempted to be transacted to make them appear to have
originated from legitimate sources.

Anti-Money Laundering Council

Q: What is the Anti-Money Laundering Council (AMLC)

The government body tasked to carry out the
implementation of the Anti-Money Laundering Law is the
Anti-Money Laundering Council. It is authorized to impose
administrative sanctions for the violation of the law, rules or
regulations issued pursuant to the Anti-Money Laundering
Law.

It may freeze monetary instrument or property alleged to be
the proceeds of unlawful activity. The AMLC shall apply for a
freeze order with the Court of Appeals. Such order may be
issued ex parte.

It is also authorized to inquire into bank deposits or
investments, regardless of currency but it needs a bank
inquiry order. The AMLC shall apply for a bank inquiry order
with any competent court. Such competent court is the
Regional Trial Court. The bank inquiry order cannot be issued
ex parte but under the recent law dated June 2012, bank
inquiry order can now be issued ex parte.
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 57
UNIVERSITY OF SANTO TOMAS

Covered institutions

Q: What are the covered institutions?

A:

1. Institutions supervised or regulated by the BSP
2. Institutions supervised and regulated by the Insurance
Commission; and
3. Entities dealing in currency, commodities, or financial
derivatives based thereon valuable objects, cash
substitutes, and other similar monetary or property
supervised and regulated by the SEC.
NOTE: (Enumeration under Golden Notes 2011)

1. Banks
2. Nonbanks
3. Quasibanks
4. Trust entities
5. All other institutions, their subsidiaries and affiliates
supervised or regulated by BSP
6. Insurance companies and all other institutions
supervised and regulated by the Insurance
Commission
7. Securities dealers, brokers, salesmen, investment
houses and other similar entities managing securities
or rendering services as investment agent, advisor,
or consultant
8. Mutual funds, closedend investment companies,
common trust funds, preneed companies and other
similar entities
9. foreign exchange, corporations, money changers,
money payments, remittance and transfer
companies and other similar entities; and
10. 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 SEC.

Q: What are the obligations of covered institutions?

A:

1. Customer identification
2. Record keeping (records should be kept and safely
stored for 5 years from the date of the transaction)
3. Reporting of covered and suspicious transactions

Covered transactions

Q: What is a covered transaction?

A: A covered transaction in cash or other equivalent
monetary instrument involving in a total amount in excess of
five hundred thousand pesos (P500,000) within one banking
day.

Suspicious transactions

Q: What are suspicious transactions?

A: Suspicious transactions are transactions with covered
institutions, regardless of the amounts involved, where any of
the following circumstances exist:

1. There is no underlying legal or trade obligation,
purpose or economic justification
2. The client is not properly identified
3. The amount involved is not commensurate with the
business or financial capacity of the client;
4. Taking into account all known circumstances, it may
be perceived that the clients transaction is
structured in order to avoid being the subject of
reporting requirements under the AMLA;
5. Any circumstances relating to the transaction which
is observed to deviate from the profile of the client
and/or the clients past transactions with the
covered institution;
6. The transactions is in a way related to an unlawful
activity or offense under the AMLA that is about to
be, is being or has been committed; or
7. Any transactions that is similar or analogous to any
of the foregoing.

Q: What are the acts punishable under R.A. 9160?

A:
1. Knowingly transacting or attempting to transact any
monetary instrument/property which represents,
involves, or relates to, the proceeds of any unlawful
activity (Action)

2. Knowingly performing or failing to perform an act in
relation to any monetary instrument/property
involving the proceeds of any unlawful activity as a
result of which he facilitated the offense of money
laundering (Omission).

3. Knowingly failing to disclose and file with the AMLC
any monetary instrument/ property required to be
disclosed and filed (Failure to report).

Safe Harbor Provision

Q: What is the so-called Safe harbor provision?

A: No administrative, criminal or civil proceedings shall lie
against any person for having made a covered transaction
report in the regular performance of his duties and in good
faith, whether or not such reporting results in any criminal
prosecution under the AMLA or any other Philippine law.
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 58
UNIVERSITY OF SANTO TOMAS

Venue of action; Jurisdiction

Q: Which court has jurisdiction for violations of the AMLA?

A:
1. RTC-all cases of Anti-Money Laundering
2. Sandiganbayan- those committed by public officers
and private persons in conspiracy with them

Predicate crimes

Q: What is the unlawful activity referred to in R.A. 9160?

A: Unlawful activity is the offense which generates dirty
money. It is commonly called the predicate crime refers to
any act or omission or series or combination thereof involving
or having relation to the following:

1. Kidnapping for ransom;
2. Drug trafficking and related offenses;
3. Graft and corrupt practices;
4. Plunder;
5. Robbery and extortion;
6. Jueteng and Masiao;
7. Piracy;
8. Qualified theft;
9. Swindling;
10. Smuggling;
11. Violations under the Electronic Commerce Act of
2000;
12. Hijacking, destructive arson and murder, including
those perpetrated by terrorists against non-
combatant persons and similar targets;
13. Fraudulent practices and other violations under the
Securities Regulation Code of 2000;
14. Felonies or offenses of a similar nature that are
punishable under the penal laws of other countries.

Bank inquiry

Q: Is there a need for a pre-existing or pending case in court
for violation of the Anti-Money Laundering Law before a
bank inquiry order may be issued by a court?

A: No.

Q: Can a bank inquirty be availed of ex-parte?

A: The AMLC is authorized to inquire into bank deposits or
investments, regardless of currency but it needs a bank
inquiry order. The AMLC shall apply for a bank inquiry order
with any competent court. Such competent court is the
Regional Trial Court. The bank inquiry order cannot be issued
ex parte but under the recent law dated June 2012, bank
inquiry order can now be issued ex parte.

Prior to June 2012:

A: No. A bank inquiry order, unlike a freeze order cannot be
issued unless notice is given to the owners of the account,
allowing them the opportunity to contest the issuance of
such order (Republic v. Eugenio, 545 SCRA 384, 2008).

NOTE: Still, even if the bank inquiry order may be availed of
without need of a pre-existing case under the AMLA, it does
not follow that such order may be availed of ex parte. It is
evident that Sec. 11 does not specifically authorize, as a
general rule, the issuance ex parte of the bank inquiry order.
Of course, Sec. 11 also allows the AMLC to inquire into bank
accounts without having to obtain a judicial order in cases
where there is probable cause that the deposits or
investments are related to kidnapping for ransom, certain
violations of the Comprehensive Dangerous Drugs Act of
2002, hijacking and other violations under R.A. No. 6235,
destructive arson and murder.

In the instances where a court order is required for the
issuance of the bank inquiry order, nothing in Sec. 11
specifically authorizes that such court order may be issued ex
parte. The necessary implication of this finding that Sec. 11 of
the AMLA does not generally authorize the issuance ex parte
of the bank inquiry order would be that such orders cannot
be issued unless notice is given to the owners of the account,
allowing them the to contest the issuance of the order.

The court receiving the application for inquiry order cannot
simply take the AMLCs word that probable cause exists that
the deposits or investments are related to an unlawful
activity. It will have to exercise its own determinative
function in order to be convinced of such fact. The account
holder would be certainly capable of contesting such
probable cause if given the opportunity to be apprised of the
pending application to inquire into his account; hence a
notice requirement would not be an empty spectacle
(Republic v. Eugenio, et al. G.R. No. 174629, Feb. 14, 2008).

Q: What are the exceptions to the rule that a court order is
necessary before the AMLC can inquire into bank deposits?

A: No court order is required in the following cases:

1. Kidnapping for ransom;
2. Drug trafficking and related offenses;
3. Hijacking;
4. Destructive arson;
5. Murder
6. Those perpetrated by terrorists against non-
combatant persons and similar targets.

Freeze order

Q: Which court has jurisdiction in the freezing of monetary
instrument or property?
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 59
UNIVERSITY OF SANTO TOMAS

A: The Court of Appeals has the jurisdiction to freeze the
account 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.

Note: The freeze order shall be for a period of 20 days unless
extended by the court.

BANK INQUIRY ORDER FREEZE ORDER
The AMLC is authorized to
inquire into bank deposits or
investments, regardless of
currency but it needs a bank
inquiry order.
The AMLC may freeze
monetary instrument or
property alleged to be the
proceeds of unlawful activity.
Jurisdiction
Regional Trial Court Court of Appeals
Issuance
Under the recent law dated
June 2012, bank inquiry
order can now be issued ex
parte.
Can be issued ex parte
Duration
N/A The freeze order shall be for
a period of 20 days unless
extended by the court.

Q: Does the AMLC have the authority to inquire into bank
deposits?

A: Notwithstanding the provisions of R.A. 1405 (The Bank
Secrecy Law), as amended; R.A. 6426, as amended; R.A. 8791
(General Banking Law of 2000), and other laws, the AMLA
may inquire into or examine any particular deposit or
investment with any banking institution or non-bank financial
institution upon order of any competent court in cases of
violation of AMLA when it has been established that there is
probable cause that the deposits or investments involved are
in any way related to an unlawful activity.

Q: Alvin is jobless but is reputed to be a jueteng operator.
He has never been charged or convicted of any crime. He
maintains several bank accounts amounting to P100 Million.
AMLC charged Alvin with violation of the AntiMoney
Laundering Law. Can Alvin move to dismiss the case on the
ground that he has no criminal record?

A: No. The contention of Alvin is not tenable because under
AMLA, "money laundering crime" committed when the
proceeds of an "unlawful activity," like jueteng operations,
are made to appear as having originated from legitimate
sources.

The money laundering crime is separate from the unlawful
activity of being a jueteng operator, and requires no previous
conviction for the unlawful activity. (Sec. 3, AMLA)

Q: In disclosing Alvin's bank accounts to the AMLC, did the
bank violate any law?

A: No, the bank did not violate any law. The bank being
specified as a "covered institution" under the AntiMoney
Laundering Law, is obliged to report to the AMLC covered and
suspicious transactions, without thereby violating any law.
This is one of the exceptions to the Secrecy of Bank Deposit
Act.



TRUTH IN LENDING ACT (RA 3765) (TILA)

Historical Background

The Truth in Lending Law was pass to compliment the then
USURY LAW. The USURY LAW is suspended (not repealed) as
of
1982. The Central Bank (CB) lifted the ceiling on interest rate.

Q: When is an interest considered as usurious?

A: A rate of interest is USURIOUS if it in excess of the ceiling
set forth by the Bangko Sentral ng Pilipinas (BSP).

Circular 905

In 1982 CB issued Circular 905 lifting the ceiling on interest
rate. There being no ceiling in interest rates then there is no
usurious rate of interest.

Truth in Lending Law

When the Truth in Lending Law was passed the Usury Law
was still in place. Under said law the rate of interest is
usurious if the interest is more than 12% for secured loans
and more than 40% for unsecured loan (no collateral, no
mortgages).

Many persons were found to circumvent the usury law by
sticking to the ceiling but collecting other items not on their
interest but other charges. Since they are not interest then
they are not usurious but they jacked up the cost of credit. So
this is why the Truth in Lending Law was passed to
compliment the Usury Law.

Purpose

Q: What is the purpose of Truth in Lending Act (TILA)?

A:

1. To complement the Usury Law;
2. To protect persons from a lack of awareness of the
true cost of credit by assuring full disclosure of such
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 60
UNIVERSITY OF SANTO TOMAS
cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.

Q: What are the items required to be disclosed?

A: Prior to the consummation fo a loan transaction, the bank,
as creditor, is obliged to finish a client with a clear statement,
in writing, setting forth, to the extent applicable and in
accordance with the Rules and regulations prescribed by the
Monetary Board of the CB, the ff. information:

a. the cash price or delivered prie of the property or service
to be acquired
b. the amounts if any, to be credited as down payment and
or trade-in
c. the difference between the amounts set forth under
clauses 1 and 2
d. the charges, individually itemmized which are to be paid
by such person in connection with the transaction but
which are not incident to the extension of credit
e. the finance charges expressed in terms of pesos and
centavos
f. the percentage charges bears to the total amount to be
financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation (the unpaid
interest on the outstanding obligation)

Illustration: A wants to purchase a car on installment basis.
The cost of the car is 3M. He made a down payment of P1M.
The balance (P2M) is covered by a promissory note payable
over 60 mos. (5 yrs to pay). The truth in lending law requires
the creditor (the car company) to disclose to the borrower
(the buyer to the car) the ff information:

1. Cost Price/Delivery Price - How much is the cost or
value of the delivery of the car? P3M
2. Amount of Down Payment P1M; OR Trade In (if
the borrower wants to trade his old car in exchange
for a new car then the trade in value has to be
indicated in the document)
3. The Difference bet. 1 and 2
4. Charges not incident to the credit which must be
itemized.

Examples: handling fee, service fee, registration fee,

5. The total amount

Example: If the car has a value of 3M and down
payment is 1M, how much is the amount to be
financed? 2M. It is payable in 5 years, then 2M plus
interest over 5 years. It has to be indicated.

6. Finance charges (interest)
Example: compounded monthly, in
arrears/discounted, collectible quarterly/annually

Q: What if a promissory note grants the creditor the power
to unilaterally fix the interest rate?

A: That means the promissory note does not contain a clear
statement in writing of finance charge. Such provision is
illegal not only because it violates the provisions of the Civil
Code on mutuality of contracts but also because it violates
the Truth in Lending Act.

Uncovered transactions

Q: What transactions are not covered by TILA?

A: The law does not apply to transaction on cash basis but
only where there is a credit component (Dean Divina).

NOTE: It also does not apply to:
1. Those which do not involve the payment of any
finance charges by the debtor; and
2. Where the debtor is the one specifying a definite
and fixed set of credit terms such as bank deposits,
insurance contracts, sale of bonds, etc.

The TILA is also applicable only to a creditor as defined by
law, a person engaged in the business of extending credit.

Q: You want to buy a DVD component. You went to SM
Appliance Center. You got it and you got your credit card
from your wallet, and then presented it to the sales lady.
The sales lady swiped it into the machine. After 1 month you
got a billing statement from your card company. It turns out
that you have a revolving credit with the card company. You
are allowed to pay 36 months with the card company 0
interests for 36 mos. So you are not forced to pay affront.
You will pay on installment basis for 36 mos. 0 interest.
Billing statement comes; it says 12% interest on the invoice
charges and other fees or charges that the card company
may determine from time to time. Did SM Appliance
Center Violated that Truth in Lend Law?

A: No because the transaction between SM and the card
holder is on cash basis. The installment basis is between the
card holder and the card company. If there is anyone
required to comply with the Truth in Lending Law it is the
card company. The truth in lending law does not apply when
there is no credit component in the transaction. It does not
apply when the transaction is payable in cash.

Effect of non-compliance

Q: What are the effects of non-compliance?

A:
1. Charges not disclosed need not be paid and
2. If paid can be recovered
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 61
UNIVERSITY OF SANTO TOMAS
3. Unenforceability and declaration of nullity are not
the consequences of non-compliance with the Truth
in Lending Act.
4. The offender is liable to pay a penalty for an amount
equal to twice the finance charge required by such
creditor but not exceed P2,000 on any credit
transaction. The action to recover the penalty should
be brought within 1 year from the date of the
occurrence of the violation.
5. In case of willful violation of the law, the offender
shall be liable to pay a fine or imprisonment or both
at the option of the court.

Q: What if the borrower is not duly informed of the data
required by RA 3765 prior to the consummation of the
availment or drawdown?

A: The lender will have no right to collect such charge or
increases thereof, even if stipulated in the promissory note.
However, such failure will not affect the validity or
enforceability of any contract or transaction (Development
Bank of the Philippines v. Arcilla, Jr., 462 SCRA 599, 2005).

ON THE TRANSACTION ON THE CREDITOR
Failure to disclose to any person any information in violation of
TILA or any regulation issued.
(Sec. 6 [a])
Charges not itemized cannot be
collected. If already paid, can be
recovered

Liable in the amount of P100 or
in an amount equal to twice the
finance charged required by
such creditor, whichever is the
greater, however, such liability
shall not exceed P2,000 on any
credit transaction.
Willful violation of any provision of TILA or any regulation issued.
Except as provided in subsection
(a), nothing shall affect the
validity or enforceability of any
contract or transactions.
Shall be liable to a fine of not
less than P1,000 or more than
P5,000 or imprisonment for not
less than 6 months, nor more
than one year or both.

Q: What is the penalty for violation of law?

A: The penalty for violation of the law is P100.00 or an
amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is
greater, except that such liability shall not exceed P2,000 on
any credit transaction.

Q: When must an action for violation of the Truth in Lending
Act be brought?

A: Within 1 year from the date of the occurrence of the
violation.

NOTE: As the penalty depends on the finance charge required
of the borrower, the borrowers cause of action would only
accrue when such finance charge is required.

Q: Who can file the action to recover?

A: The action to recover the penalty may be instituted by the
aggrieved private person separately and independently from
the criminal case for the same offense (UCPB v. Sps. Beluso,
530 SCRA 567, 2007).



PHILIPPINE DEPOSIT INSURANCE CORPORATION
(R.A. 3591 as amended by RA 9302)

Basic Policy

Q: What is the basic policy for the creation of PDIC?

A: Promote and safeguard the interest of the depositing
public by way of providing permanent and continuing
insurance coverage on all insure deposits.

Insured deposit

Q: What is an insured deposit?

A: Insured deposit means the amount due to any bona fide
depositor for legitimate deposits in an insured bank net of
any obligation of the depositor to the insured bank as of the
date of closure, but not to exceed P500,000.00. Such net
amount shall be determined according to such regulations as
the Board of Directors may prescribe. (As amended by Sec. 3,
R.A. 9576)

Liability to depositors

Q: Where does PDIC get the premiums?

A: It collects premiums from the banks. Not from the
depositors/client. It is based on a certain percentage of the
total deposits, - 1%. Every year PDIC collects premium from
the bank to insure their deposits dependent on the amount
of the all the deposits. If the bank collapses, then you can file
your claim with PDIC. This is the concept of PDIC. It ensures
your deposit even without you paying the premium (which is
paid by the bank).

Q: When is the PDIC liable?

A: PDIC can only be liable if the insured bank actually receives
deposit and the bank is ordered to be closed by the BSP.

Q: What are the CONDITIONS to make PDIC liable?

A:
1. The bank must have receive deposits
2. The bank became insolvent or closed because of
insolvency. If the bank is operating in good condition
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 62
UNIVERSITY OF SANTO TOMAS
you dont go to PDIC. You go to the bank to get back
your money.

Q: What are the requisites in order for the deposits be
covered by the insurance?

A:

1. The unpaid balance of money or its equivalent
received by a bank in the usual course of business
and for which it has given of is obliged to give credit
to a commercial, checking, savings, time or thrift
account
2. Must give rise to creditor-debtor relationship
between the bank and the depositor

Q: What is the rule in case of deposits in a branch of
domestic bank outside the Philippines?

A: Deposits in a branch of domestic bank outside the
Philippines shall not be covered unless the insured elects to
include the same for insurance subject to approval of the
PDIC.

Commencement of liability

Q: When will the liability by the PDIC to pay insured
deposits commence?

A: PDIC shall commence the determination of insured
deposits due to the depositors of the closed bank upon its
actual take-over of the closed bank.

Deposit accounts covered

The following accounts are COVERED by PDIC:
1. Savings
2. Current/Checking Account (these are the same)
3. Dollar Deposits the new law made it clear Dollar
Deposits are covered. You have to convert the same
to Philippine Currency at the time of closure of the
Bank.

Q: Are the deposits in foreign currency covered by the
insurance?

A: Deposit obligations in foreign currency of any insured bank
are likewise insured.

NOTE: Foreign currency deposits are covered under the
provisions of RA 3591, as amended, and insurance payment
shall be in the same currency in which the insured deposits
are denominated.

Accounts not covered

Accounts NOT Covered by PDIC:

1. Trust Fund
2. Money Market Placement - here you buy securities
from the bank there is no creditor debtor
relationship)

Q: What is a trust fund?

A: Funds held by an insured bank in a fiduciary capacity and
include, without being limited to, funds as trustee, executor,
administrator, guardian or agent.

Q: Why is Trust Fund not included?

A: Because what are covered by the PDIC are only deposits,
funds deposited with the bank giving rise to a creditor debtor
relationship. So if there is no creditor-debtor relationship
then that is not insured with PDIC.

Extent of liability

Q: What is the extent of PDICs liability?

A: The amount due to any depositor for deposits in an
insured bank net of any obligation of the depositor to the
insured bank as of the date of the closure, but not exceed
P500,000.00 per depositor.


Determination of the insured deposits

Q: When and how shall PDIC commence the determination
of insured deposits?

A: PDIC shall commence the determination of insured
deposits due the depositors of a closed bank upon its actual
take-over of the closed bank. PDIC shall give notice to the
depositors of the closed bank of the insured deposits due
them by whatever means deemed appropriated by the Board
of Directors. PDIC shall publish the notice once a week for at
least 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.

Calculation of liability

Per depositor, per capacity rule

Q: What are the types of deposits covered?

A: Demand, savings, and time deposits. If the depositor has
all three types of accounts with the same bank, he can only
recover up to P500,000.00. He is considered as one depositor.

Q: Is the liabiity of PDI on a per bank or per branch basis?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 63
UNIVERSITY OF SANTO TOMAS
A: Per bank basis.

Q: How o you determine the amount due to a depositor?

A: In determining such amount due to any depositor, there
shall be added together all deposits in the bank maintained in
the same right and capacity for his benefit either in his own
name and the name of the others.

Joint accounts

Rules:

1. Deduct any loan of the depositor from the deposit
with the insured bank to determine net insured
deposit
2. Individually owned deposit account is insured
separately from joint accounts regardless of whether
the conjunction and, or, and/or is issued. In
determining such amount due to any depositor,
there shall be added together all deposits in the
bank maintained in the same right and capacity for
his benefit either in his own name and the name of
the others.
3. If the account is held jointly by two or more natural
persons, or by 2 or more juridical persons or entities,
the maximum insured deposit shall be divided into
as many equal shares as there are individuals,
juridical persons or entities, unless a different
sharing is stipulated in the document of deposit;
4. If the account is held by a juridical person jointly
with a natural person, the maximum shall be
presumed to belong entirely to such juridical person
or entity.
5. The aggregate of the interests of each coowner over
several joint accounts, whether owned by the same
or different combinations of individuals, juridical
persons or entities, shall likewise be subject to the
maximum insured deposit of P500,000.00.

Illustration:

1. A has P400k deposit- can recover P400k
2. A has P200k deposit in 3 branches- only P500k
3. A has P200k deposit in 3 branches of ABC and
another P200k deposit in 3 branches of XYZ- P500k
on each bank
4. A and/or B P600k deposit- P300k each

Mode of payment

Q: What are the modes of payment?

A:
1. Cash
2. Making available to each depositor a transferred
deposit in another insured bank in an amount equal
to insured deposit of such depositor, subject to
submission of proof of claims

Effect of payment of insured deposits

Q: What is the effect of payment of the insured deposits?

A:

1. PDIC is discharged from any further liability to the
depositor
2. PDIC, upon the payment of any depositor, shall be
subrogated to all the rights of the depositor against
the closed bank to the extent of such payment.
Subrogation shall include the right on the part of
PDIC to receive the same dividends from the
proceeds of the assets of such closed bank and
recoveries on account of stockholders equity as
would have been payable to the depositor on a claim
for the insured deposit but such depositor shall
retain his claim by any uninsured portion of his
deposit.

Q: Are the insured deposits paid by PDIC considered as
preferred credits against the closed bank?

A: Yes. All the payments made by 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.

Q: What is the period by which PDIC shall settle a claim of
the insured depositor?

A: PDIC has 6 months from the date of filing of claim for
insured deposit.

Q: What is the effect of failure to settle a claim of insured of
insured depositor within the 6-month period?

A:

GR: Failure to settle the claim within 6 months, where such
failure was due to grave abuse of discretion, gross negligence,
bad faith, or malice, shall, upon conviction, subject the
directors, officers or employees of PDIC responsible for the
delay, to imprisonment from 6 months to one year.

XPN: The period shall not apply if the validity of the claim
requires the resolution of issues of facts and or law by
another office, body or agency.

Failure of depositor to claim insured deposits

Q: What is the period within which a depositor of insured
deposits may file his claim?
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 64
UNIVERSITY OF SANTO TOMAS

A: 2 years from the closure of the bank by the Central Bank.

Q: What is the effect of failure of depositor to claim insured
deposits?

A: Unless otherwise waived by the PDIC, if the depositor in
the closed bank shall fail to claim his insured deposit with
PDIC within 2 years from actual take-over of the closed bank
by the receiver or does not enforce his claim filed with the
PDIC within 2 years after the 2-year period to file a claim, all
rights of the depositor against the PDIC with respect to the
insured deposit shall be barred; however, all rights of the
depositor against the closed bank and its shareholders or the
receivership estate to which the PDIC may have become
subrogated shall thereupon revert to the depositor.

Q: When may the PDIC examine banks and deposit
accounts?

A: The PDIC may conduct examination of banks with prior
approval of the MB provided that no examination can be
conducted within 12 months from the last examination date;
provided, however that PDIC may, in coordination with BSP
conduct a special examination if there is a threatened or
impending closure of a bank.

Prohibiting against splitting of deposits

Q: When does splitting of deposits occur?

A: Whenever a depositors deposit account exceeds
P500,000.00 is broken down and transferred into 2 or more
accounts in the name/s of natural or juridical persons who
have no beneficial ownership on transferred deposits within
120 days immediately preceding or during a bankdeclared
bank holiday, or immediately preceding a closure order by
the Monetary Board of the BSP for the purpose of availing of
the maximum deposit insurance coverage.

Q: What is he penalty for splitting of deposits?

A: The penalty of prison mayor or a fine or not less than
P50,000.00 but not more than P2,000,000.00 or both, at the
discretion of the court.

Prohibition against issuance of TRO

Q: What is rule regarding issuances of TROs, etc. against
PDIC for acts under R.A. 3591, as amended?

A:

GR: No court, except the CA, shall issue any TRO, preliminary
injunction or preliminary mandatory injunction against PDIC
for any action under R.A. 3591, as amended. Such prohibition
applies in all cases disputes or controversies instituted by a
private party, the insured bank, or any shareholder of the
insured bank.

XPN: The Supreme Court may issue a restraining order or
injunction when the matter is of extreme urgency involving
constitutional issue, such that unless a temporary restraining
order is issued, grave injustice and irreparable injury will
arise.

PDIC may reduce interest on deposit

Q: Does PDIC have the power to reduce interest on deposit?

A: PDIC law now empowers the PDIC to reduce the interest
rate on any deposit made within 6 months prior to closure. So
if you are induced by the offer of the bank of its high
interest rate, think twice because all of these banks have
closed in the past and PDIC , any way, has the power to
reduce the interest rate to a reasonable level.




WAREHOUSE RECEIPTS LAW

Q: What is a warehouse receipt?

A: A warehouse receipt is both an acknowledgment receipt
and a bilateral contract between a warehouseman and a
depositor.

Q: When does Warehouse Receipts Law apply?

A: This law only applies if the receipt is issued by a
warehouseman as defined by law.

Nature and Functions

Q: What is the nature of a warehouse receipt?

A:
1. It is a written acknowledgment by the
warehouseman that he has received and holds
certain goods therein described in his warehouse for
the person to whom the document is issued.
2. Receipts not issued by a warehouseman are not
warehouse receipts although in the form of
warehouse receipts. This transaction will not be
governed by the warehouse receipts law but by the
law on deposit
3. A warehouse receipt is not a negotiable instrument
within the meaning of the Negotiable Instruments
Law even though the warehouse receipt, as a
document of title, may be negotiable

Q: What are the 2-fold functions of the warehouse receipt?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 65
UNIVERSITY OF SANTO TOMAS
A:
1. A contract
2. A receipt

Q: Distinguish Warehouse Receipts Law from the
Documents of Title under the Civil Code.

A:

WAREHOUSE RECEIPTS LAW DOCUMENTS OF TITLE
UNDER THE CIVIL CODE
Warehouse receipts issued
by warehouses, whether
public or private, bonded or
not
Other receipts of documents
issued in bailment contracts
other than warehouse
receipts (Civil Code
15071520)
1


Q: Who is a warehouse man?

A: A person, natural or juridical, lawfully engaged in the
business of storing of goods for profit. (Sec. 58, WRL)

Q: What are the rights of a warehouseman?

A:
1. He has to be paid storage charges and other fees as
may be stipulated in the warehouse receipt. If he is
not paid the storage charges, he may withhold
delivery of the goods in his possession; OR
2. When there is an offer pay the lien or the charges
but the claimant/depositor doesnt want surrender
the receipt, then the warehouseman cannot be
compelled to deliver; OR
3. If the depositor/claimant doesnt want to
acknowledge the receipt of goods, then the
warehouseman cannot be compelled to deliver.

Q: What are the basic conditions before a warehouseman
can be compelled to deliver?

A:

1. The lien must be paid. This is compose of storage
charges and other fees.
2. The receipt must be surrendered or returned to the
warehouseman
3. The claimant/depositor must acknowledge the
receipt of the goods

Q: What is a warehouse?

A: The building or place where goods are deposited and
stored for profit.

1
Article 1507 A document of title in which it is stated that the goods referred
to therein will be delivered to the bearer, or to the order of any person
named in such document is a negotiable document of title. (n)


Q: Who may issue warehouse receipt?

A:
1. A warehouseman, whether public or private, bonded
or not. (Sec. 1)
2. A person authorized by a warehouseman.

Q: if X is warehouseman and he issued a warehouse receipt,
what does that mean?

A:

1. It means that the warehouseman acknowledges the
receipt of the goods,
2. And it is bilateral contract in the sense that the
warehouseman has the obligation to safekeep and
preserve the goods of the goods in his possession
using due diligence of a good family, pending the
delivery to the depositor or any person entitled to
possession and he has the right to be paid storage
charges as stipulated in the document.

Q: What is the form of a warehouse receipt and what are its
essential terms?

A: It need not be in particular form but must embody within
its written or printed terms:

1. The location of the warehouse
2. The date of the issue
3. The consecutive number of the receipt
4. A statement whether the goods received will be
delivered to bearer, to a specified person or to a
specified person or his order
5. Fees
6. description of the goods
7. The signature of the warehouseman
8. If the receipt is issued for goods of which the
warehouseman is the owner, either solely or jointly
or in common with others, the fact of such
ownership; and
9. A statement of the amount of advances made and of
liabilities incurred for which the warehouseman
claims a lien. (Sec. 2)

Q: What are the effects of omission of any of the essential
terms?

A:
1. A warehouseman shall be liable to any person
injured thereby for all damages caused by the
omission
2. Validity of receipt not affected
3. Negotiability of receipts not affected
4. Contract is converted to ordinary deposit.

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 66
UNIVERSITY OF SANTO TOMAS
Q: What is the effect when the goods deposited are
incorrectly described?

A: It does not make the receipt ineffective when the identity
of the goods is fully established by evidence. Thus, the
indorsement and delivery shall constitute sufficient transfer
of the title of the goods.

GR: Warehouseman shall be liable for damages for
nonexistence or misdescription of goods at the time of its
issue.

XPN: When the goods are described based on:

1. Series or labels upon them
2. Statement that the goods are of certain kind.

Q: What terms may and may not be inserted?

A: A warehouseman may insert in a receipt issued by him any
other terms and conditions provided that such terms and
conditions shall not be:

1. Contrary to the Warehouse Receipts Law. (Sec. 3)
2. Terms reducing the required diligence of the
warehouseman.
3. Contrary to law, morals, good customs, public order
or public policy.
4. Those exempting the warehouseman from liability
for misdelivery or for not giving statutory notice in
case of sale of goods.
5. Those exempting the warehouseman from liability
for negligence.

To whom delivered

Q: To whom is the warehouse receipt delivered?

A:

In general

1. To the person lawfully entitled to the possession of
the goods or his agent
2. The person entitled to the delivery under a non-
negotiable receipt
3. Person in possession of a duly negotiated warehouse
receipt


Specific situations

4. Between a judgment creditor and holder of a duly
negotiated warehouse receipt, the latter has the
better right
5. Between the unpaid seller of the goods deposited to
the warehouseman and the holder of a duly
negotiated warehouse receipt, the latter has the
better right
6. The rights of the assignee of a non-negotiable
warehouse receipt may be defeated by the
judgment creditor of the depositor or the unpaid
seller of the goods deposited pending notice to the
warehouseman of the assignment or transfer
7. If the goods were stolen from the owner and
deposited to the warehouseman who subsequently
issued a warehouse receipt which in turn was duly
negotiated to an innocent purchaser for value, the
owner has the better right than the holder of the
negotiable warehouse receipt. This is because a thief
transfers no title.
8. If the goods were deposited by the owner for which
the warehouseman issued a negotiable warehouse
receipt but the receipt was negotiated in bad faith,
the holder of such negotiable warehouse receipt has
a better right against owner because the validity of
the negotiation is not impaired by the fact that such
negotiation was a breach of duty on the part of the
person making the negotiation provided the holder
has no notice of the breach of duty or fraud, mistake
or duress.
9. The negotiation of the warehouse receipt by the
buyer of goods from and deposited to the
warehouse is valid even if the warehouseman who
issued a negotiable receipt was not paid by the
buyer.

KINDS OF WAREHOUSE RECEIPTS

Q: What are the kinds of warehouse receipts?

A:
1. Negotiable warehouse receipt- is a receipt in which
it is stated that the goods received will be delivered
to the bearer or to the order of any person named in
such receipt.
2. Non-negotiable warehouse receipts- a receipt in
which it is stated that the goods received will be
delivered to the depositor or to any other specified
person.

Negotiable warehouse
receipt
Non-negotiable warehouse
receipt
May be acquired through
negotiation
May be acquired through
transfer or assignment
Rights of the holder of the
receipt:

1. If indorsed:

a. Acquires title to the goods
as the person negotiating.
(Sec. 41)
b. Acquires the direct
Rights of transferee:


1. Acquires title to the
goods subject to the terms
of any agreement with the
transferor. (Sec. 42)
2. Acquires the right to
notify the warehouseman of
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 67
UNIVERSITY OF SANTO TOMAS
obligation of the
warehouseman to hold
possession of the goods for
him as if the warehouseman
directly contracted with him.
(Ibid.)

2. If not indorsed: He may
compel indorsement;
otherwise, he would acquire
title as that of an assignee
(Section 43).


the transfer and thereby
acquires the direct
obligation of the
warehouseman to hold
possession of the goods for
him. (Sec. 42)

NOTE: Prior to notice, the
title of the transferee may be
defeated by the levy of an
attachment or execution
upon the goods by a creditor
of the transferor or by a
notification to the
warehouseman by the
transferor or a subsequent
purchaser from the
transferor of a subsequent
sale of the goods by the
transferor. (Sec. 42)
Defeats the lien of the seller
of the goods covered
thereby.
Acquires the title as that of
his transferor.
Good covered cannot be
garnished, attached or levied
on execution by execution,
unless:
1. Receipt is
surrendered.
2. Its negotiation is
enjoined by the
court.
3. The goods are
impounded by
the court. (Sec.
25)

Note: This shall not apply if
the person depositing is not
the owner of the goods or
one who has no right to
convey title to the goods
binding upon the owner.
Pending notification to the
warehouseman, goods can
be.

Reason: Absent such notice,
both the warehouseman and
the sheriff have a right to
assume that the goods are
still owned by the person
whose name appears in the
receipt.
Protects the purchaser in
good faith and for value.
The assignee only steps into
the shoes of the assignor.

Q: What are the advantages of a negotiable warehouse
receipt?

1. The goods while in the possession of the
warehouseman cannot be garnished or levied on
execution
UNLESS:
a. the receipt is surrendered or
b. the negotiation is enjoined, or
c. the receipt is impounded by order of court

2. The holder of the negotiable warehouse receipt are
not subject to the unpaid vendors lien.
3. The holder of the negotiable warehouse receipt
acquires the direct obligation of the warehouseman
to hold the goods in his favor with or without notice
of the negotiation.

Q: What is required in a nonnegotiable receipt?

A: It shall have plainly placed upon its face by the
warehouseman issuing it nonnegotiable, or not
negotiable. (Sec. 7)

NOTE: Failure to mark nonnegotiable shall make it
negotiable (if the holder purchased it for value supposing it to
be negotiable).

Q: How is it transferred?

A: A nonnegotiable warehouse receipt may be transferred by
its delivery to the transferee accompanied by a deed of
assignment, donation or other form of transfer.

Q: What is the effect of indorsement?

A: Even if the receipt is indorsed, the transferee acquires no
additional right (Sec. 39)

Q: Distinguish between negotiable instrument and
negotiable warehouse receipts.

A:

NEGOTIABLE INSTRUMENT NEGOTIABLE WAREHOUSE
RECEIPT
The obligation is to pay
money while in a warehouse
receipt, the obligation is to
deliver goods.
In a warehouse receipt, the
endorsers or immediate
parties are not liable for any
failure on the part of the
warehouseman or previous
endorsers of the receipt to
fulfill their obligations.
The general endorsers
warrant that the instrument,
after due presentment, shall
be paid and in that case of
dishonor and notice of
dishonor is duly given, the
endorser shall pay the holder
The endorsers of a
negotiable warehouse
receipt may however be held
liable for breach of
warranties, such as:
1. The receipt is
genuine and in
respects what it
purports to be;
2. They have legal title
to the instrument;
3. The goods are fit for
consumption and
merchantable;
4. They are not aware
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 68
UNIVERSITY OF SANTO TOMAS
of any information
that would render
the instrument
valueless or
worthless

Q: Who may negotiate?

A:
1. The owner thereof;
2. Any person to whom the possession or custody of
the receipt has been entrusted by the owner, if, by
the terms of the receipt, the goods are deliverable to
the order of the person to whom the possession or
custody of receipt has been entrusted or in such
form that it may be negotiated by delivery. (Sec. 40)

Q: What happens if the indorsement is necessary but the
negotiable receipt was only delivered?

A:

1. The transferee acquires title against the transferor
2. There is no direct obligation of the warehouseman;
and
3. The transferee can compel the transferor to
complete the negotiation by indorsing the
instrument. Negotiation takes effect as of the time
when the indorsement is actually made.

Q: In case the signature of an owner of a negotiable receipt
was forged and the forger who now holds the negotiable
receipt was able to withdraw the goods from the
warehouseman. What are the rights of the owner of the
negotiable receipt?

A: If under the terms of the negotiable warehouse receipt,
the goods are deliverable to the depositor or to his order, the
owner of the said negotiable receipt may proceed against the
warehouseman and/or the holder. Without the valid
indorsement of the owner to the holder or in blank, the
warehouseman is liable to the owner for conversion in the
misdelivery. If, however, by the terms of the negotiable
warehouse receipt, the goods are deliverable to bearer
(either because it is so expressed in the warehouse receipt or
because of a blank indorsement by a person to whose order
the goods are deliverable) the owner may only proceed
against the holder. The warehouseman is not liable for
conversion where the goods are delivered to a person in
possession of a bearer negotiable instrument.

RIGHTS OF A HOLDER OF A NEGOTIABLE WAREHOUSE
RECEIPT

Q: What are the rights of a holder of a negotiable
warehouse receipt?

A:
1. The holder of a negotiable receipt acquires:
a. Such title to the goods as the depositor or the
person negotiating had or had ability to convey
to a purchaser in good faith for value;
b. The direct obligation of the warehouseman to
hold possession of the goods for him according
to the terms of the receipt as if the
warehouseman had contracted directly with him
2. The goods covered by the receipt cannot be
garnished or levied upon under execution unless the
receipt is surrendered, or impounded or its
negotiation enjoined.
3. The goods that the receipt covers are not subject to
a sellers lien or stoppage in transit.

RIGHTS OF A TRANSFEREE OF A NON-NEGOTIABLE
WAREHOUSE RECEIPT

Q: What are the rights of a holder of a negotiable
warehouse receipt?

A:
1. The title to the goods as against the transferor
2. The right to notify the warehouseman of the transfer
thereof
3. The right, thereafter, to acquire the obligation of the
warehouseman to hold the goods for him
4. The right of the transferee is not absolute as it is
subject to the terms if any agreement with the
transferor. He merely steps into the shoes of the
transferor.

Q: Coco was issued by a warehouseman a negotiable receipt
for safekeeping by the latter of his goods. Can the judgment
creditor of Coco levy by execution the goods covered by the
negotiable receipt?

A: The goods cannot, while in the possession of the
warehouseman, be attached by garnishment or otherwise, or
be levied upon under an execution unless the receipt be first
surrendered to the warehouseman, or its negotiation
enjoined. The warehouseman cannot be compelled to deliver
the actual possession of the goods until the receipt is
surrendered to it or impounded by the court.

Q: Assuming that prior to the levy, the receipt was sold to
Yoyo on the basis of which he filed a claim with the sheriff.
Would Yoyo have better rights to the goods than the
creditor? Explain your answer.

A: Yes. Yoyo, as a holder for value of the receipt, has a better
right to the goods than the creditor. It is Yoyo that can
surrender the receipt which is in its possession and can
comply with the other requirements which will oblige the
warehouseman to deliver the goods, namely, to sign a receipt
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 69
UNIVERSITY OF SANTO TOMAS
for the delivery of the goods, and to pay the warehouseman's
liens and fees and other charges. (1999 Bar Question)

Q: Bon took the goods of Angela without her consent and
deposited the same with a warehouseman. The latter issued
to Bon a negotiable receipt which she indorsed for value to
Ryan. Between Angela and Ryan, who has better right over
the goods? Why?

A: Ryan has better right to the goods. The goods are covered
by a negotiable warehouse receipt which was indorsed to
Ryan for value. The negotiation to Ryan was not impaired by
the fact that Bon took the goods without the consent of
Angela, as Ryan had no notice of such fact. Moreover, Ryan is
in possession of the warehouse receipt and only he can
surrender it to the warehouseman. (Sec. 8, WRL)

Q: What is the proper recourse of the warehouseman if he is
uncertain as to who is entitled to the goods? Explain.

A: Since there is a conflicting claim of ownership or title, the
warehouseman should file a complaint in interpleader
requiring Ryan and Angela to interplead. The matter involves
a judicial question as to whose claim is valid.

Q: What is the rule where a warehouse receipt is transferred
to secure payment of a loan by way of pledge or mortgage?

A: The pledgee or mortgagee does not automatically become
the owner of the goods but merely retains the right to keep
and with the consent of the owner to sell them so as to
satisfy the obligation from the proceeds for the simple reason
that the transaction is not a sale but only a mortgage or
pledge. Likewise, if the property is lost without the fault or
negligence of the mortgagee or pledgee, then said goods are
to be regarded as lost on account of the real owner,
mortgagor or pledgor.

Q: Does the nonpayment by the original depositors of the
purchase price render the further negotiation of the receipt
invalid?

A: No, the negotiation of the warehouse receipt by the buyer
of goods purchased from and deposited to the
warehouseman is valid even if the warehouseman who issued
the negotiable warehouse receipt was not paid by the buyer.
The validity of the negotiation cannot be impaired by the fact
that the owner/warehouseman was deprived of the
possession of the same by fraud, mistake or conversion.

DUTIES OF WAREHOUSEMAN

Q: What are the duties of warehouseman?

A:

1. To take care of the goods entrusted to his
safekeeping with the same care as reasonably
careful owner of similar goods would exercise
2. To deliver the goods to the holder of the receipt or
the deposit provided the following conditions are
fulfilled.
a. Offer to satisfy the warehousemans lien
b. Offer to surrender the receipt, if negotiable with
such indorsements as would be necessary for
the negotiation of the receipt
c. Readiness and willingness to sign when the
goods are delivered acknowledgement that they
have received

NOTE: The refusal of the warehouseman who previously
owned goods stored with it to deliver the goods to the
endorsee of the receipt on the ground that the goods had not
been paid by the buyer is unlawful.

The warehouseman has no cause of action for repossession
and damages against a person to whom it delivered
deposited articles on the basis of an alleged falsified the
delivery permit where the real parties interested in the
questioned articles have not yet sued the warehouseman for
damages on account of wrongful delivery.

Q: What if the receipts are lost or destroyed?

A: A court of competent jurisdiction may order the delivery of
the goods only:

a. Upon satisfactory proof of the loss or destruction of
the receipt; and
b. Upon the giving of a bond with sufficient sureties to
be approved by the court. (Sec. 14)

NOTE: The delivery of the goods under an order of the court
shall not relieve the warehouseman from liability to a person
to whom the negotiable receipt has been or shall be
negotiated for value without notice of the proceedings or of
the delivery of the goods. (Sec. 14)

Q: When does the duty to insure the goods arise?

A:

1. Where the law provides
2. Where it was an inducement for the depositor to
enter into the contract;
3. Established practice; or
4. Where the warehouse receipt contains a
representation to that effect.

Q: What is conversion?

A: An unathorized assumption and exercise of the right of
ownership over goods belonging to another through the
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
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alteration of their condition or the exclusion of the owners
right.

Q: What are the instances where a warehouseman is liable
for conversion?

A:

1. Where the delivery is made to person other than
those authorized
2. Even if delivered to persons entitled, he may still be
liable for conversion if prior to delivery:
a. He had been requested not to make such
delivery; or
b. He had received notice of the adverse claim or
title of a third person.

Q: Give the effects of alteration of the receipt on the liability
of the warehouseman.

A:

1. Alteration immaterial whether fraudulent or not,
whether authorized or not, the warehouseman is
liable on the altered receipt according to its original
tenor
2. Authorized material alteration the warehouseman
is liable according to the terms of the receipt as
altered
3. Material alteration innocently made the
warehouseman is liable on the altered receipt
according to its original receipt
4. Material alteration fraudulently made
warehouseman is liable according to the original
tenor of the receipt to a purchaser of the receipt for
value without notice, and even to the alterer and
subsequent purchasers with notice except that as
regards to the last two, the warehousemans liability
is limited only to delivery as he is excused from any
liability.

Q: What are the instances where a warehouseman is
criminally liable for his acts?

A:

1. Issuance of receipts for goods not received. (Sec. 50)
2. Issuance of receipt containing false statement. (Sec.
51)
3. Issuance of duplicate negotiable warehouse receipt
not marked as such. (Sec. 52)
4. Issuance of a negotiable warehouse receipt of which
he is an owner without stating such fact of
ownership. (Sec. 53)
5. Delivery of goods without obtaining negotiable
warehouse receipt. (Sec. 54)
6. Negotiation of receipt for mortgaged goods. (Sec. 5)
7. Issuance of warehouse receipts for good not
received. (Sec. 50)
8. Commingling of goods. (Sec. 24)

Q: What are the other acts for which warehouseman is
liable?

A:
1. Failure to stamp duplicate on copies of negotiable
receipt. (Sec.6)
2. Failure to place nonnegotiable or
notnegotiable on a nonnegotiable receipt. (Sec.
7)
3. Misdelivery of goods.(Sec. 10)
4. Failure to effect cancellation of a negotiable receipt
upon delivery of the goods. (Sec. 11)
5. Issuing receipt for nonexisting goods or
misdescribed goods. (Sec.20)
6. Failure to take care of the goods. (Sec. 21)
7. Failure to give notice in case of sale of goods to
satisfy lien (Sec. 33) or because the goods are
perishable or hazardous. (Sec. 34)

WAREHOUSEMANS LIEN

Q: What is the rule when more than one negotiable receipt
is issued for the same goods?

A: A warehouseman shall be liable for all damages caused by
his failure to do so to anyone who purchased the subsequent
receipt for value supposing it to be an original, even though
the purchase be after the delivery of the goods by the
warehouseman to the holder of the original receipt (Sec. 6).

Q: What is the warehousemans lien?

A: The warehousemans lien over the goods deposited with
him is his security, just like a pledge mortgage for the
payment of the charges for the storage and preservation of
the goods, money advanced and other expenses in relation to
such goods.

Q: What are the remedies available to the warehouseman
to enforce his lien?

A:
1. Refuse to deliver the goods until his lien is satisfied
2. To sell the goods and apply the proceeds to the
value of the lien
3. By other means allowed by law to a creditor against
his debtor for the collection from the depositor of all
charges and advances which the debtor contracted
with the warehouseman; or
4. Such remedies allowed by law for the enforcement
of a lien against personal property.

Q: What is the rule in case of the lien of the warehouse?
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UNIVERSITY OF SANTO TOMAS

A: A warehousemans lien should in no event go beyond the
value of the credit in favor of the pledge.

Q: Where will the warehousemans fees and charges cease
to accrue?

A: A warehouseman fees and charges cease to accrue from
the date of the rejection by the warehouseman to heed the
lawful demand by the endorsee if the quedan for the release
of the goods.



REAL ESTATE MORTGAGE LAW

Q: What is the essence a contract of mortgage?

A: Its essence is that a property has been identified or set
apart from the mass of property of the debtor as security for
the fulfillment of his obligation, in case of default of payment.

NOTE: In this contract, as a general rule, the debtor retains
possession of the property mortgaged as a security for the
payment of the sum barrowed from the creditor because by
mortgage, the debtor merely subjects the property to a lien
but ownership thereof is not parted with.

It is not however essential that the property mortgaged
remains in the possession of the mortgagor. Thus, the latter
may deliver said property to the mortgagee without thereby
altering the nature of the contract.

Q: What is real estate mortgage (REM)?

A: It is a contract whereby the debtor secures to the creditor
the fulfillment of a principal obligation, specially subjecting to
such security immovable property or real rights over
immovable property which obligation shall be satisfied with
the proceeds of the sale of said property or rights in case the
said obligation is not complied with at the time stipulated.

Nature

Q: What is the nature of REM?

A: It creates real right over the property, such that in
subsequent transfers by the mortgagor, the transferee must
respect the mortgage.

REAL ESTATE MORTGAGE
Consensual contract
Subject matter is real property
Possession of the thing mortgaged remains with the debtor
Mortgagee does not possess such right
Sale may be judicial or extrajudicial
Must be registered, otherwise, it is not valid against third
persons although binding between the parties
Real right and real property by itself

Q: What else are deemed included in a mortgage of real
property?

A:

1. New plantings;
2. Fruits, except those collected before the obligation
falls due, and those removed and stored when it falls
due;
3. Accrued and unpaid rents as well as those which
should have to be paid while certain credits remains
wholly unsatisfied;
4. Buildings, machinery and accessories belonging to
the mortgage debtor
5. All objects permanently attached to a mortgaged
land or building although they may have been placed
there after the execution of the mortgage are also
included;
6. A more costly building erected in place of the
mortgaged building which was torn down by the
debtor unless the mortgaged estate passes to the
hands of a third person, the mortgage does not
extend to any machinery, object or construction
which he may have brought or placed there and
which such third person may remove whenever it is
convenient for him to do so.

After-acquired properties

Q: What is the effect of any stipulation in the mortgage
contract including after-acquired properties?

A: It is valid. This is common and logical in cases where the
properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold or to be
used but with the understanding that they shall be replaced
with others to be thereafter acquired by the mortgagor. Its
purpose is to maintain the original value of the properties
given as security.

A mortgage given to secure future advancements enables the
parties to provide continuous dealings, the nature or extent
of which may not be known or anticipated at the time, and
they avoid the expense and inconvenience of executing a new
security on each new transaction.

Q: In such stipulation is the attachment of lien retroactive?

A: The said lien attaches and vests not at the time said
improvements are constructed but on the date of the
recording and registration of the deed of mortgage.

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Facultad de Derecho Civil 72
UNIVERSITY OF SANTO TOMAS
NOTE: As a rule, an action to foreclose a mortgage must be
limited to the amount mentioned in the mortgage. But 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 4 corners of the instrument the intent to
secure future loans or advancements and other indebtedness
can be gathered.

Dragnet clause

Q: What is a dragnet clause?

A: It is a clause which operates as a convenience and
accommodation to the barrowers as it makes available
additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing
costs, costs of extra legal services, recording fees etc. It
subsumes all debts of past or future origin.

Q: How do you construe such clause?

A: It must be carefully scrutinized and strictly construed
particularly where the mortgage contract is one of adhesion.

NOTE: A mortgage must sufficiently describe the debt sought
to be secured, and an obligation is not secured by a mortgage
unless it comes fairly within the terms of the mortgage.

But where the obligation is not a series of indeterminate
sums incurred over a period of time but 2 specific amounts
procured in a single instance, what applies is the general rule
state above that an action to foreclose a mortgage must be
limited to the amount mentioned in the mortgage.

A mortgage given to secure future advancements is a
continuing security and is not discharged by the repayment of
the amount named in the mortgage, until the full amount of
the advancements is paid. It permitted the mortgagor to take
the money as it is needed and thus avoid the necessity of
paying interest until the necessity for its use actually arises

Stipulation forbidding owner from alienating immovable
property

Art. 2130. A stipulation forbidding the owner from
alienating the immovable mortgaged shall be void. (n)

NOTE: The mortgagee can simply withhold his consent and
thereby prevent the mortgagor from selling the property. Yet,
in case of alienation of property, the transferee is bound to
respect the encumbrance because being a real right, the
property remains subject to the fulfillment of the obligation
for whose guaranty it was constituted.





Remedies available to mortgagee upon default of the
mortgagor

Q: What are the remedies available to mortgagee upon
default of the mortgagor?

A:

1. He may file an action for collection to enforce
payment of the loan secured by the REM. The filing
of an action for collection, regardless of venue,
precludes the remedy of foreclosure,
2. As an alternative remedy, the mortgage may
foreclose the mortgage. The foreclosure may be
done judicially or extra-judicially. Foreclsoure bars
action for collection unless it is done to recover
deficiency after the foreclosure sale. The only
exception is when the complaint for judicial
foreclosure is filed but the court dismissed because
the REM did not have the written conformity of the
spouse but the court ordered the mortgagee to file
an action for collection. The action for collection
may be sustained to prevent unjust enrichment.
3. If the loan is secured by the real estate and chattel
mortgages and the mortgagee elects to foreclose the
chattel mortgage, he cannot file an action to recover
any deficiency unless he has foreclosed too the REM
and the proceeds thereof are still insufficient to
satisfy the debt
4. The filing of criminal case for violation of BP 22 by
the mortgagee-creditor against the mortgagor will
bar the former from exercising the remedy of
foreclosure because under the Rules of Criminal
Procedure, he is deemed to have already availed
himself the remedy of collection suit.

Foreclosure of REM

Q: What is foreclosure?

A: It is the remedy available to the mortgagee by which he
subjects the mortgaged property to the satisfaction of the
obligation to secure which the mortgage was given through
the sale of the property at public auction and the application
of the proceeds thereof to the payment of his claim.

NOTE: Foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the
property and includes the sale itself.

Q: What is the remedy of a party aggrieved by the
foreclosure?

A: He may petition that the sale be set aside and the writ of
possession be canceled because the mortgage was not
violated or the sale was not made in accordance with the
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UNIVERSITY OF SANTO TOMAS
provisions thereof. He may ask for the annulment of the
foreclosure sale on ground that:

a. There was fraud, collusion, accident, mutual
mistake, breach of trust or misconduct by the
purchaser;
b. Sale had not been fairly and regularly conducted;
c. The price was inadequate and the inadequacy was
so great as to shock the conscience of the court.

Need of power of attorney

Q: What is the requirement regarding the agreement
involving real estate mortgage?

A: The loan or mortgage agreement should contain a special
power of attorney authorizing the mortgagee to foreclose
extra-judicially (to take possession of the property and sell it
in case of default). This SPA is the basis of the right of the
mortgagee to foreclose the mortgage extra-judicially.

Q: Why is special of power of attorney needed?

A: Because an extrajudicial foreclosure may only be effected
if the mortgage contract covering a real estate, clause is
incorporated therein giving the mortgagee the power, upon
default of the debtor to foreclose the mortgage by an
extrajudicial sale of the mortgaged property.

Procedure

Q: Where is the venue of the action?

A: The petition for sale is not an ordinary action and is
therefor not governed by the rules on venue. The petition/s
for sale must be filed with the Office of the Clerk of Court of
the City where the real property/ies is/are situated.

Posting requirement

Q: Where should the notice of sale be posted?

A: It shall be posted in a conspicious place where the sale
shall be conducted:

a. Sheriffs Office;
b. Assessors Office; and
c. Register of Deed

Q: What is the posting requirement be waived?

A: The posting requirement is jurisdictional and as such,
cannot be waived. The certificate of posting may be waived
but not the actual posting itself.

Publication requirement

Q: In what newspaper shall the notice of sale be published?

A: It shall be published in a newspaper of general circulation
once a week for 3 consecutive weeks.

Q: What is the test to determine the sufficiency of
newspaper of general circulation?

A: It should cater to the general community and not to
specific group or interest only.

Q: When is a paper deemed a newspaper of general
circulation?

A:

1. It must be published for the dissemination of local
news and general information;
2. It must have a bona fide subscription list of paying
subscribers;
3. It must be published at regular intervals; and
4. It must be available to the public in general and not
just to a select few chosen by the publisher,
otherwise, the precise objective of publication of
notice of sale will not be realized;
5. It must not be devoted to the interests or published
for the entertainment of a particular profession,
trade, calling, race or religion.

Need for Republication in case of postponement

Q: When is republication required?

A: In case of postponement, the notice of sale must be
republished once a week for 3 consecutive weeks unless the
notice of sale contains an alternative date and the sale is
subsequently conducted on such date.

Q: Can the publication and posting requirements be waived?

A: No, they are imbued with public policy considerations and
any waiver thereon would be inconsistent with the intent and
letter or the law. It would thus be converting into a private
sale what ought to be a public auction.

Yet, the failure to post a notice is not per se a ground for
invalidating a foreclosure sale provided that the notice
thereof is duly published in a newspaper of general
circulation. The publication accordingly alone is more than
sufficient compliance with the notice-posting requirement.

Personal notice to the mortgagor when and when need not
needed

Q: Is personal notice to the mortgagor of the date, time and
place of the sale required?

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Facultad de Derecho Civil 74
UNIVERSITY OF SANTO TOMAS
A:
GR: No because publication amounts to notice to the whole
world
XPN: Personal amounts to notice to the whole worls unless
personal notice is required by:
1. Stipulation, in which case, it must be complied with
in addition to publication, otherwise, the foreclosure
is void.

Possession by purchaser of foreclosed property

Q: During the period of redemption, is the mortgagee
entitled to possession as a matter of right?

A:

GR: No. During the period of redemption, the mortgagee is
not entitled to possession as a matter of right. It is
discretionary to the court and subject to bond requirement.

XPN: But if the petition for writ of possession is prayed for
after the expiration of the redemption period and
consolidation of title in favor of the mortgagee, the issuance
of the writ is ministerial duty on the part of the court and
bond is not required.

Remedy in case of foreclosure

Q: If there is a balance due to the mortgagee after applying
the proceeds of the sale, is the mortgagee entitled to
recover the deficiency?

A: Yes. However, in case of extrajudicial foreclosures, Act.
3135 does not give a mortgagee the right to recover
deficiency after the public auction sale, neither does it
expressly or impliedly prohibit such recover.

NOTE: To recover deficiency, the extrajudicial foreclosure
must be valid.

Q: Why is the mortgagee entitled to recover deficiency?

A: In both extrajudicial and judicial foreclosures, the
mortgage is but a security and not a satisfaction of the
indebtedness. It is of no importance if the buyer or highest
bidder is the creditor himself.

NOTE: Where a third person is the mortgagor, he is not liable
for any deficiency in the absence of a contrary stipulation.
The action for the recovery of such deficiency must be
directed against the debtor.

CONCEPT OF DEFICIENCY JUDGMENT

Q: Explain the concept of deficiency judgment.

A: If the deficiency is embodied in the judgment, it is referred
to as deficiency judgment. A mortgagee may recover any
deficiency in the mortgage account which is not realized in
the foreclosure sale and that an independent civil action for
the recovery of the deficiency may be filed even during the
period of redemption.

Q: What is the prescriptive period for the action?

A: The action to recover a deficiency after foreclosure
prescribes after 10 years from the time the right of action
accrues.

The mortgagee in both real and chattel mortgages has, by
law, the right to claim for the deficiency resulting from the
price obtained in the sale of the property at public auction.

NATURE OF JUDICIAL FORECLOSURE PROCEEDING

Q: What is the nature of judicial foreclosure proceeding?

A: It is an action quasi in rem which is based on a personal
claim against a specific property of the defendant. Its purpose
is to have the property seized and sold by court order to the
end that the proceeds thereof be applied to the payment of
plaintiffs claim.

Q: What is the result of failure to pay indebtedness?

A: The principal obligation is the money indebtedness and the
subjection of the property is only resorted to upon the failure
to pay the debt. Thus, the money indebtedness is the
principal thing not the foreclosure of the property which is
the only result or an incident of the failure to pay the debt.

NOTE: The fact that the property mortgaged is destroyed is
not ground to reduce the indebtedness secured.

Action for the foreclosure of mortgage survives after the
death of the mortgagor

Q: Does the action for the foreclosure of mortgage survive
after the death of the mortgagor?

A: Yes. It is an action which survives the death of the
mortgagor because the claim against him is not a pure money
claim but an action to enforce a mortgagee lien.
Consequently, the judgment rendered therein may be
enforced by a writ of execution.

Q: What is the remedy?

A: It may be prosecuted against the executor or administrator
independently of the testate or intestate proceedings for the
settlement of the mortgagors estate.


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Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 75
UNIVERSITY OF SANTO TOMAS

NATURE OF POWER OF FORECLOSURE BY EXTRAJUDICIAL
SALE

NOTE: The power to foreclose is not an ordinary agency that
contemplates exclusively the representation of the principal
by the agent but is primarily an authority conferred upon the
mortgagee for the latters own protection.

Q: What is the nature of the power of foreclosure by extra-
judicial sale?

A: It is an ancillary stipulation supported by the same cause
or consideration for the mortgage and forms an essential and
inseparable part of the bilateral agreement. It is proper only
when so provided under a special power inserted in or
attached to the mortgage contract.

NOTE: The power to decide to foreclose or not is the
prerogative of the mortgagee.

STIPULATION OF UPSET PRICE

Q: Is a stipulation of upset price valid?

A: A stipulation in a mortgage of real property fixing an upset
pricethe minimum price at which the property shall be
soldto become operative in the event of a foreclose sale at
public auction is null and void for the property must be sold
to the highest bidder.

It is debatable however if the rule will still apply where the
purchaser happens to be the creditor or mortgagee himself.

EFFECT OF INADEQUACY OF THE PRICE

Q: What is the effect of the inadequacy in the price in
foreclosure sale?

A: Where there is a right to redeem, inadequacy of the price
is not material because the judgment debtor may reacquire
the property or else sell his right to redeem and thus recover
any loss he claims to have suffered by reason of the price
obtained at the auction sale.

Q: Is inadequacy of price sufficient to annul or set aside
foreclosure sale?

A: Mere inadequacy of the price will not be sufficient to
annul or set aside the foreclosure sale. The property may be
sold for less than its fair market value upon the theory that
the lesser the price the easier for the owner of to effect the
redemption so that the low price even works to his
advantage.

NOTE: The value of the property has no bearing on the bid
price at the public auction, provided that it was regularly and
honestly conducted.

WAIVER OF SECURITY BY MORTGAGEE

NOTE: The ME may institute either a:

a. personal action for debt (he may waive the right to
foreclose his mortgage and maintain a personal
action for recovery of the indebtedness) or
b. a real action to foreclose the mortgage. In either
case, he is entitled to obtain a deficiency judgment
for whatever sum might be due after the liquidation
of the property covered by the mortgaged.

Q: What is the nature of these remedies?

A: The remedy is alternative and not cumulative or
successivemortgagee cannot have both remedies since he
has only 1 cause of action.

Q: What are the remedies of the CR holding a real estate
mortgage for the satisfaction of his credit in case the MR
dies?

A:

1. Waive the mortgage and claim the entire debt from
the estate of the MR as an ordinary claim;
2. Foreclose the mortgage judicially and prove any
deficiency as an ordinary claim;
3. 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. This is
an extrajudicial foreclosure which bars any
subsequent deficiency claim against the estate of
the deceased.

Q: Does foreclosure have retroactive effect?

A: A foreclosure sale retroacts to the date of the registration
of the mortgage and that a person who takes a mortgage in
good faith and for valuable consideration, the record showing
clear title to the MR will be protected against equitable
claims on the title in favor of third persons of which he had
no actual or constructive notice.

NOTE: A notice of adverse claim annotated after the
registration of the mortgage but before the foreclosure and
sale at public auction of the property cannot affect the rights
of the ME. Thus, it no longer matters that the annotation of
the sheriffs certificate of sale and the affidavit of
consolidation of ownership was made subsequent to the
annotation of the notice of lis pendens.


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Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 76
UNIVERSITY OF SANTO TOMAS

REDEMPTION

Q: What is redemption?

A: It is the transaction by which the mortgagor reacquires or
buys back the property which may have passed under the
mortgage or divests the property of the lien which the
mortgage may have created.

Q: What is the purpose of redemption?

A: The concept of redemption is to allow the owner to
repurchase or buy back, within a certain period and for a
certain amount, a property that has been sold due to debt,
tax, or encumbrance.

Q: What is the redemption period?

A:

GR: Within one year from the registration of the sale and not
from actual sale.

XPN: If the following requisites are present, the redemption
period is 3 months from the date of the sale or registration,
whichever comes earlier:

1. The mortgagor is a juridical person
2. The mortgagor is a bank, quasi-bank or trust entity
3. The mode of foreclose is extrajudicial

NOTE: The one year redemption period rule still applies if the
mortgagor is a natural person and/or the mortgagee is not a
bank, quasi-bank or trust entity and/or the mode of foreclose
is judicial (but in the latter case, only if the mortgagee is a
bank or a credit institution because if the mortgagee is
different, there is no right of redemption in judicial
foreclosure but only equity of redemption).

Kinds of redemption

Q: What are the kinds of redemption?

A:

1. Equity redemption right of mortgagor in case of
judicial foreclosure to redeem the mortgaged
property after his default in the performance of the
conditions of the mortgage but before the
confirmation of the sale of the mortgaged property.
2. Right of redemption the right of the mortgagor in
case of extra-judicial foreclosure to redeem the
mortgaged property within a certain period from
and after it was sold for the satisfaction of the
mortgaged debt.


EQUITY OF REDEMPTION

Exercised before confirmation of sale

Q: When can the mortgagor exercise the equity of
redemption?

A: The mortgagor must exercise his equity of redemption
before but not after the sale is confirmed by the court. It is
simply the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the
secured debt within the 90-day period after the judgment
becomes final in accordance with Rule 68, or even after the
foreclosure sale but prior to its confirmation.

Q: What if the case is one of judicial foreclosure?

A: No equivalent right of redemption exists.

NOTE: Being an incorporeal right, the value of an equity of
redemption can neither be quantified nor equated with
actual value of the property nor equated with the actual
value of the property upon which it may be exercised.

Acquired by second mortgagee

Q: Describe the right of a second mortgagee?

A: A second mortgagee acquires only the equity redemption
vested in the mortgagor, and his rights are strictly
subordinate to the superior lien of the first mortgagee.

Taking physical possession not necessary for levy

Q: Is taking of possession necessary for levy?

A: To levy upon the mortgagors equity of redemption, it is
not necessary for the sheriff to take physical possession of
the mortgaged property.

RIGHT OF REDEMPTION

Q: What is the period to exercise the right of redemption?

A: The mortgagor may redeem the property at any time
within the term of 1 year from and after the date of the sale,
i.e., the date of registration of the certificate of sale with the
appropriate Registry of Deeds.

Q: Does the filing of an action by redemption to enforce his
right to redeem suspend the running period of the statutory
period to redeem the property?

A: No. It doesnt also bar the purchaser at public auction from
procuring a writ of possession after the period had lapsed,
without prejudice to the final outcome of the action to
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Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 77
UNIVERSITY OF SANTO TOMAS
enforce the right of redemption. It also doesnt suspend the
period to institute an action to annul the foreclosure sale.

GENERAL BANKING LAW OF 2000

The General Banking Law of 2000 (R.A. 8791) now provides
that juridical mortgagors like partnerships and corporations
are barred from the right of redemption of mortgaged
property sold pursuant to an extrajudicial foreclosure, after
the registration of the certificate of foreclosure with the
applicable Register of Deeds. This amendment is open to
constitutional objection of being violative of equal protection
guarantee for it discriminates against corporate or juridical
mortgagors and the prohibition against the impairment of the
obligation of contracts.

Also, R.A. 8791 now limits the redemption period to only 3
months, to begin from the date of the foreclosure sale but
not after the registration of the certificate of foreclosure sale
which ever comes first.

Q: What is the effect of failure to exercise right?

A: The title to the property sold under a mortgagee
foreclosure remains with the mortgagor or his grantee until
the expiration of redemption period. The right of purchaser
at the foreclosure sale is merely inchoate until after the
period of redemption has expired without the right being
exercised.

If no redemption is made within the prescribed period, the
purchaser becomes the absolute owner of the property. He
has the absolute right to a writ of possession which is the
final process to carry out or consummate the extrajudicial
foreclosure. Henceforth, the mortgagor losses his right over
the property.

Q: Is this provision regarding the one-year period to exercise
the right of redemption mandatory?

A: It is only directory and can be extended by agreement of
the parties.

Q: What are the 2 requisites for this agreement of the
parties?

A:
1. voluntary agreement of the parties to extend the
redemption period
2. debtors commitment to pay redemption price on a
fixed date.

Q: What is the effect of the exercise of the right?

A:

1. redemption eliminates from his title the lien created
by the levy or attachment or judgment or
registration of the mortgage thereon.
2. Redemption defeats the inchoate right of purchaser
and restores the property to the same condition as if
no sale had been made
3. It does not give the mortgagor a new title, but
merely restores to him the title freed of the
encumbrance of the lien foreclosed.
4. The exercise of the right of redemption is an implied
admission of the regularity of the foreclosure sale
and steps the mortgagor from later impugning its
validity on that ground

NOTE: What is actually effected where redemption is
exercised is not the recovery of the property since ownership
is never lost. Redemption is inconsistent with the claim of
invalidity of the sale.

Q: What if the mortgaged property is sold to a 3
rd
party?

A: A sale by the mortgagor to a 3
rd
party of the mortgaged
property during the period for redemption transfers only the
right to redeem the property and the right to possess, use
and enjoy the same during the period.

NOTE: Under Rule 39, the judgment debtor remains in
possession of the property foreclosed and sold, during the
period of redemption, but he cannot make a conveyance of
the ownership of the property as said ownership belongs to
the purchaser at the foreclosure sale.

Q: What if the sale is not registered and made without
consent of the mortgagee?

A: The buyer was not validly substituted as debtor, and
hence, had no right to redeem.

Q: What is the effect of an extra-judicial foreclosure effected
with fraud?

A: Such is null and void ab initio. The consolidation of
ownership of the subject property to the mortgagee as the
highest bidder and its subsequent resale to a 3
rd
party are
also without force or effect. The mortgagor is entitled to the
equitable remedy of redemption.

CONFIRMATION BY COURT OF AUCTION SALE IN JUDICIAL
FORECLOSURE

Q: What is the procedure for the equity of redemption right
of the mortgagor?

A:

1. Pay the secured debt within the 120-day period
from the entry of judgment in accordance with Sec.
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 78
UNIVERSITY OF SANTO TOMAS
2, Rule 68 or even after the foreclosure sale but prior
to its confirmation
2. In case of compromise agreement, parties may agree
on the amounts to be paid, when they should be
paid, and the effects of non-payment or violation of
the terms of their agreement

Q: What is the nature of judicial foreclosure or real estate
mortgage?

A: The general rule is that the mortgagor cannot exercise his
right of redemption after the sale is confirmed.

Q: What is the importance of confirmation of the sale of the
mortgaged real property?

A: It cuts off all the rights or interests of the mortgagor and of
the mortgagee and persons holding under him, and with
them the equity of redemption in the property and vests
them in the purchaser. Confirmation retroacts to the date of
the sale. It is a final order not merely interlocutory.

CONTROL OF COURT OVER PROCEEDINGS
BEFORE CONFIRMATION

Q: Who controls the proceedings over the proceedings
before the confirmation?

A: The court retains control of the proceedings by exercising
sound discretion in regard to it either granting or withholding
confirmation as the rights and interests of the parties and
ends of justice may require.

NOTE: The subsequent sale by purchaser to a 3
rd
person of
the mortgaged property does not prevent the court from
granting the mortgagor a period within which to redeem the
property by paying the judgment debt and the expenses of
sale and costs.

Q: Without the confirmation by the court, what is the effect
of acceptance of bid at the foreclosure sale?

A: It does not confer title on the purchaser who is nothing
more than a preferred bidder.

Q: What is the nature of the mortrgagors right of
redemption?

A:

Nature of the mortgagors right of redemption

1. An absolute privilege the exercise of which is entirely
dependent upon the will and discretion of redemptioner.
Thus, there is no legal obligation to exercise the right

The formal offer to redeem is not a distinct step or condition
sine qua non to the filing of an action in court for the valid
exercise of the right of legal redemption.

Q: What then constitutes a condition precedent?

A: Either a formal offer to redeem or the filing of an action in
court together with the consignation of the redemption price
within the reglementary period.

2. A mere statutory privilege it must be exercised in the
mode and within the period prescribed by the statute.

The filing of an action to enforce redemption within the
period is equivalent to a formal offer to redeem and should
the court allow the redemption, the redemptioner should
then pay the amount already determined.

The right on redemption is liberally construed in favor of the
original owner of the property.

By executing a dacion en pago by the mortgagor in favor of
the mortgagee, the former waived the redemption period
normally given a mortgagor.

3. Involves title to foreclosed property

Redemption period NOT interrupted by the filing of an
action for nullity of sale

Q: Is the redemption period interrupted by the filing of an
action for nullity of sale?

A: No.

Q: What will toll the running?

A: What will toll the running of the period is the action to
compute the redemption price.

Q: Who may redeem?

A:

1. The mortgagor
2. His successors
3. Assign
4. Junior encumbrancer

Amount of redemption price

Q: What is the amount of the redemption price?

A:
1. If the mortgagee is a bank, quasi-bank, or trust
entity, the bid price is the:
a. outstanding obligation
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 79
UNIVERSITY OF SANTO TOMAS
b. plus interest stipulated in the mortgage
agreement
c. plus cost and expenses incurred during the
foreclosure less any income derived from the
property,
2. If the mortgagor is an accomodation mortgagor, the
redemption price is the amount of the bid price plus
12% interest per annum
3. If the mortgagee is not a bank, quasi-bank or trust
entity, the redemption price is the amount of the bid
price plus 12% per annum.

Q: What is the redemption price in case of accomodation
mortgagors?

A: Accommodation mortgagors are not liable for the payment
of the loan of the debtor. The liability of the accommodation
mortgagors extends only up to the loan value of their
mortgaged property and not to the entire loan itself. Hence,
it is only just that they be allowed to redeem their mortgaged
property by paying only the winning bid price thereof (plus
interest thereon) at the public auction sale.

Effect of the pendency of action for annulment of sale

Q: Is the filing of an action to nullify the extrajudicial sale a
prejudicial question to the petition filed by the mortgagee
for the issuance of the writ of possession?

A: No, a complaint for annulment of extrajudicial sale is a civil
action and a petition for the issuance of writ of possession is
but an incident to the land registration proceeding hence no
prejudicial question can arise from the two actions.

Q: What is the effect of the pendency of action for
annulment of sale?

A: If the foreclosure is irregular, the mortgagor may file an
action to nullify the sale. Such action however, does not
suspend the running of the redemption period or the
issuance of the writ of possession if such writ is prayed for
after expiration of the redemption period.

Writ of possession

Q: Is the issuance of the writ of possession ministerial or
discretionary?

A: The issuance of the writ of possession after the expiration
of redemption period and consolidation of title is the
ministerial duty of the court. It can be granted ex parte and
not subject to a bond requirement.

Q: To whom can the writ of possession be enforced?

A: Only against:
1. The mortgagor
2. His successors in interest
3. Assigns

Q: Can the writ of possession be enforced against 3
rd

persons?

A: No, it cannot be enforced against third persons whose title
is adverse to the mortgagor, in which case, an action to
recover possession is the appropriate remedy.

Remedy of mortgagee to obtain possession

Q: What is the remedy in case the mortgagee cannot obtain
possession?

A: If a mortgagee cannot obtain possession of the mortgaged
property for its sale on foreclosure, he must bring a civil
action either to:
a. To recover such possession as a preliminary step to
the sale or
b. To obtain judicial foreclosure.

REPLEVIN

Q: What is replevin?

A: It is the appropriate action to recover possession
preliminary to the extra-judicial foreclosure of a chattel
mortgage.

Q: Who can institute replevin suit?

A: It is not only the owner but also a person entitled to the
possession of the property can institute a replevin suit.

Q: When does a mortgagee become a transferee?

A: He becomes a transferee only after acquiring the property
in the foreclosure sale and subsequently consolidates his title
to it.



ACT 3135

Q: What are the stages in extra-judicial foreclosure?

A:

1. Execution of contract of loan and REM agreement
with the corresponding SPA;
2. Default of the mortgagor-debtor either by:

a. Non-payment; or
b. Violation of the terms of the loan or REM
agreement.

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 80
UNIVERSITY OF SANTO TOMAS
3. Filing of petition for sale with Clerk of Court who acts
as ex-officio sheriff. Then, the clerk of court will
raffle it among the sheriffs who will conduct the
foreclosure sale once given the authority to do so;

Q: Where should the petition be filed? Is it subject to the
rules on venue?

A: It is not subject to the rules on venue. The petition is filed
where the property is located.

Q: What if the mortgaged properties are located in different
places or provinces?

A: In case the mortgaged properties are located in different
provinces, the venue of the extrajudicial foreclosure
proceedings is the place where each of the mortgaged
property is located.

Q: Will the above rule violate the principle of indivisibility of
the mortgagee?

A: No. The principle of indivisibility of the mortgagee states
that all the mortgaged properties will answer for the
mortgage debt and the partial payment of the debt does not
extinguish that part paid corresponding to the mortgaged
properties.

NOTE: There is no more indivisibility of mortgage after the
foreclosure. The mortgagor can redeem on a piece-meal
basis.

Q: What is the prescriptive period of a mortgage action?

A: It prescribes in 10 years from the time the right of action
accrues.

Q: When does the right of action accrue?

A: It accrues from the time the mortgagor defaults in the
payment of his obligation to the mortgagor defaults in the
payment of his obligation to the mortgagee and not from the
time of the execution of the mortgage contract;

4. Compliance with certain jurisdictional requirements:

a. Publication- in a newspaper of general
circulation once a week for 3 consecutive
weeks; and
b. Posting- of the notice of sale for not less than 20
days in at least 3 public/conspicuous places in
the province or municipality where the property
is located.

NOTE: A certificate of posting is not indispensable for the
validity of an extra-judicial foreclosure sale of real property.
What the law requires is the posting of the notice of sale and
not the certificate of posting.

5. Foreclosure- the remedy available to the mortgagee
by which he subjects the mortgaged property to the
satisfaction of the obligation to secure which the
mortgage was given
6. Registration of sale with the Register of Deeds

NOTE: This pertains to the annotation of the sale to the
Transfer Certificate of Title on file with the Register of Deeds

7. Redemption the mortgagor reacquires or buys
back the property, which may have passed under the
mortgage
8. Consolidation of title

Q: How is the title consolidated?

A: By filing an affidavit with the Register of Deeds.

Q: What must the affidavit of consolidation of title indicate?

A: It must indicate the relevant dates to show mortgagors
failure to redeem within the allowable time. This enables the
mortgagee to acquire full ownership over the property. His
inchoate right ripens to full ownership.

9. Cancellation of title of the mortgagor and issuance
of a new title in favor of the mortgagee

Q: What is the basis of this?

A: The basis of which is the order of court confirming the sale.

10. Petition for writ of possession

Q: Is there a need to file an ejectment suit?

A: No. That would be very costly and although a summay
proceeding, ejectment cases take long period of time.

Q: What is writ of possession?

A: Here, the mortgagee employs force to oust the mortgagor
from the property.

Q: Can this writ of possession be issued during the
redemption period?

A: This writ may be even issued during the redemption
period.

Q: Is a bond required?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 81
UNIVERSITY OF SANTO TOMAS
A: Yes, This writ may be even issued during the redemption
period provided the mortgagee is issued a bond but the grant
of which is discretionary on the part of the court.

Q: What if petition for the writ is filed after the expiration of
the redemption period?

A: The issuance of which is ministerial on the part of the
court. This writ can be issued without the issuance of a bond;
in fact, it can even be issued ex parte.

Q: Is the writ suspended by the mere filing of the mortgagor
of an action to annul the foreclosure sale?

A: No.

Publication requirement

Q: Is there a need for personal notice?

A: No. The publication takes the place of the notice.

XPN:

1. When the mortgagee assumes the obligation to
notify the mortgagor
2. unless so stipulated.

Q: What is meant by once a week for 3 consecutive
weeks?

A: A period of 7 days, inclusive of the first day of publication.
The publication must be made 7 days apart.

Q: What happens when the foreclosure sale is postponed?

A: The notice of sale must be republished once a week for 3
consecutive weeks, otherwise, foreclosure is invalid.

Q: What is the effect of loss of the affidavit of publisher?

A: The presumption of regularity in the performance of duty
is not applicable. The affidavit must be produced, otherwise,
there is no such publication, hence, no valid public sale.

Republication

Q: What is the rule in case of republication?

A:

GR: Republication is absolute

XPNs:

1. The publication also states an alternative date and
the sale pushed through on that date
2. The sale was not finished and is continued the
followi8ng day until completed
3. When there is waiver

Q: What is the effect of clerical errors?

A: Clerical errors in the name of the mortgagor and the
technical description in the notice of sale are not sufficient to
annul a foreclosure.

Q: Can the notices required by law be waived?

A: No. Notices are given to secure bidders and prevent
sacrifice of property.

Two-bidder rule not applicable

NOTE: The case of PS Bank v. Certeza scrapped the 2-bidder
rule. Neither Act No. 3135 nor the previous circulars issued by
the Court governing extrajudicial foreclosures provide for a
similar requirement. The two-bidder rule is provided under
P.D. No. 1594 and its implementing rules with respect to
contracts for government infrastructure projects because of
the public interest involved. Although there is a public
interest in the regularity of extrajudicial foreclosure of
mortgages, the private interest is predominant. The reason,
therefore, for the requirement that there must be at least
two bidders is not as exigent as in the case of contracts for
government infrastructure projects. It is no longer required
to have at least two bidders in an extrajudicial foreclosure of
mortgage

Q: Does the two-bidder rule apply in case of foreclosure of a
real estate mortgage?

A: No.

Foreclosure sale

Q: How is the foreclosure sale conducted?

A: The highest bidder wins.

a. if the mortgagee wins, there is no need to pay cash
to the mortgagor, and thus, the bid price would
simply be applied to the amount of obligation
b. if the highest bidder is not the mortgagee, then the
purchaser needs to pay cash and remit his payment
to the mortgagee.

Failure to implead subordinate lien holders

Q: What is the effect of failure to implead subordinate lien
holders to the mortgage as defendants in foreclosure
proceedings? Would that render the proceedings not valid?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 82
UNIVERSITY OF SANTO TOMAS
A: No. The only effect of failure on the part of the mortgagee
to make the subordinate lien holder a defendant is that the
decree of foreclosure in a suit to which the holders of a
second lien are not parties leaves equity of redemption in
favor of such lien holders unforeclosed and unaffected.

Right of redemption

Q: When must the buyer exercise the right of redemption?

A: 1 year from the date of registration of the certificate of
sale.

Q: What is the effect of the exercise of the right of
redemption?

A: The exercise of the right of redemption is an implied
admission of the regularity of the foreclosure sale and estops
the mortgagor from later impugning its validity on that
ground. Redemption is inconsistent with the claim of the
invalidity of the sale.

Q: When does the 1 year period for redemption not apply?

A: It does not apply to real estate mortgages constituted by
juridical persons in favor of:

a. bank
b. quasi-bank
c. trust entity

Q: The period of redemption can only be exercised until but
not after the registration of the certificate of sale or 3
months from foreclosure, whichever is earlier, under what
conditions?

A:

1. mortgagor must be a juridical person that is either a
partnership or a corporation
2. morgtagee is:
a. bank
b. quasi-bank
c. trust entity
3. foreclosure is done extra-judicially

Q: Primetime Corp. obtained a P10 M, 5-year loan from the
Universal Bank. As security for the loan the following
securities were agreed:
a. a real estate mortgage over the land and building
owned by Primetime Corp
b. joint and several promissory note of Mr. Primo
Timbol, the President of Primetime Corp.
c. a real estate mortgage over the residential house
and lot owned by Mr. Timbol.
The Primetime Corp. was not able to pay the obligation.
Thus, the real estate was foreclosed.

A:

a. With respect to the real estate mortgage over the
land and building owned by Primetime Corp., a
juridical body, the period of redemption is only 3
months
b. With respect to the real estate mortgage over the
house and lot owned by Mr. Timbol, the period of
redemption is 1 year from the date of registration of
the certificate of sale.

Q: What if the mortgagor is an estate?

A: The issue is not yet settled. Probably 3 months, since it is
already a judicial person since the mortgagor in such case has
already died.

Right of redemption vs. repurchase

Q: Differentiate the Right of redemption and repurchase.

A:

RIGHT OF REDEMPTION REPURCHASE
Becomes functus officio
on the date of expiry and
The exercise of the right
of redemption after the
period is not really one
of redemption but
repurchase
By force of law; the
purchaser at public
auction is bound to
accept the redemption
No such obligation; the
law will not compel the
purchaser to resell

Redemption Price

Q: What is the rule as to the redemption price in case the
mortgagee is a banking institution?

A: The redemption price is the amount fixed by the court in
the order of execution or the amount due under the
mortgaged deed.

Q: How about in case of accommodation mortgagors?

A: Accomodation mortgagors are not liable for the payment
of the loan of the debtor. The liability of the accommodation
extends only up to the loan value of their mortgaged property
and not to the entire loan itself. Hence, its only just that they
be allowed to redeem their mortgaged property by paying
only the winning bid price thereof (plus interest thereon) at
the public auction.

Q: What is the effect of filing an action to annul the
foreclosure sale during the one year redemption period?

NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 83
UNIVERSITY OF SANTO TOMAS
A: It will not toll the running of the 1 year redemption period.

NOTE: A judicial action instituted for the sole purpose of
determining the amount of the redemption price, if before
the expiration of the original period to redeem, has the effect
of a valid exercise of the right of the right to redeem and will
suspend the running of the period of redemption even if
unaccompanied by a simultaneous tender of the redemption
price.

Summary

AMOUNT
Banks
Quasi-banks
Trust entity
Outstanding obligation
+
Interest stipulated under
the agreement
Non-banks Bid price
+
Interest of 12% per annum

NOTE: In this case, there is
encouragement for a higher
bid to make the
redemption more difficult
Mortgagee is a bank but
mortgagor is an
accommodation mortgagor
Value of the loan

Q: Are the bidder obliged to bid based on the FMV?

A: No.

XPN: Grossly inadequate/shocking to the conscience

Q: What if the right of redemption is exercised beyond the 1
year period, what will be the interest rate?

A: The interest rate is the stipulated interest rate for the one
year period but beyond such 1 year period, an interest rate of
12% per annum shall be imposed.

Owner of the mortgaged property

Q: Who is the owner of the mortgaged property?

A: During the redemption period, the mortgagor is still the
owner. Hence, he may still execute attributes of ownership
during the period such as executing a second mortgage on
the same subject property.

Q: The mortgagee introduced improvements on the
property sought to be redeemed. Will the cost of the
improvements be imputed to the redemption price?

A: No, to rule otherwise would defeat the purpose of the law.

Q: What is the remedy if the mortgagor failed to redeem but
refuses to surrender the certificate of title?

A: The court may order the Register of Deeds to register the
final deed of sale because otherwise the buyer will never be
able to consolidate his title.

Q: What if the property is in the possession of the lessee
whose lease has not terminated?

A: The mortgagee is entitled to the issuance of writ of
possession even if the property is in the possession of a
lessee whose lease has not expired

XPNS:

a. The lease had been previously registered in the
Registry of Property
b. Despite the non-registration, the mortgagee had
prior knowledge of the existence and the duration of
the lease (actual knowledge being equivalent to
registration)

Remedies of 3
rd
parties

Q: What are the remedies available in favor of 3
rd
parties
adversely affected by the order for the issuance of the writ
of possession in favor of the winning bidder?

A:

1. Terceria to determine whether the sheriffs has
rightfully or wrongfully taken hold of the property
not belonging to the judgment debtor or obligor
2. An independent separate action to vindicate their
claim of ownership and/or possession over the
foreclosed property.

Q: What is the effect of filing a collection case?

A: It is tantamount to abandonment of the remedy to
foreclose the REM. The principle applies even though the
mortgage was constituted on the property of a 3
rd
party
mortgagor and collection suit was filed before foreign courts.

JUDICIAL FORECLOSURE

Q: What are the stages in judicial foreclose?

A:

1. File a complaint against the mortgagor together
with the subsequent lien holders, otherwise equity
of redemption will not be divested
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 84
UNIVERSITY OF SANTO TOMAS
2. Hearing
3. Judgment
4. Entry judgment- this is the reckoning point whereby
the period of equity of redemption is computed
5. 90-120 days from the entry of judgment for the
mortgagor to pay his debt, as determined by the
court
6. Upon failure to pay, the mortgagee must file a
Motion for Execution foreclosing the mortgage
7. Execution sale
8. Mortgagee to file Motion for Confirmation of Sale

Q: What is the purpose of the Motion for Confirmation of
Sale?

A: Its purpose is to declare the sale valid in accordance with
the law.

9. Issuance of the order confirming the sale

Q: Is this order confirming the sale appealable?

A: Yes because it is not an interlocutory order. Thus, the
mortgagee must wait until the finality of the order

10. Cancellation of the title of the mortgagor and
issuance of new title to the mortgagee

Q: What is the basis of this?

A: The order of the court confirming the sale

11. Motion for writ of possession from the same court
that ordered the foreclosure

Q: When can you exercise the right of redemption in judicial
foreclosure?

A:

GR: There is no right of redemption in judicial foreclosure,
only equity of redemption

XPN: If the mortgagee or bidder is a:

a. Bank
b. Credit institution, the mortgagor has 1 year from the
registration of order confirming the sale and the
certificate of sale to redeem the property

EQUITY OF REDEMPTION

Q: What is equity of redemption?

A: The right of the mortgagor not to be divested of the
ownership of the mortgaged property and to stop the
foreclosure sale by paying the mortgage debt within 90-120
days from entry of judgment and even beyond, until finality
of order confirming the sale.

EQUITY OF
REDEMPTION
RIGHT OF REDEMPTION
GR: Only in Judicial
foreclosure

XPN: In case of extra-
judicial foreclosure
involving a bank as
mortgagee and a
juridical person as
mortgagor

GR: There is no right of
redemption in juridical
foreclosure, only equity
in redemption

XPN: If the mortgagee or
bidder is:
a. Bank
c. Credit
institution, the
mortgagor has
1 year from the
registration of
order
confirming the
sale and the
certificate of
sale to redeem
the property

To whom conferred
May be acquired by a
second mortgagee in
case of sale of property
To the
a. mortgagor,
b. successors-in-
interest
c. or any
judgment
creditor of the
mortgagor
Period
In judicial foreclosure:
90-120 days from entry
of judgment or until
finality of order
confirming sale
GR: Extra-judicial
foreclosure under Act
3135-1 year from the
date of registration of
certificate of sale

XPN: in banks, 3 months
from the date of actual
sale or registration
whichever is earlier
When exercised
After the entry of
judgment but before
foreclosure sale;
After foreclosure sale
but before confirmation
sale
Only after foreclosure
sale





NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 85
UNIVERSITY OF SANTO TOMAS
ACT 3135 v. RULE 68 of Rules of Court
2


2
RULE 68
FORECLOSURE OF REAL ESTATE MORTGAGE

Section 1. Complaint in action for foreclosure.

In an action for the foreclosure of a mortgage or other encumbrance upon
real estate, the complaint shall set forth the date and due execution of the
mortgage; its assignments, if any; the names and residences of the
mortgagor and the mortgagee; a description of the mortgaged property; a
statement of the date of the note or other documentary evidence of the
obligation secured by the mortgage, the amount claimed to be unpaid
thereon; and the names and residences of all persons having or claiming an
interest in the property subordinate in right to that of the holder of the
mortgage, all of whom shall be made defendants in the action.

Sec. 2. Judgment on foreclosure for payment or sale.
If upon the trial in such action the court shall find the facts set forth in the
complaint to be true, it shall ascertain the amount due to the plaintiff upon
the mortgage debt or obligation, including interest and other charges as
approved by the court, and costs, and shall render judgment for the sum so
found due and order that the same be paid to the court or to the judgment
obligee within a period of not less than ninety (90) days nor more than one
hundred twenty (120) days from the entry of judgment, and that in default of
such payment the property shall be sold at public auction to satisfy the
judgment.

Sec. 3. Sale of mortgaged property; effect.
When the defendant, after being directed to do so as provided in the next
preceding section, fails to pay the amount of the judgment within the period
specified therein, the court, upon motion, shall order the property to be sold
in the manner and under the provisions of Rule 39 and other regulations
governing sales of real estate under execution. Such sale shall not affect the
rights of persons holding prior encumbrances upon the property or a part
thereof, and when confirmed by an order of the court, also upon motion, it
shall operate to divest the rights in the property of all the parties to the
action and to vest their rights in the purchaser, subject to such rights of
redemption as may be allowed by law.
Upon the finality of the order of confirmation or upon the expiration of the
period of redemption when allowed by law, the purchaser at the auction sale
or last redemptioner, if any, shall be entitled to the possession of the
property unless a third party is actually holding the same adversely to the
judgment obligor. The said purchaser or last redemptioner may secure a writ
of possession, upon motion, from the court which ordered the foreclosure.

Sec. 4. Disposition of proceeds of sale.
The amount realized from the foreclosure sale of the mortgaged property
shall, after deducting the costs of the sale, be paid to the person foreclosing
the mortgage, and when there shall be any balance or residue, after paying
off the mortgage debt due, the same shall be paid to junior encumbrancers
in the order of their priority, to be ascertained by the court, or if there be no
such encumbrancers or there be a balance or residue after payment to them,
then to the mortgagor or his duly authorized agent, or to the person entitled
to it.

Sec. 5. How sale to proceed in case the debt is not all due.
If the debt for which the mortgage or encumbrance was held is not all due as
provided in the judgment, as soon as a sufficient portion of the property has
been sold to pay the total amount and the costs due, the sale shall
terminate; and afterwards, as often as more becomes due for principal or
interest and other valid charges, the court may, on motion, order more to be
sold. But if the property cannot be sold in portions without prejudice to the
parties, the whole shall be ordered to be sold in the first instance, and the
entire debt and costs shall be paid, if the proceeds of the sale be sufficient
therefor, there being a rebate of interest where such rebate is proper.

Sec. 6. Deficiency judgment.
If upon the sale of any real property as provided in the next preceding
section there be a balance due to the plaintiff after applying the proceeds of
the sale, the court, upon motion, shall render judgment against the

ACT 3135 RULE 68 of Rules of
Court
There should be a
special power of
attorney
No special power of
attorney is required
If not registered, the
only remedy is the
judicial foreclosure
Can extra-judicially
foreclose even if not
registered
Process:

1. File a complaint
for judicial
foreclosure
2. Implead the
junior
mortgagors,
otherwise, the
equity of
redemption is
reserved to
them
3. Order
confirming the
sale


ACTION FOR FORECLOSURE

Q: What is the effect of filing of action for foreclosure?


defendant for any such balance for which, by the record of the case, he may
be personally liable to the plaintiff, upon which execution may issue
immediately if the balance is all due at the time of the rendition of the
judgment; otherwise, the plaintiff shall be entitled to execution at such time
as the balance remaining becomes due under the terms of the original
contract, which time shall be stated in the judgment.

Sec. 7. Registration.

A certified copy of the final order of the court confirming the sale shall be
registered in the registry of deeds. If no right of redemption exists, the
certificate of title in the name of the mortgagor shall be cancelled, and a new
one issued in the name of the purchaser.

Where a right of redemption exists, the certificate of title in the name of the
mortgagor shall not be cancelled, but the certificate of sale and the order
confirming the sale shall be registered and a brief memorandum thereof
made by the registrar of deeds upon the certificate of title. In the event the
property is redeemed, the deed of redemption shall be registered with the
registry of deeds, and a brief memorandum thereof shall be made by the
registrar of deeds on said certificate of title.

If the property is not redeemed, the final deed of sale executed by the sheriff
in favor of the purchaser at the foreclosure sale shall be registered with the
registry of deeds; whereupon the certificate of title in the name of the
mortgagor shall be cancelled and a new one issued in the name of the
purchaser.

Sec. 8. Applicability of other provisions.
The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable to the
judicial foreclosure of real estate mortgages under this Rule insofar as the
former are not inconsistent with or may serve to supplement the provisions
of the latter.
NOTES ON SPECIAL COMMERCIAL LAWS
Kenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho Civil 86
UNIVERSITY OF SANTO TOMAS
A:

GR: It bars the action for collection

XPN: In case of deficiency

Mortgage by spouses

Q: What if the mortgage was entered into by the spouses?

A: The surviving spouse should also be impleaded. The
surviving spouse is an indispensable party

DRAGNET CLAUSE

Q: What is a dragnet clause?

A: Such agreement that covers future debts without
executing another fresh agreement or amendment.

NOTE: An agreement with a dragnet clause is valid. In case of
chattel mortgage, there is a need to execute a fresh
agreement or an agreement which modifies the previous
ones.

Currency

Q: What if the agreement provides that the loan should be
in peso but the actual payment was made in dollars? What
should be the currency of the redemption price?

A: It is the currency stipulated, thus, the payment should be
in the currency stipulated.




REFERENCES

DIVINA, Nilo T., Handbook on Philippine Commercial Law
(2
nd
Edition), 2010, CIBI Foundation, Inc.
Divina Notes on Banking and Special Commercial Laws
2012
UST Golden Notes, 2011
Marx Notes




NOTES