BANKING FINAL EXAMINATION

1. Explain the after-incurred-obligation clause in real estate mortgages, taking into

account Prudential Bank v. Alviar
After-incurred obligation
o Future obligation secured by a REM
o Valid: Art. 2091, CC: A pledge or mortgage may secure any
obligation
o Dragnet clause: A prior REM will extend the security purpose of
such to a newly incurred obligation
o Prudential Bank v. Alviar:
! As long as the parties intended that the REM will cover other
obligations, then the dragnet clause will be valid and the REM
will apply to the AIO
! BUT even if there is a valid dragnet clause, if a loan is secured
by a separate security, such AIO will not be part of the
dragnet clause (Reliance of the security)
x BEC: The separate security will answer for the newly
incurred obligation
x UNLESS: The separate security is not enough to
answer for the subsequent loan
In CM: There can be NO AIO bec. This would contradict with the Affidavit of
Good Faith accomplished during its execution
o ACME Shoe Rubber case
! However, it can be used as evidence to compel the
mortgagor to reform the previous CM/ create a new one
x Until then: Mortgagee has no COA or preferential
rights over the property covered
2. What is a due diligence investigation?
Due diligence investigation
o Higher level of diligence expected of banks in their investigation on
the value of their acquisitions
o The careful examination and inquiry with regard to the entitys
documentation and records, and assets and liabilities
o Done to ascertain the true value of the assets is close to the real
value of the assets
Types
o Acquisition
! Relevant in mergers/ consolidation
! Of a companys financial documents, incorporation
documents, assets, etc.
! To determine WON it is profitable and viable to acquire a
certain company (PLDT case)
o Prospectus

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Relevant in initial public offering or subsequent sale of

Of the securities being offered
To determine the value of the property being offered as a
security so the bank can decide to accept or deny the
security

3. Explain the so-called lender-controlled cash waterfall account in project

financing.
Mode of payment in project financing
An asset is built through an SPV by different sponsors
Sponsors contribute to the fund for the construction of the asset
Asset generates funds/ payment
Payments deposited to a main account
Payments deposited to the main account automatically trickle down to the
sub-accounts " pertain to the different obligations incurred by building the
asset
4. What are derivatives? What does ISDA stand for?
Derivatives
o Financial instruments, where the value is derived from the price of
one or more assets:
! Equity securities
! Fixed income securities
! Foreign currencies
! Commodities
o Tool to manage exposure to risk from the underlying assets by
hedging the assets from risk exposures
o Examples:
a. Option
i. Call option holder has the right to buy the asset at a
specified price on or before the settlement date
ii. Put option holder has the right to sell the asset at a
specified price on or before the settlement date
b. Forward contract for the purchase and sale of commodities/
currencies at a future date at a stipulated price; Gain/ loss
depends on the gap between the contracted price and current
market price
c. Currency swap Simultaneous purchase and sale of
currencies between the same parties at a future date
ISDA
o International Swaps and Derivatives (f: Dealership) Association
o Organization which aims to standardize derivative transactions
globally
o Created the ISDA Master Agreement a uniform agreement that
facilitates over the counter transactions of derivatives

5. Explain the significance of the Allied Bank case in trust-receipt transactions?

Trust receipt transaction
o Transaction where the entruster (bank) delivers goods to the
entrustee for the latter to sell
o The proceeds shall be delivered to the bank, to the extent of the
amount the entrustee owes the bank
o Obligations of the entrustee:
a. To hold and preserve the proceeds of the sale and turn them
over
b. To hold the object of the trust and its proceeds separately and
distinctly from his own property
c. To return the object to the entrustor in case it isnt sold
d. To abide by any other agreement in the trust agreement
Allied Banking v. Ordoez (1990)
o Goods not intended for sale may be subject of a trust receipt
transaction
! Includes all properties included in the production of the goods
to be sold
! Effect: The penal provisions of the Trust Receipts Law cover
goods not intended for sale, such that violations under the
TRL constitute estafa
x Violated by: Any transaction involved with the business
not properly held in trust by the entrustee
x Regardless of intent, as TRL is a special law, and so is
malum prohibitum
Ng v. People (2010)
o ONLY: (1) goods for sale; or (2) goods intended for sale may be the
subject of a TRT
! Referred to PD 115 whereas clause
! Defn of TR: Entrustee obligates himself to sell or otherwise
dispose of the goods, documents, and instruments
6. What is the period of redemption in an extrajudicial foreclosure of a real estate
mortgage?
GR: One year from foreclosure sale, to be counted from the registration of
the certificate of sale in the Register of Deeds
EXC: If mortgagor is a juridical person + mortgagee is a bank Only up to
registration of the certificate of sale (max. 3 months) (Sec. 47, GBL)
o EXC to EXC: Foreign banks cannot benefit from the short time
period in line with RA 133, which requires judicial foreclosure
7. State the rule on the registration of securities under the Securities Regulation
Code. Also state the exceptions to that rule.

GR: ALL sales and transfers of securities must be recorded in the SEC (Full
and fair disclosure policy SRC is a truth in securities law)
o Sec. 8, SRC: A registration statement must be filed and approved
by the SEC before securities are sold or offered for sale or
distribution
o Sec. 56: Misrepresentation in the registration statement = liability
o RATIO:
! To balance the asymmetry of information
! To allow investors to be properly guided and informed and
protect them from fraud
EXC:
a. Exempt securities still exempt even when resold
i. Issued by government, agencies, depts.
x Govt never insolvent
ii. Issued by foreign governments
x International relations
iii. Issued by receiver/ trustee in bankrupt entity
x Special rules and regulations
iv. Those the sale/ transfer under the Insurance
Commission, HLURB, BIR
x Special rules and regulations
v. Those insured by banks except its own shares of stock
x Regulated by the BSP
b. Exempt transactions applies only to the present exempt
transaction bec. Of the person or circumstances
i. Sale to qualified buyers banks, investment
companies, registered investment houses, etc.
ii. Private placement proper sale of securities by the
issuer to <20 people in the PHL during any 12 month
period to a non-qualified buyer
iii. Judicial sale, or sale by receiver, admin, trustee
c. Offshore sale territoriality

8. Distinguish a covered transaction report from a suspicious transaction report

under the Anti-Money Laundering Act.
9. What is a hold out?
10. What is a comfort letter? Why is this used in lieu of a guarantee?
Comfort letter
o Letter by parent company to lender
! To induce the latter to extend credit accommodations w/
formers subsidiary

o Not a guaranty: Parent company merely relays its intention to

maintain the fiscal integrity of the subsidiary/ not to dilute its
stockholdings
! Provides the lender cold comfort
! Does not incur any liability or a defined legal commitment, just
based on moral obligation
o AKA Keep well letter, letter of awareness
Reasons why comfort letters are resorted to:
a. PC undertook a negative covenant to make a guaranty
b. PC does not want the transaction footnoted in its financial
statement
c. Internal regulation of PC prohibit guaranty

11. What is an Omnibus Agreement? Explain its purpose.

Project financing requires huge capital
Sponsors create an SPV to finance the project
The project is then pledged or mortgaged to the SPV via an Omnibus
Agreement to act as security
12. How would you structure an assignment of receivables so that it will not be
deemed a chattel mortgage or a pledge, and no dacion en pago will result?
Word the assignment in such a way so as to show that:
o There is an absolute transfer (and not just a lien) to ensure
payment
o It is not a dacion The loan will not be considered paid without an
express application of the money assigned
o There shall be reconveyance Should the borrower be fully paid,
the assignment will be reconveyed to his account
o It is not a pledge This is not a pledge
13. Explain the significance of Traders Royal Bank v. Castaares in conventional
compensation.
A conventional compensation allows the set-off of obligations despite the
absence of some of the requisites for legal compensation. Traders Royal
Bank confirms this principle
Requisites of legal compensation:
o Reciprocally creditors and debtors of each other
o Debts involve money or a fungible thing of the same kind
o Due and demandable
o Liquidated
Requisites of conventional compensation: (Traders Royal Bank)
o Parties can fully dispose of the credit he seeks to compensate
o Agree to the extinguishment of their mutual credits

14. What is securitization? Why is it necessary to effect a true sale of receivables in a

securitization transaction?
Sec. 3, Securitization Act:
o Seller/ originator sells assets on a without recourse basis to an SPE
(SPC/ trust)
! Sec. 12: Must be a true sale Irrevocable and without recourse
x So that the transfer is beyond the reach of the creditors
x Ownership of the assets must not be an issue
x If not a true sale, legal dispute
o SPE issues asset-backed securities to investors " financing the
purchase price
! Requires SEC approval
15. When Raymonds loan was not paid on time, Reliable Bank extrajudicially
foreclosed the real estate mortgage securing his loan. After five months from the
registration of the certificate of sale, Raymond contacted Reliable Bank to redeem
the property, but Reliable Bank advised him that he could no longer do so
because his up-to-three-months right of redemption had already elapsed. Is
Reliable Bank right?
NO. Sec. 47, GBL: Right of redemption may be exercised within one year
from foreclosure sale, to be counted from the registration of the certificate
of sale in the Register of Deeds
3 month period only applies if mortgagor is a juridical person + mortgagee
is a bank
HERE: Raymond is a natural person
16. What is project financing?
Financing of an economic asset
which generates sufficient cash flows to cover operating costs and debt service
for a reasonable length of time, less than the economic life of the asset
How it works:
o One or more firms sponsors the project, providing the equity
capital needed, and funneling this into an SPV
o Remainder to be financed through external loans
o SPV builds the project and operates/ transfers it, accdg to the
agreement
o Income is made subject to a Trust Retention Agreement
o Lenders appoint a trustee
o Trustee opens a parent account which shall receive all the
revenues of the asset
o The revenues will cascade into sub-accounts within the parent
account (cash waterfall)
17. Company X borrowed P10 million from Bank Y and executed a pledge over
certain shares of stock, as well as a real estate mortgage, in Bank Ys favor to

secure the borrowing. Subsequently, Company X defaulted and Bank Y

immediately foreclosed the pledge. The net proceeds from the foreclosure sale
amounted to P7 million. To recover the shortfall, Bank Y moved to foreclose the
real estate mortgage, but Company X objected. Is the objection justified?
YES. Art. 2115, CC: Foreclosure of the pledge extinguishes the primary
obligation
o Hence: pledge cannot recover the shortfall
! Stipulation to the contrary = VOID
! Loan = primary contract; Mortgage = accessory " cannot stand
w/o principal
! Regardless of WON proceeds from the foreclosure equal the
amount of the loan
o HERE: Bank can no longer recover the deficiency because it already
foreclosed the pledge
o Bank should have: Foreclosed the REM and then the pledge, if there is
deficiency still
! This would not have extinguished the debt