LETTERS OF CREDIT

A. DEFINITION
Letters of credit are those issued by one merchant to
another or for the purpose of attending to a commercial transaction.
(Art. 567 Code of Commerce).
A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable interest of
seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying. (Bank
of America, NT and SA v Court of Appeals et. al., GR No. 105395,
Dec. 10, 1993)
A letter of credit is defined as an engagement by a bank or
other person made at the request of a customer that the issuer will
honor drafts or other demands for payment upon compliance with
the conditions specified in the credit. (Prudential Bank v.
Intermediate Appellate Court et. al., GR. No. 74886, Dec. 8, 1992)
A letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods
to a third person and assumes responsibility for payment for debt
therefore to the addressee. (Transfield Philippines v. Luzon Hydro
Corp.)
B. GOVERNING LAWS
Letters of Credits have long been and are still governed by
the provisions of the Uniform Customs and Practice for
Documentary Credits of the International Chamber of Commerce.
(MWSS v. Daway, GR. No. 160732, June 21, 2004)
In Bank of P.I. vs De Nery (35 SCRA 256, 1970), the
Supreme Court pronounced that the observance of the U.C.P. is
justified by Article 2 of the Code of Commerce. Article 2 of the Code
of Commerce enunciates that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall
be governed by the usages and customs generally observed.
C. NATURE OF LETTER OF CREDIT
1. A letter of credit is nothing more than a commitment by the issuer
that the party in whose favor it is issued and who can collect upon
it, will have his credit against the applicant of the letter duly paid in
the amount specified therein. a letter of credit which states that the
bill shale be duly honored on presentation is not a contract between
the applicant and the issuing bank or between the applicant and the
Central Bank. The contract in which the applicant is a party and on
which he can claim a violation of vested rights is his application for
the issuance of the letter of Credit (Climaco vs. Central Bank of the
Phils. Vol. *, Court of Appeals Reports 414, No. 34, 691-R, Sept. 16,
1965)
2. Letters of credit under the Code of Commerce, are not negotiable
instruments being issued in favor of a specified person and not to

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order. Article 568 (1) of the Code of Commerce provides that the
essential conditions of letters of credit shall be:
(1)To be issued in favor of a definite person and not to
bearer.
3. The bearer of the letter of credit is not considered bound to receive
the money; he may use the letter as he pleases, and the contracts
an obligation only by receiving the money. (Bouviers Law
Dictionary)
Art. 572 of the Code of Commerce provides that If the
bearer of a letter of credit does not make use thereof within the
period agreed upon with the drawer, or, in default the period fixed,
within six months, counted from its date, in any point in the
Philippines, and within twelve months outside thereof, it shall be
void in fact and in law.
4. Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
documents and is thus a commitment by the issuer that the party in
whose favor it is issued an who can collect upon it will have his
credit against the applicant of the letter, duly paid in the amount
specified in the letter. They are effect absolute undertakings 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 and while they are security arrangements, they
are not converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and
other required shipping documents are presented to it. They are
definite undertakings to pay at sight once the documents stipulated
therein are presented. (MWSS v. Daway, GR. No. 160732, June 21,
2004)
D. PARTIES TO A LETTER OF CREDIT
As enumerated by the Supreme Court in Lee vs. Court of Appeals,
GR. No. 117913, Feb. 1, 2002, the following are the parties to the
letter of credit:
1. The buyer or importer;
2. The seller, also referred to as the beneficiary;
3. The opening bank which is usually the buyers bank
which actually issues the letter of credit;
4. The notifying bank which is the correspondent of the
opening bank through which it advises the beneficiary
of the letter of credit;
5. The negotiating bank which is usually any bank in the
city of the beneficiary. the services of the notifying bank
must always be utilized if the letter of credit is to be
advised to the beneficiary through cable;
6. The paying bank which buys or discounts the drafts
contemplated by the letter of credit if such draft is to be
drawn on the opening bank or another designated bank
not in the city of the beneficiary. As a rule, whenever
the facilities of the opening bank are used, the
beneficiary is supposed to present his drafts to the
notifying bank for negotiation; and

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7. The confirming bank which , upon the request of the

beneficiary, confirms the letter of credit issued by the
opening bank.
E. RIGHTS and OBLIGATIONS of PARTIES
1. The buyer procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipts of the documents of title;
2. The seller, who in compliance with the contract of sale ships the
goods to the buyer and delivers the document of title and draft to
the issuing bank to recover payment;
3. The bank issuing the letter of credit undertakes to pay the seller
upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement.
4. The notifying (advising) bank conveys to the seller the existence of
the letter of credit;
5. The paying bank undertakes to encash the drafts drawn by the
exporter. (Bank of America, NT and SA vs. Court of Appeals, GR. No.
105395, Dec. 10, 1993).
In case of a notifying bank, the correspondent bank assumes
no liability except to notify and or transmit to the beneficiary
the existence of the other letter of credit. A negotiating
bank, on the other hand, is a correspondent bank which buys
or discounts a drafts under a letter of credit. Its liability is
dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but
after negotiation, a contractual relationship will then prevail
between the negotiating bank and the seller. In the case of a
confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if
the correspondent bank itself had issued the letter of credit.
(FEATI Bank vs. CA)
F. BASIC PRINCIPLES OF LETTER OF CREDIT
1. Doctrine of Independence
The so-called independence principle assures the seller
or the beneficiary of prompt payment independent of any breach
of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished
or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness,
falsification or legal effect of any documents, or for the general
and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/
or omissions, solvency, performance or standing or the
consigner, the carriers, or the insurers of the goods, or any other
person whomsoever. (Transfield Philippines Inc. vs. Luzon Hydro
Corporation, 443 SCRA 307, GR. No. 146717, Nov. 22, 2004)
2. Fraud exception principle

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Fraud is an exception to the independence principle.

Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for the payment under a standby credit
may qualify as fraud sufficient to support an injunction against
payment. However, injunction should not be granted unless: (a)
there is a clear proof of fraud; (b) the fraud constitutes
fraudulent abuse of the independent purpose of the letter of
credit and not only fraud under the main agreement; and (c)
irreparable injury might follow if injunction is not granted, of the
recovery of damages would be seriously damaged. (Transfield
Philippines Inc. vs. Luzon Hydro Corporation, 443 SCRA 307 GR.
No. 14717, Nov. 22, 2004)
3. Doctrine of strict compliance
It is a settled rule in commercial transactions
involving letter of credit that the documents tendered must
strictly conform to the terms of the letter of credit. The
tender of documents by the beneficiary (seller) must include
all documents required by the letter. A correspondent bank
which departs from what has been stipulated under the
letter of credit, as when it accepts a faulty tender, acts on its
own risks and it may not thereafter be able to recover from
the buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary. Thus, the rule strict
compliance. (FEATI Bank and Trust Company vs. Court of
Appeals, 196 SCRA 576 (1991)

JURISPRUDENCE

BANK OF AMERICA, NT and SA V. CA et. al. GR. No.105395

December 10, 1993
FACTS:
Petitioner Bank of America (BA) Manila received by registered
mail an irrevocable letter of credit purportedly issued by bank BS,
Thailand (issuing bank) for the account of General chemicals Ltd (GCL),
Thailand (buyer) in the amount of US$ 2,782,000.00 to cover the sale
of certain goods with BA, as advising bank, and private respondent
Inter-Resin Industrial Corporation (IRIC) (seller) as beneficiary. Upon
receipt of the letter of advice, with the letter of credit, IRIC sent its
lawyer to BA to have the letter of credit confirmed. BA,s employee in
charge of letter of credit explained that there was no need for
confirmation because the letter of credit would not have been
transmitted if it were not genuine.
IRIC sought to make a partial availment under the letter of credit
covering shipments of goods to GCL valued at US$ 1,320,600. after
being satisfied that he documents IRIC submitted conformed with the
conditions expressed in the letter of credit, BA issued in favor of IRIC a
cashiers check for the peso equivalent of the draft. BA adverse BS of
the availment and sough corresponding reimbursement therefor.
When IRIS tried to make a second availment. BA stopped the
processing or IRISs documents upon receipt of telex from BS Thailand
declaring the letter of credit fraudulent. BA sued IRIC for recovery of
the peso equivalent of the draft of the US$ 1,320,000 on the partial
availment of the now disallowed letter of credit.

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ISSUES:
1) Whether BA has warranted the genuineness and authenticity
of the letter of credit and, corollarily, whether it has acted
merely as an advising bank or as a confirming bank.
2) Whether IRIC has actually shipped the goods (ropes) specified
by the letter of credit; and
3) Following the dishonor of the letter of credit by BS, whether
BA may recover against IRIC under the draft executed in its
partial availment of the letter of credit.
HELD:
1. BA has only been an advising, not confirming bank this much
is clearly evident, among other things, by the provisions of the
letter of credit itself, the petitions banks letter of advice, its
request for payment of advising fee, and the admission of
Inter-Resin that it has paid the same. That BA has asked IRIC
to submit documents required by the letter of credit and
eventually has paid the proceeds thereof, did not obviously
make it a confirming bank. The fact, too, that the draft
required by the letter of credit is to be drawn under the
account of GCL (buyer) only means the same had to be
presented to Bank of Ayudhya (issuing bank) for payment. It
may be significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to
pay the draft.
2. Whether or not IRIC sent waste instead of its products, is
really of no consequence. In the operation of a letter of credit,
the involved banks deal only with documents and not on
goods described on those documents.
3. BA, as a negotiating bank, is entitled to recover on IRISs
partial availment as beneficiary of the letter of credit which
has been disowned by the alleged issuer bank.

PRINCIPLES INVOLVED:
1) Concept and modern use of a letter of credit. A letter of credit
is financial device developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interest of a seller who
refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying. To
break the impasse, the buyer may be required to contract a
bank to issue a letter of credit, the issuing bank can authorize
the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents
required by the letter of credit. The buyer and seller agree on
what documents are to be presented for the payment, but
ordinarily they are documents of title evidencing or attesting
to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to
the buyer and in the process secures the required shipping
documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required

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documents to the issuing bank. The issuing bank redeems the

draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the document
upon paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the document
entitling him to the goods.
2) Letters of credit distinguished from other accessory contracts.
What characterizes letters of credit, as distinguished from
other accessory contracts , is the engagement of the issuing
bank to pay the seller once the draft and the issuing bank to
pay the seller once the draft and the required documents are
presented to it. In turn, this arrangement assures the seller of
prompt payment, independent of any breach of the main
contract. By the so called independence principle, the bank
determines compliance with the letter of credit only by the
examining the shipping documents presented; it is precluded
from determining whether the main contract is accomplished
or not.
FEATI BANK and TRUST COMPANY vs. COURT of APPEALS
196 SCRA 576, 1991
FACTS:
Private respondent Villaluz agreed to sell 2, 000 cubic meter of
lauan logs to Christiansen. The latter issued purchase order No. 76171.
On the instructions of the consignee, Hanmi Trade Developmet
Ltd., de Santa Ana California, the Security issued Irrevocable Letter of
Credit available at sight in favor of Villaluz for the sum of $54,000, the
total purchase price of the lauan logs.
The letter of credit was mailed to the FEATI Bank and Trust
Company with the instruction to the latter that it forward the enclosed
letter of credit to the beneficaiary.
Christiansen refused to issue the certification as required in
paragraph 4 of the letter of credit despite several request made by the
private respondent.
Because of the absence of certification by Christiansen, FBTC
resused to advance the payment on the letter of credit.
Since the demands by the private respondent for Christiansen to
execute the certification proved futile, Villaluz instituted an action for
mandamus and specific performance against Christiansen and FBTC
before the CFI.
However, while the case was still pending trial, Christiansen left
the Philippines without informing the court and his counsel. Hence,
Villauz filed an amended complaint to the make FBTC solidarily liable
with Christiansen.
After trial, the CFI found FBTC solidarily liable. The trial court
ruled that petitioner, in accepting the obligation to notify the
respondent that the irrevocable credit has been transmitted to the
petitioner on behalf of the private respondent, has confirmed the letter.
Thus, FBTC is a confirming bank, CA, in affirming the trial courts
decision, added that petitioner acted as a guarantor of the issuing
bank and in effect also of the latters principal or client.
ISSUES:

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1) Whether or not a correspondent bank is to be held liable under

the letter of credit despite non-compliance by the beneficiary
with the terms thereof?
2) Whether of not petitioner is a notifying bank or a confirming bank
3) Whether or not petitioner acted as a guarantor of the issuing
bank and in effect also of the latters principal or client.
HELD:
1) Under the provisions of the UCP, the bank may only negotiate,
accept or pay, if the documents tendered to it are on their face in
accordance with the terms and conditions of the documentary
credit. And since a correspondent bank, like the petitioner
principally deals only with document, the absence of any
document required in the documentary credit justifies the refusal
by the correspondent bank to negotiate, accept or pay the
beneficiary, as it is not its obligation to look beyond the
documents. It merely has to rely on the completeness of the
documents tendered by the beneficiary.
2) The letter merely provided that the petitioner forward the
enclosed original credit to the beneficiary. Considering the
aforesaid instruction to the petitioner by the issuing bank, the
Security Pacific National Bank, it is indubitable that the petitioner
is only a notifying bank and not a confirming banks a ruled by
the courts below.
If the petitioner was a confirming bank, then a categorical
declaration should have been stated in the letter of credit that the
petitioner is to honor all drafts drawn in conformity with the letter of
credit. What was simply stated therein was the instruction that the
petitioner forward the original letter of credit to the beneficiary.
3) The concept of guarantee vis-svis the concept of an irrevocable
credit are inconsistent with each other.
The guarantee theory destroys the independence of the banks
responsibility from the contract upon which it was opened. The nature
of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantors obligation is merely collateral and it arises
only upon the default of the person primarily liable. On the other hand,
in an irrevocable credit, the bank undertakes a primary obligation.
LAND BANK OF THE PHILIPPINES vs. MONETS EXPORT AND
MANUFACTURING CORPORATION et. al.
GR. No. 161865, March 10, 2005
FACTS:
Petitioner Land Bank of the Philippines (Land Bank), and Monets
Export and Manufacturing Corporation (Monet) executed an Export
Packing Credit Line agreement under which Monet was given a credit
line in the amount of P250,000.00, secured by the proceeds of its
export letters of credit, the continuing guaranty of the spouses Vicente
V. Tagle Sr. and Ma. Consuelo C. Tagle, and the third party mortgage
executed by Pepita C. Mendigoria.
The credit line agreement was renewed and amended several
times until it was increased to P5,000,000.00. Owing to the continued
failure and refusal of Monet, notwithstanding repeated demands, to
pay its indebtedness to Land Bank, which have ballooned to

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P11,464,246.19, a complaint for collection of sum of money with

prayer for preliminary attachment was filed by Land Bank with the RTC.
In their joint Answer with Compulsory Conterclaim, Monet and
the Tagle spouses alleged that Land Bank failed and refused to collect
the receivables on their export letter of credit against Wishbone
Trading Company of Hongkong in the sum of US$ 33,434.00, while it
made unauthorized payments on their import letter of credit to
Beautilike (H.K.) LTd. in the amount of US $38,768.40, which seriously
damaged the business interest of Monet.
Meanwhile, Land Bank contended of Monet, the issuing bank in
the Beautilike transaction involving an import letter of credit, it only
deals in documents and it is not involved in the contract of the parties.
ISSUE: Whether or not Land Bank is correct.
HELD:
The relationship between the beneficiary and the issuer of a
letter of credit is not strictly contractual, because both privity and
meeting of the minds are lacking. Thus, upon receipt by Land Bank of
the documents of the title which conform with what the letter of credit
requires, it is duty bound to pay the seller.
Thus, no fault or acts of mismanagement can be attributed to
Land Bank relative to Monets import letter of credit.
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and presents
it together with the required documents to the issuing bank. The
issuing bank redeems the draft and pays cash to the seller if it finds
that the documents submitted by the seller conform with what the
letter of credit requires. The bank then obtains possession of the
documents upon paying the seller. The transaction is completed when
the buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. Under this arrangement, the seller gets paid
only if he delivers the documents of title over the goods, while the
buyer acquires the said documents and control over the goods only
after reimbursing the bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay the
seller once the draft and the required shipping documents are
presented to it. In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main sales contract. By the
so-called independence principle, the bank determines compliance
with the letter of credits only by examining the shipping documents
presented; it is precluded from determining whether the main contract
is actually accomplished or not.
The Uniform Customs and Practice (USCP) for Documentary
Credits provides that credits, by their nature, are separate transactions
from the sales or other contract(s) on which they may be based and
banks are in no way concerned with or bound by such contract(s), even
if any reference whatsoever to such contract(s) is included in the
credit. Consequently, the undertaking of a bank to pay, accept and pay
draft(s) or negotiable and/or fulfill any other obligation under the credit
is not subject to claims or defenses by the applicant resulting from his
relationship with the issuing bank or the beneficiary.

QUESTIONS AND ANSWERS

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1. Are letters of credit negotiable instruments?

Letters of credit are usually negotiable. The issuing bank is
obligated to pay not only the beneficiary, but also any bank nominated
by the beneficiary. Negotiable instruments are passed freely from one
party to another almost in the same way as money.
2. What is the exception to the independence principle?

The Fraud exception rule. It provides that the untruthfulness of

a certificate accompanying a demand for payment under a standby
letter of credit may qualify as fraud sufficient to support an injunction
against payment. (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22,
2004)

3. Can Irrevocable Letters of Credit be amended?

Irrevocable Letters of Credit cannot be amended or cancelled
without the agreement of the credit parties. Unconfirmed irrevocable
letters of credit cannot be modified without the written consent of both
the issuing bank and the beneficiary. Confirmed irrevocable letters of
credit need also confirming bank's written consent in order any
modification or cancellation to be effective.
4. I generally open letters of credit through my bank. How are
your
letters
of
credit
different?
The letters of credit that we open are opened using our bank accounts
at prime banking institutions. When you open the letter of credit
through your bank, you use your credit line. When you open through
us, you use our credit lines.
5. Why do I need to pay your fee before you open the letter of
credit? Can't you take your fee out of the profits of our
transaction?
We do not participate in the transactions of our clients as a party to the
transaction other than a provider of certain financing. Therefore, we do
not participate in the profits of our client's transactions. Our fees are
the same regardless of the profit margin in the transaction.
6. Can I cancel my letter of credit after it has been opened?
All of the instruments that we issue are irrevocable and cannot be
canceled
except
by
the
beneficiary.

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7. What type of collateral do you require to open a letter of

credit?
In most cases we do not require a specific collateral deposit to open a
letter of credit. We offer transactional based finance. When a client
wishes to open a letter of credit, he presents us with the details of his
transaction so that we can make a decision about the transaction on its
merit. The final decision by our company to enter into a transaction is
made according to a set of criteria.
8. What is the charge for opening a letter of credit?
The letter of credit charge depends on a number of factors. Our agents
can provide you with an up to date Tariff schedule.
9. What is the maximum size letter of credit that you open?
We are able to open letters of credit of almost any size. We consider
the complexity of the transaction; the goods that are being trades;
and, other factors having to do with the parties to the transactions and
where they take place.
10. For what type of goods do you open letter of credit?
We can open letters of credit for any type of goods provided they fall
into our ethical and legal criteria. That said, we will not get involved in
transactions involving weaponry or ammunition under any
circumstances.
11. I opened a letter of credit to my supplier, but he did not
ship the goods. Will you refund my fee?
Once the letter of credit is opened your fee cannot be refunded. We
recommend to all of our clients that they need to assure themselves of
their suppliers' ability to perform before opening any banking
instruments to them.

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WAREHOUSE RECEIPT LAW (Act No. 3135)

1. Warehouse Receipt
A warehouse receipt is a written acknowledgment by the
warehouseman that he has received the goods described therein
and holds the same for the person to whom it is issued or as the
latter may order.
It is a contract between the owner of the goods or the
person authorized by the owner to transfer ownership or
possession over the goods, on one hand, and the warehouseman,
on the other hand, for the latter to store the goods and the
former to pay the compensation for that service.
2. Warehouseman a person lawfully engaged in the business of
storing goods for profit and issues warehouse receipt. Only a
warehouseman may issue a warehouse receipt.
3. Warehouse - a building or place where the goods are deposited
and stored for profit.
4. Non-negotiable Receipt receipt in which it stated that the
goods received will be delivered to the depositor or to any other
specified person.
5. Negotiable Receipt receipt in which it is stated that the
goods received shall be delivered to the bearer or to the order of
any person named in such receipt.
Purpose of the Law
1. To regulate the status, rights, and liabilities of the parties in a
warehousing contract;
2. To protect those who in good faith and for value, acquire
negotiable warehouse receipts by negotiation;
3. To render the title to, and the right of possession of, property
stored in warehouses more easily convertible;
4. To facilitate the use of warehouse receipts as documents of title;
and
5. In order to accomplish these, to place much greater
responsibility on the warehouseman.
Form and Contents of the Warehouse Receipt:
1. Location of warehouse. This requirement is for the benefit of
the holders of warehouse receipts to enable them to determine
where the goods are deposited especially when the
warehouseman has more than one warehouse located in
different places.
2. Date of issue of receipt. Although a warehouse receipt is not
essential to create a contract of storage, the date of issue
appearing therein, indicates prima facie the date when the
contract of deposit is perfected and when the storage charges
shall begin to run against the depositor.

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3. Consecutive number of receipt. The purpose of this

requirement is to identify each receipt with the goods which it
was issued. There is no express requirement as to when the
consecutive numbering shall begin.
4. Person to whom goods are deliverable. This requirement
determines the person or person who shall prima facie be
entitled lawfully to the possession of the goods deposited.
5. Rate of storage charges. This states the consideration for the
contract from the view of the warehouseman.
6. Description of goods or packages. The general object of
giving a description of the goods in the receipt is for
identification so that the identical property delivered to the
warehouseman may be delivered back by him upon the return of
the warehouse receipt. The mere fact that the goods deposited
are incorrectly described does not make the receipt when the
identity of the goods is fully established by the evidence.
7. Signature of warehouseman. The warehousemans signature
furnishes the best evidence of the fact that the warehouseman
has received the goods described in the receipt and has bound
himself to assume all obligations in connection therewith.
8. Warehousemans ownership of or interest in the goods.
This is to prevent abuses which in the past had arisen from the
past had arisen from warehousemen issuing receipts on their
goods.
9. Statement of advances made and liabilities incurred. This
is to preserve the lien of the warehouseman over the goods
stored or the proceeds thereof in his hands.
Effect of Omission of Any of the Essential Terms
1. The validity of the warehouse receipt is not affected.
2. The warehouseman shall be held liable for damages to those
injured by omission.
3. The negotiability of the warehouse receipt is not affected.
4. The issuance of warehouse receipt in the form provided by law is
merely permissive and directory and not mandatory in the sense
that if the requirements are not observed, then the goods
delivered for the storage become ordinarily deposits.
Terms Which May not be Inserted in a Warehouse Receipt
Under Section 3, the warehouseman is given the power to
insert additional terms or conditions in receipts issued by him
subject to two (2) limitations under subsection (a) and (b) . In
addition to those limitations, the stipulations in the receipt must not
be contrary to law, morals, good customs, public order or public
policy.
1. Exemption from liability for misdelivery. Under
subsection (a), a warehouseman is not authorized to insert
any term exempting him from liability for misdelivery of goods
because such would be against Section 10 of the Act or for not
giving statutory notice in case of sale of goods because such
would be contrary to Sections 33 and 34.
2. Exemption from liability for negligence. Under subsection
(b), a warehouseman cannot insert any term which would
relieve him from liability for his own negligence such as For
account and at the risk of the depositor. The warehouseman

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is required by law to exercise that degree of care in the

safekeeping of the goods entrusted to him which reasonable
careful man would exercise in regard to similar goods of his
own.
Nature and Function of a Warehouse Receipts
1. It is a written acknowledgement by a warehouseman that he has
received and holds a certain goods therein described in store of
the person to whom it is issued.
2. It is a simple written contract between the owners of the goods
and the warehouseman to pay the compensation for that service.
3. It is a bilateral contract. It imports that goods are in the hands of
a warehouseman and is a symbolical representation of the
property itself.
4. A warehouse receipt is not a negotiable instrument within the
meaning of the Negotiable Instrument Law in the technical sense
that a bill of exchange or promissory note is negotiable even
though the Warehouse Receipts Act declares it negotiable.
Persons to Whom Goods Must be Delivered
1. Person lawfully entitled to possession of goods or his agent. The
warehouseman is justified to deliver the goods to the person to
whom a competent court has ordered the delivery of goods or to
an attaching creditor or to the purchaser in case of sale of the
goods by the warehouseman to enforce his lien where the goods
are perishable or hazardous.
2. Person entitled to delivery under a non-negotiable receipt or with
written authority.
3. Person in possession of negotiable receipt.
Negotiable Instrument v. Negotiable Warehouse Receipt
Negotiable Instrument
When altered deliberately, it
becomes null and void.
If originally payable to
bearer, it will always remain
payable regardless of the way it is
endorsed.
A holder in due course may
be able to obtain a title better
than that which the party who
negotiated the instrument to him
had.

Negotiable
Warehouse
Receipt
When altered, it is valid but
it may be enforced only in
accordance with its original tenor.
If payable to bearer and is
endorsed specially, it will be
converted
into
a
receipt
deliverable to order and can only
be
negotiated
further
by
indorsement and delivery.
An indorsee even if a holder
in due course obtains only such
title as the person negotiating
over the goods.

Rights of a Person to Whom a Non-negotiable Warehouse

Receipt Has Been Transferred
1. Right to the title of the goods as against the transferor;
2. Right to notify the warehouseman of the transfer thereof; and

13 | P a g e

3. The right thereafter to acquire the

warehouseman to hold the goods for him.

obligation

of

the

Rights of a Person to Whom a Negotiable Warehouse Receipt

Has Been Transferred
1. The right of the goods as against the transferor and
2. The right to compel the transferor to indorse the receipt. But if
the intention of the transferor is that the receipt should merely
be transferred, the transferee has no right to require the
transferor to indorse the receipt.
Principal Obligations of the Warehouseman
A warehouseman is essentially a depositary with
respect to the goods received and stored by him in his
warehouse. The following are the principal obligations of the
warehouseman:
1. To take care of the goods entrusted to his safekeeping.
General rule: A warehouseman is required to exercise such
degree of care which
a reasonable careful owner would exercise over
similar goods of his own. He shall be liable for any loss or injury to
the goods caused by his failure to exercise such
care.
Exception: He shall not be liable for any loss or injury which
could not have
avoided by the exercise of such care.
Exception to the exception: He may limit his liability to an
agreed value of the
property received in case of loss. He cannot
stipulate that he will not be responsible for any loss caused by his
negligence.
2. To deliver the goods to the holder of the receipt or the
depositor
upon
demand,
provided
demand
is
accompanied with:
3. An offer to satisfy the warehousemans lien;
A warehouseman having a lien valid against the person
demanding the goods may
refuse to deliver the goods to him until
the lien is satisfied.
The offer to satisfy the warehousemans lien is, therefore,
required before the
warehouseman is bound to deliver or return the
goods.
4. An offer to surrender the negotiable receipt properly
endorsed;
The offer to surrender the receipt is required for the protection of
the warehouseman since the receipt represents the goods described
therein.
If the receipt is negotiable, the demand for the delivery of the
goods must be
accompanied by an offer to surrender the receipt
properly indorsed. If the receipt
issued is not negotiable, any
person lawfully entitled to the possession of the
goods may be
entitled to delivery without surrender of the receipt.

14 | P a g e

5. A readiness and willingness to sign an acknowledgement

that the goods have been delivered if such is requested
by the warehouseman.
Lawful Excuses Non-delivery Goods
1. The warehouseman can refuse to deliver the goods if he has
acquired title or right to the possession of the goods:
2. Directly or indirectly from the transfer made by the depositor at
the time of the deposit for storage or subsequent thereto; or
3. From the warehousemans lien.
4. If someone other than the depositor or person claiming under the
depositor has a claim to the title or possession of the goods and
the warehouseman has information of such claim, the
warehouseman shall be excused from liability from refusing to
deliver the goods either to the depositor or person claiming
under him until he has had a reasonable time to ascertain the
validity of the adverse claim or to bring legal proceedings to
compel all claimants to interplead.
5. The warehouseman will not be required to deliver the goods if
such had been lost. But this is without prejudice to liabilities
which may be incurred by him due to such loss.
6. The warehouseman having a valid lien against the person
demanding the goods may refuse to deliver the goods to him
until the lien is satisfied.
7. If goods have been lawfully sold or disposed of because of their
perishable or hazardous nature, the warehouseman shall not be
liable for failure to deliver the goods.
When is there misdelivery?
There is misdelivery when the warehouseman delivers the
goods to a person who is not in fact lawfully entitled to the
possession of the goods.
Warehousemans Liability for Misdelivery
1. Where a warehouseman delivers the goods to one who is not
in fact lawfully entitled to the possession of them, the
warehouseman shall be liable for conversion/estafa to all
having a right of property or possession in the goods if he
delivered the goods otherwise than as authorized. Conversion is
an unauthorized assumption and exercise of the right of
ownership over goods belonging to another through the
alteration of their condition or the exclusion of the owners right.
2. And though he delivered the goods as authorized he shall be so
liable if prior to such delivery he had either:
a. Been requested, by or on behalf of the person lawfully
entitled to a right of property or
possession in the goods, not to make such delivery or
b. Had information that the delivery about to be made was
to one not lawfully entitled to the possession of the goods.
Effects of Alteration on Liability of Warehouseman
The liability of a warehouseman under a warehouse receipt which
has been altered depends on the nature of the alteration as follows:

15 | P a g e

1. Alteration immaterial. If the alteration is immaterial, the tenor

of the receipt is not changed, whether fraudulent or not,
authorized or not, the warehouseman is liable on the altered
receipt according to its original tenor;
2. Alteration material. If the alteration is material, the tenor of
the receipt is changed, but authorized, the warehouseman is
liable according to the terms of the receipt as altered;
3. Material innocently made. If the alteration is material but
innocently made though unauthorized, the warehouseman is
liable on the altered receipt according to its original tenor; and
4. Material alteration fraudulently made. If the alteration is
material and fraudulently made, the 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.
Liability of a Warehouseman
1. Liability of a warehouseman in case of lost or destroyed
receipt. Where a negotiable receipt has been lost or destroyed,
the court may order delivery to a person upon satisfactory proof
of such loss or destruction and upon proper posting of a bond to
protect the warehouseman from any liability or expense which he
may incur by reason of the original receipt remaining
outstanding.
2. Liability of warehouseman as to duplicate. When more than
one negotiable receipt is issued for the same goods, the word
duplicate must be plainly placed by the warehouseman upon
the face of every such receipt, except on the first issued. In such
case, the warehouseman warrants (a) that the duplicate is an
accurate copy of the original receipt; and (b) such original
receipt is uncancelled at the date of the issue of the duplicate.
Extent of Warehousemans Lien
A warehouseman shall have a lien on goods deposited or on
the proceeds thereof in his hands for:
1. All lawful charges for storage and preservation of the goods
2. All lawful claims for money advances, interest, insurance,
transportation, labor, weighing, cooperating, and other charges
and expenses in relation to such goods
3. All reasonable charges and expenses for notice and
advertisements of sale and for the sale of the goods where
default has been made in satisfying the warehouse lien.
How is a lien enforced?
1. By refusing to deliver the goods until the lien is satisfied;
2. By causing the extrajudicial sale of the property and applying the
proceeds to the value of the lien;
3. By filing a civil action for unpaid charges or by way of
counterclaim in an action to recover the property from him.

How is a lien lost?

16 | P a g e

1. By surrendering possession of the goods. A warehouseman

loses his lien upon goods by voluntarily surrendering the
possession thereof without requiring payment of his lien. It will
be presumed that the lien has been waived or abandoned where
the warehouseman permits a depositor to remove the goods but
not where the property is taken without the warehousemans
consent or by force or under a legal process, as by replevin suit.
2. By wrongfully refusing to deliver goods. The warehouseman
also losses his lien by refusing to deliver the goods where the
holder of the receipt offers to comply with the requirements of
section 8. The loss of the warehousemans lien, does not
necessarily mean the extinguishment of the depositors
obligation to pay the warehousing fees and charges which
continues to be personal liability.
Negotiation and Transfer of Receipts
How to negotiate a receipt deliverable to order.
1. By indorsing it in blank thereby making it deliverable to bearer
or
2. By special indorsement, which would require further
indorsements for further negotiations.
In both cases, the indorsements must be coupled with
delivery.
How to negotiate a receipt deliverable to bearer.
There is no need to indorse for negotiation. Physical delivery of
the instrument will suffice. But if the instrument is indorsed specially,
the bearer character of the receipt is destroyed and for further
negotiation, there will be a need for indorsement.
Criminal Offenses
1. Warehouseman, or any officer, agent or servant of the
warehouseman, issues or aids in issuing a receipt knowing that the
goods have not actually been received or are not under his actual
control at the time of issuing of such receipt.
LIABILITY: Imprisonment not exceeding 5 yrs or by a fine not
exceeding P10, 000.00, or by both.
2. Warehouseman, or any officer, agent or servant of warehouseman,
fraudulently issues or aids in fraudulently issuing a receipt for goods
knowing that it contains any false statements.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not
exceeding P2,000.00, or by both.
3. Warehouseman, or any officer, agent or servant of warehouseman,
issues or aids in issuing a duplicate or additional negotiable receipt for
goods knowing that a former negotiable receipt for the same goods is
outstanding and uncancelled, without plainly placing duplicate
(except in case of loss or destroyed receipts)
LIABILITY: Imprisonment not exceeding 5 yrs, or by a fine not
exceeding P10,000.00, or by both.
4. If there are goods deposited or held by the warehouseman as an
owner, either solely or jointly with others, and that warehouseman, or

17 | P a g e

any officer, agent or his servant, knowing such ownership, issues or

aids in issuing a negotiable receipt not stating such ownership.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not
exceeding P2,000.00, or by both.
5. Warehouseman, or any officer, agent or servant of warehouseman,
delivers goods out of the possession of such warehouseman, knowing
that a negotiable receipt is outstanding and uncancelled, without
obtaining the possession of such receipt at or before the time of
delivery
LIABILITY: Imprisonment not exceeding 1 yr, or a fine not
exceeding P2,000.00, or by both.
6. Any person who deposits goods to which he has no title, or upon
which there is a lien or mortgage, and who takes, for such goods a
negotiable receipt which he afterwards negotiates for value without
disclosing his want of title or existence of the lien or mortgage.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not
exceeding P2,000.00, or by both.

JURISPRUDENCE
Roman v. Asia Banking Corporation, G.R. No. L-17825, June 26,
1922
Legal principle: As provided by the Warehouse Receipts Act, in case
the warehouse man fails to mark it as non-negotiable, a holder of the
receipt who purchase if for value supposing it to be negotiable may, at
his option, treat such receipt as imposing upon the warehouseman the
same liabilities he would have incurred had the receipt been
negotiable.
Facts: U. de Poli, for value received, issued a quedanconvering the
576 bultos of tobacco to the Asia Banking Corporation. It was executed
as a security for a loan. The aforesaid 576 butlos are part and parcel of
the 2, 766 bultos purchased by U. de Poli from Felisa Roman.
The quedan
which is a warehouse receipt issued by the
warehouse of U. de Poli for 576 bultos of tobacco. In the left margin of
the face of the receipt, U. de Poli certifies that he is the sole owner of
the merchandise therein described. The receipt is endorsed in blank; it
is not markednon-negotiable or not negotiable.
Since a sale was consummated between Roman and U. de Poli,
Romans claim is a vendors lien. The lower court ruled in favor of
Roman on the theory that since the transfer to Asia Banking Corp.
(ASIA) was neither a pledge nor a mortgage, but a security for a loan,
the vendors lien of Roman should be accorded preference over it.
However, if the warehouse receipt issued was non-negotiable, the
vendors lien of Roman cannot prevail against the rights of ASIA as
indorsee of the receipt.
Issue: Whether the quedan issued by U. de Poli in favor of ASIA
negotiable, despite failure to mark it as not negotiable?

18 | P a g e

Held: YES. The warehouse receipt in question is negotiable. It recited

that certain merchandise deposited in the ware house pororden of
the depositor instead of a la orden, there was no other direct
statement showing whether the goods received are to be delivered to
the bearer, to a specified person, or to a specified order or his order.
However, the use of pororden was merely a clerical or grammatical
error and that the receipt was negotiable.
As provided by the Warehouse Receipts Act, in case the
warehouse man fails to mark it as non-negotiable, a holder of the
receipt who purchase if for value supposing it to be negotiable may, at
his option, treat such receipt as imposing upon the warehouseman the
same liabilities he would have incurred had the receipt been
negotiable. This appears to have given any warehouse receipt not
marked non-negotiable practically the same effect as a receipt
which, by its terms, is negotiable provided the holder of such
unmarked receipt acquired it for value supposing it to be negotiable,
circumstances which admittedly exist in the present case. Hence, the
rights of the indorsee, ASIA, are superior to the vendors lien.

CIR V. Hawaiian-Philippine Company, G.R. No. L-16315 , May

30, 1964
Legal Principle: A warehouseman has been defined as one who
receives and stores goods of another for compensation. For one to be
considered engaged in the warehousing business, therefore, it is
sufficient that he receives goods owned by another for storage, and
collects fees in connection with the same.
Facts: The petitioner, a corporation duly organized in accordance with
law, is operating a sugar central in the City of Silay, Occidental Negros.
It produces centrifugal sugar from sugarcane supplied by planters. The
processed sugar is divided between the planters and the petitioner in
the proportion stipulated in the milling contracts, and thereafter is
deposited in the warehouses of the latter. For the sugar deposited by
the planters, the petitioner issues the corresponding warehouse
receipts of "quedans". It does not collect storage charges on the sugar
deposited in its warehouse during the first 90 days period counted
from the time it is extracted from the sugarcane. Upon the lapse of the
first ninety days and up to the beginning of the next milling season, it
collects a fee of P0.30 per picul a month. Henceforth, if the sugar is not
yet withdrawn, a penalty of P0.25 per picul or fraction thereof a month
is imposed.
The storage of sugar is carried in the books of the company
denominated "Manufacturing Cost Ledger Control"; the storage fees
under Account No. 521620; the expense accounts of the factory under
Account No. 5200; and the so-called "Sugar Bodega Operations" under
Account No. 5216, under which is a Sub-Account No. 20, captioned,
"Credits". The collections from storage after the lapse of the first 90
days period are entered in the company's books as debit to CASH, and
credit to Expense Account No. 2516-20
The credit for storage charges decreased the deductible expense
resulting in the corresponding increase of the taxable income of the
petitioner. This is reflected by the entries enclosed in parenthesis in
Exhibit "G", under the heading "Storage Charges". The alleged reason

19 | P a g e

for this accounting operation is that, inasmuch as the "Sugar Bodega

Operations" is considered as an expense account, entries under it are
"debits". Similarly, since "Storage Charges" constitute "credit", the
corresponding figures are enclosed in parenthesis as they decrease
the expenses of maintaining the sugar warehouses.
Upon investigation conducted by the Bureau, it was found that
during the years 1949 to 1957, the petitioner realized from collected
storage fees a total gross receipts of P212,853.00, on the basis of
which the respondent determined the petitioner's liability for fixed and
percentage taxes, 25% surcharge, and administrative penalty in the
aggregate amount of P8,411.99.
Issue: Whether petitioner is a warehouseman liable for the payment
of the fixed and percentage taxes prescribed in Sections 182 and 191
of the National Internal Revenue Code
Held: YES. Respondent disclaims liability under the provisions quoted
above, alleging that it is not engaged the business of storing its
planters' sugar for profit; that the maintenance of its warehouses is
merely incidental to its business of manufacturing sugar and in
compliance with its obligation to its planters. We find this to be without
merit.
It is clear from the facts of the case that, after manufacturing the
sugar of its planters, respondent stores it in its warehouses and issues
the corresponding "quedans" to the planters who own the sugar; that
while the sugar is stored free during the first ninety days from the date
the it "quedans" are issued, the undisputed fact is that, upon the
expiration of said period, respondent charger, and collects storage
fees; that for the period beginning 1949 to 1957, respondent's total
gross receipts from this particular enterprise amounted to
P212,853.00.
A warehouseman has been defined as one who receives and
stores goods of another for compensation. For one to be considered
engaged in the warehousing business, therefore, it is sufficient that he
receives goods owned by another for storage, and collects fees in
connection with the same. In fact, Section 2 of the General Bonded
Warehouse Act, as amended, defines a warehouseman as "a person
engaged in the business of receiving commodity for storage."
That respondent stores its planters' sugar free of charge for the
first ninety days does not exempt it from liability under the legal
provisions under consideration. Were such fact sufficient for that
purpose, the law imposing the tax would be rendered ineffectual.

PNB v. LaureanoAtendido, G.R. No. L-6342, January 26, 1954

Legal Principle: Where a warehouse receipt or quedan is transferred
or endorsed to a creditor only to secure the payment of a loan or debt,
the transferee or endorsee does not automatically become the owner
of the goods covered by the warehouse receipt or quedan but he
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 of the sale.
Facts: LaureanoAtendido obtained from PNB a loan of P3k and pledged
2000 cavans of palay to guarantee payment which were then

20 | P a g e

deposited in the warehouse of Cheng Siong Lam & Co and to that

effect the borrower endorsed in favour of the bank the corresponding
warehouse receipt.
Before the maturity of the loan, the 2000 cavans of palay
disappeared for unknown reasons in the warehouse. When the loan
matured, the borrower failed to pay obligation
Defendant claimed that the warehouse receipt covering the
palay which was given as security having been endorsed in blank in
favor of the bank and the palay having been lost or disappeared, he
thereby became relieved of liability.
Issue: Whether or not the surrender of the warehouse receipt covering
2000 cavans of palay given as security, endorsed in blank, to PNB, has
the effect of transferring their title or ownership OR it should be
considered merely as a guarantee to secure the payment of the
obligation of Defendant?
Held: Where a warehouse receipt or quedan is transferred or endorsed
to a creditor only to secure the payment of a loan or debt, the
transferee or endorsee does not automatically become the owner of
the goods covered by the warehouse receipt or quedan but he 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 of the sale. This is for
the simple reason that the transaction involved is not a sale but only a
mortgage or pledge, and that if the property covered by the quedans
or warehouse receipts is lost without fault or negligence of the
mortgagee or pledge or the transferee or endorsee of the warehouse
receipt or quedan, then said goods are to be regarded as lost on
account of the real owner, mortgagor or pledgor.
Nature of contract is Pledge supported by the stipulations
embodied in the contract signed by Defendant when he secured the
loan from PNB. The 2000 cavans of palay covered by the warehouse
receipt were given to PNB only as a guarantee to secure the fulfilment
by Defendant in his obligation. This clearly appears in the contract
wherein it is expressly stated that said 2000 cavanes of palay were
given as collateral security.
It follows that by the very nature of the transaction its ownership
remains with the pledgor subject only to foreclosure in case of nonfulfillment of the obligation. By this we mean that if the obligation is
not paid upon maturity the most that the pledge can do is to sell the
property and apply the proceeds to the payment of the obligation and
to return the balance, if any, to the pledgor. This is the essence of the
contract, for, according to law, a pledge cannot become the owner of,
nor appropriate to himself the thing given in pledge.
If by the contract of pledge, the pledgor continues to be the
owner of the thing pledged during the pendency of the obligation, it
stands to reason that in case of loss of the property, the loss should be
borne by the pledgor. The fact that the warehouse receipt covering the
palay was delivered, endorsed in blank, to the bank does not alter the
situation, the purpose of such endorsement being merely to transfer
the juridical possession of the property to the pledge and to forestall
any possible disposition thereof on the part of the pledgor.

21 | P a g e

QUESTIONS AND ANSWERS

1.What should be done to put the receipt within the purview of
Warehouse Receipts?
The
warehouse
receipt
should
be
issued
by
the
warehouseman because he is the authorized person to issue such
receipts.
2.What is the effect of the omission of the essential contents
of the warehouse receipts?
A warehouseman shall be liable to any person injured thereby all
damages caused by the omission from a negotiable receipt of any
of the terms herein required. The validity of the receipt not affected
and negotiability of the receipt is also not affected.
3. What should accompany the demand for the return of the
goods?
An offer to satisfy the warehousemans lien and an offer to surrender
the receipt, if negotiable with such indorsements as would be
necessary for the negotiation of the receipts.
4. What is the liability of the warehouseman for the nonexistence or misdescription of goods?
As a general rule, the warehouseman is under obligation to deliver the
identical property stored with him and if he fails to do so, he is liable
directly to the owner .As against a bona fide holder of a warehouse
receipt, the warehouseman is estopped whether the receipt is
negotiable or not, to deny that he has received the goods described in
it.
5. Does the warehouseman can refuse delivery because he
acquired title or right over the goods?
The warehouseman cannot refuse to deliver the goods on the ground
that he has acquired title or right to the possession of the same
unless such title or right is derived
Directly or indirectly from a transfer made by the
depositor at the time of the deposit for storage or
subsequent thereto
From the warehousemans lien
6. How do you attach or impose a lien over the goods covered
by a warehouse receipt?
If it is not negotiable, the court would issue a writ of attachment. If it is
negotiable, the court should require the surrender of the receipt
and restrict further negotiations.
7. Against what property may the lien may be enforced?
a. Against all goods, whenever deposited, belonging to the person
who is liable to the debtor for the claims in regard to which the lien is
asserted.
b.
Against all goods belonging to others which have been
deposited at any time by the person who is liable as debtor for claims

22 | P a g e

in regard to which the lien is asserted if such person had been

entrusted with the possession of the goods that a pledge of the
same by him at the time of the deposit to one who took the goods in
good faith for value would have been valid.
8. How a warehouseman loses his lien?
a. By surrendering possession thereof
b.
By refusing to deliver the goods when a demand is made with
which he is bound to comply under the provisions of the law
9. What are the warehousemans liabilities for misdelivery?
Where a warehouseman delivers the goods to one who is not in fact
lawfully entitled to the possession of them, the warehouseman shall
be liable for conversion/estafa to all having a right of property or
possession in the goods if he delivered the goods otherwise than as
authorized . And though he delivered the goods as authorized he shall
be so liable if prior to such delivery he had either
Been requested by or
entitled to a right of
not to make such delivery.

on behalf of the person lawfully

property or possession in the goods,

Had information that the delivery about to be made was to

one not lawfully

entitled to the possession of the goods.

10. What is the legal remedy of the warehouseman in case of
conflicting claim?
File an action for interpleader. This is a remedy given to the
warehouseman in case there is more than one person who claims title
or possession of the goods either as a defense to an action brought
against him for non-delivery or as an original suit; this would require
the different claimants to litigate among themselves.
Sec.18 provides that if someone other than the depositor or
person claiming has a claim to the title or possession of the goods, the
warehouseman shall be excused from liability for refusing to deliver the
goods until he has a reasonable time to ascertain the validity of the
adverse claim or bring legal proceedings to compel claimants to
interplead.

23 | P a g e

TRUST RECEIPTS LAW

(P.D. No. 115)
PURPOSE OF THE LAW
(a) to encourage and promote the use of trust receipts as an
additional and convenient aid to commerce and trade;
(b) to provide for the regulation of trust receipts transactions in
order to assure the protection of the rights and enforcement of
obligations of the parties involved therein; and
(c) to declare the misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents or instruments
released under trust receipts as a criminal offense punishable under
Article Three hundred and fifteen (Article 315) of the Revised Penal
Code.

TRUST RECEIPT DEFINITION

It refers to the written or printed document signed by the

entrustee in favor of the entruster containing terms and conditions
substantially complying with the provisions of P.D. 115 or the Trust
Receipts Law. No further formality of execution or authentication shall
be necessary to the validity of a trust receipt.

TRUST RECEIPT TRANSACTION DEFINITION

It refers to any transaction by and between an entruster and the
entrustee, whereby the entruster (who owns or holds absolute title or
security interests over certain specified goods, documents or
instruments) releases the same to the possession of the entrustee

24 | P a g e

upon the latters execution and delivery to the entruster of a signed

document called a trust receipt. (PD 115, Sec. 4)
PARTIES TO A TRUST RECEIPT
a. "Entrustee" shall refer to the person having or taking possession of
goods, documents or instruments under a trust receipt transaction,
and any successor in interest of such person for the purpose or
purposes specified in the trust receipt agreement.
b. "Entruster" shall refer to the person holding title over the goods,
documents, or instruments subject of a trust receipt transaction, and
any successor in interest of such person.
***"Person" means, as the case may be, an individual, trustee,
receiver, or other fiduciary, partnership, corporation, business trust or
other association, and two more persons having a joint or common
interest.
IMPORTANCE OF TRUST RECEIPTS
(a) to encourage and promote the use of trust receipts as an additional
and convenient aid to commerce and trade;
(b) to provide for the regulation of trust receipts transactions in order
to assure the protection of the rights and enforcement of obligations of
the parties involved therein; and
(c) to declare the misuse and/or misappropriation of goods or proceeds
realized from the sale of goods, documents or instruments released
under trust receipts as a criminal offense punishable under Article
Three hundred and fifteen of the Revised Penal Code.
DIFFERENCE BETWEEN TRUST RECEIPTS AND LETTERS OF
CREDIT
Letters of Credit and Trust Receipts are commonly used to
improve cash flow for any type of business that imports/exports goods
for sale or supplies commodities which are used in the production of
finished goods. Whether starting your own business or expanding an
existing business L/Cs and TRs are important financial instruments
designed to reduce risk and trim the high cost of potential
import/export trade operation failures. Successful import/export cash
flow scenarios rely on these types of financial strategies to create
operational efficiencies important to thwarting risks associated with a
buyers receipt of contracted goods and a sellers receipt of payment
for such goods.
a. Identification
A Letter of Credit or L/C is a document issued by a bank that
guarantees payment to a seller for a specified amount, at a certain
period of time. The buyer gains protection through absolute
compliance to the L/C terms before the payment to the seller is
released.
A Trust Receipt or TR is a document of release of goods to a
customer by a bank. After an L/C is drafted and the import shipment

25 | P a g e

has arrived, this type of additional financing may be offered in place of

a buyers immediate payment. The customer may use or sell the goods
but the bank retains title to them.
b. Function
A typical scenario where an L/C is used is when an importer
makes application to a bank for credit to pay an exporter. When the
buyer receives the goods from the seller and is deemed compliant with
the L/C in terms of timely presentation of documents and goods that
conform to the conditions set out by the L/C, the funds are released
from the bank to pay the seller.
Commonly, if the importer is in good standing with the bank, an
offer of TR financing will be extend. When the terms of the TR are
agreed to (usually for payment in 60 to 90 days at a specified rate),
the bank will release the goods to the buyer for the purpose of
manufacture or sale whilst retaining the title to the goods. The buyer is
required to keep the goods separate from its other business and hold
the goods or proceeds from the sale of goods subject to remittance or
repossession of the bank.
b. Advantages
Major advantages of using a L/C for import/export transactions
include the buyer's ability to access certain suppliers who will not trade
without a letter of credit, payment of receivables is accelerated and
supplier collection time is reduced. In these cases, the buyer is assured
payment as long as the L/C is compliant to its terms.
When you use a TR the buyer need note make payment
immediately when documents are presented. Among other
advantages, the importer may take possession of the goods for resale
before paying the bank. As well, the buyer's working capital or cash
flow is not tied up and can be used for other business purposes.
d. Considerations
L/C financing may help with cash flow but the fees associated
with documentation and loan rates can be cost prohibitive. As with any
contract agreement, reviewing the details of the L/C before signing is
of utmost importance. Buyers may gain major advantages if the
supplier does not participate in forming the terms of the L/C. The seller
should always review the contract in its early stages to resolve
discrepancies and vet errors before any bank is involved. If an error
needs to be corrected or terms adjusted, banks will charge additional
fees. Sellers can request that buyers pay for all bank fees associated
with the L/C.
TR's may have unattractive associated rates and fees that can
outweigh the advantages of convenience and freed-up working capital.
Considering the use of other instruments like Import Documentary
Collections may better help to reduce costs.
A. CONCEPT OF A TRUST RECEIPT TRANSACTION
A trust receipt transaction, within the meaning of this Decree, is
any transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as

26 | P a g e

entrustee, whereby the entruster, who owns or holds absolute title or

security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed
document called a "trust receipt".
1. LOAN /SECURITY FEATURE
In a letter of credit-trust receipt arrangement, a bank extends a
loan covered by the letter of credit, and the trust receipts act as
the security for the loan. In other words, the transaction involves
a loan feature represented by the letter of credit, and a security
feature which is in the covering trust receipt. [ Vintola v. Insular
Bank of Asia and America ]
The security feature is what provides the much needed
financial assistance to our traders in the importation or purchase
of goods or merchandise through the use of those goods or
merchandise as collateral for the advancements made by a bank.
The title of the bank to the security is the one sought to be
protected and not the loan which is a separate and distinct
agreement. [People v. Nitafan (1992)]
2. OWNERSHIP
OF
THE
GOODS,
DOCUMENTS
INSTRUMENTS UNDER A TRUST RECEIPT

AND

To secure the banker (entrustee) shall be repaid at the critical

point that is, when the imported goods finally reach the hands
of the intended vendee the banker takes the full title to the
goods at the very beginning, and he continues to hold that title
as his indispensable security until the goods are sold.
The importer (entruster) becomes absolute owner of the
imported merchandise as soon as he has paid its price. The
ownership of the merchandise continues to be vested in the
owner thereof or in the person who has advance payment
(entrustee), until he has been paid full, or if the merchandise has
already been sold, the proceeds of the sale should be turned
over to him by the importer or by his representative or successor
in interest. {Prudential Bank v. National Labor Relations
Commission (1995)]
B. RIGHTS OF THE ENTRUSTER
(1) In case of sale: Right to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as
appears in the trust receipt.
(2) In case of non-sale: Right to the return of the goods, documents or
instruments.
(3) Right to the enforcement of all other rights conferred on him in
the trust receipt (which are not contrary to the provisions of PD 115)
(4) Right to cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds
realized therefrom at any time upon default or failure of the entrustee
to comply with any of the terms and conditions of the trust receipt or
any other agreement between the entruster and the entrustee

27 | P a g e

(5) Right to sell the goods, documents or instruments at public or

private sale, not less than five days after serving or sending of notice
to the entrustee of the intention to sell
(6) Right to purchase at a public sale the goods, documents, or
instruments
(7) Right to recover deficiency from the entrustee should the
proceeds be insufficient [PD 115, Sec. 7]
The entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty of sale or other
disposition of the goods, documents or instruments under the terms of
the trust receipt transaction be responsible as principal or as
vendor under any sale or contract to sell made by the
entrustee. [PD 115, Sec. 8]
B.1. VALIDITY OF THE SECURITY INTEREST AGAINST THE
CREDITORS OF THE ENTRUSTEE/INNOCENT PURCHASERS FOR
VALUE
The entrusters security interest in goods, documents, or
instruments pursuant to the terms of a trust receipt shall be valid
as against all creditors of the entrustee for the duration of the
trust receipt agreement. [PD 115, Sec. 12]
A purchaser of goods from an entrustee with right to sell, or
of documents or instruments through their customary form of
transfer, who buys the goods, documents, or instruments for
value and in good faith from the entrustee, acquires said goods,
documents or instruments free from the entrusters security
Interest. [PD 115, Sec. 11]
C. OBLIGATIONS AND LIABILITIES OF THE ENTRUSTEE
1. hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt;
2. receive the proceeds in trust for the entruster and turn over the
same to the entruster to the extent of the amount owing to the
entruster or as appears on the trust receipt;
3. insure the goods for their total value against loss from fire, theft,
pilferage or other casualties;
4. keep said goods or proceeds thereof whether in money or whatever
form, separate and capable of identification as property of the
entruster; and
5. return the goods, documents or instruments in the event of nonsale or upon demand of the entruster; and
6. observe terms and conditions of the trust receipt not contrary to
PD 115. [PD 115, Sec.9]
C.1.
PAYMENT/DELIVERY
OF
PROCEEDS
OF
SALE
DISPOSITION OF GOODS, DOCUMENTS OR INSTRUMENTS

OR

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 shall constitute the crime of estafa, punishable under RPC
315, par.1 (b) [ PD 115,Sec.13]

28 | P a g e

C.2. RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN

CASE OF SALE
The risk of loss shall be borne by the entrustee. Loss of goods,
documents or instruments which are the subject of a trust receipt,
pending their disposition, irrespective of whether or not it was due to
the fault or negligence of the entrustee, shall not extinguish his
obligation to the entruster for the value thereof. [PD 115, Sec.10]
C.3. PENAL SANCTION IF OFFENDER IS A CORPORATION
If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty 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, Sec. 13]

D. REMEDIES AVAILABLE
D.1. UPON DEFAULT OR FAILURE OF THE ENTRUSTEE TO COMPLY
WITH THE TERMS AND CONDITIONS
a.) The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom.
b.) The entruster may sell the goods, documents or instruments not
less than five days after serving or sending of the requisite notice, and
the entruster may become a purchaser at a public sale.
c.) The proceeds shall be applied
(a) to the payment of the expenses thereof;
(b) to the payment of the expenses of re-taking, keeping
and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustees indebtedness to
the entruster. [PD 115, Sec. 7]
D.2. IN CASE OF FAILURE TO TURN OVER THE PROCEEDS OF THE
SALE, OR FAILURE TO RETURN IN CASE OF NON-SALE
File a criminal case for estafa under RPC 315, par. 1(b). [PD 115,
Sec.13]

JURISPRUDENCE
PILIPINAS BANK, petitioner, vs. ALFREDO T. ONG and LEONCIA
LIM, respondents. [G.R. No. 133176. August 8, 2002]
FACTS:
On April 1991, Baliwag Mahogany Corporation (BMC), through its
president, respondent Alfredo T. Ong, applied for a domestic
commercial letter of credit with petitioner Pilipinas Bank (hereinafter
referred to as the bank) to finance the purchase of about 100,000
board feet of Air Dried, Dark Red Lauan sawn lumber.

29 | P a g e

The bank approved the application and issued Letter of Credit No.
91/725-HO in the amount of P 3,500,000.00. To secure payment of the
amount, BMC, through respondent Ong, executed two (2) trust receipts
providing inter alia that it shall turn over the proceeds of the goods to
the bank, if sold, or return the goods, if unsold, upon maturity on July
28, 1991 and August 4, 1991.
On due dates, BNC failed to comply with the trust receipt agreement.
On November 22, 1991, it filed with the Securities and Exchange
Commission (SEC) a Petition for Rehabilitation and for a Declaration in
a State of Suspension of Payments under Section 6 (c) of P.D. No. 902A, as amended, docketed as SEC Case No. 4109. On November 27,
1992, the SEC rendered a Decision approving the Rehabilitation Plan of
BMC as contained in the MOA and declaring it in a state of suspension
of payments.
However, BMC and respondent Ong defaulted in the payment of their
obligations under the rescheduled payment scheme provided in the
MOA.
ISSUE: Did the respondents, Ong and Leoncia Lim, as the president
and treasurer of BMC, respectively violate the Trust Receipt Law (PD
No. 115)?
RULING: NO. The execution of the MOA constitutes a novation which
places petitioner Bank in estoppel to insist on the original trust
relation and constitutes a bar to the filing of any criminal information
for violation of the trust receipts law.
It has the effect of a compromise agreement, novated BMCs existing
obligations under the trust receipt agreement. The novation converted
the parties relationship into one of an ordinary creditor and debtor.
Moreover, the execution of the MOA precludes any criminal liability on
their part which may arise in case they violate any provision thereof.
The execution of the MOA extinguished respondents obligation under
the trust receipt. Respondents liability, if any, would only be civil in
nature since the trust receipts were transformed into mere loan
documents after the execution of the MOA. This is reinforced by the
fact that the mortgage contracts executed by the BMC survived
despite its non-compliance with the conditions set forth in the MOA.
ALFREDO CHING, petitioner, versus THE SECRETARY OF
JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT,
JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila,
Branch 52; RIZAL COMMERCIAL BANKING CORP. and THE
PEOPLE OF THE PHILIPPINES, respondents.
(G. R. No. 164317 February 6, 2006)
FACTS:
Ching was the Senior Vice President of Philippine Blooming Mills, Inc
(PBMI). PBMI, through Ching applied with the Rizal Commercial Banking
Corporation (RCBC) for the issuance of Commercial Letters of Credit to
finance its importation of assorted goods. RCBC approved the
application, and irrevocable Letters of Credit were issued in favor of
Ching (PBMI). The goods were purchased and delivered in trust to
PBMI. Ching signed 13 trust receipts as SURETY, acknowledging

30 | P a g e

delivery of goods to RCBC or to return their value despite repeated

demands. Thus, RCBC filed a criminal complaint for estafa against
Ching. The City Prosecutor found probable cause for estafa, thus 13
informations were filed.
Ching appealed to the Minister of Justice which ordered the withdrawal
of the informations. RCBC refiled the criminal complaint for estafa
before the office of the City Prosecutor. The City Prosecutor ruled that
there was no probable cause to charge Ching as his liability was only
civil and not criminal having signed the trust receipts as surety. RCBC
appealed to the Secretary of Justice which reversed the resolution of
the City prosecutor, holding that Ching as senior Vice-President of
PBMI, executed the 13 trust receipts and as such, was one responsible
for the offense. The execution of said receipts is enough to indict Ching
as the official responsible for the violation of PD 115 (Trust Receipts
Law).
The Court of Appeals (CA) affirmed the decision of the Secretary of
Justice. Hence, this appeal.
ISSUE: Can Ching be held criminally liable for violating the Trust
Receipts Law when he signed the trust receipts merely as a surety and
not as the entrustee?
RULING: Yes.An officer of a corporation who signed a trust receipt
cannot hide behind the cloak of the separate corporate personality of
the corporation and cannot avoid criminal persecution even though he
had no physical possession of the goods nor is benefitted by the
delictual acts. Though the entrustee is a corporation, nevertheless, the
law specifically makes the officers, employees and other officers or
persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The rationale is
that such officers or employees are vested with authority and
responsibility to devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally accountable.
A corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment. However, a
corporation may be charged and prosecuted for a crime of the
imposable penalty is FINE.
Rosario Textile Mills versus Home Bankers Savings and Trust
Company (G.R. No. 137232
June 29, 2005)
FACTS:
Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied
from Home Bankers Savings and Trust Co. for an Omnibus Credit Line
for P10 million. The bank approved RTMCs credit line but for only P8
million. The bank notified RTMC of the grant of the said loan thru a
letter dated March 2, 1989 which contained terms and conditions
conformed by RTMC thru Edilberto V. Yujuico.
On March 3, 1989, Yujuico signed a Surety Agreement in favor of the
bank, in which he bound himself jointly and severally with RTMC for the
payment of all RTMCs indebtedness to the bank from 1989 to 1990.
RTMC availed of the credit line by making numerous drawdowns, each

31 | P a g e

drawdown being covered by a separate promissory note and trust

receipt. RTMC, represented by Yujuico, executed in favor of the bank a
total of eleven (11) promissory notes.
Yujuico contend that he should be absolved from liability. He alleged
that the bank gave assurance that the suretyship agreement was
merely a formality under which Yujuico will not be personally liable. He
theorized that when RTMC imported the raw materials needed for its
manufacturer, using the credit line, he was merely acting on behalf of
the bank, the true owner of the goods by virtue of the trust receipts.
ISSUE: IsYujuico absolved from liability by the grant of the credit line
and the execution of the suretyship agreement?
RULING: No. Yujuicos agreement conveniently ignores the true nature
of its transaction with the bank. A trust receipt is a security agreement
pursuant to which a bank acquires a security interest in the goods. It
secures an indebtedness and there can be no such thing as security
interest that secures no obligation.
In Samo vs. People, the Supreme Court described a trust receipt as a
security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. In this case, Yujuico signed to
secure the obligation of the bank to pay. Hence, he is liable under the
trust receipts law.

QUESTIONS AND ANSWERS

1. What is the loan and security feature of the trust receipt
transaction?
A trust receipt arrangement is endowed with its own distinctive
features and characteristics. Under that set-up, a bank extends a loan
covered by the Letter of Credit, with the trust receipt as a security for
the loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in
the covering trust receipt. A trust receipt, therefore, is a security
agreement, pursuant to which a bank acquires a "security interest" in
the goods. It secures an indebtedness and there can be no such thing
as security interest that secures no obligation (Sps. Vintola vs. Insular
Bank of Asia and America, G.R. No. 73271, May 29, 1987).
2. Who is the owner of the articles subject of the TR?
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

32 | P a g e

Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R.
No. 137232. June 29, 2005).
3. What is the penal sanction if offender is a corporation?
The Trust Receipts Law recognizes the impossibility of imposing
the penalty of imprisonment on a corporation. Hence, if the entrustee
is a corporation, the law makes the officers or employees or other
persons responsible for the offense liable to suffer the penalty of
imprisonment. The reason is obvious, corporations, partnerships,
associations and other juridical entities cannot be put to jail. Hence,
the criminal liability falls on the human agent responsible for the
violation of the Trust Receipts Law (Ong vs. CA, G.R. No. 119858, April
29, 2003).
4. In the event of default by the entrustee on his obligation
under the trust receipt agreement, is it absolutely necessary
for the entruster to cancel the trust and take possession of the
goods to be able to enforce his right thereunder?
The law uses the word "may" in granting to the entruster the
right to cancel the trust and take possession of the goods.
Consequently, the entrustee has the discretion to avail of such right or
seek any alternative action, such as a third party claim or a separate
civil action which it deems best 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 trust agreement (South City Homes, Inc. v. BA Finance
Corporation, G.R. No. 135462, Dec. 7, 2001).
5. What is the effect of novation of a trust agreement?
Where the entruster and entrustee entered into an agreement
which provides for conditions incompatible with the trust receipt
agreement, the obligation under the trust receipt is extinguished.
Hence, the breach in the subsequent agreement does not give rise to a
criminal liability under P.D. 115 but only civil liability (Philippine Bank
versus Ong, G.R. No. 133176, Aug. 8, 2002).
6. Can deposits in a savings account opened by the buyer
subsequent to the TR transaction be applied to outstanding
obligations under the TR account?
No, the receipt of the bank of a sum of money without reference
to the trust receipt obligation does not obligate the bank to apply the
money received against the trust receipt obligation. Neither does
compensation arise because compensation is not proper when one of
the debts consists in civil liability arising from criminal (Metropolitan
Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).
7. What acts or omissions are penalized under the Trust
Receipts Law?
It declares the failure to turn over goods or proceeds realized
from sale thereof, as a criminal offense under Article 315 (1) (b) of the
Revised Penal Code. The law is violated whenever the entrustee or
person to whom trust receipts were issued to: (a) return the goods
covered by the trust receipts; or (b) return the proceeds of the sale of
said goods (Metropolitan Bank versus Tonda, G.R. No. 134436, August
16, 2000).

33 | P a g e

8. Is lack of intent to defraud a bar to the prosecution of these

acts or omissions?
No. The TR Law is violated whenever the entrustee fails to: (1)
turn over the proceeds of the sale of the goods, or (2) return the goods
covered by the trust receipts if the goods are not sold. The mere failure
to account or return gives rise to the crime which is malumprohibitum.
There is no requirement to prove intent to defraud (Ching versus
Secretary of Justice, G.R. No. 164317, February 6, 2006; Colinares
versus Court of Appeals, G.R. No. 90828, September 5, 2000; Ong
versus Court of Appeals, G.R. No. 119858, April 29, 2003).
9. Mr. Noble, as the President of ABC Trading Inc executed a
trust receipt in favor of BPI Bank to secure the importation by
this company of certain good. After release and sale of the
imported goods, the proceeds from the sale were not turned
over the BPI. Would BPI be justified in filing a case for estafa
against Noble?
SUGGESTED ANSWER:
Yes, BPI would be justified in filing a case for estafa under PD 115
against Noble. The fact that the trust receipt was issued in favor of a
bank, instead of a seller, to secure the importation of the goods did not
preclude the application of the Trust Receipt Law. Under the law, any
officer or employee of a corporation responsible for the violotation of a
trust receipt is subject to the liability thereunder (Sia versus People
166 SCRA 655).
10. X buys goods from a foreign supplier using his credit line
with a bank to pay for the goods. Upon arrival of the goods at
the pier, the bank requires X to sign a trust receipt that
contains the usual language. X disposes of the goods and
receives payment but does not pay the bank. The bank files a
criminal action against X for violation of the Trust Receipt Law.
X asserts that the trust receipt is only to secure his debt and
that a criminal action cannot lie against him because that
would be violative of his constitutional right against
imprisonment for non-payment of a debt. Is he correct?
SUGGESTED ANSWER:
No. Violation of a trust receipt is criminal as it is punished as estafa
under Art 315 of the RPC. There is a public policy involved which is to
assure the entruster the reimbursement of the amount advanced or
the balance thereof for the goods subject of the trust receipt. The
execution of the trust receipt or the use thereof promotes the smooth
flow of commerce as it helps the importer or buyer of the goods
covered thereby.
11. PB & Co., Inc., a manufacturer of steel and steel products,
imported certain raw materials for use by it in the manufacture
of its products. The importation was effected through a trust
receipt arrangement with AB Banking Corporation. When it
applied for issuance by AB Banking Corporation of a letter of
credit, PB & Co., Inc., did not make any representation to the
bank that it would be selling what it had imported. It failed to
pay the bank. When demand was made upon it to account for

34 | P a g e

the importation, to return the articles, or turn-over the

proceeds of the sale thereof to the bank, PB & Co., Inc., also
failed. The bank sued PB & Co.s President who was the
signatory of the trust receipt for estafa. The President put up
the defense that he could not be made liable because there
was no deceit resulting in the violation of the trust receipt
because the raw materials were not sold but used by the
corporation in the manufacture of its products. Would those
defenses be sustainable? Why?
SUGGESTED ANSWER:
No, the defenses are not sustainable. The lack of deceit should not be
sustained because of the mere failure to account for the importation,
or return the articles constitute abuse of confidence under the crime,
estafa. The facts that the goods were not sold but were used in the
manufacture of its products is immaterial because a violation of the
trust receipts law happened when it failed to account for the goods or
return them to the Bank upon demand.

CHATTEL MORTGAGE (Act. No. 1501)

Article 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.
Article 1485. The preceding article shall be applied to
contracts purporting to be leases of personal property with
option to buy, when the lessor has deprived the lessee of the
possession or enjoyment of the thing.
Article 2140. By a chattel mortgage, personal property is
recorded in the Chattel Mortgage Register as a security for the
performance of an obligation. If the movable, instead of being
recorded, is delivered to the creditor or a third person, the
contract is a pledge and not a chattel mortgage.

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Article 2141. The provisions of this Code on pledge,

insofar as they are not in conflict with the Chattel Mortgage
Law shall be applicable to chattel mortgages.
DEFINITION OF CHATTEL MORTGAGE:

CHATTEL MORTGAGE is a contract by virtue of which a

personal property is recorded in the Chattel Mortgage Register as
security for the performance of an obligation.
Section 3, Act 1508 (Chattel Mortgage Law )
It is a conditional sale of personal property as security
for the payment of a debt, or the performance of some
other obligation specified therein, the condition being that
the sale shall be void upon the seller paying to the
purchaser a sum of money or doing some other act named.
If the condition is performed according to its terms, the
mortgage and sale immediately become void, and the
mortgagee is thereby divested of his title.

CHARACTERISTICS:
1) It is an accessory contract because it secures performance of a
principal obligation.
2) It is a formal contract because it requires registration in the
Chattel Mortgage Register for its validity (but only as against
third persons).
3) It is a unilateral contract because it produces only obligations
on the part of the creditor to free the thing from the
encumbrance on fulfillment of the obligation.
4) The excess of the proceeds of the sale goes to the debtor or
mortgagor.
5) Creditor or mortgagee can recover deficiency from the debtor or
mortgagor, except if covered by the Recto Law.

CHATTEL MORTGAGE DISTINGUISHED FROM PLEDGE:

Chattel
Pledge
Mortgage
1) Delivery of Personal Property
Not
required

Delivery is
required
for
validity
2) Registration in the Chattel
Mortgage Register
Necessary
Not
for validity of necessary; Public
the CM against document
is
third persons
enough to bind
third persons

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3) Right to Excess of Proceeds of

Sale
The
The excess
excess goes to goes
to
the
the
debtor/ pledgee/creditor,
mortgagor
unless otherwise
stipulated
4) Right to Recover Deficiency
Creditor/
Creditor/
mortgagee can mortgagee is not
recover from the entitled
to
debtor/
recover
any
mortgagor,
deficiency
after
except
if the property is
covered
by sold,
Recto Law
notwithstanding
contrary
stipulation
A. ESSENTIAL REQUISITES:
1) It is constituted to secure the fulfillment of a principal obligation.
2) The mortgagor must be the absolute owner of the thing
mortgaged.
3) The persons constituting the mortgage have the free disposal of
their property, and in the absence thereof, that they be legally
authorized for the purpose.
4) It cannot exist without a valid obligation.
5) It must be registered.
Registration of Chattel Mortgage:
(1)Period-before the mortgagor has complied with his principal
obligation and no right of innocent third persons is prejudiced.
(2)Venuea) If the mortgagor resides in the Philippines in the office of
the register of deeds of the province in which the mortgagor
resides at the time of the making of the chattel mortgage.
b) If the mortgagor does not reside in the Philippines in the
province in which the property is situated.
c) If the property is located in a different province
registration in both provinces is required.
(3)Effecta) It creates real rights which follow the chattel.
b) It is an effective and binding notice to other creditors.
c) It gives the mortgagee symbolical possession.
Effect of failure to register in the Chattel Mortgage Registry:
The mortgage is binding between the parties. However, the right
of the person in whose favor the law establishes a mortgage is to
demand the execution and the recording of the instrument.
B. FORMAL REQUISITES:

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(1) It should substantially comply with the form prescribed by law;

(2) It should be signed by the person/s executing the same in the
presence of two witnesses who shall sign the mortgage as witnesses to
the execution thereof; and
(3) Each mortgagor and mortgagee or, in the absence of the
mortgagee, his agent or attorney, shall make and subscribe an affidavit
in the form prescribed by law, which affidavit, signed by the parties to
the mortgage and the two witnesses and the certificate of the oath
signed by the person authorized to administer an oath shall be
appended to such mortgage and recorded therewith. [Sec. 5, Act 1508]
a) Affidavit of good faith is required, and it states that the chattel
mortgage is
i. Made solely for the purpose of securing the obligation
specified in the chattel mortgage, and
ii.
The principal obligation is a just and valid obligation, and
one not entered into for the purpose of fraud.
C. AFTER-ACQUIRED PROPERTY
GENERAL RULE: A chattel mortgage shall cover only the
property described therein and not like or substituted property
thereafter acquired by the mortgagor. (Sec 7, Act 1508)
EXCEPTION: The after-acquired property is either:
1) in renewal of, or in substitution for, goods on hand when the
mortgage was executed; or
2) purchased with the proceeds of the sale of such goods (Torres v
Limjap. 56 Phil 141, 1931)
D. AFTER-INCURRED OBLIGATIONS
GENERAL RULE: Chattel mortgage shall be made for the
purpose of securing the obligation SPECIFIED IN THE CONDITIONS
THEREOF, AND FOR NO OTHER PURPOSE. (Sec 3, Act 1508); A chattel
mortgage can only cover obligations existing at the time the mortgage
is constituted (Acme Shoe, et al v CA, GR No. 103576, August 22,
1996).
EXCEPTION: When:
1) The old contract is amended or a new chattel mortgage is made
which stipulates an agreement covering the newly contracted
debt; AND
2) Such contract must observe the formalities prescribed by the
Chattel Mortgage Law as mentioned in Section 5.
E. RIGHT OF JUNIOR MORTGAGEE
The only right passes to junior mortgagee or the second
mortgagee is the right of redemption within the period of redemption
allowed by law, for as long as the mortgagor has not yet exercised his
right of redemption.

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GENERAL RULE: The rights of the first mortgagee over

mortgaged properties are superior to those of a subsequent attaching
creditor and other junior mortgagees. In Chattel Mortgage the right is
only an EQUITY REDEMPTION.
Period
exercised:

within

which

equity

of

redemption

may

be

Right of redemption is exercised from the date the condition of

chattel mortgage is broken but BEFORE the foreclosure sale of
collateral. The 30-day period to foreclose a chattel mortgage is the
minimum period after violation of the mortgage condition for the
mortgage creditor to cause the sale at public auction of the mortgaged
chattel and is the period of grace for the mortgagor to discharge the
mortgage obligation.
Amount to be paid:
1) The amount due on such mortgagee; and
2) The costs and expenses incurred by such breach of condition
before sale.
Persons entitled to redeem:
1) Mortgagor;
2) A person holding subsequent mortgagee;
3) A subsequent attaching creditor.
EFFECT OF TAKING POSSESSION OF MORTGAGED PROPERTY AS
AGAINST A JUNIOR MORTGAGEE:
In order to make a mortgaged property in a chattel mortgage to
create a lien as against possible rights of creditors, subsequent
purchasers and encumbrancers in good faith, it is necessary that the
possession of the mortgaged chattels be transferred, or within
reasonable time the instrument be filed or recorded. Hence, a first
chattel mortgage unregistered is absolutely void against a second or
junior mortgagee taken in good faith; and such junior mortgagee need
not be recorded at all to give priority over such first mortgagee.
F. FORECLOSURE PROCEDURE
(Section 14, Chattel Mortgage Law)
1) Thirty (30) days after the condition of a chattel mortgage is
broken, the mortgagee may cause the mortgaged property or
any part thereof to be sold at public auction by a public officer at
a public place in the municipality where the mortgagor resides or
where the property is situated;
2) The application for the foreclosure of the mortgagee should be
filed with the Executive Judge through the Clerk of Court;
3) After receipt of the application, the Clerk of Court shall, among
other duties:
i. Raffle the application among the Sheriffs; and
ii.
Cause the posting of the notice of sale.
4) Notice of the time, place and purpose of such sale must be
posted, at least ten (10) days before the date of sale, at 2 or
more public places in the property is situated;

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5) The mortgagee shall notify the mortgagor and the persons

holding subsequent mortgages of the time and place of sale, at
least 10 days before the sale, either by notice in writing directed
to him or left at his abode, if within the municipality, or sent by
mail if he does not reside in such community;
6) The officer making the sale shall, within 30 days thereafter, make
in writing a return of his doings and file the same in the office of
the registry of deeds where the mortgage is recorded, and the
registry of deeds shall record the same. The return shall
particularly describe the articles sold and state the amount
received for each article.
DEFAULT AND FORECLOSURE:
The default of the mortgagor have no effect of vesting ownership
of the mortgaged property on the mortgagee. He is only permitted to
recover his credit from proceeds of the sale of the property at public
auction through public officer in the manner prescribed in Sec. 14, Act
No. 1508. PactumCommissorium is prohibited.
G. REDEMPTION
Definition:
It is a transaction by which the mortgagor reacquires the
property which may have passed under the mortgage or divests the
property of the lien which the mortgage may have created.
Kinds:
(a) Equity of redemption: A mortgagors total ownership value
or rights in a mortgaged investment, property or asset.
In judicial foreclosure of real estate mortgage under the ROC, it is
the right of the mortgagor to redeem the mortgaged property by
paying the secured debt within the 120 day period from entry of
judgment or after the foreclosure sale, but before the sale of the
mortgaged property or confirmation of sale
(b) Right of redemption: The right to disencumber
property or to free it from a claim or lien, specifically the right
to free from encumbrance of a foreclosure or other judicial
sale, or to recover the title passing thereby by paying what is
due with interests and costs.
In extrajudicial foreclosure of real estate mortgage, the right of
the mortgagor to redeem the property within a certain period after it
was sold for the satisfaction of the debt.
(i) For natural persons one year from the registration of the TCT
(ii) For juridical persons three months from the foreclosure
Note: Formal offer to redeem must be with tender of redemption
price to preserve right of redemption
When is equity of redemption may be exercised?

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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.
The following may redeem if the condition of the mortgage is
broken:
1) Mortgagor
2) A person holding subsequent mortgage
3) A subsequent attaching creditor (Sec. 13, Act 1508)

H. CLAIM FOR DEFICIENCY

General Rule: The mortgagee is entitled to recover deficiency.
Exception:
1) Recto Law;
2) In accommodation mortgages, the accommodation mortgagor is
liable only to the extent of the value of the mortgaged property;
3) Due to death of mortgagor. (Vda. De Jacob v. CA, G.R. No. 88602,
Apr. 6, 1990)
Application of Recto Law:
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)
(Articles 1484 & 1485 of the Civil Code)
Requisites for the Sale to be covered under the Recto
Law:
1) Sale of personal property
2) Payable in installments
3) CM constituted over the same property
Remedies of the Unpaid Seller under the Recto Law:
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.

JURISPRUDENCE
ACME SHOE vs. COURT OF APPEALS
G.R. No. 103576 August 22, 1996
PRINCIPLE/S:
1) Contracts of Security; Contracts of security are either personal
or real. ). In contracts of real security, such as a mortgage, that
fulfillment is secured by an encumbrance of property -- in chattel
mortgage by the execution of the corresponding and substantially in

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the form prescribed by law-- upon the essential condition that if the
obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation, but
that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory character of
the agreement. As the law so puts it, once the obligation is complied
with, then the contract of security becomes, ipso facto, null and void.
2) The rule on after-incurred obligations; a chattel mortgage can
only cover obligations existing at the time the mortgage is constituted.
FACTS: Chua Pac, president and general manager of Acme Shoe,
Rubber and Plastic Corporation, executed a chattel mortgage in favor
of Producers Bank of the Philippines, as a security for a corporate loan
in the amount of P3M. The chattel mortgage contained a clause that
provided for the mortgage to stand as security for all other obligations
contracted before, during and after the constitution of the mortgage.
The P3M was paid. Subsequently, the corporation obtained additional
financial accommodations totalling P2.7M. This was also paid on the
due date. Again, the bank extended another loan to the corporation in
the amount of P1M, covered by four promissory notes. However, the
corporation was unable to pay this at maturity. Thereupon, the bank
applied for an extra-judicial foreclosure of mortgage.
ISSUE/S:
1) Whether or not extra-judicial foreclosure of the chattel
mortgage is proper.
2)Would it be valid and effective to have a clause in a chattel
mortgage that purports to likewise extend its coverage to obligations
yet to be contracted or incurred?
RULING:
1)No. The chattel mortgage was terminated when payment for
the P3M loan was made so there was no chattel mortgage to even
foreclose at the time the bank instituted the extra-judicial foreclosure.
Contracts of security are either personal or real. In contracts of
real security, such a mortgage, that fulfillment is secured by an
encumbrance of property -- in chattel mortgage by the execution-upon the essential condition that if the obligation becomes due and the
debtor defaults, then the property encumbered can be alienated for
the payment of the obligation, but that should the obligation be duly
paid, then the contract is automatically extinguished proceeding from
the accessory character of the agreement. As the law so puts it, once
the obligation is complied with, then the contract of security becomes,
ipso facto, null and void.
2) No. While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as these
future debts are accurately described, a chattel mortgage,
however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet to be contracted
can be a binding 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 concluding a fresh chattel

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mortgage or by amending the old contract conformably with the

form prescribed by the Chattel Mortgage Law.
ALEJANDRO TORES, et al v FRANCISCO LIMJAP, special
administrator of the deceased Henson
GR No. 34385; September 21, 1931
PRINCIPLE/S:
1)The provision in Section 7 of Act 1508 does not apply to drug
stores, bazaars and all other stores in the nature of a revolving and
floating business, i.e. one that deals with the sale of either perishable
goods, "rolling" goods, or goods subject to wear and tear.
2)A stipulation in the chattel mortgage, extending its scope and
effect to after-acquired property, is valid and binding 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.
FACTS: Chattel mortgages were executed by defendant (Henson) on
his drug store in favor of the plaintiff as security for his loan he
acquired from the latter. Included in the contract is a stipulation
authorizing Henson to sell the goods covered by the mortgage and
replace them with the other goods thereafter acquired. Since
defendant failed to comply with his obligation to pay the interest on
the loans, plaintiffs wanted to take possession of the chattels and
moved to foreclose their mortgages thereon. The defendant however
asserted that the chattels (referring to the goods) which the plaintiffs
sought to recover were not the same property described in the
mortgage and are therefore not to be attached. According to him, even
if the contract contained a stipulation extending its scope and effect to
after-acquired property, it is not valid because it contravenes the
provision of Section 7 of Act 1508: Chattel mortgage should cover
only property described therein and not like or substituted property
thereafter acquired.
ISSUE/S:
1) WON a stipulation in a mortgage extending its scope and
effects to after-acquired goods valid?
2) Are the goods in question covered by the chattel mortgage
despite the express provision of Section 7 of Act 1508?
RULING:
1) Yes, a stipulation is valid and binding if the after-acquired
property is in renewal of, or in substitution for, goods on hand when
the mortgage was executed, or is purchased with the proceeds of the
sale of such goods. In the case, the goods on hand when the mortgage
was executed were substituted by these after-acquired properties.
2) Yes. The provision in the last paragraph of Section 7 of the
Chattel Mortgage law is not applicable to drug stores, bazaars and all
other stores in the nature of a revolving and floating business. The
intention of the Law is to promote business and trade in these Islands

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and to give impetus to the economic development of the country. If

said provision were intended to apply to this class of business, it would
be practically impossible to constitute a mortgage on such stores
without closing them, contrary to the very spirit about a handicap to
trade and business, would restrain the circulation of capital, and would
defeat the purpose for which the law was enacted, to wit, the
promotion of business and the economic development of the country.
INDUSTRIAL FINANCE CORPORATION, petitioner,vs.
CASTOR TOBIAS, respondent.
G.R. No. L41555; July 27 1977
PRINCIPLE:
Should the vendee or purchaser of a personal property be in
default in the payment of two or more of the agreed installments, the
vendor or seller has the option to either exact fulfillment by the
purchaser of -the obligation, or to cancel the sale, or to foreclose the
mortgage on the purchased personal property, if one was constituted.
The remedies provided for in Art. 1484 are considered alternative, not
cumulative
FACTS: On June 16, 1968, Tobias bought on installment 1 Dodge truck
from Leelin Motors, Inc. executing a promissory note in favor of the
latter, for the sum of P29.070.28 payable in thirty-six (36) equal
installments with interest at the rate of 12% per annum. To secure
payment of the promissory note, respondent Tobias executed in favor
of Leelin Motors, Inc. a chattel mortgage on the Dodge truck.
On June 19, 1969, Leelin Motors, Inc. indorsed the promissory
note and assigned the chattel mortgage to petitioner Industrial Finance
Corporation. Tobias paid 6 installments on the promissory note directly
to the petitioner Industrial Finance Corporation but defaulted on more
than two installments, IFC through a letter gave Tobias a choice of
either paying the balance of the purchase price or surrender the truck.
Tobias responded to the letter voluntarily and willingly surrendering the
truck which was still in the custody of Leelin Motors ever since the
truck met an accident. Upon learning that the truck met an accident,
IFC decided not to get the truck anymore from Leelin Motors. Instead,
IFC filed an action against Tobias to recover the unpaid balance of the
promissory note.
The lower court dismissed the complaint and on appeal, the CA
affirmed the decision of the CFI.
ISSUE: Whether or not IFC is estopped to insist on its claim the
balance of the promissory note when it demanded the return or
surrender of the track in its letter of May 14, 1970.
RULING: No. The claim of respondent cannot be sustained. Art. 1484
is clear that "should the vendee or purchaser of a personal property be
in default in the payment of two or more of the agreed installments,
the vendor or seller has the option to either exact fulfillment by the
purchaser of -the obligation, or to cancel the sale, or to foreclose the
mortgage on the purchased personal property, if one was constituted.
Since the case involves the sale of personal property on installments
Art. 1484 of the Civil Code should apply.

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Since the petitioner has not availed itself of the remedy of

cancelling the sale of the truck in question or of foreclosing the chattel
mortgage on said truck, petitioner is still free to avail of the remedy of
exacting fulfillment.
MAGNA FINANCIAL SERVICES GROUP, INC. vs. ELIAS
COLARINA
G.R. No. 158635, December 9, 2005
FACTS: Elias Colarina bought on installment one (1) unit Suzuki
Multicab from Magna Financial Services Group, Inc. After making down
payment, Colarina executed promissory note for the balance and
executed a deed of chattel mortgage over the motor vehicle. Colarina
failed to pay monthly amortization beginning January 1999 and despite
repeated demands, he failed to settle the balance. Financial Services
Group filed for foreclosure of Chattel Mortgage with replevin. Colarina
voluntarily surrendered physical possession of the vehicle. The trial
court rendered judgment in favour of Magna Financial Services.
Colarina appealed to the RTC but it affirmed the decision of the trial
court.
ISSUE: Whether or not there is actual sale of the mortgaged vehicle
that would bar the creditor from recovering unpaid balance.
RULING: No. There was no actual foreclosure of the subject vehicle.
Where the mortgagee (Magna Financial Services Group, Inc.) elects a
remedy of foreclosure, the law requires the actual foreclosure of the
mortgaged chattel in accordance with Sec. 14 of Act No. 1508.
The law requires actual sale of the mortgaged chattel when the
mortgagee elects a remedy of foreclosure in order to recover the
unpaid balance from mortgagor.
Under the law, the delivery of possession of the mortgaged
property to the mortgagee can only operate to extinguish liability of
the mortgagor if the mortgagee had actually caused the foreclosure
sale of the mortgaged property when it recovered possession thereof.
In this case, there has been no actual sale of the property at public
auction; hence Magna Financial Services cannot recover the unpaid
balance from Colarina.

QUESTIONS AND ANSWERS

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1)Distinguish a contract of chattel mortgage from a contract of

pledge.
Answer: The following are the distinctions between a contract of
chattel mortgage and a contract of pledge:
1) A chattel mortgage is a formal contract while a pledge is a real
contract;
2) In a contract of Chattel Mortgage, possession belongs to the
creditor, while in a contract of pledge possession belongs to
the debtor;
3) A contract of chattel mortgage must be recorded in a public
instrument to bind third persons while a contract of pledge must
be in a public instrument containing description of the thing
pledged and the date thereof to bind third persons.
2) Juan constructed a building on a parcel of land he leased
from Mario. He executed a chattel mortgage over said building
in favor of Pedro for a loan obtained from the latter. When he
could not pay Pedro, Pedro initiated foreclosure proceedings.
Juan claimed that
the building he had constructed on the
leased land cannot be validly foreclosed because the building
was, by law, an immovable. Is Juan correct?
Answer: No, Juan is not correct. The Chattel Mortgage is void and
cannot be foreclosed because the building is an immovable and cannot
be an object of a chattel mortgage.
However, If the building was intended and is built of light materials, the
chattel mortgage may be considered as valid as between the parties
and it may be considered in respect to them as movable property,
since it can be removed from one place to another.
3)What kind of property can be the subject of a chattel
mortgage?
Answer:
General rule: Personal property only
Exception: Real property covered by chattel mortgage:
a. Growing crops (Sec 7 of Act 1508 or Chattel Mortgage Law)
b. House built on another persons land (Tumalad v Vicencio, 41
SCRA 143, 1971)
c. Machinery permanently affixed to a building, under the
doctrine of estoppel (Makati Leasing v Wearever Textile, 122 SCRA 296,
1983)
4) Can like or substituted property be deemed covered by a
chattel mortgage?
Answer: Generally, NO because Sec 7 of Act 1508 expressly provides
that only property described therein and not like or substituted
property thereafter acquired by a mortgagor may be covered by a
chattel mortgage. However, this provision does not apply to drug
stores, bazaars and all other stores in the nature of a revolving and
floating business, ie. One that deals with the sale of either perishable
goods, rolling goods, or goods subject to wear and tear. (Torres v
Limjap, 56 Phil 141, 1931)
5) Is a promise expressing the inclusion of future debts in a
chattel mortgage initially contracted valid and enforceable?

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Answer: It is valid but the security itself cant be enforced or cannot

exist/arise until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh contract or by
amending the old one and provided that it conforms to the formalities
prescribed by the Chattel Mortgage Law.
6) What is the effect of a mortgagee, who does not have
possession of the property but registered the mortgage, to
subsequent mortgagee?
Answer: The mortgagee has the right superior to the right of the
subsequent mortgagee. The mortgage has the force and effect of
mortgage when registered. The mortgagee can enforce his right on the
day on which it is filed for record, or on which the property is delivered.
The mortgage then is given life and force as against all persons,
second mortgagee or subsequent mortgage.
7) Can a chattel mortgagee sue for deficiency following
foreclosure?
Answer: Yes. A chattel mortgagee can sue for a deficiency judgment
following foreclosure.
Exception: The property sold in installments, the mortgagee can
no longer take any action against the purchaser to recover any unpaid
balance of the price (Art 1484, Civil Code).
Where the mortgagee elects a remedy of foreclosure, the law
requires the actual foreclosure of the mortgaged chattel
8) Where the proceeds from the sale of mortgage property
(chattel mortgage) do not fully satisfy the secured debt, is the
mortgagee entitled to recover the deficiency from the
mortgagor? State the rule and exception if any.
Answer: Generally, yes, the mortaggee is entitled to recover the
deficiency from the mortgagor.(Ablazavs Ignacio, L-11460, May
23,1958)
An exception to the aforementioned rule may be found in Article 1484
which speaks of a chattel mortgage as security for the purchase of
personal property payable in installments. Here, no deficiency
judgment can be asked. Any agreement to the contrary shall be void.
9) Can the unpaid seller avail of all remedies?
Answer: No, the remedies are alternative.
10) Is the mortgagees letter informing the mortgagor of his
intent to foreclose is already considered a foreclosure of the
chattel?
Answer: 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. (Industrial
Finance Corp v. Castor Tobias, G.R. No. L41555, July 27 1977)

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REAL ESTATE MORTGAGE LAW

(Act No. 3135, as amended by R.A 4118)
Articles 2124 2131 Civil Code
Art. 2124. Only the following property may be the object of a contract of
mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
Nevertheless, movables may be the object of a chattel mortgage. (1874a)
DEFINITION OF REAL ESTATE MORTGAGE
Mortgage (otherwise known as real estate mortgage or real mortgage)
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. (De Leon)
It is a contract in which the debtor guarantees to the creditor the
fulfillment of a principal obligation, subjecting for the faithful compliance
therewith a real property in case of non-fulfillment of said obligation at the time
stipulated. (12 Manresa, p. 460).
ESSENTIAL REQUISITES
Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. (1857)

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Art. 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or mortgage
consists may be alienated for the payment to the creditor. (1858)
Art. 2125. In addition to the requisites stated in Article 2085, it is
indispensable, in order that a mortgage may be validly constituted, that the
document in which it appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is nevertheless binding between the
parties.
The persons in whose favor the law establishes a mortgage have no
other right than to demand the execution and the recording of the document in
which the mortgage is formalized. (1875a)
The Essential Requisites of Mortgage are:
1. That it is constituted to secure the fulfillment of a principal obligation;
2. That the mortgagor be the absolute owner of the thing pledged or
mortgaged;
3. That the persons constituting the mortgage have the free disposal of
their property, and in the absence thereof, that they be legally
authorized for the purpose;
4. That the things in which the pledge or mortgage consists may be
alienated for the payment to the creditor when the principal
obligation becomes due;
5. That the document in which it appears be recorded in the Registry of
Property
A duly executed mortgage is presumed to be valid until the contrary
is shown. To the party attacking, rests the burden of proving its invalidity
due to fraud, duress or illegality. The right to attack the validity of a
mortgage may be lost by a waiver of defects and objections, or by
unreasonable delay to act amounting to ratification.

REGISTRATION REQUIREMENTS
A registration, whether registered or not is binding between the
parties, registration being necessary only to make the same valid against
third persons. Thus, registration only operates as a notice of the mortgage to
others, but neither adds to its validity nor convert an invalid mortgage into a
valid one between the parties. If the purpose of registration is merely to give
notice, the question regarding the effect or invalidity of instrument, are
expected to be decided after not before registration. It must follow as a
necessary consequence that registration must first be allowed and the
validity or the effect litigated afterwards.
WHY IS THERE A REQUIREMENT FOR THE REGISTRATION OF
MORTGAGE?
1. Mortgagee is entitled to registration of mortgage as a matter of right.
The mortgagor is understood to have given his consent to its
registration, and he cannot be permitted to revoke it unilaterally.
2. Proceedings for registration do not determine validity of mortgage or
its effect.
It is merely a declaration that the record of the title appears to be
burdened with the mortgage described. It must follow as a necessary

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consequence that registration must first be allowed and its validity or

effect litigated afterwards.
3. Registration without prejudice to better right of third parties.
A registered mortgage is superior to a contract to sell, subject to
any liabilities the owner (vendor / mortgagor) may have incurred in favor
of the buyer. In a contract to sell, title is retained by the vendor until full
payment of the price.
4. Registrability of encumbrance acquired subsequent to the mortgage.
Where the mortgage deed has been duly registered, said deed
forms part of the records for the registration of the property mortgaged.
Thus in a proceeding for the annotation of an encumbrance over the
property subsequently acquired, which is being opposed by the
mortgagee, the latter has no need for the introduction of the mortgage
dee to prove its existence.
5. Registrability of mortgage by surviving spouse of his/her undivided
share of conjugal property.
The mortgage by the wife, after the death of her husband in an
undivided one-half share of the conjugal partnership is valid, the
registration being an essential requirement in order that the mortgage
may be validly constituted. Registration will not affect the rights of the
deceased husbands creditors or of his heirs for their interest is limited to
the husbands half of the estate covered by the mortgage.
6. Subsequent registration of an adverse claim.
A prior registration of a lien creates a preference; hence, the
subsequent annotation of an adverse claim cannot defeat the rights of the
mortgagee or the purchaser at the auction sale whose rights were derived
from prior mortgage validly registered.
COVERAGE
Governs sales made under a special power inserted in or attached to
any real-estate mortgage, which is made as security for the payment of
money or the fulfillment of any other obligation. The Act will govern the
manner in which the sale and redemption shall be effected, whether or not
provision for the same is made in the power. (Sec 1, Act 3135)
The law covers only real estate mortgages. It is intended merely to
regulate the extrajudicial sale and redemption of the property if and when
the mortgagee is given a special power or express authority to do so in the
deed itself or in a document annexed thereto.
Art. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate remains
in the possession of the mortgagor, or it passes into the hands of a third
person. (1877)
THE FOLLOWING ARE DEEMED
MORTGAGE OF REAL PROPERTY:

TO

BE

INCLUDED

IN

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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 the credit remains wholly unsatisfied;
4. Buildings, machinery and accessories belonging to the mortgage
debtor installed on a mortgaged sugar central;
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.
Note: if the mortgaged estate passes into the hands of a third person,
the mortgage does not extend to any machinery, object, chattel 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.
REMEDIES AVAILABLE TO MORTGAGE UPON DEFAULT OF THE
MORTGAGOR
When a mortgagor (borrower) defaults on mortgage payments, the
mortgagee (lender) has several remedies at its disposal. The most frequently
used remedies are a power of sale, an action for judicial sale, and an
action for foreclosure.
1. Power of sale
Following a default, a mortgagee may sell the mortgaged property
pursuant to a private power of sale. This remedy allows a mortgagee to
force a sale of the mortgaged property for the purpose of recovering the
outstanding balance remaining on the mortgage.
When a mortgagee exercises its power of sale, it is able to convey
the mortgaged property to a third party purchaser despite the owners
wishes or objection. The benefit of this remedy is that the process is quite
simple. Upon default, a mortgagee must provide notice to a mortgagor
that it intends to exercise its power of sale remedy. The mortgagee then
only has to wait 35 days before it can properly convey the mortgaged
property. Within this period, the mortgagor may stop the process only by
providing for the entire balance remaining on the mortgage.
The goal of the mortgagee using a power of sale is not to profit, but
simply to recover the balance outstanding on the mortgage. Provided that
the proceeds extinguish the mortgage, the defaulting mortgagor is
actually entitled to the surplus proceeds. As a result, the mortgagee can
be held liable to the mortgagor if the property is not sold at its fair market
value. The common law is clear that when a mortgagee exercises its
power of sale, it has a duty to the mortgagor to receive the highest value
possible. As a result, some mortgagees are dissuaded from pursing a
power of sale, instead choosing a remedy where liability can be avoided.
2. Judicial sale
Similarly to a power of sale, a judicial sale allows the mortgagee to
convey the mortgaged property to a third party purchaser despite the
owners wishes or objections. However, in a judicial sale, the court
oversees the entire process. Consequently, the mortgagee cannot be held

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liable if the proceeds are only sufficient to pay off the outstanding balance
on the mortgage. As a result, several mortgagees select this mechanism
as it insulates them from future liability.
Countering the benefits though is the fact that a judicial sale is a
lengthy process. It requires greater notice to the mortgagor, and several
appearances before the court. As a result of the additional time and cost
required, many mortgagees bypass the judicial sale remedy.
3. Foreclosure
Another remedy available to mortgagees is an action for
foreclosure. Unlike the other two remedies, when a mortgagee
successfully forecloses a property, it receives a court order awarding it full
possessory and legal title of the mortgaged property. As a result, the
mortgagee is entitled to all the proceeds following a sale, meaning it has
no duty to provide the surplus to the mortgagor. While the full
extinguishment of the mortgagors interest is advantageous, it can also
operate against the mortgagee. Where a property cannot be sold for an
amount sufficient enough to satisfy the outstanding mortgage, a
mortgagee has no standing to bring a claim against the mortgagor for the
difference. Conversely, in both a power of sale and judicial sale, a
mortgagee may claim against a mortgagor for the deficiency following a
sale. This additional risk requires mortgagees to carefully consider the
market value of the property before deciding upon the foreclosure
remedy.
NEED FOR SPECIAL POWER OF ATTORNEY
A Special Power of Attorney is a legal document wherein a person
designates another person to do a particular act in his behalf. This document
states the authority of a person and the limits of his authority in doing a
particular act. The person executing this document is called the principal and
the person designated by the principal to do a particular act is the agent.
This document, in order to be valid must be signed by the principal and
notarized by a Notary Public. The usual authorities given under a Special
Power of Attorney are the following:
1. Authority to Sell a Real Property
2. Authority to Sell Shares of Stocks or other personal properties
3. Authority to manage the business of the principal
4. Authority to withdraw retirement benefits
5. Authority to obtain a loan
6. Authority to Mortgage Real Property
7. Other Acts which cannot be consummated without the proper
authorization from the concerned person.
AUTHORITY TO FORECLOSE EXTRAJUDICIALLY
Foreclosure It is a 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.
Validity and effect of foreclosureForeclosure is but a necessary
consequence of non-payment of mortgage indebtedness. As a general rule,
the mortgage can be foreclosed only when the debt remains unpaid at the
time it is due. The right of foreclosure cannot be exercised by any other
person other than the creditor-mortgagee or his assigns.

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A mortgage contract may contain an acceleration clause

on occasion of the mortgagors default, the whole sum
remaining
unpaid
automatically becomes due and payable.
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 where the mortgagor is in default in the payment of said
obligation. Foreclosure may be effected judicially or extra-judicially.
JUDICIAL FORECLOSURE UNDER THE RULES OF COURT
This is governed by Rule 68 of the Rules of Court.
1. Judicial action for the purpose. A mortgage may be
foreclosed judicially by bringing an action for that purpose, in
the proper court which has jurisdiction over the area wherein
the real property involved or a portion thereof, is situated. (see
Sec.1, Rule 4, Rules of Court.)
2. Order to mortgagor to pay mortgage debt. If the court
finds the complaint to be well-founded, it shall order the
mortgagor to pay the amount due upon the mortgage debt or
obligation with interest and other charges within a period of not
less than 90 days nor more than 120 days from the entry of
judgment. (Sec.2, Rule 68, Ibid.)
3. Sale to highest bidder at public auction. If the
mortgagor fails to pay at the time directed in the order, the
court, upon motion, shall order the property to be sold to the
highest bidder at public auction. (Sec. 3, Ibid.)
4. Confirmation of sale. The sale when confirmed by an order
of the court, also upon motion, shall operate to divest the rights
of all parties to the action and to vest their rights in the
purchaser subject to such right of redemption as may be
allowed by law. (Ibid.)
5. Execution of judgment. No judgment rendered in an
action for foreclosure or mortgage can be executed otherwise
than in the manner prescribed by the law on mortgages,
because parties to an action are not authorized to change the
procedure which it prescribed. (Piano vs. Cayanong, 7 SCRA 397
[1963].)
6. Application of proceeds of sale. The proceeds of the sale
shall be applied to the payment of the:
a. Costs of the sale;
b. The amount due the mortgagee;
c. Claims of junior encumbrancers or persons holding subsequent
mortgages in the order of their priority; and
d. The balance if any, shall be paid to the mortgagor or his duly
authorized agent, or to the person entitled to it. (Sec.4, Rule 68, Rules
of Court.)

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7. Execution of sheriffs certificate. In judicial foreclosures,

the foreclosure is not complete until the sheriffs certificate is
executed, acknowledged and recorded. In the absence of a
Certificate of Sale, no title passes by the foreclosure
proceedings to the vendee. It is only when the foreclosure
proceedings are completed and the mortgaged property sold to
the purchaser that all interests of the mortgagor are cut off
from the property.
EXTRAJUDICIAL FORCLOSURE Under act No. 3135 as
amended; and A.M. No. 99-10-05-0 which prescribes the
rules in cases of extrajudicial foreclosure of mortgages.
-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 mortgage
property.(Sec.1, Act No. 3135)
1. Where to file
All applications for extrajudicial foreclosure of mortgage whether
under the direction of the sheriff or a notary public, pursuant to Act 3135,
as amended by Act 4118, shall be filed with the executive judge,
through the Clerk of court.
2. Where to sell
Under Sec. 2 of Act No. 3138 as amended by Act No. 4118, Sale
cannot be made legally outside of the province in which the property sold is
situated; and in case the place within said province in which the sale is to
be made is the subject of stipulation, Such sale shall be made in said place
in the municipal building of the municipality in which the property or part
thereof is situated.
3. Posting requirement
Sec.3, of Act No. 3135 merely requires that the notice of sale be
posted in at least three(3) places in the city or municipality where the
property is situated, to wit: the Sheriffs Office, the Assessors office, and
the Register of deeds which are certainly the public places contemplated by
law.(Fortune motor vs. Metropolitan Bank & trust Co., 265 SCRA 72)
4. Publication Requirement
a. Sufficiency of Newspaper Publication Section 3
Notice shall be given by posting notices of the sale for not less than
twenty (20) days in at least three (3) public places of the municipality or
city where the property is situated, and if such property is worth more than
four hundred pesos (P400.00), such notice shall also be published once a
week for at least three (3) consecutive weeks in a newspaper of general
circulation in the municipality or city.
b. Need for Republication in Case of Postponement
Republication is necessary for the validity of a postponed
extrajudicial foreclosure sale. Another publication is required in case the
auction sale is rescheduled, and the absence of such republication
invalidates the foreclosure sale. The last paragraph of the prescribed notice
of sale (under SC Circular 7-2002) allows the holding of a rescheduled
auction sale without reposting or republication of the notice. In the event

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the public auction should not take place on the said date, it shall be held on
__________, ______ without further notice. However, the rescheduled auction
sale will only be valid if the rescheduled date of auction is clearly specified
in the prior notice of sale. The absence of this information in the prior
notice of sale will render the rescheduled auction sale void for lack of
reposting or republication.
c. Personal notice to the mortgagor when and when not needed.
General rule: Personal notice to the mortgagor is not generally
required.
Exception: Unless required in the mortgage contract, the lack of
personal notice to the mortgagor is not a ground to set aside
foreclosure sale.
Unless otherwise stipulated by the parties to the mortgage contract,
the debtor-mortgagor need not be personally serve a copy of the
notice of extrajudicial foreclosure. (SC Circular 7-2002)
5. Personal Notice to the Mortgagor When and when
not needed
General Rule: Personal notice to the mortgagor is not generally
required. Exception: Unless required in the mortgage contract, the lack of
personal notice to the mortgagor is not a ground to set aside a foreclosure
sale.
Unless otherwise stipulated by the parties to the mortgage contract,
the debtor-mortgagor need not be personally served a copy of the notice of
the extra- judicial foreclosure. SC Circular 7-2002.
POSSESSION BY PURCHASER OF FORCLOSED PROPERTY
Once title to the property has been consolidated in the buyers name
upon failure of the mortgagee to redeem the property within the one year
redemption period, the writ of possession becomes a matter of right
belonging to the buyer.
Consequently, the buyers can demand possession of the property
anytime. Its right to possession has then ripened into the right of a confirmed
absolute owner and the issuance of the writ becomes a ministerial function
that does not admit of the exercise of the courts discretion. The court acting
on an application for its issuance, should issue the writ as a matter of course
and without delay. (GR no. 172504 Donna C. Nagtalon vs. United Coconut
Planters Bank, July 31, 2013)
REMEDY OF DEBTOR IF FORECLOSURE IS NOT PROPER
Under Sec. 8 of Act no. 3135, the debtor may, in the proceedings in
which possession was requested, within 30 days after the purchaser is given
possession was requested, within 30 days after the purchaser is given
possession of the property, pettion that the sale be set aside and the writ of
possession be cancelled because the mortgage was violated or the sale was
not made in accordance with the provisions thereof.
REDEMPTION

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DEFINITION:
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. It allows the owner to
repurchase or buy back within a certain period and for a certain amount, a
property that has been sold due to the debt or encumbrance.
KINDS:
1. EQUITY OF REDEMPTION
Right of the 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
Right of the mortgagor in case of extrajudicial foreclosure to redeem
the mortgaged property within a certain period from and after it was sold
for the satisfaction of the mortgage debt.
EQUITY OF REDEMPTION
RIGHT OF REDEMPTION
the equitable right of the the statutory right of the
mortgagor to
mortgagor to
redeem
redeem
available before auction sale
available
foreclosure

available after auction sale

only

judicial available only in extra-judicial

foreclosure, but by exception
is allowed in judicial
The period for the exercise is
foreclosure when the
mortgagee is the PNB or a
within 90 days but no more
bank or a banking institution
than 120 days from entry of
foreclosure judgment
one year from redemption is
within one year from date of
registration of the sheriffs
certificate of sale but not after,
the registration of the
certificate of sale with the
applicable register of deeds
which in no case shall be more
than three months after
foreclosure, whichever is
earlier

REQUISITES OF VALID REDEMPTION

Pursuant to Section 28, Rule 39 of the Rules of Court and subject to the
provisions of special laws, the requisites for valid redemption are:

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1. The redemption must be made within one (1) year from the date of
the registration of the certificate of sale, not from the date of the foreclosure
sale. The existence of the right of redemption operates to depress the
market value of the property until the period expires, and to render the
period indefinite would render nugatory the period fixed by statute.
The period of redemption is not a prescriptive period but a condition
precedent provided by law to restrict the right of the person exercising
redemption.
2. Payment of the purchase price of the property plus 1% interest
per month together with the taxes thereon, if any, paid by the
purchaser and the amount of his prior lien, if any, with the same rate of
interest computed from the date of registration of the sale, up to the
time of redemption; and
3. Written notice of the redemption must be served on the officer
who made the sale and a duplicate fi led with the proper Register of
Deeds. (Rosales vs. Yboa, 120 SCRA 869 [1983].)
4. In judicial foreclosure, the general rule is that the mortgagor of
real estate can no longer exercise his right of redemption after the sale
is confirmed by the court. Allowing a redemption after the lapse of the
statutory period, when the buyer at the foreclosure sale does not object
but even consents to the redemption, will uphold the policy of the law
which is to aid rather than defeat the right of redemption. There is
nothing in the law which prevents a waiver of the statutory period for
redemption. (Ramirez vs. Court of Appeals, 219 SCRA 598 [1993].)
5. The mortgagor or his assignee is required to tender payment
within the prescribed period to make said redemption valid, or to
preserve the right of redemption for future enforcement beyond such
period of redemption.
WHO MAY REDEEM?
1.
2.
3.
4.

The debtor;
The debtor's successors-in-interest;
Any judicial creditor or judgment creditor of the debtor;
Any person having a lien on the property subsequent to
the mortgage or deed of trust under which the property is
sold (Redemption price to be paid by accommodation
mortgagors

PERIOD OF REDEMPTION
1. Extra-judicial
a. Natural person 1 year from the registration of the certificate of
sale with Registry of Deeds
b. Juridical Person same rule as natural person
c. Juridical Person (mortgagee is bank) 3 moths after foreclosure or
before registration of
certificate of foreclosure whichever is earlier
2. Judicial before confirmation of the sale by
the court

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Note: Allowing redemption after the lapse of the statutory period

when the buyer at the statutory period when the buyer at the foreclosure
sale does not object but even consents to the redemption, will uphold the
policy of the law which is to aid rather than defeat the right of
redemption.
AMOUNT OF REDEMPTION PRICE
1. Mortgagee is not a bank (Act No. 3135 in relation to Section 28, Rule
39 of the Revised Rules of Court)
a. Purchase price of the property
b. 1% interest per month on the purchase price
c. Taxes paid and amount of purchasers prior lien, if any, with the same
rate of interest computed
from the date of registration of sale, up to the time of redemption.
2. Mortgagee is a bank. (General Banking Law of 2000)
a. Amount due under the mortgage deed
b. Interest
c. Cost and expenses
EFFECTS OF PENDENCY OF ACTION FOR ANNULMENT OF
SALE
The filing of Court action to enforce redemption has the effect of
preserving the redemptioners rights and freezing the expiration of one year
period to redeem. (Banco Filipino v. CA)
WRIT OF POSSESSION
DEFINITION:
A writ of possession is generally understood to be an order by a court
whereby the sheriff is commanded to place in possession of real or personal
property the person entitled thereto such as when a property is
extrajudicially foreclosed. In a foreclosure of real estate mortgage, this right
of the writ is granted to the purchaser.
WHEN MAY BE ISSUED?
A writ of possession may be issued under the following instances:
1. Land registration proceeding;
2. In a Judicial Foreclosure of a real estate mortgage, provided that:
a. The debtor is in the possession of the mortgaged realty;
b. No third person, not a party to the foreclosure suit, had intervened.
3. In Extrajudicial foreclosure of real estate
mortgage.
4. In Ordinary execution sales (Section 33, rule 39,
rules of court)
DUTY OF THE COURT TO ISSUE SAID WRIT:
a. On extrajudicial foreclosure

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The issuance of the writ of possession is merely a ministerial

function of the court.(A.G development corporation vs CA, 1997; mamerto
marquez foundation Inc. vs Pizarro, 2005)
In any sale made under the provisions of this act, the purchaser
may petition the court of first instance (now Regional Trial Court) of the
province or place where the propert or any part thereof is situated, to
give him possession thereof during the redemption period, furnishing
bond in an amount equivalent to the use of the property for a period of
twelve months, to indemnify the debtor in case it be shown that the sale
was made without violating the mortgage or without complying with the
requirements of this act ( Section 7, Act 3135 as amended)
b. On Judicial Foreclosure
Also Ministerial.
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
(section 3, second paragraph, rule 68, rules of court)
Note: The right of the applicant or a subsequent purchaser to
request for the issuance of a writ of possession never prescribes. ( Rodil
vs. Benedicto, 1980; Paderes vs Court of appeals, 2005)
ENFORCEMENT AGAINST THIRD PERSON:
GENERAL RULE:
The writ of possession issues as a matter of right 1) during redemption
period, by filing a petition ex parte and approval of the furnished bond, and
2) after the redemption period.
EXCEPTION:
No possession of the mortgage property may be awarded to the
purchaser if a third party is actually holding or in possession of the property
adversely to the judgment debtor.
REASON FOR THE EXCEPTION:
One who claims to be the owner of the property possessed by another
must bring the appropriate judicial action for its physical recovery (Article
433, civil code of the Philippines)
An ex parte petition for issuance of a writ of possession is not, strictly
speaking, a judicial process contemplated in article 433.
REASON FOR THE REASON:

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The writ of possession does not issue in case of doubt. The court may
not grant the writ through a mere motion where title is in doubt, the
proceedings, being, for the issuance of the writ is a mere incident in the
transfer of title. ( PNB vs CA 374 scra 22; DBP vs prime Neighborhood, 587
scra 582)
To do so would tantamount to the third Persons summary ejectment, in
violation of the basic tenets of due process under the constitution which
states that no person shall be deprived of life, Liberty or Property without
due process of law?
PENDENCY OF ACTION FOR ANNULMENT OF SALE:
The law and jurisprudence are clear that both during and after the
period of redemption, the purchaser at the foreclosure sale is entitled as of
right to a writ of possession , REGARDLESS of whether or not there is a
pending suit for annulment of the mortgage or the foreclosure sale
itself, without prejudice to the eventual outcome of said case. (De leon,
credit transaction, 2011)
Any objection on the validity of the sale and the writ issued pursuant
thereto should be threshed out in a subsequent proceedings under section 8
of Act 3135.
The debtor may, in the proceedings in which possession was
requested, but not later than thirty days after the purchaser was given
possession, petition that the sale be set aside and the writ of possession
cancelled, specifying the damages suffered by him, because the mortgage
was not violated or the sale was not made in accordance with the provisions
hereof, and the court shall take cognizance of this petition in accordance
with the summary procedure provided for in section one hundred and twelve
of Act Numbered Four hundred and ninety-six; and if it finds the complaint of
the debtor justified, it shall dispose in his favor of all or part of the bond
furnished by the person who obtained possession. Either of the parties may
appeal from the order of the judge in accordance with section fourteen of Act
Numbered Four hundred and ninety-six; but the order of possession shall
continue in effect during the pendency of the appeal.
Such question cannot be raised to opposed the issuance of the writ of
possession, since the proceeding is ex parte. (PNB vs Sanao Marketing Corp,
465 scra 287; Sulit vs CA, 268 scra 441)
ANNULMENT OF SALE
DEFINITION:
It is a real action and a remedy available to the Mortgagor to make
inoperative the foreclosure sale of the real property mortgage if a ground
exist.
An action to annul a real estate mortgage foreclosure sale is no
different from an action to annul a private sale of real property ( Muoz vs
Llamas, 1950)
GROUNDS:

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1. That there was a fraud, collusion, accident, mutual mistake, breach of

trust or misconduct by the purchaser.
2. That the sale had not been fairly and regularly conducted.
3. That the price was inadequate and inadequacy was so great as to
shock the conscience of the court. ( UPCB vs Spouses Beluso, 2007)

JURISPRUDENCE
1. San Juan vs. Court of Appeals, 363 SCRA
387
FACTS:
o Petitioner Asuncion San Juan mortgaged her property, a
lot in Bacolod, to Private Respondent Young Auto Supply
Co., Inc.
o Upon default in the payment of the principal loan secured
by the mortgage, an extrajudicial foreclosure proceeding
was instituted by private respondent before the city
sheriff of Bacolod City. Since private respondent was the
sole bidder in the auction sale, the corresponding
Certificate of Sale was issued in its favor.
o The Certificate was registered with the Office of the
Register of Deeds of Bacolod City.
o Private respondent filed, before the Regional Trial Court of
Negros Occidental, a Petition for the registration and the
annotation of the final Certificate of Sale. During the trial,
petitioner manifested that the owners duplicate
Certificate of Title to the property, subject of the
foreclosure sale, was in her possession. Thus, the trial
court issued an Order directing petitioner to deliver to
private respondent within seventy-two (72) hours
therefrom the owners duplicate copy.
o Because of petitioners failure to comply with the Order,
the trial court issued another Order directed to annotate
in the original Certificate of Title in favor of respondent
without the necessity of presenting the owners copy of
the aforementioned transfer certificate of title.
o The appellate court held that the final Certificate of Sale
was properly and regularly issued by the ex oficio city
sheriff of Bacolod City. This was done by virtue of the
alleged failure of the oppositor, Asuncion San Juan, to
exercise her right of redemption that has already expired.
o The Court of Appeals added that the fact of the
mortgage, its release and the Certificate of Sale are
matters of record in the Office of the Register of Deeds of
Bacolod City. It cannot be, therefore, said that these
instruments were irregularly executed. For being public
documents, they are entitled to the presumption of
regularity.
ISSUE: Whether or not the petitioner had been lawfully divested of
her title to the subject property.
RULING: Petition denied.

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o To defend her title over the property, petitioner should

have filed the necessary court action from the moment
she discovered the mortgage. Yet, it took almost three (3)
years -- well beyond the lapse of the redemption period -and the issuance of the final Certificate of Sale, before
she protested and attacked the validity of the real estate
mortgage.
o The right to attack the validity of a mortgage may be lost
by a waiver of defects and objections, such as alleged
fraud or misrepresentation. Mortgagors desiring to attack
the validity of a mortgage should act with promptness.
Otherwise, unreasonable delay may amount to
ratification.
o A duly executed mortgage is presumed to be valid until
the contrary is shown. To the party attacking rests the
burden of proving its invalidity due to fraud, duress or
illegality. It should be stressed that, as a general rule,
courts will adopt such construction as will sustain rather
than defeat the mortgage.
o Once a mortgage has been signed in due form, the
mortgagee is entitled to its registration as a matter of
right. By executing the mortgage, the mortgagor is
understood to have given his consent to its registration,
and he cannot be permitted to revoke it unilaterally. The
validity and fulfillment of contracts can not be left to the
will of one of the contracting parties.
o The annotation of private respondents final Certificate of
Sale in the Original Certificate of Title, even without the
presentation of petitioners duplicate, was valid. To rule
otherwise would result in a situation in which a purchaser
in a foreclosure sale can never consolidate his or her title
to the property even after the lapse of the redemption
period, because of the sheer refusal or failure of the
former owner to submit the latters duplicate certificate of
title.
2. METROPOLITAN BANK AND TRUST COMPANY, INC vs. EUGENIO
PEAFIEL
ISSUE: WON the notice of sale was published in a newspaper of
general circulation
HELD:NO.
For the purpose of extrajudicial foreclosure of mortgage, the party
alleging non-compliance with the requisite publication has the burden of
proving the same.
Nonetheless, the publishers testimony that they "do not just offer to
anybody" implies that the newspaper is not available to the public in general.
This statement, taken in conjunction with the fact that there are no
subscribers in Mandaluyong City, convinces the Court that Maharlika Pilipinas
is, in fact, not a newspaper of general circulation in MandaluyongCity The
object of a notice of sale is to inform the public of the nature and condition of
the property to be sold, and of the time,place and terms of the sale. Notices
are given for the purpose of securing bidders and to prevent a sacrifice of
the property. The goal of the notice srequirement is to achieve a "reasonably

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wide publicity" of the auction sale. This is why publication in a newspaper of

general circulation is required. The Court has previously taken judicial notice
of the "far-reaching effects" of publishing the notice of sale in a newspaper of
general circulation.
3.
DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF
APPEALS and EMERALD RESORT HOTEL CORPORATION
ISSUE: WON the extrajudicial foreclosure of real estate chattel
mortgage is valid.
HELD:Void.
There is no question that DBP published the notice of auction sale
scheduled on 12August 1986. However, no auction sale took place on 12
August 1986 because DBP,at the instance of ERHC, agreed to postpone the
same to 11 September 1986.
Publication, therefore, is required to give the foreclosure sale a
reasonablywide publicity such that those interested might attend the
public sale. To allow theparties to waive this jurisdictional requirement would
result in converting into aprivate sale what ought to be a public auction.
ACT NO. 3135 - AN ACT TO REGULATE THE SALE OF PROPERTY
UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REALESTATE MORTGAGES
Section 1. When a sale is made under a special power inserted in or
attached to any real-estate mortgage hereafter made as security for the
payment of money or the fulfillment of any other obligation, the provisions of
the following election shall govern as to the manner in which the sale and
redemption shall be effected, whether or not provision for the same is made in
the
power.
Sec. 2. Said sale cannot be made legally outside of the province in which the
property sold is situated; and in case the place within said province in which
the sale is to be made is subject to stipulation, such sale shall be made in said
place or in the municipal building of the municipality in which the property or
part
thereof
is
situated.
Sec. 3. Notice shall be given by posting notices of the sale for not less than
twenty days in at least three public places of the municipality or city where the
property is situated, and if such property is worth more than four hundred
pesos, such notice shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the municipality or
city.
Sec. 4. The sale shall be made at public auction, between the hours or nine in
the morning and four in the afternoon; and shall be under the direction of the
sheriff of the province, the justice or auxiliary justice of the peace of the
municipality in which such sale has to be made, or a notary public of said
municipality, who shall be entitled to collect a fee of five pesos each day of
actual
work
performed,
in
addition
to
his
expenses.
Sec. 5. At any sale, the creditor, trustee, or other persons authorized to act for
the creditor, may participate in the bidding and purchase under the same

63 | P a g e

conditions as any other bidder, unless the contrary has been expressly
provided in the mortgage or trust deed under which the sale is made.
Sec. 6. In all cases in which an extrajudicial sale is made under the special
power herein before referred to, the debtor, his successors in interest or any
judicial creditor or judgment creditor of said debtor, or any person having a
lien on the property subsequent to the mortgage or deed of trust under which
the property is sold, may redeem the same at any time within the term of one
year from and after the date of the sale; and such redemption shall be
governed by the provisions of sections four hundred and sixty-four to four
hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as
these are not inconsistent with the provisions of this Act.
Sec. 7. In any sale made under the provisions of this Act, the purchaser may
petition the Court of First Instance of the province or place where the property
or any part thereof is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equivalent to the use of the
property for a period of twelve months, to indemnify the debtor in case it be
shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act. Such petition shall be made
under oath and filed in form of an ex parte motion in the registration or
cadastral proceedings if the property is registered, or in special proceedings in
the case of property registered under the Mortgage Law or under section one
hundred and ninety-four of the Administrative Code, or of any other real
property encumbered with a mortgage duly registered in the office of any
register of deeds in accordance with any existing law, and in each case the
clerk of the court shall, upon the filing of such petition, collect the fees
specified in paragraph eleven of section one hundred and fourteen of Act
Numbered Four hundred and ninety-six, as amended by Act Numbered Twentyeight hundred and sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the sheriff of the province
in which the property is situated, who shall execute said order immediately.
Sec. 8. The debtor may, in the proceedings in which possession was
requested, but not later than thirty days after the purchaser was given
possession, petition that the sale be set aside and the writ of possession
cancelled, specifying the damages suffered by him, because the mortgage
was not violated or the sale was not made in accordance with the provisions
hereof, and the court shall take cognizance of this petition in accordance with
the summary procedure provided for in section one hundred and twelve of Act
Numbered Four hundred and ninety-six; and if it finds the complaint of the
debtor justified, it shall dispose in his favor of all or part of the bond furnished
by the person who obtained possession. Either of the parties may appeal from
the order of the judge in accordance with section fourteen of Act Numbered
Four hundred and ninety-six; but the order of possession shall continue in
effect
during
the
pendency
of
the
appeal.
Sec. 9. When the property is redeemed after the purchaser has been given
possession, the redeemer shall be entitled to deduct from the price of
redemption any rentals that said purchaser may have collected in case the
property or any part thereof was rented; if the purchaser occupied the
property as his own dwelling, it being town property, or used it gainfully, it
being rural property, the redeemer may deduct from the price the interest of
one per centum per month provided for in section four hundred and sixty-five
of
the
Code
of
Civil
Procedure.

64 | P a g e

Sec. 10. This Act shall take effect on its approval.

Approved: March 6, 1924
ACT NO. 4118 - AN ACT TO AMEND ACT NUMBERED THIRTY-ONE
HUNDRED AND THIRTY-FIVE, ENTITLED "AN ACT TO REGULATE THE
SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR
ANNEXED TO REAL-ESTATE MORTGAGES.
Section 1. Section six of Act Numbered Thirty-one hundred and thirtyfive, entitled "An Act to regulate the sale of property under special powers
inserted in or annexed to real-estate mortgages," is hereby amended to read
as follows:
"Section 6. In all cases in which an extrajudicial sale is made under the
special power hereinbefore referred to, the debtor, his successors in interest or
any judicial creditor or judgment creditor of said debtor, or any person having
a lien on the property subsequent to the mortgage or deed of trust under
which the property is sold, may redeem the same at any time within the term
of one year from and after the date of the sale; and such redemption shall be
governed by the provisions of sections four hundred and sixty-four to four
hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as
these are not inconsistent with the provisions of this Act."
Sec. 2. The following three sections are hereby inserted after section six
of said Act Numbered Thirty-one hundred and thirty-five:
Section 7. In any sale made under the provisions of this Act, the
purchaser may petition the Court of First Instance of the province or place
where the property or any part thereof is situated, to give him possession
thereof during the redemption period, furnishing bond in an amount
equivalent to the use of the property for a period of twelve months, to
indemnify the debtor in case it be shown that the sale was made without
violating the mortgage or without complying with the requirements of this Act.
Such petition shall be made under oath and filed in form of an ex parte motion
in the registration or cadastral proceedings if the property is registered, or in
special proceedings in the case of property registered under the Mortgage Law
or under section one hundred and ninety-four of the Administrative Code, or of
any other real property encumbered with a mortgage duly registered in the
office of any register of deeds in accordance with any existing law, and in each
case the clerk of the court shall, upon the filing of such petition, collect the
fees specified in paragraph eleven of section one hundred and fourteen of Act
Numbered Four hundred and ninety-six, as amended by Act Numbered Twentyeight hundred and sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the sheriff of the province
in which the property is situated, who shall execute said order immediately.
"Section 8. The debtor may, in the proceedings in which possession was
requested, but not later than thirty days after the purchaser was given
possession, petition that the sale be set aside and the writ of possession
cancelled, specifying the damages suffered by him, because the mortgage
was not violated or the sale was not made in accordance with the provisions
hereof, and the court shall take cognizance of this petition in accordance with
the summary procedure provided for in section one hundred and twelve of Act
Numbered Four hundred and ninety-six; and if it finds the complaint of the

65 | P a g e

debtor justified, it shall dispose in his favor of all or part of the bond furnished
by the person who obtained possession. Either of the parties may appeal from
the order of the judge in accordance with section fourteen of Act Numbered
Four hundred and ninety-six; but the order of possession shall continue in
effect
during
the
pendency
of
the
appeal.
"Section 9. When the property is redeemed after the purchaser has been given
possession, the redeemer shall be entitled to deduct from the price of
redemption any rentals that said purchaser may have collected in case the
property or any part thereof was rented; if the purchaser occupied the
property as his own dwelling, it being town property, or used it gainfully, it
being rural property, the redeemer may deduct from the price the interest of
one per centum per month provided for in section four hundred and sixty-five
of the Code of Civil Procedure."
Sec. 3. The number of the present section seven of said Act Numbered
Thirty-one hundred and thirty-five is hereby changed, making it section ten.
Sec. 4. This Act shall take effect on its approval.
Approved: December 7, 1933

QUESTIONS AND ANSWERS

1. A real estate mortgage may be foreclosed judicially or
extrajudicially. In what instance may a mortgagee
extrajudicially foreclose a real estate mortgage? (5%)
SUGGESTED ANSWER:
When a sale is made under a special power inserted or
attached to any real-estate mortgage, thereafter given as security
for the payment of money or the fulfillment of any other obligation,
then the mortgagee may extrajudicially foreclose the real estate
mortgage (Sec. 1, Act No. 3135, as amended)
2. What are the three public places being contemplated by the
law where posting of notices shall be made?
a.) Sheriffs office;
b.) Assessors office; and
c.) Register of deeds
RATIO: These are the places where people interested in
purchasing real estate congregate usually proceed.(De leon)
3. What is the effect if the posting and publication requirement
is waived?
To allow the parties to waive the posting and publication
requirements, would result in converting into a private sale what
ought to be a public auction.(PNB V. Nepomuceno 394 scra 405)
4. What I the proper remedy to seek reversal of judgment in
an action for foreclosure of a real estate mortgage?

66 | P a g e

It has been held that the proper remedy to seek reversal of a

judgment in an action for forclosure of real estate mortgage is not a
petition for annulment of judgment but an appeal from the
judgment itself or from the order confirming the sale of a real estate
mortgage. (Agbada v. Inter-urban developers, Inc., 389 SCRA 430)
5. What are the three most frequently used remedies available
to mortgage upon default of the mortgagor?
Power of sale, an action for judicial sale, and an action for
foreclosure.
6. A mortgage contract may contain an acceleration clause.
What does this mean?
On occasion of the mortgagors default, the whole sum
unpaid automatically becomes due and payable.

remaining

7. What is the remedy of the debtor if the foreclosure is not

proper?
Under Sec. 8 of Act no. 3135, the debtor may, in the proceedings in
which possession was requested, within 30 days after the purchaser is
given possession was requested, within 30 days after the purchaser is
given possession of the property, pettion that the sale be set aside and
the writ of possession be cancelled because the mortgage was violated or
the sale was not made in accordance with the provisions thereof.
8. What is the effect of pendency of action for annulment of sale?
The filing of Court action to enforce redemption has the effect of
preserving the redemptioners rights and freezing the expiration of one
year period to redeem. (Banco Filipino v. CA)
9. What is the difference between equity of redemption and
right of redemption?
Right of the mortgagor in case of judicial foreclosure is the right of
the owner 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. On the other hand,
Right of the mortgagor in case of extrajudicial foreclosure is the right of
the owner to redeem the mortgaged property within a certain period from
and after it was sold for the satisfaction of the mortgage debt.
10.
Who are the persons entitled to redeem the property
that was foreclosed?
a. The debtor;
b. The debtor's successors-in-interest;
c. Any judicial creditor or judgment creditor of
the debtor;
d. Any person having a lien on the property
subsequent to the mortgage or deed of trust
under which the property is sold (Redemption
price to be paid by accommodation
mortgagors

67 | P a g e

THE GENERAL BANKING LAW OF 2000

(R.A.8791)
BANKING INSTITUTION- an entity duly authorized by the Monetary
Board of the Central Bank to engage regularly in the lending of funds
obtained from the public through the receipt of deposits of any kind
and regularly conducting such operation (Sec. 2, R.A. 337).
DISTINCTIONS BETWEEN AN ORDINARY AND A BANKING
CORPORATION
Ordinary Corporation
Under the supervision of the
SEC

Banking Corporation
Under the supervision of the
SEC

May be organized as a stock or

Must generally be a stock
non-stock corporation
corporation
May be registered with the SEC
Must secure a Certificate of
without any Certificate of Authority Authority from the Monetary Board of
issued by a government agency
the BSP before it can register with
the SEC
Must be composed of 5-15
Has also 5-15 directors, in case
directors, each of whom must own at of merger or consolidation, the
least one share of the capital stock of directors shall not exceed 21
the corporation
May issue par value or no par
Issues only par value shares of
value shares of stocks
stocks
May declare dividends out of its
May not declare dividends if
unrestricted retained earnings
any of the conditions under Sec. 57
of R.A. 8791 are present
May acquire its own shares for
May not acquire its own shares
a legitimate corporate purpose or accept them as security for a loan;
provided it has unrestricted retained except when authorized by the
earnings in the books to cover the monetary board, but such shares
shares to be acquired or purchased
must be disposed of within 6 months
from their acquisition
CLASSIFICATIONS OF BANKS OR BANKING INSTITUTIONS
SALIENT FEATURES
Universal
Bank

Commercial
Bank

-authorized to engage in normal bank

operations, financing, warehousing and
non-allied enterprises
-exercises the powers of an investment
house
-has the highest capitalization
requirement (see table below)
-accepts or creates demand deposits
withdrawable by checks
-cannot exercise the powers of an

GOVERNING
LAW
R.A.
8791

R.A.
8791

68 | P a g e

Offshore
Banking
Units

Savings and
Mortgage
Bank
Stock
Savings and
Mortgage
Association
Private
Developmen
t Banks
Rural Bank
Cooperative
Banks
Islamic
Banks
Specialized
and Unique
Government
Banks
Branches of
Foreign
Banks in the
Philippines

investment house and invest in nonallied enterprises

-foreign banking institution authorized
by the BSP to do business in the
Philippines
-conducts business transactions in
foreign currencies involving the receipt
of funds from external sources and the
utilization of such resources in
transactions with non-residents or
other offshore banking units
-accumulates funds of depositors for
investment or for loans for personal or
home financing
-accumulates savings deposits of
members, stockholders or other
persons for loans or investments

R.A.
8791

R.A.
8791
R.A. 3779, R.A.
7906
R.A. 4093, R.A.
7906

-provides credit for rural community

purposes
-organized primarily to make financial
and credit services available to
cooperatives
-dealings and activities are subject to
basic principles and rulings of Islamic
Shariah
-examples: DBP and LBP
-governed by their respective charters
but still subject to the supervision and
regulation by the BSP

R.A. 7353, R.A.

7906
R.A. 6983
R.A. 6848

R.A. 8791

Amended Minimum Capital Requirements for Banks

Bank Category/Network
Size

Universal Banks
Head Office only
Up to 10 branches 1/
11 to 100 branches1/
More than 100 branches1/
Commercial Banks
Head Office only
Up to 10 branches1/

Existing Minimum
Capitalization
P

Revised
Minimum
Capitalizatio
n

4.95

billion2/

P3.00billion
6.00billion
15.00billion
20.00 billion

2.40 billion2/
2.00billion
4.00billion
10.00billion

69 | P a g e

15.00 billion

11 to 100 branches1/
More than 100 branches1/
Thrift Banks
Head Office in:
Metro Manila
Cebu and Davao cities
Other Areas
Head Office in the National
Capital
Region (NCR)
Head Office only
Up to 10 branches1/
11 to 50 branches1/
More than 50 branches1/
Head Office in All Other Areas
Outside NCR
Head Office only
Up to 10 branches1/
11 to 50 branches1/
More than 50 branches1/
Rural
and
Cooperative

1.00 billion2/
500 million2/
250 million2/

Banks
Head Office in:
100million2/
Metro Manila
50million2/
Cebu and Davao cities
25million2/
Other cities
1st to 4th class municipalities 10million2/
5 million2/
5th to 6th class municipalities
Head Office in NCR
Head Office only
Up to 10 branches1/
11 to 50 branches1/
More than 50 branches1/
Head Office in All Other Areas
Outside NCR (All Cities up to 3rd
Class Municipalities)
Head Office only
Up to 10 branches1/
11 to 50 branches1/
More than 50 branches1/
Head Office in All Other Areas
Outside NCR (4th to 6th Class
Municipalities)
Head Office only
Up to 10 branches1/
11 to 50 branches1/
More than 50 branches1/

500million
750million
1.00billion
2.00 billion

200million
300million
400million
800 million

50million
75million
100million
200 million

20million
30million
40million
80 million

10million
15million
20million
40 million

70 | P a g e

QUASI-BANKING INSTITUTIONS- entities regularly lending funds but

receiving deposits only occasionally and not from the general public,
such as trust companies and non-stock savings and loan associations.
-also refers to those 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.
TRUST CORPORATIONS- quasi-banking corporations formed or
organized for the purpose of acting as trustee or administering any
trust or holding property in trust or on deposit for the use, benefit or
behoove of others.
BANK POWERS AND LIABILITIES
BANKPOWERS
1. Banking powers - these are the main powers; without any of these
powers, the entity is not a bank (Sec. 3, RA 8791).
a. The power to accept deposits
b. The power to lend funds obtained in the form of deposits.
2. Powers of a commercial bank (Sec. 29, RA 8791)
a. General powers incident to corporations
b. All such powers as may be necessary to carry on the business of
commercial banking such as:
- accepting drafts and issuing letters of credit
- discounting and negotiating promissory notes, drafts, bills of
exchange, and other evidences of debt
-accepting or creating demand deposits
- receiving other types of deposits and deposit substitutes
-buying and selling foreign exchange and gold or silver bullion
-acquiring marketable bonds and other debt securities
-extending credit
c. To invest in equities of allied enterprises
3. Powers of a universal bank (Sec. 23, RA 8791)
a. Has the powers authorized for a commercial bank
b. Has the powers of an investment house
c. Has the power to invest the equities of allied (both financial or nonfinancial) or non-allied enterprises
** allied enterprises- those entities which enhance or complement
banking.
** financial allied enterprises- in thrift banks, rural banks, or other
allied enterprise.
** non-financial allied enterprises- activities such as warehousing,
lease of safety deposit boxes.
4. Corporate powers
According to sec. 8, R.A. 8791, a bank or a quasi-bank is a stock
corporation. It has the general powers incident to corporations.

71 | P a g e

Note:
R.A. 8791, section 14 states that the "Securities and Exchange
Commission shall not register the articles of incorporation of any bank,
or any amendment thereto, unless accompanied by a certificate of
authority issued by the Monetary Board, under its seal..." as a bank is
under the supervision, policy direction, authority, and examination of
the BangkoSentral (Sections 4-7, RA 8791).
A stock corporation is one which has a capital stock divided into shares
and is authorized to distribute to the holders of such shares dividends
or allotments of the surplus profits. (BP 68/Corporation Code, Sec. 3)
As a stock corporation, a bank is to issue par value stocks only, which
are shares with a value fixed in the articles of incorporation. (Sec. 9, RA
8791).
Furthermore, "to maintain the quality of bank management and afford
better protection to depositors and the public in general, the Monetary
Board shall prescribe, pass upon and review the qualifications and
disqualifications of individuals elected or appointed bank directors or
officers and disqualify those unfit." - FIT AND PROPER RULE (Sec. 16,
RA 8791).
The corporate powers of a bank are:
a. It is a legal or juridical person, with a personality separate and apart
from its individual stockholders, with the power to sue and be sued in
its corporate name.
b. It has the power of succession by its corporate name for the period
stated in the articles of incorporation. It has the capacity to have
continuity of existence despite the changes on the persons who
compose it. The personality continues despite the change of
stockholders or officers.
c. To adopt by-laws not contrary to law, morals, or public policy and to
amend or repeal the same in accordance with the Corporation Code.
d. To exercise such other powers as may be essential or necessary to
carry out its purposes as stated in the articles of incorporation.
LIABILITIES
1. Liability for tort
A bank will be held liable for the negligence of its officers or agents
when acting within the course and scope of their employment. (PCI
Bank
vs.
CA
350
SCRA
446,
2001).
2. Liability for fraud
A bank is liable to innocent third persons where the representation is
made in the course of its business by a bank agent acting within the
general scope of his authority even though the agent is secretly a

72 | P a g e

using his authority and attempting to perpetrate a fraud upon his

principal or some other person, for his own ultimate benefit (Phil
Banking Corp. vs. CA 419 SCRA 487, 2004).
3. Liability for acts and contracts
As a corporation, obligations incurred by the bank acting thru its
authorized agents are its sole liabilities.
Illustration:
The bank is bound by the agreement entered into by its branch
manager with a client's deposit at an interest of 17% p.a. The bank
impugned the interest rate; however, it is bound by the contract made.
(BPI Family Bank vs. First Metro Investment Corp, 429 SCRA 30, 2004).
4. Liabilities for crimes
As a corporation, it cannot be held liable for a crime committed by its
officers since it does not have the essential element of malice. The
responsible officers would be criminally liable, without prejudice to the
civil
liabilities
of
such
banking
corporation.
DILIGENCE REQUIRED OF BANKS
*The banking system has become an indispensable institution in the
modern world and plays a vital role in the economic life of every
civilized society- it is important that banks should guard against injury
attributable to negligence or bad faith on its part. THE HIGHEST
DEGREE OF DILIGENCE is expected, and high standards of integrity
and performance are required of banks. (Security Bank vs. RCBC, 577
SCRA
407,
2009).
*The degree of diligence required of banks is more than that of a
reasonable man or a good father of a family. In view of the fiduciary
nature of their relationship with their depositors, banks are duty-bound
to treat the accounts of their clients with the highest degree of care.
(BPI vs. Lifetime Marketing Corp., 555 SCRA 373, 2008).
*The law imposes on banks a high degree of obligation to treat
the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of banking. (PNB vs. Pike, 470 SCRA 328,
2005).
*The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family. This
fiduciary relationship means that the banks obligation to observe high
standards of integrity and performance is deemed written into every
deposit agreement between a bank and its depositor. (Phil Banking
Corp. vs. CA, G.R. No. 127469. January 15, 2014).
*The fiduciary nature of the relationship between a bank and its
depositors means that the bank is under obligation to treat the
accounts of his depositors with meticulous care whether such account
consists only of a few hundred pesos or of millions of pesos. (Simex
International, Manila vs. CA, 183 SCRA 408, 1992).

73 | P a g e

Illustrations:
1. The bank was grossly negligent when it allowed the sum of
PhP220,000.00 to be withdrawn thru falsified withdrawal slips without
the depositor's authority and knowledge. The evidence showed that
Bank did not exercise the degree of diligence it ought to have
exercised in dealing with its clients - diligence higher than that of a
good father of a family. If only respondent bank exercised such
diligence, no anomaly or irregularity would have happened. (Cagungun
vs.
Planters
Dev.
Bank,
473
SCRA
259,
2005).
2. The external auditor of the company forged the signature of its
officers on several checks and deposited the same to his account using
a fictitious name. The court ruled that a bank is required to take
meticulous care of the deposits of its clients, who have the right to
expect high standards of integrity and performance from it. Among its
obligations in further care thereof is knowing the signatures of its
clients. (PBI vs. Casa Montessori Internationale, 430 SCRA 261, 2004).
NATURE OF BANK FUNDS AND BANK DEPOSITS
Deposits
Deposits consists of money placed into banking institutions
for safekeeping. The account holder has the right to withdraw
deposited funds, as set forth in the terms and conditions governing the
account agreement.
These funds are liabilities of the bank, because these have
to be returned to the owners on demand. These likewise become
assets of the bank.
Kinds of Deposits
1. Currents Deposits
The depositors of such deposits can withdraw and deposit
money whenever they desire. Since banks have to keep the deposited
amount of such accounts in cash always they carry either no interest or
very low rate of interest.
Current Deposits are also called Demand Deposits
because these can be demanded or withdrawn by the depositors at
any time they want. Thus, these are highly useful for traders and big
business firms because they have to make payments and accept
payments many times in a day.
Demand deposit accounts may have joint owners. Both
owners must sign when opening the account, but only one owner must
sign when closing the account. Either owner may deposit or withdraw
funds and sign checks without permission from the other owner.
Financial institutions typically create minimum balances for
demand deposit accounts. Accounts falling below the minimum value
typically are assessed a fee each time the balance drops below the
required value.
2. Fixed Deposits
Fixed Deposits are also called Time Deposits ,
Certificate of Deposit or Savings Bonds since these are the

74 | P a g e

deposits which are deposited for a definite period of time, thus, it

cannot be withdrawn before the expiry of the stipulated time.
These deposits generally carry a higher rate of interest
because banks can use these for a definite time without having the
fear of being withdrawn.
Generally speaking, the longer the term, the better the
yield of the money.
3. Savings Deposits
Money up to a certain limit can be deposited and
withdrawn once or twice in a week, thus, the rate of interest is very
less.
These accounts are not as convenient to use as checking
accounts, however, these accounts let customers keep liquid assets
while still earning a monetary return.
Types of Deposits Accounts
1. Individual or Single Account are individually-owned
accounts or accounts held under one name: either as natural person or
juridical entity
2. Joint Account
a) "And" account. This is a co-ownership account wherein
the signatures of both co-depositors are required for withdrawals.
b) "And / Or" account. Eighter one of the co-depositors
may deposit and withdraw from the account without the knowledge,
consent and signature of the other.
Upon the death of one, the survivor may withdraw
the entire balance on deposit.
Joint Accounts may be deemed a survivorship agreement
depending on the intention of the parties.
Survivorship agreement is one whereby the co-depositors
agree to permit either of them to withdraw the whole deposit during
their lifetime and transferring the balance to the survivor upon the
death of one of them. It is not prohibited unless its operation or effect
may be violative of the law.
Deposit Substitutes (Quasi-banking functions)
An alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement or acceptance
of debt instruments for the borrowers own-account, for the purpose of
re-lending or purchasing of receivables and other obligations (Sec. 95,
RA 7653)
Special Rules on Depositors
1. Minors. They can open bank accounts in their own right
provided that:
a) they are at least 7 years of age;
b) they are able to read and write and have sufficient
discretion;
c) they are not otherwise disqualified by any other
incapacity; and
d) it should only be savings or time deposits (Sec. 1, P.D.
734)

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Parents may deposit for their minor children and guardians for
their wards (Sec. 1, P.D. 734)
With respect to thrift banks, if any guardian shall give notice
in writing to any thrift bank not to make payments of deposits,
dividends, or interest to the minor of whom he is the guardian,
then such payment shall be made only to the guardian (Sec.
22, Thrift Banks Act of 1995)
2. Married Women are allowed to open bank accounts without
the assistance of their husbands (R.A. 7192)
2. Corporations. Judicial persons are capacitated to open bank
accounts with respect to corporations, the opening of an account in its
behalf is in fact a requirement even before its life commences.
STIPULATION OF INTEREST
Section 1 of P.D. No. 1684 also empowered the Central Banks
Monetary Board to prescribe the maximum rates of interest for loans
and certain forbearances. Pursuant to such authority, the Monetary
Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other
Financial Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
The rate of interest, including commissions, premiums, fees and
other charges, on any loan, or forbearance of any money, goods or
credits, regardless of maturity and whether secured or unsecured, shall
not be subject to any ceiling prescribed under or pursuant to the Usury
Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting
parties to stipulate freely regarding any subsequent adjustment in the
interest rate that shall accrue on a loan or forbearance of money,
goods or credits. In fine, they can agree to adjust, upward or
downward, the interest previously stipulated. However, contrary to the
stubborn insistence of petitioner bank, the said law and circular did not
authorize either party to unilaterally raise the interest rate without the
others consent.
It is basic that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who contracts,
his act has no more efficacy than if it had been done under duress or
by a person of unsound mind.
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan contracts, it cannot be gainsaid
that the rate of interest is always a vital component, for it can make or
break a capital venture. Thus, any change must be mutually agreed
upon, otherwise, it is bereft of any binding effect.

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GRANT OF LOANS AND SECURITY REQUIREMENTS

SECTION 39. Grant and Purpose of Loans and Other Credit
Accommodations. - A bank shall grant loans and other credit
accommodations only in amounts and for the periods of time essential
for the effective completion of the operations to be financed. Such
grant of loans and other credit accommodations shall be consistent
with safe and sound banking practices. (75a)
The purpose of all loans and other credit accommodations shall be
stated in the application and in the contract between the bank and the
borrower. If the bank finds that the proceeds of the loan or other credit
accommodation have been employed, without its approval, for
purposes other than those agreed upon with the bank, it shall have the
right to terminate the loan or other credit accommodation and demand
immediate repayment of the obligation. (77)
SECTION 40. Requirement for Grant Of Loans or 0ther Credit
Accommodations. - Before granting a loan or other credit
accommodation, a bank must ascertain that the debtor is capable of
fulfilling his commitments to the bank.
Toward this end, a bank may demand from its credit applicants a
statement of their assets and liabilities and of their income and
expenditures and such information as may be prescribed by law or by
rules and regulations of the Monetary Board to enable the bank to
properly evaluate the credit application which includes the
corresponding financial statements submitted for taxation purposes to
the Bureau of Internal Revenue. Should such statements prove to be
false or incorrect in any material detail, the bank may terminate any
loan or other credit accommodation granted on the basis of said
statements and shall have the right to demand immediate repayment
or liquidation of the obligation.
In formulating rules and regulations under this Section, the Monetary
Board shall recognize the peculiar characteristics of micro financing,
such as cash flow-based lending to the basic sectors that are not
covered by traditional collateral. (76a).
PENALTIES FOR VIOLATIONS
a. Monetary Penalties - Fines of one-tenth of one percent (1/10 of
1%) of the excess over the ceiling but not to exceed Thirty Thousand
Pesos (P30,000.00) a day for each SBL violation shall be assessed on
the bank to be reckoned from the date the excess started up to the
date when such excess was eliminated: Provided, That a maximum fine
of Five Hundred Pesos (P500.00) a day for each violation shall be
imposed against banks with total resources of less than P50 million at
the time of granting of loan/credit accommodation.
b. Other Sanctions
First Offense Reprimand for the directors/officers who approved the
credit availment which resulted in the excess with a warning that
subsequent violations will be subject to more severe sanctions.
Subsequent Offenses

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1. Fine of One Thousand Pesos (P1,000.00) for directors/officers who

approved the credit availment which resulted in the excess.
2. Suspension of the banks branching privileges and access to
BangkoSentral rediscounting facilities until the excess is eliminated.
3. Other penalties as the Monetary Board may impose depending on
the gravity of the offense.

JURISPRUDENCE
Republic vs Security Credit and Acceptance Corp. (19
SCRA 58)
Facts: Defendant corporation managed to induce the public to open
59 643 savings deposits accounts with an aggregate amount of P1 689
136.74 deposited which it lent out to borrowers. However, it was not
authorized by the Central Bank to operate a banking institution.
Issue: May Security Credit and Acceptance Corp. be considered as a
banking institution?
Ruling: Yes. The determining factors in deciding whether a person or
an entity is a banking institutions are engagement in the lending of
funds obtained from the public and regularity in conducting such
operation. The Corporations actions fall squarely on such requisites.
ASSOCIATED BANK (Now WESTMONT BANK) vs. TAN
G.R. No. 156940. December 14, 2004
FACTS:
Tan is a businessman and a regular depositor-creditor of
Associated Bank. He deposited a postdated check with the said bank in
the amount of Php101,000.00. The check was duly entered in his bank
record making his balance in the amount of PhP297,000.00. Tan was
advised that the check had been cleared and so on the same date, Tan
withdrew PhP240,000.00 leaving a balance of PhP57,793.45. A day
after, he deposited PhP50,000.00 making his existing balance in the
amount of PhP107,793.45.
Tan issued checks to his business partners and suppliers.
However, his partners went back to him alleging that the check he
issued bounced for insufficiency of funds. In his Complaint, Tan alleged
that he had sufficient funds to pay the checks he issued.
The bank averred that Tan had no cause of action and it argued
that it had all the right to debit the account of Tan by reason of the
dishonor of the check deposited by him which was withdrawn by him
prior to its clearing. The bank did not inform Tan that a debit had been
made on his account.
ISSUE:
Did the bank treat the account of its depositor with the highest
degree of care?
RULING:
No.The manager of the bank categorically admitted that she and
the employees of the bank allowed Tan to withdraw the amount of
check deposited without clearance from the drawee bank. This act

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clearly disregarded banking system. The Court confirmed the ruling of

the trial court that the bank manager was negligent in handling the
checking account of respondent Tan.
PCIB vs. Court of Appeals
G.R. No. 121413 January 29, 2001
FACTS: This case is composed of three consolidated petitions involving
several checks, payable to the Bureau of Internal Revenue, but was
embezzled allegedly by an organized syndicate.
I. G. R. Nos. 121413 and 121479
On October 19, 1977, plaintiff Ford issued a Citibank check
amounting to P4,746,114.41 in favor of the Commissioner of Internal
Revenue for the payment of manufacturers taxes. The check was
deposited with defendant IBAA (now PCIB), subsequently cleared the
the Central Bank, and paid by Citibank to IBAA. The proceeds never
reached BIR, so plaintiff was compelled to make a second payment.
Defendant refused to reimburse plaintiff, and so the latter filed a
complaint. An investigation revealed that the check was recalled by
Godofredo Rivera, the general ledger accountant of Ford, and was
replaced by a managers check. Alleged members of a syndicate
deposited the two managers checks with Pacific Banking Corporation.
Ford filed a third party complaint against Rivera and PBC. The case
against PBC was dismissed. The case against Rivera was likewise
dismissed because summons could not be served. The trial court held
Citibank and PCIB jointly and severally liable to Ford, but the Court of
Appeals only held PCIB liable.
II. G. R. No. 128604
Ford drew two checks in favor of the Commissioner of Internal
Revenue, amounting to P5,851,706.37 and P6,311,591.73. Both are
crossed checks payable to payees account only. The checks never
reached BIR, so plaintiff was compelled to make second payments.
Plaintiff instituted an action for recovery against PCIB and Citibank.
On investigation of NBI, the modus operandi was discovered.
Gorofredo Rivera made the checks but instead of delivering them to
BIR, passed it to Castro, who was the manager of PCIB San Andres.
Castro opened a checking account in the name of a fictitious person
Reynaldo Reyes. Castro deposited a worthless Bank of America check
with the same amount as that issued by Ford. While being routed to
the Central Bank for clearing, the worthless check was replaced by the
genuine one from Ford.
The trial court absolved PCIB and held Citibank liable, which
decision was affirmed in toto by the Court of Appeals.
ISSUES:
(1) Whether there is contributory negligence on the part of Ford
(2) Has petitioner Ford the right to recover from the collecting bank
(PCIBank) and the drawee bank (Citibank) the value of the checks
intended as payment to the Commissioner of Internal Revenue?
HELD:
(1) The general rule is that if the master is injured by the negligence of
a third person and by the concurring contributory negligence of his
own servant or agent, the latter's negligence is imputed to his superior
and will defeat the superior's action against the third person,

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assuming, of course that the contributory negligence was the

proximate cause of the injury of which complaint is made. As
defined, proximate cause is that which, in the natural and continuous
sequence, unbroken by any efficient, intervening cause produces the
injury and without the result would not have occurred. It appears that
although the employees of Ford initiated the transactions attributable
to an organized syndicate, in our view, their actions were not the
proximate cause of encashing the checks payable to the CIR. The
degree of Ford's negligence, if any, could not be characterized as the
proximate cause of the injury to the parties. The mere fact that the
forgery was committed by a drawer-payor's confidential employee or
agent, who by virtue of his position had unusual facilities for
perpertrating the fraud and imposing the forged paper upon the bank,
does notentitle the bank toshift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer.
This rule likewise applies to the checks fraudulently negotiated or
diverted by the confidential employees who hold them in their
possession.
(2) We have to scrutinize, separately, PCIBank's share of negligence
when the syndicate achieved its ultimate agenda of stealing the
proceeds of these checks.
a. G. R. Nos. 121413 and 121479.
On record, PCIBank failed to verify the authority of Mr. Rivera to
negotiate the checks. The neglect of PCIBank employees to verify
whether his letter requesting for the replacement of the Citibank Check
No. SN-04867 was duly authorized, showed lack of care and prudence
required in the circumstances. Furthermore, it was admitted that
PCIBank is authorized to collect the payment of taxpayers in behalf of
the BIR. As an agent of BIR, PCIBank is duty bound to consult its
principal regarding the unwarranted instructions given by the payor or
its agent. It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to which it is sent
for collection is, in the absence of an argreement to the contrary, that
of principal and agent. A bank which receives such paper for collection
is the agent of the payee or holder.
Indeed, the crossing of the check with the phrase "Payee's
Account Only," is a warning that the check should be deposited only in
the account of the CIR. Thus, it is the duty of the collecting bank
PCIBank to ascertain that the check be deposited in payee's account
only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make
the clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed".
Lastly, banking business requires that the one who first cashes
and negotiates the check must take some precautions to learn whether
or not it is genuine. And if the one cashing the check through
indifference or other circumstance assists the forger in committing the
fraud, he should not be permitted to retain the proceeds of the check
from the drawee whose sole fault was that it did not discover the
forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which
cashes a check drawn upon another bank, without requiring proof as to
the identity of persons presenting it, or making inquiries with regard to
them, cannot hold the proceeds against the drawee when the proceeds
of the checks were afterwards diverted to the hands of a third party. In

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such cases the drawee bank has a right to believe that the cashing
bank (or the collecting bank) had, by the usual proper investigation,
satisfied itself of the authenticity of the negotiation of the checks.
Thus, one who encashed a check which had been forged or diverted
and in turn received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success of the fraud
practiced on the drawee bank. The latter may recover from the holder
the money paid on the check.
b. G. R. No. 128604
In this case, there was no evidence presented confirming the
conscious participation of PCIBank in the embezzlement. As a general
rule, however, a banking corporation is liable for the wrongful or
tortuous acts and declarations of its officers or agents within the
course and scope of their employment. A bank will be held liable for
the negligence of its officers or agents when acting within the course
and scope of their employment. It may be liable for the tortuous acts of
its officers even as regards that species of tort of which malice is an
essential element. In this case, we find a situation where the PCIBank
appears also to be the victim of the scheme hatched by a syndicate in
which its own management employees had participated. But in this
case, responsibility for negligence does not lie on PCIBank's shoulders
alone.

QUESTIONS AND ANSWERS

BAR QUESTION (1978)
1. ABC Investment Corporation is engaged in the purchase of
accounts receivables, or specifically installment papers of
purchasers of cars and trucks. As a source of its funding, the
corporation sells its bonds from time to time to the public. The
proceeds of which are utilized in financing operations. On the
basis of these facts, the Legal Counsel of the Central Bank
rendered an opinion to the effect that ABC Investment Corp. is
a banking institution within the purview of the General
Banking Act.
Is this correct? Give reasons for your answer.
No, the opinion of the Legal Counsel is not correct because said
corporation does not fall within the definition of a bank. A bank as
defined by law is one which is engaged in the receipt of deposits of any
kind. Moreover, being a financing corporation, it has not been
considered expressly by our law as a banking institution.
2. What are the main powers of a bank?
The banking powers of accepting deposits and lending funds
from deposits.
3. What is meant by fiduciary relationship between a bank and
its depositor?
The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family.
This fiduciary relationship means that the banks obligation to

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observe high standards of integrity and performance is deemed

written into every deposit agreement between a bank and its
depositor. (Phil Banking Corp. vs. CA, G.R. No. 127469. January 15,
2014). The bank is under obligation to treat the accounts of his
depositors with meticulous care whether such account consists only
of a few hundred pesos or of millions of pesos. (Simex International,
Manila vs. CA, 183 SCRA 408, 1992).
4. Mr. U, a bank employee, allowed withdrawal from an account
of Mr. Z by a certain person who claimed to be Mr. Z without
verifying his signature. Consequently, the withdrawal turned
out to be an unauthorized one. Mr. Z filed a complaint against
the bank for damages. However, the bank averred that Mr. Z
has no cause of action against it as the one liable should be Mr.
U. Is the banks contention correct?
No.A bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their employment.
(PCI
Bank
vs.
CA
350
SCRA
446,
2001).
5. What is the relationship between the depositor and the bank
with respect to the money deposited by the former with the
latter?
There is a debtor-creditor relationship between the bank
and its depositor. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank agrees to
pay the depositor on demand. The savings deposit agreement between
the bank and the depositor is the contract that determines the rights
and obligations of the parties.
6. When a co-depositor inquires into the deposits, does he
need the written consent of the other depositor?
No. A co-payee in a check deposited in a bank is likewise a
co-depositor. No written consent therefore of the other co-payee is
needed in an inquiry of the deposits by the said co-depositor.

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BANGKO SENTRAL NG PILIPINAS LAW

RA 7653 (1993)
A. STATE POLICIES
1. the State shall maintain a CENTRAL MONETARY AUTHORITY
2.

that shall function and operate as an INDEPENDENT and

ACCOUNTABLE BODY CORPORATE in the discharge of its mandated
responsibilities CONCERNING MONEY, BANKING AND CREDIT

3. in line with this policy, and considering its unique functions and
responsibilities, the central monetary authority established under
this Act, while being a government-owned corporation, shall enjoy
FISCAL and ADMINISTRATIVE AUTONOMY (sec. 1)
B. CREATION OF THE BSP
SECTION 2. Creation of the Bangko Sentral. There is hereby
established an independent central monetary authority, which shall
be a body corporate known as the Bangko Sentral ng Pilipinas,
hereafter referred to as the Bangko Sentral.
C. BSP RESPONSIBILITIES
1. provide POLICY DIRECTIONS in the areas of MONEY, BANKING, AND
CREDIT
2. have SUPERVISION OVER the OPERATIONS of BANKS

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3. excercise such REGULATORY POWERS as provided in this Act and

other pertinent laws over the operations of FINANCE COMPANIES and
non-bank financial institutions performing quasi-banking functions,
hereafter referred to as QUASI-BANKS, and institutions performing
similar functions (sec. 3)
BSP Primary Objective
1.

MAINTAIN PRICE STABILITY conducive to a balanced and

sustainable growth of the economy

2. it shall also promote and maintain MONETARY STABILITY and the

CONVERTIBILITY of the PESO
D. THE MONETARY BOARD
The powers and function of Bangko Sentral are exercised by its
Monetary Board, which has seven members appointed by the President
of The Philippines. Under the New Central Bank Act, one of the
government sector members of the Monetary Board must also be a
member of the Cabinet designated by the President.
The New Central Bank Act establishes certain qualifications for the
members of the Monetary Board and also prohibits members from
holding certain positions with other governmental agencies and private
institutions that may give rise to conflicts of interest. With the
exception of the members of the Cabinet, the Governor and the other
members of the Monetary Board serve terms of six years and may only
be removed for cause.
The Monetary Board meets at least once a week. The Board may be
called to a meeting by the Governor of the Bangko Sentral or by
two (2) other members of the Board. Usually, the Board meets every
Thursday but on some occasions, it convenes to discuss urgent issues.

Powers and Functions of the Monetary Board

In the exercise of its authority, the Monetary Board shall:
1. Issue rules and regulations it considers necessary for the
effective discharge of the responsibilities and exercise of the
powers vested upon the Monetary Board and the Bangko Sentral;
2. Direct the management, operations, and administration of the
Bangko Sentral, reorganize its personnel, and issue such rules
and regulations as it may deem necessary or convenient for this
purpose. The legal units of the Bangko Sentral shall be under the
exclusive supervision and control of the Monetary Board;
3. Establish a human resource management system which shall
govern the selection, hiring, appointment, transfer, promotion, or
dismissal of all personnel. Such system shall aim to establish
professionalism and excellence at all levels of the Bangko Sentral
in accordance with sound principles of management.
A compensation structure, based on job evaluation studies and

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wage surveys subject to the Board's approval, shall be instituted

as an integral component of the Bangko Sentral's human
resource
development
program.
On the recommendation of the Governor, appoint, fix the
remunerations and other emoluments, and remove personnel of
the Bangko Sentral, subject to pertinent civil service laws:
Provided, That the Monetary Board shall have exclusive and final
authority to promote, transfer, assign, or reassign personnel of
the Bangko Sentral and these personnel actions are deemed
made in the interest of the service and not disciplinary: Provided,
further, That the Monetary Board may delegate such authority to
the Governor under such guidelines as it may determine;
4. Adopt an annual budget for and authorize such expenditures by
the Bangko Sentral in the interest of the effective administration
and operations of the Bangko Sentral in accordance with
applicable laws and regulations; and
5. Indemnify its members and other officials of the Bangko Sentral,
including personnel of the departments performing supervision
and examination functions against all costs and expenses
reasonably incurred by such persons in connection with any civil
or criminal action, suit or proceedings to which he may be, or is,
made a party by reason of the performance of his functions or
duties, unless he is finally adjudged in such action or proceeding
to be liable for negligence or misconduct.
E. HOW THE BSP HANDLES BANKS IN DISTRESS?
Examination and Supervision of the BSP (sec. 25)
the BSP shall have
a) SUPERVISION OVER
b) and CONDUCT PERIODIC or SPECIAL EXAMINATIONS of
A) BANKING institutions
B) QUASI-BANKS
C) INCLUDING their SUBSIDIARIES and AFFILIATES engaged in
ALLIED ACTIVITIES
- a SUBSIDIARY means a corporation MORE THAN 50% of the VOTING
STOCK of which is owned by a bank or quasi-bank
- an AFFILIATE means a corporation the VOTING STOCK of which, to the
extent of 50% OR LESS, is owned by a bank or quasi-bank or which is
related or linked to such institution or intermediary through common
stockholders or such other factors as may be determined by the
Monetary Board
The department heads and the EXAMINERS of the supervising and/or
examining departments are hereby AUTHORIZED
1. to ADMINISTER OATHS to any director, officer, or employee of any
institution under their respective supervision or subject to their
examination
2. and to COMPEL the PRESENTATION of all books, documents, papers
or RECORDS necessary in their judgment to ascertain the facts
relative to the true condition of any institution as well as the books
and records of persons and entities relative to or in connection with

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the operations, activities or transactions of the institution under

examination, SUBJECT to the provision of existing laws protecting or
safeguarding the SECRECY or confidentiality of BANK DEPOSITS as
well as INVESTMENTS of private persons, natural or juridical, in DEBT
INSTRUMENTS issued by the Government
No injunction against BSP (SEC. 25)
NO RESTRAINING ORDER or INJUNCTION shall be issued BY the
COURT ENJOINING the BSP from EXAMINING any institution subject to
supervision or examination by the BSPB
UNLESS there is
a) CONVINCING PROOF that the action of the BSP is PLAINLY
ARBITRARY and made in BAD FAITH
b) and the petitioner or plaintiff FILES with the clerk or judge of
the court in which the action is pending a BOND executed in
favor of the BSP in an amount to be fixed by the court
- the provisions of Rule 58 of the New Rules of Court insofar as they are
applicable and not inconsistent with the provisions of this section shall
govern the issuance and dissolution of the restraining order or
injunction contemplated in this section
Conservatorship (SEC. 29)
Whenever

on the BASIS of a REPORT submitted by the appropriate

SUPERVISING or EXAMINING DEPARTMENT
the MB finds that a BANK or a QUASI-BANK is in a STATE of
CONTINUING INABILITY or UNWILLINGNESS to MAINTAIN a
CONDITION of LIQUIDITY deemed adequate to protect the
interest of depositors and creditors

The MB may APPOINT a CONSERVATOR w/ such POWERS as the MB

shall deem necessary
a) to TAKE CHARGE of the ASSETS, liabilities, and the
management thereof
b) REORGANIZE the MANAGEMENT
c) COLLECT all monies and debts due said institution
d) and exercise all powers necessary to RESTORE its VIABILITY
e) the conservator shall REPORT and be RESPONSIBLE TO the MB
f) and shall have the power to OVERRULE or REVOKE the
ACTIONS of the PREVIOUS management and BOARD of
directors of the bank or quasi-bank
- (qualifications) the conservator should be competent and
knowledgeable in BANK OPERATIONS and MANAGEMENT
- (period) the conservatorship shall NOT EXCEED 1 YEAR
Remuneration:
1. The conservator shall receive remuneration to be fixed by the
Monetary Board in an amount NOT to EXCEED 2/3 of the SALARY of
the PRESIDENT of the institution in one (1) year, payable in twelve
(12) equal monthly payments
2. If at any time within one-year period, the conservatorship is
TERMINATED

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Bank Closure (sec. 30)

whenever, upon REPORT of the head of the supervising or examining
department, the MB FINDS that a
bank or quasi-bank:
1. is UNABLE to PAY its LIABILITIES

AS THEY BECOME DUE

BUSINESS

in the ORDINARY COURSE OF

provided that this shall NOT INCLUDE inability to pay caused

by EXTRAORDINARY DEMANDS induced by FINANCIAL PANIC in
the BANKING COMMUNITY

2. has INSUFFICIENT REALIZABLE ASSETS, as determined by the

BangkoSentral, to meet its liabilities or
3. CANNOT CONTINUE in BUSINESS W/O INVOLVING PROBABLE LOSSES
to its DEPOSITORS or CREDITORS or
4. has WILLFULLY VIOLATED a CEASE AND DESIST ORDER under sec. 37
that has BECOME FINAL involving ACTS or transactions which
amount to FRAUD or a DISSIPATION of the ASSETS of the institution
1. notifies the BSP or publicly announces a BANK HOLIDAY or in ANY
MANNER SUSPENDS the PAYMENT of its DEPOSIT LIABILITIES
CONTINUOUSLY for MORE THAN 30 DAYS (added ground under Sec
53 of RA8791)
2. Conducting business in an UNSAFE or UNSOUND manner (added
ground under Sec 56 of RA8791)
The MB may SUMMARILY and W/O need for PRIOR HEARING:
- FORBID the institution from DOING BUSINESS in the
Philippines
- and DESIGNATE the PDIC as RECEIVER of the banking
institution (for a bank)
- or ANY PERSON of RECOGNIZED COMPETENCE in banking or finance
may be designated AS RECEIVER (for a quasi-bank)
Receivership (Sec 30)
A. DUTIES OF THE RECEIVER UPON HIS DESIGNATION:
1. the receiver shall immediately GATHER and TAKE CHARGE of all the
assets and liabilities of the institution
2. ADMINISTER the same for the BENEFIT of its CREDITORS
3. exercise the GENERAL POWERS of a RECEIVER under the Revised
Rules of Court
A) SHALL NOT PAY OR COMMIT ANY ACT THAT WILL INVOLVE THE
transfer OR DISPOSITION OF any asset OF THE INSTITUTION W/
THE exception OF administrative expenditures
B) THE RECEIVER MAY deposit OR PLACE THE FUNDS OF THE
INSTITUTION IN non-speculative investments

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4. NOT LATER than 90 DAYS FROM take over -- the receiver shall
DETERMINE as soon as possible, WHETHER the INSTITUTION may be
REHABILITATED or otherwise placed in such a condition so that it
may be permitted to RESUME BUSINESS with safety to its depositors
and creditors and the general public:
Any determination for the RESUMPTION of business of the
institution shall be SUBJECT to PRIOR APPROVAL of the MB
5. if the receiver DETERMINES that the institution CANNOT be
REHABILITATED or permitted to RESUME BUSINESS in accordance
with the next preceding paragraph
a) the MB shall NOTIFY IN WRITING the BOARD of directors of its
findings
b) and direct the receiver to PROCEED w/ the LIQUIDATION of the
institution
Liquidation
A. DUTIES OF RECEIVER DURING LIQUIDATION (SEC 30):
1. FILE EX PARTE with the proper RTC, and W/O requirement of PRIOR
NOTICE or any other action, a PETITION FOR ASSISTANCE IN THE
LIQUIDATION of the institution
a) pursuant to a LIQUIDATION PLAN ADOPTED by the PDIC for
general application to all closed banks
b) in case of QUASI-BANKS, the liquidation plan shall be adopted
by the MB
c) upon acquiring jurisdiction, the COURT shall, upon MOTION BY
the RECEIVER after due notice
- ADJUDICATE DISPUTED CLAIMS against the institution
- assist the ENFORCEMENT of INDIVIDUAL LIABILITIES of the
stockholders, directors and officers
- and DECIDE on OTHER ISSUES as may be material to implement
the liquidation plan adopted
d) the RECEIVER shall PAY the COST of the PROCEEDINGS from
the assets of the institution
2. CONVERT the ASSETS of the institutions TO MONEY
a) DISPOSE of the same to CREDITORS and OTHER PARTIES, for
the purpose of paying the debts of such institution in
accordance with the rules on CONCURRENCE AND
PREFERENCE OF CREDIT under the Civil Code of the Philippines
b) in the name of the institution, and w/ the assistance of
counsel, INSTITUTE such ACTIONS as may be necessary to
COLLECT and RECOVER accounts and assets of, or DEFEND
any action against, the institution
- the ASSETS of an institution under receivership or liquidation shall be
DEEMED in CUSTODIA LEGIS in the hands of the receiver and shall,
FROM the MOMENT the institution was PLACED UNDER such
RECEIVERSHIP or LIQUIDATION, be EXEMPT from any order of
garnishment, levy, attachment, or EXECUTION

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- the ACTIONS of the MB taken under this section or under sec. 29 of

this Act shall be FINAL AND EXECUTORY, and may NOT be
RESTRAINED or SET ASIDE BY the COURT EXCEPT on PETITION FOR
CERTIORARI on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction
- the PETITION for certiorari may ONLY be FILED BY the STOCKHOLDERS
OF RECORD representing the MAJORITY of the CAPITAL STOCK W/IN
10 DAYS FROM RECEIPT by the board of directors of the institution of
the ORDER directing receivership, liquidation or conservatorship
- the DESIGNATION of a CONSERVATOR under Section 29 of this Act or
the APPOINTMENT of a RECEIVER under this section shall be VESTED
EXCLUSIVELY w/ the MB
the DESIGNATION of a CONSERVATOR is NOT a PRECONDITION to the
DESIGNATION of a RECEIVER
DISTRIBUTION OF ASSETS (SEC. 31)
In case of liquidation of a bank or quasi-bank, after PAYMENT of the
COST of proceedings, including reasonable EXPENSES and fees of the
RECEIVER to be allowed by the court, the receiver shall PAY the DEBTS
of such institution, under order of the court, in accordance with the
rules on CONCURRENCE AND PREFERENCE OF CREDIT as provided in
the Civil Code.
DISPOSITION OF REVENUES AND EARNINGS (SEC 32)
All revenues and earnings realized by the receiver in winding up the
affairs and administering the assets of any bank or quasi-bank within
the purview of this Act shall be used to pay the COSTS, FEES AND
EXPENSES mentioned in the preceding section, SALARIES of such
PERSONNEL whose employment is rendered necessary in the discharge
of the liquidation together with other additional expenses caused
thereby. The BALANCE of revenues and earnings, after the payment of
all said expenses, shall FORM PART of the ASSETS available for
PAYMENT to CREDITORS.
DISPOSITION OF BANKING FRANCHISE (SEC. 33)
The Bangko Sentral may, if public interest so requires, award to
an institution, upon such terms and conditions as the Monetary Board
may approve, the banking franchise of a bank under liquidation to
operate in the area where said bank or its branches were previously
operating: Provided, That whatever proceeds may be realized from
such award shall be subject to the appropriate exclusive disposition of
the Monetary Board.
F. HOW THE BSP HANDLES EXCHANGE CRISIS?
Exchange Crisis Authority (sec. 72)
in order
a) to achieve the PRIMARY OBJECTIVE of the BangkoSentral
b)

or PROTECT the INTERNATIONAL RESERVES of the

BangkoSentral in the imminence of, or DURING an EXCHANGE
CRISIS, or in time of NATIONAL EMERGENCY

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c) and to give the Monetary Board and the Government time in

which to take CONSTRUCTIVE MEASURES to forestall, combat,
or overcome such a crisis or emergency
the MB w/ the CONCURRENCE of AT LEAST 5 of its MEMBERS and W/
the APPROVAL of the
PRESIDENT of the Philippines may
a) TEMPORARILY SUSPEND or RESTRICT SALES OF EXCHANGE BY
the BSP
b) and may SUBJECT ALL TRANSACTIONS in GOLD and FOREIGN
EXCHANGE TO LICENSE by the BangkoSentral,
c) and may REQUIRE that any FOREIGN EXCHANGE thereafter
OBTAINED by any PERSON RESIDING or entity OPERATING IN
the PHILIPPINES be DELIVERED TO the BSP or to any bank or
agent designated by the BangkoSentral for the purpose, AT the
EFFECTIVE EXCHANGE RATE or rates
A. AS CUSTODIAN OF COUNTRYS INTERNATIONAL RESERVES
International Monetary Stabilization. (Sec. 64)
The BangkoSentral shall exercise its powers under this Act to
PRESERVE the INTERNATIONAL VALUE of the PESO and to maintain its
CONVERTIBILITY into other freely convertible currencies primarily for,
although not necessarily limited to, current payments for foreign trade
and invisibles.
International Reserves. (Sec. 65)
In order to maintain the international stability and convertibility
of the Philippine peso, the BangkoSentral shall MAINTAIN
INTERNATIONAL RESERVES adequate to meet any FORESEEABLE NET
DEMANDS on the BangkoSentral for FOREIGN CURRENCIES.
COMPOSITION OF THE INTERNATIONAL RESERVES. (Sec. 66)
The international reserves of the BangkoSentral may INCLUDE
but shall NOT be LIMITED to the following assets:
(A)
(B)

GOLD; and
ASSETS IN FOREIGN CURRENCIES in the form of: documents and
instruments customarily employed for the international transfer of
funds; demand and time deposits in central banks, treasuries and
commercial banks abroad; foreign government securities; and foreign
notes and coins.
The Monetary Board shall endeavor to hold the foreign exchange
resources of the BangkoSentral in freely convertible currencies;
moreover, the Board shall give particular consideration to the
prospects of continued strength and convertibility of the currencies in
which the reserve is maintained, as well as to the anticipated demands
for such currencies. The Monetary Board shall issue regulations
determining the other qualifications which foreign exchange assets
must meet in order to be included in the international reserves of the
BangkoSentral.

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The BangkoSentral shall be free to convert any of the assets in

its international reserves into other assets as described in subsections
(a) and (b) of this section.
B. AS CONTROLLER OF CREDIT
Guiding Principle. (Sec. 61)
The Monetary Board shall endeavor to control any expansion or
contraction in monetary aggregates which is prejudicial to the
attainment or maintenance of PRICE STABILITY.
Power to Define Terms. (Sec. 62)
For purposes of this article and of this Act, the Monetary Board
shall formulate definitions of monetary aggregates, credit and prices
and shall make public such definitions and any changes thereof.
Action When ABNORMAL MOVEMENTS OCCUR IN THE MONETARY
AGGREGATES, CREDIT, OR PRICE LEVEL. (Sec. 63)

Whenever abnormal movements in the monetary aggregates, in

credit, or in prices endanger the stability of the Philippine economy
or important sectors thereof, the Monetary Board shall:

(A)

TAKE such REMEDIAL MEASURES as are appropriate and within

the powers granted to the Monetary Board and the BangkoSentral
under the provisions of this Act; and

(B)

SUBMIT to the PRESIDENT of the Philippines and the CONGRESS,

and make public, a DETAILED REPORT which shall include, as a
minimum, a description and analysis of:

(1)

the CAUSES of the rise or fall of the monetary aggregates,

of credit or of prices;

(2)

the extent to which the changes in the monetary

aggregates, in credit, or in prices have been reflected in changes in the
level of domestic output, employment, wages and economic activity in
general, and the NATURE and SIGNIFICANCE of any such changes; and

(3)

the MEASURES which the Monetary Board has TAKEN and

the other monetary, fiscal or administrative measures which it
RECOMMENDS to be adopted.

Whenever the monetary aggregates, or the level of credit, increases

or decreases by MORE THAN fifteen percent (15%), or the cost of
living index increases by MORE THAN ten percent (10%), in relation
to the level existing at the end of the corresponding month of the
preceding year, or even though any of these quantitative guidelines
have not been reached when in its judgment the circumstances so
warrant, the Monetary Board shall submit the reports mentioned in
this section, and shall state therein whether, in the opinion of the
Board, said changes in the monetary aggregates, credit or cost of
living represent a threat to the stability of the Philippine economy or
of important sectors thereof.

The Monetary Board shall continue to submit periodic reports to the

President of the Philippines and to Congress until it considers that
the monetary, credit or price disturbances have disappeared or
have been adequately controlled.

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Guiding Principles. (Sec. 81)

The REDISCOUNTS, DISCOUNTS, LOANS AND ADVANCES which the

BangkoSentral is authorized to EXTEND to BANKING INSTITUTIONS
under the provisions of the present article of this Act shall be used
to influence the volume of credit consistent with the objective of
price stability.

EXCHANGE CRISIS PROVISION (sec. 72) (supra)

Acquisition of Inconvertible Currencies (Sec. 73)
The BangkoSentral shall avoid the acquisition and holding of currencies
which are not freely convertible, and may acquire such currencies in an
amount exceeding the minimum balance necessary to cover current
demands for said currencies only when, and to the extent that, such
acquisition is considered by the Monetary Board to be in the national
interest.
Exchange Rates. (Sec. 74)

The Monetary Board shall DETERMINE the EXCHANGE RATE POLICY

of the country.

The Monetary Board shall determine the rates at which the

BangkoSentral shall buy and sell spot exchange, and shall establish
deviation limits from the effective exchange rate or rates as it may
deem proper.

The BangkoSentral shall not collect any additional commissions or

charges of any sort, other than actual telegraphic or cable costs
incurred by it.

The Monetary Board shall similarly determine the rates for other
types of foreign exchange transactions by the BangkoSentral,
including purchases and sales of foreign notes and coins, but the
margins between the effective exchange rates and the rates thus
established may not exceed the corresponding margins for spot
exchange transactions by more than the additional costs or
expenses involved in each type of transactions.

Operations with Foreign Entities. (Sec. 75)

The Monetary Board may authorize the BangkoSentral to grant

loans to and receive loans from foreign banks and other foreign or
international entities, both public and private, and may engage in
such other operations with these entities as are in the national
interest and are appropriate to its character as a central bank.

The BangkoSentral may also act as agent or correspondent for such

entities.

Upon authority of the Monetary Board, the BangkoSentral may

pledge any gold or other assets which it possesses as security
against loans which it receives from foreign or international entities.

Foreign Exchange Holdings of the Banks (Sec. 76)

In order that the BangkoSentral may at all times have foreign

exchange resources sufficient to enable it to maintain the

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international stability and convertibility of the peso, or in order to

promote the domestic investment of bank resources, the Monetary
Board may require the banks to sell to the BangkoSentral or to other
banks all or part of their surplus holdings of foreign exchange.

The Monetary Board may, whenever warranted, determine the net

assets and net liabilities of banks and shall, in making such a
determination, take into account the bank's networth, outstanding
liabilities, actual and contingent, or such other financial or
performance ratios as may be appropriate under the circumstances.

Requirement of Balanced Currency Position (Sec. 77)

The Monetary Board may require the banks to maintain a balanced

position between their assets and liabilities in Philippine pesos or in
any other currency or currencies in which they operate.

The banks shall be granted a reasonable period of time in which to

adjust their currency positions to any such requirement.

The powers granted under this section shall be exercised only when
special circumstances make such action necessary.

Regulation of Non-spot Exchange Transactions. (Sec. 78)

In order to restrain the banks from taking speculative positions with
respect to future fluctuations in foreign exchange rates, the Monetary
Board may issue such regulations governing bank purchases and sales
of non-spot exchange as it may consider necessary for said purpose.
Other Exchange Profits and Losses. (Sec. 79)
The banks shall bear the risks of non-compliance with the terms of the
foreign exchange documents and instruments which they buy and sell,
and shall also bear any other typically commercial or banking risks,
including exchange risks not assumed by the BangkoSentral under the
provisions of the preceding section.
CREDIT OPERATIONS
Guiding Principles (Sec. 81)
The REDISCOUNTS, DISCOUNTS, LOANS AND ADVANCES which the
BangkoSentral is authorized to EXTEND to BANKING INSTITUTIONS
under the provisions of the present article of this Act shall be used to
influence the volume of credit consistent with the objective of price
stability.

JURISPRUDENCE
ABACUS REAL ESTATE DEVELOPMENT v. MANILA
BANKING CORP
[G.R. No. 162270. April 06, 2005]
The appointment of a receiver operates to suspend the authority
of the bank and of its directors and officers over its property and
effects, such authority being reposed in the receiver, and in this

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respect, the receivership is equivalent to an injunction to restrain the

bank officers from intermeddling with the property of the bank in any
way.
Facts:
Manila Banking Corporation (Manila Bank, for brevity), owns a
1,435-square meter parcel of land located along Gil Puyat Avenue
Extension, Makati City and covered by Transfer Certificate of Title (TCT)
No. 132935 of the Registry of Deeds of Makati. Prior to 1984, the bank
began constructing on said land a 14-storey building. Not long after,
however, the bank encountered financial difficulties that rendered it
unable to finish construction of the building. Central Bank of the
Philippines, now Bangko Sentralng Pilipinas, ordered the closure of
Manila Bank and placed it under receivership, with Feliciano Miranda,
Jr. being initially appointed as Receiver. The legality of the closure was
contested by the bank before the proper court. Manila Banks then
acting president, the late Vicente G. Puyat, in a bid to save the banks
investment, started scouting for possible investors who could finance
the completion of the building earlier mentioned.
A group of investors, represented by Calixto Y. Laureano
(hereafter referred to as Laureano group), wrote Vicente G. Puyat
offering to lease the building for ten (10) years and to advance the cost
to complete the same, with the advanced cost to be amortized and
offset against rental payments during the term of the lease. Likewise,
the letter-offer stated that in consideration of advancing the
construction cost, the group wanted to be given the exclusive option
to purchase the building and the lot on which it was constructed.
Vicente G. Puyat accepted the Laureano groups offer and granted it an
exclusive option to purchase the lot and building for One Hundred
Fifty Million Pesos (P150,000,000.00). Later, or on October 31, 1989,
the building was leased to MEQCO for a period of ten (10) years
pursuant to a contract of lease bearing that date. MEQCO subleased
the property to petitioner Abacus Real Estate Development Center, Inc.
(Abacus, for short), a corporation formed by the Laureano group for the
purpose, under identical provisions as that of the October 31, 1989
lease contract between Manila Bank and MEQCO.
Issue:
Whether or not Vicente Puyat, acting as president of Manila
Bank, has the power to sell the disputed properties.
Held:
There can be no quibbling that respondent Manila Bank was
under receivership, pursuant to Central Banks MB Resolution No. 505
dated May 22, 1987, at the time the late Vicente G. Puyat granted the
exclusive option to purchase to the Laureano group of investors.
Owing to this defining reality, the appellate court was correct in
declaring that Vicente G. Puyat was without authority to grant the
exclusive option to purchase the lot and building in question. The
invocation by the appellate court of the following pronouncement
inVillanueva vs. Court of Appeals was apropos, to say the least the
assets of the bank pass beyond its control into the possession and
control of the receiver whose duty it is to administer the assets for the
benefit of the creditors of the bank. Thus, the appointment of a
receiver operates to suspend the authority of the bank and of its
directors and officers over its property and effects, such authority

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being reposed in the receiver, and in this respect, the receivership is

equivalent to an injunction to restrain the bank officers from
intermeddling with the property of the bank in any way. With
respondent bank having been already placed under receivership, its
officers, inclusive of its acting president, Vicente G. Puyat, were no
longer authorized to transact business in connection with the banks
assets and property. Clearly then, the exclusive option to purchase
granted by Vicente G. Puyat was and still is unenforceable against
Manila Bank.
Concededly, a contract unenforceable for lack of authority by one
of the parties may be ratified by the person in whose name the
contract was executed. However, even assuming, in gratia argument,
that Atty. Renan Santos, Manila Banks receiver, approved the
exclusive option to purchase granted by Vicente G. Puyat, the same
would still be of no force and effect.
MIRANDA v. COURT OF APPEALS
[G.R. No. 169334, September 8, 2006]
Solidary liability cannot attach to the BSP, in its capacity as
government regulator of banks, and the PDIC as statutory receiver
under R.A. No. 7653, because they are the principal government
agencies mandated by law to determine the financial viability of banks
and quasi-banks, and facilitate receivership and liquidation of closed
financial institutions, upon a factual determination of the latters
insolvency.
Facts:
Leticia G. Miranda (Miranda) was a depositor of Prime Savings
Bank. She withdrew substantial amounts from her account, but instead
of cash she opted to be issued a crossed cashiers check in the sum of
P2,500,000 and cashiers check in the amount of P3,002,000.
Petitioner deposited the two checks into her account in another bank
on the same day, however, Bangko Sentralng Pilipinas (BSP)
suspended the clearing privileges of Prime Savings Bank effective 2:00
p.m. of June 3, 1999. The two checks of petitioner were returned to her
unpaid. Subsequently, Prime Savings Bank declared a bank holiday.
The BSP placed Prime Savings Bank under the receivership of the
Philippine Deposit Insurance Corporation (PDIC).
Petitioner filed a civil action for sum of money in the Regional
Trial Court to recover the funds from her unpaid checks against Prime
Savings Bank, PDIC and the BSP. The court rendered judgment against
defendants and ordered them to pay the plaintiff. On appeal, the Court
of Appeals reversed the trial court and ruled in favor of the PDIC and
BSP, dismissing the case against them, without prejudice to the right of
petitioner to file her claim before the court designated to adjudicate on
claims against Prime Savings Bank. Petitioners motion for
reconsideration was denied. Hence, this petition.
Issue:
Whether or not the PDIC are solidarily liable to pay the
petitioner.
Held:
Only Prime Savings Bank that is liable to pay for the amount of
the two cashiers checks. Solidary liability cannot attach to the BSP, in
its capacity as government regulator of banks, and the PDIC as
statutory receiver under R.A. No. 7653, because they are the principal

95 | P a g e

government agencies mandated by law to determine the financial

viability of banks and quasi-banks, and facilitate receivership and
liquidation of closed financial institutions, upon a factual determination
of the latters insolvency. However, 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, it has been held that the purchase is
entitled to a preference in the assets of the bank on its liquidation
before the check is paid. Hence, the CA decision is affirmed with
modification that the claim of petitioner Miranda is entitled to
preference in the assets of PSB in its liquidation.

SUAN V. GONZALES
[A.C. No. 6377 March 12, 2007]
The filing of the intra-corporate case before the RTC to compel
the bank to disclose its stockholdings, to allow them the inspection of
corporate books and records, and the payment of damages does not
amount to forum-shopping notwithstanding the BSPs investigation on
the banks unsafe and unsound business practices
Facts:
Gonzales filed a case for Mandamus, Computation of Interests,
Enforcement of Inspection, Dividend and Appraisal Rights, Damages
and Attorneys Fees against the Rural Green Bank of Caraga, Inc. and
the members of its Board of Directors before the Regional Trial Court
(RTC) of Butuan City. The petition prayed for, inter alia, that a
temporary restraining order be issued enjoining the conduct of the
annual stockholders meeting and the holding of the election of the
Board of Directors. The trial court issued a temporary restraining order
(TRO) conditioned upon respondents posting of a bond.
Thereafter, Gonzales submitted a certification by Stronghold
Insurance Company, Incorporated (SICI) together with a Certification
issued by then Court Administrator, now Associate Justice, Presbitero J.
Velasco, Jr. that, according to the Clerk of Court of the Municipal Trial
Court in Cities (MTCC) of Butuan City, SICI has no pending obligation
and/or liability to the government insofar as confiscated bonds in civil
and criminal cases are concerned.
Suan also claimed that in the complaint filed by respondent,
together with Eduardo, Purisima, Ruben, and Manuel, all surnamed Tan,
before the BangkoSentralngPilipinas (BSP) against Ismael E. Andaya
and the members of the Board of Directors of the Rural Green Bank of
Caraga, Inc. for alleged gross violation of the principles of good
corporate governance, they represented themselves as the banks
minority stockholders with a total holdings amounting to more or
less P5
million while
the
controlling
stockholders
own
approximately 80% of the authorized capital stock. He also claimed
that there was forum shopping as the RTC has jurisdiction over the
case.
Issue:

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Whether or not there was forum shopping in filing the complaint.

Held:
The filing of the intra-corporate case before the RTC does not
amount to forum-shopping. It is a formal demand of respondents legal
rights in a court of justice in the manner prescribed by the court or by
the law with respect to the controversy involved. The relief sought in
the case is primarily to compel the bank to disclose its stockholdings,
to allow them the inspection of corporate books and records, and the
payment of damages. It was also prayed that a TRO be issued to enjoin
the holding of the annual stockholders meeting and the election of the
members of the Board, which, only courts of justice can issue.
On
the
other
hand,
the
complaint
filed
with
the BangkoSentralngPilipinas was an invocation of the BSPs
supervisory powers over banking operations which does not amount to
a judicial proceeding. It brought to the attention of the BSP the alleged
questionable actions of the banks Board of Directors in violation of the
principles of good corporate governance. It prayed for the conduct of
an investigation over the alleged unsafe and unsound business
practices of the bank and to make necessary corrective measures to
prevent the collapse of the bank.

QUESTIONS AND ANSWERS

Q1. What are the primary objectives of BSP?
A1:
1.1. To maintain price stability conducive to a balanced and
sustainable growth of the economy;
1.2. To promote and maintain monetary stability and the convertibility
of the peso.
Q2. Can the bank still grant new loans and accept new deposits, while
under receivership?
A2. No. During the receivership, the assets and properties of the
corporation are being gathered for conversion into cash in preparation
for distribution to creditors. Granting new loans and accepting new
deposits would constitutes doing business for the bank in the ordinary
course of business which is contrary to the purpose and nature of
receivership proceeding.
Q3. Where will the claims against the insolvent bank are filed?
A3. Where liquidation is undertaken with judicial intervention, 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,
GR. NO. 112830, Feb. 1, 1996).
Q4. Can the bank file its claim against another person/ entity before
the liquidation court?

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A4. No. The exclusive jurisdiction of the liquidation court pertains

only to the adjudication of claims against the bank. It does not cover
the reverse situation where it is which files a claim against another
person or legal entity (Manalo v. Ca, GR. NO. 141297, Oct. 8, 2001).
Q5. Can the president or officers of the bank, placed under
receivership authorize to transact business in connection with the
banks assets and property?
A5. No. The appointment of a receiver operates to suspend the
authority of the bank and its officers over the bank assets and
properties, such authority being reposed in the receiver (Abacus Real
Estate Center, Inc. v. Manila Banking Corp., GR. NO. 162270, APRIL 6,
2005).
Q6. Is the bank still obligated to pay the time deposits upon maturity
despite the fact that its operation was suspended by the Central Bank?
A6. The suspension of the 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, GR. NO. 45886, APRIL 19, 1989).
Q7. What action will you institute to question the Monetary Boards
order?
A7. The order of the monetary board may be questioned on a
petition for certiorari on the ground that the action taken was in excess
of jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction. The petition for certiorari may only be filed by
the stockholders of record representing the majority of the capital
stock within ten (10) days from receipt by the board of directors of the
institution of the order directing; receivership, liquidation or
conservatorship (Section 30, R.A. NO. 7653).

LAW ON SECRECY OF BANK DEPOSITS (R.A.

1405)
1.PURPOSES
RA 1405 has 2 allied purposes:
1. To discourage private hoarding; and
2. To encourage people to deposit their money in banking
institutions so that it may be utilized by way of authorized loans
and thereby assist in economic development.
Owing to this piece of litigation, the confidentiality of bank
deposits remains to be a basic state policy in the Philippines.
Section 2 of the law institutionalized this policy by characterizing

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as absolutely confidential in general all deposits of whatever

nature with banks and other financial institution in the country.
2. COVERAGE
RA 1405 covers all deposits of whatever nature with banks or
banking institutions in the Philippines and investments in government
bonds are absolutely confidential in nature and may not be examined,
inquired or looked into by any person, government official, bureau or
office. (Section 2, RA 1405)
What is Deposit?
- Deposit refers to money or funds placed with a bank that can
be withdrawn on the depositors order or demand, such as
deposit accounts in the form of savings, current and time
deposits.
- Deposits are characterized as being in the nature of a simple
loan. The placing of deposits in a bank creates a creditordebtor relationship between the depositor and the bank. As
such, the bank, being the debtor, has the obligation to pay a
certain sum of money to the depositor, being the creditor.
What are investments in Government Bond?
- Refer to investments in bonds issued by Government of the
Philippines, its political subdivisions and its instrumentalities.
- Government bonds are debt securities which are
unconditional obligations of the state and backed by its full
taxing power.
- Examples are treasury bills notes, retail treasury bonds and
other free bonds
3. PROHIBITED ACTS AND PERSONS LIABLE
(i) Any person or government official who, or any government
bureau or office that, examines, inquires or looks into a bank deposit or
government bond investment in any of the instances not allowed in
Section 2;
(ii) Any official or employee of a banking institution who makes a
disclosure concerning bank deposits to another in any instance not
allowed by law (Sec. 3); and
(iii) Any person who commits a violation of any of the provisions
of the law. (Sec.5).
Under the General Banking Law, Bank directors, officers,
employees or agents are prohibited from disclosing to any
unauthorized person, without order of a competent court, any
information relative to funds or properties belonging to private
individuals, corporations, or any other entity in the custody of the
bank. (Sec. 55(b) RA 8791)
Thrift Banks Act and the Rural Bank Act likewise prohibit any
bank officer, employee or agent from disclosing any information on
such funds or properties. (Sec 21 (a)(2), RA 7906 and Sec 26 (a)(2), RA
7353)
EXCEPTIONS:

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As a rule, all deposits of whatever nature in banks or

banking institutions in the Philippines and investments in government
bonds are absolutely confidential in nature. (Sec. 2, RA 1405)
I.

Under the Law on Secrecy of Bank Deposits:

Section 2 of RA 1405, provides that bank deposits and
government bond investments may be examined inquired and
looked into in the following instances:
1) Upon written permission or consent in writing by the
depositor;
For consent to be valid, it should be made knowingly,
voluntarily and with sufficient awareness of the relevant
circumstances and likely consequences/
2) In cases of impeachment of the President, Vice President,
Members of the Supreme Court, Members of the
Constitutional Commissions and Ombudsman for the culpable
violation of the Constitution, treason, bribery, graft and
corruption, other high crimes of betrayal of public trust. (Art.
XI, Sec. 2, Philippines Constitution)
3) Upon order of a competent court in cases of bribery or
dereliction of duty of public officials.
4) In cases where the money deposited or invested is the subject
matter of litigation.
The money deposited should be the very thing in
dispute. (BSB Group, INC. vs Go)
II. OTHER LAWS PROMOTING SECRECY OF BANK DEPOSITS
POLICY
A. Under the Foreign Currency Deposit Act (Rep. Act
6426)
1) Except upon written permission by the depositor.
Foreign Currency Deposit Act are considered are hereby
declared as and considered of an absolutely confidential
nature, and in no instance shall foreign currency deposits be
examined, inquired or looked into by any person, government
officials, bureau or office, whether judicial or administrative,
or any other entity whether public or private. (Sec. 8, RA
6426, amended by PD 1034, 1035 and 1246);
2) Foreign Currency Deposit Act accounts are exempt from
attachment, garnishment, or any other order or process of any
court, legislative body, government agency or any administrative
body whatsoever. (Intengan vs CA, 377 SCRA 63)
B. ANTI-GRAFT AND CORRUPT PRACTICES ACT
1) Bank deposits of a public officials, his spouse and unmarried
children may be taken into consideration in the enforcement of Sec. 8
of the Anti-Graft and Corrupt Practices Act.
Sec. 8. Dismissal due to unexplained wealth.
properties in the name of the spouse and unmarried
children of such public official may be taken into
consideration, when their acquisition through legitimate
means cannot be satisfactorily shown.. (PNB vs Gancayco, 15
SCRA 91)

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2) On unexplained wealth, before an in-camera inspection may

be allowed of bank deposits, there must be a pending case before a
court of competent jurisdiction, the account must be clearly identified,
the bank personnel and the account holder must be notified to be
present during the inspection, and such inspection may cover only the
account in the pending case. (Marquez vs Desierto)

C. EXCEPTIONS UNDER OTHER LAWS

Bank deposits and investments may be examined, inquired
or looked into as provided for under other laws in the following
instances:
1) The ombudsman has the power to issue subpoena and subpoena
ducestecum, take testimony in any investigation or inquiry as
well as examine and access bank accounts and records,
2) The Philippine Deposit Insurance Commission and The
BangkoSentral may inquire into bank deposits where there is a
finding of unsafe or unsound banking practices;
3) Directors, Officers, Stockholders, and related interests who
contract a loan or any form of financial accommodation with their
bank or related bank are required to execute a written waiver of
Secrecy of Deposits pursuant to the New Central Bank Act.
GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS
The Secrecy of Bank Deposit Account does not prohibit
attachment or garnishment of bank accounts.
a) What is garnishment?
1. A court order directing that money or property of third party
(usually wages paid by an employer) be seized to satisfy a
debt owned by a debtor to a creditor.
2. A legal procedure by which a creditor can collect what a
debtor owes by reaching the debtors property when it is in
the hands of someone other than the debtor.
Garnishment without prior notice and a prior hearing
violates the fundamental principles of due process.
b) Garnishment vs Attachment
Garnishment is the process of seizing of property of the debtor
that is in the possession of a third party while attachment is the
process of seizing property of the debtor that is in the possession
of the debtor.
c) Cases of garnishment of deposits, including foreign deposits.
PENALTIES FOR VIOLATION
SECTION 5. Any violation of this law will subject offender upon
conviction, to an imprisonment of not more than five years or a fine of not
more than twenty thousand pesos or both, in the discretion of the court.

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JURISPRUDENCE
Ejercito vs. Sandiganbayan
Facts:
Joseph Victor G. Ejercito is the owner of Trust Account No. 858
which was originally opened at Urban Bank but which is now
maintained at Export and Industry Bank, which is the purchaser and
owner now of the former Urban Bank and Urbancorp Investment, Inc.
He is also the owner of Savings Account No. 0116-17345-9 which was
originally opened at Urban Bank
Estrada was subsequently charged with Plunder.
The
Sandiganbayan filed a Request for Issuance of Subpoena DucesTecum
for the issuance of a subpoena directing the President of Export and
Industry Bank (EIB, formerly Urban Bank) or his/her authorized
representative to produce various document related to the
investigation.
Issue:
Whether or not a Trust Account is covered by the term deposit as
used in R.A. 1405
Held:
YES.The Trust Account no. 858 is covered by the term deposit.
The Trust Agreement between petitioner and Urban Bank provides that
the trust account covers "deposit, placement or investment of funds"
by Urban Bank for and in behalf of petitioner.
The money deposited under Trust Account No. 858, was,
therefore, 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. Section 2 of the same law in fact even more clearly shows that the
term "deposits" as what the phrase of whatever nature proscribes
pertain not only to money which is deposited but also to those which
are invested. Clearly, therefore, RA 1405 is broad enough to cover Trust
Account no. 858.
Intengan v. CA 377 SCRA 63, 2002
Facts:

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Citibank filed a complaint for violation of the Corporation Code

against 2 of its officers. The complaint was attached with the affidavit
of Vic Lim, VP of Citibank, who was then instructed by the higher
management of the bank to investigate the anomalous/highly irregular
activities of the said officers. As evidence, Lim annexed bank records
purporting to establish the deception practiced by the officers. Some of
the documents pertained to the dollar deposits of petitioners. As an
incident to the foregoing, petitioners filed respective motions for the
exclusion and physical withdrawal of their bank records that were
attached to Lims affidavit. The filing of Information against private
respondents was recommended for alleged violation of Republic Act
No. 1405. Private respondents appealed before the DOJ which ruled in
their favor. Resort to the Court, referred the matter to the CA which
then held that the disclosure was proper and falls under the exception
under R.A. No. 1405.
Issue:
Whether or not the disclosure falls under the exception under
R.A. No. 1405.
Ruling: NO.
The accounts in question are U.S. dollar deposits; consequently,
the applicable law is not Republic Act No. 1405 but Republic Act (RA)
No. 6426, known as the Foreign Currency Deposit Act of the
Philippines. Thus, under R.A. No. 6426 there is only a single exception
to the secrecy of foreign currency deposits, that is, disclosure is
allowed only upon the written permission of the depositor. The violation
of the secrecy of foreign deposit is punishable as an act
malumprohibitum. Violation of Foreign Currency Deposit Act prescribes
in eight (8) years, and the filling of the complaint or information of the
alleged violation of the violation of the Secretary of Bank Deposit Act
does not toll the running of the prescriptive period.
SALVACION VS. CENTRAL BANK
G.R. No. 94723 August 21, 1997
FACTS:

Greg Bartelli, an American tourist, was arrested for committing

four counts of rape and serious illegal detention against Karen
Salvacion. Police recovered from him several dollar checks and a dollar
account in the China Banking Corp. He was, however, able to escape
from prison. In a civil case filed against him, the trial court awarded
Salvacion moral, exemplary and attorneys fees amounting to almost
P1,000,000.00.

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Salvacion tried to execute the judgment on the dollar deposit of

Bartelli with the China Banking Corp. but the latter refused arguing
that Section 11 of Central Bank Circular No. 960 exempts foreign
currency deposits from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any
administrative body whatsoever. Salvacion therefore filed this action
for declaratory relief in the Supreme Court.

ISSUE:
Should Section 113 of Central Bank Circular No. 960 and Section
8 of Republic Act No. 6426, as amended by PD 1246, otherwise known
as the Foreign Currency Deposit Act be made applicable to a foreign
transient?

HELD:
NO. The provisions of Section 113 of Central Bank Circular
No. 960 and PD No. 1246, insofar as it amends Section 8 of
Republic Act No. 6426, are hereby held to be INAPPLICABLE to
this case because of its peculiar circumstances. Respondents are
hereby required to comply with the writ of execution issued in
the civil case and to release to petitioners the dollar deposit of
Bartelli in such amount as would satisfy the judgment.

PHILIPPINE NATIONAL BANK vs. EMILIO A. GANCAYCO

G.R. No. L-18343, 30 September 1965
FACTS:
PNB was required to produce the records of the bank deposits of J
imenez who was then under investigation for unexplained wealth. In de
clining to reveal its records, the plaintiff bank invoked Republic Act No.
1405 or the Law on Secrecy of Bank Deposits with the following excepti
ons:

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1) Upon written permission of the depositor;

2) In cases of impeachment;
3) Upon order of a competent court in cases of bribery or derelict
ion of duty of public officials;
4) In cases where the money deposited is the subject matter of t
he litigation.
ISSUE:
Whether or not a bank can be compelled to disclose the records
of accounts of a depositor who is under investigation for unexplained w
ealth.

RULING:
Yes. Cases of unexplained wealth are similar to cases of bribery o
r dereliction of duty and no reason is seen why these two classes of cas
es cannot be excepted from the rule making bank deposits confidential
. The policy as to one cannot be different from the policy as to the othe
r. This policy express the motion that a public office is a public trust an
d any person who enters upon its discharge does so with the full knowl
edge that his life, so far as relevant to his duty, is open to public scruti
ny.

QUESTIONS AND ANSWERS

1. A bought some goods from a department store and paid with his
personal check. The check was dishonored. On the assumption that
the department store did not know who A was, the store manager
inquired from the checks drawee bank the name of the dishonored
check. The drawee bank refused to disclose the name of the drawer
invoking the Secrecy of Bank Deposits Law. Is the bank correct?
ANSWER: In this case, the bank is not justified in not divulging
the name of the drawer to the store manager. The store manager is
merely inquiring as to the name of the drawer of the check. To divulge

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the same would not in any way amount to disclosure of any. Also, the
inquiry is not an investigation of any balance in favor of the drawer.
2. M, a newspaper columnist, while making a deposit in a bank,
overheard a bank teller informing a co-employee that G, a wellknown public official, has just a few hundred pesos in Gs bank
account and that her check will probably bounce. M wrote about this
information in his newspaper column. G filed a complaint against M
for unlawfully disclosing information about her bank account. Will it
prosper?
ANSWER: The suit will not prosper. The Law on Secrecy of Bank
Deposits does not penalize the mere receipt of information about a
bank account. M, having merely overheard the information on Gs
account and not having examined, inquired or looked into the said
account cannot be penalized under Sec. 2 of the Bank Secrecy Law.
Neither could he be penalized under Sec. 3 of the Bank Secrecy Law
since Sec. 3 refers to disclosures made by officials or employees of
banking institutions.
3. Shirlene bought P500,00 worth of Pabahay bonds issued by the Home
Development Mutual Fund, a government agency, through ABC bank.
Afterwards, she placed the bonds in a safety deposit box she rented
from ABC bank. Ella one of the banks safety deposit attendants, saw
what shirlene placed inside her box, noting that they were in her
name. During lunch, she told her co-attendants what she saw and
wondered aloud how government employee like shirlene could have
money to buy the bonds. Could Shirlene file a complaint against Ella
for violation of RA 1405?
ANSWER: Yes. Shirlene could. The disclosure by Ella to her coattendants of the existence, and the deposit in the safety box, of the
bonds is a prohibited act under RA 1405. A deposit in a safety deposit
act is also protected by the said law.
4. What does the law prohibits?
ANSWER:
a) The examination and inquiry or looking into all deposits of
whatever nature with the banks or banking institutions in the
Philippines including the investments in bonds issued by the
Government or its political subdivisions and instrumentalities
by any person, government official, bureau; and
b) The disclosure by any official or employee of nay banking
institution to any unauthorized person of any information
concerning said deposits.
5. What disclosures or inquiries into deposits are not prohibited?

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ANSWER:
a) Upon written permission of the depositor;
b) In cases of impeachment;
c) Upon order of a competent court in cases or bribery or
dereliction of duty of public officials;
d) In cases where the money deposited or invested is the subject
matter or litigation;
e) Upon the order of the court or subpoena issued by the
Ombudsman in cases of unexplained wealth. This is subject to
the following requisites:
i.

Only an in-camera inspection is allowed;

ii.

There must be a pending case before a court of

competent jurisdiction;

iii.

Account is clearly identified;

iv.

Examination is limited to account subject of the court

case; and

v.

Bank personnel and the account holder must be notified

to be present during the inspection.

f) Upon the 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;
g) Upon the order of the Commissioner of Internal Revenue when
a taxpayer files an application to compromise his tax liability
by reason of financial incapacity;
h) Upon examination made in the course of a special or general
audit of a bank as authorized by the Monetary Board after
being satisfied that there is reasonable ground to believe that
a bank fraud or irregularity is being committed and it has

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become necessary to look into the deposit to establish the

same;
i) Upon examination of a banks independent auditor, the result
of which are for the exclusive use of the bank;
j) In case of suspicious transaction under the Anti-Money
Laundering Law;
k) Under the Anti-Money Laundering Law where banks are
required to report to Anti-Money Laundering Council any
transaction in cash or other equivalent monetary instrument
in excess of P500,000.00 in any one day;
l) Also under Anti-Money Laundering Law, the Anti-Money
Laundering Council may inquire into a deposit or investment
maintained with any financial institution upon order of a
competent court, in cases of violation of the Act, when there is
a probable cause that the deposit or investment is in any way
related to an unlawful activity as defined in the Act or a
money laundering offense under the Act;
m) When a director, officer, stockholder and related interest
(DOSRI) obtains a loan from his bank or its subsidiaries, or
with related controlling interests of more than 5% of the
capital, or surplus of the bank, it shall constitute a waiver of
secrecy nature in all banks in the Philippines; and
n) Under the Unclaimed Balances Law;
o) The examination of a bank account under Section 10, Rule 57
in relation to the examination of a party whose property is
attached and persons indebted to a defendant or controlling
his property.

5) Who are the primarily liable for violations of the law?

ANSWER:The persons primarily liable for a violation of the law
would be a bank employee or officer and the person, government

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officer, agency or office looking into the deposit when not authorized
by any of the exceptions to the law.

Note: Investigations by the Monetary Board and the Bureau of

Internal Revenue are confidential in nature. Thus, any disclosure in
violation of the confidentiality will create liability.

6) Will the garnishment of a bank deposit violate the law?

ANSWER:No, the garnishment of a bank deposit will not violate
the law. If the existence of the deposit is disclosed, the same is
considered as purely incidental to the execution process.
What is to be disclosed only is the existence of the deposit,
particularly whether or not it is sufficient to satisfy the garnishment.
Hence, a disclosure of the balance may constitute a violation of the
law.
7) In a case where the money deposited or invested is the subject
matter of the litigation, could an inquiry into the whereabouts of
the amount extend to the deposits held in the name of persons
other than the one responsible?
ANSWER: Even in cases not involving prosecution under the
Anti-Graft and Practices Act, an inquiry into the whereabouts of the
amount converted necessarily extends to whatever in concealed, held
or recorded in the name of persons other than the responsible
inasmuch as the case is aimed at recovering the amount converted.
8) Are foreign currency deposits covered by the law?
ANSWERS: While the law does not cover foreign currency
deposits, they however are absolutely confidential and cannot be
disclosed pursuant to RA 6426, otherwise known as the Foreign
Currency Deposit Act, the only exception to disclosure being upon the
written consent of the depositor.

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An additional exemption has been provided by the Anti-Money

Laundering Law when it has been established that there is probable
cause that the deposits involved are in any way related to the offense
of money laundering.
9) Will an unlawful examination of a bank account render the
information obtained inadmissible?
ANSWER: There is nothing in the law that provides that an
unlawful examination shall render the evidence obtained therefrom to
be inadmissible.
10)

What is the penalty for a violation of the law?

ANSWER: Upon conviction, a violator may be sentenced to

imprisonment of not more than 5 years or a fine of not more than

200,000.00, or both at the discretion of the court.

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PHILIPPINE DEPOSIT INSURANCE

CORPORATION (PDIC)
RA No. 3591, as amended
Objective:
To provide permanent and continuing deposit insurance coverage
for the depositing public to help promote public confidence and
stability in the economy. It ensures prompt payment of insured deposit,
exercises complementary supervision of banks, adopts responsive
resolution.
Basic Policy (Section 2)
1. Insures the deposits of all banks which are entitled to the
benefits of insurance;
2. Promote and safeguard the interest of the depositing public by
providing insurance coverage on all insured deposits and helping
maintain a sound and stable banking system;
3. Strengthen the mandatory deposit insurance coverage system to
generate, preserve, maintain faith and confidence in the
countrys banking system;
4. Protect it from illegal schemes and machinations.
Concept of Insured deposit (Section 5)
>it covers only the amount due to any depositor for deposits in an
insured bank, net of any obligation to the insured bank as of date of
closure, this does not exceed Five Hundred Thousand
Pesos(500,000.00).
>in determining the amount due to any depositor, it shall be added
together all deposits in the bank maintained in the same right and
capacity for his or her benefit.
>a joint account regardless of the conjunction and, or, and/or, it
shall be insured separately from any individually owned deposit
account
Provided:
1. If the account is held jointly by two or more natural persons or by
two or more juridical persons, the maximum insured deposit shall be
divided equally among them, unless there is another written sharing
scheme;
2. If the account is held by a juridical person jointly with one or more
natural persons, the maximum insured deposit shall be presumed to
belong entirely to such juridical person;
3. The aggregate of interest of each co-owner over several joint
accounts, whether owned by the same or different combinations of
individuals be subject to the maximum insured deposit of Five
Hundred Thousand Pesos (500,000.00);
Functions of PDIC:
1. Deposit Insurer
2. Co-regulator of banks

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3. Receiver and liquidation of closed banks methods, and applies

efficient , management of receivership and liquidation functions
Types of deposit insured by PDIC:
1.
2.
3.
4.
5.
6.
7.
8.

deposits of all commercial banks

savings and mortgage banks
Rural banks
Private development banks
Cooperative banks
Savings and loan associations
Branches and agencies in the Philippines of foreign banks
All other corporations authorized to perform banking functions
in the Philippines
9. Foreign currency deposits (RA No. 6426)
PDIC Insurance coverage:
Deposit insurance coverage is not determined on a peraccount basis
The type of account, whether checking, savings, time or
other form of deposit, has no bearing on the amount of
insurance coverage.
Deposits in different banking institutions are insured
separately. But if a bank has one or more branches, the
main office and all branch officers are considered as one
bank.
Risk covered by PDIC:
1. Only the risk of a bank closure ordered by the Monetary
Board
2. Not due to theft, fire, closure by reason of strike or
existence of public disorder, revolution or civil war
The insurance premium is paid by the banks, not by the
depositors. The bank is assessed one-fifth (1/5) of one
percent (1%) per annum of the assessment base of the
bank.
The list of priorities after payment of the maximum amount of
insured deposit:
1.
2.
3.
4.

government taxes
Labor claims
Secured credits
Trust funds
Funds held by insured bank in a fiduciary capacity
and includes without being limited to, funds held
as trustee, executor, administrator, guardian or
agent (Section 5).

EXTENT OF LIABILITY
The extent of the PDICs liability to a bank depositor is the
amount due to any depositor for deposits to the insured bank
net of any obligation of the depositor to the insured bank as
of the date of closure but not to exceed Five Hundred
Thousand Pesos (500,000.00) per depositor.
DETERMINATIONS OF INSURED DEPOSITS

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 PDIC shall commence the determination of insured deposits

due the depositors of a closed bank upon its actual takeover
of the closed bank. PDIC shall give notice to the depositors of
the closed bank of the insured deposits due them of whatever
means deemed appropriate by the Board of Directors. PDIC
shall publish the notice once a week for atleast three (3)
consecutive weeks in a newspaper of general circulation as
when appropriate, in a newspaper circulated in the
community or communities where the closed bank or its
branches are located (Sec. 16 R.A. No. 3591, as amended).
CALCULATION OF LIABILITY
A. Per depositor, per capacity rule-capacity of the bank types
of deposits
1. Demand-current accounts
2. Savings- saving accounts
3. Time deposits- time to mature

If the depositor has all three types of accounts with the

same bank, he can only recover up to the amount of Five
Hundred Thousand Pesos. He is considered as one depositor.
B. joint accounts
A joint account regardless of whether the conjunction
and, or, and/or is used shall be insured separately
from any individually-owned deposit account. Provided
that:
1. If the account is held jointly by two or more
natural 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;
2. If the account is held by a juridical person or
entity with one or more natural persons, the maximum
insured shall be presumed to belong entirely to such
juridical person or entity.
C. Mode of payment
1. by cash; or
2. by making available to each depositor a transferred
deposit in another insured bank in an amount equal to insured
deposit of such depositor (Sec. 14 R.A. 3591, as amended).
PDIC, in its discretion, may require proof of claims to be
filed before paying the insured deposits and that in any case where
PDIC is not satisfied as to the viability of a claim for an insured deposit,
it may require final determination of a court of competent jurisdiction
before paying such claim (Sec. 14 R. A. 3591, as amended).
D. Effect of payment of insured deposit
1. PDIC is discharged from any further liability to the
depositor;

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2. PDIC is subrogated to all the rights of the depositor

against the closed bank to the extent of such payment.
E. Payments of insured deposits as preferred credit under
article 2244 of the Civil Code:
All payments 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 Civil Code (Sec. 15 R. A. No. 3591
as amended).
F. Failure to settle claim of insured depositor
1. PDIC has six (6) months from the date of filing of
claim for insured deposit.
2. Failure to settle the claim within six months from
the date of claim for insured deposit, where such failure
was due to grave abuse of discretion, gross negligence,
bad faith, or malice, shall upon conviction, subject the
directors, officers or employees of PDIC are responsible for
the delay, to imprisonment from six months to one year.
The period shall not apply if the validity of the
claim requires the resolution of issues of facts and/or law
by another office, body or agency (Sec. 14; R.A. 3591 as
amended).
G. Failure of depositor to claim insured deposits effect:
It constitute a waiver of his (depositor) right to claim
if he fails to claim his insured deposits with the PDIC within
2 years from the actual takeover of the closed bank bt the
receiver, unless otherwise waived by PDIC (Sec. 16; R. A.
3591, as amended).
The period by which a depositor of insured deposits
may file his claim is within 2 years from the closure of the
bank by the central bank.
Unsafe and/or Unsound Banking Practices
The PDIC hereby adopts the general principles and guidelines in
Bangko Sentral ng Pilipinas (BSP) Circular No. 341 (series of
2002), as amended by BSP Circular No. 640 (series of 2009),
relating to the determination of activities that may be considered
unsafe and/or unsound banking practices.
I.

Principles in the Determination of Unsafe and/or Unsound

Deposit-Related Practices
In addition to the banking practices the PDIC may deem unsafe
and/or unsound under Section II hereof, the PDIC shall deem a
deposit- related practice, activity, transaction, or omission
committed or being committed by banks or its directors, officers
and employees or agents to be an unsafe and/or unsound
banking practice when it has resulted or may result in:

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II.

1.

Unreasonable delay in the processing or determination of

the validity of deposit claims in the event of bank closure;
or

2.

Material loss or damage or abnormal risk to the banks

depositors, creditors, shareholders, or to the PDIC; or

3.

Material loss or damage or abnormal risk or danger to the

safety, stability, liquidity, or solvency of the bank.

Unsafe and/or Unsound Deposit-Related Practices

The following may be considered unsafe and/or unsound depositrelated practices:
1.
Performance of any deposit-related practice, activity, or
transaction without the requisite approvals or without
adequate controls, as mandated by existing laws, rules,
and regulations, which may result to unaccounted,
undocumented and/or unrecorded deposits.
2.

Failure to keep bank records (printed and/or electronic)

within the bank premises especially deposit documents
such as, but not limited to, signature cards, depositor
information files, and deposit ledgers.
For purposes of this section, premises shall refer to
places where a bank has a legal right to stay or occupy to
conduct its operations and/or keep its records. It includes,
but is not limited to, lands and buildings, warehouses,
storerooms, online storage, and offsite or backup sites
owned or leased by a bank. For those not owned by the
bank, it must be covered by a contract showing the banks
legal right to stay or occupy therein.

3.

Granting high interest rates when the bank has: (i)

negative unimpaired capital and (ii) either a liquid assetsto-deposits ratio of less than 10% or an operating loss.
A bank is deemed offering high interest rates on deposits if
the interest rate is over 50% of the prevailing comparable
market median rate for similar bank categories.
Liquid assets refer to the sum of Cash, Due from BSP/Banks
and Financial Assets, net of allowance for credit losses.

4.

Non-compliance with PDIC Regulatory Issuances.

5.

Other deposit-related practices, activities, and transactions

which the PDIC may identify through appropriate
issuances.

Attached for guidance is a list of specific activities which the

PDIC may consider to be unsafe and/or unsound banking
practices (Annex A). The PDIC may hereafter consider other acts
or omissions as unsafe and/or unsound pursuant to the general
principles and guidelines in this Regulatory Issuance.

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III.

Consequences of Unsafe and/or Unsound Practices

The commission of unsafe and/or unsound practices as defined in
this Regulatory Issuance may have these consequences:
1.

Deposit accounts and all information related thereto may

be inquired into or examined by PDIC upon the finding of
unsafe and/or unsound banking practices, notwithstanding
any provisions of law to the contrary. (Section 8, 8th par.,
PDIC Charter)

2.

The PDIC Board of Directors may issue a cease and desist

order, and require the bank or its directors or agents
concerned to desist and/or correct the practices or
violations. (Section 7, PDIC Charter)

3.

Deposit insurance on deposit accounts or transactions

constituting, and/or emanating from, unsafe and/or
unsound banking practice/s as determined by the PDIC
Board shall not be paid, after due notice and hearing, and
publication of a directive to cease and desist from
engaging in the cited unsafe and/or unsound practice/s.
(Section 4 (f), PDIC Charter)

The foregoing shall be without prejudice to the criminal, civil, and

administrative actions that may be instituted against, or fines
imposed upon, the bank and its responsible directors, officers,
employees, or agents, pursuant to the provisions of the PDIC
Charter, PDIC Regulatory Issuances, and other pertinent laws.
How is insurance coverage determined?
In determining the insured amount, the outstanding balance of each
account is adjusted, such that interests are updated, withholding taxes
are deducted, accounts maintained by a depositor in the same right
and capacity are added together; and whenever applicable, unpaid
loans and other obligations of the depositor are deducted; and in no
case shall insured deposit exceed P500,000.
R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for the
following accounts or transactions:
1. Investment products such as bonds, securities and trust
accounts;
2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and
unsound banking practices;
Deposits that are determined to be proceeds of an unlawful activity as
defined under the Anti-Money Laundering Law.

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JURISPRUDENCE
PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC) VS.
PHILIPPINE COUNTRYSIDE RURAL BANK, INC. (PCRBI) ET AL.
G. R. No. 176433 January 24, 2011

FACTS:
On 2005 the Board of Directors of the PDIC Board adopting
resolution No. 2005-03-032 (3) approving the conduct of an
investigation in accordance with Sec. 9 of R. A. No. 3591, as amended,
in the basis of the reports of examination of the Bangko Sentral ng
Pilipinas on ten (10) banks, four (4) of which are repondents in this
petition for review. The said resolution also created as Specail
Investigation Team to conduct the said investigation with the authority
to administer oath, to examine, take and preserve testimony of any
person relating to the subject of the investigation and to examine
pertinent banks.
In accordance with the PDIC Board Resolution the head of the
PDIC issued Notice of Investigation to the President as the highest
Ranking Officer of PCRBI. In the course of investigation, PCRBI was
found to have granted loans to certain, which were settled by way of
dacion of properties. The properties had already heen previously
foreclosed and consolidated under the names of PCRBI, BEAI, and RBCI.
Similarly, a notice of investigation was served and PCRBI, BEAI
and a separate notice of investigation served to RBCI. Subsequently,
PCRBI, BEAI, and RBCI refused entry to their bank premises and access
to their records and documents by PDIC Investigation Team. PCRBI
latter refuses to the continuance of the PDIC upon the advices of its
legal counsel on the grounds that there is no prior approval from the
Monetary Board allowing the conduct of PDIC to investigate.
ISSUE:
Whether or not the approval of the Monetary Board of the Bsngko
Sentral ng Pilipinas is necessary before the PDIC may conduct an
investigation of respondent banks.
HELD:
PDIC is of the position that in order for it to exercise its power of
investigation, the law requires that:
a. the investigation is based on a complaint of a depositor or any
government agency or the report of examination of the BSP and PDIC
b. the complaint alleges, on the BSP and/or PDIC report of
examination contains adverse findings of fraud inequalities
or
anomalies committed by the bank and/or its directors, officers,
employees or agents; and
c. the investigation is upon the authority of the PDIC Board of
Directors.
It argues that when it commenced its investigation on banks, all
of the aforementioned requirements were met. PDIC stresses that its
power of examination is different from its power of investigation, in

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such that the former requires prior approval of the Monetary Board
while the require merely the PDIC Board. It further claim that power of
examination cannot be exercised within twelve months from the last
examinations conducted, whereas the power of investigation merely to
look into the condition of the bank. Whereas the power of investigation
aims to address fraud, inequalities and anomalies based on complaint
from depositors and other government agencies upon reports of
examination conducted by the PDIC or by the BSP.

Philippine Deposit Insurance Corporation vs. Court of Appeals

G.R. No. 118917 - December 22, 1997
FACTS: On September 22, 1983, plaintiffs-appellees invested in money
market placements with the Premiere Financing Corporation (PFC) in
the sum of P10,000.00 each for which they were issued by the PFC
corresponding promissory notes and checks. On the same date
(September 22, 1983), John Francis Cotaoco, for and in behalf of
plaintiffs-appellees, went to the PFC to encash the promissory notes
and checks, but the PFC referred him to the Regent Saving Bank
(RSB). Instead of paying the promissory notes and checks, the RSB,
upon agreement of Cotaoco, issued the subject 13 certificates of time
deposit with Nos. 09648 to 09660, inclusive, each stating, among
others, that the same certifies that the bearer thereof has deposited
with the RSB the sum of P10,000.00; that the certificate shall bear 14%
interest per annum; that the certificate is insured up toP15,000.00 with
the PDIC; and that the maturity date thereof is on November 3, 1983
(Exhs. B, B-1 to B-12).
On the aforesaid maturity dated (November 3, 1983), Cotaoco
went to the RSB to encash the said certificates. Thereat, RSB
Executive Vice President Jose M. Damian requested Cotaoco for a
deferment or an extension of a few days to enable the RSB to raise the
amount to pay for the same (Exh. D). Cotaoco agreed. Despite said
extension, the RSB still failed to pay the value of the
certificates. Instead, RSB advised Cotaoco to file a claim with the PDIC.
Meanwhile, on June 15, 1984, the Monetary Board of the Central
Bank issued Resolution No. 788 (Exh. 2, Records, p. 159) suspending
the operations of the RSB. Eventually, the records of RSB were
secured and its deposit liabilities were eventually determined. On
December 7, 1984, the Monetary Board issued Resolution No. 1496
(Exh. 1) liquidating the RSB. Subsequently, a masterlist or inventory
of the RSB assets and liabilities was prepared. However, the
certificates of time deposit of plaintiffs-appellees were not included in
the list on the ground that the certificates were not funded by the PFC
or duly recorded as liabilities of RSB.
On September 4, 1984, plaintiffs-appellees filed with the PDIC
their respective claims for the amount of the certificates (Exhs. C, C1, to C-12). Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey
Ngkaion, who have similar claims on their certificates of time deposit
with the RSB, likewise filed their claims with the PDIC. To their dismay,
PDIC refused the aforesaid claims on the ground that the Traders Royal
Bank Check No. 299255 dated September 22, 1983 for the amount
of P125,846.07 (Exh. B) issued by PFC for the aforementioned
certificates was returned by the drawee bank for having been drawn
against insufficient funds; and said check was not replaced by the PFC,

118 | P a g e

resulting in the cancellation of the certificates as indebtedness or

liabilities of RSB.
Consequently, on March 31, 1987, private respondents filed an
action for collection against PDIC, RSB and the Central Bank.
On September 14, 1987, the trial court, declared the Central
Bank in default for failing to file an answer.
On May 29, 1989, the trial court rendered its decision ordering
the defendants therein to pay plaintiffs, jointly and severally, the
amount corresponding to the latters certificates of time deposit.
Both PDIC and RSB appealed.
ISSUE: Whether or not PDIC can be held liable for value of the
certificates of time deposit held by the petitioners.
HELD: NO. Whenever an insured bank shall have been closed on
account of insolvency,
payment of the insured deposits in such bank shall be made by the
Corporation as soon as possible. The term deposit means the unpaid
balance of money or its equivalent received by a bank in the usual
course of business and for which it has given or is obliged to give credit
to a commercial, checking, savings, time or thrift account or which is
evidence by passbook, check and/or certificate of deposit printed or
issued in accordance with Central Bank rules and regulations and other
applicable laws, together with such other obligations of a bank which,
consistent with banking usage and practices, the Board of Directors
shall determine and prescribe by regulations to be deposit liabilities of
the Bank. These pieces of evidence convincingly show that the subject
CTDs were indeed issued without RSB receiving any money
therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591,
therefore came into existence. Accordingly, petitioner PDIC cannot be
held liable for value of the certificates of time deposit held by private
respondents.
Philippine Deposit Insurance Corporation vs. Court of
Appeals
A. G.R. No. 126911 April 30, 2003
FACTS: Prior to May 22, 1997, respondents had 71 certificates of time
deposits denominated as "Golden Time Deposits" (GTD) with an
aggregate face value of P1,115,889.96. May 22, 1987, a Friday, the
Monetary Board (MB) of the Central Bank of the Philippines, now
Bangko Sentral ng Pilipinas, issued Resolution 5052 prohibiting Manila
Banking Corporation to do business in the Philippines, and placing its
assets and affairs under receivership. The Resolution, however, was
not served on MBC until Tuesday the following week, or on May 26,
1987, when the designated Receiver took over. On May 25, 1987 - the
next banking day following the issuance of the MB Resolution,
respondent Jose Abad was at the MBC at 9:00 a.m. for the purpose of
pre-terminating the71 aforementioned GTDs and re-depositing the fund
represented thereby into 28 new GTDs in denominations of P40,000.00
or less under the names of herein respondents individually or jointly
with each others Of the 28 new GTDs, Jose Abad pre-terminated 8 and
withdrew the value thereof in the total amount of P320,000.00.
Respondents thereafter filed their claims with the PDIC for the payment
of the remaining 20 insured GTDs. February 11, 1988, PDIC paid

119 | P a g e

respondents the value of 3 claims in the total amount of P120,000.00.

PDIC, however, withheld payment of the 17 remaining claims after
Washington Solidum, Deputy Receiver of MBC-Iloilo, submitted a report
to the PDIC that there was massive conversion and substitution of trust
and deposit accounts on May 25, 1987 at MBC-Iloilo. Because of
the report, PDIC entertained serious reservation in recognizing
respondents' GTDs as deposit liabilities of MBC-Iloilo. Thus, PDIC filed a
petition for declaratory relief against respondents with the RTC of Iloilo
City, for a judicial declaration determination of the insurability of
respondents' GTD sat MBC-Iloilo. In their Answer respondents set up a
counterclaim against PDIC whereby they asked for payment of their
insured deposits. The Trial Court ordered petitioners to pay the balance
of the deposit insurance to respondents. The Court of Appeals affirmed
the decision of the lower court. Petitioner posits that the trial court
erred in ordering it to pay the balance of the deposit insurance to
respondents, maintaining that the instant petition stemmed from a
petition for declaratory relief which does not essentially entail an
executory process, and the only relief that should have been granted
by the trial court is a declaration of the parties' rights and duties. As
such, petitioner continues, no order of payment may arise from the
case as this is beyond the office of declaratory relief proceedings.
ISSUE: Whether or not the trial court order the payment of the
balance even if the petition stemmed from a petition for declaratory
relief which does not essentially entail an executor process.
HELD: YES. Without doubt, a petition for declaratory relief does
not essentially entail an executory process. There is nothing in its
nature, however, that prohibits a counter claim from being set-up in
the same action. There is nothing in the nature of a special civil action
for declaratory relief that prescribes the filing of a counterclaim based
on the same transaction, deed or contract subject of the complaint. A
special civil action is after all not essentially different from an ordinary
civil action, which is generally governed by Rules 1 to 56 of the Rules
of Court, except that the former deals with a special subject
matter which makes necessary some special regulation. But the
identity between their fundamental nature is such that the same rules
governing ordinary civil suits may and do apply to special civil actions
if not inconsistent with or if they may serve to supplement the
provisions of the peculiar rules governing special laws.

QUESTIONS AND ANSWERS

1. What is PDICs overall mandate?
PDIC exists to provide permanent and continuing deposit
insurance coverage for the depositing public to help promote public
confidence and stability in the economy. It ensures prompt payment of
insured deposits, exercises complementary supervision of banks,
adopts responsive resolution methods, and applies efficient
management of receivership and liquidation functions.
2. What is PDICs maximum deposit insurance coverage?
Effective June 1, 2009, the maximum deposit insurance coverage is
P500,000 per depositor. All deposit accounts by a depositor in a closed

120 | P a g e

bank maintained in the same right and capacity shall be added

together.
Under R.A. No. 9576, the PDIC may propose to adjust the MDIC, subject
to the approval of the President of the Philippines, in case of a
condition that threatens the monetary and financial stability of the
banking system that may have systemic consequences.
3. What is an insured deposit?
The term 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 date of closure,
but not to exceed P500,000.00. A joint account shall be insured
separately from any individually-owned deposit account.
R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for the
following accounts or transactions:
1. Investment
accounts;

products

such

as

bonds,

securities

and

trust

2. Deposit accounts which are unfunded, fictitious or fraudulent;

3. Deposit products constituting or emanating from unsafe and
unsound banking practices;
4. Deposits that are determined to be proceeds of an unlawful
activity as defined under the Anti-Money Laundering Law.
4. Are all banks members of PDIC?
Membership of banks to PDIC is mandatory; hence, all operating banks
are members of PDIC.
5. What types of deposits are insured by PDIC?
Except for the exclusions stipulated in RA 9576, deposits of all
commercial banks, savings and mortgage banks, rural banks, private
development banks, cooperative banks, savings and loan associations,
as well as branches and agencies in the Philippines of foreign banks
and all other corporations authorized to perform banking functions in
the Philippines, are insured with PDIC. As for Philippine banks with
branches outside the country, RA 9576 stipulates that subject to the
approval of the Board of Directors, any insured bank with branch
outside the Philippines may elect to include for insurance its deposit
obligations payable at such branch.
Foreign currency deposits are also insured by PDIC pursuant to RA
6426 (An act instituting a foreign currency deposit system in the
Philippines, and for other purposes) and Central Bank (CB) Circular
No. 1389. Depositors may receive payment in the same currency in
which the insured deposit is denominated.
Exclusions from deposit insurance coverage as stipulated in R.A. No.
9576:

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1. Investment
accounts;

products

such

as

bonds,

securities

and

trust

2. Deposit accounts which are unfunded, fictitious or fraudulent;

3. Deposit products constituting or emanating from unsafe and
unsound banking practices;
Deposits that are determined to be proceeds of an unlawful activity as
defined under the Anti-Money Laundering Law.
6. Are deposits maintained in Philippine banks with branches
outside the Philippines insured by the PDIC?
The PDIC Charter provides that a Philippine bank may elect to insure
with the PDIC its deposits in branches outside the Philippines. As of 31
December 2012, no Philippine bank has elected to insure deposits in
their foreign branches with PDIC.
To verify if your deposits in a branch of a Philippine bank outside the
Philippines are covered by deposit insurance in the host foreign
country, please inquire with the account officer of your branch.
7. Can PDIC insurance coverage be increased by having several
accounts in the same name in an insured bank?
No. Deposit insurance coverage is not determined on a per-account
basis. The type of account (whether checking, savings, time or other
form of deposit) has no bearing on the amount of insurance coverage.
8. If I have deposits in several different insured banks, will my
deposits be added together for insurance purposes?
No. Deposits in different banking institutions are insured separately.
However, if a bank has one or more branches, the main office and all
branch offices are considered as one bank. Thus, if you have deposits
at the main office and at one or more branch offices of the same bank,
the deposits are added together when determining deposit insurance
coverage, the total of which shall not exceed P500,000.
9. How long does it take PDIC to settle a claim for insured
deposit?
PDIC aims to pay valid claims as soon as possible. Prior to payout,
claims are examined thoroughly. This is to protect the Deposit
Insurance Fund (DIF) which is the source of insurance payments.
Sometimes, depositors mistakenly assume that the payouts are
sourced from their deposits. This is not the case. The payouts are from
PDICs own funds.
The claim for insured deposit should be settled within six (6) months
from the date of filing provided all requirements are met but the claim
must be filed within twenty-four (24) months after bank takeover. The
six-month period shall not apply if the documents of the claimant are
incomplete or if the validity of the claim requires the resolution of
issues of facts and law by another office, body or agency,
independently or in coordination with PDIC.

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10. What happens when the depositor of a closed bank fails to

file his claim within the 24-month period?
All rights of the depositor with respect to the insured deposit shall no
longer be honored. But he may still make a claim against the assets of
the closed bank.
11. If the deposit account in a closed bank is more than
P500,000.00, what happens to the excess of the maximum
amount of insured deposit?
If the closed bank is not rehabilitated or taken over by another bank,
amount in excess of the P500,000 coverage can still be claimed upon
the final liquidation of the remaining assets of the closed bank.
The claim may be filed with the Liquidator of the closed bank but
payment of the said claim will depend on the bank's available assets to
settle its preferred claims (Government taxes, labor claims, secured
credits and trust funds) and approval of the Liquidation Court. The
schedule of payment beyond the P500,000.00 maximum insurance
shall be based on priorities set by law.
12. What specific risks to a bank does PDIC cover?
PDIC covers only the risk of a bank closure ordered by the Monetary
Board. Thus, bank losses due to theft fire, closure by reason of strike or
existence of public disorder, revolution or civil war, are not covered by
PDIC.

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ANTI-MONEY LAUNDERING ACT

(R.A. 9160)
A. POLICY of the LAW
1. The integrity and confidentiality of bank accounts shall be
protected and preserved;
2. To ensure that the Philippines shall not be used as a money
laundering site for the proceeds of any unlawful activity.
3. Philippines shall not extend cooperation in transnational
and prosecutions of persons involved in money laundering
activities wherever committed
B. COVERED INSTITUTION
1.
2.
3.
4.
5.

Banks
Nonbanks
Quasibanks
Trust entities
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. (Sec. 3 R.A. 9160, as amended)
C. OBLIGATIONS of COVERED INSTITUTIONS

They are mandated by the AMLA to submit covered and

suspicious transaction reports to the AMLC.

D. COVERED TRANSACTIONS

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These are transactions in cash or other equivalent

monetary instrument involving a total amount in excess of
500,000.00 within 1 banking day.

E. SUSPICIOUS TRANSACTIONS
Regardless of amount, if any of the following is present:
1. No underlying economic, trade or legal justification
2. Client not properly identified; numbered accounts are allowed
provided client is identified.
3. Transaction is not commensurate with financial capability of the
client
4. Transaction is so structured that it cannot be reported to the
AMLC
5. Transaction which deviates from usual profile of the client
6. Relates to unlawful activity as defined by law
7. Analogous transactions
F. WHEN is MONEY LAUNDERING COMMITTED
The meaning of Money Laundering
- A crime whereby the proceeds of unlawful activity
are transacted, making them
appear to have come from
lawful
transaction. (Sec. 4 R.A. 9160, as amended)

Money laundering act is committed by the following

persons:
a) Any person knowing that the monetary instrument or
property represents, involves, or relates to, the
proceeds of any unlawful activity, transacts or
attempts to transact said monetary instrument or
property;
b) Any person knowing that any monetary instrument or
property involves the proceeds of any unlawful
activity performs or fails to perform any act as a
result of which he facilitates the offense referred to in
No. 1 above
c) Any person knowing that any monetary instrument or
property is required under this Act to be disclosed
and filed with the AntiMoney Laundering Council
(AMLC), fails to do so. (Sec 4 R.A. 9160, as amended)

G. UNLAWFUL ACTIVITIES or PREDICATE CRIMES

a.
b.
c.
d.
e.
f.
g.

These refer to any act or omission or series or combination

thereof involving or having direct relation to the following:

Kidnapping for ransom

Drug trafficking and related offenses
Graft and corrupt practices
Plunder
Robbery and Extortion
Jueteng and Masiao
Piracy

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h.
i.
j.
k.
l.

Qualified theft
Swindling
Smuggling
Violations under the Electronic Commerce Act of 2000
Hijacking, destructive arson, and murder, including those
perpetrated by terrorists against non-combatant persons and
similar targets.
m. Fraudulent practices and other violations under the SRC
of
2000;
n. Felonies or offenses of a similar nature that are
punishable
under the penal laws of other countries.
(Sec.
3(i)
R.A. 9160, as
amended)
H. ANTI-MONEY LAUNDERING COUNCIL

Composition:
1. Governor of Bangko Sentral ng Pilipinas as Chairman
2. Insurance Commissioner
3. Chairman of Security and Exchange Commissioner

The purpose of the law on creating the Anti-Money

Laundering Council

1. To protect and preserve the integrity and

confidentiality of bank accounts;
2. To ensure that the Philippines shall not be used as a
money laundering site for proceeds of any unlawful
activity; and
3. To extend cooperation in transnational investigation
and prosecution of person involved in money
laundering activities wherever committed.
The AMLC is a collegial body where Chairman & members
of AMLC are entitled to one vote each
General Rule:
AMLC acts unanimously in discharge of functions
Exception:
In case of incapacity, absence or disability, any
member to discharge his functions, the officer
designated shall act in his stead.

SECRETARIAT
Headed by Exec. Director, appointed by AMLC for a
term of percentage years
qualifications:
a) member of Phil. Bar;
b) at least 35 years of age;
c) of good moral character;
d) with unquestionable integrity & known probity; and

126 | P a g e

e) Must have served for at least 5 years in Insurance

Commission, SEC or BSP & shall hold full-time
permanent position within the BSP.
General Rule:
Members of AMLC, Executive Director, all members
Secretariat, on detail, on secondment shall not
manner any information by reason of

of
reveal in any
their office
Exception:

Under any orders of the court, Congress, or any

offices authorized by law

government

MEETING:
AMLC shall meet every first Monday of the month or
as may be necessary at the call of Chairman

as often

Through modern technologies such as, but not

limited
to
TELECONFERENCING
&
VIDEOCONFERENCING

BUDGET: (appropriated by Congress)

Used to defray operational expenses, including
indemnification for LEGAL COST & EXPENSES.

I. FUNCTIONS
The following are the functions of the anti-money laundering act:
1. To require and receive reports of suspicious transactions from
covered institutions
Note: Covered institutions include, (banks and all other
institutions and their subsidiaries and affiliates supervised or
regulated by BSP; insurance companies and all other institutions
supervised or regulated by the IC; and securities dealers and other
entities supervised or regulated by the SEC)
2. To issue orders addressed to the Supervising Authority or the
covered institution
3. To institute civil forfeiture proceedings and all other remedial
proceedings through the OSG
4. To cause the filing of complaints with the DOJ or the
Ombudsman for the prosecution of money laundering offenses
5. To
investigate
suspicious
transactions
and
covered
transactions deemed suspicious after an investigation by
AMLC
6. To apply before the CA, ex parte, for the freezing of any
monetary instrument/property alleged to be proceeds of any
unlawful activity as defined in the AMLA
7. To implement such measures as may be necessary and
justified to counteract money laundering
8. To receive and take action in respect of any request for
assistance from foreign states in their own anti-money
laundering operations

127 | P a g e

9. To develop educational programs on the pernicious effects of

money laundering.
10.
To enlist the assistance of any branch, department,
bureau, office, agency or instrumentality of the government,
including GOCCs in undertaking any and all anti-money
laundering operations
11. To impose administrative sanctions for the violation of
laws, rules, regulations and orders and resolutions issued
pursuant thereto. (Sec. 7 R.A. 9160, as amended)
12. To examine or inquire into bank deposits/investments upon
order of any competent court in cases of violation of the
AMLA, when it has been established that there is probable
cause that the deposits/investments are related to an
unlawful activity. (Sec. 11 R.A. 9160, as amended)
Note: No court order, however, is necessary in cases
involving kidnapping for ransom; narcotics offenses; and hijacking,
destructive arson and murder, including those perpetrated by
terrorists against non-combatant persons and similar targets.
J. FREEZING of MONETARY INSTRUMENT or PROPERTY

The following has the jurisdiction for violations of AntiMoney Laundering Act:

1. RTC all cases on money laundering.

2. Sandiganbayan Those committed by public officers and
private persons in conspiracy with them. (Sec. 5. R.A. (160,
as amended)

The Court of Appeals has the jurisdiction to issue a freeze

order because, It is solely the CA which has the authority to
issue a freeze order upon application ex parte by the AMLC
and after determination that probable cause exists.

It also has the exclusive jurisdiction to extend existing

freeze orders previously issued by the AMLC vis--vis accounts
and deposits related to money-laundering activities. (Republic v.
Cabrini Green & Ramos, G.R. No. 154522, May 5, 2006)
K. AUTHORITY to INQUIRE INTO BANK DEPOSITS

The Anti-Money Laundering Council (AMLC) can inquire into

bank deposits when

General Rule:
Only upon order of any competent court in cases of
violation of R.A.9160, as amended.
Exception:
No need of court order in cases of Kidnapping,
Hijacking, Drugs,
Arson, Murder. (Sec. 11 R.A. 9160, as amended)

JURISPRUDENCE

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REPUBLIC versus GLASGOW CREDIT and COLLECTION SERVICES

INC.
FACTS:
Glasgow is a corporation existing under the laws of the
Philippines and has funds in the amount of P21, 301, 430.00 deposited
with City state Savings Bank, Inc. (CSBI).
However, the aforestated bank account is related to the unlawful
activities of Estafa and violation of Securities Regulation Code.
Thus, the Republic filed a complaint in the Regional Trial Court of
Manila for civil forfeiture of assets with plea for issuance of temporary
retraining order and writ of preliminary injunction and was granted.
Glasgow filed a motion to dismiss alleging that the complaint was
premature and stated no case of action as there was still no conviction
of Estafa or other criminal violations, Hence, the petition.
ISSUE:
Is criminal conviction for unlawful activity is considered a pre
requisites for the institution of a civil forfeiture?
HELD:
NO, The complaint was sufficient in form and substance, the
question submitted to the court for determination is the sufficiency of
the allegations made in the complaint to constitute a cause of action
and not whether those allegations of facts are true. A finding of guilt
for an unlawful activity is not an essential element for forfeiture.
REPUBLIC versus CABRINI GREEN and ROSS INC.
FACTS:
The Anti- Money Laundering Council (AMLC) issued freeze orders
against various accounts of respondents. The bank accounts were
previously found prima facie to be related to the unlawful activities.
Before the lapse of fifteen (15) days, AMLC filed with the Court of
Appeals (CA) petitions for extension of effectivity of its freeze orders.
However, Court of Appeals disregard the petitions. It ruled that it
was not vested by R.A 9160 with the power to extend a freeze order.
ISSUE:
Which court has jurisdiction to extend the effectivity of a freeze
orders?
HELD:
The law stands, it is solely the Court of Appeals which has the
authority to issue a freeze order as well as to extend its effectivity, It
has the exclusive jurisdiction to extend existing freeze orders
previously issued by the Anti Money Laundering Council accounts and
deposits related to money-laundering activities.
REPUBLIC versus EUGENIO
FACTS:

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Anti- Money Laundering Council filed an application to inquire or

examine the deposited or investments of Alvarez et. al, before the
Regional Trial Court of Makati. The latter granting the Anti- Money
Laundering Council the authority to inquire and examine the subject
bank accounts.
The trial court being satisfied that there existed probable
cause to believe that the deposits in various accounts are related to
the offense of violation of Anti-Graft and corrupt practices Act now the
subject of criminal prosecution.
ISSUE:
Whether or not the bank accounts of respondents can be
examined.
HELD:
All bank deposits are absolutely confidential. However, the Anti
Money Laundering Act also provides exceptions to the Bank Secrecy
Act. It may inquire into a bank account upon orders of any competent
court in case of violation of the Anti Money Laundering Act.

QUESTIONS AND ANSWERS

1. 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. (Bar exam question 2002)
A. Can Alvin move to dismiss the case on the ground that he
has no criminal record?
ANSWER:
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)
B. In disclosing Alvin's bank accounts to the AMLC, did the
bank violate any law?
ANSWER:
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
2. Rudy 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
and
has
purchased 5 houses and lots for his children from the
Luansing Realty, Inc. Since he does not have any visible
job, the company reported his purchases to the Anti-

130 | P a g e

Money Laundering Council (AMLC). Thereafter, AMLC charged

him with violation of the Anti-Money Laundering Law. Upon
request of the AMLC, the bank disclosed to it Rudy's bank
deposits
amounting
to
P100
Million. Subsequently, he
was charged in court for violation of
the Anti-Money
Laundering Law. (Bar exam question 2002)
A: Can Rudy move to dismiss the case on the ground that he
has no criminal record? (2.5%)
ANSWER:
No. Under the Anti-Money Laundering Law, Rudy would be
guilty
of a "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 (See also Sec. 3, AntiMoney
Laundering Act of 2001).
B: To raise funds for his defense, Rudy sold the houses and
lots to a friend. Can Luansing Realty, Inc. be compelled
to transfer to the buyer ownership of the houses and lots?
(2.5%)
ANSWER:
Luansing Realty, Inc. is a real estate company, hence it is not a
covered institution under Section 3 of the Anti- Money
Laundering Act.
Only
banking institutions, insurance
companies,
securities dealers and brokers, pre- need companies
and other entities administering or otherwise dealing in currency,
commodities or financial derivatives are covered
institutions.
Hence, Luansing
Realty, Inc. may not use the Anti-Money
Laundering Act to refuse to transfer to the buyer ownership of the
houses and lots.
C: In disclosing Rudy's bank accounts to the AMLC,
bank violate any law?
(2.5%)

did the

ANSWER:
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.
D: Supposing the titles of the houses and lots are in
possession of the Luansing Realty, Inc., is it under
obligation to deliver the titles to Rudy? (2.5%)
ANSWER
Yes, it has an obligation to deliver titles to Rudy. As Luansing
Realty, Inc. is not a covered institution under Section 3 of the
Anti-Money Laundering Act, it may not invoke this law to refuse
delivery of the titles to Rudy.
3. Who shall be liable if the offender is a juridical entity?

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Answer:
If the offender is a corporation, association, partnership or any
judicial
person, the penalty shall be imposed upon the responsible
officers, as the case may be, who participated or
failed to prevent
its
commission. If the offender is a juridical person, the court may
suspend or revoke its license. (Rule 3, Sec. 2 (par.6), IRR)

4. Who has the authority to freeze accounts?

Answer:
The AMLC is authorized under Sections 6 (6) and 10 of the AMLA
to
freeze any account
or any monetary instrument or property
subject
thereof upon determination that probable cause exists that
the same is
in any way related to any unlawful activity and/or
money
laundering offense. The AMLC may freeze any account or
any monetary instrument or
property subject thereof prior to
the institution or in the course of, the criminal proceedings involving
the unlawful activity and/or money laundering offense to which
said account, monetary instrument or property is any way
related. The
freeze order on such account shall be effective
immediately for a
period not exceeding fifteen (15) days.
5. May a court issue TRO or writ of injunction to extend a
freeze order?
Answer:
Only the CA and SC. No court shall issue a temporary restraining
order or writ of injunction against any freeze order issued by the
AMLC or any court order extending period of effectivity of the
freeze order except the Court of Appeals or the Supreme Court.
(Rule 3, Sec. 3 (par.h), IRR)
6. Are institutions required to verify the identity of their
clients through face-to-face contracts?
Answer:
To the extent and through such means allowed under existing
laws and applicable rules and regulations of the BSP, the SEC and the
IC,
covered institutions may create new accounts without face-toface contract. (Rule 5, Sec. 1, par. D, IRR)
7. How should the AMLA be construed or implemented?
Answer:
It shall not be construed or implemented in a manner that will
discriminate against certain customer types, such as politicallyexposed persons, as well as their relatives, or against a certain
religion, race or ethnic origin, or such other attributes or profiles
when
used as the only basis to deny these persons access to the
services provided by the covered persons. Whenever a bank, or quasibank,
financial institution or whenever any person or entity
commits said
discriminatory act, the person or persons responsible
for such
violation shall be subject to sanctions as may be deemed
appropriate
by their respective regulators.
8. Is personal knowledge necessary that the monetary
instrument is the proceed of unlawful activity to be qualified

132 | P a g e

as an offender?
Answer:
Yes, Money laundering is committed by any person who, knowing
that any monetary instrument or property represents, involves,
or
relates to the proceeds of any unlawful activity. Sec. 4, RA 10365.
9. What are the exemptions on the authority of the AMLC to
inquire into bank deposits of the offender?
Answer:
There is no need of acquiring a court order in cases of
kidnapping,
Hijacking, Drugs, Arson and Murder. Because they
are acts or omissions that involves direct relation to the offended
party.
10. What are the compositions of the Anti-money laundering
council?
Answer:
The following are the compositions of the AMLC:
A: Governor of BangkoSentralngPilipinas as Chairman;
B: Insurance Commissioner;
C: Chairman of Security and Exchange Commissioner.

TRUTH IN LENDING ACT (R.A. 3765)

CIRCULAR NO. 158
Series of 1998
Pursuant to Monetary Board Resolution No. 369 dated 12 March 1998,
amending the composition of the reserve requirement on all types of
peso deposit and deposit substitute liabilities of expanded commercial
banks, commercial banks and non-banks with quasi-banking (NBQBs)
functions and certain types of deposit and deposit substitute liabilities
of thrift banks and rural banks, and Monetary Board Resolution No. 403
dated 18 March 1998, advancing the effectivity date of the
abovementioned changes, Books I, II, III and IV of the Manual of
Regulations are hereby amended as follows:
Book I
Expanded Commercial Banks and Commercial Banks
SECTION 1. Sections 1203, 1214, 1225, 1232, 1236 and 1253 of Book
1 of the Manual of Regulations are hereby amended by reducing the
required reserves against demand and savings deposits, NOW
accounts, time deposits and negotiable certificate of time deposits
regardless of maturity of banks with expanded commercial banking
authority, commercial banks, the Land Bank of the Philippines, the
Development Bank of the Philippines and the Al-Amanah Islamic
Investment Bank of the Philippines from thirteen percent (13%) to ten
percent (10%).
SECTION 2. Section 1283 of Book I of the Manual of Regulations is
hereby amended by reducing the required reserves against deposit
substitute liabilities regardless of maturity from thirteen percent (13%)
to ten percent (10%).

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Book II
Thrift Banks
SECTION 3. Section 2203, Section 2225 and Section 2253 of Book II of
the Manual of Regulations are hereby amended by reducing the
required reserves against demand deposits and NOW accounts from
thirteen percent (13%) to ten percent (10%).
SECTION 4. Section 2283 of Book II of the Manual of Regulations is
hereby amended by reducing the required reserves against deposit
substitute liabilities regardless of maturity from thirteen percent (13%)
to ten percent (10%).
SECTION 5. Sections 2232, 2236, and 2253 of Book II of the Manual of
Regulations are hereby amended by reducing the required reserves
against time deposits and negotiable certificates of time deposits
regardless of maturity from eleven percent (11%) to eight percent
(8%).
SECTION 6. Sections 2214 and 2253 of Book II of the Manual of
Regulations are hereby amended by reducing the required reserves
against savings deposits from eleven percent (11%) to eight percent
(8%).
Book III
Rural Banks
SECTION 7. Sections 3203 and 3253 of Book III of the Manual of
Regulations are hereby amended by reducing the required reserves
against demand deposits from thirteen percent (13%) to ten percent
(10%).
SECTION 8. Sections 3225, 3236, and 3253 of Book III of the Manual
of Regulations are hereby amended by reducing the required reserves
against NOW accounts from thirteen percent (13%) to ten percent
(10%).
SECTION 9. Under Sections 3214 and 3232 of Book III of the Manual of
Regulations, the required reserves against savings and time deposits
regardless of maturity shall remain at five percent (5%).
Book IV
Non-Bank Financial Intermediaries
SECTION 10. The first paragraph of Section 4283Q of Book IV of the
Manual of Regulations is hereby amended by reducing the required
reserves against deposit substitute liabilities, regardless of maturity,
from thirteen percent (13%) to ten percent (10%).
Books I, II, III and IV
Liquidity Reserves for all Financial Intermediaries

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SECTION 11. On top of the regular reserve requirements, liquidity

reserve ratios against peso demand, savings, time deposit and deposit
substitute liabilities shall be raised, as follows:
a. For expanded commercial banks, commercial banks, and nonbank financial intermediaries with quasi-banking functions
(NBQBs), from four percent (4%) to seven percent (7%);
b. For thrift banks, from three percent (3%) to six percent (6%); and
c. For rural banks, from zero to three percent (3%) against their
demand deposit liabilities.
The required liquidity reserve may be maintained in the form of shortterm market-yielding government securities purchased directly from
the BSP-Treasury Department, pursuant to Circular No. 10 dated 29
December 1993.
Form and Composition
Intermediaries

of

Regular

Reserves

for

all

Financial

SECTION 12. Regular reserves shall be maintained in the same form

and composition as provided in Sections 1254, 2254, 3254, 1283,
2283.1, 3283, and 4283Q of Books I, II, III, and IV, respectively, of the
Manual of Regulations for Banks and Other Financial Intermediaries.

TRUTH IN LENDING ACT

I. Purpose: To protect the citizens of the state from a lack of
awareness of the true cost of credit to the user through a guaranteed
full disclosure of such cost with a view of preventing the uninformed
use of credit to the detriment of the national economy. It was intended
to ensure that credit terms are disclosed in a meaningful way so
consumers can compare credit terms more readily and knowledgeably.
( Section 2 )

II. Obligation of Creditors to Person to whom CREDIT IS

EXTENDED

Any creditor, PRIOR TO THE CONSUMPTION OF THE

TRANSACTION shall FURNISH a clear statement in writing
setting forth, to the extent applicable and in accordance with
the rules and regulations prescribed by the Board, the
following INFORMATION; ( as provided in Section 4 )
a. the cash price or delivered price of the property or service
to be acquired;
b. the amounts, if any, to be credited as down payment
and/or trade-in;

135 | P a g e

c.
the difference between the amounts set forth under
clauses (1) and (2);
d. the charges, individually itemized, which are paid or to be
paid by such person in connection with the transaction but
which are not incident to the extension of credit;
e. the total amount to be financed;
f. the finance charge expressed in terms of pesos and
centavos; and
g. the percentage that the finance bears to the total amount
to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
III. COVERED AND EXCLUDED TRANSACTIONS
A. THOSE COVERED ARE:
The law covers any creditor, which is defined as any person
engaged in the business of extending credit (including any
person who as a regular business practice make loans or sells
or rents property or services on a time, credit, or installment
basis, either as principal or as agent) who requires as an
incident to the extension of credit, the payment of a finance
charge.
B. THOSE EXCLUDED ARE:
The following transactions are exempt;
1. Credit extended primarily for a business, commercial, or
agricultural purpose;
2. Credit extended to other than a natural person (including credit
to government agencies or instrumentalities);
3. Credit in excess of $25 thousand not secured by real or personal
property used as the principal dwelling of the consumer;
4. Public utility credit;
5. Credit extended by a broker-dealer registered with the Securities
and Exchange Commission (SEC) or the Commodity Futures
Trading Commission (CFTC), involving securities or commodities
accounts;
6. Home fuel budget plans; and
7. Certain student loan programs.
NOTE: When determining whether credit is for consumer purposes, the
creditor must evaluate all of the following:
Any statement obtained from the consumer describing the purpose
of the proceeds.

136 | P a g e

- For example, a statement that the proceeds will be used for a

vacation trip would indicate a consumer purpose.
- If the loan has a mixed-purpose (e.g., proceeds will be used to buy a
car that will be
used for personal and business purposes), the lender must look to the
primary
purpose of the loan to decide whether disclosures are necessary. A
statement of
purpose from the consumer will help the lender make that decision.
- A checked box indicating that the loan is for a business purpose,
absent any
documentation showing the intended use of the proceeds, could be
insufficient
evidence that the loan did not have a consumer purpose.
The consumer's primary occupation and how it relates to the use of
the proceeds. The higher the correlation between the consumer's
occupation and the property purchased from the loan proceeds, the
greater the likelihood that the loan has a business purpose.
For example, proceeds used to purchase dental supplies for a dentist
would indicate a business purpose.
Personal management of the assets purchased from proceeds. The
lower the degree of the borrower's personal involvement in the
management of the investment or enterprise purchased by the loan
proceeds, the less likely the loan will have a business purpose.
For example, money borrowed to purchase stock in an automobile
company by an individual who does not work for that company would
indicate a personal investment and a consumer purpose.
The size of the transaction. The larger the size of the transaction, the
more likely the loan will have a business purpose. For example, if the
loan is for a $5,000,000 real estate transaction, that might indicate a
business purpose.
The amount of income derived from the property acquired by the
loan proceeds relative to the borrower's total income. The lesser the
income derived from the acquired property, the more likely the loan
will have a consumer purpose.
For example, if the borrower has an annual salary of $100,000 and
receives about $500 in annual dividends from the acquired property,
that would indicate a consumer purpose.
IV.

CONSEQUENCES OF NON-COMPLIANCE WITH OBLIGATION

1. Any creditor who violates the law is liable in the amount of P100 or
in an amount equal to twice the finance charged required by such
creditor in connection with such

137 | P a g e

transaction, whichever is the greater, except that such liability shall

not exceed P2,000 on any credit transaction. The action must be
brought within one year from the date of the occurrence of the
violation.
2. The creditor is also liable for reasonable attorneys fees and court
costs as determined by the court.
3. Any person who willfully violates any provision of this law or any
regulation issued thereunder shall be fined by not less than P1,00 or
more than P5,000 or imprisonment of not less than 6 months, nor more
than one year or both.
However, no punishment or penalty under this law shall apply to the
Philippine Government or any agency or any political subdivision
thereof. (section 6 )

JURISPRUDENCE
UCPB v. Sps. Beluso August 17, 2007 No. 159912
Facts:
UCPB granted spouses Beluso a Promissory Notes Line under a
Credit Agreement whereby the latter could avail from the former credit
up to the maximum amount of P1.2 M, which was amended to increase
P2.35 M. Spouses Beluso have executed a total of 5 promissory notes,
the last two of which they claim to have never been released to them.
In any case, UCPB applied interest rates on the different promissory
notes ranging from 18% to 34%, and thereafter continued to charge
interests and penalties. When the respondents failed to make
payments, UCPB foreclosed their mortgaged properties. Respondents
filed a petition for annulment thereof. RTC ruled in favor of respondents
and the CA affirmed thereof. It was ruled that the provision on interest
rates agreed upon by the parties is void as the rates and bases
therefor were determined solely by the petitioner. UCPB argues that
there is no violation of the principle of mutuality of contracts, and
assuming there is, it was already cured by estoppel on the part of
respondents.
Issue:
Is the contention of the petitioner UCPB meritorious?
Ruling:
No. Article 1308 provides that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will
of one of them. In order that obligations arising from contracts may
have the force of law between the parties, there must be mutuality
between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties
is void. The provision stating that the interest shall be at therate
indicative of DBD retail rate or as determined by the Branch Head is
indeed dependent solely on the will of petitioner UCPB. Under such

138 | P a g e

provision, petitioner UCPB has two choices on what the interest rate
shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head. As UCPB is given this choice, the rate
should be categorically determinable in both choices. If either of these
two choices presents an opportunity for UCPB to fix the rate at will, the
bank can easily choose such an option, thus making the entire interest
rate provision violative of the principle of mutuality of contracts. Not
just one, but rather both, of these choices are dependent solely on the
will of UCPB. Spouses Beluso had acknowledged before the RTC their
obligation to pay a 12% legal interest on their loans. There is sufficient
basis to impose a 12% legal interest in favor of petitioner in the case at
bar, as what we have voided is merely the stipulated rate of interest
and not the stipulation that the loan shall earn interest. We uphold the
contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes
providing for the compounding of interest were neither nullified by the
RTC or the Court of Appeals, nor assailed by the spouses Beluso.
Note:Furthermore, opening a credit line does not create a credit
transaction of loan or mutuum, since the former is merely a
preparatory contract to the contract of loan or mutuum. Under such
credit line, the bank is merely obliged, for the considerations specified
therefor, to lend to the other party amounts not exceeding the limit
provided. The credit transaction thus occurred not when the credit line
was opened, but rather when the credit line was availed of. In the case
at bar, the violation of the Truth in Lending Act allegedly occurred not
when the parties executed the Credit Agreement, where no interest
rate was mentioned, but when the parties executed the promissory
notes, where the allegedly offending interest rate was stipulated.
Consolidated Bank v. CA
Facts:
George King Tim Pua obtained several loans from Consolidated
Bank for which he executed several promissory notes. In order to
secure Puas payment of the promissory notes, he assigned the
proceeds of his fire insurance policy. The proceeds of the fire insurance
policy was then applied to Puas obligations with Consolidated Bank.
Pua sued the bank for recovery of the unpaid balances on the
promissory notes.
Issue:
Whether or not Pua is obliged to pay handling charges .
Ruling:
Banks and non-bank financial intermediaries authorized to
engage in quest-banking functions are required to strictly adhere to the
provisions of the Truth in Lending Act. Where the promissory note
signed by the borrowers do not contain any stipulation on the payment
of handling charges, the bank cannot collect the same even though a CB
circular authorized banks to collect handling charges on loans over
P500,00
DBP v. Arcilla Jr.
Facts:

139 | P a g e

Atty. Felipe Arcilla Jr. was employed by the DBP. After he was assigned to
the legal department, he decided to avail of a loan under the Individual
Housing Project (IHP) of the bank for the payment of the parcel of land
purchased by him and for its construction. When Arcilla resigned from
DBP, the bank notified him that his loan has been converted to a regular
housing loan. Arcilla agreed to the reservation by the DBP of its right to
increase the rate of interest on the loan, as well as all other fees and
charges on loans and advances pursuant to such policy as it may adopt from
time to time during the period of the loan.
Issue:
Whether or not DBP violated RA 3765 otherwise known as The
Truth in Lending Act.
Ruling:
Section 1 of R.A. No. 3765 provides that prior to the
consummation of a loan transaction, the bank, as creditor, is obliged to
furnish 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 Central Bank of the
Philippines, the following information:
1. the cash price or delivered price of the property or service to be
acquired;
2. the amounts, if any, to be credited as down payment and/or
trade-in;
3. the difference between the amounts set forth under clauses(1)
and (2);
4. the charges, individually itemized, which are paid or to be paid
by such person in connection with the transaction but which are
not incident to the extension of credit;
5. the total amount to be financed;
6. the finance charges expressed in terms of pesos and centavos;
and
7. the percentage that the finance charge bears to the total amount
to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
If the borrower is not duly informed of the data required by the
law prior to the consummation of the availment or drawdown, the
lender will have no right to collect such charge or increases thereof,
even if stipulated in the promissory note. However, such failure shall not
affect the validity or enforceability of any contract or transaction.

QUESTIONS AND ANSWERS

1. What is the policy behind the Truth in Lending Act?
The declared policy behind the law is to protect the people from lack of
awareness of the true cost of credit by assuring full disclosure of such
cost, with a view of preventing the uninformed use of credit to the
detriment of the national economy.
2. In that definition, what is meant by credit?
It means any loan, mortgage, deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or sale or contract of

140 | P a g e

sale of property or services, either for present or future delivery, under

which part or all of the price is payable subsequent to the making of
such sale or contract; any rental-purchase contract; any contract or
arrangement for the hire, bailment, or leasing of property; any option,
demand, lien, pledge, or other claim against, or for the delivery of,
property or money; any purchase, or other acquisition of, or any credit
upon the security of, any obligation of claim arising out of any of the
foregoing; and any transaction or series of transactions having a
similar purpose or effect.
3. In the same definition, what is meant by a finance charge?
A finance charge includes interest, fees, service charges, discounts,
and such other charges incident to the extension of credit as may be
prescribed by the Monetary Board of the Bangko Sentral ng Pilipinas
through regulations.
4. What are the information required to be furnished to the
debtor or borrower?
(1) the cash price or delivered price of the property or service to be
acquired;
(2) the amounts, if any, to be credited as down payment and/or tradein;
(3) the difference between the amounts set forth under clauses (1) and
(2);
(4) the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which are not
incident
to
the
extension
of
credit;
(5)
the
total
amount
to
be
financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.
5. When and how should this information be furnished to the
debtor or borrower?
The information enumerated above must be disclosed to the debtor or
borrower prior to the consummation of the transaction. The information
must be clearly stated in writing.
6. What is the effect on the obligation in case of violations to
the Truth in Lending Act?
The contract or transaction remains valid or enforceable, subject to the
penalties discussed below.

FOREIGN INVESTMENT ACT (R.A. 7042, as

amended)
I. POLICY OF THE LAW

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a. On extent of foreign ownership of export enterprises, THERE

ARE NO RESTRICTIONS
- the state shall attract, promote and welcome productive
investments from FOREIGN individuals, partnerships, corporations and
governments ( including political subdivisions) which significantly
contribute
to
national
industrialization
and
socio-economic
development.
b. Foreigners can INVEST as much as 100% equity EXCEPT in
areas included in the NEGATIVE LISTS.
- Foreign investments that significantly expand livelihood
and employment for Filipinos.
- An investment which enhances the economic value of
farm products.
- Serves mainly the domestic market.
II. DEFINITION OF TERMS
a. Foreign Investment
-an equity investment made by a non-Philippine national
in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the Central Bank
which shall asses and appraise the value of such assets other than
foreign exchange.
b. Doing Business in the Philippines
- Solicitation of orders, service contracts, opening officers,
and any other ACTS that IMPLY a CONTINUITY of commercial dealings
or arrangements.
Note:
Doing business does not merely include mere
investment as a shareholder by a foreign entity in domestic
corporations.
c. Export Enterprise
- an enterprise where a manufacturer, processor or service
enterprise EXPORTS SIXTY percent (60%) or more of its ourput.
- a trader purchases products domestically and EXPORTS
SIXTY percent (60%) or more of such purchases.
d. Domestic Market Enterprise
- an enterprise which PRODUCES GOODS FOR SALE
- RENDERS SERVICES to the domestic market ENTIRELY
- FAILURE to continuously export at least SIXTY percent
(60%)
III. REGISTRATION
NATIONALS

OF

INVESTMENT

OF

NON-PHILIPPINE

a. WITHOUT NEED OF PRIOR APPROVAL, a non-Philippine national

who is not disqualified by law may, upon registration with the
Securities and Exchange commission (SEC) or with the Bureau of
Trade Regulation and Consumer Protection (BPTRC) of the
Department of Trade and Industry in the CASE OF SINGLE
PROPRIETORSHIPS, do BUSINESS or

142 | P a g e

b. INVEST in a DOMESTIC enterprise up to ONE HUNDRED

percent (100%) of its capital, unless said participation is
prohibited or limited by law.
c. The SEC or BRTRCP shall not impose any limitations on the
extent of foreign ownership in an enterprise as the case may be.
Note: Any enterprise seeking to avail of incentives under the
Omnibus Investment code of 1987 must apply for registration
with the Board of Investments (BOI).
A non-Philippine national in line of a business as an existing joint
venture being a substantial partner must DISCLOSE the facts of
the partners in the joint venture.
During the TRANSITORY period, SEC shall disallow registration of
the applying non-Philippine national if the existing joint venture
enterprise, particularly the Filipino partners, can REASONABLY
PROVE that they are CAPABLE to make the investment needed
for the domestic market activities.
SEC shall effect registration within fifteen (15) days upon
submission of completed requirements.
IV. FOREIGN INVESTMENT in DOMESTIC MARKET Enterprise
-Non-Philippine nationals may own up to one hundred percent
(100%) of domestic market enterprise unless foreign ownership
therein is prohibited or limited by the Constitution or the Foreign
Investment Negative Lists.
V. FOREIGN INVESTMENT NEGATIVE LISTS
In Negative List A, It enumerates the areas of activities
reserved to Philippine nationals by mandate of the
Constitution and specific laws.
No Foreign Equity
1. Mass Media except recording
2. Practice of professions
3. Retail trade enterprises with paid-up capital of not less than
US$2,500,000.00
4. Cooperatives
5. Private Security Agencies
6. Small-scale Mining
7. Utilization of Marine Resources in archipelagic waters,
territorial sea, and
exclusive economic zone
8. Ownership, operation and management of cockpits
9. Manufacture, repair, stockpiling and/or distribution of nuclear
weapons
10. Manufacture, repair, stockpiling and/or distribution of
biological, chemical
and radiological weapons and anti-personal mines
11. Manufacture of firecrackers and other pyrotechnic devices

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Up to Twenty Percent (20%) Foreign Equity

12. Private radio communication network
Up to Twenty-Five Percent (25%) Foreign Equity
13. Private recruitment, whether for local or overseas
employment
14. Contracts for the construction and repair of locally-funded
public works,
except:
a. infrastructure/development projects covered in RA 7718; and
b. projects which are foreign funded or assisted and required to
undergo international competitive bidding (Sec. 2(a) of RA 7718)
15. Contracts for construction of defense-related structure
Up to Thirty Percent (30%) Foreign Equity
16. Advertising
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of natural resources
18. Ownership of Private Lands
19. Operation and management of public utilities
20. Ownership/establishment and administration of educational
institutions
21. Culture, production, milling, processing, trading excepting
retailing, of rice
and corn and acquiring, by barter, purchase or otherwise, rice
and corn and the
byproducts thereof
22. Contracts for the supply of materials, goods and commodities to
23. Government owned or controlled corporation, company, agency
or Municipal
24. Corporation
23. Project Proponent and facility Operator of a BOT project
requiring a public
utilities franchise
24. Operation of deep-sea commercial fishing vessels
25. Adjustment Companies
26. Ownership of condominium units where the common areas in
the
condominium projects are co-owned by the owners of the
separate units or
owned by a corporation
Up to Sixty Percent (60%) Foreign Equity
27. Financing companies regulated by the Securities and
Exchange Commission
28. Investment houses regulated by the SEC
What is the coverage of Negative List B?
In Negative List B, foreign ownership in certain business is
limited for reason of

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security, defense, risk to health and morals and protection of

small-andmedium scale enterprises. These are:
Up to Forty Percent (40 %) Foreign Equity
1. Manufacture, repair, storage and/or distribution of products and/or
ingredients requiring Philippine National Police (PNP) clearance:
a. Firearms (handguns to shotguns), parts of firearms and
ammunition therefore,
instruments or implements used or intended to be used in
the manufacture of
firearms
b. Gunpowder
c. Dynamite
d. Blasting supplies
e. Ingredients used in making explosives
f. Telescopic sight, sniper scope and other similar devices
2. Manufacture, repair, storage and/or distribution of products requiring
Department of National Defense (DND) clearance;
a. Guns and ammunition for warfare
b. Military ordnance and parts thereof (e.g., torpedoes, depth
charges, bombs,
grenades, missiles)
c. Gunnery, bombing and fire control systems and components
d. Guided missiles/missile systems and components
e. Tactical aircraft (fixed and rotary -winged), parts and
components thereof
f. Space vehicles and component systems
g. Combat vessels (air. land and naval) and auxiliaries
h. Weapons repair and maintenance equipment
i. Military communications equipment
j. Night vision equipment
k. Stimulated coherent radiation devices, components and
accessories
l. Armament training devices
m. Others as may be determined by the Secretary of the DND
3. Manufacture and distribution of dangerous drugs
4. Sauna and steam bathhouses, massage clinics and other like
activities
regulated by law because of risks posed to public health and
morals
5. All forms of gambling, e.g. race track operation
6. Domestic market enterprises with paid-in equity capital of less
than the
equivalent of US$200,000
7. Domestic market enterprises, which involve advanced technology
or employ at
least fifty (50) direct employees with paid-in-equity capital of
less than the
equivalent of US$100,000

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JURISPRUDENCE
Steelcase, Inc. v. Design International Selections, Inc.
(DISI), G.R. No. 171995, 18 April 2012

FACTS:
Steelcase,

Inc.

(Steelcase)

granted

Design

International

Selections, Inc. (DISI) the right to market, sell, distribute, install, and
service its products to end-user customers within the Philippines.
Steelcase argues that Section 3(d) of R.A. No. 7042 or the Foreign
Investments Act of 1991 (FIA) expressly states that the phrase doing
business excludes the appointment by a foreign corporation of a local
distributor domiciled in the Philippines which transacts business in its
own name and for its own account. On the other hand, DISI argues that
it was appointed by Steelcase as the latters exclusive distributor of
Steelcase products. The dealership agreement between Steelcase and
DISI had been described by the owner himself as basically a buy and
sell arrangement.

ISSUE:
Whether Steelcase had been doing business in the Philippines.

RULING: NO.
The appointment of a distributor in the Philippines is not
sufficient to constitute doing business unless it is under the full control
of the foreign corporation. On the other hand, if the distributor is an
independent entity which buys and distributes products, other than
those of the foreign corporation, for its own name and its own account,
the latter cannot be considered to be doing business in the Philippines.
Here, DISI was an independent contractor which sold Steelcase
products in its own name and for its own account. As a result,
Steelcase

cannot

be

considered

to

be

doing

business

in

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the Philippines by its act of appointing a distributor as it falls under one

of the exceptions under R.A. No. 7042.

MR HOLDINGS, LTD vs. SHERIFF CARLOS P. BAJAR, SHERIFF

FERDINAND M. JANDUSAY, SOLIDBANK CORPORATION, AND
MARCOPPER MINING CORPORATION
G.R. No. 138104
April 11, 2002
FACTS:
Marcopper Mining Corporation was unable to pay its loans from
the Asian Development Bank (ADB). Later, ADB transferred all its rights
to collect from Marcopper to MR Holdings, Ltd. In order to pay MR
Holdings, Marcopper assigned all its assets to MR Holdings and
executed therefor a Deed of Assignment in MR Holdings favor.
Meanwhile,
another
creditor
of
Marcopper,
Solidbank
Corporation, won a case against Marcopper. The court then issued a
writ of execution directing Sheriff Carlos Bajar to levy Marcoppers
assets.
MR Holdings then filed an opposition asserting that it is now the
owner of Marcoppers assets hence, Bajar cannot levy them. The lower
court denied MR Holdings on the ground that the Deed of Assignment
was made in bad faith and that MR Holdings was a foreign corporation
doing business without a license in the Philippines (by virtue of the
Deed of Assignment) and as such cannot sue in the Philippines.
ISSUE: Whether or not MR Holdings may sue on this particular
transaction.
HELD: Yes. The Supreme Court emphasized the following rules when it
comes to foreign corporations doing business here in the Philippines:
1.

if
a
foreign
corporation does
business in
the
Philippines without a license, it cannot sue before the Philippine
courts;
2.
if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine courts on an
isolated transaction or on a cause of action entirely independent of any
business transaction;
3.
if a foreign corporation does business in the Philippines
with the required license, it can sue before Philippine courts on any
transaction.
Being a mere assignee does not constitute doing business in
the Philippines. MR Holdings, a foreign corporation, cannot be said to

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be doing business simply because it became an assignee of Marcopper.

MR Holdings was not doing anything else other than being a mere
assignee. The only time that MR Holdings is considered to be doing
business here is that if it continues the business of Marcopper which
it did not.
Therefore, since it is not doing business here, pursuant to the
rules above, it can sue without any license before Philippine courts on
an isolated transaction or on a cause of action entirely independent of
any business transaction.
Anent the issue of bad faith, the same was not proven. It appears
that the deed of assignment was an earlier agreement incidental to the
loan agreement between ADB and Marcopper which precedes the
action brought by Solidbank against Marcopper.
HAHN v. CA
G.R. No. 113074; January 22, 1997
FACTS:
Petitioner Alfred Hahn is a Filipino citizen doing business under
the name and style "Hahn-Manila". On the other hand, private
respondent (BMW) is a nonresident foreign corporation existing under
the laws of the former Federal Republic of Germany, with principal
office at Munich, Germany.
On March 7, 1967, petitioner executed in favor of private
respondent a "Deed of Assignment with Special Power of Attorney. Per
the agreement, the parties "continue[d] business relations as has been
usual in the past without a formal contract."
But on February 16, 1993, in a meeting with a BMW
representative and the president of Columbia Motors Corporation
(CMC), Jose Alvarez, petitioner was informed that BMW was arranging
to grant the exclusive dealership of BMW cars and products to CMC,
which had expressed interest in acquiring the same.
On February 24, 1993, petitioner received confirmation of the
information from BMW which, in a letter, expressed dissatisfaction with
various aspects of petitioner's business, mentioning among other
things, decline in sales, deteriorating services, and inadequate
showroom and warehouse facilities, and petitioner's alleged failure to
comply with the standards for an exclusive BMW dealer.
Nonetheless, BMW expressed willingness to continue business
relations with the petitioner on the basis of a "standard BMW importer"
contract, otherwise, it said, if this was not acceptable to petitioner,
BMW would have no alternative but to terminate petitioner's exclusive
dealership effective June 30, 1993.
Because of Hahn's insistence on the former business relations,
BMW withdrew on March 26, 1993 its offer of a "standard importer
contract" and terminated the exclusive dealer relationship effective
June 30, 1993.
On April 29, 1993, BMW proposed that Hahn and CMC jointly
import and distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he
filed a complaint for specific performance and damages against BMW
to compel it to continue the exclusive dealership.
ISSUE:
Whether petitioner Alfred Hahn is the agent or distributor in the
Philippines of private respondent BMW

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HELD:
Alfred Hahn is an agent of BMW.
The Supreme Court held that agency is shown when Hahn
claimed he took orders for BMW cars and transmits them to BMW. Then
BMW fixes the down payment and pricing charges and will notify Hahn
of the scheduled production month for the orders, and reconfirm the
orders by signing and returning to Hahn the acceptance sheets.
The payment is made by the buyer directly to BMW. Title to cars
purchased passed directly to the buyer and Hahn never paid for the
purchase price of BMW cars sold in the Philippines. Hahn was credited
with a commission equal to 14% of the purchase price upon the
invoicing of a vehicle order by BMW. Upon confirmation in writing that
the vehicles had been registered in the Philippines and serviced by
him, Hahn received an additional 3% of the full purchase price. Hahn
performed after-sale services, including, warranty services. for which
he received reimbursement from BMW. All orders were on invoices and
forms of BMW.
Moreover, the Court distinguished an agent from a broker. The
court ruled that an agent receives a commission upon the successful
conclusion of a sale. On the other hand, a broker earns his pay merely
by bringing the buyer and the seller together, even if no sale is
eventually made.

QUESTIONS AND ANSWERS

1. What is the general policy of the government for foreign
investments?
The Philippine government is encouraging foreign investors to
invest in the country with businesses that will provide opportunities in
employment, develop the productivity of resources, heighten the
volume as well as the value of exports and provide the future
development of the economys foundation.
2. What requirements must be complied with before a foreign
corporationcan do business in the Philippines?
If the foreign corporation itself intends to do business in the
Philippines under its foreign charter, the foreign corporation must first
secure a License to do Business in the Philippines from the Philippine
Securities & Exchange Commission (SEC). If the foreign corporation
intends to do business in the Philippines by incorporating a Philippine

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company, the foreign corporation must first secure the approval of the
SEC by filing its incorporation papers, together with authenticated
copies of its foreigncharter and by-laws.

3. What is the effect of being issued a License to Do Business

in thePhilippines?
When a foreign corporation is issued the license to do business in
the Philippines, it may commence to transact its business in the
Philippines and continue to do so for as long as it retain its authority to
act as a corporation under the laws of the country or state of its
incorporation, unless such license is sooner surrendered, revoked,
suspended, or annulled.
4. How does the Philippines define foreign corporations?
Foreign corporations has been defined as one, which owes its existence
to the laws of another state, and generally, has no legal existence
within another state. Section 123 of the Corporation Code defines a
foreign corporation as one formed, organized, and existing under any
laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in the Philippines.
5. Can a foreign company invest in the Philippines?
Yes. The Foreign Investment Act (R.A. 7042, 1991, amended by R.A.
8179, 1996) liberalized the entry of foreign investment into the
Philippines. Under the FIA, foreign investors are generally treated like
their domestic counterparts and must register with the Securities and
Exchange Commission (SEC) (in the case of a corporation or
partnership) or with the Department of Trade and Industrys Bureau of
Trade Regulation and Consumer Protection (in the case of a sole
proprietorship).
6. What is the percentage of foreign equity allowed under the
FIA?
With the liberalization of the foreign investment law, 100% foreign
equity may be allowed in all areas of investment except those reserved
for Filipinos under the Philippine Constitution and existing laws.
7. Is there a need for the foreign corporation to appoint its local
agent in the Philippines?
Yes, if the foreign corporation intends to do business in the Philippines
under its foreign charter. Among the things to be stated in the verified
application are the name and address of the foreign corporations
resident agent authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local office, all
notices affecting the corporation.
8. What is the effect of failure to appoint or maintain a local
agent?

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The failure to appoint or maintain a resident agent in the Philippines, or

after change of its resident agent or his address, failure to submit to
the SEC a statement of such change, are grounds for revocation of a
license granted to a foreign corporation to do business in the
Philippines.
9. Is there any Reciprocity Compliance?
Yes. Attached to the application shall also be a duly executed
certificate under oath by the authorized official or officials of the
jurisdiction of incorporation of the foreign corporation, attesting to the
fact that the laws of the country or state of the applicant allow Filipino
citizens and corporation to do business therein.

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