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Transfield Philippines vs Luzon Hydro Electric Corp.

GR No 146717, Nov 22, 2004


The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement
like for instance a typical standby; or (b) independence may be only as to the justification aspect like in
a commercial letter of credit or repayment standby, which is identical with the same obligations under
the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of
the credit the payment of the credit would constitute fraudulent abuse of the credit.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp.
(LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos.
Transfield was given the sole responsibility for the design, construction, commissioning, testing and
completion of the Project. The contract provides for a period for which the project is to be completed and
also allows for the extension of the period provided that the extension is based on justifiable grounds such
as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters of credit were
required to be opened. During the construction of the plant, Transfield requested for extension of time
citing typhoon and various disputes delaying the construction. LHC did not give due course to the
extension of the period prayed for but referred the matter to arbitration committee. Because of the delay
in the construction of the plant, LHC called on the stand-by letters of credit because of default. However,
the demand was objected by Transfield on the ground that there is still pending arbitration on their
request for extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case

Held: Transfields argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would
convert the letter of credit into a mere guarantee.

The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement like
for instance a typical standby; or (b) independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the
credit the payment of the credit would constitute fraudulent abuse of the credit.

Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter
of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a
letter of credit is drawable only after settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in
commercial transactions.

The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the
required documents are presented to it. The so-called independence principle assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions stipulated in the documents
or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

Prudential Bank v Intermediate Appellate Court and Anacleto Chi G.R. No. 74886 December 8, 1992
Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers
who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit
or commitment fees mutually agreed upon.
Facts: Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a 5-year deferred payment plan. To effect the payment, PRMI
applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho.
Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 Against this letter of credit, drafts
were drawn and issued by Nissho, which were all paid by the Prudential Bank through its correspondent
in Japan, the Bank of Tokyo, Ltd. Two of the original drafts were accepted by PRMI through its president,
Anacleto R. Chi, while the others were not. Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to the PRMI which accepted delivery of the same. To enable PRMI to
take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust
receipt which was signed by Anacleto R. Chi in his capacity as President of PRMI company

At the back of the trust receipt was printed a form to be accomplished by 2 sureties who, by the very
terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the
PRMI fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential
Bank. . PRMI was able to take delivery of the textile machineries and installed the same at its factory site.
Chi argued that presentment for acceptance was necessary to make PRMI liable. The trial court ruled
that that presentment for acceptance was an indispensable requisite for Philippine Rayons liability on the
drafts to attach.

Issue : Whether or not presentment for acceptance was needed in order for PRMI to be liable under the
draft.

HELD : Presentment for acceptance is defined an the production of a bill of exchange to a drawee for
acceptance. Acceptance, however, was not even necessary in the first place because the drafts which
were eventually issued were sight drafts. Even if these were not sight drafts, thereby necessitating
acceptance, it would be the Bank (Bank of America) and not Philippine Rayon which had to accept
the same for the latter was not the drawee.

The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was
an indispensable requisite for Philippine Rayons liability on the drafts to attach. Contrary to both courts
pronouncements, Philippine Rayon immediately became liable upon Bank of Americas payment on the
letter of credit. Such is the essence of the letter of credit issued by the petitioner. A different conclusion
would violate the principle upon which commercial letters of credit are founded because in such a case,
both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed
at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the
petitioner had fully paid for it.
In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance
is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law
(NIL).

In the instant case then, the drawee was necessarily the herein the Bank of America. It was to the latter
that the drafts were presented for payment.

RULING:
In the case at bar, the drawee was necessarily the herein petitioner. It was to the latter that the drafts
were presented for payment. There was in fact no need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143
of the Negotiable Instruments Law (NIL). The said section provides that presentment for acceptance must
be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the
drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill
liable. Obviously then, sight drafts do not require presentment for acceptance.

Feati Bank and Trust Company v Court of Appeals G.R. No. 94209 April 30, 1991
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 letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under
the 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.
Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to
deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the
arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd., the Security
Pacific National Bank of Los Angeles, California issued an irrevocable letter of credit available at sight in
favor of Villaluz for the sum of $54,000.00, 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 beneficiary. The letter of credit also provided that the
draft to be drawn is on Security Pacific National Bank and that it be accompanied by certain documents.
The logs were thereafter loaded on a vessel but Christiansen refused to issue the certification required in
paragraph 4 of the letter of credit, despite repeated requests by the private respondent. The logs however
were still shipped and received by consignee, to whom Christiansen sold the logs. Because of the absence
of the certification by Christiansen, the Feati Bank and Trust company refused to advance the payment
on the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to execute
the certification proved futile, he filed an action for mandamus and specific performance against
Christiansen and Feati Bank and Trust Company before the Court of First Instance of Rizal. Christiansen
however left the Philippines and Villaluz filed an amended complaint making Feati Bank and Trust
Company.

Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen

Held: In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank.

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 letter of credit.

A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the
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.

In this case, the letter merely provided that the petitioner forward the enclosed original credit to the
beneficiary. (Records, Vol. I, p. 11) 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 bank as ruled by the courts below.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is
only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows
therefore that when the petitioner refused to negotiate with the private respondent, the latter has no
cause of action against the petitioner for the enforcement of his rights under the letter.

Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends there.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character
of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before
negotiation has no contractual relationship with the seller. Whether therefore the petitioner is a notifying
bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the
letter of credit or has actually negotiated with Feati, the refusal by the petitioner to accept the tender of
the private respondent is justified.

Bank of Philippine Islands v De Reny Fabric Industries G.R. No. L-24821 October 16, 1970
Doctrine: Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
appellants agreed that the Bank shall not be responsible for the existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting to be represented by documents; for
any difference in character, quality, quantity, condition, or value of the property from that expressed in
documents. Having been positively proven as a fact, the appellants are bound by this established usage.
Facts:: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4) irrevocable
commercial letters of credit with the Bank of Philippine Islands (BPI). The letter of credits was used to
cover the purchase of goods by De Reny from its American supplier, the J.B. Distributing Company. As
each shipment arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the
Bank amounting to 12,000. Further payments were, however, subsequently discontinued by the
corporation when it became established, as a result of a chemical test conducted by the National Science
Development Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs. The
corporation also refused to take possession of these goods, and for this reason, the Bank caused them to
be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its
complaint with the court.

Issue : Whether or not De Reny fabrics is liable under the letter of Credit

Held : Even without the stipulation recited above, the appellants cannot shift the burden of loss to the
Bank on account of the violation by their vendor of its prestation. It was uncontrovertibly proven by the
Bank during the trial below that banks, in providing financing in international business transactions such
as those entered into by the appellants, do not deal with the property to be exported or shipped to the
importer, but deal only with documents. The existence of a custom in international banking and financing
circles negating any duty on the part of a bank to verify whether what has been described in letters of
credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been
positively proven as a fact, the appellants are bound by this established usage. They were, after all, the
ones who tapped the facilities afforded by the Bank in order to engage in international business.

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the existence, character, quality, quantity, conditions, packing,
value, or delivery of the property purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from that expressed in documents, or for
partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the
Credit, as well as for any deviation from instructions, delay, default or fraud by the shipper or anyone
else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us.
Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their
covenant.

Metropolitan Waterworks and Sewerage System V. Hon. Reynaldo B. Daway G.R. No. 160732. June
21, 2004
MARCH 15, 2014LEAVE A COMMENT
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the the standby letter
of credit issued by the bank as the former prohibition is on the enforcement of claims against guarantors
or sureties of the debtors whose obligations are not solidary with the debtor.
The concept of guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with
each other. The guarantee theory destroys the independence of the banks responsibility from the
contract upon which it was opened and the nature of both contracts is mutually in conflict with each
other. A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank
undertakes a primary obligation. On the other hand, a guarantor undertakes a collateral obligation
which arises only upon the debtors default. A Standby Letter of Credit is a primary obligation and not
an accessory contract.
Facts: Maynilad obtained a 20-year concession to manage, repair, refurbish, and upgrade existing
Metropolitan Waterworks and Sewerage System (MWSS) water delivery and sewerage services in Metro
Manilas west zone. Maynilad, under the concession agreement undertook to pay concession fees and
itsforeign loans. To secure its obligations, Maynilad was required under Section 9 of the concession
contract to put up a bond, bank guarantee or other security acceptable to MWSS. Pursuant to this
requirement, Maynilad arranged on for a three-year facility with a number of foreign banks led by Citicorp
Intl for the issuance of an irrevocable standby letter of credit (SLC) in the amount of $ 120 million in favor
of MWSS for the full and prompt payment of Maynilads obligations to MWSS. Due to devaluation of the
peso and other business reversals of Maynilad, MWSS filed a notice of early termination of the concession
contract. Upon certification of the non performance of Maynilad obligation, the MWSS moved to collect
from Citicorp on the standby letters of credit issued. Maynilad filed for corporate rehabilitation. Judge
Daway stayed the payment of the letter of credit by Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim
Rules on Corporate Rehabilitation.

Issue: Whether or not the payment of the standby of letter of credit can be stayed by filing of a petition
for rehabilitation

Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the the standby
letter of credit issued by the bank as the former prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose obligations are not solidary with the debtor.

The participating banks obligation under the letter of credit are solidary with respondent Maynilad in that
it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior
exhaustion of the debtors assets. These are the same characteristics of a surety or solidary obligor. And
being solidary, the claims against them can be pursued separately from and independently of the
rehabilitation case.

Issuing banks under the letters of credit are not equivalent to guarantors. The concept of guarantee vis-
-vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory
destroys the independence of the banks responsibility from the contract upon which it was opened and
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 letter of credit, the bank undertakes a primary obligation. We have
also defined a letter of credit as an engagement by a bank or other person made at the request of a
customer that the issuer shall honor drafts or other demands of payment upon compliance with the
conditions specified in the credit.

A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank undertakes
a primary obligation. On the other hand, a guarantor undertakes a collateral obligation which arises only
upon the debtors default. A Standby Letter of Credit is a primary obligation and not an accessory contract.
FACTS: MWSS granted Maynilad under a Concession Agreement to manage, operate, repair,
decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone
Service Area, for which Maynilad undertook to pay the corresponding concession fees which, among
other things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations, Maynilad was required under Section 6.9
of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.

In compliance with this requirement, Maynilad arranged for a three-year facility with a number of
foreign banks, led by Citicorp Intl Ltd., for the issuance of an Irrevocable Standby Letter of Credit in
favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS as aforestated.

Later, the parties agreed to resolve the issues between them [Maynilad is asking for a mechanism by
which it hoped to recover the losses it had allegedly incurred and would be incurring as a result of the
depreciation of the Philippine Peso against the US Dollar and in filing to get what it desired, Maynilad
unilaterally suspended the payment of the concession fees] through an amendment of the Concession
Agreement which was based on the terms set down in MWSS Board of Trustees Resolution which
provided inter alia for a formula that would allow Maynilad to recover foreign exchange losses it had
incurred or would incur under the terms of the Concession Agreement.
However Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to
comply with its obligations under the Concession Agreement and its Amendment regarding the
adjustment mechanism that would cover Maynilads foreign exchange losses. Maynilad filed a Notice of
Early Termination of the concession, which was challenged by MWSS. This matter was eventually
brought before the Appeals Panel by MWSS. the Appeals Panel ruled that there was no Event of
Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore,
Maynilad should pay the concession fees that had fallen due.

The award of the Appeals Panel became final. MWSS, thereafter, submitted a written notice to Citicorp
Intl Ltd, as agent for the participating banks, that by virtue of Maynilads failure to perform its
obligations under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit
and thereby demanded payment.

Prior to this, however, Maynilad had filed on a petition for rehabilitation before the RTC of Quezon City
which resulted in the issuance of the Stay Order and the disputed Order of November 27, 2003.

ISSUE: WON the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it
enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued
the Irrevocable Standby Letter of Credit in its favor
HELD: the petition for certiorari is granted.The Order of November 27, 2003 of the RTC of Quezon City
90, is hereby declared null and voidand set aside.
YES

First, the claim is not one against the debtor but against an entity that respondent Maynilad has
procured to answer for its non-performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily
liable with the debtor. Respondent Maynilads claim that the banks are not solidarily liable with the
debtor does not find support in jurisprudence.
Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount
upon the presentation of documentsand is thus 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 in the letter They are in 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.

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the
prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose
obligations are not solidary with the debtor. The participating banks obligation are solidary with
respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is
not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a
surety or solidary obligor. And being solidary, the claims against them can be pursued separately from
and independently of the rehabilitation case.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are
not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for
the account of Maynilad in favor of the MWSS as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession Agreement and herein MWSS is authorized by
the banks to draw on it by the simple act of delivering to the agent a written certification substantially in
the form of the Letter of Credit.

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage
developed over the years in the banking and commercial practice of letters of credit, we hold that
except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters
of credit are solidary with that of the person or entity requesting for its issuance, the same being a
direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the
set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on
the obligation of the banks under the Letter of Credit under the argument that this was not a solidary
obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the
jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding against the
Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter
of Credit, public respondent acted in excess of his jurisdiction.

NOTES:
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of guarantee visvis the
concept of an irrevocable letter of credit are inconsistent with each other.The guarantee theory
destroys the independence of the banks responsibility from the contract upon which it was opened and
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 letter of credit, the bank undertakes a primary obligation.
We have also defined a letter of credit as an engagement by a bank or other person made at the request
of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the
conditions specified in the credit.

INSULAR BANK OF ASIA & AMERICA vs. IAC


G.R. No. L-74834 November 17, 1988

The Spouses Mendoza obtained two loans from Philam Life totalling PhP 600,000. The loans (together
with a 14% nominal interest rate) were to be liquidated in equal amortizations over a period of 5 years.
To secure payment, Philam Life required that the said amortizations be guaranteed by an irrevocable
standby letter of credit (L/C) of a commercial bank. As such, the Spouses Mendoza contracted with
Insular Bank for the issuance of two irrevocable standby L/C in favor of Philam Life for the total amount
of PhP 600,000. These L/Cs were, in turn, secured by a real estate mortgage on the property of the
spouses in favor of Insular Bank.

The Mendozas failed to pay Philam Life the amortizations that fell due on 11 June 1978, thus, Philam Life
informed Insular Bank that it was declaring both loans "entirely due and demandable", and demanded
the payment of PhP492,996.30. Insular Bank contested the propriety of calling in the entire loan, and
philam life desisted. However, the spouses once again defaulted on their amortization, causing Philam
Life to declare the remaining PhP 274,779.56 entirely due and demandable again. By way of defense,
Insular Bank claimed that, as a mere guarantor of the spouses, its remaining obligation under the two
standby L/Cs were only PhP30,100.60. Later, the bank even claimed that it made an overpayment to
Philam Life, and demanded a refund of the same.

Philam life filed a suit against the spouses and Insular Bank for the recovery of the amount of the loan
allegedly still owed to them. The trial court ruled that Insular Bank, "as surety", was discharged of its
liability to the extent of the payment made by the spouses, as the principal debtors, to Philam Life.
Upon appeal of Philam Life and the spouses, the appellate court reversed the lower court's decision, and
ruled that insular bank's liability was not reduced by virtue of the payments made by Mendoza.

ISSUE: Whether the partial payments made by the Spouses Mendoza would have the effect of reducing
the liability of the Insular Bank as guarantor or surety under the terms of the standby L/C in question.

RULING:
NO, the partial payments made will not reduce the liability of Insular Bank.
Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the
Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed
P600,000.00.

But while they are a security arrangement, they are not converted thereby into contracts
of guaranty.

They are primary obligations and not accessory contracts. Being separate and independent
agreements, the payments made by the Mendozas cannot be added in computing IBBA's
liability under its own standby letters of credit.
Payments made by the Mendozas directly to Philam Life are in
compliance with their own prestation under the loan agreements. And although these payments could
result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's
separate undertaking under its L/Cs remains.

The amount of P222,000.00 as found by the trial court, therefore, considered as "any obligation of the
accountee" under the L/Cs will still have to be paid by Insular Bank under the explicit terms thereof,
which the bank had itself supplied. Letters of credit are strictly construed to the end that the rights of
those directly parties to them may be preserved and their interest safeguarded. Like any other writing, it
will be construed most strongly against the writer and so as to be reasonable and consistent with honest
intentions.

Colinares v CA G.R. No. 90828. September 5, 2000


MARCH 15, 2014LEAVE A COMMENT
The ownership of the merchandise continues to be vested in the person who had advanced payment
until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should
be turned over to him by the importer or by his representative or successor in interest.
Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a consideration
of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latters convent at Camaman-
an, Cagayan de Oro City. Colinares applied for a commercial letter of credit with the Philippine Banking
Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC approved
the letter of credit for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-
forma trust receipt as security.
PBC debited P6,720 from Petitioners marginal deposit as partial payment of the loan. After the initial
payment, the spouses defaulted. PBC wrote to Petitioners demanding that the amount be paid within
seven days from notice. Instead of complying with PBCs demand, Veloso confessed that they
lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of until 15 June 1980
to settle the account. Colinares proposed that the terms of payment of the loan be modified P2,000 on
or before 3 December 1980, and P1,000 per month . Pending approval of the proposal, Petitioners
paid P1,000 to PBC on 4 December 1980, and thereafter P500 on 11 February 1981, 16 March 1981, and
20 April 1981. Concurrently with the separate demand for attorneys fees by PBCs legal counsel, PBC
continued to demand payment of the balance. On 14 January 1983, Petitioners were charged with the
violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the transaction was a clean loan as per verbal guarantee of
Cayo Garcia Tuiza, PBCs former manager. He and petitioner Colinares signed the documents without
reading the fine print, only learning of the trust receipt implication much later. When he brought this to
the attention of PBC, Mr. Tuiza assured him that the trust receipt was a mere formality. The Trust Receipts
Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another regardless of whether the latter
is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse
of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to
meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan.

Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on Trust Receipt
Held: Colinares received the merchandise from CM Builders Centre on 30 October 1979. On that day,
ownership over the merchandise was already transferred to Petitioners who were to use the materials for
their construction project. It was only a day later, 31 October 1979, that they went to the bank to apply
for a loan to pay for the merchandise. This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released to the importer in trust subsequent to
the grant of the loan.

The bank acquires a security interest in the goods as holder of a security title for the advances it had
made to the entrustee. The ownership of the merchandise continues to be vested in the person who had
advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds
of the sale should be turned over to him by the importer or by his representative or successor in interest.
To secure that the bank shall be paid, it takes full title to the goods at the very beginning and continues
to hold that title as his indispensable security until the goods are sold and the vendee is called upon to
pay for them; hence, the importer has never owned the goods and is not able to deliver possession. In a
certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes
absolute owner of the imported merchandise as soon as he has paid its price. There are two possible
situations in a trust receipt transaction. The first is covered by the provision which refers to money
received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise
sold. The second is covered by the provision which refers to merchandise received under the obligation
to return it (devolvera) to the owner. Failure of the entrustee to turn over the proceeds of the sale of
the goods, covered by the trust receipt to the entruster or to return said goods if they were not disposed
of in accordance with the terms of the trust receipt shall be punishable as estafa under Article 315 (1) of
the Revised Penal Code, without need of proving intent to defraud.

DE BARRETO, ET. AL. v. VILLANUEVA, ET. AL., (1961)


Special Preferred Credits
(Important: See full text of the Resolution)

Facts: Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot
herein involved to Villanueva for P19K. The purchaser paid P1,500 in advance, and executed a promissory
note for the balance. However, the buyer could only pay P5,500 On account of the note, for which reason
the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to
secure a clean certificate of title and mortgaged the property to appellant Barretto to secure a loan of
P30K, said mortgage having been duly recorded.

Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her
favor, obtained judgment, and upon its becoming final asked for execution. Cruzado filed a motion for
recognition for her "vendor's lien" invoking Articles 2242, 2243, and 2249 of the new Civil Code. After
hearing, the court below ordered the "lien" annotated on the back of the title, with the proviso that in
case of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto
should be paid pro rata from the proceeds.

Appellants insist that:


1. The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only
become effective in the event of insolvency of the vendee, which has not been proved to exist in the
instant case; and
2. That the Cruzado is not a true vendor of the foreclosed property.

Article 2242 of the new Civil Code enumerates the claims, mortgage and liens that constitute an
encumbrance on specific immovable property, and among them are:
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro-rata after the payment of the taxes and
assessment upon the immovable property or real rights.

Held: Application of the above-quoted provisions to the case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.

Issue: Appellants argument: inasmuch as the unpaid vendor's lien in this case was not registered, it
should not prejudice the said appellants' registered rights over the property.

Held: There is nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil
Code enumerating the preferred claims, mortgages and liens on immovables, specifically requires that.
Unlike the unpaid price of real property sold. mortgage credits, in order to be given preference, should be
recorded in the Registry of Property. If the legislative intent was to impose the same requirement in the
case of the vendor's lien, or the unpaid price of real property sold, the lawmakers could have easily
inserted the same qualification which now modifies the mortgage credits. The law, however, does not
make any distinction between registered and unregistered vendor's lien, which only goes to show that
any lien of that kind enjoys the preferred credit status.

As to the point made that the articles of the Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation.
If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-
debtor relationships where there are concurrence of credits would be left without any rules to govern
them, and it would render purposeless the special laws on insolvency.

Resolution on Motion to Consider (1962)


Appellants, spouses Barretto, have filed a motion vigorously urging that our decision be reconsidered and
set aside, and a new one entered declaring that their right as mortgagees remain superior to the
unrecorded claim of herein appellee for the balance of the purchase price of her rights, title, and interests
in the mortgaged property.

We have reached the conclusion that our original decision must be reconsidered and set aside:

Under the system of the Civil Code of the Philippines, only taxes enjoy a similar absolute preference. All
the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among
themselves, but must be paid pro-rata i.e., in proportion to the amount of the respective credits.
Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific real property or real rights, they, shall
be satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or
real rights."
The full application of Articles 2249 and 2242 demands that there must be first some proceedings where
the claims of all the preferred creditors may be bindingly adjudicated, such as:
1. insolvency,
2. the settlement of decedents estate under Rule 87 of the Rules of Court, or
3. other liquidation proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that
The claims or credits enumerated in the two preceding articles" shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing insolvency.

And the rule is further clarified in the Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be harmonized is settled by Article
2243. The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in
accordance with the Insolvency Law."

Rule
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure
sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of
preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to
ascertain the pro-rata dividend corresponding to each, because the rights of the other creditors likewise"
enjoying preference under Article 2242 can not be ascertained.

Held: There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not require
the character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must
remain subordinate to the latter.

J.L. BERNARDO CONSTRUCTION v. CA, (2000)


Special Preferred Credits

There is no contractors lien in favor of petitioners.

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect
to specific personal or real property of the debtor. Specifically, the contractors lien claimed by petitioners
is granted under the third paragraph of Article 2242 which provides that the claims of contractors engaged
in the construction, reconstruction or repair of buildings or other works shall be preferred with respect to
the specific building or other immovable property constructed.

However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the same
specific property of the debtor is subjected to the claims of several creditors and the value of such
property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead
of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be
enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency proceedings.
This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241
and 2242 shall be considered as mortgages or pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency.

Held: The action filed by petitioners in the trial court does not partake of the nature of an insolvency
proceeding. It is basically for specific performance and damages. Thus, even if it is finally adjudicated that
petitioners herein actually stand in the position of unpaid contractors and are entitled to invoke the
contractors lien granted under Article 2242, such lien cannot be enforced in the present action for there
is no way of determining whether or not there exist other preferred creditors with claims over the San
Antonio Public Market. The records do not contain any allegation that petitioners are the only creditors
with respect to such property. The fact that no third party claims have been filed in the trial court will not
bar other creditors from subsequently bringing actions and claiming that they also have preferred liens
against the property involved.

DBP v. CA, 363 SCRA 307 (2001)


Special Preferred Credits

Rule
Directors of insolvent corporation, who are creditors of the company, can not secure to themselves any
preference or advantage over other creditors in the payment of their claims. The governing body of
officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing
creditors, and it would be a breach of such trust for them to undertake to give any one of its members
any advantage over any other creditors in securing the payment of his debts in preference to all
others. The legal principle prevents directors of an insolvent corporation from giving themselves a
preference over outside creditors.

There exists in Remingtons favor a lien on the unpaid purchases of Marinduque Mining, and as
transferee of these purchases, DBP should be held liable for the value thereof. In the absence of
liquidation proceedings, however, the claim of Remington cannot be enforced against DBP. Article 2241
of the Civil Code provides:

Article 2241. With reference to specific movable property of the debtor, the following claims or liens shall
be preferred:
xxx
(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession
of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price
is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing
by destination, provided it has not lost its form, substance and identity, neither is the right lost by the sale
of the thing together with other property for a lump sum, when the price thereof can be determined
proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;

Held: Although Barretto involved specific immovable property, the ruling therein should apply equally in
this case where specific movable property is involved. As the extra-judicial foreclosure instituted by PNB
and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro
rata share from DBP.
PHILIPPINE SAVINGS BANK, petitioner, vs. HON. GREGORIO T. LANTIN, Presiding Judge, Court of First
Instance of Manila, Branch VII, and CANDIDO RAMOS, respondents. G.R. No. L-33929.
September 2, 1983

DOCTRINE:
In the case at bar, although the lower court found that there were no known creditors other than
the plaintiff and the defendant herein, this cannot be conclusive. It will not bar other creditors in the event
they show up and present their claims against the petitioner bank, claiming that they also have preferred
liens against the property involved. Consequently, Transfer Certificate of Title No. 101864 issued in favor
of the bank which is supposed to be indefeasible would remain constantly unstable and questionable.
Such could not have been the intention of Article 2243 of the Civil Code although it considers claims and
credits under Article 2242 as statutory liens. Neither does the De Barretto case sanction such instability.

Since the action filed by the private respondent is not one which can be considered as equivalent
general liquidation having the same import as an insolvency or settlement of the decedents estate
proceeding, the well established principle must be applied that a purchaser in good faith and for value
takes registered land free from liens and encumbrances other than statutory liens and those recorded in
the Certificate of Title. It is an admitted fact that at the time the deeds of real estate mortgage in favor of
the petitioner bank were constituted, the transfer certificate of title of the spouses Tabligan was free from
any recorded alien and encumbrances, so that the only registered liens in the title were deeds in favor of
the petitioner.

FACTS:
A duplex-apartment house was built by private respondent Candido Ramos for the spouses
Filomeno and Soccoro Tabligan at a total cost of P32,927.00. The spouses paid Ramos P7,139.00 only.
Hence, Ramos used his own money to P25,788.50 to finish the construction of the duplex-apartment.
On December 16, 1966, February 1, 1967, and February 28, 1867, The spouses Tabligan obtained
three loans from petitioner PSB, in the amount of P35,000 for the purpose of constructing the duplex-
apartment. To secure payment of the loans, they executed three promissory notes and three deeds of
real estate mortgage over the property subject matter of this litigation. The deed of real estate mortgage
was registered by petitioner on December 19, 1966, February 2, 1967, and March 1, 1967, respectively,
with the Register of Deeds of Manila. At the time of registration of the mortgages, TCT No. 86195 was free
from all liens and encumbrances. The bank foreclosed the mortgages, and at the public auction held on
July 23, 1969, was the highest bidder. On August 5, 1969 the petitioner bank registered the certificate of
sale in its name. Later on, the bank consolidated its ownership and TCT No. 101864 was issued by the RD
of Manila in the name of the Bank.
Private respondent filed an action against the spouses to collect the unpaid cost of the house, the
case was docketed as Civil case no69228. Ramos succeeded in obtaining a writ of preliminary attachment.
Consequently, a notice of adverse claim was annotated at the back of TCT No. 86195. A decision was
rendered in favour of Ramos. A writ of execution was accordingly issued but was returned unsatisfied. As
the spouses did not have any property to satisfy the judgment in favour of Ramos, he wrote the petitioner
bank for the delivery to him of his pro-rata share in the value of the duplex-apartment in accordance with
CC Art no 2242, but the bank refused, prompting Ramos to file the instant case.

ISSUE:
Whether Ramos is entitled to claim a pro-rata share in the value of the property in question?
RULING:
Bank: relying on De Barretto vs Villanueva, it is not the proceeding contemplated, there must be
an insolvency proceeding other than liquidation proceedings. The architects lien did not acquire the
character of a statutory lien equal to PSBs registered mortgage.
Ramos: the proceedings in the trial court can qualify as a general liquidation of the estate of the
spouses Tabligan because the only existing property of the spouses is the duplex apartment.
The proceedings in the court below do not partake in the nature of insolvency proceedings or
settlement of a decedents estate. The action filed by Ramos was only to collect the unpaid cost of the
construction of the duplex apartment.
Insolvency proceedings and settlement of a decedents estat are both proceedings in rem which
are binding against the whole world regardless of whether or not persons having interest were notified
or not, they are equally bound.
The fact that the lower court found that there were no known creditors other than Ramos and
PSB is not conclusive, it will not bar other creditors in the event they show up and present their claims
against PSB claiming that they also have preferred liend against the property involved. The TCT which was
issued in favour of the bank is supposed to be indefeasible would remain constantly unstable and
questionable.
The bank could not have known of any contractors lien because, as far as it was concerned, it
financed the entire construction even if the stated purpose of the loans was only to complete the
construction.
Since the action filed by the private respondent is not one which can be considered as equivalent
general liquidation having the same import as an insolvency or settlement of the decedents estate
proceeding, the well established principle must be applied that a purchaser in good faith and for value
takes registered land free from liens and encumbrances other than statutory liens and those recorded in
the Certificate of Title.

DISPOSITIVE PORTION:
WHEREFORE, the petition is granted. The decision of the Court of First Instance of Manila, Branch VII is,
hereby, reversed and set aside. The complaint and the counterclaim are dismissed.
SO ORDERED.

REPUBLIC V. PERALTA MISSING

CORDOVA v. REYES DAWAY LIM BERNARDO LINDO ROSALES LAW OFFICES, (2007)
Common Credits, Art. 2245, Art. 2251

The Civil Code provisions on concurrence and preference of credits are applicable to the liquidation
proceedings.

Petitioner argues that he was a preferred creditor because private respondents illegally withdrew
his shares from the custodian banks and sold them without his knowledge and consent and
without authority from the SEC. He quotes Article 2241 (2) of the Civil Code:

With reference to specific movable property of the debtor, the following claims or liens
shall be preferred:
(2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials
committed in the performance of their duties, on the movables, money or securities obtained by
them;

He asserts that, as a preferred creditor, he was entitled to the entire monetary value of his shares.

Issue: Was petitioner a preferred or ordinary creditor under these provisions?

Held: Petitioners argument is incorrect. Article 2241 refers only to specific movable property. His claim
was for the payment of money, which is generic property and not specific or determinate. Petitioners
CSPI shares were specific or determinate movable properties. But after they were sold, the money raised
from the sale became generic and were commingled with the cash and other assets of Philfinance. Unlike
shares of stock, money is a generic thing. It is designated merely by its class or genus without any particular
designation or physical segregation from all others of the same class. This means that once a certain
amount is added to the cash balance, one can no longer pinpoint the specific amount included which then
becomes part of a whole mass of money.

Considering that petitioner did not fall under any of the provisions applicable to preferred creditors, he
was deemed an ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles,
shall enjoy no preference.

This being so, Article 2251 (2) states that:


Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.

Like all the other ordinary creditors or claimants against Philfinance, he was entitled to a rate of recovery
of only 15% of his money claim.

RUBY INDUSTRIAL v. CA (1998)

FACTS:
1. Petitioner Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass
manufacturing, while petitioner Benhar International, Inc. (BENHAR) is a domestic
corporation engaged in importation and sale of vehicle spare parts (BENHAR is wholly-owned
by the Yu family and headed by Henry Yu who is also a director and majority stockholder of
RUBY).
2. In 1983, RUBY suffered severe liquidity problems - December 13, 1983, it filed a Petition for
Suspension of Payments with the Securities and Exchange Commission (SEC). RUBY was
declared under suspension of payments, enjoined RUBY from disposing property EXCEPT for
ordinary operations and necessary/legitimate expenses.
3. 1984, the SEC Hearing Panel created a management committee for RUBY to: (1) undertake
the management of RUBY; (2) take custody of and control over all existing assets and
liabilities of RUBY; (3) evaluate RUBY's existing assets and liabilities, earnings and operations;
(4) determine the best way to salvage and protect the interest of its investors and creditors;
and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.
4. At RUBY's special stockholders meeting, its majority stockholders led by Yu Kim
Giang presented the BENHAR/RUBY Rehabilitation Plan to be submitted to SEC. Under the
plan, BENHAR shall lend its P60 million credit line in China Bank to RUBY, payable within ten
(10) years, BENHAR shall purchase the credits of RUBY's creditors and mortgage RUBY's
properties to obtain credit facilities for RUBY. Upon approval of the rehabilitation plan,
BENHAR shall control and manage RUBY'S operations. For its service, BENHAR shall receive a
management fee equivalent to 7.5% of RUBY's net sales.
5. 40% of the stockholders opposed the BENHAR/RUBY Plan, including private respondent
MIGUEL LIM, a minority shareholder of RUBY. Private respondent Allied Leasing and Finance
Corporation, the biggest unsecured creditor of RUBY and chairman of the management
committee, also objected to the plan as it would transfer RUBY's assets beyond the reach
and to the prejudice of its unsecured creditors. Despite the oppositions, the majority
stockholders still submitted the BENHAR/RUBY Plan to the SEC for approval.
6. RUBY's minority stockholders, represented by private respondent Lim, submitted their own
rehabilitation plan (the ALTERNATIVE PLAN) to the SEC where they proposed to: (1) pay all
RUBY'S creditors without securing any bank loan; (2) run and operate RUBY without charging
management fees; (3) buy-out the majority shares or sell their shares to the majority
stockholders; (4) rehabilitate RUBY's two plants; and (5) secure a loan at 25% interest, as
against the 28% interest charged in the loan under the BENHAR/RUBY Plan.
7. Both plans were endorsed by the SEC to RUBY's management committee for evaluation.
8. October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. The minority
stockholders, thru private respondent Lim, appealed the approval to the
SEC en banc. On November 15, 1988, the SEC en banc temporarily enjoined the
implementation of the BENHAR/RUBY Plan. On December 20, 1988, after the expiration of
the TRO, the SEC en banc granted the writ of preliminary injunction against the enforcement
of the BENHAR/RUBY Plan.
9. BENHAR and Henry Yu, later joined by RUBY and Yu Kim Giang, appealed to the Court of
Appeals (CA-G.R. SP No. 16798) questioning the issuance of the writ. Their appeal was denied.
10. BENHAR and company elevated the matter to the SC. In a minute Resolution, dated February
28, 1990, we denied the petition and upheld the injunction against the implementation of
the BENHAR/RUBY Plan.
11. It appears that before the SEC Hearing Panel approved the BENHAR/RUBY Plan on October
28, 1988, BENHAR had already implemented part of the plan by paying off Far East Bank &
Trust Company (FEBTC), one of RUBY's secured creditors. Thus, by May 30, 1988, FEBTC had
already executed a deed of assignment of credit and mortgage rights in favor of
BENHAR. Moreover, despite the SEC en banc's TRO and injunction, BENHAR still paid RUBY's
other secured creditors who, in turn, assigned their credits in favor of BENHAR.
Hence, RUBY's biggest unsecured creditor, Allied Leasing and Finance Corporation, and private
respondent Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite the parties
thereto in contempt for willful violation of the December 20, 1983 SEC Order enjoining RUBY from
disposing its properties and making payments pending the hearing of its petition for suspension of
payments. Private respondents Lim and Allied Leasing charged that in paying off FEBTC's credits, FEBTC
was given undue preference over the other creditors of RUBY.
Acting on private respondents' motions, the SEC Hearing Panel nullified the deeds of assignment
executed by RUBY's creditors in favor of BENHAR and declared the parties thereto guilty of indirect
contempt.[14]
Petitioners appealed to the SEC en banc. Their appeal was denied.[15] It was ruled that, pending
approval of the BENHAR/RUBY plan, BENHAR had no authority to pay off FEBTC, one of RUBY's
creditors. In prematurely implementing the BENHAR/RUBY plan, BENHAR defied the SEC Order declaring
RUBY under suspension of payments and directing the management committee to preserve its assets.
Petitioners RUBY and BENHAR, joined by Henry Yu and Yu Kim Giang, appealed to the Court of
Appeals (CA-G.R. SP No. 18310). On August 29, 1990, the Court of Appeals affirmed the SEC ruling
nullifying the deeds of assignment.[16] It also declared that its decision is final and executory as to RUBY
and Yu Kim Giang for their failure to file their pleadings within the reglementary period. This Court
affirmed the Court of Appeals' decision in G.R. No. 96675.[17]
Earlier, on May 29, 1990, after the SEC en banc enjoined the implementation of BENHAR/RUBY Plan,
RUBY filed with the SEC en banc an ex-parte petition to create a new management committee and to
approve its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised plan, BENHAR
shall receive P34.068 Million of the P60.437 Million credit facility to be extended to RUBY, as
reimbursement for BENHAR's payment to some of RUBY's creditors.
The SEC en banc directed RUBY to submit the Revised BENHAR/RUBY Plan to its creditors for
comment and approval. The petition for the creation of a new management committee was remanded
for further proceedings to the SEC Hearing Panel. The Alternative Plan of RUBY's minority stockholders
was also forwarded to the hearing panel for evaluation.
On April 26, 1991, over ninety (90%) percent of RUBY's creditors objected to the Revised
BENHAR/RUBY Plan and the creation of a new management committee.Instead, they endorsed the
minority stockholders' Alternative Plan.
At the hearing of the petition for the creation of a new management committee, three (3) members
of the original management committee[18] opposed the Revised BENHAR/RUBY Plan on the following
grounds:

(1) the Revised BENHAR/RUBY Plan would legitimize the entry of BENHAR, a total stranger, to RUBY as
BENHAR would become the biggest creditor of RUBY;

(2) the revised plan would put RUBY's assets beyond the reach of the unsecured creditors and the
minority stockholders; and,

(3) the revised plan was not approved by RUBY's stockholders in a meeting called for the purpose.

However, on September 18, 1991, despite the objections of over 90% of RUBY's creditors and three
(3) members of the management committee, the SEC Hearing Panel approved the revised plan and
dissolved the existing management committee. It also created a new management committee and
appointed BENHAR as one of its members.[19] In addition to the powers originally conferred to the
management committee under P.D. No. 902-A, the new management committee was tasked to oversee
the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.
Consequently, the original management committee, Lim, and the Allied Leasing Corporation
appealed to the SEC en banc. On July 30, 1993, the SEC En Banc affirmed the approval of the Revised
BENHAR/RUBY Plan and the creation of a new management committee.[20] To avoid any group from
controlling the management of RUBY, the SEC appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao
as additional members of the new management committee. Further, it declared that BENHAR's
membership in the new management committee is subject to the condition that BENHAR will extend its
credit facilities to RUBY without using the latter's assets as security or collateral.
Private respondents Lim, Allied Leasing Corporation and the original management committee moved
for reconsideration. Petitioners, on the other hand, asked the SEC to reconsider the portion of its Order
prohibiting BENHAR from utilizing RUBY's assets as collateral.
On October 15, 1993, the SEC denied private respondents' motions for reconsideration. However, it
granted petitioners' motion and allowed BENHAR to use RUBY's assets as collateral for loans, subject to
the approval of the majority of all the members of the new management committee.[21]
On appeal by private respondents, the Court of Appeals set aside[22] SEC's approval of the Revised
BENHAR/RUBY plan and remanded the case to the SEC for further proceedings. It ruled that the revised
plan circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying the deeds of assignment executed
by RUBY's creditors in favor of BENHAR. Under the revised plan, BENHAR was to receive P34.068 Million
of the P60.437 Million credit facility to be extended to RUBY, as settlement for its advance payment to
RUBY's seven (7) secured creditors. In effect, the payments made by BENHAR under the void Deeds of
Assignment were recognized as payable to BENHAR under the revised plan. Petitioners' motion for
reconsideration was denied.
1.