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REPUBLIC ACT NO. 8791 AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIZATION AND OPERATIONS OF BANKS, QUASI-BANKS, TRUST ENTITIES AND FOR OTHER PURPOSES CHAPTER I TITLE AND CLASSIFICATION OF BANKS SECTION 1. Title. The short title of this Act shall be "The General Banking Law of 2000." (1a) SECTION 2. Declaration of Policy. The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary natureof banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. (n) SECTION 3. Definition and Classification of Banks. 3.1. "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits. (2a) 3.2. Banks shall be classified into: (a) Universal banks; (b) Commercial banks; (c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks, as defined in Republic Act No. 7906 (hereafter the "Thrift Banks Act"); (d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act"); (e) Cooperative banks, as defined in Republic Act No. 6938 (hereafter the "Cooperative Code"); (f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and (g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (6-Aa) CHAPTER II AUTHORITY OF THE BANGKO SENTRAL SECTION 4. Supervisory Powers. The operations and activities of banks shall be subject to supervision of the Bangko Sentral. "Supervision" shall include the following: 4.1. The issuance of rules of conduct or the establishment of standards of operation for uniform application to all institutions or functions covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied; 4.2. The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the Monetary Board; 4.3. Overseeing to ascertain that laws and regulations are complied with; 4.4. Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall be immediately addressed; 4.5. Inquiring into the solvency and liquidity of the institution (2-D); or 4.6. Enforcing prompt corrective action. (n) The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. (2-Ca) For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of
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subject to Bangko Sentral supervision. (2-Ca) For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for purposes of relending or purchasing of receivables and other obligations. (2-Da) SECTION 5. Policy Direction; Ratios, Ceilings and Limitations. The Bangko Sentral shall provide policy direction in the areas of money, banking and credit. (n) For this purpose, the Monetary Board may prescribe ratios, ceilings, limitations, or other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for International Settlements (BIS). The Monetary Board may exempt particular categories of transactions from such ratios, ceilings and limitations, but not limited to exceptional cases or to enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue in business with safety to its creditors, depositors and the general public. (2-Ca) SECTION 6. Authority to Engage in Banking and Quasi-Banking Functions. No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions. The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking functions and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or other special laws. The department head and the examiners of the appropriate supervising and examining department are hereby authorized to administer oaths to any such person, employee, officer, or director of any such entity and to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act. Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws. (4a) SECTION 7. Examination by the Bangko Sentral. The Bangko Sentral shall, when examining a bank, have the authority to examine an enterprise which is wholly or majority-owned or controlled by the bank. (21-Ba) CHAPTER III ORGANIZATION, MANAGEMENT AND ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES SECTION 8. Organization. The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions: 8.1. That the entity is a stock corporation (7); 8.2. That its funds are obtained from the public, which shall mean twenty (20) or more persons (2-Da); and 8.3. That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied. (n) No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their
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the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base. SECTION 9. Issuance of Stocks. The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks: Provided, That banks shall issue par value stocks only. SECTION 10. Treasury Stocks. No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary Board: Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. (24a) SECTION 11. Foreign Stockholdings. Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. (12a; 12-Aa) The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. (n) SECTION 12. Stockholdings of Family Groups or Related Interests. Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such an individual with the bank. (12-Da) SECTION 13. Corporate Stockholdings. Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. (12-Ba) SECTION 14. Certificate of Authority to Register. 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. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it: 14.1 That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with; 14.2. That the public interest and economic conditions, both general and local, justify the authorization; and 14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest. (9) The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral. (10) SECTION 15. Board of Directors. The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board of directors of bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. (n) Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. (Sec. 7, RA 7721) The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing. (n) SECTION 16. Fit and Proper Rule. 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
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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 found unfit. After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position. In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence. (9-Aa) SECTION 17. Directors of Merged or Consolidated Banks. In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21). (13a) SECTION 18. Compensation and Other Benefits of Directors and Officers. To protect the funds of depositors and creditors, the Monetary Board may regulate the payment by the bank to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following: 18.1. When a bank is under comptrollership or conservatorship; or 18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or 18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition. (n) SECTION 19. Prohibition on Public Officials. Except as otherwise provided in the Rural Banks Act, no appointive or elective public official, whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the bank or unless otherwise provided under existing laws. (13) SECTION 20. Bank Branches. Universal or commercial banks may open branches or other offices within or outside the Philippines upon prior approval of the Bangko Sentral. Branching by all other banks shall be governed by pertinent laws. A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and/or sale of the financial products of its allied undertaking or of its investment house units. A bank authorized to establish branches or other offices shall be responsible for all business conducted in such branches and offices to the same extent and in the same manner as though such business had all been conducted in the head office. A bank and its branches and offices shall be treated as one unit. (6-B; 27) SECTION 21. Banking Days and Hours. Unless otherwise authorized by the Bangko Sentral in the interest of the banking public, all banks including their branches and offices shall transact business on all working days for at least six (6) hours a day. In addition, banks or any of their branches or offices may open for business on Saturdays, Sundays or holidays for at least three (3) hours a day: Provided, That banks which opt to open on days other than working days shall report to the Bangko Sentral the additional days during which they or their branches or offices shall transact business. For purposes of this Section, working days shall mean Mondays to Fridays, except if such days are holidays. (6-Ca) SECTION 22. Strikes and Lockouts. The banking industry is hereby declared as indispensable to the national interest and, not withstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same. (6-E) CHAPTER IV DEPOSITS, LOANS AND OTHER OPERATIONS
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DEPOSITS, LOANS AND OTHER OPERATIONS ARTICLE I - OPERATIONS OF UNIVERSAL BANKS SECTION 23. Powers of a Universal Bank. A universal bank shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act. (21-B) SECTION 24. Equity Investments of a Universal Bank. A universal bank may, subject to the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise prescribe: 24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and 24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank. As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments. (21-Ba) SECTION 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise. A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank. (21-B; 21-Ca) SECTION 26. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises. A universal bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. (21-Ba) SECTION 27. Equity Investments of a Universal Bank in Non-Allied Enterprises. The equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single nonallied enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. (21-B) SECTION 28. Equity Investments in Quasi-Banks. To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (12-E) ARTICLE II - OPERATIONS OF COMMERCIAL BANKS SECTION 29. Powers of a Commercial Bank. A commercial bank shall have, in addition to the general powers incident to corporations, 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; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. (21a) SECTION 30. Equity Investments of a Commercial Bank. A commercial bank may, subject to the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise prescribe: 30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent
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30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bank; and 30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of the net worth of the bank. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments. (21A-a; 21-Ca) SECTION 31. Equity Investments of a Commercial Bank in Financial Allied Enterprises. A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank. Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise. (21-Aa; 21-Ca) SECTION 32. Equity Investments of a Commercial Bank in Non-Financial Allied Enterprises. A commercial bank may own up to one hundred percent (100%) of the equity in a nonfinancial allied enterprise. (21-Aa) ARTICLE III - PROVISIONS APPLICABLE TO ALL BANKS, QUASI-BANKS, AND TRUST ENTITIES SECTION 33. Acceptance of Demand Deposits. A bank other than a universal or commercial bank cannot accept or create demand deposits except upon prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. (72-Aa) SECTION 34. Risk-Based Capital. The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. For purposes of this Section, the Monetary Board may require that such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for International Settlements (BIS), relating to risk-based capital requirements: Provided, further, That it may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided, finally, That such ratio shall be applied uniformly to banks of the same category. In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, the Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe. Before the effectivity of the rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force. (22a) SECTION 35. Limit on Loans, Credit Accommodations and Guarantees. 35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, the
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35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the borrower. 35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. 35.3. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (b) in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. 35.4. Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: (a) the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or (c) the subsidiaries though separate entities operate merely as departments or divisions of a single entity. 35.5. For purposes of this Section, loans, other credit accommodations and guarantees shall exclude: (a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government; (b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest; (c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines; (d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and (e) other loans or credit accommodations which the Monetary Board may from time to time, specify as non-risk items. 35.6. Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. 35.7. Certain types of contingent accounts of borrowers may be included among those subject to these prescribed limits as may be determined by the Monetary Board. (23a) SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, indorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned: Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko
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Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral. Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in enterprises owned or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans, credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit. The Monetary Board shall define the term "related interests." The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. (83a) SECTION 37. Loans and Other Credit Accommodations Against Real Estate. Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees. (78a) SECTION 38. Loans and Other Credit Accommodations on Security of Chattels and Intangible Properties. Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties, such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees. (78a) 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 Other 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 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
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rules and regulations of 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 microfinancing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral. (76a) SECTION 41. Unsecured Loans or Other Credit Accommodations. The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks. (n) SECTION 42. Other Security Requirements for Bank Credits. The Monetary Board may, by regulation, prescribe further security requirements to which the various types of bank credits shall be subject, and, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, the Board may by regulation, reduce the maximum ratios established in Sections 36 and 37 of this Act, or, in special cases, increase the maximum ratios established therein. (78) SECTION 43. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations. The Monetary Board may, similarly, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. The Monetary Board shall regulate the interest imposed on microfinance borrowers by lending investors and similar lenders, such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations. (78a) SECTION 44. Amortization on Loans and Other Credit Accommodations. The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed. In case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic amortization payments, but such payments must be made at least annually: Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted. (79a) In case of loans and other credit accommodations to microfinance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks. (n) SECTION 45. Prepayment of Loans and Other Credit Accommodations. A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower. (80a) SECTION 46. Development Assistance Incentives. The Bangko Sentral shall provide incentives to banks which, without government guarantee, extend loans to finance educational institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content. (n)
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institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content. (n) SECTION 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. (78a) SECTION 48. Renewal or Extension of Loans and Other Credit Accommodations. The Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations. (81) SECTION 49. Provisions for Losses and Write-Offs. All debts due to any bank on which interest is past due and unpaid for such period as may be determined by the Monetary Board, unless the same are well-secured and in the process of collection shall be considered bad debts within the meaning of this Section. The Monetary Board may fix, by regulation or by order in a specific case, the amount of reserves for bad debts or doubtful accounts or other contingencies. Writing off of loans, other credit accommodations, advances and other assets shall be subject to regulations issued by the Monetary Board. (84a) SECTION 50. Major Investments. For the purpose of enhancing bank supervision, the Monetary Board shall establish criteria for reviewing major acquisitions or investments by a bank including corporate affiliations or structures that may expose the bank to undue risks or in any way hinder effective supervision. SECTION 51. Ceiling on Investments in Certain Assets. Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof, including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board. (25a) SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances: 52.1. Such as shall be mortgaged to it in good faith by way of security for debts; 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held
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its dealings; or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section. (25a) SECTION 53. Other Banking Services. In addition to the operations specifically authorized in this Act, a bank may perform the following services: 53.1. Receive in custody funds, documents and valuable objects; 53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; 53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; 53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and 53.5. Rent out safety deposit boxes. The bank shall perform the services permitted under Subsections 53.1, 53.2, 53.3 and 53.4 as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities. The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank. In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. (72a) SECTION 54. Prohibition to Act as Insurer. A bank shall not directly engage in insurance business as the insurer. (73) SECTION 55. Prohibited Transactions. 55.1. No director, officer, employee, or agent of any bank shall (a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person; (b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; (c) Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank; (d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or (e) Outsource inherent banking functions. 55.2. No borrower of a bank shall (a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; (b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; (c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or (d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.
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other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. 55.3. No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same. (87-Aa) The making of false reports or misrepresentation or suppression of material facts by personnel of the Bangko Sentral ng Pilipinas shall constitute fraud and shall be subject to the administrative and criminal sanctions provided under the New Central Bank Act. 55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or nonregular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits. SECTION 56. Conducting Business in an Unsafe or Unsound Manner. In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances: 56.1. The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution; 56.2. The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general; 56.3. The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or 56.4. The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby. Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. (n) SECTION 57. Prohibition on Dividend Declaration. No bank or quasi-bank shall declare dividends greater than its accumulated net profits then on hand, deducting therefrom its losses and bad debts. Neither shall the bank nor quasi-bank declare dividends, if at the time of declaration: 57.1 Its clearing account with the Bangko Sentral is overdrawn; or 57.2 It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days; or 57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or 57.4 It has committed a major violation as may be determined by the Bangko Sentral. (84a) SECTION 58. Independent Auditor. The Monetary Board may require a bank, quasi-bank or trust entity to engage the services of an independent auditor to be chosen by the bank, quasi-bank or trust entity concerned from a list of certified public accountants acceptable to the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be on a continuing basis where the auditor shall act as resident examiner, or on the basis of special engagements, but in any case, the independent auditor shall be responsible to the bank's, quasi-bank's or trust entity's board of directors. A copy of the report shall be furnished to the Monetary Board. The Monetary Board may also direct the board of directors of a bank, quasi-bank, trusty entity and/or the individual members thereof, to conduct, either personally or by a committee created by the board, an annual balance sheet audit of the bank, quasi-bank or trust entity to review the internal audit and control
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control system of the bank, quasi-bank or trust entity and to submit a report of such audit. (6-Da) SECTION 59. Authority to Regulate Electronic Transactions. The Bangko Sentral shall have full authority to regulate the use of electronic devices, such as computers, and processes for recording, storing and transmitting information or data in connection with the operations of a bank, quasibank or trust entity, including the delivery of services and products to customers by such entity. (n) SECTION 60. Financial Statements. Every bank, quasi-bank or trust entity shall submit to the appropriate supervising and examining department of the Bangko Sentral financial statements in such form and frequency as may be prescribed by the Bangko Sentral. Such statements, which shall be as of a specific date designated by the Bangko Sentral, shall show the actual financial condition of the institution submitting the statement, and of its branches, offices, subsidiaries and affiliates, including the results of its operations, and shall contain such information as may be required in Bangko Sentral regulations. (n) SECTION 61. Publication of Financial Statements. Every bank, quasi-bank or trust entity, shall publish a statement of its financial condition, including those of its subsidiaries and affiliates, in such terms understandable to the layman and in such frequency as may be prescribed by the Bangko Sentral, in English or Filipino, at least once every quarter in a newspaper of general circulation in the city or province where the principal office, in the case of a domestic institution, or the principal branch or office in the case of a foreign bank, is located, but if no newspaper is published in the same province, then in a newspaper published in Metro Manila or in the nearest city or province. The Bangko Sentral may by regulation prescribe the newspaper where the statements prescribed herein shall be published. The Monetary Board may allow the posting of the financial statements of a bank, quasi-bank or trust entity in public places it may determine, in lieu of the publication required in the preceding paragraph, when warranted by the circumstances. Additionally, banks shall make available to the public in such form and manner as the Bangko Sentral may prescribe the complete set of its audited financial statements as well as such other relevant information including those on enterprises majority-owned or controlled by the bank, that will inform the public of the true financial condition of a bank as of any given time. In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary Board, by a vote of at least five (5) of its members, in special cases and upon application of the bank, quasi-bank or trust entity, may allow such bank, quasibank or trust entity to defer for a stated period of time the publication of the statement of financial condition required herein. (n) SECTION 62. Publication of Capital Stock. A bank, quasi-bank or trust entity incorporated under the laws of the Philippines shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid up. No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head office, or of the bank in its entirety without indicating at the same time and with equal prominence the amount of the capital, if any, definitely assigned to such branch. In case no capital has been definitely assigned to such branch, such fact shall be stated in, and shall form part of the publication. (82) SECTION 63. Settlement of Disputes. The provisions of any law to the contrary notwithstanding, the Bangko Sentral shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks,
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in actions or proceedings initiated by or brought before them involving controversies in banks, quasibanks or trust entities arising out of and involving relations between and among their directors, officers or stockholders, as well as disputes between any or all of them and the bank, quasi-bank or trust entity of which they are directors, officers or stockholders. (n) SECTION 64. Unauthorized Advertisement or Business Representation. No person, association, or corporation unless duly authorized to engage in the business of a bank, quasi-bank, trust entity, or savings and loan association as defined in this Act, or other banking laws, shall advertise or hold itself out as being engaged in the business of such bank, quasi-bank, trust entity, or association, or use in connection with its business title, the word or words "bank", "banking", "banker", "quasi-bank", "quasibanking", "quasi-banker", "savings and loan association", "trust corporation", "trust company" or words of similar import or transact in any manner the business of any such bank, corporation or association. (6) SECTION 65. Service Fees. The Bangko Sentral may charge equitable rates, commissions or fees, as may be prescribed by the Monetary Board for supervision, examination and other services which it renders under this Act. (n) SECTION 66. Penalty for Violation of this Act. Unless otherwise herein provided, the violation of any of the provisions of this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer. If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General. (87) CHAPTER V PLACEMENT UNDER CONSERVATORSHIP SECTION 67. Conservatorship. The grounds and procedures for placing a bank under conservatorship, as well as, the powers and duties of the conservator appointed for the bank shall be governed by the provisions of Section 29 and the last two paragraphs of Section 30 of the New Central Bank Act: Provided, That this Section shall also apply to conservatorship proceedings of quasi-banks. (n) CHAPTER VI CESSATION OF BANKING BUSINESS SECTION 68. Voluntary Liquidation. In case of the voluntary liquidation of any bank organized under the laws of the Philippines, or of any branch or office in the Philippines of a foreign bank, written notice of such liquidation shall be sent to the Monetary Board before such liquidation is undertaken, and the Monetary Board shall have the right to intervene and take such steps as may be necessary to protect the interests of creditors. (86) SECTION 69. Receivership and Involuntary Liquidation. The grounds and procedures for placing a bank under receivership or liquidation, as well as the powers and duties of the receiver or liquidator appointed for the bank shall be governed by the provisions of Sections 30, 31, 32, and 33 of the New Central Bank Act: Provided, That 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 Bangko Sentral, in an amount to be fixed by the court. This Section shall also apply to the extent possible to the receivership and liquidation proceedings of quasi-banks. (n) SECTION 70. Penalty for Transactions After a Bank Becomes Insolvent. Any director or officer of any bank declared insolvent or placed under receivership by the Monetary Board who refuses to turn over the bank's records and assets to the designated receivers, or who tampers with banks records, or who appropriates for himself or another party or destroys or causes the misappropriation and destruction of the bank's assets, or who receives or permits or causes to be received in said bank any deposit, collection of loans and/or receivables, or who pays out or permits or causes to be paid out any funds of said bank, or who transfers or permits or causes to be transferred any securities or property of
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deposit, collection of loans and/or receivables, or who pays out or permits or causes to be paid out any funds of said bank, or who transfers or permits or causes to be transferred any securities or property of said bank shall be subject to the penal provisions of the New Central Bank Act. (85a) CHAPTER VII LAWS GOVERNING OTHER TYPES OF BANKS SECTION 71. Other Banking Laws. The organization, ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern. (n) CHAPTER VIII FOREIGN BANKS SECTION 72. Transacting Business in the Philippines. The entry of foreign banks in the Philippines through the establishment of branches shall be governed by the provisions of the Foreign Banks Liberalization Act. The conduct of offshore banking business in the Philippines shall be governed by the provisions of the Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree." (14a) SECTION 73. Acquisition of Voting Stock in a Domestic Bank. Within seven (7) years from the effectivity of this Act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines. Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares of such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof. In the exercise of this authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines. (Secs. 2 and 3, RA 7721) SECTION 74. Local Branches of Foreign Banks. In the case of a foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be held to refer to such units. (68) SECTION 75. Head Office Guarantee. In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch. (69) Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance with existing laws. (19) SECTION 76. Summons and Legal Process. Summons and legal process served upon the Philippine agent or head of any foreign bank designated to accept service thereof shall give jurisdiction to
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to the courts over such bank, and service of notices on such agent or head shall be as binding upon the bank which he represents as if made upon the bank itself. Should the authority of such agent or head to accept service of summons and legal processes for the bank or notice to it be revoked, or should such agent or head become mentally incompetent or otherwise unable to accept service while exercising such authority, it shall be the duty of the bank to name and designate promptly another agent or head upon whom service of summons and processes in legal proceedings against the bank and of notices affecting the bank may be made, and to file with the Securities and Exchange Commission a duly authenticated nomination of such agent. In the absence of the agent or head or should there be no person authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments and such service shall be as effective as if made upon the bank or its duly authorized agent or head. In case of service for the bank upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments, the said Deputy Governor shall register and transmit by mail to the president or the secretary of the bank at its head or principal office a copy, duly certified by him, of the summons, process, or notice. The sending of such copy of the summons, process, or notice shall be a necessary part of the services and shall complete the service. The registry receipt of mailing shall be prima facie evidence of the transmission of the summons, process or notice. All costs necessarily incurred by the said Deputy Governor for the making and mailing and sending of a copy of the summons, process, or notice to the president or the secretary of the bank at its head or principal office shall be paid in advance by the party at whose instance the service is made. (17) SECTION 77. Laws Applicable. In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines, any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation. (18) SECTION 78. Revocation of License of a Foreign Bank. The Monetary Board may revoke the license to transact business in the Philippines of any foreign bank, if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. After the revocation of its license, it shall be unlawful for any such foreign bank to transact business in the Philippines unless its license is renewed or reissued. After the revocation of such license, the Bangko Sentral shall take the necessary action to protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable. (16) CHAPTER IX TRUST OPERATIONS SECTION 79. Authority to Engage in Trust Business. Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others. For purposes of this Act, such a corporation shall be referred to as a trust entity. (56a; 57a) SECTION 80. Conduct of Trust Business. A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims. No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign or lend money or property to, or purchase debt instruments
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instruments of, any of the departments, directors, officers, stockholders, or employees of the trust entity, relatives within the first degree of consanguinity or affinity, or the related interests, of such directors, officers and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the other party involved in the transaction is fully disclosed to the trustor or beneficiary of the trust prior to the transaction. The Monetary Board shall promulgate such rules and regulations as may be necessary to prevent circumvention of this prohibition or the evasion of the responsibility herein imposed on a trust entity. (56) SECTION 81. Registration of Articles of Incorporation and By-Laws of a Trust Entity. The Securities and Exchange Commission shall not register the articles of incorporation and by-laws or any amendment thereto, of any trust entity, unless accompanied by a certificate of authority issued by the Bangko Sentral. (n) SECTION 82. Minimum Capitalization. A trust entity, before it can engage in trust or other fiduciary business, shall comply with the minimum paid-in capital requirement which will be determined by the Monetary Board. (n) SECTION 83. Powers of a Trust Entity. A trust entity, in addition to the general powers incident to corporations, shall have the power to: 83.1. Act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any trust consistent with law; 83.2. Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other incompetent person, and as receiver and depositary of any moneys paid into court by parties to any legal proceedings and of property of any kind which may be brought under the jurisdiction of the court; 83.3. Act as the executor of any will when it is named the executor thereof; 83.4. Act as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased person when there is no will; 83.5. Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; and 83.6. Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board. (58) SECTION 84. Deposit for the Faithful Performance of Trust Duties. Before transacting trust business, every trust entity shall deposit with the Bangko Sentral as security for the faithful performance of its trust duties, cash or securities approved by the Monetary Board in an amount equal to not less than Five hundred thousand pesos (P500,000.00) or such higher amount as may be fixed by the Monetary Board: Provided, however, That the Monetary Board shall require every trust entity to increase the amount of its cash or securities on deposit with the Bangko Sentral whenever in its judgment such increase is necessary by reason of the trust business of such entity: Provided, further, That the paid-in capital and surplus of such entity must be at least equal to the amount required to be deposited with the Bangko Sentral in accordance with the provisions of this paragraph. Should the capital and surplus fall below said amount, the Monetary Board shall have the same authority as that granted to it under the provisions of the fifth paragraph of Section 34 of this Act. A trust entity so long as it shall continue to be solvent and comply with laws or regulations shall have the right to collect the interest earned on such securities deposited with the Bangko Sentral and, from time to time, with the approval of the Bangko Sentral, to exchange the securities for others. If the trust entity fails to comply with any law or regulation, the Bangko Sentral shall retain such interest on the securities deposited with it for the benefit of rightful claimants. All claims arising out of the trust business
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business of a trust entity shall have priority over all other claims as regards the cash or securities deposited as above provided. The Monetary Board may not permit the cash or securities deposited in accordance with the provisions of this Section to be reduced below the prescribed minimum amount until the depositing entity shall discontinue its trust business and shall satisfy the Monetary Board that it has complied with all its obligations in connection with such business. (65a) SECTION 85. Bond of Certain Persons for the Faithful Performance of Duties. Before an executor, administrator, guardian, trustee, receiver or depositary appointed by the court enters upon the execution of his duties, he shall, upon order of the court, file a bond in such sum, as the court may direct. Upon the application of any executor, administrator, guardian, trustee, receiver, depositary or any other person in interest, the court may, after notice and hearing, order that the subject matter of the trust or any part thereof be deposited with a trust entity. Upon presentation of proof to the court that the subject matter of the trust has been deposited with a trust entity, the court may order that the bond given by such persons for the faithful performance of their duties be reduced to such sums as it may deem proper: Provided, however, That the reduced bond shall be sufficient to secure adequately the proper administration and care of any property remaining under the control of such persons and the proper accounting for such property. Property deposited with any trust entity in conformity with this Section shall be held by such entity under the orders and direction of the court. (59) SECTION 86. Exemption of Trust Entity from Bond Requirement. No bond or other security shall be required by the court from a trust entity for the faithful performance of its duties as courtappointed trustee, executor, administrator, guardian, receiver, or depositary. However, the court may, upon proper application with it showing special cause therefor, require the trust entity to post a bond or other security for the protection of funds or property confided to such entity. (59) SECTION 87. Separation of Trust Business from General Business. The trust business and all funds, properties or securities received by any trust entity as executor, administrator, guardian, trustee, receiver, or depositary shall be kept separate and distinct from the general business including all other funds, properties, and assets of such trust entity. The accounts of all such funds, properties, or securities shall likewise be kept separate and distinct from the accounts of the general business of the trust entity. (61) SECTION 88. Investment Limitations of a Trust Entity. Unless otherwise directed by the instrument creating the trust, the lending and investment of funds and other assets acquired by a trust entity as executor, administrator, guardian, trustee, receiver or depositary of the estate of any minor or other incompetent person shall be limited to loans or investments as may be prescribed by law, the Monetary Board or any court of competent jurisdiction. (63a) SECTION 89. Real Estate Acquired by a Trust Entity. Unless otherwise specifically directed by the trustor or the nature of the trust, real estate acquired by a trust entity in whatever manner and for whatever purpose, shall likewise be governed by the relevant provisions of Section 52 of this Act. (64a) SECTION 90. Investment of Non-Trust Funds. The investment of funds other than trust funds of a trust entity which is a bank, financing company or an investment house shall be governed by the relevant provisions of this Act and other applicable laws. (64) SECTION 91. Sanctions and Penalties. A trust entity or any of its officers and directors found to have willfully violated any pertinent provisions of this Act, shall be subject to the sanctions and penalties provided under Section 66 of this Act as well as Sections 36 and 37 of the New Central Bank Act. (63) SECTION 92. Exemption of Trust Assets from Claims. No assets held by a trust entity in
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SECTION 92. Exemption of Trust Assets from Claims. No assets held by a trust entity in its capacity as trustee shall be subject to any claims other than those of the parties interested in the specific trusts. (65) SECTION 93. Establishment of Branches of a Trust Entity. The ordinary business of a trust entity shall be transacted at the place of business specified in its articles of incorporation. Such trust entity may, with prior approval of the Monetary Board, establish branches in the Philippines, and the said entity shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office. For the purpose of this Act, the trust entity and its branches shall be treated as one unit. (67) CHAPTER X FINAL PROVISIONS SECTION 94. Phase Out of Bangko Sentral Powers Over Building and Loan Associations. Within a period of three (3) years from the effectivity of this Act, the Bangko Sentral shall phase out and transfer its supervising and regulatory powers over building and loan associations to the Home Insurance and Guaranty Corporation which shall assume the same. Until otherwise provided by law, building and loan associations shall continue to be governed by Sections 39 to 55, Chapter VI of the General Banking Act, as amended, including such rules and regulations issued pursuant thereto. Upon assumption by the Home Insurance and Guaranty Corporation of supervising and regulatory powers over building and loan associations, all references in Sections 39 to 55 of the General Banking Act, as amended, to the Bangko Sentral and the Monetary Board shall be deemed to refer to the Home Insurance and Guaranty Corporation and its board of directors, respectively. (n) SECTION 95. Repealing Clause. Except as may be provided for in Sections 34 and 94 of this Act, the General Banking Act, as amended, and the provisions of any other law, special charters, rule or regulation issued pursuant to said General Banking Act, as amended, or parts thereof, which may be inconsistent with the provisions of this Act are hereby repealed. The provisions of paragraph 8, Section 8, Republic Act No. 3591, as amended by Republic Act No. 7400, are likewise repealed. (90a) SECTION 96. Separability Clause. If any provision or section of this Act or the application thereof to any person or circumstance is held invalid, the other provisions or sections of this Act, and the application of such provision or section to other persons or circumstances, shall not be affected thereby. (n) SECTION 97. Effectivity Clause. This Act shall take effect fifteen (15) days following its publication in the Official Gazette or in two (2) national newspapers of general circulation. (91) Approved, MANUEL B. VILLAR JR. FRANKLIN M. DRILON Speaker of the House President of the Senate of Representatives This Act, which is a consolidation of Senate Bill No. 1519 and House Bill No. 6814, was finally passed by the Senate and the House of Representatives on April 12, 2000. ROBERTO P. NAZARENO OSCAR G. YABES Secretary General Secretary of the Senate House of Representatives Approved: JOSEPH EJERCITO ESTRADA Approved: May 23, 2000

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Digest: Simex vs. CA

Saturday, July 11, 2009 1:34 PM

Simex International vs CA Date: March 19, 1990 Petitioner: Simex International Inc Respondents: CA and Traders Royal Bank Ponente: Cruz Facts: Simex is a corporation engaged in the exportation of food products. It buys these products from various local suppliers and then sells them in the US, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit. Simex is a depositor of Traders Royal Bank and maintained a checking account in its branch at Romulo Avenue, Cubao, Quezon City. Simex deposited to its account in the bank the amount of P100,000, thus increasing its balance as of that date to P190,380.74. Subsequently, the petitioner issued several checks against its deposit but was surprised to learn later that they had been dishonored for insufficient funds. As a consequence, the California Manufacturing Corporation sent a letter of demand to the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also withheld delivery of the order made by the petitioner. Similar letters were sent to the petitioner by the Malabon Long Life Trading and by the G. and U. Enterprises. Investigations showed that the sum of P100,000 had not been credited to Simex account. The error was rectified and the dishonored checks were paid after they were re -deposited. 4 Simex demanded reparation from the bank for its "gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the CFI of Rizal claiming from the bank moral damages in the sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs. The judge denied moral and exemplary damages (no bad faith bank rectified mistakes) but ordered the bank to pay nominal damages of P20,000.00 plus P5,000.00 attorney's fees and costs. The CA affirmed.
Issue: WON the bank is liable for moral damages Held: Yes

Ratio: This Court has carefully examined the facts of this case and finds that it cannot share some of the conclusions of the lower courts. It seems to us that the negligence of the bank had been brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We feel it is not enough to say that the bank rectified its records and credited the deposit in less than a month as if this were sufficient repentance. The error should not have been committed in the first place. The bank has not even explained why it was committed at all. It is true that the dishonored checks were "eventually" paid. However, this took almost a month when, properly, the checks should have been paid immediately upon presentment. The initial carelessness of the bank, aggravated by the lack of promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith. Petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. This was due to the fault of the bank which was undeniably remiss in its duty to the petitioner. Article 2205 CC provides that actual or compensatory damages may be received "(2) for injury to the plaintiff's business standing or commercial credit." There is no question that the petitioner did sustain actual injury as a result of the dishonored checks and that the existence of the loss having been established "absolute certainty as to its amount is not required." Such injury should bolster all the more the demand of the petitioner for moral damages and justifies the examination by this Court of the validity and reasonableness of the said claim. Moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the injuries he may have suffered. In the case at bar, the petitioner is seeking such damages for the prejudice sustained by it as a result of the bank's fault. The CA said that the claimed losses are purely speculative and are not supported by substantial evidence, but if failed to consider that the amount of such losses need not be established with exactitude, precisely because of their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 CC specifically provides that "no proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated." That is why the determination of the amount to be awarded is left to the sound discretion of the court, according to "the circumstances of each case." Petitioners claim of moral damages in the amount of P1M is nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense. Also, a corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, etc. The only exception to this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation. We shall recognize that the petitioner did suffer injury because of the bank's negligence the caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because

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dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The bank makes much of the one instance when the petitioner was sued in a collection case, but that did not prove that it did not have a good reputation that could not be marred, more so since that case was ultimately settled. It does not appear that, as the bank would portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect. The award of nominal damages in the sum of P20,000 was not the proper relief to which the petitioner was entitled. Under Article 2221 CC, "nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the fault of the bank, the proper remedy is the award to it of moral damages, which we impose, in our discretion, in the same amount of P20,000.00. Issue: WON the bank is liable for exemplary damages Held: Yes Ratio: The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the bank was remiss in that duty and violated that relationship. What is especially deplorable is that, having been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages. The Court hereby imposes upon the bank exemplary damages in the amount of P50,000, "by way of example or correction for the public good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent against the repetition of the ineptness and indifference that has been displayed here, lest the confidence of the public in the banking system be further impaired.

Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI00.188\Simex%20International%20vs%20CA.docx >

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DIGEST: BPI v. IAC

Saturday, July 11, 2009 1:39 PM

BPI vs IAC Date: February 21, 1992 Petitioner: BPI Respondents: IAC and spouses Arthur and Viviene Canlas Ponente: Grino-Aquino Facts: Arthur and Vivienne Canlas, opened a joint current account in the QC branch of the Commercial Bank, and Trust Company of the Philippines (CBTC) with an initial deposit of P2,250. Prior thereto, Arthur had an existing separate personal checking account in the same branch. When the spouses opened their joint current account, the "new accounts" teller of the bank pulled out from the bank's files the old and existing signature card of Arthur for use as ID and reference. By mistake, she placed the old personal account number of Arthur on the deposit slip for the new joint checking account of the spouses so that the deposit of P2,250 for the joint account was miscredited to Arthur's personal account. The spouses subsequently deposited other amounts in their joint account. However, when Vivienne issued check for P1,639.89 and another check for P1,160, one of the checks was dishonored by the bank for insufficient funds and a penalty of P20 was deducted from the account in both instances. The bank tried to call up the spouses at the telephone number which they had given in their application form, but the bank could not contact them because they actually reside in Porac, Pampanga. The address and number which they gave belonged to Mrs. Canlas' parents. The spouses filed a complaint for damages against the bank before the CFI of Pampanga. An MTD on the ground of improper venue was denied. During the pendency of the case, the BPI and CBTC were merged. BPI took over the defense of any pending actions against CBTC. The RTC then rendered judgment against BPI sentencing it to pay the spouses actual, moral and exemplary damages, attorneys fees and costs. The IAC deleted the actual damages and reduced the other awards.
Issue: WON the venue was improperly laid in Pampanga in light of the spouses earlier declaration that QC is their true residence

Held: No Ratio Personal actions may be instituted in the CFI of the province where the defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff. In this case, there was ample proof that the residence of the plaintiffs is B. Sacan, Porac, Pampanga. The city address of Mrs. Canlas' parents was placed by the spouses in their application for a joint checking account, at the suggestion of the new accounts teller, presumably to facilitate mailing of the bank statements and communicating with the private respondents in case any problems should arise involving the account. No waiver of their provincial residence for purposes of determining the venue of an action against the bank may be inferred from the so -called "misrepresentation" of their true residence. Issue: WON the bank was guilty of negligence in handling the spouses bank account Held: Yes Ratio: There is no merit in petitioner's argument that it should not be considered negligent, much less held liable for damages on account of the inadvertence of its bank employee for Article 1173 of the Civil Code only requires it to exercise the diligence of a good father of a family. In Simex International vs. CA, this Court stressed the fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of it in handling the accounts entrusted to its care. [Court quotes Simex on exemplary damages part] The bank is not expected to be infallible but, as correctly observed by respondent Appellate Court, in this instance, it must bear the blame for not discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass through a battery of bank personnel whose duty it is to check and countercheck them for possible errors. Apparently, the officials and employees tasked to do that did not perform their duties with due care, as may be gathered from the testimony of the bank's lone witness. Antonio Enciso, who casually declared that "the approving officer does not have to see the account numbers and all those things. Those are very petty things for the approving manager to look into". Unfortunately, it was a "petty thing," like the incorrect account number that the bank teller wrote on the initial deposit slip for the newly -opened joint current account of the Canlas spouses, that sparked this half-a-million-peso damage suit against the bank. While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to the private respondents for which they are entitled to recover reasonable moral damages. The award of reasonable attorney's fees is proper for the private respondents were compelled to litigate to protect their interest. However, the absence of malice and bad faith renders the award of exemplary damages improper.

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faith renders the award of exemplary damages improper.

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Digest: BPI vs. CA

Saturday, July 11, 2009 1:43 PM

BPI vs CA Date: February 29, 2000 Petitioner: BPI Respondents: CA and Benjamin Napiza Ponente: Ynares Santiago Facts: Napiza deposited in Foreign Currency Deposit Unit (FCDU) Savings Account No. 028 -187 which he maintained in BPI Buendia Avenue Extension Branch, Continental Bank Managers Check payable to "cash" in the amount $2,500.00 and duly endorsed by Napiza on its dorsal side. It appears that the check belonged to a certain Henry Chan who went to the office of Napiza and requested him to deposit the check in his dollar account by way of accommodation and for the purpose of clearing the same. Napiza acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw the amount of the check upon private respondents presentation to the bank of his passbook. Using the blank withdrawal slip given by Napiza to Chan, one Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No. 028 -187. Notably, the withdrawal slip shows that the amount was payable to Ramon de Guzman and Agnes de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo. On November 20, 1984, petitioner received communication from the Wells Fargo Bank International of New York that the said check deposited by Napiza was a counterfeit check. BPI then instructed Napizas son to inform his father that the check has bounced. The manager also sent a telegram regarding the dishonor of the check. The son undertook to return the amount of $2,500.00 to the bank. On December 18, 1984, Reyes reminded private respondent of his sons promise and warned that should he fail to return that amount within seven (7) days, the matter would be referred to the banks lawyers for appropriate action to protect the banks interest. In reply, Napiza wrote BPIs counsel stating that he deposited the check "for clearing purposes" only to accommodate Chan. BPI field a case against Napiza praying for the return of the amount. Napiza admitted signing the blank withdrawal slip with the understanding that the amount deposited would be withdrawn only after the check has been cleared. However, without his knowledge, the amount of $3541.67 was withdrawn from his dollar account through the collusion with one of BPIs employees. BPI should have disallowed the withdrawal because his passbook was not presented. The trial court rendered judgment dismissing the complaint as to so hold Napiza liable "would render inutile the requirement of clearance from the drawee bank before the value of a particular foreign check or draft can be credited to the account of a depositor making such deposit." Also, BPI should not have authorized the withdrawal from Napizas account prior to the receipt of the notice of final payment. The CA affirmed and held that BPI committed gross negligence in allowing Gayon Jr to withdraw the money without even presenting Napizas passbook and before the checks were cleared. Issue: WON Napiza, in affixing his signature at the dorsal side of the check, should be liable for the amount stated therein according to Section 66 NIL Held: No Ratio: Ordinarily, Napiza may be held liable as an indorser of the check or even as an accommodation party. However, to hold Napiza liable for the amount of the check he deposited by the strict application of the law and without considering the circumstances in the case would result in an injustice and in the erosion of the public trust in the banking system. The interest of justice thus demands looking into the events that led to the encashment of the check. BPI asserts that by signing the withdrawal slip, Napiza "presented the opportunity for the withdrawal of the amount in question." BPI relied "on the genuine signature on the withdrawal slip, the personality of Napizas son and the lapse of more than fifty (50) days from date of deposit of the Continental Bank draft, without the same being returned yet." We hold, however, that the propriety of the withdrawal should be gauged by compliance with the rules thereon that both petitioner bank and its depositors are duty -bound to observe. Under the rules (appearing in the passbook), to be able to withdraw from the savings account deposit under the Philippine foreign currency deposit system, two requisites must be presented to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositors passbook. Napiza admits that he signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the request for withdrawal must name the payee, the amount to be withdrawn and the place where such withdrawal should be made. That the withdrawal slip was in fact a blank one with only Napizas two signatures affixed on the proper spaces is buttressed by BPIs allegation that had Napiza indicated therein the person authorized to receive the money, then Gayon, Jr. could not have withdrawn any amount. BPI contends that "(i)n failing to do so ( i.e., naming his authorized agent), he practically authorized any possessor thereof to write any amount and to collect the same."

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write any amount and to collect the same." Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a special instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman." Such being the case, BPIs personnel should have been duly warned that Gayon, who was also employed in BPIs Buendia Ave. branch, was not the proper payee of the proceeds of the check. Otherwise, either Ramon or Agnes de Guzman should have issued another authority to Gayon for such withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to withdraw" naming Gayon the person who can withdraw the amount indicated in the check. Napiza does not deny having signed such authority. However, considering BPIs clear admission that the withdrawal slip was a blank one except for Napizas signature, the unavoidable conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by petitioner to withdraw the amount. Under these facts, there could not have been a principal -agent relationship between Napiza and Gayon so as to render the former liable for the amount withdrawn. Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and presented with the corresponding foreign currency savings passbook by the depositor in person. For withdrawals thru a representative, depositor should accomplish the authority at the back." The requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the person making the withdrawal is authorized by the depositor to do so. This is clear from Rule No. 6 set out by BPI so that, for the protection of the banks interest and as a reminder to the depositor, the withdrawal shall be entered in the depositors passbook. The fact that Napizas passbook was not presented during the withdrawal is evidenced by the entries therein showing that the last transaction that he made with the bank was on September 3, 1984, the date he deposited the controversial check in the amount of $2,500.00. In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus:
"2.......All deposits will be received as current funds and will be repaid in the same manner; provided, however, that deposits of drafts, checks, money orders, etc. will be accepted as subject to collection only and credited to the account only upon receipt of the notice of final payment .

In depositing the check in his name, Napiza did not become the outright owner of the amount stated therein. Under the above rule, by depositing the check with BPI, Napiza was, in a way, merely designating BPI as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a managers check or ordinary check, is not legal tender. As such, after receiving the deposit, under its own rules, BPI shall credit the amount in Napizas account or infuse value thereon only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit. Again, this is in accordance with ordinary banking practices and with this Courts pronouncement that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." The rule finds more meaning in this case where the check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in question is a managers check. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors "with meticulous care, always having in mind the fiduciary nature of their relationship." As such, in dealing with its depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care. In the case at bar, petitioner, in allowing the withdrawal of private respondents deposit, failed to exercise the diligence of a good father of a family. In total disregard of its own rules, petitioners personnel negligently handled private respondents account to petitioners detriment. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith , provides the test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that." BPI violated its own rules by allowing the withdrawal of an amount that is definitely over and above the aggregate amount of Napizas dollar deposits that had yet to be cleared. The banks ledger shows that before he deposited $2,500.00, Napiza had a balance of only $750.00. Upon Napizas deposit of $2,500.00 on September 3, 1984, that amount was credited in his ledger as a deposit resulting in the corresponding total balance of $3,250.00. On September 10, 1984, the amount of $600.00 and the additional charges of $10.00 were indicated therein as withdrawn thereby leaving a balance of $2,640.00. On September 30, 1984, an interest of $11.59 was reflected in the ledger and on October 23, 1984, the amount of $2,541.67 was entered as withdrawn with a balance of $109.92. On November 19, 1984 the word "hold" was written beside the balance of $109.92. That must have been the time when Reyes, BPIs branch manager, was informed unofficially of the fact that the check deposited was a counterfeit, but BPIs Buendia Ave. Branch received a copy of the communication from Wells Fargo Bank the following day, November 20, 1984. According to Reyes, Wells Fargo Bank International handled the clearing of checks drawn against U.S. banks that were deposited with petitioner. While it is true that Napizas having signed a blank withdrawal slip set in motion the events that resulted in the withdrawal and encashment of the counterfeit check, the negligence of BPIs personnel was the proximate cause of the loss that BPI sustained. Proximate cause, which is determined by a mixed consideration of logic, common sense, policy and precedent, is "that cause, which, in natural and continuous

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consideration of logic, common sense, policy and precedent, is "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred." The proximate cause of the withdrawal and eventual loss of the amount of $2,500.00 on BPIs part was its personnels negligence in allowing such withdrawal in disregard of its own rules and the clearing requirement in the banking system.
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Consolidated Bank and Trust Corporation vs. CA

Wednesday, July 08, 2009 9:14 AM

[2003V862] THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs, respondents.2003 Sep 111st DivisionG.R. No. 138569D E C I S I O N CARPIO, J.:

The Case
Before us is a petition for review of the Decision[1] of the Court of Appeals dated 27 October 1998 and its Resolution dated 11 May 1999. The assailed decision reversed the Decision[2] of the Regional Trial Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as Solidbank Corporation (Solidbank), of any liability. The questioned resolution of the appellate court denied the motion for reconsideration of Solidbank but modified the decision by deleting the award of exemplary damages, attorneys fees, expenses of litigation and cost of suit. The Facts Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the practice of accounting. Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account No. S/A 200-16872-6. On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook. Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the passbook.*3+ Calapre went back to L.C. Diaz and reported the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller stamped the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check that it had long closed.*4+ PBC subsequently dishonored the check because of insufficient funds and because the signature in the check differed from PBCs specimen signature. Failing to get back the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz,
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Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez. The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account.[5] On the same day, Diaz formally wrote Solidbank to make the same request. It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000. In an Information[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992. On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank refused. On 25 August 1992, L.C. Diaz filed a Complaint[7] for Recovery of a Sum of Money against Solidbank with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a decision absolving Solidbank and dismissing the complaint. L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its Decision reversing the decision of the trial court. On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages and attorneys fees. The Ruling of the Trial Court In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules state that possession of this book shall raise the presumption of ownership and any payment or payments made by the bank upon the production of the said book and entry therein of the withdrawal shall have the same effect as if made to the depositor personally.*9+ At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel (Manuel) for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards. The trial court concluded that Solidbank acted with care and observed the rules on savings account when it allowed the withdrawal of P300,000 from the savings account of L.C. Diaz. The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the National Bureau of Investigation (NBI) report on the authenticity of the signatures on the withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its action. Another provision of the rules on savings account states that the depositor must keep the passbook under lock and key.*10+ When another person presents the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the
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Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the passbook. The trial court ruled that the passbook presented during the questioned transaction was now out of the lock and key and presumptively ready for a business transaction.*11+ Solidbank did not have any participation in the custody and care of the passbook. The trial court believed that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a person other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person; and (3) the possession by an unauthorized person of a PBC check long closed by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz claimed that a letter must accompany withdrawals of more than P20,000. The letter must request Solidbank to allow the withdrawal and convert the amount to a managers check. The bearer must also have a letter authorizing him to withdraw the same amount. Another person driving a car must accompany the bearer so that he would not walk from Solidbank to the office in making the withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any separate letter of authorization or any communication with Solidbank that the money be converted into a managers check.
The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan. The dispositive portion of the decision of the trial court reads: IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint. The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees. With costs against plaintiff. SO ORDERED.[12] The Ruling of the Court of Appeals The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying the provision of the Civil Code on quasi-delict, to wit: Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter. The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff. The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated that the teller, who was not presented by Solidbank during trial, should have called up the depositor because the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank
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the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for its negligence in the selection and supervision of its employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of the doctrine of last clear chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father of a family. The business and functions of banks are affected with public interest. Banks are obligated to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz.

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered. 1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12% per annum from the date of filing of the complaint until paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and expenses of litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00 as attorneys fees.
SO ORDERED.[13] Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the award of damages. The appellate court deleted the award of exemplary damages and attorneys fees. Invoking Article 2231*14+ of the Civil Code, the appellate court ruled that exemplary damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of simple negligence only, the award of exemplary damages was not justified. Consequently, the award of attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation and cost of suit were also not imposed on Solidbank. The dispositive portion of the Resolution reads as follows: WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by deleting the award of exemplary damages and attorneys fees, expenses of litigation and cost of suit. SO ORDERED.[15] Hence, this petition. The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE
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ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN. IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY.*16+ The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no pre-existing contractual relationship between the parties. We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan.*17+ Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. 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. The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (RA 8791),*18+ which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. [19] This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals,[20] holding that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.*21+ 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. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
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fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family.[22] Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence*23+ at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust.[24] The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan. The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.
Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every kind of obligation is demandable. For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to its depositor. Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and kept under lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same. In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its employees.

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Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case. Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.[25]

The bank must not only exercise high standards of integrity and performance, it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the high standards of integrity and performance required of Solidbanks employees.
Proximate Cause of the Unauthorized Withdrawal Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its passbook under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the appellate court, the proximate cause was the tellers negligence in processing the withdrawal without first verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury and without which the result would not have occurred.[26] Proximate cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy and precedent.[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person. Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre. We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz. There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
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practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check, which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the teller had no reason to be suspicious of the transaction. Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and Information Sheet of Emerano Ilagan: xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse racing. Ilagan was apprehended and meekly admitted his guilt.[28] ( mphasis supplied.) L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks claim that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook. Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable with the loss.[29] Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the impending harm by the exercise of due diligence.[30] We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from liability.[31] Such contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the defendant from his breach of contract.[32] Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the circumstances. This means that if the defendant exercised the proper diligence in the selection and supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a
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reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced. In Philippine Bank of Commerce v. Court of Appeals,[33] where the Court held the depositor guilty of contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by private respondent L.C. Diaz and Company, CPAs. Proportionate costs.
SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, and Ynares-Santiago, JJ., concur.

Azcuna, J., on official leave. [1] Penned by Associate Justice Eugenio S. Labitoria with Associate Justices Jesus M. Elbinias, Marina L. Buzon, Godardo A. Jacinto and Candido V. Rivera, concurring, Fourth Division (Special Division of Five Justices). [2] Penned by Judge Felixberto T. Olalia, Jr. [3] Rollo, p. 119. [4] Ibid., p. 229. The account must have been long dormant.

[5] Records, p. 9.
[6] Ibid., p. 34.

[7] Docketed as Civil Case No. 92-62384.

[8] Docketed as CA-G.R. CV No. 49243. [9] Rollo, p. 231. [10] Ibid., p. 233. [11] Ibid., p. 60.

[12] Ibid., p. 66.

[13] Rollo, pp. 49-50.

[14] Art. 2231. In quasi-delicts, exemplary damages may be granted if the defendant acted with gross negligence. [15] Rollo, p. 43.
[16] Ibid., pp. 33-34.

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[16] Ibid., pp. 33-34. *17+ Article 1953 of the Civil Code provides: A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay the creditor an equal amount of the same kind and quality.

[18] The General Banking Law of 2000.

[19] In the United States, the prevailing rule, as enunciated by the U.S. Supreme Court in Bank of Marin v. England, 385 U.S. 99 (1966), is that the bank-depositor relationship is governed by contract, and the bankruptcy of the depositor does not alter the relationship unless the bank receives notice of the bankruptcy. However, the Supreme Court of some states, like Arizona, have held that banks have more than a contractual duty to depositors, and that a special relationship may create a fiduciary obligation on banks outside of their contract with depositors. See Stewart v. Phoenix National Bank, 49 Ariz. 34, 64 P. 2d 101 (1937); Klein v. First Edina National Bank, 293 Minn. 418, 196 N.W. 2d 619 (1972). [20] G.R. No. 88013, 19 March 1990, 183 SCRA 360. [21] The ruling in Simex International was followed in the following cases: Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162, 21 February 1992, 206 SCRA 408; Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, 27 May 1994, 232 SCRA 559; Tan v. Court of Appeals, G.R. No. 108555, 20 December 1994, 239 SCRA 310; Metropolitan Bank & Trust Co. v. Court of Appeals, G.R. No. 112576, 26 October 1994, 237 SCRA 761; Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667 (1997); Firestone v. Court of Appeals, G.R. No. 113236, 5 March 2001, 353 SCRA 601. *22+ The second paragraph of Article 1172 of the Civil Code provides: If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. [23] See notes 20 and 21. [24] Serrano v. Central Bank, G.R. L-30511, 14 February 1980, 96 SCRA 96.

[25] Cangco v. Manila Railroad Co., 38 Phil. 769 (1918); De Guia v. Meralco, 40 Phil. 706 (1920).
[26] Philippine Bank of Commerce v. Court of Appeals, supra note 21, citing Vda. de Bataclan v. Medina, 102 Phil. 181 (1957). [27] Ibid. [28] Rollo, p. 35. [29] Philippine Bank of Commerce v. Court of Appeals, supra note 21.

[30] Ibid.
[31] See note 23.

[32] Del Prado v. Manila Electric Co., 52 Phil. 900 (1928-1929).

[33] See note 21. \---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/ ([2003V862] THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS
Banking Page 36

([2003V862] THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs, respondents., G.R. No. 138569, 2003 Sep 11, 1st Division)

Banking Page 37

Samsung Construction Company Philippines v Far East Bank

Wednesday, July 08, 2009 9:15 AM

[2004V901] SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., Petitioner, - versus - FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, Respondents.2004 Aug 132nd DivisionG.R. No. 129015D E C I S I O N

Tinga, J.:

Called to fore in the present petition is a classic textbook question - if a bank pays out on a forged check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law.

The salient facts follow.

Plaintiff Samsung Construction Company Philippines, Inc. (Samsung Construction), while based in Bian, Laguna, maintained a current account with defendant Far East Bank and Trust Company*1+ (FEBTC) at the latters Bel -Air, Makati branch.*2+ The sole signatory to Samsung Constructions account was Jong Kyu Lee (Jong), its Project Manager,*3+ while the checks remained in the custody of the companys accountant, Kyu Yong Lee (Kyu).*4+

On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the banks branch in Bel -Air, Makati. The check, payable to cash and drawn against Samsung Constructions current account, was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung Constructions account. After ascertaining there were enough funds to cover the check,*5+ she compared the signature appearing on the check with the specimen signature of Jong as contained in the specimen signature card with the bank. After comparing the two signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check. She then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.[6]

At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the check as against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez
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then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III (Sempio), the assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jongs signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu authorized the banks encashment of the check to Gonzaga.

The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check for Jongs signature, Kyu perused the checkbook and found that the last blank check was missing.*7+ He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for the amount of the check.[8] Jong proceeded to the police station and consulted with his lawyers.[9] Subsequently, a criminal case for qualified theft was filed against Sempio before the Laguna court.[10]

In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with interest.[11] In response, FEBTC said that it was still conducting an investigation on the matter. Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the questioned check plus interest, and attorneys fees.*12+ The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.[13]

During the trial, both sides presented their respective expert witnesses to testify on the claim that Jongs signature was forged. Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her examination, she concluded that Jongs signature had been forged on the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP),[14] presented Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed that Jongs signature on the check was genuine.*15+

Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held that Jongs signature on the check was forged and accordingly directed the bank to pay or credit back to Samsung Constructions account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled from the time the complaint was filed, and attorneys fees in the amount of Fifteen Thousand Pesos (P15,000.00).

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FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth Division of the Court of Appeals rendered a Decision,[16] reversing the RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the PNP created doubt as to whether there was forgery.[17] Moreover, the appellate court also held that assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would have prevented Sempio from gaining access thereto.[18] The Court of Appeals invoked the ruling in PNB v. National City Bank of New York[19] that, if a loss, which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of intentional fraud.[20]

Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts when it overturned the RTCs finding of forgery. It also contends that the appellate court erred in finding that it had been negligent in safekeeping the check, and in applying the equity principle enunciated in PNB v. National City Bank of New York.

Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:

When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. mphasis supplied)

The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such signature is ineffectual or does not discharge the instrument.*21+ If payment is made, the drawee cannot charge it to the drawers account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the makers signature and is expected to know and compare it.[22] The rule has a healthy cautionary effect on banks by encouraging

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care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance.[23]

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the banks obligation to pay checks drawn by the depositor in proper form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositors order. When the bank pays a check, on which the depositors signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the bank is held liable.

The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositors.

The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the loss. Even in a case where the forged check was drawn by the depositors partner, the loss was placed upon the bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for money which had been deposited to the plaintiffs credit and which the bank had paid out on checks bearing forgeries of the plaintiffs signature.

xxx

It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after discovering the forgery, before notifying the bank, did not, as a matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from holding the bank liable. xxx

This rule of liability can be stated briefly in these words: "A bank is bound to know its depositors signature." The rule is variously expressed in the many decisions in which the question has
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depositors signature." The rule is variously expressed in the many decisions in which the question has been considered. But they all sum up to the proposition that a bank must know the signatures of those whose general deposits it carries.[24]

By no means is the principle rendered obsolete with the advent of modern commercial transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable Instruments and Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw against the customers account by specifying whose signature is necessary on checks that are chargeable against the customers account. Therefore, a check drawn against the account of an individual customer that is signed by someone other than the customer, and without authority from her, is not properly payable and is not chargeable to the customers account, inasmuch as any "unauthorized signature on an instrument is ineffective" as the signature of the person whose name is signed.[25]

Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged.*26+ On the premise that Jongs signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived.[27] The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check.[28]

Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations.[29]

In ruling that forgery was not duly proven, the Court of Appeals held:

[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the conflicting conclusions made by handwriting experts from the NBI and the PNP, both agencies of the government.
xxx

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These contradictory findings create doubt on whether there was indeed a forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive and convincing evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not unusual. The trier of fact will have to decide which version to believe, and explain why or why not such version is more credible than the other. Reliance therefore cannot be placed merely on the fact that there are colliding opinions of two experts, both clothed with the presumption of official duty, in order to draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the understanding that it has the appropriate skill and competence to plough through the minutiae that scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate courts error in this case warrants special attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a governing standard by every court in the land, barely any actionable claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary "expert" opinion.

On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of the PNP, and explained its reason behind the conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion that the testimony of the NBI document examiner is more credible because the testimony of the PNP Crime Laboratory Services document

examiner reveals that there are a lot of differences in the questioned signature as compared to the standard specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures used reveals that it is a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who executed the questioned signature was hesitant when the signature was made.[30]

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During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there [are] differences on that questioned signature and the standard signatures."[31] This Court, in examining the signatures, makes a similar finding. The PNP expert excused the noted 'differences" by asserting that they were mere "variations," which are normal deviations found in writing.[32] Yet the RTC, which had the opportunity to examine the relevant documents and to personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted several times with apparent differences between strokes in the questioned signature and the genuine samples. Each time, she would just blandly

assert that these differences were just "variations,"[33] as if the mere conjuration of the word would sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no value unless supported by sufficiently cogent reasons which might amount almost to a demonstration.[34]

The most telling difference between the questioned and genuine signatures examined by the PNP is in the final upward stroke in the signature, or "the point to the short stroke of the terminal in the capital letter L," as referred to by the PNP examiner who had marked it in her comparison chart as "point no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a ninety degree (90) angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the PNP, at least nine (9) ended with an upward stroke.[35] However, unlike the questioned signature, the upward strokes of eight (8) of these signatures are looped, while the upward stroke of the seventh[36] forms a severe forty-five degree (45) with the previous stroke. The difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point no. 6.

Q: A:

Now, in this questioned document point no. 6, the "s" stroke is directly upwards. Yes, sir.

Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke s is pointing directly upwards? A: There is none in the standard signature, sir.[37]

Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a mere variation,[38] the same excuse she proffered for the other marked differences noted by the Court and the counsel for petitioner.[39]

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There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five examinees in the Competitive Seminar in Question Document Examination, conducted by the NBI Academy, which qualified her as a document examiner.[40] She had trained with the Royal Hongkong Police Laboratory and is a member of the International Association for Identification.[41] As of the time she testified, she had examined more than fifty to fifty-five thousand questioned documents, on an average of fifteen to twenty documents a day.[42] In comparison, PNP document examiner Perez admitted to having examined only around five hundred documents as of her testimony.[43]

In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method consisting of analysis, recognition, comparison and evaluation of the writing habits with the use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances. She also prepared enlarged photographs of the signatures in order to facilitate the necessary comparisons.[44] She compared the questioned signature as against ten (10) other sample signatures of Jong. Five of these signatures were executed on checks previously issued by Jong, while the

other five contained in business letters Jong had signed.[45] The NBI found that there were significant differences in the handwriting characteristics existing between the questioned and the sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics, and other identifying details.[46]

The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to convincingly demonstrate why such findings were more credible than those of the NBI expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be established comparing the contested signatures as against those of any sample signature duly established as that of the persons whose signature was forged.

FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank signature cards. The crucial fact in question is whether or not the check was forged, not whether the bank could have detected the forgery. The latter issue becomes relevant only if there is need to weigh the comparative negligence between the bank and the party whose signature was forged.

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At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the signature on the check was not his.[47] The assertion may seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know whether or not the signature on the check was his. While his claim should not be taken at face value, any averments he would have on the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is supported by the findings of the NBI examiner. They are also backed by factual circumstances that support the conclusion that the assailed check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a business establishment to draw a check for close to a million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate criminal charges against Sempio, the putative forger.[48]

Now for determination is whether Samsung Construction was precluded from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that Samsung Construction was negligent, and invoked the doctrines that"where a loss must be borne by one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded[49] or who put into the power of the third person to perpetuate the wrong."[50] Applying these rules, the Court of Appeals determined that it was the negligence of Samsung Construction that allowed the encashment of the forged check.

In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III, an assistant accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank check and who presumably is responsible for its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the blank checks and who through negligence, enabled Sempio to have access to the same. Had the Korean accountant been more careful and prudent in keeping the blank checks Sempio would not have had the chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears to have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check was encashed, he was there to certify that it was a genuine check issued to purchase equipment for the company.[51]

We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of negligence.[52] Yet, we are unable to conclude that Samsung Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part would have prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that such partys negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. The Courts pronouncement in PCI Bank v. Court of Appeals*53+ applies in this case, to wit:

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case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payors confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.[54]

Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a "safety box,"[55] and no contrary version was presented by FEBTC. However, such testimony cannot prove that the checks were indeed kept in a safety box, as Jongs testimony on that point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to how the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Constructions part. The presumption remains that every person takes ordinary care of his concerns,[56] and that the ordinary course of business has been followed.[57] Negligence is not presumed, but must be proven by him who alleges it.[58] While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim it had alleged - whether the check was forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that ordinary care was employed.

Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While the payee, as in this case, may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may be "a difficult office,"[59] but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence.

The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on the part of the bank in its acceptance and payment of the forged check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB v. National City Bank of New York, [60] as relied upon by the Court of Appeals, deserves careful examination.

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The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the banker.[61] mphasis supplied)

Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying around does not constitute such negligence as will free the bank from liability to him, where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract some of the check blanks, forges the depositors signature and collect on the checks from the bank.[62] And for another, in point of fact Samsung Construction was not negligent at all since it reported the forgery almost immediately upon discovery.[63]

It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,[64] which was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is that the drawee is in a position to verify the drawers signature by comparison with one in his hands, but has ordinarily no opportunity to verify an indorsement.[65]

Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the drawers signature or a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawers signature.*66+

The general rule imputing liability on the drawee who paid out on the forgery holds in this case.

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Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well comment on the banks performance of its duty. It might be so that the bank complied with its own internal rules prior to paying out on the questionable check. Yet, there are several troubling circumstances that lead us to believe that the bank itself was remiss in its duty.

The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one bank officer; and should

the amount exceed one hundred thousand pesos, the concurrence of two bank officers is required.[67]

In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large amount to be made payable to cash or to bearer, instead of to the order of a specified person.[68] Moreover, the check was presented for payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung Construction.[69] These circumstances are already suspicious if taken independently, much more so if they are evaluated in concurrence. Given the shadiness attending Gonzagas presentment of the check, it was not sufficient for FEBTC to have merely complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the authority of Gonzaga to collect payment therefor.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to verify the check.[70] She added that calling the issuer or drawer of the check to verify the same was not part of the standard procedure of the bank, but an extra effort.*71+ Even assuming that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the check was presented.

FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact Jong about problems with his account, Jong would hand the phone over to Sempio.[72] However, the only proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know Sempio personally,[73] and had met Sempio for the first time only on the day the check was encashed.[74] In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was actually known to the employees of the bank.[75] Obviously, Velez had no personal knowledge as to the past relationship between FEBTC
Banking Page 49

of the bank.[75] Obviously, Velez had no personal knowledge as to the past relationship between FEBTC and Sempio, and any averments of her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air branch, including those who supposedly had transacted with Sempio before.

Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction, the irregular circumstances attending the presentment of the forged check should have put the bank on the highest degree of alert. The Court recently emphasized that the highest degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their clients account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.[76]

Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the bank as long as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is not precluded by negligence from setting up the forgery, the general rule should apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.[77] A bank is liable, irrespective of its good faith, in paying a forged check.[78]

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.

SO ORDERED.

DANTE O. TINGA
Associate Justice

Banking Page 50

WE CONCUR:

REYNATO S. PUNO Associate Justice Chairman

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

ROMEO J. CALLEJO, SR.

Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

ATT ES T AT I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

Banking Page 51

REYNATO S. PUNO

Associate Justice
Chairman, Second Division

CE R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

HILARIO G. DAVIDE, JR. Chief Justice

--------------------------------------------------------------------------------

[1]Later acquired by or merged with the Bank of the Philippine Islands.

[2]Rollo, p. 35.

Banking Page 52

[3]Ibid.

[4]Id. at 28.

[5]Ibid.

[6]Ibid.

[7]Rollo, p. 35.

[8]See TSN dated 25 June 1993, p. 10.

[9]Id. at 9.

[10]See TSN dated 15 June 1993, p. 26.

[11]Ibid.

[12]Act No. 2031.

[13]Presided by Judge E.G. Sandoval, now Justice of the Sandiganbayan.

[14]TSN dated 8 October 1993, p. 8.

[15]Rollo, p. 24.

Banking Page 53

[15]Rollo, p. 24.

[16]Penned by Justice S. Montoya, concurred in by Justices G. Jacinto and A. Tuquero.

[17]Rollo, p. 38.

[18]Ibid.

[19]63 Phil 711 (1936).

[20]Rollo, p. 38.

[21]Bank of Philippine Islands v. Court of Appeals, G.R. No. 102383, 26 November 1992, 216 SCRA 51, 65.

[22]Farnsworth, E.A., Negotiable Instruments: Cases and Materials, 2nd ed. (1959), at 173.

[23]Id. at 174.

[24]Brady, J.E., The Law of Forged and Altered Checks (1925), at 6-7. Case citations omitted.

[25]Nickles, S.H., Negotiable Instruments and Other Related Commercial Paper, 2nd ed. (1993), at 415.

[26]Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 689.

[27]Philippine National Bank v. National City Bank of New York, 63 Phil. 711, 743-744 (1936); citing 17 A. L. R., 891; 5 R. C. L., 559.

[28]Brady, H.J., Brady on Bank Checks, 3rd ed. (1962), at 475; citing Hardy v. Chesapeake Bank (1879) 51Md. 562, 34 Am. Rep. 325.
Banking Page 54

51Md. 562, 34 Am. Rep. 325.

[29]Osborn, A., Questioned Document Problems, 2nd ed. (1946), at 181-182.

[30]Rollo, p. 31.

[31]TSN dated 8 October 1993, p. 15.

[32]Id. at 15 and 19.

[33]See TSN dated 8 October 1993, pp. 15, 17, 19, 34, 36 and 38.

[34]Venuto v. Lizzo, 148 App. Div. 164, 132 N.Y. Supp. 1066 (1911), as cited in A. Osborn, supra, note 29.

*35+Defendants Exhibits Nos. "S-1," "S-7," "S-8," "S-9," "S-10," "S-12," "S-14," "S-15," and "S-16."

*36+Defendants Exhibit No. "S-9."

[37]TSN dated 8 October 1993, p. 35.

[38]Id. at 19 and 36.

[39]Supra, note 26.

[40]TSN dated 27 April 1993, p. 5.

[41]Id. at 7.

Banking Page 55

[42]Id. at 7-8.

[43]TSN dated 8 October 1993, p. 4.

[44]TSN dated 27 April 1993, pp. 18-19.

[45]Id. at 14.

[46]Per NBI Questioned Documents Report No. 244-492, Plaintiffs Exhibit "D."

[47]See TSN dated 25 January 1993, p. 7.

[48]See note 10.

[49]Rollo, p. 38, citing PNB v. National City Bank of New York, 63 Phil. 711, 733 (1936), which in turn cites Gloucester Bank v. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem, 151 Mass., 280; and B.B. Ford & Co. v. Peoples Bank of Orangeburg, 74 S.C., 180.

[50]Ibid., citing PNB v. CA, 134 Phil. 829, 834 (1968), which in turn cites Blondeau v. Nano, 61 Phil. 625, 631, 632.

[51]Rollo, p. 38.

[52]MWSS v. Court of Appeals, G.R. No. L-62943, 14 July 1986, 143 SCRA 20, 31.

[53]G.R. Nos. 121413, 121479 and 128604, 29 January 2001, 350 SCRA 446.

[54]Ibid at 465.

Banking Page 56

[55]TSN dated 25 January 1993, pp. 19, 31.

[56]See Section 3(d), Rule 131, Rules of Court.

[57]See Section 3(q), Rule 131, Rules of Court.

[58]Taylor v. Manila Electric Railroad, 16 Phil. 8, 28 (1910), citing Scaevola, Jurisprudencia del Codigo Civil, vol. 6, 551, 552.

[59]US v. Tria, 17 Phil. 303, 307 (1910).

[60]63 Phil. 711 (1936).

[61]Id. at 740; citing 2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.

[62]Brady, J.E., The Law of Forged and Altered Checks, supra, note 24, at 24-27; citing MacIntosh v. Bank, 123 Mass. 393; East St. Louis Cotton Oil Co. v. Bank of Steele, Mo., 205 S.W. Rep. 96.

[63]"For his failure or negligence either to discover or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his account under the forged indorsement." Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 690; citing American jurisprudence. "A bank may escape liability where the depositors negligence consists of failure to properly examine his bank statements and cancelled checks and failure to notify the bank of forgery within a reasonable time." H. Bailey, supra, note 28, at 477. But see note 24.

[64]G.R. No. L-26001, 29 October 1968, 25 SCRA 693.

[65]Farnsworth, E.A., supra note 22, at 173.

Banking Page 57

[66]Brady, J.E., supra, note 24, at 5.

[67]See TSN dated 12 July 1993, p. 8.

[68]"When the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty." Sec. 8, Act No. 2031 (Negotiable Instruments Law). Worthy of note is the fact that a check payable to bearer is more likely to be forged than one that is payable to order. The unofficial essence of bearer check is that anyone who possesses or holds it can indorse or receive payment for it which implies that payment is not limited to a particular person. See Nickles, S.H., Matheson, J.H., and Adams, E.S., Modern Commercial Paper: The New Law of Negotiable Instruments and Related Commercial Paper (1994), at 61.

[69]See TSN dated 26 July 1993, p. 18.

[70]See TSN dated 12 July 1993, p. 11.

[71]Ibid.

[72]Id. at 17.

[73]Id. at 18.

[74]TSN dated 26 July 1993, p. 3.

[75]Id. at 6.

[76]Westmont Bank v. Ong, G.R. No. 132560, 30 January 2002, 375 SCRA 212, 220-221.

[77]Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, 10 October 2002, 390 SCRA 608, 614.
Banking Page 58

608, 614.

[78]Bailey, H.J., supra, note 28 at 474.

PUNO, J., Chairman, AUSTRIA-MARTINEZ, CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ. Promulgated: \---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/ ([2004V901] SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., Petitioner, - versus - FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, Respondents., G.R. No. 129015, 2004 Aug 13, 2nd Division)

Banking Page 59

Heirs of Eduardo Manlapat v CA

Wednesday, July 08, 2009 9:19 AM

[2005V543] HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPAT -BANAAG and LEON M. BANAAG, JR., Petitioners, versus HON. COURT OF APPEALS, RURAL BANK OF SAN PASCUAL, INC., and JOSE B. SALAZAR, CONSUELO CRUZ and ROSALINA CRUZ-BAUTISTA, and the REGISTER OF DEEDS of Meycauayan, Bulacan, Respondents.2005 Jun 82nd DivisionG.R. No. 125585D E C I S I O N

Tinga, J.: Before this Court is a Rule 45 petition assailing the Decision[1] dated 29 September 1994 of the Court of Appeals that reversed the Decision[2] dated 30 April 1991 of the Regional Trial Court (RTC) of Bulacan, Branch 6, Malolos. The trial court declared Transfer Certificates of Title (TCTs) No. T -9326-P(M) and No. T-9327-P(M) as void ab initio and ordered the restoration of Original Certificate of Title (OCT) No. P-153(M) in the name of Eduardo Manlapat (Eduardo), petitioners predecessor -in-interest.

The controversy involves Lot No. 2204, a parcel of land with an area of 1,058 square meters, located at Panghulo, Obando, Bulacan . The property had been originally in the possession of Jose Alvarez, Eduardos grandfather, until his demise in 1916. It remained unregistered until 8 October 1976 when OCT No. P-153(M) was issued in the name of Eduardo pursuant to a free patent issued in Eduardos name[3] that was entered in the Registry of Deeds of Meycauayan, Bulacan.[4] The subject lot is adjacent to a fishpond owned by one Ricardo Cruz (Ricardo), predecessor -in-interest of respondents Consuelo Cruz and Rosalina Cruz-Bautista (Cruzes).[5]
On 19 December 1954, before the subject lot was titled, Eduardo sold a portion thereof with an area of 553 square meters to Ricardo . The sale is evidenced by a deed of sale entitled Kasulatan ng Bilihang Tuluyan ng Lupang Walang Titulo (Kasulatan)*6+ which was signed by Eduardo himself as vendor and his wife Engracia Aniceto with a certain Santiago Enriquez signing as witness. The deed was notarized by Notary Public Manolo Cruz.[7] On 4 April 1963, the Kasulatan was registered with the Register of Deeds of Bulacan.[8]

Eduardo: tagapagmana ni Jose Alvarez na may possession ng lupa Ricardo: may ari ng katabing Fishpond *Eduardo allegedl sold a portion of the land to Ricardo w/ a Kasulatan which was notarized and registered w/ the register of deeds

On 18 March 1981, another Deed of Sale[9] conveying another portion of the subject lot consisting of 50 square meters as right of way was executed by Eduardo in favor of Ricardo in order to reach the portion covered by the first sale executed in 1954 and to have access to his fishpond from the provincial road.[10] The deed was signed by Eduardo himself and his wife Engracia Aniceto, together with Eduardo Manlapat, Jr. and Patricio Manlapat. The same was also duly notarized on 18 July 1981 by Notary Public Arsenio Guevarra.[11]

In December 1981, Leon Banaag, Jr. (Banaag), as attorney -in-fact of his father-in-law Eduardo, executed a mortgage with the Rural Bank of San Pascual, Obando Branch (RBSP), for P100,000.00 with the subject lot as collateral. Banaag deposited the owners duplicate certificate of OCT No. P -153(M) with the bank.

On 31 August 1986, Ricardo died without learning of the prior issuance of OCT No. P -153(M) in the name of Eduardo.[12] His heirs, the Cruzes, were not immediately aware of the consummated sale between Eduardo and Ricardo.

Eduardo himself died on 4 April 1987. He was survived by his heirs, Engracia Aniceto, his spouse; and children, Patricio, Bonifacio, Eduardo, Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat.[13] Neither did the heirs of Eduardo (petitioners) inform the Cruzes of the prior sale in favor of their predecessor-in-interest, Ricardo. Yet subsequently, the Cruzes came to learn about the sale and the issuance of the OCT in the name of Eduardo.

Upon learning of their right to the subject lot, the Cruzes immediately tried to confront petitioners on the mortgage and obtain the surrender of the OCT. The Cruzes, however, were thwarted in their bid to see the heirs. On the advice of the Bureau of Lands, NCR Office, they brought the matter to the barangay captain of Barangay Panghulo, Obando, Bulacan. During the hearing, petitioners were informed that the Cruzes had a legal right to the property covered by OCT and needed the OCT for the purpose of securing a separate title to cover the interest of Ricardo. Petitioners, however, were unwilling to surrender the OCT.[14]

Having failed to physically obtain the title from petitioners, in July 1989, the Cruzes instead went to RBSP which had custody of the owners duplicate certificate of the OCT, earlier surrendered as a consequence of the mortgage. Transacting with RBSPs manager, Jose Salazar (Salazar), the Cruzes sought to borrow the owners duplicate certificate for the purpose of photocopying the same and thereafter showing a copy thereof to the Register of Deeds. Salazar allowed the Cruzes to bring the owners duplicate certificate outside the bank premises when the latter showed the Kasulatan.*15+ The Cruzes returned the owners duplicate certificate on the same day after having copied the same. They then brought the copy of the OCT to Register of Deeds Jose Flores (Flores) of Meycauayan and showed

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then brought the copy of the OCT to Register of Deeds Jose Flores (Flores) of Meycauayan and showed the same to him to secure his legal opinion as to how the Cruzes could legally protect their interest in the property and register the same.[16] Flores suggested the preparation of a subdivision plan to be able to segregate the area purchased by Ricardo from Eduardo and have the same covered by a separate title.[17]

Thereafter, the Cruzes solicited the opinion of Ricardo Arandilla (Arandilla), Land Registration Officer, Director III, Legal Affairs Department, Land Registration Authority at Quezon City, who agreed with the advice given by Flores.[18] Relying on the suggestions of Flores and Arandilla, the Cruzes hired two geodetic engineers to prepare the corresponding subdivision plan. The subdivision plan was presented to the Land Management Bureau, Region III, and there it was approved by a certain Mr. Pambid of said office on 21 July 1989.

After securing the approval of the subdivision plan, the Cruzes went back to RBSP and again asked for the owners duplicate certificate from Salazar. The Cruzes informed him that the presentation of the owners duplicate certificate was necessary, per advise of the Register of Deeds, for the cancellation of the OCT and the issuance in lieu thereof of two separate titles in the names of Ricardo and Eduardo in accordance with the approved subdivision plan.*19+ Before giving the owners duplicate certificate, Salazar required the Cruzes to see Atty. Renato Santiago (Atty. Santiago), legal counsel of RBSP, to secure from the latter a clearance to borrow the title. Atty. Santiago would give the clearance on the condition that only Cruzes put up a substitute collateral, which they did.[20] As a result, the Cruzes got hold again of the owners duplicate certificate.

After the Cruzes presented the owners duplicate certificate, along with the deeds of sale and the subdivision plan, the Register of Deeds cancelled the OCT and issued in lieu thereof TCT No. T -9326-P(M) covering 603 square meters of Lot No. 2204 in the name of Ricardo and TCT No. T -9327-P(M) covering the remaining 455 square meters in the name of Eduardo.[21]

On 9 August 1989, the Cruzes went back to the bank and surrendered to Salazar TCT No. 9327 -P(M) in the name of Eduardo and retrieved the title they had earlier given as substitute collateral. After securing the new separate titles, the Cruzes furnished petitioners with a copy of TCT No. 9327 -P(M) through the barangay captain and paid the real property tax for 1989.[22]

The Cruzes also sent a formal letter to Guillermo Reyes, Jr., Director, Supervision Sector, Department III of the Central Bank of the Philippines, inquiring whether they committed any violation of existing bank laws under the circumstances. A certain Zosimo Topacio, Jr. of the Supervision Sector sent a reply letter advising the Cruzes, since the matter is between them and the bank, to get in touch with the bank for the final settlement of the case.[23]

In October of 1989, Banaag went to RBSP, intending to tender full payment of the mortgage obligation. It was only then that he learned of the dealings of the Cruzes with the bank which eventually led to the subdivision of the subject lot and the issuance of two separate titles thereon. In exchange for the full payment of the loan, RBSP tried to persuade petitioners to accept TCT No. T -9327-P(M) in the name of Eduardo.[24]

As a result, three (3) cases were lodged, later consolidated, with the trial court, all involving the issuance of the TCTs, to wit:

(1) Civil Case No. 650-M-89, for reconveyance with damages filed by the heirs of Eduardo Manlapat against Consuelo Cruz, Rosalina Cruz-Bautista, Rural Bank of San Pascual, Jose Salazar and Jose Flores, in his capacity as Deputy Registrar, Meycauayan Branch of the Registry of Deeds of Bulacan;

(2) Civil Case No. 141-M-90 for damages filed by Jose Salazar against Consuelo Cruz, et. [sic] al.; and

(3) Civil Case No. 644-M-89, for declaration of nullity of title with damages filed by Rural Bank of San Pascual, Inc. against the spouses Ricardo Cruz and Consuelo Cruz, et al.[25]

After trial of the consolidated cases, the RTC of Malolos rendered a decision in favor of the heirs of Eduardo, the dispositive portion of which reads:

WHEREFORE, premised from the foregoing, judgment is hereby rendered:

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WHEREFORE, premised from the foregoing, judgment is hereby rendered:

1.Declaring Transfer Certificates of Title Nos. T-9326-P(M) and T-9327-P(M) as void ab initio and ordering the Register of Deeds, Meycauayan Branch to cancel said titles and to restore Original Certificate of Title No. P-153(M) in the name of plaintiffs predecessor -in-interest Eduardo Manlapat;

2.-Ordering the defendants Rural Bank of San Pascual, Jose Salazar, Consuelo Cruz and Rosalina Cruz Bautista, to pay the plaintiffs Heirs of Eduardo Manlapat, jointly and severally, the following:

a)P200,000.00 as moral damages; b)P50,000.00 as exemplary damages; c)P20,000.00 as attorneys fees; and d)the costs of the suit.

3.Dismissing the counterclaims.

SO ORDERED.*26+

The trial court found that petitioners were entitled to the reliefs of reconveyance and damages. On this matter, it ruled that petitioners were bona fide mortgagors of an unclouded title bearing no annotation of any lien and/or encumbrance. This fact, according to the trial court, was confirmed by the bank when it accepted the mortgage unconditionally on 25 November 1981. It found that petitioners were complacent and unperturbed, believing that the title to their property, while serving as security for a loan, was safely vaulted in the impermeable confines of RBSP. To their surprise and prejudice, said title was subdivided into two portions, leaving them a portion of 455 square meters from the original total area of 1,058 square meters, all because of the fraudulent and negligent acts of respondents and RBSP. The trial court ratiocinated that even assuming that a portion of the subject lot was sold by Eduardo to Ricardo, petitioners were still not privy to the transaction between the bank and the Cruzes which eventually led to the subdivision of the OCT into TCTs No. T-9326-P(M) and No. T-9327-P(M), clearly to the damage and prejudice of petitioners.[27]

Concerning the claims for damages, the trial court found the same to be bereft of merit. It ruled that although the act of the Cruzes could be deemed fraudulent, still it would not constitute intrinsic fraud. Salazar, nonetheless, was clearly guilty of negligence in letting the Cruzes borrow the owners duplicate certificate of the OCT. Neither the bank nor its manager had business entrusting to strangers titles mortgaged to it by other persons for whatever reason. It was a clear violation of the mortgage and banking laws, the trial court concluded.

The trial court also ruled that although Salazar was personally responsible for allowing the title to be borrowed, the bank could not escape liability for it was guilty of contributory negligence. The evidence showed that RBSPs legal counsel was sought for advice regarding respondents request. This could only mean that RBSP through its lawyer if not through its manager had known in advance of the Cruzes intention and still it did nothing to prevent the eventuality. Salazar was not even summarily dismissed by the bank if he was indeed the sole person to blame. Hence, the banks claim for damages must necessarily fail.[28]

The trial court granted the prayer for the annulment of the TCTs as a necessary consequence of its declaration that reconveyance was in order. As to Flores, his work being ministerial as Deputy Register of the Bulacan Registry of Deeds, the trial court absolved him of any liability with a stern warning that he should deal with his future transactions more carefully and in the strictest sense as a responsible government official.[29]

Aggrieved by the decision of the trial court, RBSP, Salazar and the Cruzes appealed to the Court of Appeals. The appellate court, however, reversed the decision of the RTC. The decretal text of the decision reads:

THE FOREGOING CONSIDERED, the appealed decision is hereby reversed and set aside, with costs against the appellees.

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against the appellees.

SO ORDERED.[30]

The appellate court ruled that petitioners were not bona fide mortgagors since as early as 1954 or before the 1981 mortgage, Eduardo already sold to Ricardo a portion of the subject lot with an area of 553 square meters. This fact, the Court of Appeals noted, is even supported by a document of sale signed by Eduardo Jr. and Engracia Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan. The appellate court also found that on 18 March 1981, for the second time, Eduardo sold to Ricardo a separate area containing 50 square meters, as a road right -of-way.[31] Clearly, the OCT was issued only after the first sale. It also noted that the title was given to the Cruzes by RBSP voluntarily, with knowledge even of the banks counsel.*32+ Hence, the imposition of damages cannot be justified, the Cruzes themselves being the owners of the property. Certainly, Eduardo misled the bank into accepting the entire area as a collateral since the 603-square meter portion did not anymore belong to him. The appellate court, however, concluded that there was no conspiracy between the bank and Salazar.[33]

Hence, this petition for review on certiorari.

SC Petitioners ascribe errors to the appellate court by asking the following questions, to wit: (a) can a mortgagor be compelled to receive from the mortgagee a smaller portion of the originally encumbered title partitioned during the subsistence of the mortgage, without the knowledge of, or authority derived from, the registered owner; (b) can the mortgagee question the veracity of the registered title of the mortgagor, as noted in the owners duplicate certificate, and thus, deliver the certificate to such third persons, invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor; (c) can an adverse prior claim against a registered title be noted, registered and entered without a competent court order; and (d) can belief of ownership justify the taking of property without due process of law?[34]

The kernel of the controversy boils down to the issue of whether the cancellation of the OCT in the name of the petitioners predecessor -in-interest and its splitting into two separate titles, one for the petitioners and the other for the Cruzes, may be accorded legal recognition given the peculiar factual backdrop of the case. We rule in the affirmative.

Private respondents (Cruzes) own

the portion titled in their names

Consonant with law and justice, the ultimate denouement of the property dispute lies in the determination of the respective bases of the warring claims. Here, as in other legal disputes, what is written generally deserves credence.

A careful perusal of the evidence on record reveals that the Cruzes have sufficiently proven their claim of ownership over the portion of Lot No. 2204 with an area of 553 square meters. The duly notarized instrument of conveyance was executed in 1954 to which no less than Eduardo was a signatory. The execution of the deed of sale was rendered beyond doubt by Eduardos admission in his Sinumpaang Salaysay dated 24 April 1963.[35] These documents make the affirmance of the right of the Cruzes ineluctable. The apparent irregularity, however, in the obtention of the owners duplicate certificate from the bank, later to be presented to the Register of Deeds to secure the issuance of two new TCTs in place of the OCT, is another matter.

Petitioners argue that the 1954 deed of sale was not annotated on the OCT which was issued in 1976 in favor of Eduardo; thus, the Cruzes claim of ownership based on the sale would not hold water. The Court is not persuaded.

Registration is not a requirement for validity of the contract as between the parties, for the effect of registration serves chiefly to bind third persons.[36] The principal purpose of registration is merely to notify other persons not parties to a contract that a transaction involving the property had been entered

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into. Where the party has knowledge of a prior existing interest which is unregistered at the time he acquired a right to the same land, his knowledge of that prior unregistered interest has the effect of registration as to him.[37]

Further, the heirs of Eduardo cannot be considered third persons for purposes of applying the rule. The conveyance shall not be valid against any person unless registered, except (1) the grantor, (2) his heirs and devisees, and (3) third persons having actual notice or knowledge thereof.[38] Not only are petitioners the heirs of Eduardo, some of them were actually parties to the Kasulatan executed in favor of Ricardo. Thus, the annotation of the adverse claim of the Cruzes on the OCT is no longer required to bind the heirs of Eduardo, petitioners herein.

Petitioners had no right to constitute mortgage over disputed portion

The requirements of a valid mortgage are clearly laid down in Article 2085 of the New Civil Code, viz:

ART. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) (2)

That they be constituted to secure the fulfillment of a principal obligation; 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. mphasis supplied)

For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the New Civil Code.[39] The mortgagor must be the owner, otherwise the mortgage is void.[40] In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien.[41] A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property.[42] In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal obligation.[43] Such delivery does not empower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is an attribute of ownership.[44] The right to dispose includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor cause the impairment of the security in any manner without violating the foregoing rule.[45] The mortgagee only owns the mortgage credit, not the property itself.[46]

Petitioners submit as an issue whether a mortgagor may be compelled to receive from the mortgagee a smaller portion of the lot covered by the originally encumbered title, which lot was partitioned during the subsistence of the mortgage without the knowledge or authority of the mortgagor as registered owner. This formulation is disingenuous, baselessly assuming, as it does, as an admitted fact that the mortgagor is the owner of the mortgaged property in its entirety. Indeed, it has not become a salient issue in this case since the mortgagor was not the owner of the entire mortgaged property in the first place.

Issuance of OCT No. P-153(M), improper

It is a glaring fact that OCT No. P-153(M) covering the property mortgaged was in the name of Eduardo, without any annotation of any prior disposition or encumbrance. However, the property was sufficiently shown to be not entirely owned by Eduardo as evidenced by the Kasulatan. Readily apparent upon perusal of the records is that the OCT was issued in 1976, long after the Kasulatan was executed way back in 1954. Thus, a portion of the property registered in Eduardos name arising from the grant of free patent did not actually belong to him. The utilization of the Torrens system to perpetrate fraud cannot be accorded judicial sanction.

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Time and again, this Court has ruled that the principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title, as was conclusively established in this case. The Torrens title does not furnish a shied for fraud.[47] Registration does not vest title. It is not a mode of acquiring ownership but is merely evidence of such title over a particular property. It does not give the holder any better right than what he actually has, especially if the registration was done in bad faith. The effect is that it is as if no registration was made at all.[48] In fact, this Court has ruled that a decree of registration cut off or extinguished a right acquired by a person when such right refers to a lien or encumbrance on the landnot to the right of ownership thereofwhich was not annotated on the certificate of title issued thereon.[49]

Issuance of TCT Nos. T-9326-P(M) and T-9327-P(M), Valid

The validity of the issuance of two TCTs, one for the portion sold to the predecessor -in-interest of the Cruzes and the other for the portion retained by petitioners, is readily apparent from Section 53 of the Presidential Decree (P.D.) No. 1529 or the Property Registration Decree. It provides:

SEC 53. Presentation of owners duplicate upon entry of new certificate. No voluntary instrument shall be registered by the Register of Deeds, unless the owners duplicate certificate is presented with such instrument, except in cases expressly provided for in this Decree or upon order of the court, for cause shown.

The production of the owners duplicate certificate, whenever any voluntary instrument is presented for registration, shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith.

In all cases of registration procured by fraud, the owner may pursue all his legal and equitable remedies against the parties to such fraud without prejudice, however, to the rights of any innocent holder of the decree of registration on the original petition or application, any subsequent registration procured by the presentation of a forged duplicate certificate of title, or a forged deed or instrument, shall be null and void. mphasis supplied)

Petitioners argue that the issuance of the TCTs violated the third paragraph of Section 53 of P.D. No. 1529. The argument is baseless. It must be noted that the provision speaks of forged duplicate certificate of title and forged deed or instrument. Neither instance obtains in this case. What the Cruzes presented before the Register of Deeds was the very genuine owners duplicate certificate earlier deposited by Banaag, Eduardos attorney -in-fact, with RBSP. Likewise, the instruments of conveyance are authentic, not forged. Section 53 has never been clearer on the point that as long as the owners duplicate certificate is presented to the Register of Deeds together with the instrument of conveyance, such presentation serves as conclusive authority to the Register of Deeds to issue a transfer certificate or make a memorandum of registration in accordance with the instrument.

The records of the case show that despite the efforts made by the Cruzes in persuading the heirs of Eduardo to allow them to secure a separate TCT on the claimed portion, their ownership being amply evidenced by the Kasulatan and Sinumpaang Salaysay where Eduardo himself acknowledged the sales in favor of Ricardo, the heirs adamantly rejected the notion of separate titling. This prompted the Cruzes to approach the bank manager of RBSP for the purpose of protecting their property right. They succeeded in persuading the latter to lend the owners duplicate certificate. Despite the apparent irregularity in allowing the Cruzes to get hold of the owners duplicate certificate, the bank officers consented to the Cruzes plan to register the deeds of sale and secure two new separate titles, without notifying the heirs of Eduardo about it.

Further, the law on the matter, specifically P.D. No. 1529, has no explicit requirement as to the manner of acquiring the owners duplicate for purposes of issuing a TCT. This led the Register of Deeds of Meycauayan as well as the Central Bank officer, in rendering an opinion on the legal feasibility of the process resorted to by the Cruzes. Section 53 of P.D. No. 1529 simply requires the production of the owners duplicate certificate, whenever any voluntary instrument is presented for registration, and the same shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith.

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under him, in favor of every purchaser for value and in good faith.

Quite interesting, however, is the contention of the heirs of Eduardo that the surreptitious lending of the owners duplicate certificate constitutes fraud within the ambit of the third paragraph of Section 53 which could nullify the eventual issuance of the TCTs. Yet we cannot subscribe to their position.

Impelled by the inaction of the heirs of Eduardo as to their claim, the Cruzes went to the bank where the property was mortgaged. Through its manager and legal officer, they were assured of recovery of the claimed parcel of land since they are the successors -in-interest of the real owner thereof. Relying on the bank officers opinion as to the legality of the means sought to be employed by them and the suggestion of the Central Bank officer that the matter could be best settled between them and the bank, the Cruzes pursued the titling of the claimed portion in the name of Ricardo. The Register of Deeds eventually issued the disputed TCTs.

The Cruzes resorted to such means to protect their interest in the property that rightfully belongs to them only because of the bank officers acquiescence thereto. The Cruzes could not have secured a separate TCT in the name of Ricardo without the banks approval. Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands.[50] The highest degree of diligence is expected, and high standards of integrity and performance are even required of it.[51]

Indeed, petitioners contend that the mortgagee cannot question the veracity of the registered title of the mortgagor as noted in the owners duplicate certificate, and, thus, he cannot deliver the certificate to such third persons invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor. The strength of this argument is diluted by the peculiar factual milieu of the case.

A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title. This rule is strictly applied to banking institutions. A mortgagee -bank must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who the real owners thereof are.[52]

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Banks keep in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence that amounts to lack of good faith. Absent good faith, banks would be denied the protective mantle of the land registration statute, Act 496, which extends only to purchasers for value and good faith, as well as to mortgagees of the same character and description.[53] Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.[54]

Bank Liable for Nominal Damages

Of deep concern to this Court, however, is the fact that the bank lent the owners duplicate of the OCT to the Cruzes when the latter presented the instruments of conveyance as basis of their claim of ownership over a portion of land covered by the title. Simple rationalization would dictate that a mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its possession. Although we cannot dismiss the banks acknowledgment of the Cruzes claim as legitimized by instruments of conveyance in their possession, we nonetheless cannot sanction how the bank was inveigled to do the bidding of virtual strangers. Undoubtedly, the banks cooperative stance facilitated the issuance of the TCTs. To make matters worse, the bank did not even notify the heirs of Eduardo. The conduct of the bank is as dangerous as it is unthinkably negligent. However, the aspect does not impair the right of the Cruzes to be recognized as legitimate owners of their portion of the property.

Undoubtedly, in the absence of the banks participation, the Register of Deeds could not have issued the disputed TCTs. We cannot find fault on the part of the Register of Deeds in issuing the TCTs as his authority to issue the same is clearly sanctioned by law. It is thus ministerial on the part of the Register of Deeds to issue TCT if the deed of conveyance and the original owners duplicate are presented to him as there appears on theface of the instruments no badge of irregularity or

nullity.[55] If there is someone to blame for the shortcut resorted to by the Cruzes, it would be the bank itself whose manager and legal officer helped the Cruzes to facilitate the issuance of the TCTs.

The bank should not have allowed complete strangers to take possession of the owners duplicate certificate even if the purpose is merely for photocopying for a danger of losing the same is more than

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certificate even if the purpose is merely for photocopying for a danger of losing the same is more than imminent. They should be aware of the conclusive presumption in Section 53. Such act constitutes manifest negligence on the part of the bank which would necessarily hold it liable for damages under Article 1170 and other relevant provisions of the Civil Code.[56]

In the absence of evidence, the damages that may be awarded may be in the form of nominal damages. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.*57+ This award rests on the mortgagors right to rely on the banks observance of the highest diligence in the conduct of its business. The act of RBSP of entrusting to respondents the owners duplicate certificate entrusted to it by the mortgagor without even notifying the mortgagor and absent any prior investigation on the veracity of respondents claim and character is a patent failure to foresee the risk created by the act in view of the provisions of Section 53 of P.D. No. 1529. This act runs afoul of every banks mandate to observe the highest degree of diligence in dealing with its clients. Moreover, a mortgagor has also the right to be afforded due process before deprivation or diminution of his property is effected as the OCT was still in the name of Eduardo. Notice and hearing are indispensable elements of this right which the bank miserably ignored.

Under the circumstances, the Court believes the award of P50,000.00 as nominal damages is appropriate.

Five-Year Prohibition against alienation or encumbrance under the Public Land Act

One vital point. Apparently glossed over by the courts below and the parties is an aspect which is essential, spread as it is all over the record and intertwined with the crux of the controversy, relating as it does to the validity of the dispositions of the subject property and the mortgage thereon. Eduardo was issued a title in 1976 on the basis of his free patent application. Such application implies the recognition of the public dominion character of the land and, hence, the five (5) -year prohibition imposed by the Public Land Act against alienation or encumbrance of the land covered by a free patent or homestead[58] should have been considered.

The deed of sale covering the fifty (50) -square meter right of way executed by Eduardo on 18 March 1981 is obviously covered by the proscription, the free patent having been issued on 8 October 1976. However, petitioners may recover the portion sold since the prohibition was imposed in favor of the free patent holder. In Philippine National Bank v. De los Reyes,[59] this Court ruled squarely on the point, thus:

While the law bars recovery in a case where the object of the contract is contrary to law and one or both parties acted in bad faith, we cannot here apply the doctrine of in pari delicto which admits of an exception, namely, that when the contract is merely prohibited by law, not illegal per se, and the prohibition is designed for the protection of the party seeking to recover, he is entitled to the relief prayed for whenever public policy is enhanced thereby. Under the Public Land Act, the prohibition to alienate is predicated on the fundamental policy of the State to preserve and keep in the family of the homesteader that portion of public land which the State has gratuitously given to him, and recovery is allowed even where the land acquired under the Public Land Act was sold and not merely encumbered, within the prohibited period.[60]

The sale of the 553 square meter portion is a different story. It was executed in 1954, twenty -two (22) years before the issuance of the patent in 1976. Apparently, Eduardo disposed of the portion even before he thought of applying for a free patent. Where the sale or transfer took place before the filing of the free patent application, whether by the vendor or the vendee, the prohibition should not be applied. In such situation, neither the prohibition nor the rationale therefor which is
to keep in the family of the patentee that portion of the public land which the government has gratuitously given him, by shielding him from the temptation to dispose of his landholding, could be relevant. Precisely, he had disposed of his rights to the lot even before the government could give the title to him.

The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in

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The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in December 1981 a few months past the period of prohibition.

WHEREFORE, the Decision of the Court of Appeals is AFFIRMED, subject to the modifications herein. Respondent Rural Bank of San Pascual is hereby ORDERED to PAY petitioners Fifty Thousand Pesos (P50,000.00) by way of nominal damages. Respondents Consuelo Cruz and Rosalina Cruz -Bautista are hereby DIVESTED of title to, and respondent Register of Deeds of Meycauayan, Bulacan is accordingly ORDERED to segregate, the portion of fifty (50) square meters of the subject Lot No. 2204, as depicted in the approved plan covering the lot, marked as Exhibit A, and to issue a new title covering the said portion in the name of the petitioners at the expense of the petitioners. No costs.

SO ORDERED.

DANTE O. TINGA

Associate Justice

WE CONCUR:

(On Official Leave)

REYNATO S. PUNO Associate Justice Chairman

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR. Associate Justice

Acting Chairman

Associate Justice

MINITA V. CHICO-NAZARIO Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

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Associate Justice Acting Chairman, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairmans Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

HILARIO G. DAVIDE, JR. Chief Justice

*On Official Leave.

[1]Rollo, pp. 51-65. Decision penned by Associate Justice Bernardo Ll. Salas and concurred in by Justices Jorge S. Imperial and Hector L. Hofilea.

[2]Id. at 42-48. Decision penned by Judge Pablo S. Villanueva.

[3]The Sinumpaang Salaysay signed by Eduardo on 24 April 1963 shows that he is the only heir of his grandfather Jose Alvarez who died in 1916. Eduardos mother, daughter of Alvarez, predeceased her father. The sworn statement also shows that the subject lot was in the possession of his grandfather at the time of his death. See also Exhibit 2 - E, p. 4.

[4]The Bureau of Lands issued Free Patent No. 111-6 in the name of Eduardo which became the basis for the issuance of OCT No. P-153(M) by the Register of Deeds dated October 8, 1976.

[5]Rollo. p. 28.

[6]Exhibits, p. 3.

[7]Records, p. 30. See also Rollo, p. 213. The deed was entered in the notarial book of the notary public as Document No. 29, Page 6, Book No. I, Series of 1954.

[8]Rollo, p. 213. The deed was recorded as Inscription No. 16707, Page No. 257, Volume 89, File No.

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[8]Rollo, p. 213. The deed was recorded as Inscription No. 16707, Page No. 257, Volume 89, File No. 21819.

[9]Records, p. 10. Annex A.

[10]Rollo, p. 97.

[11]Records, p. 11. See also Rollo, p. 97. The deed was entered in the notarial book of the notary public as Document No. 261, Page 54, Book XIII, Series of 1981.

[12]Rollo, p. 98.

[13]Records, p. 4.

[14]Rollo, p. 99. See also Exhibit, p. 21. The Sinumpaang Salaysay of Barangay Captain Bonifacio Enriquez of Panghulo, Obando, Bulacan attested to the fact that on July 1989 the Cruzes lodged a complaint with his office regarding a lot with an area of 1,058 square meters, 553 square meters of which was sold to Ricardo on 19 December 1954. This sale was confirmed by Eduardo through a Sinumpaang Salaysay dated 24 April 1963.

[15]Id. at 52 and 100.

[16]Id. at 100.

[17]Ibid.

[18]Id. at 101.

[19]Ibid.

[20]Id. at 102.

[21]Id. at 28-29.

[22]Id. at 103-104.

[23]Exhibit, p. 18.

[24]Rollo, p. 29.

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[25]Supra notes 1 and 2.

[26]Rollo, p. 48.

[27]Id. at 46.

[28]Id. at 47-48.

[29]Id. at 48.

[30]Id. at 65.

[31]Id. at 56.

[32]Id. at 57.

[33]Id. at 65.

[34]Id. at 31-32.

[35]Exhibit No. 4.

[36]Samanilla v. Cajucom, et al., 107 Phil. 432 (1960).

[37]Lagandaon v. Court of Appeals, G.R. Nos. 102526-31, 21 May 1998, 290 SCRA 330.

*38+Pea, Registration of Land Titles and Deeds, 1994 ed., p. 28.

[39]Lagrosa v. Court of Appeals, 371 Phil. 225 (1999).

[40]National Bank v. Palma Gil, 55 Phil. 639 (1930-1931); Contreras v. China Banking Corporation, 76 Phil. 709 (1946).

An agent cannot therefore mortgage in his own name the property of the principal, otherwise the contract is void. But the agent can do so, in the name of the principal, for here the mortgagor is the principal. Hence, if the agent is properly authorized, the contract is valid. See Arenas v. Raymundo, 19

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Phil. 46 (1911).

[41]Ching Sen Ben v. Court of Appeals, 373 Phil. 544 (1999).

[42]Lagrosa v. Court of Appeals, supra note 39, citing Adlawan v. Torres, 233 SCRA 645.

That is why Article 2130 of the New Civil Code provides that a stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

*43+Ownership is retained by the mortgagor since the latter merely subjects it to a lien. In case of nonpayment of debt secured by a mortgage, the mortgagee has the right to foreclose the mortgaged property and have it sold to satisfy the outstanding indebtedness to enforce his right and consolidation of ownership is not an appropriate remedy. Only upon the lapse of the redemption period and the judgment debtor failed to exercise his right of redemption, ownership will vest or be consolidated in the purchaser. (Dr. Igmidio Cuevas Lat, LAW ON MORTGAGE, 2001 ed., p. 1)

[44]Article 428 of the Civil Code of the Philippines provides:

ART. 428. The owner has the right to enjoy and dispose of a thing, without other limitations than those established by law.

The owner has also a right of action against the holder and possessor of the thing in order to recover it.

[45]Article 2088 of the Civil Code of the Philippines provides:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

[46]Article 2128 of the Civil Code of the Philippines provides:

ART. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law.

[47]Sacdalan v. Court of Appeals, G.R. No. 128967, 20 May 2004, 428 SCRA 586; Republic v. Court of Appeals, G.R. No. 60169, 23 March 1990, 183 SCRA 620; Adille v. Court of Appeals, G.R. No. 44546, 29 January 1988, 157 SCRA 455; Amerol v. Bagumbaran, G.R. No. 33261, 30 September 1987, 154 SCRA 396.

[48]Avila v. Tapucar, G.R. No. 45947, 27 August 1991, 201 SCRA 148; Miranda v. Court of Appeals, G.R. No. 46064, 7 September 1989, 177 SCRA 303, citing De Guzman v. Court of Appeals, 156 SCRA 701.

[49]Development Bank of the Philippines v. Court of Appeals, 387 Phil. 283 (2000).

[50]Development Bank of the Philippines v. Court of Appeals, 387 Phil. 283 (2000), citing Cavite Development Bank v. Lim, G.R. No. 13169, 1 February 2000, 324 SCRA 346, citing Tomas v. Tomas, 98 SCRA 280(1980).

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SCRA 280(1980).

[51]Bank of the Philippine Islands v. Casa Montessori Internationale, et al, G.R. No. 149454 and Casa Montessori Internationale v. Bank of the Philippine Islands, G.R. No. 149507, 28 May 2004, 430 SCRA 261.

[52]Tomas v. Tomas, No. L-36897, 25 June 1980, 98 SCRA 280.

[53]Government Service Insurance System v. Court of Appeals, G.R. No. 128471, 6 March 1998, 287 SCRA 204, 209, citing Tomas v. Tomas, supra note 50.

[54]Id. at 210, citing Rural Bank of Compostela v. Court of Appeals, et al, G.R. No. 122801, 8 April 1997.

*55+See Pea, Registration of Land Titles and Deeds, 1994 ed., p. 519 citing Tinatan v. Serilla, 54 O.G. 23, September 15, 1958, Court of Appeals; Gonzales v. Basa, Jr., 73 Phil. 704 (1942).

[56]The following Civil Code provisions are pertinent:

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

Article 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances.

Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

Article 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same.

Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.

Article 1973. . . . . The depositary is responsible for the negligence of his employees.

[57]Article 2221 of the Civil Code.

See also my Separate Opinion in the case of Agabon v. NLRC, G.R. No. 158693, November 17, 2004: Nominal damages are adjudicated in order that a right of a plaintiff which has been violated or invaded by another may be vindicated or recognized without having to indemnify the plaintiff for any loss suffered by him. Nominal damages may likewise be awarded in every obligation arising from law, contracts, quasi-contracts, acts or omissions punished by law and quasi -delicts, or where any property right has been invaded.

. . . [I]t should be recognized that nominal damages are not meant to be compensatory, and should not be computed through a formula based on actual losses. Consequently, nominal damages are usually limited in pecuniary value. This fact should be impressed upon the prospective claimant, especially one who is contemplating seeking actual/compensatory damages.

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[58]SECTION 118. Except in favor of the Government or any of its branches, units, or institutions, lands acquired under free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of issuance of the patent or grant, nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said period, but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations.

No alienation, transfer, or conveyance of any homestead after five years and before twenty -five years after issuance of title shall be valid without the approval of the Secretary of Agriculture and Commerce, which approval shall not be denied except on constitutional and legal grounds.

[59]G.R. Nos. 46898-99, 28 November 1989, 179 SCRA 619.

[60]Id. at 628-629, citing Pascua v. Talens, 80 Phil. 792 (1949); Delos Santos v. Roman Catholic Church of Midsayap, et al., 94 Phil. 405 (1954); Ras v. Sua, et al., 25 SCRA 153 (1968).
\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez ---/

([2005V543] HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPAT -BANAAG and LEON M. BANAAG, JR., Petitioners, versus HON. COURT OF APPEALS, RURAL BANK OF SAN PASCUAL, INC., and JOSE B. SALAZAR, CONSUELO CRUZ and ROSALINA CRUZ-BAUTISTA, and the REGISTER OF DEEDS of Meycauayan, Bulacan, Respondents., G.R. No. 125585, 2005 Jun 8, 2nd Division)

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Digest: Heirs of Eduardo

Saturday, July 11, 2009 12:05 PM

Heirs of Manlapat vs CA Date: June 8, 2005 Petitioners: Heirs of Eduardo Manlapat, represented by Gloria Manlapat Banaag, et al Respondents: CA, Rural Bank of San Pascual Inc and Jose Salazar, et al Ponente: Tinga Facts: The controversy involves Lot No. 2204 located at Panghulo, Obando, Bulacan. The property had been originally in the possession of Jose Alvarez, Eduardos grandfather. It later registered in the name of Eduardo and was entered in the Registry of Deeds of Meycauayan, Bulacan. The lot is adjacent to a fishpond owned by Ricardo Cruz, predecessor-in-interest of respondents Consuelo Cruz and Rosalina Cruz-Bautista. Before the lot was titled, Eduardo sold a portion with an area of 553 sqm to Ricardo. The sale is evidenced by a deed of sale which was signed by Eduardo himself as vendor and his wife Engracia Aniceto with Santiago Enriquez signing as witness. The Kasulatan was registered with the Register of Deeds. Another deed of sale covering 50sqm of the lot was executed by Eduardo in favor of Ricardo. Later, Leon Banaag, Jr, as attorney-in-fact of his father-in-law Eduardo, executed a mortgage with the Rural Bank of San Pascual, Obando Branch (RBSP), for P100,000 with the subject lot as collateral. Banaag deposited the owners duplicate certificate of OCT No. P-153(M) with the bank. Ricardo died without learning of the prior issuance of OCT No. P-153(M) in the name of Eduardo. His heirs, the Cruzes, were not immediately aware of the consummated sale between Eduardo and Ricardo. Eduardo himself died and was survived by his heirs, Engracia Aniceto, his spouse; and children, Patricio, Bonifacio, Eduardo, Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat. Neither did the heirs of Eduardo inform the Cruzes of the prior sale in favor of Ricardo. Yet subsequently, the Cruzes came to learn about the sale and the issuance of the OCT in the name of Eduardo. Upon learning the sale, the Cruzes tried to confront petitioners on the mortgage and obtain the surrender of the OCT. On the advice of the Bureau of Lands, NCR Office, they brought the matter to the barangay captain of Barangay Panghulo, Obando, Bulacan. Petitioners, however, were unwilling to surrender the OCT. Having failed to physically obtain the title from petitioners, in July 1989, the Cruzes instead went to RBSP (bank) which had custody of the owners duplicate certificate of the OCT, earlier surrendered as a consequence of the mortgage. Transacting with RBSPs manager, Jose Salazar, the Cruzes sought to borrow the owners duplicate certificate for the purpose of photocopying the same and thereafter showing a copy thereof to the Register of Deeds. Salazar allowed the Cruzes to bring the owners duplicate certificate outside the bank premises when the latter showed the Kasulatan. They then brought the copy of the OCT to Register of Deeds Jose Flores of Meycauayan and showed the same to him to secure his legal opinion as to how the Cruzes could legally protect their interest in the property and register the same. Flores suggested the preparation of a subdivision plan to be able to segregate the area purchased by Ricardo from Eduardo and have the same covered by a separate title. After securing the approval of the subdivision plan, the Cruzes went back to RBSP and again asked for the owners duplicate certificate from Salazar. The Cruzes informed him that the presentation of the owners duplicate certificate was necessary, per advise of the Register of Deeds, for the cancellation of the OCT and the issuance in lieu thereof of two separate titles in the names of Ricardo and Eduardo in accordance with the subdivision plan. The Cruzes got hold again of the owners duplicate certificate.
After the Cruzes presented the *owners duplicate certificate, along with the *deeds of sale and the *subdivision plan, the Register of Deeds cancelled the OCT and issued in lieu thereof TCT No. T-9326-P(M) covering 603 square meters of Lot No. 2204 in the name of Ricardo and TCT No. T-9327-P(M) covering the remaining 455 square meters in the name of Eduardo.

2 deeds of sale (kasuulatan) were executed by Eduardo in favor of Ricardo

Mortgaged w/o knowledge of the buyers BANAAG executed the mortgage as ATTY-IN-Fact of Eduardo Heirs of Ricardo (buyer) unaware of 2nd sale, nor was Ricardo aware of the mortgage and issuance of OCT in favor of seller Eduardo

SALAZAR: Bank's Manager Borrow OCT from bank, photocopied it, then showed it to Register of Deeds

OCT cancelled; new TCT Issued in the name of Ricardo

Cruz gave the cancelled TCT in the name of Eduardo to the

bank, then furnished new copy of the TCT to barangay The Cruzes went back to the bank and surrendered to Salazar TCT No. 9327-P(M) in the name of Eduardo and retrieved the title they had earlier given as substitute collateral. After securing the new separate titles, captain and paid the real property tax the Cruzes furnished petitioners with a copy of TCT No. 9327-P(M) through the barangay captain and paid the real property tax for 1989.
Banaag went to RBSP, intending to tender full payment of the mortgage obligation. It was only then that he Banaag found out about the actions of Cruzes only when it learned of the dealings of the Cruzes with the bank which eventually led to the subdivision of the subject lot intended to render full payment. Bank wanted to waive full and the issuance of two separate titles thereon. In exchange for the full payment of the loan, RBSP tried to payment in exchange of cancelled TCT in the name of Eduardo persuade petitioners to accept TCT No. T-9327-P(M) in the name of Eduardo. As a result, three (3) cases were lodged, later consolidated, with the trial court, all involving the issuance of the TCTs.

RTC:

After trial of the consolidated cases, the RTC of Malolos rendered a decision in favor of the heirs of Eduardo. The trial court found that petitioners were entitled to the reliefs of reconveyance and damages. On this matter, it ruled that petitioners were bona fide mortgagors of an unclouded title bearing no annotation of any lien and/or encumbrance. It found that petitioners were complacent and unperturbed, believing that the title to their property, while serving as security for a loan, was safely vaulted in the impermeable confines of RBSP. To their surprise and prejudice, said title was subdivided into two portions, leaving them a portion of 455 square meters from the original total area of 1,058 square meters, all because of the fraudulent and negligent acts of respondents and RBSP. It ruled that although the act of the Cruzes could be deemed fraudulent, still it would not constitute intrinsic fraud. Salazar, nonetheless, was clearly guilty of negligence in letting the Cruzes borrow the owners duplicate certificate of the OCT. Neither the bank nor its manager had business entrusting to strangers titles mortgaged to it by other persons for whatever reason. It was a clear violation of the mortgage and banking laws, the trial court concluded.
The trial court also ruled that although Salazar was personally responsible for allowing the title to be borrowed, the bank could not escape liability for it was guilty of contributory negligence. The evidence showed that RBSPs legal counsel was sought for advice regarding respondents request. This could only mean that RBSP through its lawyer if not through its manager had known in advance of the Cruzes intention and still it did nothing to prevent the eventuality. Salazar was not even summarily dismissed by the bank if he was indeed the sole person to blame. Hence, the banks claim for damages must necessarily fail. The CA reversed and ruled that petitioners were not bona fide mortgagors since as early as 1954 or before

RTC: For Manlapats (heirs) -Bank negligent in letting the Cruzes borrow OCT, though Salazar personally responsible for allowing the title to be borrowed -Heirs bona fide mortgagors of an unclouded title

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CA:

The CA reversed and ruled that petitioners were not bona fide mortgagors since as early as 1954 or before the 1981 mortgage, Eduardo already sold to Ricardo a portion of the subject lot with an area of 553 square meters. This fact, the Court of Appeals noted, is even supported by a document of sale signed by Eduardo Jr. and Engracia Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan. The appellate court also found that on 18 March 1981, for the second time, Eduardo sold to Ricardo a separate area containing 50 square meters, as a road right-of-way. Clearly, the OCT was issued only after the first sale. It also noted that the title was given to the Cruzes by RBSP voluntarily, with knowledge even of the banks counsel. Hence, the imposition of damages cannot be justified, the Cruzes themselves being the owners of the property. Certainly, Eduardo misled the bank into accepting the entire area as a collateral since the 603-square meter portion did not anymore belong to him. The appellate court, however, concluded that there was no conspiracy between the bank and Salazar. Issue: WON the Cruzes own the portion titled in their names Held: Yes Ratio: A careful perusal of the evidence on record reveals that the Cruzes have sufficiently proven their claim of ownership over the portion of Lot No. 2204 with an area of 553 square meters. The duly notarized instrument of conveyance was executed in 1954 to which no less than Eduardo was a signatory. The execution of the deed of sale was rendered beyond doubt by Eduardos admission in his Sinumpaang Salaysay dated 24 April 1963. These documents make the affirmance of the right of the Cruzes ineluctable. The apparent irregularity, however, in the obtention of the owners duplicate certificate from the bank, later to be presented to the Register of Deeds to secure the issuance of two new TCTs in place of the OCT, is another matter. Petitioners argue that the 1954 deed of sale was not annotated on the OCT which was issued in 1976 in favor of Eduardo; thus, the Cruzes claim of ownership based on the sale would not hold water. The Court is not persuaded. Registration is not a requirement for validity of the contract as between the parties, for the effect of registration serves chiefly to bind third persons. The principal purpose of registration is merely to notify other persons not parties to a contract that a transaction involving the property had been entered into. Where the party has knowledge of a prior existing interest which is unregistered at the time he acquired a right to the same land, his knowledge of that prior unregistered interest has the effect of registration as to him. Further, the heirs of Eduardo cannot be considered third persons for purposes of applying the rule. The conveyance shall not be valid against any person unless registered, except (1) the grantor, (2) his heirs and devisees, and (3) third persons having actual notice or knowledge thereof. Not only are petitioners the heirs of Eduardo, some of them were actually parties to the Kasulatan executed in favor of Ricardo. Thus, the annotation of the adverse claim of the Cruzes on the OCT is no longer required to bind the heirs of Eduardo, petitioners herein.
Issue: WON petitioners had a right to constitute mortgage over the disputed portion Held: No Ratio: For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the New Civil Code. The mortgagor must be the owner, otherwise the mortgage is void. In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property. In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal obligation. Such delivery does not empower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is an attribute of ownership. The right to dispose includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor cause the impairment of the security in any manner without violating the foregoing rule. The mortgagee only owns the mortgage credit, not the property itself. Petitioners submit as an issue whether a mortgagor may be compelled to receive from the mortgagee a smaller portion of the lot covered by the originally encumbered title, which lot was partitioned during the subsistence of the mortgage without the knowledge or authority of the mortgagor as registered owner. This formulation is disingenuous, baselessly assuming, as it does, as an admitted fact that the mortgagor is the owner of the mortgaged property in its entirety. Indeed, it has not become a salient issue in this case since the mortgagor was not the owner of the entire mortgaged property in the first place.

CA: Reversed TC -Manlapats were NOT bona fide mortgagors (mortgaged a land which was already sold to another) -Bank not liable because they only gave the OCT to the true owners of the property

Not a mortgagor because not the owner

Issue: WON the issuance of OCT No. P-153(M) was proper Held: No Ratio: It is a glaring fact that OCT No. P-153(M) covering the property mortgaged was in the name of Eduardo, without any annotation of any prior disposition or encumbrance. However, the property was sufficiently shown to be not entirely owned by Eduardo as evidenced by the Kasulatan. The OCT was issued in 1976, long after the Kasulatan was executed way back in 1954. Thus, a portion of the property registered in Eduardos name arising from the grant of free patent did not actually belong to him. The utilization of the Torrens system to perpetrate fraud cannot be accorded judicial sanction. Time and again, this Court has ruled that the principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title, as was conclusively established in this case. The Torrens title does not furnish a shied for fraud. Registration does not vest title. It is not a mode of acquiring ownership but is merely evidence of such title over a particular property. It does not give the holder any better right than what he actually has, especially if the registration was done in bad faith. The effect is that it is as if no registration was made at all. In fact, this Court has ruled that a decree of registration cut off or extinguished a right acquired by a person when such right refers to a lien or encumbrance on the landnot to the right of ownership thereof which was not annotated on the certificate of title issued thereon. Issue: WON the issuance of TCT Nos. T-9326-P(M) and T-9327-P(M) were valid Held: Yes Ratio: The validity of the issuance of two TCTs, one for the portion sold to the predecessor -in-interest of the Cruzes and the other for the portion retained by petitioners, is readily apparent from Section 53 of the PD No. 1529 or the Property Registration Decree. Petitioners argue that the issuance of the TCTs violated the third paragraph of Section 53 of P.D. No. 1529. The argument is baseless. It must be noted that the provision speaks of forged duplicate certificate of title and forged deed or instrument. Neither instance obtains in this case. What the Cruzes presented before the Register of Deeds was the very genuine owners duplicate certificate earlier deposited by Banaag, Eduardos attorney -in-fact, with RBSP. Likewise, the instruments of conveyance are authentic, not forged. Section 53 has never been clearer on the point that as long as the owners duplicate certificate is presented to the Register of Deeds together with the instrument of conveyance, such presentation serves as conclusive authority to

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Register of Deeds together with the instrument of conveyance, such presentation serves as conclusive authority to the Register of Deeds to issue a transfer certificate or make a memorandum of registration in accordance with the instrument. The records of the case show that despite the efforts made by the Cruzes in persuading the heirs of Eduardo to allow them to secure a separate TCT on the claimed portion, their ownership being amply evidenced by the Kasulatan and Sinumpaang Salaysay where Eduardo himself acknowledged the sales in favor of Ricardo, the heirs adamantly rejected the notion of separate titling. This prompted the Cruzes to approach the bank manager of RBSP for the purpose of protecting their property right. They succeeded in persuading the latter to lend the owners duplicate certificate. Despite the apparent irregularity in allowing the Cruzes to get hold of the owners duplicate certificate, the bank officers consented to the Cruzes plan to register the deeds of sale and secure two new separate titles, without notifying the heirs of Eduardo about it. Further, the law on the matter, specifically P.D. No. 1529, has no explicit requirement as to the manner of acquiring the owners duplicate for purposes of issuing a TCT. This led the Register of Deeds of Meycauayan as well as the Central Bank officer, in rendering an opinion on the legal feasibility of the process resorted to by the Cruzes. Section 53 of P.D. No. 1529 simply requires the production of the owners duplicate certificate, whenever any voluntary instrument is presented for registration, and the same shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith. Quite interesting, however, is the contention of the heirs of Eduardo that the surreptitious lending of the owners duplicate certificate constitutes fraud within the ambit of the third paragraph of Section 53 which could nullify the eventual issuance of the TCTs. Yet we cannot subscribe to their position. Indeed, petitioners contend that the mortgagee cannot question the veracity of the registered title of the mortgagor as noted in the owners duplicate certificate, and, thus, he cannot deliver the certificate to such third persons invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor. The strength of this argument is diluted by the peculiar factual milieu of the case. A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title. This rule is strictly applied to banking institutions. A mortgagee-bank must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who the real owners thereof are. Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Banks keep in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence that amounts to lack of good faith. Absent good faith, banks would be denied the protective mantle of the land registration statute, Act 496, which extends only to purchasers for value and good faith, as well as to mortgagees of the same character and description. Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.
Issue: WON the bank is liable for nominal damages Held: Yes

Ratio: Of deep concern to this Court, however, is the fact that the bank lent the owners duplicate of the OCT to the Cruzes when the latter presented the instruments of conveyance as basis of their claim of ownership over a portion of land covered by the title. Simple rationalization would dictate that a mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its possession. Although we cannot dismiss the banks acknowledgment of the Cruzes claim as legitimized by instruments of conveyance in their possession, we nonetheless cannot sanction how the bank was inveigled to do the bidding of virtual strangers. Undoubtedly, the banks cooperative stance facilitated the issuance of the TCTs. To make matters worse, the bank did not even notify the heirs of Eduardo. The conduct of the bank is as dangerous as it is unthinkably negligent. However, the aspect does not impair the right of the Cruzes to be recognized as legitimate owners of their portion of the property. Undoubtedly, in the absence of the banks participation, the Register of Deeds could not have issued the disputed TCTs. We cannot find fault on the part of the Register of Deeds in issuing the TCTs as his authority to issue the same is clearly sanctioned by law. It is thus ministerial on the part of the Register of Deeds to issue TCT if the deed of conveyance and the original owners duplicate are presented to him as there appears on the face of the instruments no badge of irregularity or nullity. If there is someone to blame for the shortcut resorted to by the Cruzes, it would be the bank itself whose manager and legal officer helped the Cruzes to facilitate the issuance of the TCTs. The bank should not have allowed complete strangers to take possession of the owners duplicate certificate even if the purpose is merely for photocopying for a danger of losing the same is more than imminent. They should be aware of the conclusive presumption in Section 53. Such act constitutes manifest negligence on the part of the bank which would necessarily hold it liable for damages under Article 1170 and other relevant provisions of the Civil Code. In the absence of evidence, the damages that may be awarded may be in the form of nominal damages. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. This award rests on the mortgagors right to rely on the banks observance of the highest diligence in the conduct of its business. The act of RBSP of entrusting to respondents the owners duplicate certificate entrusted to it by the mortgagor without even notifying the mortgagor and absent any prior investigation on the veracity of respondents claim and character is a patent failure to foresee the risk created by the act in view of the provisions of Section 53 of P.D. No. 1529. This act runs afoul of every banks mandate to observe the highest degree of diligence in dealing with its clients. Moreover, a mortgagor has also the right to be afforded due process before deprivation or diminution of his property is effected as the OCT was still in the name of Eduardo. Notice and hearing are indispensable elements of this right which the bank miserably ignored. Under the circumstances, the Court believes the award of P50,000.00 as nominal damages is appropriate. Issue: WON the first sale was valid Held: No Ratio: Eduardo was issued a title in 1976 on the basis of his free patent application. Such application implies the recognition of the public dominion character of the land and, hence, the five (5) -year prohibition imposed by the Public Land Act against alienation or encumbrance of the land covered by a free patent or homestead should have been considered. The deed of sale covering the fifty (50)-square meter right of way executed by Eduardo on 18 March 1981 is obviously covered by the proscription, the free patent having been issued on 8 October 1976. However,

On bank's liability: LIABLE! -bank should not lend documents of its clients to strangers!

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petitioners may recover the portion sold since the prohibition was imposed in favor of the free patent holder. The sale of the 553 square meter portion is a different story. It was executed in 1954, twenty-two (22) years before the issuance of the patent in 1976. Apparently, Eduardo disposed of the portion even before he thought of applying for a free patent. Where the sale or transfer took place before the filing of the free patent application, whether by the vendor or the vendee, the prohibition should not be applied. In such situation, neither the prohibition nor the rationale therefor which is to keep in the family of the patentee that portion of the public land which the government has gratuitously given him, by shielding him from the temptation to dispose of his landholding, could be relevant. Precisely, he had disposed of his rights to the lot even before the government could give the title to him. The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in December 1981 a few months past the period of prohibition.
Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI03.640\Heirs%20of%20Manlapat%20vs%20CA.docx>

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PNB v Pike
Wednesday, July 08, 2009 9:22 AM

[2005V1071] PHILIPPINE NATIONAL BANK, Petitioner, versus NORMAN Y. PIKE, Respondent.2005 Sep 202nd DivisionG.R. No. 157845D E C I S I O N

CHICO-NAZARIO, J.: This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, seeks to reverse the Decision[1] dated 19 December 2002, and the Resolution[2] dated 02 April 2003, both of the Court of Appeals, in CA-G.R. CV No. 59389, which affirmed with modification the Decision[3] rendered by the Regional Trial Court (RTC), Branch 07 of Manila, dated 10 January 1997, in Civil Case No. 94-68821 in favor of herein respondent Norman Pike (Pike).

The case stemmed from a complaint[4] filed by herein respondent Pike for damages[5] against Philippine National Bank (PNB) on 04 January 1994.
Complainant Pike often traveled to and from Japan as a gay entertainer in said country. Sometime in 1991, he opened U.S. Dollar Savings Account No. 0265-704591-0 with herein petitioner PNB Buendia branch for which he was issued a corresponding passbook. The complaint alleged in substance that before complainant Pike left for Japan on 18 March 1993, he kept the aforementioned passbook inside a cabinet under lock and key, in his home; that on 19 April 1993, a few hours after he arrived from Japan, he discovered that some of his valuables were missing including the passbook; that he immediately reported the incident to the police which led to the arrest and prosecution of a certain Mr. Joy Manuel Davasol; that complainant Pike also discovered that Davasol made two (2) unauthorized withdrawals from his U.S. Dollar Savings Account No. 0265-704591-0, both times at the PNB Buendia branch on the following dates:

DATE
AMOUNT 31 March 1993 $3,500.00 05 April 1993

4,000.00
TOTAL

$7,500.00

that on several occasions, complainant Pike went to defendant PNBs Buendia branch and verbally protested the unauthorized withdrawals and likewise demanded the return of the total withdrawn amount of U.S. $7,500.00, on the ground that he never authorized anybody to withdraw from his
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amount of U.S. $7,500.00, on the ground that he never authorized anybody to withdraw from his account as the signatures appearing on the subject withdrawal slips were clearly forgeries; that defendant PNB refused to credit said amount back to complainants U.S. Dollar Savings Account without justifiable reason, and instead, defendant bank wrote him that it exercised due diligence in the handling of said account; and that on 06 May 1993, complainant Pike wrote defendant PNB simply to request that the hold-account be lifted so that he may withdraw the remaining balance left in his U.S.$ Savings Account and nothing else.

On the other hand, defendant PNB alleged, in its Motion to Dismiss[6] of 18 April 1994, a counterstatement of facts. Its factual allegations read:

. . . On March 15, 1993 at PNB Buendia Branch, Mr. Norman Y. Pike, together with a certain Joy Davasol went to see PNB AVP Mr. Lorenzo T. Val (sic), Jr. purposely to withdraw the amount of $2,000.00. Mr. Pike also informed AVP Val that he is leaving for abroad (Japan) and made verbal instruction to honor all withdrawals to be transmitted by his Talent Manager and Choreographer, Joy Davasol who shall present pre-signed withdrawal slips bearing his (Pikes) signature. . .

On April 19, 1993, a certain Josephine Balmaceda, who claimed to be plaintiffs sister executed an affidavit . . . . stating therein that they discovered today (April 19, 1993) the lost (sic) of her brothers passbook issued by PNB on account of robbery, committed in the residence/office of her brother, promptly reporting the matter to the police authorities and her brother cannot report the matter to the Bank because he was currently in Japan and therefore requesting the Bank to issue a hold-order on her brothers passbook.

But a copy of an alarm (Police) Report dated April 19, 1993. . . stated that plaintiff (who was the one who reported the matter) after one month in Japan, he (complainant) arrived yesterday. . .

On April 26, 1993, Atty. Nathaniel Ifurung who claims to be plaintiffs counsel sent a demand letter to VP Violeta T. Suquila (then VP and Manager of PNB Buendia Branch) demanding the bank to credit back the amount of US$7,500.00 which were withdrawn on March 31, 1993 and April 5, 1993, because his clients signatures were forged and the withdrawal made thereon were unauthorized. . .

On May 5, 1993, Mr. Norman Y. Pike executed an affidavit of loss (sic) Dollar Account Passbook and requested the PNB to replace the same and allow him to make withdrawals thereon. He stated that his passbook was stolen together with other valuables which he discovered only in the early morning of April 19, 1993. . . On May 6, 1993, plaintiff Norman Y. Pike wrote a letter. . . addressed to the Manager of PNB, Buendia Branch the full contents of said letter hereto quoted as follows: May 6, 1993

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The Manager
Philippine National Bank Buendia Branch Paseo de Roxas cor. Gil Puyat Street Makati, Metro Manila

Sir:

In connection with the request of my sister, Mrs. Josephine P. Balmaceda for the hold-order on my dollar savings passbook No. 265-704591-0, I am now requesting your good office to lift the same so I can withdraw the remaining balance of my passbook which was reported lost sometime in March of this year.

I also promise not to hold responsible the bank and its officers for the withdrawal made on my dollar savings passbook on March 19 and April 5, 1993 respectively as a result of the lost (sic) of my passbook.

Sgd. NORMAN Y. PIKE

Depositor
Philippine Passport No. H918022 Issued at Manila on Sept. 6, 1990

Place of Issuance

On the same day May 6, 1993 Plaintiff Norman Y. Pike was allowed by defendant bank to withdraw the remaining balance from his passbook .

A letter dated May 18, 1993 was sent to Plaintiffs counsel by PNB stating that the Bank regrets that it cannot accede to such request inasmuch as the Bank exercised due diligence of a good father to his family in the handling of transactions covering the deposit account of Mr. Pike .
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family in the handling of transactions covering the deposit account of Mr. Pike .

On July 2, 1993, Plaintiffs counsel sent a letter to PNB Vice Pres. Suquila denying that his client made any such promise not to hold responsible the bank and its officers for the withdrawal made .

A letter dated July 29, 1993 was sent to Plaintiffs counsel by VP Suquila stating that plaintiffs withdrawal of the remaining balance of his account with the Bank effectively estops him from claiming on the alleged unauthorized withdrawals.

The trial court, in its decision dated 10 January 1997, made the following findings of fact:

. . . [T]hat the bank is responsible for such unauthorized withdrawals. The court is not impressed with the defense put up by the bank. Its contention that the withdrawals were authorized by the plaintiff because there was an arrangement between the bank represented by its Asst. Vice President Lorenzo Bal, Jr. and the depositor Norman Y. Pike to the effect that pre-signed withdrawal slips, that is, withdrawal slip signed by the depositor in the presence of Mr. Bal whereby it would be made to appear that it was the depositor himself who presented the same to the bank despite the fact that it was another person who presented the same should be honored by the bank cannot be sanctioned by the court. Firstly, the court is not satisfied that there was indeed such an arrangement. . . It is Mr. Bals contention that such an arrangement although not ordinarily entered into is still a legal procedure of the bank and is resorted to accommodate the depositors specially honored and valued depositor at that.

...

The court compared the signatures in the questioned withdrawal slips with the known signatures of the depositor and is convinced that the signatures in the unauthorized withdrawal slips do not correspond to the true signatures of the depositor.

From the evidence that it received, the court is convinced that the bank was negligent in the performance of its duties such that unauthorized withdrawals were made in the deposit of plaintiff Norman Y. Pike.[7]

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The dispositive portion of the trial courts decision reads:

WHEREFORE and considering the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendant and ordering the defendant to pay the following:

1. 2.

US$7,500.00 plus interest thereon at the rate of 12% per annum until the full amount is paid; P25,000.00 for and as attorneys fees;

3.
4.

P50,000.00 as moral damages and P50,000.00 as exemplary damages; and

Plus the costs of suit.[8]

Defendant PNBs motion for reconsideration was subsequently denied by the court a quo.*9+

On appeal, the Court of Appeals issued the assailed decision dated 19 December 2002, affirming the findings of the RTC that indeed defendant-appellant PNB was negligent in exercising the diligence required of a business imbued with public interest such as that of the banking industry, however, it modified the rate of interest and award for damages, to wit:

WHEREFORE, premises considered, the Decision dated January 10, 1997 issued by the Regional Trial Court of Manila, Branch 7, in Civil Case No. 94-68821, is hereby AFFIRMED with MODIFICATION, as follows:

1. Ordering appellant, the Philippine National Bank, Buendia Branch, to refund appellee the amount of $7,500.00 plus interest of 6% per annum to be computed from the date of the filing of the complaint which interest rate shall become 12% per annum from the time the judgment in this case becomes final and executory until its satisfaction;

2.

The award for moral damages is reduced to P20,000.00; and

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2.

The award for moral damages is reduced to P20,000.00; and

3.

The award for exemplary damages is likewise reduced to P20,000.00.

Costs against appellant.[10]

The appellate court held that:

Appellant claims that appellee personally talked to its officers to allow Joy Manuel Davasol to make withdrawals. Appellee even left pre-signed withdrawal slips before he went to Japan. However, appellant could have told appellee to authorize the withdrawal by a representative by indicating the same at the space provided at the back portion of the withdrawal slip. This operational flaw was observed by the trial court, when it ruled:

The court cannot also understand why the bank did not require the correct, proper and the usual procedure of requiring a depositor who is withdrawing the money through a representative to fill up the back portion of the withdrawal slips, which form was issued by the bank itself.

A perusal of the records discloses that appellee had previously authorized withdrawals by a representative. However, these withdrawals were properly accompanied by a withdrawal by a representative form aside from a handwritten request by appellee to allow such withdrawals by his representative, or a typewritten letter-request for withdrawal by a representative. Certainly, appellant lacked the due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking.

In its desire to be exonerated from liability, appellant advances the argument that, granting negligence on its part, appellee condoned this negligence as shown in his letter dated May 6, 1993, wherein appellee purportedly undertook, not to hold the bank and its officers responsible for the unauthorized withdrawals from his account.

We do not agree. It should be emphasized that while the appellee admitted signing the letter dated May 6, 1993, he, however, denied having undertook (sic) to exonerate the appellant from liability for the unauthorized withdrawals. Appellee questioned the second paragraph of the said letter as being superimposed so that his signature overlapped the text of the second paragraph of said letter. A waiver of right, in order to be valid, should be in a language that clearly manifests his desire to do so. In the

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instant case, appellees filing of the instant action is inconsistent with appellants contention that he had waived his right to question appellants negligent act of allowing the unauthorized withdrawals from his account.[11]

Defendant-appellant PNB filed a motion for reconsideration. In a Resolution dated 02 April 2003, the Court of Appeals denied said motion.

Hence, this petition.

Petitioner PNB now seeks the review of the aforequoted decision and resolution of the Court of Appeals predicated on the following issues:

I.

WHETHER OR NOT THE PRINCIPLE OF ESTOPPEL WAS NOT PROPERLY APPLIED IN THIS CASE;

II.

WHETHER OR NOT RESPONDENT HAVE SUBSTANTIALLY PROVEN THAT THE SIGNATURES APPEARING ON THE TWO (2) QUESTIONED PRE-SIGNED WITHDRAWAL SLIP FORMS ARE ALL FORGERIES IN ACCORDANCE WITH SECTION 22, RULE 132 OF THE REVISED RULES OF COURT; and

III.

WHETHER OR NOT MORAL AND EXEMPLARY DAMAGES CAN BE AWARDED AGAINST A PARTY IN GOOD FAITH.

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Petitioner PNB contends that due to the verbal instructions[12] of respondent Pike, a valued depositor, it allowed the withdrawal by another person. Plus, the fact that said respondent withdrew the remaining balance in his US Savings Account and executed a waiver releasing petitioner PNB from any liability due to the loss of the funds should rightly negate a finding of negligence on its part. Accordingly, petitioner PNB claims that the appellate court, as well as the trial court erred in holding that the withdrawals in question were unauthorized as the signatures appearing on the subject withdrawal slips were forgeries. Petitioner PNB, therefore, argues that it should not be held liable for the amount withdrawn from the account of respondent Pike in the sum of $7,500.00, as well as for moral and exemplary damages.

A priori, it is quite evident that the petition is anchored on a plea to review or re-examine the factual conclusions reached by the trial court and affirmed by the Court of Appeals, and for this Court to hold otherwise. Whether:

1) respondent Pikes signatures appearing on the pertinent withdrawal slips used by Joy Manuel Davasol[13] to withdraw the amount of $7,500.00, were forgeries, as found by the trial court and affirmed by the Court of Appeals, or were authentic as claimed by petitioner bank; and

2) respondent Pike in fact executed a waiver absolving petitioner bank from any legal responsibility due to the unauthorized withdrawals, as maintained by petitioner bank, or the paragraph containing said waiver was intercalated by some other person, thus, amounting no waiver at all, as held by the courts a quo.

are questions of fact and not of law. Inexorably, these issues call for an inquiry into the facts and evidence on record. This, as we have so often held, we cannot do.

Elementary is the rule that this Court is not the appropriate venue to consider anew the factual issues as it is not a trier of facts, and, it generally does not weigh anew the evidence already passed upon by the Court of Appeals.[14] When this Court is tasked to go over once more the evidence presented by both parties, and analyze, assess and weigh them to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of evidence of one party or the other, the Court cannot and will not do the same.[15] Such task is foreclosed by the rule enunciated under Section 1 of Rule 45[16] of the Rules of Court:

SECTION 1. Filing of petition with Supreme Court. - . . . The petition shall raise only questions of law[17] which must be distinctly set forth.

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We have oft ruled that factual findings of the Court of Appeals are conclusive on the parties and not reviewable by this Court and they carry even more weight when the Court of Appeals affirms the factual findings of the trial court,*18+ and in the absence of any showing that the findings complained of are totally devoid of support in the evidence on record, or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand. The courts a quo are in a much better position to evaluate properly the evidence.

Finding no other alternative but to affirm their finding that petitioner PNB negligently allowed the unauthorized withdrawals subject of the case at bar, the instant petition for review must necessarily fail.

At this juncture, it bears emphasizing that negligence of banking institutions should never be countenanced. The negligence here lies in the lackadaisical attitude exhibited by employees of petitioner PNB in their treatment of respondent Pikes US Dollar Savings Account that resulted in the unauthorized withdrawal of $7,500.00. Nevertheless, though its employees may be the ones negligent, a banks liability as an obligor is not merely vicarious but primary, as banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees,[19] and having such obligation, this Court cannot ignore the circumstances surrounding the case at bar how the employees of petitioner PNB turned their heads, nay, closed their eyes to the suspicious circumstances enfolding the two withdrawals subject of the case at bar. It may even be said that they went out of their ways to disregard standard operating procedures formulated to ensure the security of each and every account that they are handling. Petitioner PNB does not deny that the withdrawal slips used were in breach of standard operating procedures of banks in the ordinary and usual course of banking operations as testified to by one of its witnesses, Mr. Lorenzo T. Bal, Assistant Vice President of Petitioner PNBs Buendia branch, on cross-examination[20] he stated thus:

Q: Mr. Witness, when the original of Exhibit B*21+ was presented to you for approval, how many signatures of depositor appears thereon?

A:

Two (2) signatures appears (sic) on the face of the withdrawal slip.

Q:

When it (sic) was (sic) presented to you immediately?

A:

Yes, sir.

Q:

Are you sure of that?

Banking Page 87

Q:

Are you sure of that?

A:

Yes, sir. Because it was pre signed withdrawal slip.

Q:

What does the signature appear, the word recipient means?

A:

Received.

Q:

So, what you are saying is that, the depositor here signed this even before receiving the amount?

A: Because before the withdrawal was made, Mr. Pike, the depositor came to the bank when he withdrew the $2,000.00 and instructed me or requested us even the supervisor to honor all withdrawal slip.

Q:

And this is a regular procedure?

A:

Yes, sir.

Q:

Are you sure of that?

A:

Yes, sir.

Q:

Do you have written manual on this particular procedure, Mr. Witness?

A:

Of course, that includes in the Rules and regulations of the bank.

Q:

Are you are (sic) are very sure of that?

A:

And banking is a fast transaction between the depositor and the bank.
Banking Page 88

A:

And banking is a fast transaction between the depositor and the bank.

Q:

And then, is the use of the back portion of the withdrawal slip with a heading of authorization?

A: Normally, a depositor and the bank agrees on certain terms that if you allow withdrawal from his account, his or her account, its enough that the signature of the depositor appears on both spaces in the front side of the withdrawal slip. Even if you do not have the back portion of the withdrawal slip.

Q:

You are very sure of that?

A:

Yes, sir.

Q: And that has been done with the other withdrawal slip of Norman Pike as stated or as shown in the Statement of Account?

A:

Yes, sir.

Q:

That withdrawal made by representative?

A:

Yes, sir.

From the foregoing, petitioner PNBs witness was utterly remiss in protecting the banks client, as well as the bank itself, when he allowed an account holder to make it appear as if he was the one actually withdrawing from an account and actually receiving the withdrawn amount. Ordinarily, banks allow withdrawal by someone who is not the account holder so long as the account holder authorizes his representative to withdraw and receive from his account by signing on the space provided particularly for such transactions, usually found at the back of withdrawal slips. As fittingly found by the courts a quo, if indeed, respondent Pike signed the withdrawal slips in the presence of Mr. Lorenzo Bal, petitioner PNBs AVP at its Buendia branch, why did he not call respondent Pikes attention and refer him to the space provided for authorizing representatives to withdraw from and receive the proceeds of such withdrawal? Or, at the very least, sign or initial the same so that he could identify the pre-signed withdrawal slips made by Mr. Pike?

Banking Page 89

Q:

You are also saying that on March 15, 1993, you likewise met Joy Manuel Dabasol?

A:

Yes, sir.

Q:

And you (sic) also saying on March 15, 1993, you also met Norman Pike, the depositor,

A:

Yes, sir.

Q:

And when did you first met (sic) Norman Pike?

A:

March 15 when he withdrew $2,000.00.

Q:

That was the first time?

A:

First time, yes.

Q: And Mr. Norman Pike was already transacting with you long before that day, is this correct? For how long was he transacting with you?

A:

That was my first time.

Q: That was the first time. What I mean is, that he was transacting with the PNB, Buendia Branch long before you met him?

A:

Maybe.

Banking Page 90

Q: And the withdrawal made on April 5, 1993 which you approved, you did not look at Exhibit C, the Savings Signature Card Individual?

A:

We do not look at that, that is kept in the vault.

Q:

Yes or no?

A:

No, sir.

Q:

And Mr. witness, Exhibit C-1*22+ which is being kept at your vault, also contains a picture?

A:

Yes, sir.

Q:

And the picture of the depositor?

A:

Yes, sir.

Q:

And are you familiar with the identity of the depositor Norman Pike?

A:

What particular identity?

Q:

His appearance?

A:

He is gay looking fellow.

Banking Page 91

COURT:

Answer. You are familiar with his physical appearance?

A:

Not so much. Because there are so much depositor (sic) in the bank.[23] [Emphasis ours.]

By his own testimony, the witness negated the very reason for the banks bizarre accommodation of the alleged verbal request of respondent Pike that he was a valued client. From the aforequoted, it appears that the witness, Lorenzo Bal, was not even reasonably familiar with respondent Pike, yet, he was ready, willing and able to accommodate the verbal request of said depositor. Worse still, the witness still approved the withdrawal transaction without asking for any proof of identification for the reason that: 1) Davasol was in possession of a pre-signed withdrawal slip; and 2) the witness recognized the signature of respondent Pike even after admitting that he did not bother to counter check the signature on the slip with the specimen signature card of respondent Pike and that he met respondent Pike just once so that he cannot seem to recall what the latter looks like. The ensuing quoted testimony of the same witness will justify a finding of negligence amounting to bad faith, to wit:

Q:

And you also met Joy Manuel Dabasol on March 15?

A:

Yes, sir.

Q:

And can you describe Joy Manuel Dabasol?

A: I cannot recall his face but then he is a Talent manager, because there are so many depositors in the bank.

...

Q: Mr. witness, you are saying that Mr. Pike, the depositor gave you verbal authority to honor withdrawal by Joy Manuel Dabasol?

A:

Yes, sir.

Banking Page 92

A:

Yes, sir.

Q: Why did you not require then that Mr. Pike instead sign the authorization portion and that the name of Joy Manuel Dabasol appear thereon with his signature?

...

A:

I required Mr. Norman Pike to sign the withdrawal slip on the face of the withdrawal slip.

Q:

But not the authorization portion of the said withdrawal slip?

...

A:

No, because that is sufficient already.

Q:

And is this your normal procedure, Mr. witness? This particular procedure that you conducted?

A:

I dont think so.

Q: Mr. witness, when on April 5, 1993, when Joy Dabasol came to the office and according to you, you do not remember him, is that correct?

A:

I cannot recall his face.

...

Q:

And he just showed you a withdrawal slip, is this correct?

A:

Yes, on April 5.

Banking Page 93

Q:

Did you require him to produce any Identification Card, yes or no?

A:

No.

Q:

And how did you know then that it was Joy Dabasol who was making the withdrawal on April 5?

A:

Because the presigned withdrawal slip was presented to me.

Q:

Is that all your basis?

A:

Yes, sir. Because his signature appears.

...

Q: Mr. witness, this alleged authority given to you by Norman Pike to honor withdrawal by Joy Manuel Dabasol, was that in writing?

A:

It was verbally requested.

Q:

And that is SPO (sic) of PNB, Buendia Branch to accept verbal authorities?

A:

Yes.

Q:

Is that Standard Operating Procedure?

A: It is not SPO, but when you knew the client, Your Honor, you have to honor also the trust and confidence. Let us say if you

Banking Page 94

Q: According to you, you met Norman Pike only on March 15, 1993 and immediately you allowed him to withdraw through pre-signed withdrawal slip?

A: Yes, Your Honor. Because a depositor requested you to honor his signature, you have to do that or else willand besides the request is for purpose of expediency, Your Honor. Because most often than that, he is out of the country, in Japan. And his Talent Manager is the one managing the recruiting agency. The money will be used in the operating expenses.

...

Q:

You did not even bother to look at the Savings Signature Card Individual, yes or no?

A:

No, sir.[24] [ mphases supplied.]

Having admitted that pre-signed withdrawal slips do not constitute the normal procedure with respect to withdrawals by representatives should have already put petitioner PNBs employees on guard. Rather than readily validating and permitting said withdrawals, they should have proceeded more cautiously. Clearly, petitioner banks employee, Lorenzo T. Bal, an Assistant Vice President at that, was exceedingly careless in his treatment of respondent Pikes savings account.

From the foregoing, the evidence clearly showed that the petitioner bank did not exercise the degree of diligence that it ought to have exercised in dealing with their clients.

With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more than that of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. Thus, 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. Section 2 of Republic Act No. 8791,[25] which took effect on 13 June 2000, makes a categorical declaration that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance.*26+

Though passed long after the unauthorized withdrawals in this case, the aforequoted provision is a statutory affirmation of Supreme Court decisions already in esse at the time of such withdrawals. We
Banking Page 95

statutory affirmation of Supreme Court decisions already in esse at the time of such withdrawals. We elucidated in the 1990 case of Simex International, Inc. v. Court of Appeals,*27+ that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.*28+

Likewise, in the case of The Consolidated Bank and Trust Corporation v. Court of Appeals,[29] we clarified that said fiduciary relationship means that the banks obligation to observe highest standards of integrity and performance is deemed written into every deposit agreement 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. Article 1172 of the New Civil Code states that the degree of diligence required of an obligor[30] is that prescribed by law or contract, and absent such stipulation then the diligence of a family. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such accounts consist only of a few hundred pesos or of millions of pesos.[31]

Anent the issue of the propriety of the award of damages in this case, petitioner PNB asseverates that there was no evidence to prove that respondent Pike suffered anguish, embarrassment and mental sufferings*32+ due to its acts in allowing the alleged unauthorized withdrawals. And, having relied on the instructions of a valued depositor, petitioner PNB likewise avers that its actions were made in good faith, for this reason, there is no factual basis for said award.

Petitioner PNBs assertions fail to impress us.

The award of moral and exemplary damages is left to the sound discretion of the court, and if such discretion is well exercised, as in this case, it will not be disturbed on appeal.[33] In the case of Philippine Telegraph & Telephone Corporation v. Court of Appeals,[34] we had the occasion to reiterate the conditions to be met in order that moral damages may be recovered. In said case we stated:

An award of moral damages would require, firstly, evidence of besmirched reputation, or physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that the case is predicated on any of the instances expressed or envisioned by Articles 2219[35] and 2220[36] of the Civil Code.

Specifically, in culpa contractual or breach of contract, as here, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith,[37] or is found guilty of gross negligence amounting to bad faith,[38] or in wanton disregard of his contractual obligations.[39] Verily, the breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive.[40]

Banking Page 96

There is no reason to disturb the trial courts finding of petitioner banks employees negligence in their treatment of respondent Pikes account. In the case on hand, the Court of Appeals sustained, and rightly so, that an award of moral damages is warranted. For, as found by said appellate court, citing the case of Prudential Bank v. Court of Appeals,*41+ the banks negligence is a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business, as banking, hence, the award of P20,000.00 as moral damages, is proper.

The award of exemplary damages is also proper as a warning to petitioner PNB and all concerned not to recklessly disregard their obligation to exercise the highest and strictest diligence in serving their depositors.

Finally, the aforestated grant of exemplary damages entitles respondent Pike the award of attorney's fees in the amount of P20,000.00 and the award of P10,000.00 for litigation expenses.[42]

WHEREFORE, the instant petition is DENIED. The assailed Decision dated 19 December 2002, and the Resolution dated 02 April 2003, both of the Court of Appeals, in CA-G.R. CV No. 59389, which affirmed with modification the Decision rendered by the Regional Trial Court (RTC), Branch 07 of Manila, dated 10 January 1997, in Civil Case No. 94-68821, are hereby AFFIRMED with the modification that petitioner PNB is directed to pay respondent Pike additional 1) P20,000.00 representing attorneys fees; and 2) P10,000.00 representing expenses of litigation. Costs against petitioner PNB.

SO ORDERED.

MINITA V. CHICO-NAZARIO Associate Justice

WE CONCUR:

REYNATO S. PUNO

Banking Page 97

REYNATO S. PUNO Associate Justice Chairman

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice ROMEO J. CALLEJO, SR.

Associate Justice

DANTE O. TINGA
Associate Justice

ATT ES T AT I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Associate Justice Chairman, Second Division

Banking Page 98

CE R T I F I C AT I O N

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairmans Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

HILARIO G. DAVIDE, JR.

Chief Justice

[1] Penned by Associate Justice Juan Q. Enriquez, Jr. with Associate Justices Bernardo P. Abesamis and Edgardo F. Sundiam, concurring; Rollo, p. 8. [2] Rollo, p. 16.

[3] 43.
[4]

Penned by Honorable Enrico A. Lanzanas, presiding judge of RTC-Branch 07, Manila; Rollo, p.

Records, pp. 1-5.

[5] In his complaint filed before the RTC, herein respondent Pike prayed that judgment be rendered ordering defendant PNB (herein petitioner) to pay the following: 1. damages; US$7,500.00 plus 3% interest per month until fully paid representing actual

2.
3.

P25,000.00 for and as attorneys fees plus P1,000.00 honorarium per court appearance;
P50,000.00 as moral damages;

4.
5.

P50,000.00 as exemplary damages; and

P20,000.00 as cost of suit and litigation expenses.

RTC Records, p. 4. [6] [7] Records, pp. 22-47. Rollo, pp. 52-54.

Banking Page 99

[8] [9] [10] [11]

Rollo, pp. 54-55. [denial of mr by rtc]. Rollo, p. 15. Rollo, pp. 12-13.

*12+ According to petitioner PNBs AVP Lorenzo T. Bal, respondent Pike gave verbal instructions to allow the latters representative, namely Joy Manuel Davasol, to be able to withdraw from said US $ Savings Account by presenting a pre-signed withdrawal slip.

[13] The person who, undisputedly, withdrew the amount of $7,500.00 from the US Dollar Savings Account of respondent Pike. [14] Prudential Bank and Trust Company v. Reyes, G.R. No. 141093, 20 February 2001, 352 SCRA 316; and Langkaan Realty Development, Inc. v. United Coconut Planters Bank, G.R. No. 139437, 08 December 2000, 347 SCRA 542. [15] [16] Elayda v. Court of Appeals, G.R. No. 49327, 18 July 1991, 199 SCRA 349. Appeal by Certiorari to the Supreme Court

[17] Question of law has been defined as one that does not call for any examination of the probative value of the evidence presented by the parties. [18] [19] [20] [21] Borromeo v. Sun, G.R. No. 75908, 22 October 1999, 317 SCRA 176. BPI v. Court of Appeals, G.R. No. 102383, 26 November 1992, 216 SCRA 51. TSN, 01 December 1994, pp. 18-20. Withdrawal slip for $4,000.00.

[22]
[23]

Savings Signature Card of Norman Pike.

TSN, 01 December 1994, pp. 22-25.

[24]
[25]

Id., pp. 26-52.

The General Banking Law of 2000.

[26] The Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No.138569, 11 September 2003, 410 SCRA 562.

[27]

G.R. No. 88013, 19 March 1990, 183 SCRA 360.

[28] Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162, 21 February 1992, 206, SCRA 408; Tan v. Court of Appeals, G.R. No. 108555, 20 December 1994, 239 SCRA 310; Metropolitan Bank & Trust Co v. Court of Appeals, G.R. No. 112576, 26 October 1994, 237 SCRA 761; Firestone v. Court of Appeals, G.R. No. 113236, 05 March 2001, 353 SCRA 601.

Banking Page 100

[29]

Supra, note 19.

[30] The provisions of the New Civil Code on simple loan govern the contract between a bank and its depositor. Specifically, Article 1880 categorically provides that . . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Thus, the relationship between a bank and its depositor is that of a debtor-creditor, the depositor being the creditor as it lends the bank money; and the bank is the debtor, which agrees to pay the depositor on demand. [31] *32+ [33] Supra, note 11. Petitioner PNBs Memorandum, p. 43; Rollo, p. 277. Barzaga v. Court of Appeals, G.R. No. 115159, 12 February 1997, 268 SCRA 105, 1997.

[34]
[35]

G.R. No. 139268, 03 September 2002.

Art. 2219. Moral damages may be recovered in the following and analogous cases:

(1)

A criminal offense resulting in physical injuries;

(2)

Quasi-delicts causing physical injuries;

(3)

Seduction, abduction, rape or other lascivious acts;

(4)

Adultery or concubinage;

(5)

Illegal or arbitrary detention or arrest;

(6)

Illegal search;

(7)

Libel, slander or any other form of defamation;

(8)

Malicious prosecution;

(9)

Acts mentioned in article 309;

Banking Page 101

(10)

Acts of actions referred to in articles 21, 26, 27, 28, 2930, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may mentioned in No. 9 of this article, in the order named.

bring the action

[36] Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. [37]
[38] [39] [40] [41] [42]

Article 2220 New Civil Code.

Supra. Supra, note 27. Herbosa v. Court of Appeals, G.R. No. 119086, 25 January 2002, 374 SCRA 578. G.R. No. 125536, 16 March 2000, 328 SCRA 264. Art. 2208 (1) of the New Civil Code provides:

Art. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot be recovered, except:
(1) . When exemplary damages are awarded;

\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/

([2005V1071] PHILIPPINE NATIONAL BANK, Petitioner, versus NORMAN Y. PIKE, Respondent., G.R. No. 157845, 2005 Sep 20, 2nd Division)

Banking Page 102

Digest: PNB v. Pike

Saturday, July 11, 2009 12:05 PM

PNB vs Pike Date: September 20, 2005 Petitioner: PNB Respondent: Norman Pike Ponente: Chico Nazario Facts: Norman Pike often traveled to and from Japan as a gay entertainer in said country. Sometime in 1991, he opened U.S. Dollar Savings Account with PNB Buendia branch for which he was issued a passbook. The complaint alleged that before Pike left for Japan on 18 March 1993, he kept the passbook inside a cabinet under lock and key, in his home. A few hours after he arrived from Japan, he discovered that some of his valuables were missing including the passbook; that he immediately reported the incident to the police which led to the arrest and prosecution of a certain Mr. Joy Manuel Davasol. Pike also discovered that Davasol made 2 unauthorized withdrawals from his U.S. Dollar Savings Account. Pike went to PNBs Buendia branch and verbally protested the unauthorized withdrawals and likewise demanded the return of the total withdrawn amount of U.S. $7,500.00, on the ground that he never authorized anybody to withdraw from his account as the signatures appearing on the subject withdrawal slips were clearly forgeries. PNB refused to credit said amount back to Pikes U.S. Dollar Savings Account , and instead, the bank wrote him that it exercised due diligence in the handling of said account. Pike filed a case against PNB. PNB, on the other hand, claimed that before Pike went to Japan, he and Davasol went to see PNB AVP Mr. Lorenzo Val and instructed the latter to honor all withdrawals to be made by Davasol. After the loss of Pikes passbook, he allegedly withdraw the balance from his passbook and executed an affidavit promising not to hold responsible the bank and its officers for the withdrawal made. The trial court ruled that the bank is liable for the unauthorized withdrawals. The bank was negligent in the performance of its duties such that unauthorized withdrawals were made in the deposit of Pike. The CA affirmed the findings of the RTC that indeed defendant-appellant PNB was negligent in exercising the diligence required of a business imbued with public interest such as that of the banking industry, however, it modified the rate of interest and award for damages. Issue: WON PNB is liable for the unauthorized withdrawals Held: Yes Ratio A priori, it is quite evident that the petition is anchored on a plea to review or re-examine the factual conclusions reached by the trial court and affirmed by the CA, and for this Court to hold otherwise. Whether:
1) Pikes signatures appearing on the pertinent withdrawal slips used by Joy Manuel Davasol to withdraw the amount of $7,500.00, were forgeries, as found by the trial court and affirmed by the Court of Appeals, or were authentic as claimed by petitioner bank; and 2) Pike in fact executed a waiver absolving petitioner bank from any legal responsibility due to the unauthorized withdrawals, as maintained by petitioner bank, or the paragraph containing said waiver was intercalated by some other person, thus, amounting no waiver at all, as held by the courts a quo.

Are questions of fact and not of law. Inexorably, these issues call for an inquiry into the facts and evidence on record. This, as we have so often held, we cannot do. Elementary is the rule that this Court is not the appropriate venue to consider anew the factual issues as it is not a trier of facts, and, it generally does not weigh anew the evidence already passed upon by the Court of Appeals. When this Court is tasked to go over once more the evidence presented by both parties, and analyze, assess and weigh them to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of evidence of one party or the other, the Court cannot and will not do the same. Finding no other alternative but to affirm their finding that petitioner PNB negligently allowed the unauthorized withdrawals subject of the case at bar, the instant petition for review must necessarily fail. It bears emphasizing that negligence of banking institutions should never be countenanced. The negligence here lies in the lackadaisical attitude exhibited by employees of PNB in their treatment of respondent Pikes US Dollar Savings Account that resulted in the unauthorized withdrawal of $7,500. Nevertheless, though its

Banking Page 103

US Dollar Savings Account that resulted in the unauthorized withdrawal of $7,500. Nevertheless, though its employees may be the ones negligent, a banks liability as an obligor is not merely vicarious but primary, as banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees, and having such obligation, this Court cannot ignore the circumstances surrounding the case at bar how the employees of PNB turned their heads, nay, closed their eyes to the suspicious circumstances enfolding the two withdrawals subject of the case at bar. It may even be said that they went out of their ways to disregard standard operating procedures formulated to ensure the security of each and every account that they are handling. PNB does not deny that the withdrawal slips used were in breach of standard operating procedures of banks in the ordinary and usual course of banking operations as testified to by one of its witnesses, Mr. Lorenzo T. Bal. PNBs witness was utterly remiss in protecting the banks client, as well as the bank itself, when he allowed an account holder to make it appear as if he was the one actually withdrawing from an account and actually receiving the withdrawn amount. Ordinarily, banks allow withdrawal by someone who is not the account holder so long as the account holder authorizes his representative to withdraw and receive from his account by signing on the space provided particularly for such transactions, usually found at the back of withdrawal slips. As fittingly found by the courts a quo, if indeed, respondent Pike signed the withdrawal slips in the presence of Lorenzo Bal, PNBs AVP at its Buendia branch, why did he not call Pikes attention and refer him to the space provided for authorizing representatives to withdraw from and receive the proceeds of such withdrawal? Or, at the very least, sign or initial the same so that he could identify the pre-signed withdrawal slips made by Mr. Pike? By his own testimony, the witness negated the very reason for the banks bizarre accommodation of the alleged verbal request of Pike that he was a valued client. From the aforequoted, it appears that Lorenzo Bal, was not even reasonably familiar with Pike, yet, he was ready, willing and able to accommodate the verbal request of said depositor. Worse still, the witness still approved the withdrawal transaction without asking for any proof of identification for the reason that: 1) Davasol was in possession of a pre-signed withdrawal slip; and 2) the witness recognized the signature of respondent Pike even after admitting that he did not bother to counter check the signature on the slip with the specimen signature card of Pike and that he met respondent Pike just once so that he cannot seem to recall what the latter looks like. Having admitted that pre-signed withdrawal slips do not constitute the normal procedure with respect to withdrawals by representatives should have already put PNBs employees on guard. Rather than readily validating and permitting said withdrawals, they should have proceeded more cautiously. Clearly, Lorenzo T. Bal, an Assistant Vice President at that, was exceedingly careless in his treatment of respondent Pikes savings account. From the foregoing, the evidence clearly showed that the bank did not exercise the degree of diligence that it ought to have exercised in dealing with their clients. With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more than that of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. Thus, 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. Section 2 of Republic Act No. 8791,[25] which took effect on 13 June 2000, makes a categorical declaration that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. Issue: WON the award of damages was proper Held: Yes Ratio: The award of moral and exemplary damages is left to the sound discretion of the court, and if such discretion is well exercised, as in this case, it will not be disturbed on appeal. An award of moral damages would require, firstly, evidence of besmirched reputation, or physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that the case is predicated on any of the instances expressed or envisioned by Articles 2219 and 2220 of the Civil Code. Specifically, in culpa contractual or breach of contract, as here, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith,[38] or in wanton disregard of his contractual obligations. Verily, the breach must be wanton, reckless,

Banking Page 104

faith,[38] or in wanton disregard of his contractual obligations. Verily, the breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive. There is no reason to disturb the trial courts finding of the banks employees negligence in their treatment of Pikes account. In the case on hand, the Court of Appeals sustained, and rightly so, that an award of moral damages is warranted. For, as found by said appellate court, citing the case of Prudential Bank v. Court of Appeals, the banks negligence is a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business, as banking, hence, the award of P20,000.00 as moral damages, is proper. The award of exemplary damages is also proper as a warning to petitioner PNB and all concerned not to recklessly disregard their obligation to exercise the highest and strictest diligence in serving their depositors. Finally, the grant of exemplary damages entitles respondent Pike the award of attorney's fees in the amount of P20,000.00 and the award of P10,000.00 for litigation expenses.
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Banking Page 105

Cadiz v. CA
Wednesday, July 08, 2009 9:22 AM

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\

[2005V1279] ROMEO C. CADIZ, CARLITO BONGKINGKI and PRISCO GLORIA IV, Petitioners, versus COURT OF APPEALS, and PHILIPPINE COMMERCIAL INTERNATIONAL BANK (Now EQUITABLE PCIBANK), Respondents.2005 Oct 252nd DivisionG.R. No. 153784D E C I S I O N

Tinga, J.:

Employees who abuse their position for fiduciary gain cannot be shielded from the consequences of their wrongdoing even on account of the banks operational laxities that may have provided the gateway for their shenanigans. Their misconduct provides the bank with cause for the termination of their employment.
The facts follow. Petitioners Romeo Cadiz (Cadiz), Carlito Bongkingki (Bongkingki) and Prisco Gloria IV (Gloria) were employed as signature verifier, bookkeeper, and foreign currency denomination clerk/bookkeeperreliever, respectively, in the main office branch (MOB) of Philippine Commercial International Bank (respondent bank). The anomalies in question arose when Rosalina B. Alqueza (Alqueza) filed a complaint with PCIB for the alleged non-receipt of a Six Hundred Dollar ($600.00) demand draft drawn against it which was purchased by her husband from Hongkong and Shanghai Banking Corporation. Upon verification, it was uncovered that the demand draft was deposited on 10 June 1988 with FCDU Savings Account (S/A) No. 1083-4, an account under the name of Sonia Alfiscar (Alfiscar). Further investigation revealed that the demand draft, together with four (4) other checks, was made to appear as only one deposit covered by HSBC Check No. 979120 for One Thousand Two Hundred Thirty-two Dollars (US$1,232.00).

The Branch Manager, Ismael R. Sandig, then presided over a series of meetings, wherein Cadiz, Bongkingki and Gloria allegedly verbally admitted their participation in a scheme to divert funds intended for other accounts using the Savings Account of Alfiscar. Subsequently, Cadiz allegedly paid Alqueza P12,690.00, the peso equivalent of US$600, but insisted that the corresponding receipt be issued in Alfiscars name instead.

On account of these allegations, a special audit examination was conducted by the bank. On 31 January 1989, the internal auditors of the bank, headed by Lizza G. Baylon, submitted their findings in an official report. The auditors determined that as early as July 1987, petitioner Cadiz had reserved the savings account in the name of Sonia Alfiscar. The account was opened on 27 November 1987 and closed on 23 June 1988. Twenty-five (25) deposit slips involving the account were posted by Bongkingki while sixteen (16) deposit slips were posted by Gloria. A verification of the deposit slips yielded findings of miscoded checks, forged signatures, non-validation of deposit slips by the tellers, wrongful deposit of secondendorsed checks into foreign currency deposit accounts, the deposit slips which do not bear the required approval of bank officers, and withdrawals made either on the day of deposit or the following banking day.[1]
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banking day.[1]

In view of such findings, show-cause memoranda[2] were served on petitioners, requiring them to explain within seventy-two (72) hours why no disciplinary action should

be taken against them in connection with the results of the special audit examination. On 22 March 1989, petitioners submitted their written explanations.[3] Not satisfied with their explanations, respondent bank in memoranda[4] all dated 22 June 1989 dismissed petitioners from employment for violation of Article III Section 1 B-2 and Article III Section 1-C of the Code of Discipline.

Petitioners lodged a complaint before the labor arbiter for illegal dismissal on 18 September 1989. Labor Arbiter Ernesto S. Dinopol adjudged that petitioners were illegally dismissed and ordered their reinstatement and payment of backwages. This conclusion was based on the notices of dismissal, which, to the mind of the labor arbiter, was couched in general terms and without explaining how the rules were violated. The labor arbiter also attributed petitioners acts in fraudulently coding several deposit slips as 1511 (immediately withdrawable) as mere procedural inadequacies, with the fault attributable to respondent bank for its laxity.[5]

The labor arbiters Decision was reversed on appeal before the Second Division of the National Labor Relations Commission (NLRC), which, in a Decision[6] dated 30 June 1994, ordered the dismissal of the petition. In doing so, the NLRC departed from the labor arbiters finding of facts and concluded that petitioners were dismissed for just cause. Dismissing petitioners appeal, the Court of Appeals Ninth Division similarly determined on the basis of substantial evidence that petitioners were validly terminated in its own Decision[7] dated 13 July 2001.

After the appellate court denied petitioners motion for reconsideration, the matter was brought before this Court in a Petition for Review on Certiorari.[8]

The issues to be resolved are whether the Court of Appeals erred in not sustaining the findings of the labor arbiter and upholding those of the NLRC and whether the Court of Appeals erred in dismissing the petition by ignoring petitioners claims that they were dismissed without just cause and due process.*9+

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In its Comment,[10] respondent bank seeks to have the petition dismissed inasmuch as all the issues raised herein involve questions of fact. We note that as a general rule, only questions of law may be brought upon this Court in a petition for review on certiorari under Rule 45 of the Rules of Court. This Court is not a trier of facts, and as such is tasked to calibrate and assess the probative weight of evidence adduced by the parties during trial all over again.[11]

However, if there are competing factual findings by the different triers of fact, such as those made in this case by the labor arbiter on one hand, and those of the NLRC and Court of Appeals on the other hand, this Court is compelled to go over the records of the case, as well as the submissions of the parties, and resolve the factual issues.[12] With this in mind, we shall now proceed to examine the decisions under review.

The general thesis as laid down by the NLRC and Court of Appeals is that petitioners had surreptitiously diverted funds deposited by depositors to S/A No. 1083-4 which was under their control and disposition. On the other hand, a perusal of the labor arbiters Decision reveals a different perspective from which the case was approached. While the labor arbiter conceded that petitioners Bongkingki and Gloria had miscoded several deposit slips, rendering them immediately withdrawable, he characterized the errors as mere procedural inadequacies which were preventable had management exercised greater control over its employees.[13]

Far from petitioners thrust, the miscoding of deposit slips cannot be downplayed as mere procedural inadequacies. After all, it is such miscoding that precipitated the fraudulent withdrawals in the first place. The act operated as the first indispensable step towards the commission of fraud on the bank.

More disturbing though is the labor arbiters willingness to acquit petitioners of culpability on account of the purported negligence of the bank. It is similar to concluding that the bank guards, and not the burglars, bear primary culpability for a bank robbery. Whatever liability or responsibility was expected of the bank stands as an issue separate from the liability of the recreant bank employees. Even assuming that the bank observed less-than-ideal controls over the security of its operations, such laxity does not serve as the carte blanche signal for the bank employees to take advantage of safeguard control lapses and perpetrate chicanery on their employer.

The labor arbiter also evaluated the banks claim that Cadiz had reimbursed the amount of $600 to the aggrieved depositor Alqueza while making it appear that it was Alfiscar who had actually made the refund. In disbelieving this claim, the Labor Arbiter concluded that it is unthinkable for a lowly bank employee to impose his will upon his high and mighty employer.*14+

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This pronouncement is revelatory of absurd logic. The notion that a lowly employee will never countermand the will or interests of the employer is sufficiently rebutted by any labor law casebook, any omnibus of our labor jurisprudence, and the evolution of the human experience that disquiets persons from unhesitatingly acceding to the presumptive good faith of others. It is an accepted premise of life and jurisprudence that persons are capable, upon impure motivations, of taking advantage of others, whether their social lessers, equals, or betters. The necessity of punishment arises from this flaw of human nature. This philosophic stance of the labor arbiter actually obviates the nature of sin.

Obviously, we are hard-pressed to accord high regard to the labor arbiters discernment as a trier of facts. Nonetheless, his claim that there were procedural flaws attending the dismissal of petitioners warrants some deliberation.

The labor arbiter ruled that the notices of dismissal served on petitioners was insufficient as it failed to specifically delineate how petitioners had violated the internal rules of the bank. However, the notices do cite the rules which petitioners had violated and refer to the fact that such violations occurred relating to S/A No. 1083-4 account of Sonia Alfiscar and/or Rosalinda Alqueza.

There is no demand that the notices of dismissal themselves be couched in the form and language of judicial or quasi-judicial decisions. What is required is that the employer conduct a formal investigation process, with notices duly served on the employees informing them of the fact of investigation, and subsequently, if warranted, a separate notice of dismissal.[15] Through the formal investigatory process, the employee must be accorded the right to present his/her side, which must be considered and weighed by the employer. The employee must be sufficiently apprised of the nature of the charge against him/her, so as to be able to intelligently defend against the charges.

In the instant case, records show that respondent bank complied with the two-notice rule prescribed in Article 277(b) of the Labor Code.[16] Petitioners were given all avenues to present their side and disprove the allegations of respondent bank. An informal meeting was held between the branch manager of MOB, the three petitioners and Mr. Gener, the Vice-President of the PCIB Employees Union. As per report, petitioners admitted having used Alfiscars account to divert funds intended for other accounts. A special audit investigation was conducted to determine the extent of the fraudulent transactions. Based on the results of the investigation, respondent bank sent show-cause memoranda to petitioners, asking them to explain their lapses, under pain of disciplinary action. The memoranda, which constitute the first notice, specified the various questionable acts committed by petitioners.

Afterwards, petitioners submitted their respective replies to the memoranda. This very well complies with the requirement for hearing, by which petitioners were afforded the opportunity to defend themselves. The second notice came in the form of the termination memoranda, informing petitioners of their dismissal from service. From the foregoing, it is clear that the required procedural due process for their termination was strictly complied with.

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All told, we hold that the factual appreciation and conclusions rendered by the labor arbiter are not worthy of adoption by this Court. In contrast, from the factual determinations made by the NLRC and the Court of Appeals, we accept the following facts as proven:

1. Petitioner Cadiz reserved S/A No. 1083-4 in July 1987 as reflected on respondent banks new account register. 2. Foreign denominated checks payable to other payees were diverted into the said account.

3. The various deposit slips, covering the said checks, did not bear the machine validation of any of the tellers-in-charge.

4.
5. 6.

The signatures of the MOB officers appearing on the said deposit slips were in fact forged.
The posting of said bank transactions bore the initials of petitioners Bongkingki or Gloria. The deposit slips were coded as 1511 or on-us check.

7. Petitioner Cadiz agreed to pay Alqueza the equivalent amount of $600.00 but it was made to appear that Alfiscar paid the said amount. 8. In view of these findings, petitioners were served with show-cause memoranda asking them to explain the lapses. 9. Finding their explanations unsatisfactory, petitioners were terminated from employment.

It is from these established facts that we consider the arguments now presented by petitioners. In light of these facts, petitioners arguments hardly detract from the conclusion that their behavior in the course of the discharge of their duties is clearly malfeasant, and constitutes ground for their termination on account of just cause.

First, petitioners insist that the show-cause memoranda served on them did not impute any fraudulent behavior, but merely lapses. We disagree.

The show-cause memoranda were occasioned by the confidential report prepared by Sandig, as well as the findings of the special audit examination. The confidential report prepared by Sandig addressed to the Vice-President of respondent bank pertains to the discovery of fraudulent transactions on S/A No.1083-4 involving three employees of respondent bank. The report detailed how the events transpired, including the admissions of petitioners. From there, a special audit examination was conducted to make a thorough investigation of the questioned account. The examination yielded conspicuous findings that anomalous transactions had taken place involving petitioners.

Moreover, the show-cause memoranda respectively served on petitioners clearly indicate that they
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Moreover, the show-cause memoranda respectively served on petitioners clearly indicate that they were being made to answer questions pertaining to possible anomalous behavior on their part. For example, petitioners were asked to explain why they had posted the questioned deposits on the ledger, although there were no teller validations or teller stamps, and also on what basis they considered such transactions to be valid.[17] On the other hand, the show-cause memorandum to Cadiz directly asks him to provide the personal details of Sonia Alfiscar, why he went out of his way to make a special arrangement for the mysterious Alfiscar, and other questions pertaining to the Alfiscar accounts.

We thus cannot give credence to the averments of petitioners that the memoranda pertain to lapses, and not fraudulent transactions. The bank could not have been expected to conclude outright that petitioners were guilty of fraud, despite all the indicia that they indeed were. Certainly, the purpose of the show-cause memoranda was to afford petitioners the opportunity to acquit themselves of culpable responsibility. It would have been quite irresponsible for the bank to have premised the queries therein on irretractable conclusions that petitioners had been guilty of anomalous transactions.

Second, petitioners contend that they should be relieved of any liability considering that respondent bank did not suffer a pecuniary loss. This claim must obviously fail.

There is jurisprudential support, as noted by the Court of Appeals in citing University of the East v. NLRC*18+ that lack of material or pecuniary damages would not in any way mitigate a persons liability nor obliterate the loss of trust and confidence. In the case of Etcuban v. Sulpicio Lines,[19] this Court definitively ruled that:

. . . Whether or not the respondent bank was financially prejudiced is immaterial. Also, what matters is not the amount involved, be it paltry or gargantuan; rather the fraudulent scheme in which the petitioner was involved, which constitutes a clear betrayal of trust and confidence. . . .

Moreover, it cannot be discounted that as bank employees, the responsibilities of petitioners are impressed with a high degree of public interest. Private persons entrust their fortunes to banks, and it would cause a breakdown of the financial order if the judicial system were to leave unsanctioned bank employees who treat depositors accounts as their own private kitty.

Still, petitioners insist that respondent bank never lost trust and confidence in them as it did not place them under preventive suspension, and more tellingly, it even promoted them after the labor arbiter had ordered their reinstatement. Preventive suspension, which is never obligatory on the part of the employer, may be resorted to only when the continued employment of the employee poses a serious and imminent threat to the life or property of the employer or of his co-workers.*20+ The bank points out that the Alfiscar account, through which the anomalous transactions were coursed, was no longer active at the time the fraud was discovered.[21] Clearly, the bank had reason to conclude that the imminence of the threat posed by the employees was not as vital as it would have been had the dubious account still been open.

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As to the alleged promotions, the original employer, PCIB, admits that petitioners had been reinstated by reason of the Decision, but such act was by no means voluntary. PCIB however does not rebut the allegations that Bongkingki and Cadiz were assigned to sensitive positions within the bank after their compulsory reinstatement. This may be so, but the fact that PCIB lost no time in removing the employees from the plantilla after the NLRC reversed the labor arbiters Decision hardly evinces any continuing trust and confidence on the part of the bank, as maintained by petitioners. Moreover, considering that these reinstated employees were, for the meantime, regular employees of the bank, it is within the discretion of PCIB to reassign them as it sees fit, taking into account the circumstances.

Moreover, it would simply be temerarious for the Court to sanction the reinstatement of bank employees who have clearly engaged in anomalous banking practices. The particular fiduciary responsibilities reposed on banks and its employees cannot be emphasized enough. The fiduciary nature of banking[22] is enshrined in Republic Act No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance.*23+ The bank must not only exercise high standards of integrity and performance, it must also ensure that its employees do likewise because this is the only way to ensure that the bank will comply with its fiduciary duty.[24]

All given, we affirm the conclusion that petitioners were dismissed for just cause. Loss of trust and confidence is one of the just causes for termination by employer under Article 282 of the Labor Code. The breach of trust must be willful, meaning it must be done intentionally, knowingly, and purposely, without justifiable excuse.[25] Ideally, loss of confidence applies only to cases involving employees occupying positions of trust and confidence or to those situations where the employee is routinely charged with the care and custody of the employers money or property.*26+ Utmost trust and confidence are deemed to have been reposed on petitioners by virtue of the nature of their work.

The facts as established, as well as the need to assert the public interest in safeguarding against bank fraud, militate against the present petition.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court of Appeals AFFIRMED. Costs against petitioners.

SO ORDERED.

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DANTE O. TINGA

Associate Justice

WE CONCUR:

REYNATO S. PUNO Associate Justice

Chairman

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR. Associate Justice Associate Justice

(On Leave) MINITA V. CHICO-NAZARIO Associate Justice

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ATTESTATION

I attest that the conclusions in the above Decision had been in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Associate Justice Chairman, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairmans Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

HILARIO G. DAVIDE, JR.

Chief Justice

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[1]Rollo, pp. 8-9.

[2]Id. at 68-73.

[3]Id. at 75-79.

[4]Id. at 80-81.

[5]Id. at 115-123.

[6]Id. at 124-140. Penned by Commissioner Rogelio I. Rayala and concurred in by Presiding Commissioner Edna Bonto-Perez. Commissioner Victoriano R. Calaycay did not take part.

[7]Id. at 191-204. Penned by Associate Justice Delilah Vidallon-Magtolis, concurred in by Associate Justices Teodoro P. Regino and Josefina Guevara-Salonga.

[8]Id. at p. 3.

[9]Id. at 25-26.

[10]Id. at 343-425.

[11]Union Motor Corporation v. National Labor Relations Commission, G.R. No. 159738, 9 December 2004, 445 SCRA 683, citing Superlines Transportation Company, Inc. and Manolet Lavides v. ICC Leasing and Financing Corporation, G.R. No. 150673, 28 February 2003, 398 SCRA 508.

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and Financing Corporation, G.R. No. 150673, 28 February 2003, 398 SCRA 508.

[12]Fujitsu Computer Products Corporation v. Court of Appeals, G.R. No. 158232, 31 March 2005, 454 SCRA 737, citing Globe Telecom, Inc. v. Florendo-Flores, G.R. No. 150092, 27 September 2002, 390 SCRA 201; Caingat v. National Labor Relations Commission, G.R. No. 154308, 10 March 2005.

[13]Rollo, p. 120.

[14]Id. at 121.

[15]See Article 277, Labor Code.

[16] ART. 277. Miscellaneous provisions.

.. .

(b) Subject to the constitutional right of workers to security of tenure and their right to be protected against dismissal except for just and authorized cause and without prejudice to the requirement of notice under Article 283 of this Code, the employer shall furnish the worker whose employment is sought to be terminated a written notice containing a statement of the causes for termination and shall afford the latter ample opportunity to be heard and defend himself with the assistance of his representative if he so desire in accordance with company rules and regulations promulgated pursuant to guidelines set by the Department of Labor and Employment. Any decision taken by the employer shall be without prejudice to the right of the worker to contest the validity or legality of his dismissal by filing a complaint with the regional branch of the National Labor Relations Commission. The burden of proving that the termination was for a valid or authorized cause shall rest on the employer. The Secretary of the Department of Labor and Employment may certify the dispute in the event of a prima facie finding by the appropriate official of the Department of Labor and Employment before whom such dispute pending that the termination may cause a serious labor dispute or is in implementation of a mass lay-off.

[17]Rollo, pp. 458, 461.

[18]G.R. No. 71065, 22 November 1985, 140 SCRA 296.

[19]G.R. No. 148410, 17 January 2005, 448 SCRA 516.

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[19]G.R. No. 148410, 17 January 2005, 448 SCRA 516.

[20]See Section 3, Rule XIV, Book IV, Omnibus Rules Implementing the Labor Code.

[21]Rollo, p. 417.

[22]Solidbank Corporation v. Arrieta, G.R. No. 152720, 17 February 2005, 451 SCRA 711, citing Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No. 149454, 28 May 2004, 430 SCRA 261.

[23]Associated Bank v. Tan, G.R. No. 156940, 14 December 2004, 446 SCRAR 282.

[24]The Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No. 138569, 11 September 2003, 410 SCRA 562.

[25]PNCC v. Matias, G.R. No. 156283, 6 May 2005, citing Gonzales v. National Labor Relations Commission, 26 March 2001, 355 SCRA 195; P.J. Lhuillier Inc. v. National Labor Relations Commission, G.R. No. 158758, 29 April 2005, citing Tiu v. National Labor Relations Commission, G.R. No. 83433, 12 November 1992, 215 SCRA 540; Felix v. NLRC, G.R. No. 148256, 17 November 2004, 442 SCRA 465, citing De la Cruz v. NLRC, 268 SCRA 458 (1997).

[26]Supra note 16; Mabeza v. NLRC and Hotel Supreme, 338 Phil. 386 (1997).
\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/ ([2005V1279] ROMEO C. CADIZ, CARLITO BONGKINGKI and PRISCO GLORIA IV, Petitioners, versus COURT OF APPEALS, and PHILIPPINE COMMERCIAL INTERNATIONAL BANK (Now EQUITABLE PCIBANK), Respondents., G.R. No. 153784, 2005 Oct 25, 2nd Division)

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Digest: Cadiz v. CA
Saturday, July 11, 2009 12:06 PM

Cadiz vs CA Date: October 25, 2005 Petitioners: Romeo Cadiz, Carlito Bongkiki and Prisco Gloria Respondents: CA and PCIB (now Equitable PCI)

Ponente: Tinga
Facts: Romeo Cadiz, Carlito Bongkingki and Prisco Gloria IV were employed as signature verifier, bookkeeper, and foreign currency denomination clerk/bookkeeper-reliever, respectively, in the main office branch (MOB) of PCIB. The anomalies in question arose when Rosalina Alqueza filed a complaint with PCIB for the alleged non-receipt of a $600 demand draft drawn against it which was purchased by her husband from HSBC. It was uncovered that the demand draft was deposited on 10 June 1988 with FCDU Savings Account No. 1083-4, an account under the name of Sonia Alfiscar. Further investigation revealed that the demand draft, together with four (4) other checks, was made to appear as only one deposit covered by HSBC Check No. 979120 for US$1,232. Cadiz, Bongkingki and Gloria allegedly verbally admitted their participation in a scheme to divert funds intended for other accounts using the Savings Account of Alfiscar. Subsequently, Cadiz allegedly paid Alqueza P12,690, the peso equivalent of US$600, but insisted that the receipt be issued in Alfiscars name instead. A special audit examination was conducted by the bank.The auditors determined that as early as July 1987, Cadiz had reserved the savings account in the name of Alfiscar. The account was opened on 27 November 1987 and closed on 23 June 1988. 25 deposit slips involving the account were posted by Bongkingki while 16 deposit slips were posted by Gloria. A verification of the deposit slips yielded findings of miscoded checks, forged signatures, non-validation of deposit slips by the tellers, wrongful deposit of second-endorsed checks into foreign currency deposit accounts, the deposit slips which do not bear the required approval of bank officers, and withdrawals made either on the day of deposit or the following banking day. A show cause memoranda were served on petitioners. Not satisfied with the petitioners explanation, the bank dismissed them from employment. Petitioners filed a complaint before the labor arbiter for illegal dismissal. The labor arbiter ruled that petitioners were illegally dismissed as the notices of dismissal were couched in general terms. The NLRC reversed and ruled that petitioners were dismissed for just cause. The CA affirmed. Issue: WON petitioners were dismissed for just cause Held: Yes

Ratio: The general thesis as laid down by the NLRC and CA is that petitioners had surreptitiously diverted funds deposited by depositors to S/A No. 1083-4 which was under their control and disposition. On the other hand, the labor arbiters Decision reveals a different perspective. While the labor arbiter conceded that petitioners Bongkingki and Gloria had miscoded several deposit slips, rendering them immediately withdrawable, he characterized the errors as mere procedural inadequacies which were preventable had management exercised greater control over its employees. Far from petitioners thrust, the miscoding of deposit slips cannot be downplayed as mere procedural inadequacies. It is such miscoding that precipitated the fraudulent withdrawals in the first place. The act operated as the first indispensable step towards the commission of fraud on the bank. More disturbing though is the labor arbiters willingness to acquit petitioners of culpability on account of the purported negligence of the bank. It is similar to concluding that the bank guards, and not the burglars, bear primary culpability for a bank robbery. Whatever liability or responsibility was expected of the bank stands as an issue separate from the liability of the
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recreant bank employees. Even assuming that the bank observed less-than-ideal controls over the security of its operations, such laxity does not serve as the carte blanche signal for the bank employees to take advantage of safeguard control lapses and perpetrate chicanery on their employer. The labor arbiter also evaluated the banks claim that Cadiz had reimbursed the amount of $600 to the aggrieved depositor Alqueza while making it appear that it was Alfiscar who had actually made the refund. In disbelieving this claim, the Labor Arbiter concluded that it is unthinkable for a lowly bank employee to impose his will upon his high and mighty employer. This pronouncement is revelatory of absurd logic. The notion that a lowly employee will never countermand the will or interests of the employer is sufficiently rebutted by any labor law casebook, any omnibus of our labor jurisprudence, and the evolution of the human experience that disquiets persons from unhesitatingly acceding to the presumptive good faith of others. It is an accepted premise of life and jurisprudence that persons are capable, upon impure motivations, of taking advantage of others, whether their social lessers, equals, or betters. The necessity of punishment arises from this flaw of human nature. This philosophic stance of the labor arbiter actually obviates the nature of sin. The labor arbiter ruled that the notices of dismissal served on petitioners was insufficient as it failed to specifically delineate how petitioners had violated the internal rules of the bank. However, the notices do cite the rules which petitioners had violated and refer to the fact that such violations occurred relating to S/A No. 1083-4 account of Sonia Alfiscar and/or Rosalinda Alqueza. There is no demand that the notices of dismissal themselves be couched in the form and language of judicial or quasi-judicial decisions. What is required is that the employer conduct a formal investigation process, with notices duly served on the employees informing them of the fact of investigation, and subsequently, if warranted, a separate notice of dismissal. Through the formal investigatory process, the employee must be accorded the right to present his/her side, which must be considered and weighed by the employer. The employee must be sufficiently apprised of the nature of the charge against him/her, so as to be able to intelligently defend against the charges. In the instant case, records show that respondent bank complied with the two-notice rule prescribed in Article 277(b) of the Labor Code. Petitioners were given all avenues to present their side and disprove the allegations of the bank. An informal meeting was held between the branch manager of MOB, the three petitioners and Mr. Gener, the Vice-President of the PCIB Employees Union. As per report, petitioners admitted having used Alfiscars account to divert funds intended for other accounts. A special audit investigation was conducted to determine the extent of the fraudulent transactions. Based on the results of the investigation, respondent bank sent showcause memoranda to petitioners, asking them to explain their lapses, under pain of disciplinary action. The memoranda, which constitute the first notice, specified the various questionable acts committed by petitioners. Afterwards, petitioners submitted their respective replies to the memoranda. This very well complies with the requirement for hearing, by which petitioners were afforded the opportunity to defend themselves. The second notice came in the form of the termination memoranda, informing petitioners of their dismissal from service. From the foregoing, it is clear that the required procedural due process for their termination was strictly complied with. It is from these established facts that we consider the arguments now presented by petitioners. In light of these facts, petitioners arguments hardly detract from the conclusion that their behavior in the course of the discharge of their duties is clearly malfeasant, and constitutes ground for their termination on account of just cause. First, petitioners insist that the show-cause memoranda served on them did not impute any fraudulent behavior, but merely lapses. We disagree. The show-cause memoranda were occasioned by the confidential report prepared by Sandig, as well as the findings of the special audit examination. The confidential report prepared by Sandig addressed to the Vice -President of respondent bank pertains to the discovery of fraudulent transactions on S/A No.1083-4 involving three employees of respondent bank. The report detailed how the events transpired, including the admissions of petitioners. From there, a special audit examination was conducted to make a
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admissions of petitioners. From there, a special audit examination was conducted to make a thorough investigation of the questioned account. The examination yielded conspicuous findings that anomalous transactions had taken place involving petitioners. Moreover, the show-cause memoranda respectively served on petitioners clearly indicate that they were being made to answer questions pertaining to possible anomalous behavior on their part. For example, petitioners were asked to explain why they had posted the questioned deposits on the ledger, although there were no teller validations or teller stamps, and also on what basis they considered such transactions to be valid. On the other hand, the show-cause memorandum to Cadiz directly asks him to provide the personal details of Sonia Alfiscar, why he went out of his way to make a special arrangement for the mysterious Alfiscar, and other questions pertaining to the Alfiscar accounts. Second, petitioners contend that they should be relieved of any liability considering that respondent bank did not suffer a pecuniary loss. This claim must obviously fail. There is jurisprudential support, as noted by the CA in citing UE v. NLRC that lack of material or pecuniary damages would not in any way mitigate a persons liability nor obliterate the loss of trust and confidence. Moreover, it cannot be discounted that as bank employees, the responsibilities of petitioners are impressed with a high degree of public interest. Private persons entrust their fortunes to banks, and it would cause a breakdown of the financial order if the judicial system were to leave unsanctioned bank employees who treat depositors accounts as their own private kitty. Still, petitioners insist that respondent bank never lost trust and confidence in them as it did not place them under preventive suspension, and more tellingly, it even promoted them after the labor arbiter had ordered their reinstatement. Preventive suspension, which is never obligatory on the part of the employer, may be resorted to only when the continued employment of the employee poses a serious and imminent threat to the life or property of the employer or of his co-workers. The bank points out that the Alfiscar account, through which the anomalous transactions were coursed, was no longer active at the time the fraud was discovered. Clearly, the bank had reason to conclude that the imminence of the threat posed by the employees was not as vital as it would have been had the dubious account still been open. As to the alleged promotions, the original employer, PCIB, admits that petitioners had been reinstated by reason of the Decision, but such act was by no means voluntary. PCIB however does not rebut the allegations that Bongkingki and Cadiz were assigned to sensitive positions within the bank after their compulsory reinstatement. This may be so, but the fact that PCIB lost no time in removing the employees from the plantilla after the NLRC reversed the labor arbiters Decision hardly evinces any continuing trust and confidence on the part of the bank, as maintained by petitioners. Moreover, considering that these reinstated employees were, for the meantime, regular employees of the bank, it is within the discretion of PCIB to reassign them as it sees fit, taking into account the circumstances. Moreover, it would simply be temerarious for the Court to sanction the reinstatement of bank employees who have clearly engaged in anomalous banking practices. The particular fiduciary responsibilities reposed on banks and its employees cannot be emphasized enough. The fiduciary nature of banking is enshrined in RA 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. The bank must not only exercise high standards of integrity and performance, it must also ensure that its employees do likewise because this is the only way to ensure that the bank will comply with its fiduciary duty. All given, we affirm the conclusion that petitioners were dismissed for just cause. The facts as established, as well as the need to assert the public interest in safeguarding against bank fraud, militate against the present petition.
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Prudential Bank vs. Lim

Wednesday, July 08, 2009 9:25 AM

[2005V1299] PRUDENTIAL BANK, Petitioner, versus CHONNEY LIM, Respondent.2005 Nov 112nd DivisionG.R. No. 136371D E C I S I O N Tinga, J.:

This treats of the petition for review on certiorari of the Decision[1] of the Court of Appeals,[2] dated 31 July 1998, which affirmed with slight modification the Decision[3] of the Regional Trial Court (RTC),[4] granting the action filed by respondent for recovery of sum of money and damages.

Chonney Lim (respondent), the owner of Rikes Boutique located at Session Road, Baguio City, maintained two (2) accounts with Prudential Bank (the bank), namely: Savings Account No. 11264 and Checking Account No. 1262. He availed of the banks automatic transfer system wherein the funds from his savings account could be transferred to his checking account in case the balance of the latter account was insufficient to cover the checks he issued.

On 14 March 1988, respondent deposited the amount of P34,000.00 with his savings account. According to respondent, the following day, 15 March 1988, he deposited an equal amount with the same savings account. The matter is the crux of contention between the parties, as the bank has steadfastly denied having received the latter deposit from respondent.

On 24 May 1988, respondent issued a check against his current account in favor of the Paluwagan ng Bayan Savings Bank (Paluwagan) in the sum of P2,830.00 in payment of his loan with the said bank. On 25 May 1988, respondent drew another check against his checking account to the order of Teodulo Crisologo in the amount of P10,000.00 as payment for a business transaction with the latter.

The bank, however, dishonored both checks, claiming that respondent did not have sufficient funds in his account with the bank. Upon learning that the first check paid to Paluwagan had been dishonored, respondent wrote a letter[5] to the bank on 27 May 1988, asking it to recheck its records. On 30 May 1988, the banks manager, Tolentino Opiniano (Opiniano), sent a reply letter,*6+ offering, as an excuse for the dishonor of said check, the inadvertent earlier posting to respondents account of a postdated check.*7+ While Opiniano apologized for respondents inconvenience, he made no commitment to honor this first check.[8]

When the second dishonored check came to respondents knowledge, he immediately wrote a letter[9] to the bank, protesting the dishonor of the check. Opiniano sent a reply[10] stating that as per records, a deposit slip dated 15 March 1988 for P34,000.00 was received for deposit to Savings Account No. 11264 on 14 March 1988.

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Respondent denied having made only one deposit, insisting that he made two deposits of P34,000.00 each, one on 14 March and the other on 15 March. As proof, respondent presented the two separate deposit slips covering the transactions, the first bearing the date 14 March 1988 while the second, the date 15 March 1988.

After the bank had conducted a thorough investigation, on 10 June 1988, Opiniano informed respondent that two deposits were made on 14 March 1988, one for P34,000.00 and the other for P1,000.00; and that two other deposits were made on 15 March 1988: P4,900.00 and P2,900.00. He maintained that although the deposit slip bearing the amount of P34,000.00 is dated 15 March 1988, it was actually received the day before or on 14 March 1988. Thus, the banks position is that only one deposit of P34,000.00 was made by respondent on 14 and 15 March 1988.[11]

In view of the banks adamant refusal to alter its stand, respondent filed a Complaint*12+ before the RTC, Baguio City for the recovery of P34,000.00 representing his actual deposit and P300.00 as penalty charge, plus damages.

On 27 August 1991, the RTC rendered its Decision holding that respondent made two deposits of P34,000.00 apiece. Thus, the RTC ordered the bank to pay the following amounts: P34,000, representing the unposted deposit, with legal interest; P600.00, representing the service charges unjustifiably imposed on respondent, with legal interest; P50,000.00 as moral damages; P25,000.00 as exemplary damages; and P10,000.00 as attorneys fees, plus costs of suit.

On appeal, the Court of Appeals affirmed the decision of the trial court with modification as to the award of moral damages, reducing it to P10,000.00. The testimony of the bank teller, coupled with the fact that the two deposit slips listed different denominations of money totaling P34,000.00 per deposit slip, led the appellate court to conclude that there were indeed two deposits of P34,000.00 each, one made on 14 March and the other on 15 March 1988.

Before this Court, the bank argues in the main that the award of damages by the appellate court is groundless that consequently, the assailed decision is not in accord with law and jurisprudence.[13]

As a rule, the findings of fact of the trial court when affirmed by the Court of Appeals are final and conclusive on, and cannot be reviewed on appeal by, this Court as long as they are borne out by the record or are based on substantial evidence. The Court is not a trier of facts, its jurisdiction being limited to reviewing only errors of law that may have been committed by the lower courts.[14]

Essentially, as intimated earlier, the issue in the instant case boils down to whether respondent made a deposit of P34,000.00 on 15 March 1988, apart from the deposit of an equal amount the day before, a factual question which was resolved in the affirmative by the RTC, which finding was categorically
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factual question which was resolved in the affirmative by the RTC, which finding was categorically affirmed by the Court of Appeals. The factual issue is beyond the province of this Court to review or disturb. It is not the function of the Court to analyze or weigh all over again the evidence or premises supportive of such factual determination. The Court has consistently held that the findings of the Court of Appeals and other lower courts are, as a rule, accorded great weight, if not binding upon it, save for the most compelling and cogent reasons.[15]

We find no justification to deviate from the factual findings of the trial court and the appellate court. The bank has utterly failed to convince us that the assailed findings are devoid of basis or are not supported by substantial evidence.

As found by the RTC, respondent indeed made two deposits of P34,000.00 on 14 and 15 March 1988, viz:

On the pivotal issue of whether or not the plaintiff made only one (1) or two (2) deposits of P34,000.00 the first on March 14 and the second on March 15, 1988 the Court holds that, from the evidence extant in the record, particularly the admissions of teller Merlita Susan Caasi, the plaintiff has established his claim of having made two (2) deposits of P34,000.00. Thus, Caasi admitted that she impressed her rubber stamp, Teller 2 and duplicate on both the Exhibits B and C which are plaintiffs file copies of two separate and different deposit slips for P34,000.00 each. Exhibit B is a deposit slip, dated March 14, 1988, for P34,000.00 consisting of 300 pieces of P100 bills and 80 pieces of P50.00 bills; while Exhibit C is a deposit slip, dated March 15, 1988, also for P34,000.00, but consisting of 340 pieces of P100 bills. It is only Exhibit C that appears to have been recorded by the defendant bank (Exhibit 3). Since teller Caasi acknowledged to have stamped both deposit slips, logic and reason dictates that she should be presumed to have received the amounts covered by them unless she could satisfactorily demonstrate the contrary which she, however, miserably failed to do. The fact that only one (1) deposit of P34,000.00 is recorded in the tellers validating machine and blotter, as well as in the ledger, passbook, bookkeepers machine tape and blotter, can not help her any for the crux precisely of plaintiffs complaint is defendants negligence in not recording his other deposit of P34,000.00.*16+

The appellate court similarly observed:

On the basis of the evidence adduced by the parties, We are convinced that indeed, appellee deposited P34,000.00 on March 14 and another P34,000.00 on March 15, 1988. These two different transactions are evidenced by two deposit slips marked as Exhibits B and C. The fact that appellant received the amount represented by each deposit slip can be inferred from the testimony of Merlita Caasi, a bank teller:

ATTY. GAYO:

Q: And by stamping the duplicate copy of a depositor, in the case of Mr. Lim, who is in a practice of
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Q: And by stamping the duplicate copy of a depositor, in the case of Mr. Lim, who is in a practice of always preparing a duplicate copy for his file, your mere stamping of the duplicate would indicate that you received the money deposited? A: Yes, your Honor.

which must be read in conjunction with her testimony on cross-examination, thus:

ATTY. GAYO:

Q: I am showing you Exhibit C and tell the Honorable Court if that is the duplicate of Exhibit 3 which you also stamped with the stamp of the bank? A: I am not sure if that is the real deposit slip made at the same day because they have the practice to get another duplicate if their personal copy was lost, your Honor. This is my stamp but I am not sure if this is the same.

INTERPRETER:

Witness referring to Exhibit C.

ATTY. GAYO:

Q: But you are sure that this is your stamp as Teller No. 2 at that time?

A: It appears, it is.

Q: I am showing you now that which we reserved the last time, the original of Exhibit B, a copy an original copy of a deposit slip dated March 14, 1988, stamped with the stamp of the Bank Teller No. 2 and a duplicate. Now, can you now state to the Court that this was your stamp of the bank stamp?

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and a duplicate. Now, can you now state to the Court that this was your stamp of the bank stamp? A: That is my stamp.

Q: Even this word duplicate stamped also in this Exhibit B, the original of Exhibit B, is your stamp?
A: Yes, it is my stamp.

Appellee also presented in evidence the reverse side of the deposit slip dated March 14, 1988 he described as follows:

Q: On the front side of Exhibit B, the amount of P34,000.00 cash appears. Is this explained by any denomination of the same exhibit? A: Yes, your Honor.

Q: You are referring to what part of the exhibit? A: I am referring to Exhibit B-1, Your Honor.

Q: So that the P34,000.00 you deposited consisted of 300 pieces of P100.00 bills in the total amount of P30,000.00; 80 pieces of P50.00 bills in the total amount of P4,000.00?
A: Yes. Your Honor.

In the same manner, appellee also presented the other side of the deposit slip dated March 15, 1988, thus:

Q: On March 15, 1988, do you remember having again deposited another amount of P34,000.00 to your account with the defendant bank? A: Yes. Your Honor.

Q: Do you have a copy? Do you have evidence to show?

A: Yes. Your Honor. I have here my deposit slip on March 15, 1988, for the amount of another P34,000.00.

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Q: Is the denomination of the total deposit of P34,000.00 you made on March 15 shown in this deposit slip? A: Yes, Your Honor. It is shown at the back of the deposit slip.

Q: As what? A: At the back of the deposit slip, your Honor. It shows that the P100.00 bills I deposited is 340 pieces, amounting to P34,000.00.

Q: Do you have a xerox copy of that? A: Yes, Your Honor.

Atty. Gayo:

May we show both the original and the xerox copy. The xerox copy reflects the front page and the reverse side of the deposit slip dated March 15, 1988. May we ask for an observation.

Atty. Munoz:

The xerox copy of the deposit slip dated March 15, 1988 in the sum of P34,000.00, together with the reverse side is a faithful reproduction of the duplicate original presented.

Atty. Gayo:

May we respectfully pray that the front page of that deposit slip be marked as Exhibit C and the reverse side as Exhibit C-1.*17+

An examination of the deposit slips dated 14 March and 15 March 1988 reveals that while the slips each cover deposits in the amount of P34,000.00, they list down different denominations however. Evidently, the slips were not prepared simultaneously or concurrently. This fact militates against the banks claim that one deposit slip is simply the duplicate of the other. To sustain the banks hypothesis, we would have to conclude that respondent, with all deliberate design, prepared two deposit slips and
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we would have to conclude that respondent, with all deliberate design, prepared two deposit slips and purposely wrote different denominations in them to mislead the bank that the two deposit slips were separately executed on different occasions. There is no evidence to support such a bizarre conclusion; thus, we are content to uphold the findings of the triers of fact on this point.

The bank insists that the court misappreciated the import of the letter of Opiniano dated 10 June 1988. As we have earlier intimated, appreciation of evidence is the domain of the lower courts. The testimonies of the witnesses presented by the bank deserve scant consideration in the face of the overwhelming documentary evidence of respondent, i.e., the duplicate originals of the deposit slips bearing the amount of P34,000.00 dated 14 and 15 March 1988, respectively. Indeed, the bank failed to rebut the inexorable probative impact of the deposit slips.

Article 1172 of the Civil Code ordains that responsibility arising from negligence in the performance of an obligation is demandable. The failure of the banks employees to credit the amount of P34,000.00 to respondents savings account, resulting as it did in the dishonor of respondents checks, constitutes actionable negligence in law.

From another perspective, the negligence of the bank constitutes a breach of duty to its client. It is worthy of note that the banking industry is impressed with public interest. As such, it must observe a high degree of diligence and observe lofty standards of integrity and performance. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them.[18]

With the attending factual milieu, the imposition of damages on the errant bank is in order. Presaging this course of action is the ruling in Simex International v. Court of Appeals,[19] where this Court rendered a telling discourse on the fiduciary responsibility of depository banks, thus:

The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks.

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

The action for damages hinges on the resolution of whether respondent has sufficient funds in his account when the checks were dishonored. Both the trial and appellate courts ruled that had the bank credited the P34,000.00 deposit made by respondent on 15 March 1988, the checks would not have been dishonored. Likewise, both courts found that moral damages were in order.

The concept of moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.[20]

Needless to say, the banks wrongful act caused injury to respondent. Credit is very important to businessmen, and its loss or impairment needs to be recognized and compensated.[21] This Court in Leopoldo Araneta v. Bank of America[22] highlights the importance of good credit in the business community:

The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. As stated in the case Atlanta National Bank vs. Davis, supra, citing 2 Morse Banks, Sec. 458, "it can hardly be possible that a customer's check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot, from the nature of the case, furnish independent, distinct proof thereof." Under the circumstances of this case, we find that the award of moral damages is proper but the amount must be reverted back to P50,000.00 as ordered by the RTC, said court being in a better position to assess the amount of damages to be imposed on the negligent bank.

Furthermore, we sustain the award of exemplary damages. Such damages are imposed by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.[23] The business of a bank is affected with public interest; thus, it makes a sworn profession of diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard against injury attributable to negligence or bad faith on its part. The banking sector must at all times maintain a high level of meticulousness.*24+ In view of the banks negligence to record the deposit, the grant of exemplary damages is thus justified.

The bank raises another issue, that concerning the postdated check which it had prematurely posted[25] and which it initially assumed, when it first wrote the respondent on 30 May 1988, to be the
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posted[25] and which it initially assumed, when it first wrote the respondent on 30 May 1988, to be the cause of the dishonor of respondents check payable to Paluwagan.*26+ The bank argues that the fact it prematurely honored such postdated check did not give rise to damages.[27] This argument is irrelevant. The act or omission of the bank that gives rise to damages in favor of respondent is not the premature posting of the postdated check, but the fact that the bank did not credit respondents second deposit of P34,000.00. Besides, this is the first time that said issue was presented. As a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for its consideration. Higher courts are precluded from entertaining matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time only in a motion for reconsideration or on appeal.[28]

WHEREFORE, the petition is denied. The Decision of the RTC dated 27 August 1991 in Civil Case No. 1467-R is AFFIRMED IN FULL. Costs against petitioner.

SO ORDERED.

DANTE O. TINGA

Associate Justice

WE CONCUR:

REYNATO S. PUNO
Associate Justice Chairman

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MA. ALICIA AUSTRIA-MARTINEZ L Associate Justice

ROMEO J. CALLEJO, SR. Associate Justice

(On Leave) MINITA V. CHICO-NAZARIO Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
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REYNATO S. PUNO

Acting Chief Justice

[1]Rollo, pp. 40-51.

[2]Penned by Associate Justice Angelina Sandoval Gutierrez (now Supreme Court Associate Justice) and concurred in by Associate Justices B.A. Adefuin-De la Cruz and Presbitero J. Velasco, Jr.

[3]Rollo, pp. 24-39.

[4]Penned by Judge Salvador J. Valdez, Jr.

[5]Rollo, p. 25.

[6]Id. at 27.

[7]Check No. 275243 dated 29 May 1988 for P3,500.00 in favor of Mrs. Amparo Arre was posted on 11 May 1988.

[8]Supra note 6.

[9]Id. at 28-29.

[10]Id. at 29.

[11]Id. at 31-32.

[12]RTC Records, pp. 1-5.

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[12]RTC Records, pp. 1-5.

[13]Rollo, pp. 12-13.

[14]Swagman Hotels and Travel, Inc. v. Court of Appeals, G.R. No. 161135, 8 April 2005, 455 SCRA 175, citing Amigo v. Teves, 96 Phil. 252 (1954) and Alsua-Betts v. Court of Appeals, Nos. L-46430-31, 30 July 1979, 92 SCRA 332.

[15]Abacus Real Estate Development Center v. Manila Banking Corporation, G.R. No. 162270, 6 April 2005, 455 SCRA 97, citing PT&T v. Court of Appeals, G.R. No. 152057, 29 September 2003, 412 SCRA 263; Ibay v. Court of Appeals, G.R. No. 47158, 5 August 1992, 212 SCRA 160; and Republic v. Court of Appeals, G.R. No. 116372, 18 January 2001, 349 SCRA 451.

[16]Supra note 3 at 37-38.

[17]Supra note 1 at 45-48.

[18]Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. 138569, 11 September 2003, 410 SCRA 562, citing Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No. 149454, 28 May 2004, 430 SCRA 261.

[19]G.R. No. 88013, 19 March 1990, 183 SCRA 360.

[20]Article 2217, Civil Code.

[21]Samson v. Bank of the Philippine Islands, G.R. No. 150487, 10 July 2003, 405 SCRA 607.

[22]148-B Phil. 124 (1971).

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[23]Article 2229, Civil Code of the Philippines.

[24]Solidbank Corporation v. Arrieta, G.R. No. 152720, 17 February 2005, 451 SCRA 711, citing Simex International v. Court of Appeals, supra note 19.

[25]Supra note 7.

[26]Ibid.

[27]Rollo, p. 18.

[28]Mendoza and Casino v. Bautista, G.R. No. 143666, 18 March 2005, 453 SCRA 691, citing Sesbreno v. Central Board of Assessment Appeals, 337 Phil. 89 (1997); Manila Bay Club Corporation v. Court of Appeals, 319 Phil. 413 (1995), DBP v. West Negros College, Inc., G.R. No. 152359, 21 May 2004; Solid Homes, Inc. v. Court of Appeals, 341 Phil. 261 (1997); People v. Echegaray, 335 Phil. 343 (1997).

\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/

([2005V1299] PRUDENTIAL BANK, Petitioner, versus CHONNEY LIM, Respondent., G.R. No. 136371, 2005 Nov 11, 2nd Division)

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Digest: Prudential Bank

Saturday, July 11, 2009 12:07 PM

Prudential Bank vs Lim Date: November 11, 2005 Petitioner: Prudential Bank Respondent: Chonney Lim Ponente: Tinga Facts: Respondent maintained 2 accounts with Prudential Bank, namely: Savings Account No. 11264 and Checking Account No. 1262. He availed of the banks automatic transfer system wherein the funds from his savings account could be transferred to his checking account in case the balance of the latter account was insufficient to cover the checks he issued. On 14 March 1988, respondent deposited P34,000 with his savings account. According to respondent, the following day, he deposited an equal amount with the same savings account. The bank denies this latter deposit. On 24 May 1988, respondent issued a check against his current account in favor of the Paluwagan ng Bayan Savings Bank in the sum of P2,830.00. On 25 May 1988, respondent drew another check against his checking account to the order of Teodulo Crisologo in the amount of P10,000. The bank dishonored both checks due to insufficiency of funds. After the bank had conducted a thorough investigation, Opiniano informed respondent that two deposits were made on 14 March 1988, one for P34,000.00 and the other for P1,000.00; and that two other deposits were made on 15 March 1988: P4,900.00 and P2,900.00. He maintained that although the deposit slip bearing the amount of P34,000 is dated 15 March 1988, it was actually received the day before or on 14 March 1988. Thus, the banks position is that only one deposit of P34,000.00 was made by respondent on 14 and 15 March 1988. Respondent filed a complaint before the RTC of Baguio for the recovery of P34,000.00 representing his actual deposit and P300.00 as penalty charge, plus damages. The RTC rendered its Decision holding that respondent made two deposits of P34,000.00 apiece. Thus, the RTC ordered the bank to pay the following amounts: P34,000, representing the unposted deposit, with legal interest; P600.00, representing the service charges unjustifiably imposed on respondent, with legal interest; P50,000.00 as moral damages; P25,000.00 as exemplary damages; and P10,000.00 as attorneys fees, plus costs of suit. The CA affirmed the decision of the trial court with modification as to the award of moral damages, reducing it to P10,000.00. Issue: WON respondent made two bank deposits Held: Yes Ratio: We find no justification to deviate from the factual findings of the trial court and the CA. The bank has utterly failed to convince us that the assailed findings are devoid of basis or are not supported by substantial evidence. An examination of the deposit slips dated 14 March and 15 March 1988 reveals that while the slips each cover deposits in the amount of P34,000, they list down different denominations however. Evidently, the slips were not prepared simultaneously or concurrently. This fact militates against the banks claim that one deposit slip is simply the duplicate of the other. To sustain the banks hypothesis, we would have to conclude that respondent, with all deliberate design, prepared two deposit slips and purposely wrote different denominations in them to mislead the bank that the two deposit slips were separately executed on different occasions. There is no evidence to support such a bizarre conclusion; thus, we are content to uphold the findings of the triers of fact on this point. The bank insists that the court misappreciated the import of the letter of Opiniano dated 10 June 1988. As we have earlier intimated, appreciation of evidence is the domain of the lower courts. The testimonies of the witnesses presented by the bank deserve scant consideration in the face of the overwhelming documentary evidence of respondent, i.e., the duplicate originals of the deposit slips bearing the amount of P34,000.00 dated 14 and 15 March 1988, respectively. Indeed, the bank failed to rebut the inexorable probative impact of the deposit slips.

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Issue: WON the bank is guilty of negligence Held: Yes Ratio: Article 1172 of the Civil Code ordains that responsibility arising from negligence in the performance of an obligation is demandable. The failure of the banks employees to credit the amount of P34,000.00 to respondents savings account, resulting as it did in the dishonor of respondents checks, constitutes actionable negligence in law. From another perspective, the negligence of the bank constitutes a breach of duty to its client. It is worthy of note that the banking industry is impressed with public interest. As such, it must observe a high degree of diligence and observe lofty standards of integrity and performance. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them. With the attending factual milieu, the imposition of damages on the errant bank is in order. Presaging this course of action is the ruling in Simex International v. CA where this Court rendered a telling discourse on the fiduciary responsibility of depository banks, thus:
The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every c ivilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and com merce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith , usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordi nary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the runni ng of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. The concept of moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, woun ded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.

Needless to say, the banks wrongful act caused injury to respondent. Credit is very important to businessmen, and its loss or impairment needs to be recognized and compensated. This Court in Araneta v. Bank of America highlights the importance of good credit in the business community:
The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. As stated in the case Atlanta National Bank vs. Davis, supr a, citing 2 Morse Banks, Sec. 458, "it can hardly be possible that a customer's check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot, from the nature of the case, furnish ind ependent, distinct proof thereof."

Issue: WON moral and exemplary damages should be awarded Held: Yes Ratio: Under the circumstances of this case, we find that the award of moral damages is proper but the amount must be reverted back to P50,000.00 as ordered by the RTC, said court being in a better position to assess the amount of damages to be imposed on the negligent bank. We sustain the award of exemplary damages. Such damages are imposed by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. The business of a bank is affected with public interest; thus, it makes a sworn profession of diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard against injury attributable to negligence or bad faith on its part. The banking sector must at all times maintain a high level of meticulousness. In view of the banks negligence to record the deposit, the grant of exemplary damages is thus justified.
EXTRA: The bank raises another issue, that concerning the postdated check which it had prematurely posted and which it initially assumed, when it first wrote the respondent on 30 May 1988, to be the cause of the dishonor of respondents check payable to Paluwagan. The bank argues that the fact it prematurely honored such postdated check did not give rise to damages. This argument is irrelevant. The act or omission of the bank that gives rise to damages in favor of respondent is not the premature posting of the postdated check, but the fact that the bank did not credit respondents second deposit of P34,000.00. Besides, this is the first time that said issue was presented. As a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for its consideration. Higher courts are precluded fromentertaining matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time only in a motion for reconsideration or on appeal.
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Far East Bank and Trust Company & Pacilan

Wednesday, July 08, 2009 9:27 AM

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\

[2005V855] FAR EAST BANK AND TRUST COMPANY, NOW BANK OF THE PHILIPPINE ISLANDS, Petitioner, versus THEMISTOCLES PACILAN, JR., Respondent.2005 Jul 292nd DivisionG.R. No. 157314D E C I S I O N

CALLEJO, SR., J.: Before the Court is the petition for review on certiorari filed by Far East Bank and Trust Company (now Bank of the Philippines Islands) seeking the reversal of the Decision[1] dated August 30, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 36627 which ordered it, together with its branch accountant, Roger Villadelgado, to pay respondent Themistocles Pacilan, Jr.[2] the total sum of P100,000.00 as moral and exemplary damages. The assailed decision affirmed with modification that of the Regional Trial Court (RTC) of Negros Occidental, Bacolod City, Branch 54, in Civil Case No. 4908. Likewise sought to be reversed and set aside is the Resolution dated January 17, 2003 of the appellate court, denying petitioner banks motion for reconsideration. The case stemmed from the following undisputed facts:

Respondent Pacilan opened a current account with petitioner banks Bacolod Branch on May 23, 1980. His account was denominated as Current Account No. 53208 (0052-00407-4). The respondent had since then issued several postdated checks to different payees drawn against the said account. Sometime in March 1988, the respondent issued Check No. 2434886 in the amount of P680.00 and the same was presented for payment to petitioner bank on April 4, 1988.

Upon its presentment on the said date, Check No. 2434886 was dishonored by petitioner bank. The next day, or on April 5, 1988, the respondent deposited to his current account the amount of P800.00. The said amount was accepted by petitioner bank; hence, increasing the balance of the respondents deposit to P1,051.43.

Subsequently, when the respondent verified with petitioner bank about the dishonor of Check No. 2434866, he discovered that his current account was closed on the ground that it was improperly handled. The records of petitioner bank disclosed that between the period of March 30, 1988 and April 5, 1988, the respondent issued four checks, to wit: Check No. 2480416 for P6,000.00; Check No. 2480419 for P50.00; Check No. 2434880 for P680.00 and; Check No. 2434886 for P680.00, or a total amount of P7,410.00. At the time, however, the respondents current account with petitioner bank only had a deposit of P6,981.43. Thus, the total amount of the checks presented for payment on April 4, 1988 exceeded the balance of the respondents deposit in his account. For this reason, petitioner bank, through its branch accountant, Villadelgado, closed the respondents current account effective the evening of April 4, 1988 as it then had an overdraft of P428.57. As a consequence of the overdraft, Check No. 2434886 was dishonored.

On April 18, 1988, the respondent wrote to petitioner bank complaining that the closure of his account was unjustified. When he did not receive a reply from petitioner bank, the respondent filed with the RTC of Negros Occidental, Bacolod City, Branch 54, a complaint for damages against petitioner bank and
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RTC of Negros Occidental, Bacolod City, Branch 54, a complaint for damages against petitioner bank and Villadelgado. The case was docketed as Civil Case No. 4908. The respondent, as complainant therein, alleged that the closure of his current account by petitioner bank was unjustified because on the first banking hour of April 5, 1988, he already deposited an amount sufficient to fund his checks. The respondent pointed out that Check No. 2434886, in particular, was delivered to petitioner bank at the close of banking hours on April 4, 1988 and, following normal banking procedure, it (petitioner bank) had until the last clearing hour of the following day, or on April 5, 1988, to honor the check or return it, if not funded. In disregard of this banking procedure and practice, however, petitioner bank hastily closed the respondents current account and dishonored his Check No. 2434886.

The respondent further alleged that prior to the closure of his current account, he had issued several other postdated checks. The petitioner banks act of closing his current account allegedly preempted the deposits that he intended to make to fund those checks. Further, the petitioner banks act exposed him to criminal prosecution for violation of Batas Pambansa Blg. 22.

According to the respondent, the indecent haste that attended the closure of his account was patently malicious and intended to embarrass him. He claimed that he is a Cashier of Prudential Bank and Trust Company, whose branch office is located just across that of petitioner bank, and a prominent and respected leader both in the civic and banking communities. The alleged malicious acts of petitioner bank besmirched the respondents reputation and caused him social humiliation, wounded feelings, insurmountable worries and sleepless nights entitling him to an award of damages.

In their answer, petitioner bank and Villadelgado maintained that the respondents current account was subject to petitioner banks Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits which provide that the Bank reserves the right to close an account if the depositor frequently draws checks against insufficient funds and/or uncollected deposits and that the Bank reserves the right at any time to return checks of the depositor which are drawn against insufficient funds or for any reason.*3+

They showed that the respondent had improperly and irregularly handled his current account. For example, in 1986, the respondents account was overdrawn 156 times, in 1987, 117 times and in 1988, 26 times. In all these instances, the account was overdrawn due to the issuance of checks against insufficient funds. The respondent had also signed several checks with a different signature from the specimen on file for dubious reasons.

When the respondent made the deposit on April 5, 1988, it was obviously to cover for issuances made the previous day against an insufficiently funded account. When his Check No. 2434886 was presented for payment on April 4, 1988, he had already incurred an overdraft; hence, petitioner bank rightfully dishonored the same for insufficiency of funds.

After due proceedings, the court a quo rendered judgment in favor of the respondent as it ordered the petitioner bank and Villadelgado, jointly and severally, to pay the respondent the amounts of
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the petitioner bank and Villadelgado, jointly and severally, to pay the respondent the amounts of P100,000.00 as moral damages and P50,000.00 as exemplary damages and costs of suit. In so ruling, the court a quo also cited petitioner banks rules and regulations which state that a charge of P10.00 shall be levied against the depositor for any check that is taken up as a returned item due to insufficiency of funds on the date of receipt from the clearing office even if said check is honored and/or covered by sufficient deposit the following banking day. The same rules and regulations also provide that a check returned for insufficiency of funds for any reason of similar import may be subsequently recleared for one more time only, subject to the same charges.

According to the court a quo, following these rules and regulations, the respondent, as depositor, had the right to put up sufficient funds for a check that was taken as a returned item for insufficient funds the day following the receipt of said check from the clearing office. In fact, the said check could still be recleared for one more time. In previous instances, petitioner bank notified the respondent when he incurred an overdraft and he would then deposit sufficient funds the following day to cover the overdraft. Petitioner bank thus acted unjustifiably when it immediately closed the respondents account on April 4, 1988 and deprived him of the opportunity to reclear his check or deposit sufficient funds therefor the following day.

As a result of the closure of his current account, several of the respondents checks were subsequently dishonored and because of this, the respondent was humiliated, embarrassed and lost his credit standing in the business community. The court a quo further ratiocinated that even granting arguendo that petitioner bank had the right to close the respondents account, the manner which attended the closure constituted an abuse of the said right. Citing Article 19 of the Civil Code of the Philippines which states that *e+very person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith and Article 20 thereof which states that *e+very person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same, the court a quo adjudged petitioner bank of acting in bad faith. It held that, under the foregoing circumstances, the respondent is entitled to an award of moral and exemplary damages.

The decretal portion of the court a quos decision reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

1. Ordering the defendants [petitioner bank and Villadelgado], jointly and severally, to pay plaintiff [the respondent] the sum of P100,000.00 as moral damages;

2. Ordering the defendants, jointly and severally, to pay plaintiff the sum of P50,000.00 as exemplary damages plus costs and expenses of the suit; and

3.

Dismissing *the+ defendants counterclaim for lack of merit.

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3.

Dismissing *the+ defendants counterclaim for lack of merit.

SO ORDERED.[4]

On appeal, the CA rendered the Decision dated August 30, 2002, affirming with modification the decision of the court a quo.

The appellate court substantially affirmed the factual findings of the court a quo as it held that petitioner bank unjustifiably closed the respondents account notwithstanding that its own rules and regulations

allow that a check returned for insufficiency of funds or any reason of similar import, may be subsequently recleared for one more time, subject to standard charges. Like the court a quo, the appellate court observed that in several instances in previous years, petitioner bank would inform the respondent when he incurred an overdraft and allowed him to make a timely deposit to fund the checks that were initially dishonored for insufficiency of funds. However, on April 4, 1988, petitioner bank immediately closed the respondents account without even notifying him that he had incurred an overdraft. Even when they had already closed his account on April 4, 1988, petitioner bank still accepted the deposit that the respondent made on April 5, 1988, supposedly to cover his checks.

Echoing the reasoning of the court a quo, the CA declared that even as it may be conceded that petitioner bank had reserved the right to close an account for repeated overdrafts by the respondent, the exercise of that right must never be despotic or arbitrary. That petitioner bank chose to close the account outright and return the check, even after accepting a deposit sufficient to cover the said check, is contrary to its duty to handle the respondents account with utmost fidelity. The exercise of the right is not absolute and good faith, at least, is required. The manner by which petitioner bank closed the account of the respondent runs afoul of Article 19 of the Civil Code which enjoins every person, in the exercise of his rights, to give every one his due, and observe honesty and good faith.

The CA concluded that petitioner banks precipitate and imprudent closure of the respondents account had caused him, a respected officer of several civic and banking associations, serious anxiety and humiliation. It had, likewise, tainted his credit standing. Consequently, the award of damages is warranted. The CA, however, reduced the amount of damages awarded by the court a quo as it found the same to be excessive:

We, however, find excessive the amount of damages awarded by the RTC. In our view the reduced amount of P75,000.00 as moral damages and P25,000.00 as exemplary damages are in order. Awards for damages are not meant to enrich the plaintiff-appellee [the respondent] at the expense of defendants-appellants [the petitioners], but to obviate the moral suffering he has undergone. The
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defendants-appellants [the petitioners], but to obviate the moral suffering he has undergone. The award is aimed at the restoration, within limits possible, of the status quo ante, and should be proportionate to the suffering inflicted.[5]

The dispositive portion of the assailed CA decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the MODIFICATION that the award of moral damages is reduced to P75,000.00 and the award of exemplary damages reduced to P25,000.00.

SO ORDERED.[6]

Petitioner bank sought the reconsideration of the said decision but in the assailed Resolution dated January 17, 2003, the appellate court denied its motion. Hence, the recourse to this Court.

Petitioner bank maintains that, in closing the account of the respondent in the evening of April 4, 1988, it acted in good faith and in accordance with the rules and regulations governing the operation of a

regular demand deposit which reserves to the bank the right to close an account if the depositor frequently draws checks against insufficient funds and/or uncollected deposits. The same rules and regulations also provide that the depositor is not entitled, as a matter of right, to overdraw on this deposit and the bank reserves the right at any time to return checks of the depositor which are drawn against insufficient funds or for any reason.

It cites the numerous instances that the respondent had overdrawn his account and those instances where he deliberately signed checks using a signature different from the specimen on file. Based on these facts, petitioner bank was constrained to close the respondents account for improper and irregular handling and returned his Check No. 2434886 which was presented to the bank for payment on April 4, 1988.

Petitioner bank further posits that there is no law or rule which gives the respondent a legal right to make good his check or to deposit the corresponding amount to cover said check within 24 hours after the same is dishonored or returned by the bank for having been drawn against insufficient funds. It vigorously denies having violated Article 19 of the Civil Code as it insists that it acted in good faith and in accordance with the pertinent banking rules and regulations.

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The petition is impressed with merit. A perusal of the respective decisions of the court a quo and the appellate court show that the award of damages in the respondents favor was anchored mainly on Article 19 of the Civil Code which, quoted anew below, reads: Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

The elements of abuse of rights are the following: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another.[7] Malice or bad faith is at the core of the said provision.[8] The law always presumes good faith and any person who seeks to be awarded damages due to acts of another has the burden of proving that the latter acted in bad faith or with ill-motive.[9] Good faith refers to the state of the mind which is manifested by the acts of the individual concerned. It consists of the intention to abstain from taking an unconscionable and unscrupulous advantage of another.[10] Bad faith does not simply connote bad judgment or simple negligence, dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty due to some motives or interest or ill-will that partakes of the nature of fraud.[11] Malice connotes ill-will or spite and speaks not in response to duty. It implies an intention to do ulterior and unjustifiable harm. Malice is bad faith or bad motive.[12]

Undoubtedly, petitioner bank has the right to close the account of the respondent based on the following provisions of its Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits:

10) The Bank reserves the right to close an account if the depositor frequently draws checks against insufficient funds and/or uncollected deposits.

12)

However, it is clearly understood that the depositor is not entitled, as a matter of right, to overdraw on this deposit and the bank reserves the right at any time to return checks of the depositor which are drawn against insufficient funds or for any other reason.

The facts, as found by the court a quo and the appellate court, do not establish that, in the exercise of this right, petitioner bank committed an abuse thereof. Specifically, the second and third elements for abuse of rights are not attendant in the present case. The evidence presented by petitioner bank negates the existence of bad faith or malice on its part in closing the respondents account on April 4,
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negates the existence of bad faith or malice on its part in closing the respondents account on April 4, 1988 because on the said date the same was already overdrawn. The respondent issued four checks, all due on April 4, 1988, amounting to P7,410.00 when the balance of his current account deposit was only P6,981.43. Thus, he incurred an overdraft of P428.57 which resulted in the dishonor of his Check No. 2434886. Further, petitioner bank showed that in 1986, the current account of the respondent was overdrawn 156 times due to his issuance of checks against insufficient funds.[13] In 1987, the said account was overdrawn 117 times for the same reason.[14] Again, in 1988, 26 times.[15] There were also several instances when the respondent issued checks deliberately using a signature different from his specimen signature on file with petitioner bank.*16+ All these circumstances taken together justified the petitioner banks closure of the respondents account on April 4, 1988 for improper handling.

It is observed that nowhere under its rules and regulations is petitioner bank required to notify the respondent, or any depositor for that matter, of the closure of the account for frequently drawing checks against insufficient funds. No malice or bad faith could be imputed on petitioner bank for so acting since the records bear out that the respondent had indeed been improperly and irregularly handling his account not just a few times but hundreds of times. Under the circumstances, petitioner bank could not be faulted for exercising its right in accordance with the express rules and regulations governing the current accounts of its depositors. Upon the opening of his account, the respondent had agreed to be bound by these terms and conditions.

Neither the fact that petitioner bank accepted the deposit made by the respondent the day following the closure of his account constitutes bad faith or malice on the part of petitioner bank. The same could be characterized as simple negligence by its personnel. Said act, by itself, is not constitutive of bad faith.
The respondent had thus failed to discharge his burden of proving bad faith on the part of petitioner bank or that it was motivated by ill-will or spite in closing his account on April 4, 1988 and in inadvertently accepting his deposit on April 5, 1988.

Further, it has not been shown that these acts were done by petitioner bank with the sole intention of prejudicing and injuring the respondent. It is conceded that the respondent may have suffered damages as a result of the closure of his current account. However, there is a material distinction between damages and injury. The Court had the occasion to explain the distinction between damages and injury in this wise:

Injury is the illegal invasion of a legal right; damage is the loss, hurt or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury in those instances in which the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no remedy for damages resulting from an act which does not amount to a legal injury or wrong. These situations are often called damnum absque injuria.

In other words, in order that a plaintiff may maintain an action for the injuries of which he
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In other words, in order that a plaintiff may maintain an action for the injuries of which he complains, he must establish that such injuries resulted from a breach of duty which the defendant owed to the plaintiff a concurrence of injury to the plaintiff and legal responsibility by the person causing it. The underlying basis for the award of tort damages is the premise that the individual was injured in contemplation of law. Thus, there must first be a breach of some duty and the imposition of liability for that breach before damages may be awarded; and the breach of such duty should be the proximate cause of the injury.[17]

Whatever damages the respondent may have suffered as a consequence, e.g., dishonor of his other insufficiently funded checks, would have to be borne by him alone. It was the respondents repeated improper

and irregular handling of his account which constrained petitioner bank to close the same in accordance with the rules and regulations governing its depositors current accounts. The respondents case is clearly one of damnum absque injuria.

WHEREFORE, the petition is GRANTED. The Decision dated August 30, 2002 and Resolution dated January 17, 2003 of the Court of Appeals in CA-G.R. CV No. 36627 are REVERSED AND SET ASIDE.

SO ORDERED.

ROMEO J. CALLEJO, SR. Associate Justice

WE CONCUR:

REYNATO S. PUNO Associate Justice Chairman

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Chairman

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

DANTE O. TINGA
Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

ATT ES T AT I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO

Associate Justice
Chairman, Second Division

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CE R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairmans Attestation, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

HILARIO G. DAVIDE, JR.

Chief Justice
[1] Penned by Associate Justice Oswaldo D. Agcaoili, with Associate Justices Eliezer R. Delos Santos and Danilo B. Pine, concurring. [2] In the Resolution dated July 1, 2004 of the Court of Appeals, the Court was furnished a copy of the Notice of Death of respondent Pacilan, Jr. In compliance with the Courts Resolution dated September 27, 2004, his counsel averred that the respondent was survived by his children, namely, Jesus Rey, Jesus Rhoel, Jesus Rene and Jesus Ryan, all surnamed Pacilan. *3+ Exhibit 1, Records, p. 195. (Vol. I) [4] Records, p. 344. (Vol. II)

[5] Rollo, p. 21.

[6] Ibid.

[7] Development Bank of the Philippines v. Court of Appeals, G.R. No. 137916, 8 December 2004, 445 SCRA 500. [8] ABS-CBN Broadcasting Corporation v. Court of Appeals, G.R. No. 128690, 21 January 1999, 301 SCRA 572.
[9] Chua v. Court of Appeals, G.R. No. 112660, 14 March 1995, 242 SCRA 341. [10] Saber v. Court of Appeals, G.R. No. 132981, 31 August 2004, 437 SCRA 259. [11] Id. at 278-279. [12] Id. at 279.

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[12] Id. at 279. *13+ Exhibits 3 up to 3-X, Records, pp. 197-221. (Vol. I) *14+ Exhibits 4 up to 4-U, Id. at 222-243. (Vol. I) *15+ Exhibits 5 up to 5-E, Id. at 244-249. *16+ Exhibits 6 up to 6-C, Id. at 250-253.

[17] BPI Express Card Corporation v. Court of Appeals, G.R. No. 120639, 25 September 1998, 296 SCRA 260.
\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/ ([2005V855] FAR EAST BANK AND TRUST COMPANY, NOW BANK OF THE PHILIPPINE ISLANDS, Petitioner, versus THEMISTOCLES PACILAN, JR., Respondent., G.R. No. 157314, 2005 Jul 29, 2nd Division)

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Digest: FEBTC v. Pacilan

Saturday, July 11, 2009 12:07 PM

Far East Bank vs Pacilan Date: July 29, 2005 Petitioner: Far East Bank and Trust Company, now BPI Respondent: Themistocles Pacilan Jr Ponente: Callejo Sr Facts: Respondent opened a current account with petitioners Bacolod Branch. Respondnet since then issued several postdated checks to different payees drawn against the said account. Sometime in March 1988, the respondent issued a check in the amount of P680.00 and the same was presented for payment to petitioner bank on April 4, 1988. Upon presentment, the check was dishonored. The next day, respondent deposited to his current account the amount of P800.00. The said amount was accepted by petitioner bank; hence, increasing the balance of the respondents deposit to P1,051.43. Subsequently, when the respondent verified with the bank about the dishonored check, he discovered that his current account was closed on the ground that it was improperly handled. The records of the bank disclosed that respondent issued four checks, to wit: Check No. 2480416 for P6,000.00; Check No. 2480419 for P50.00; Check No. 2434880 for P680.00 and; Check No. 2434886 for P680.00, or a total amount of P7,410.00. At the time, however, the respondents current account with petitioner bank only had a deposit of P6,981.43. Thus, the total amount of the checks presented for payment on April 4, 1988 exceeded the balance of the respondents deposit in his account. For this reason, the bank closed respondents current account effective the evening of April 4, 1988 as it then had an overdraft of P428.57. As a consequence of the overdraft, Check No. 2434886 was dishonored. Respondent filed with the RTC of Negros Occidental a complaint for damages against the bank and Villadelgado, complaining that the closure of his account was unjustified because on the first banking hour of April 5, 1988, he already deposited an amount sufficient to fund his checks. The respondent pointed out that Check No. 2434886, in particular, was delivered to petitioner bank at the close of banking hours on April 4, 1988 and, following normal banking procedure, it had until the last clearing hour of the following day, or on April 5, 1988, to honor the check or return it, if not funded. In disregard of this banking procedure and practice, however, petitioner bank hastily closed the respondents current account and dishonored his Check No. 2434886. In their answer, the bank and Villadelgado maintained that the respondents current account was subject to the banks Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits which provide that the Bank reserves the right to close an account if the depositor frequently draws checks against insufficient funds and/or uncollected deposits and that the Bank reserves the right at any time to return checks of the depositor which are drawn against insufficient funds or for any reason. Also, respondent had improperly and irregularly handled his current account. For example, in 1986, the respondents account was overdrawn 156 times, in 1987, 117 times and in 1988, 26 times. In all these instances, the account was overdrawn due to the issuance of checks against insufficient funds. The respondent had also signed several checks with a different signature from the specimen on file for dubious reasons. The court a quo rendered judgment in favor of the respondent as it ordered the petitioner bank and Villadelgado, jointly and severally, to pay the respondent the amounts of P100,000.00 as moral damages and P50,000.00 as exemplary damages and costs of suit. The CA affirmed. Issue: WON the bank is liable for damages Held: No Ratio: A perusal of the respective decisions of the court a quo and the appellate court show that the award of damages in the respondents favor was anchored mainly on Article 19 CC. The elements of abuse of rights are the following: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of the said provision. The law always presumes good faith and any person who seeks to be awarded damages due to acts of another has the burden of proving that the latter acted in bad faith or with ill-motive. Good faith refers to the state of the mind which is manifested by the acts of the individual concerned. It consists of the intention to abstain from taking an unconscionable and unscrupulous advantage of another. Bad faith does not simply connote bad judgment or simple negligence,

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unscrupulous advantage of another. Bad faith does not simply connote bad judgment or simple negligence, dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty due to some motives or interest or ill-will that partakes of the nature of fraud. Malice connotes ill-will or spite and speaks not in response to duty. It implies an intention to do ulterior and unjustifiable harm. Malice is bad faith or bad motive. Undoubtedly, the bank has the right to close the account of the respondent based on the following provisions of its Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits. The facts, as found by the court a quo and the appellate court, do not establish that, in the exercise of this right, petitioner bank committed an abuse thereof. Specifically, the second and third elements for abuse of rights are not attendant in the present case. The evidence presented by petitioner bank negates the existence of bad faith or malice on its part in closing the respondents account on April 4, 1988 because on the said date the same was already overdrawn. The respondent issued four checks, all due on April 4, 1988, amounting to P7,410.00 when the balance of his current account deposit was only P6,981.43. Thus, he incurred an overdraft of P428.57 which resulted in the dishonor of his Check No. 2434886. Further, petitioner bank showed that in 1986, the current account of the respondent was overdrawn 156 times due to his issuance of checks against insufficient funds. In 1987, the said account was overdrawn 117 times for the same reason. Again, in 1988, 26 times. There were also several instances when the respondent issued checks deliberately using a signature different from his specimen signature on file with petitioner bank. All these circumstances taken together justified the petitioner banks closure of the respondents account on April 4, 1988 for improper handling. It is observed that nowhere under its rules and regulations is petitioner bank required to notify the respondent, or any depositor for that matter, of the closure of the account for frequently drawing checks against insufficient funds. No malice or bad faith could be imputed on petitioner bank for so acting since the records bear out that the respondent had indeed been improperly and irregularly handling his account not just a few times but hundreds of times. Under the circumstances, petitioner bank could not be faulted for exercising its right in accordance with the express rules and regulations governing the current accounts of its depositors. Upon the opening of his account, the respondent had agreed to be bound by these terms and conditions. Neither the fact that petitioner bank accepted the deposit made by the respondent the day following the closure of his account constitutes bad faith or malice on the part of petitioner bank. The same could be characterized as simple negligence by its personnel. Said act, by itself, is not constitutive of bad faith. The respondent had thus failed to discharge his burden of proving bad faith on the part of petitioner bank or that it was motivated by ill -will or spite in closing his account on April 4, 1988 and in inadvertently accepting his deposit on April 5, 1988. Further, it has not been shown that these acts were done by the bank with the sole intention of prejudicing and injuring the respondent. It is conceded that the respondent may have suffered damages as a result of the closure of his current account. However, there is a material distinction between damages and injury. The Court had the occasion to explain the distinction between damages and injury in this wise: Injury is the illegal invasion of a legal right; damage is the loss, hurt or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury in those instances in which the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no remedy for damages resulting from an act which does not amount to a legal injury or wrong. These situations are often called damnum absque injuria. Whatever damages the respondent may have suffered as a consequence, e.g., dishonor of his other insufficiently funded checks, would have to be borne by him alone. It was the respondents repeated improper and irregular handling of his account which constrained petitioner bank to close the same in accordance with the rules and regulations governing its depositors current accounts. The respondents case is clearly one of damnum absque injuria.

Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI21.531\Far%20East%20Bank%20vs%20Pacilan.docx>

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Citibank vs. Cabamongan

Wednesday, July 08, 2009 9:28 AM

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\

[2006V476] Citibank, N.A., Petitioner, versus Spouses Luis and Carmelita Cabamongan and their sons Luis Cabamongan, Jr. and Lito Cabamongan, Respondents.2006 May 21st DivisionG.R. No. 146918D E C I SI O N

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision[1] dated January 26, 2001 and the Resolution[2] dated July 30, 2001 of the Court of Appeals (CA) in CA-G.R. CV No. 59033. The factual background of the case is as follows:
On August 16, 1993, spouses Luis and Carmelita Cabamongan opened a joint and/or foreign currency time deposit in trust for their sons Luis, Jr. and Lito at the Citibank, N.A., Makati branch, with Reference No. 60-22214372, in the amount of $55,216.69 for a term of 182 days or until February 14, 1994, at 2.5625 per cent interest per annum.[3] Prior to maturity, or on November 10, 1993, a person claiming to be Carmelita went to the Makati branch and pre-terminated the said foreign currency time deposit by presenting a passport, a Bank of America Versatele Card, an ATM card and a Mabuhay Credit Card.[4] She filled up the necessary forms for pre-termination of deposits with the assistance of Account Officer Yeye San Pedro. While the transaction was being processed, she was casually interviewed by San Pedro about her personal circumstances and investment plans.[5] Since the said person failed to surrender the original Certificate of Deposit, she had to execute a notarized release and waiver document in favor of Citibank, pursuant to Citibanks internal procedure, before the money was released to her.*6+ The release and waiver document[7] was not notarized on that same day but the money was nonetheless given to the person withdrawing.[8] The transaction lasted for about 40 minutes.[9] After said person left, San Pedro realized that she left behind an identification card.[10] Thus, San Pedro called up Carmelitas listed address at No. 48 Ranger Street, Moonwalk Village, Las Pinas, Metro Manila on the same day to have the card picked up.*11+ Marites, the wife of Lito, received San Pedros call and was stunned by the news that Carmelita preterminated her foreign currency time deposit because Carmelita was in the United States at that time.[12] The Cabamongan spouses work and reside in California. Marites made an overseas call to Carmelita to inform her about what happened.[13] The Cabamongan spouses were shocked at the news. It seems that sometime between June 10 and 16, 1993, an unidentified person broke in at the couples residence at No. 3268 Baldwin Park Boulevard, Baldwin Park, California. Initially, they reported that only Carmelitas jewelry box was missing, but later on, they discovered that other items, such as their passports, bank deposit certificates, including the subject foreign currency deposit, and identification cards were also missing.[14] It was only then that the Cabamongan spouses realized that their passports and bank deposit certificates were lost.[15] Through various overseas calls, the Cabamongan spouses informed Citibank, thru San Pedro, that Carmelita was in the United States and did not preterminate their deposit and that the person who did so was an impostor who could have also been involved in the break-in of their California residence. San Pedro told the spouses to submit the necessary documents to support their claim but Citibank concluded nonetheless that Carmelita indeed preterminated her deposit. In a letter dated September 16, 1994, the Cabamongan spouses, through counsel, made a formal demand upon Citibank for payment of their preterminated deposit in the amount of $55,216.69 with legal interests.[16] In a letter dated November 28, 1994, Citibank, through counsel, refused the Cabamongan spouses demand for payment, asserting that the subject deposit was released to Carmelita upon proper identification and verification.[17]
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verification.[17]

On January 27, 1995, the Cabamongan spouses filed a complaint against Citibank before the Regional Trial Court of Makati for Specific Performance with Damages, docketed as Civil Case No 95-163 and raffled to Branch 150 (RTC).[18]
In its Answer dated April 20, 1995, Citibank insists that it was not negligent of its duties since the subject deposit was released to Carmelita only upon proper identification and verification.[19]

At the pre-trial conference the parties failed to arrive at an amicable settlement.[20] Thus, trial on the merits ensued. For the plaintiffs, the Cabamongan spouses themselves and Florenda G. Negre, Documents Examiner II of the Philippine National Police (PNP) Crime Laboratory in Camp Crame, Quezon City, testified. The Cabamongan spouses, in essence, testified that Carmelita could not have preterminated the deposit account since she was in California at the time of the incident.[21] Negre testified that an examination of the questioned signature and the samples of the standard signatures of Carmelita submitted in the RTC showed a significant divergence. She concluded that they were not written by one and the same person.[22]
For the respondent, Citibank presented San Pedro and Cris Cabalatungan, Vice-President and In-Charge of Security and Management Division. Both San Pedro and Cabalatungan testified that proper bank procedure was followed and the deposit was released to Carmelita only upon proper identification and verification.[23] On July 1, 1997, the RTC rendered a decision in favor of the Cabamongan spouses and against Citibank, the dispositive portion of which reads, thus: WHEREFORE, premises considered, defendant Citibank, N.A., is hereby ordered to pay the plaintiffs the following: 1) the principal amount of their Foreign Currency Deposit (Reference No. 6022214372) amounting to $55,216.69 or its Phil. Currency equivalent plus interests from August 16, 1993 until fully paid; 2) Moral damages of P50,000.00; 3) Attorneys fees of P50,000.00; and 4) Cost of suit.

SO ORDERED.[24]
The RTC reasoned that: xxx Citibank, N.A., committed negligence resulting to the undue suffering of the plaintiffs. The forgery of the signatures of plaintiff Carmelita Cabamongan on the questioned documents has been categorically established by the handwriting expert. xxx Defendant bank was clearly remiss in its duty and obligations to treat plaintiffs account with the highest degree of care, considering the nature of their relationship. Banks are under the obligation to treat the accounts of their depositors with meticulous care. This is the reason for their established procedure of requiring several specimen signatures and recent picture from potential depositors. For every transaction, the depositors signature is passed upon by personnel to check and countercheck possible irregularities and therefore must bear the blame when they fail to detect the forgery or discrepancy.[25]

Despite the favorable decision, the Cabamongan spouses filed on October 1, 1997 a motion to partially
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Despite the favorable decision, the Cabamongan spouses filed on October 1, 1997 a motion to partially reconsider the decision by praying for an increase of the amount of the damages awarded.[26] Citibank opposed the motion.[27] On November 19, 1997, the RTC granted the motion for partial reconsideration and amended the dispositive portion of the decision as follows:

From the foregoing, and considering all the evidence laid down by the parties, the dispositive portion of the courts decision dated July 1, 1997 is hereby amended and/or modified to read as follows:
WHEREFORE, defendant Citibank, N.A., is hereby ordered to pay the plaintiffs the following: 1) the principal amount of their foreign currency deposit (Reference No. 6022214372) amounting to $55,216.69 or its Philippine currency equivalent (at the time of its actual payment or execution) plus legal interest from Aug. 16, 1993 until fully paid. 2) moral damages in the amount of P200,000.00;

3) exemplary damages in the amount of P100,000.00;

4) attorneys fees of P100,000.00; 5) litigation expenses of P200,000.00; 6) cost of suit. SO ORDERED.[28]

Dissatisfied, Citibank filed an appeal with the CA, docketed as CA-G.R. CV No. 59033.[29] On January 26, 2001, the CA rendered a decision sustaining the finding of the RTC that Citibank was negligent, ratiocinating in this wise:
In the instant case, it is beyond dispute that the subject foreign currency deposit was pre-terminated on 10 November 1993. But Carmelita Cabamongan, who works as a nursing aid (sic) at the Sierra View Care Center in Baldwin Park, California, had shown through her Certificate of Employment and her Daily Time Record from the [sic] January to December 1993 that she was in the United States at the time of the incident.

Defendant Citibank, N.A., however, insists that Carmelita was the one who pre-terminated the deposit despite claims to the contrary. Its basis for saying so is the fact that the person who made the transaction on the incident mentioned presented a valid passport and three (3) other identification cards. The attending account officer examined these documents and even interviewed said person. She was satisfied that the person presenting the documents was indeed Carmelita Cabamongan. However, such conclusion is belied by these following circumstances. First, the said person did not present the certificate of deposit issued to Carmelita Cabamongan. This would not have been an insurmountable obstacle as the bank, in the absence of such certificate, allows the termination of the deposit for as long as the depositor executes a notarized release and waiver document in favor of the bank. However, this simple procedure was not followed by the bank, as it terminated the deposit and actually delivered the money to the impostor without having the said document notarized on the flimsy excuse that another department of the bank was in charge of notarization. The said procedure was obviously for the protection of the bank but it deliberately ignored such precaution. At the very least, the conduct of the bank amounts to negligence.
Second, in the internal memorandum of Account Officer Yeye San Pedro regarding the incident, she reported that upon comparing the authentic signatures of Carmelita Cabamongan on file with the bank with the signatures made by the person claiming to be Cabamongan on the documents required for the
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with the signatures made by the person claiming to be Cabamongan on the documents required for the termination of the deposit, she noticed that one letter in the latter [sic] signatures was different from that in the standard signatures. She requested said person to sign again and scrutinized the identification cards presented. Presumably, San Pedro was satisfied with the second set of signatures made as she eventually authorized the termination of the deposit. However, upon examination of the signatures made during the incident by the Philippine National Police (PNP) Crime Laboratory, the said signatures turned out to be forgeries. As the qualifications of Document Examiner Florenda Negre were established and she satisfactorily testified on her findings during the trial, we have no reason to doubt the validity of her findings. Again, the banks negligence is patent. San Pedro was able to detect discrepancies in the signatures but she did not exercise additional precautions to ascertain the identity of the person she was dealing with. In fact, the entire transaction took only 40 minutes to complete despite the anomalous situation. Undoubtedly, the bank could have done a better job.
Third, as the bank had on file pictures of its depositors, it is inconceivable how bank employees could have been duped by an impostor. San Pedro admitted in her testimony that the woman she dealt with did not resemble the pictures appearing on the identification cards presented but San Pedro still went on with the sensitive transaction. She did not mind such disturbing anomaly because she was convinced of the validity of the passport. She also considered as decisive the fact that the impostor had a mole on her face in the same way that the person in the pictures on the identification cards had a mole. These explanations do not account for the disparity between the pictures and the actual appearance of the impostor. That said person was allowed to withdraw the money anyway is beyond belief. The above circumstances point to the banks clear negligence. Bank transactions pass through a successive [sic] of bank personnel, whose duty is to check and countercheck transactions for possible errors. While a bank is not expected to be infallible, it must bear the blame for failing to discover mistakes of its employees despite established bank procedure involving a battery of personnel designed to minimize if not eliminate errors. In the instant case, Yeye San Pedro, the employee who primarily dealt with the impostor, did not follow bank procedure when she did not have the waiver document notarized. She also openly courted disaster by ignoring discrepancies between the actual appearance of the impostor and the pictures she presented, as well as the disparities between the signatures made during the transaction and those on file with the bank. But even if San Pedro was negligent, why must the other employees in the hierarchy of the banks work flow allow such thing to pass unnoticed and unrectified?[30] The CA, however, disagreed with the damages awarded by the RTC. It held that, insofar as the date from which legal interest of 12% is to run, it should be counted from September 16, 1994 when extrajudicial demand was made. As to moral damages, the CA reduced it to P100,000.00 and deleted the awards of exemplary damages and litigation expenses. Thus, the dispositive portion of the CA decision reads: WHEREFORE, the decision of the trial court dated 01 July 1997, and its order dated 19 November 1997, are hereby AFFIRMED with the MODIFICATION that the legal interest for actual damages awarded in the amount of $55,216.69 shall run from 16 September 1994; exemplary damages amounting to P100,000.00 and litigation expenses amounting to P200,000.00 are deleted; and moral damages is reduced to P100,000.00. Costs against defendant.

SO ORDERED.[31]
The Cabamongan spouses filed a motion for partial reconsideration on the matter of the award of damages in the decision.[32] On July 30, 2001, the CA granted in part said motion and modified its decision as follows:

1. The actual damages in amount of $55,216.69, representing the amount of appellees foreign currency
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1. The actual damages in amount of $55,216.69, representing the amount of appellees foreign currency time deposit shall earn an interest of 2.5625% for the period 16 August 1993 to 14 February 1994, as stipulated in the contract; 2. From 16 September 1994 until full payment, the amount of $55,216.69 shall earn interest at the legal rate of 12% per annum, and; 3. The award of moral damages is reduced to P50,000.00.[33]

Dissatisfied, both parties filed separate petitions for review on certiorari with this Court. The Cabamongan spouses petition, docketed as G.R. No. 149234, was denied by the Court per its Resolution dated October 17, 2001.*34+ On the other hand, Citibanks petition was given due course by the Court per Resolution dated December 10, 2001 and the parties were required to submit their respective memoranda.[35]
Citibank poses the following errors for resolution: 1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND GRAVELY ABUSED ITS DISCRETION IN UPHOLDING THE LOWER COURTS DECISION WHICH IS NOT BASED ON CLEAR EVIDENCE BUT ON GRAVE MISAPPREHENSION OF FACTS. 2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE DECISION OF THE TRIAL COURT AWARDING MORAL DAMAGES WHEN IN FACT THERE IS NO BASIS IN LAW AND FACT FOR SAID AWARD. 3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE PRINCIPAL AMOUNT OF US$55,216.69 SHOULD EARN INTEREST AT THE RATE OF 12% PER ANNUM FROM 16 SEPTEMBER 1994 UNTIL FULL PAYMENT.[36] Anent the first ground, Citibank contends that the CA erred in affirming the RTCs finding that it was negligent since the said courts failed to appreciate the extra diligence of a good father of a family exercised by Citibank thru San Pedro.

As to the second ground, Citibank argues that the Cabamongan spouses are not entitled to moral damages since moral damages can be awarded only in cases of breach of contract where the bank has acted willfully, fraudulently or in bad faith. It submits that it has not been shown in this case that Citibank acted willfully, fraudulently or in bad faith and mere negligence, even if the Cabamongan spouses suffered mental anguish or serious anxiety on account thereof, is not a ground for awarding moral damages. On the third ground, Citibank avers that the interest rate should not be 12% but the stipulated rate of 2.5625% per annum. It adds that there is no basis to pay the interest rate of 12% per annum from September 16, 1994 until full payment because as of said date there was no legal ground yet for the Cabamongan spouses to demand payment of the principal and it is only after a final judgment is issued declaring that Citibank is obliged to return the principal amount of US$55,216.69 when the right to demand payment starts and legal interest starts to run. On the other hand, the Cabamongan spouses contend that Citibanks negligence has been established by evidence. As to the interest rate, they submit that the stipulated interest of 2.5635% should apply for the 182-day contract period from August 16, 1993 to February 14, 1993; thereafter, 12% should apply. They further contend that the RTCs award of exemplary damages of P100,000.00 should be maintained. They submit that the CA erred in treating the award of litigation expenses as lawyers fees since they have shown that they incurred actual expenses in litigating their claim against Citibank. They also contend that the CA erred in reducing the award of moral damages in view of the degree of mental anguish and emotional fears, anxieties and nervousness suffered by them.[37]
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anguish and emotional fears, anxieties and nervousness suffered by them.[37]

Subsequently, Citibank, thru a new counsel, submitted a Supplemental Memorandum,[38] wherein it posits that, assuming that it was negligent, the Cabamongan spouses were guilty of contributory negligence since they failed to notify Citibank that they had migrated to the United States and were residents thereat and after having been victims of a burglary, they should have immediately assessed their loss and informed Citibank of the disappearance of the bank certificate, their passports and other identification cards, then the fraud would not have been perpetuated and the losses avoided. It further argues that since the Cabamongan spouses are guilty of contributory negligence, the doctrine of last clear chance is inapplicable.
Citibanks assertion that the Cabamongan spouses are guilty of contributory negligence and nonapplication of the doctrine of last clear chance cannot pass muster since these contentions were raised for the first time only in their Supplemental Memorandum. Indeed, the records show that said contention were neither pleaded in the petition for review and the memorandum nor in Citibanks Answer to the complaint or in its appellants brief filed with the CA. To consider the alleged facts and arguments raised belatedly in a supplemental pleading to herein petition for review at this very late stage in the proceedings would amount to trampling on the basic principles of fair play, justice and due process.[39] The Court has repeatedly emphasized that, since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence[40] is expected,[41] and high standards of integrity and performance are even required, of it.*42+ By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care,[43] always having in mind the fiduciary nature of their relationship.*44+ In this case, it has been sufficiently shown that the signatures of Carmelita in the forms for pretermination of deposits are forgeries. Citibank, with its signature verification procedure, failed to detect the forgery. Its negligence consisted in the omission of that degree of diligence required of banks. The Court has held that a bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged.*45+ Such principle equally applies here. Citibank cannot label its negligence as mere mistake or human error. Banks handle daily transactions involving millions of pesos.[46] By the very nature of their works the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees.[47] Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.[48] The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro, openly courted disaster when despite noticing discrepancies in the signature and photograph of the person claiming to be Carmelita and the failure to surrender the original certificate of time deposit, the pretermination of the account was allowed. Even the waiver document was not notarized, a procedure meant to protect the bank. For not observing the degree of diligence required of banking institutions, whose business is impressed with public interest, Citibank is liable for damages. As to the interest rate, Citibank avers that the claim of the Cabamongan spouses does not constitute a loan or forbearance of money and therefore, the interest rate of 6%, not 12%, applies. The Court does not agree. The time deposit subject matter of herein petition is a simple loan. The provisions of the New Civil Code on simple loan govern the contract between a bank and its depositor. Specifically, Article 1980 thereof
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on simple loan govern the contract between a bank and its depositor. Specifically, Article 1980 thereof categorically provides that . . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Thus, the relationship between a bank and its depositor is that of a debtor-creditor, the depositor being the creditor as it lends the bank money, and the bank is the debtor which agrees to pay the depositor on demand. The applicable interest rate on the actual damages of $55,216.69, should be in accordance with the guidelines set forth in Eastern Shipping Lines, Inc. v. Court of Appeals[49] to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest, in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.[50] Thus, in a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum counted from the time of demand. Accordingly, the stipulated interest rate of 2.562% per annum shall apply for the 182-day contract period from August 16, 1993 to February 14, 1994. For the period from the date of extra-judicial demand, September 16, 1994, until full payment, the rate of 12% shall apply. As for the intervening period between February 15, 1994 to September 15, 1994, the rate of interest then prevailing granted by Citibank shall apply since the time deposit provided for roll over upon maturity of the principal and interest.[51]

As to moral damages, in culpa contractual or breach of contract, as in the case before the Court, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith,[52] or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations.*53+ The act of Citibanks employee in allowing the pretermination of Cabamongan spouses account despite the noted discrepancies in Carmelitas signature and photograph, the absence of the original certificate of time deposit and the lack of notarized waiver dormant, constitutes gross negligence amounting to bad faith under Article 2220 of the Civil Code.

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There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably and scandalously excessive.[54] The amount of P50,000.00 awarded by the CA is reasonable and just. Moreover, said award is deemed final and executory insofar as respondents are concerned considering that their petition for review had been denied by the Court in its final and executory Resolution dated October 17, 2001 in G.R. No. 149234. Finally, Citibank contends that the award of attorneys fees should be deleted since such award appears only in the dispositive portion of the decision of the RTC and the latter failed to elaborate, explain and justify the same.

Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must be reasonable, just and equitable if the same were to be granted. Attorneys fees as part of damages are not meant to enrich the winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a suit because of the policy that no premium should be placed on the right to litigate.*55+ The award of attorneys fees is the exception rather than the general rule. As such, it is necessary for the court to make findings of facts and law that would bring the case within the exception and justify the grant of such award. The matter of attorneys fees cannot be mentioned only in the dispositive portion of the decision.[56] They must be clearly explained and justified by the trial court in the body of its decision. Consequently, the award of attorneys fees should be deleted.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision and Resolution are AFFIRMED with MODIFICATIONS, as follows: 1. The interest shall be computed as follows: a. The actual damages in principal amount of $55,216.69, representing the amount of foreign currency time deposit shall earn interest at the stipulated rate of 2.5625% for the period August 16, 1993 to February 14, 1994; b. From February 15, 1994 to September 15, 1994, the principal amount of $55,216.69 and the interest earned as of February 14, 1994 shall earn interest at the rate then prevailing granted by Citibank; c. From September 16, 1994 until full payment, the principal amount of $55,216.69 and the interest earned as of September 15, 1994, shall earn interest at the legal rate of 12% per annum;

2. The award of attorneys fees is DELETED.

No pronouncement as to costs. SO ORDERED. MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

WE CONCUR: ARTEMIO V. PANGANIBAN Chief Justice Chairperson CONSUELO YNARES-SANTIAGO Associate Justice
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CONSUELO YNARES-SANTIAGO Associate Justice

ROMEO J. CALLEJO, SR. Associate Justice

(On official leave) MINITA V. CHICO-NAZARIO Associate Justice

CE R T I F I C AT I O N Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. ARTEMIO V. PANGANIBAN Chief Justice

[1] Penned by Associate Justice Buenaventura J. Guerrero and concurred in by Associate Justices Eriberto U. Rosario, Jr. and Alicia L. Santos (all retired). Rollo, p. 42. [2] Rollo, p. 53.

[3]
[4] [5] [6] [7] [8] [9]

Records, pp. 38, 342.

TSN, Testimony of Yeye San Pedro, July 5, 1996, pp. 4-6. Id. at 7. Id. at 9, 21. Folder of Exhibits, p. 219 TSN, Testimony of Yeye San Pedro, July 5, 1996, pp. 22-24. Id. at 7.

[10]
[11]

Id. at 12, 14.

Id. at 12.

[12] TSN, Testimony of Luis Cabamongan, July 31, 1995, p. 11; TSN, Testimony of Carmelita Cabamongan, September 18, 1995, p. 5. [13]
[14]

Id.
Records, p. 50. TSN, Testimony of Luis Cabamongan, July 31, 1995, p. 26.

[15] TSN, Testimony of Luis Cabamongan, July 31, 1995, pp. 15-16, 26-27; TSN, Testimony of Carmelita Cabamongan, September 18, 1995, p. 12.

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Carmelita Cabamongan, September 18, 1995, p. 12.

[16] [17] [18] [19] Records, p. 84. Id. at 90. Id. at 1. Id. at 97.

[20]

Id. at 129.

[21] TSN, Testimony of Luis Cabamongan, July 31, 1995, p. 13; TSN, Testimony of Carmelita Cabamongan, September 18, 1995, p. 7. [22] TSN, Testimony of Florenda G. Negre, February 5, 1996, pp. 8, 19.

[23] TSN, Testimony of Yeye San Pedro, July 5, 1996; TSN, Testimony of Cris Cabalatungan, September 20, 1990.
[24] [25] Records, p. 512. Id. at 511.

[26]
[27]

Id. at 516.
Id. at 546.

[28]
[29] [30] [31] [32] [33] [34]

Id. at 556.
CA rollo, p. 4. Id. at 99-100. Id. at 103. Id. at 118. Id. at 204. Id. at 222.

[35]
[36]

Rollo, p. 103.
Id. at 151.

[37]
[38]

Id. at 118.
Id. at 170.

[39] Bank of the Philippine Islands v. Leobrera, G.R. Nos. 137147-48, November 18, 2003, 416 SCRA 15, 19; Balitaosan v. Secretary of Education, Culture and Sports, G.R. No. 138238, September 2, 2003, 410 SCRA 233, 235-236. [40] Bank of the Philippine Islands v. Court of Appeals, 383 Phil. 538, 554 (2000); Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997).
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of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997).

[41] Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350 SCRA 446, 472. *42+ 2 of Republic Act No. 8791, otherwise known as The General Banking Law of 2000.

[43] Westmont Bank v. Ong, G.R. No. 132560, January 30, 2002, 375 SCRA 212, 221; Citytrust Banking Corp. v. Intermediate Appellate Court, May 27, 1994, 232 SCRA 559, 564. [44] Simex International (Manila), Inc. v. Court of Appeals, March 19, 1990, 183 SCRA 360, 367.

[45]

San Carlos Milling Co., Ltd. v. Bank of the Philippine Islands, 59 Phil. 59, 66 (1933).

[46] Philippine Commercial International Bank v. Court of Appeals, supra; Bank of the Philippine Islands v. Court of Appeals, 216 SCRA 51, 71 (1992). [47] [48] [49] Philippine Commercial International Bank v. Court of Appeals, supra. Id. G.R. No. 97412, July 12, 1994, 234 SCRA 78.

[50]
[51]

Id. at 95-97
Records, pp. 38.

[52]

Article 2220, New Civil Code.

Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. [53] Philippine Telegraph & Telephone Corporation v. Court of Appeals, G.R. No. 139268, September 3, 2002, 388 SCRA 270, 276-277. [54] Prudential Bank v. Court of Appeals, G.R. No. 125536, March 16, 2000, 328 SCRA 264, 271; Philippine National Bank v. Court of Appeals, G.R. No. 126152, September 28, 1999, 315 SCRA 309, 315. [55] Country Bankers Insurance Corporation v. Lianga Bay and Community Multi-purpose Cooperative, Inc. G.R. No. 136914, January 25, 2002, 374 SCRA 653, 666; Ibaan Rural Bank, Inc. v. Court of Appeals, G.R. No. 123817, December 17, 1999, 321 SCRA 88, 95. *56+ Samatra v. Vda. de Parias, G.R. No. 142958, April 24, 2002, 381 SCRA 522, 533; Development Bank of the Philippines v. Court of Appeals, G.R. No. 118180, September 20, 1996, 262 SCRA 245,253. \---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/ ([2006V476] Citibank, N.A., Petitioner, versus Spouses Luis and Carmelita Cabamongan and their sons Luis Cabamongan, Jr. and Lito Cabamongan, Respondents., G.R. No. 146918, 2006 May 2, 1st Division)

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Banking Page 160

Digest: Citibank vs. Cabamongan

Saturday, July 11, 2009 12:08 PM

Citibank vs Cabamongan Date: May 2, 2006 Petitioner: Citibank Respondents: Spouses Luis and Carmelita Cabamongan and their sons Luis Cabamongan Jr and Lito Cabamongan Ponente: Austria Martinez Facts: Spouses Luis and Carmelita Cabamongan opened a joint "and/or" foreign currency time deposit in trust for their sons Luis, Jr. and Lito at the Citibank, N.A., Makati branch, in the amount of $55,216.69 for a term of 182 days or until February 14, 1994, at 2.5625 % interest pa. Prior to maturity, one Carmelita went to the Makati branch and pre-terminated the said foreign currency time deposit by presenting a passport, a Bank of America Versatele Card, an ATM card and a Mabuhay Credit Card. While the transaction was being processed, she was casually interviewed by San Pedro about her personal circumstances and investment plans. Since the said person failed to surrender the original Certificate of Deposit, she had to execute a notarized release and waiver document in favor of Citibank, pursuant to Citibank's internal procedure, before the money was released to her. The release and waiver document was not notarized on that same day but the money was nonetheless given to the person withdrawing. The transaction lasted for about 40 minutes. After said person left, San Pedro realized that she left behind an ID. San Pedro called up Carmelita's listed. Marites, the wife of Lito, received San Pedro's call and was stunned by the news that Carmelita preterminated her foreign currency time deposit because Carmelita was in the United States at that time. It appeared that an unidentified person broke in at the couple's residence in California and took their passports, bank deposit certificates, including the subject foreign currency deposit, and IDs. The Cabamongan spouses, through counsel, made a formal demand upon Citibank for payment of their preterminated deposit in the amount of $55,216.69 with legal interests. Citibank, through counsel, refused the Cabamongan spouses' demand for payment, asserting that the subject deposit was released to Carmelita upon proper identification and verification. The spouses filed a complaint against Citibank. The RTC rendered a decision in favor of the Cabamongan spouses and against Citibank, reasoning that the forgery was clearly established and Citibank was clearly remiss in its duty to treat plaintiffs account with the highest degree of care. On appeal, the CA sustained the finding that Citibank was negligent. The CA, however, disagreed with the damages awarded by the RTC. It held that, insofar as the date from which legal interest of 12% is to run, it should be counted from September 16, 1994 when extrajudicial demand was made. As to moral damages, the CA reduced it to P100,000.00 and deleted the awards of exemplary damages and litigation expenses. Issue: WON Citibank was negligent Held: Yes Ratio: Citibank's assertion that the Cabamongan spouses are guilty of contributory negligence and non-application of the doctrine of last clear chance cannot pass muster since these contentions were raised for the first time only in their Supplemental Memorandum. The Court has repeatedly emphasized that, since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is "under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship." In this case, it has been sufficiently shown that the signatures of Carmelita in the forms for pretermination of deposits are forgeries. Citibank, with its signature verification procedure, failed to detect the forgery. Its negligence consisted in the omission of that degree of diligence required of banks. The Court has held that a bank is "bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged." Such principle equally applies here. Citibank cannot label its negligence as mere mistake or human error. Banks handle daily transactions involving millions of pesos. By the very nature of their works the degree of responsibility, care and

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involving millions of pesos. By the very nature of their works the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro, openly courted disaster when despite noticing discrepancies in the signature and photograph of the person claiming to be Carmelita and the failure to surrender the original certificate of time deposit, the pretermination of the account was allowed. Even the waiver document was not notarized, a procedure meant to protect the bank. For not observing the degree of diligence required of banking institutions, whose business is impressed with public interest, Citibank is liable for damages. Issue: WON the interest rate should be fixed at 6% Held: No Ratio: The time deposit subject matter of herein petition is a simple loan. The provisions of the New Civil Code on simple loan govern the contract between a bank and its depositor. Specifically, Article 1980 thereof categorically provides that ". . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." Thus, the relationship between a bank and its depositor is that of a debtorcreditor, the depositor being the creditor as it lends the bank money, and the bank is the debtor which agrees to pay the depositor on demand. The applicable interest rate on the actual damages of $55,216.69, should be in accordance with the guidelines set forth in Eastern Shipping Lines, Inc. v. CA. Thus, in a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum counted from the time of demand. Accordingly, the stipulated interest rate of 2.562% per annum shall apply for the 182-day contract period from August 16, 1993 to February 14, 1994. For the period from the date of extra-judicial demand, September 16, 1994, until full payment, the rate of 12% shall apply. As for the intervening period between February 15, 1994 to September 15, 1994, the rate of interest then prevailing granted by Citibank shall apply since the time deposit provided for roll over upon maturity of the principal and interest. Issue: WON the bank is liable for moral damages Held: Yes Ratio: As to moral damages, in culpa contractual or breach of contract, as in the case before the Court, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations. The act of Citibank's employee in allowing the pretermination of Cabamongan spouses' account despite the noted discrepancies in Carmelita's signature and photograph, the absence of the original certificate of time deposit and the lack of notarized waiver dormant, constitutes gross negligence amounting to bad faith under Article 2220 of the Civil Code. There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably and scandalously excessive. The amount of P50,000.00 awarded by the CA is reasonable and just. Moreover, said award is deemed final and executory insofar as respondents are concerned considering that their petition for review had been denied by the Court in its final and executory Resolution dated October 17, 2001 in G.R. No. 149234. Issue: WON the award of attorneys fees was proper Held: No Ratio: Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must be reasonable, just and equitable if the same were to be granted. Attorney's fees as part of damages are not meant to enrich the winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a suit because of the policy that no premium should be placed on the right to litigate. The award of attorney's fees is the exception rather than the general rule. As such, it is necessary for the court to make findings of facts and law that would bring the case within the exception and justify the grant of such award. The matter of attorney's fees cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained

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attorney's fees cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained and justified by the trial court in the body of its decision. Consequently, the award of attorney's fees should be deleted.

Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI25.265\Citibank%20vs%20Cabamongan.docx>

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Citibank vs. Sabeniano

Wednesday, July 08, 2009 9:30 AM

*2006V1205+ *1/4+ CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS FINANCE CORPORATION, doing business under the name and style of FNCB Finance, Petitioners, versus MODESTA R. SABENIANO, Respondent.2006 Oct 121st DivisionG.R. No. 156132D E C I S I O N

CHICO-NAZARIO, J.: Before this Court is a Petition for Review on Certiorari,[1] under Rule 45 of the Revised Rules of Court, of the Decision[2] of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and the Resolution,[3] dated 20 November 2002, of the same court which, although modifying its earlier Decision, still denied for the most part the Motion for Reconsideration of herein petitioners. Petitioner Citibank, N.A. (formerly known as the First National City Bank) is a banking corporation duly authorized and existing under the laws of the United States of America and licensed to do commercial banking activities and perform trust functions in the Philippines. Petitioner Investors Finance Corporation, which did business under the name and style of FNCB Finance, was an affiliate company of petitioner Citibank, specifically handling money market placements for its clients. It is now, by virtue of a merger, doing business as part of its successor-in-interest, BPI Card Finance Corporation. However, so as to consistently establish its identity in the Petition at bar, the said petitioner shall still be referred to herein as FNCB Finance.[4] Respondent Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB Finance. Regrettably, the business relations among the parties subsequently went awry.

On 8 August 1985, respondent filed a Complaint[5] against petitioners, docketed as Civil Case No. 11336, before the Regional Trial Court (RTC) of Makati City. Respondent claimed to have substantial deposits and money market placements with the petitioners, as well as money market placements with the Ayala Investment and Development Corporation (AIDC), the proceeds of which were supposedly deposited automatically and directly to respondents accounts with petitioner Citibank. Respondent alleged that petitioners refused to return her deposits and the proceeds of her money market placements despite her repeated demands, thus, compelling respondent to file Civil Case No. 11336 against petitioners for Accounting, Sum of Money and Damages. Respondent eventually filed an Amended Complaint*6+ on 9 October 1985 to include additional claims to deposits and money market placements inadvertently left out from her original Complaint.
In their joint Answer[7] and Answer to Amended Complaint,[8] filed on 12 September 1985 and 6 November 1985, respectively, petitioners admitted that respondent had deposits and money market placements with them, including dollar accounts in the Citibank branch in Geneva, Switzerland (CitibankGeneva). Petitioners further alleged that the respondent later obtained several loans from petitioner Citibank, for which she executed Promissory Notes (PNs), and secured by (a) a Declaration of Pledge of her dollar accounts in Citibank-Geneva, and (b) Deeds of Assignment of her money market placements with petitioner FNCB Finance. When respondent failed to pay her loans despite repeated demands by petitioner Citibank, the latter exercised its right to off-set or compensate respondents outstanding loans with her deposits and money market placements, pursuant to the Declaration of Pledge and the Deeds of Assignment executed by respondent in its favor. Petitioner Citibank supposedly informed respondent Sabeniano of the foregoing compensation through letters, dated 28 September 1979 and 31 October 1979. Petitioners were therefore surprised when six years later, in 1985, respondent and her counsel made repeated requests for the withdrawal of respondents deposits and money market placements with petitioner Citibank, including her dollar accounts with Citibank-Geneva and her money
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placements with petitioner Citibank, including her dollar accounts with Citibank-Geneva and her money market placements with petitioner FNCB Finance. Thus, petitioners prayed for the dismissal of the Complaint and for the award of actual, moral, and exemplary damages, and attorneys fees. When the parties failed to reach a compromise during the pre-trial hearing,[9] trial proper ensued and the parties proceeded with the presentation of their respective evidence. Ten years after the filing of the Complaint on 8 August 1985, a Decision[10] was finally rendered in Civil Case No. 11336 on 24 August 1995 by the fourth Judge[11] who handled the said case, Judge Manuel D. Victorio, the dispositive portion of which reads WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:

(1) Declaring as illegal, null and void the setoff effected by the defendant Bank [petitioner Citibank] of plaintiffs *respondent Sabeniano+ dollar deposit with Citibank, Switzerland, in the amount of US $149,632.99, and ordering the said defendant [petitioner Citibank] to refund the said amount to the plaintiff with legal interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5 September 1979 and ordering the plaintiff [respondent Sabeniano] to pay said amount, however, there shall be no interest and penalty charges from the time the illegal setoff was effected on 31 October 1979;

(3) Dismissing all other claims and counterclaims interposed by the parties against each other.
Costs against the defendant Bank. All the parties appealed the foregoing Decision of the RTC to the Court of Appeals, docketed as CA-G.R. CV No. 51930. Respondent questioned the findings of the RTC that she was still indebted to petitioner Citibank, as well as the failure of the RTC to order petitioners to render an accounting of respondents deposits and money market placements with them. On the other hand, petitioners argued that petitioner Citibank validly compensated respondents outstanding loans with her dollar accounts with Citibank-Geneva, in accordance with the Declaration of Pledge she executed in its favor. Petitioners also alleged that the RTC erred in not declaring respondent liable for damages and interest. On 26 March 2002, the Court of Appeals rendered its Decision[12] affirming with modification the RTC Decision in Civil Case No. 11336, dated 24 August 1995, and ruling entirely in favor of respondent in this wise Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a quo is hereby AFFIRMED with MODIFICATION, as follows: 1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank of the plaintiff-appellants dollar deposit with Citibank, Switzerland, in the amount of US$149,632.99, and ordering defendant-appellant Citibank to refund the said amount to the plaintiff-appellant with legal interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time of payment; 2. As defendant-appellant Citibank failed to establish by competent evidence the alleged indebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in the account of Ms. Sabeniano is hereby declared as without legal and factual basis; 3. As defendants-appellants failed to account the following plaintiff-appellants money market placements, savings account and current accounts, the former is hereby ordered to return the same, in accordance with the terms and conditions agreed upon by the contending parties as evidenced by the
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accordance with the terms and conditions agreed upon by the contending parties as evidenced by the certificates of investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526) issued on 17 March 1977, P318,897.34 with 14.50% interest p.a.; (ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528) issued on 17 March 1977, P203,150.00 with 14.50 interest p.a.;

(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952), issued on 02 June 1977, P500,000.00 with 17% interest p.a.; (iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962), issued on 02 June 1977, P500,000.00 with 17% interest per annum;
(v) The Two Million (P2,000,000.00) money market placements of Ms. Sabeniano with the Ayala Investment & Development Corporation (AIDC) with legal interest at the rate of twelve percent (12%) per annum compounded yearly, from 30 September 1976 until fully paid;

4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of moral damages, FIVE HUNDRED THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE HUNDRED THOUSAND PESOS (P100,000.00) as attorneys fees.
Apparently, the parties to the case, namely, the respondent, on one hand, and the petitioners, on the other, made separate attempts to bring the aforementioned Decision of the Court of Appeals, dated 26 March 2002, before this Court for review. G.R. No. 152985 Respondent no longer sought a reconsideration of the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and instead, filed immediately with this Court on 3 May 2002 a Motion for Extension of Time to File a Petition for Review,[13] which, after payment of the docket and other lawful fees, was assigned the docket number G.R. No. 152985. In the said Motion, respondent alleged that she received a copy of the assailed Court of Appeals Decision on 18 April 2002 and, thus, had 15 days therefrom or until 3 May 2002 within which to file her Petition for Review. Since she informed her counsel of her desire to pursue an appeal of the Court of Appeals Decision only on 29 April 2002, her counsel neither had enough time to file a motion for reconsideration of the said Decision with the Court of Appeals, nor a Petition for Certiorari with this Court. Yet, the Motion failed to state the exact extension period respondent was requesting for. Since this Court did not act upon respondents Motion for Extension of Time to file her Petition for Review, then the period for appeal continued to run and still expired on 3 May 2002.[14] Respondent failed to file any Petition for Review within the prescribed period for appeal and, hence, this Court issued a Resolution,[15] dated 13 November 2002, in which it pronounced that G.R. No. 152985 (Modesta R. Sabeniano vs. Court of Appeals, et al.). It appearing that petitioner failed to file the intended petition for review on certiorari within the period which expired on May 3, 2002, the Court Resolves to DECLARE THIS CASE TERMINATED and DIRECT the Division Clerk of Court to INFORM the parties that the judgment sought to be reviewed has become final and executory. The said Resolution was duly recorded in the Book of Entries of Judgments on 3 January 2003. G.R. No. 156132

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G.R. No. 156132 Meanwhile, petitioners filed with the Court of Appeals a Motion for Reconsideration of its Decision in CA-G.R. CV No. 51930, dated 26 March 2002. Acting upon the said Motion, the Court of Appeals issued the Resolution,[16] dated 20 November 2002, modifying its Decision of 26 March 2002, as follows

WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLY GRANTED as Sub-paragraph (V) paragraph 3 of the assailed Decisions dispositive portion is hereby ordered DELETED.
The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION. Assailing the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002 and 20 November 2002, respectively, petitioners filed the present Petition, docketed as G.R. No. 156132. The Petition was initially denied[17] by this Court for failure of the petitioners to attach thereto a Certification against Forum Shopping. However, upon petitioners Motion and compliance with the requirements, this Court resolved[18] to reinstate the Petition.

The Petition presented fourteen (14) assignments of errors allegedly committed by the Court of Appeals in its Decision, dated 26 March 2002, involving both questions of fact and questions of law which this Court, for the sake of expediency, discusses jointly, whenever possible, in the succeeding paragraphs.
I The Resolution of this Court, dated 13 November 2002, in G.R. No. 152985, declaring the Decision of the Court of Appeals, dated 26 March 2002, final and executory, pertains to respondent Sabeniano alone. Before proceeding to a discussion of the merits of the instant Petition, this Court wishes to address first the argument, persistently advanced by respondent in her pleadings on record, as well as her numerous personal and unofficial letters to this Court which were no longer made part of the record, that the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, had already become final and executory by virtue of the Resolution of this Court in G.R. No. 152985, dated 13 November 2002. G.R. No. 152985 was the docket number assigned by this Court to respondents Motion for Extension of Time to File a Petition for Review. Respondent, though, did not file her supposed Petition. Thus, after the lapse of the prescribed period for the filing of the Petition, this Court issued the Resolution, dated 13 November 2002, declaring the Decision of the Court of Appeals, dated 26 March 2002, final and executory. It should be pointed out, however, that the Resolution, dated 13 November 2002, referred only to G.R. No. 152985, respondents appeal, which she failed to perfect through the filing of a Petition for Review within the prescribed period. The declaration of this Court in the same Resolution would bind respondent solely, and not petitioners which filed their own separate appeal before this Court, docketed as G.R. No. 156132, the Petition at bar. This would mean that respondent, on her part, should be bound by the findings of fact and law of the Court of Appeals, including the monetary amounts consequently awarded to her by the appellate court in its Decision, dated 26 March 2002; and she can no longer refute or assail any part thereof. [19] This Court already explained the matter to respondent when it issued a Resolution[20] in G.R. No. 156132, dated 2 February 2004, which addressed her Urgent Motion for the Release of the Decision with the Implementation of the Entry of Judgment in the following manner *A+cting on Citibanks and FNCB Finances Motion for Reconsideration, we resolved to grant the motion, reinstate the petition and require Sabeniano to file a comment thereto in our Resolution of June 23, 2003. Sabeniano filed a Comment dated July 17, 2003 to which Citibank and FNCB Finance filed a Reply dated August 20, 2003.

From the foregoing, it is clear that Sabeniano had knowledge of, and in fact participated in, the
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From the foregoing, it is clear that Sabeniano had knowledge of, and in fact participated in, the proceedings in G.R. No. 156132. She cannot feign ignorance of the proceedings therein and claim that the Decision of the Court of Appeals has become final and executory. More precisely, the Decision became final and executory only with regard to Sabeniano in view of her failure to file a petition for review within the extended period granted by the Court, and not to Citibank and FNCB Finance whose Petition for Review was duly reinstated and is now submitted for decision. Accordingly, the instant Urgent Motion is hereby DENIED. ( mphasis supplied.)

To sustain the argument of respondent would result in an unjust and incongruous situation wherein one party may frustrate the efforts of the opposing party to appeal the case by merely filing with this Court a Motion for Extension of Time to File a Petition for Review, ahead of the opposing party, then not actually filing the intended Petition.[21] The party who fails to file its intended Petition within the reglementary or extended period should solely bear the consequences of such failure.
Respondent Sabeniano did not commit forum shopping. Another issue that does not directly involve the merits of the present Petition, but raised by petitioners, is whether respondent should be held liable for forum shopping. Petitioners contend that respondent committed forum shopping on the basis of the following facts: While petitioners Motion for Reconsideration of the Decision in CA-G.R. CV No. 51930, dated 26 March 2002, was still pending before the Court of Appeals, respondent already filed with this Court on 3 May 2002 her Motion for Extension of Time to File a Petition for Review of the same Court of Appeals Decision, docketed as G.R. No. 152985. Thereafter, respondent continued to participate in the proceedings before the Court of Appeals in CA-G.R. CV No. 51930 by filing her Comment, dated 17 July 2002, to petitioners Motion for Reconsideration; and a Rejoinder, dated 23 September 2002, to petitioners Reply. Thus, petitioners argue that by seeking relief concurrently from this Court and the Court of Appeals, respondent is undeniably guilty of forum shopping, if not indirect contempt. This Court, however, finds no sufficient basis to hold respondent liable for forum shopping.

Forum shopping has been defined as the filing of two or more suits involving the same parties for the same cause of action, either simultaneously or successively, for the purpose of obtaining a favorable judgment.[22] The test for determining forum shopping is whether in the two (or more) cases pending, there is an identity of parties, rights or causes of action, and relief sought.[23] To guard against this deplorable practice, Rule 7, Section 5 of the revised Rules of Court imposes the following requirement
SEC. 5. Certification against forum shopping. The plaintiff or principal party shall certify under oath in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not theretofore commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of his knowledge, no such other action or claim is pending therein; (b) if there is such other pending action or claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed or is pending, he shall report that fact within five (5) days therefrom to the court wherein his aforesaid complaint or initiatory pleading has been filed. Failure to comply with the foregoing requirements shall not be curable by mere amendment of the complaint or other initiatory pleading but shall be cause for the dismissal of the case without prejudice, unless otherwise provided, upon motion and after hearing. The submission of a false certification or non-compliance with any of the undertakings therein shall constitute indirect contempt of court, without prejudice to the corresponding administrative and criminal actions. If the acts of the party or his counsel clearly constitute willful and deliberate forum shopping, the same shall be ground for summary dismissal with prejudice and shall constitute direct contempt, as well as cause for
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summary dismissal with prejudice and shall constitute direct contempt, as well as cause for administrative sanctions. Although it may seem at first glance that respondent was simultaneously seeking recourse from the Court of Appeals and this Court, a careful and closer scrutiny of the details of the case at bar would reveal otherwise. It should be recalled that respondent did nothing more in G.R. No. 152985 than to file with this Court a Motion for Extension of Time within which to file her Petition for Review. For unexplained reasons, respondent failed to submit to this Court her intended Petition within the reglementary period. Consequently, this Court was prompted to issue a Resolution, dated 13 November 2002, declaring G.R. No. 152985 terminated, and the therein assailed Court of Appeals Decision final and executory. G.R. No. 152985, therefore, did not progress and respondents appeal was unperfected. The Petition for Review would constitute the initiatory pleading before this Court, upon the timely filing of which, the case before this Court commences; much in the same way a case is initiated by the filing of a Complaint before the trial court. The Petition for Review establishes the identity of parties, rights or causes of action, and relief sought from this Court, and without such a Petition, there is technically no case before this Court. The Motion filed by respondent seeking extension of time within which to file her Petition for Review does not serve the same purpose as the Petition for Review itself. Such a Motion merely presents the important dates and the justification for the additional time requested for, but it does not go into the details of the appealed case.

Without any particular idea as to the assignments of error or the relief respondent intended to seek from this Court, in light of her failure to file her Petition for Review, there is actually no second case involving the same parties, rights or causes of action, and relief sought, as that in CA-G.R. CV No. 51930.
It should also be noted that the Certification against Forum Shopping is required to be attached to the initiatory pleading, which, in G.R. No. 152985, should have been respondents Petition for Review. It is in that Certification wherein respondent certifies, under oath, that: (a) she has not commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of her knowledge, no such other action or claim is pending therein; (b) if there is such other pending action or claim, that she is presenting a complete statement of the present status thereof; and (c) if she should thereafter learn that the same or similar action or claim has been filed or is pending, she shall report that fact within five days therefrom to this Court. Without her Petition for Review, respondent had no obligation to execute and submit the foregoing Certification against Forum Shopping. Thus, respondent did not violate Rule 7, Section 5 of the Revised Rules of Court; neither did she mislead this Court as to the pendency of another similar case. Lastly, the fact alone that the Decision of the Court of Appeals, dated 26 March 2002, essentially ruled in favor of respondent, does not necessarily preclude her from appealing the same. Granted that such a move is ostensibly irrational, nonetheless, it does not amount to malice, bad faith or abuse of the court processes in the absence of further proof. Again, it should be noted that the respondent did not file her intended Petition for Review. The Petition for Review would have presented before this Court the grounds for respondents appeal and her arguments in support thereof. Without said Petition, any reason attributed to the respondent for appealing the 26 March 2002 Decision would be grounded on mere speculations, to which this Court cannot give credence. II

As an exception to the general rule, this Court takes cognizance of questions of fact raised in the Petition at bar.
It is already a well-settled rule that the jurisdiction of this Court in cases brought before it from the Court of Appeals by virtue of Rule 45 of the Revised Rules of Court is limited to reviewing errors of law.
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Court of Appeals by virtue of Rule 45 of the Revised Rules of Court is limited to reviewing errors of law. Findings of fact of the Court of Appeals are conclusive upon this Court. There are, however, recognized exceptions to the foregoing rule, namely: (1) when the findings are grounded entirely on speculation, surmises, or conjectures; (2) when the interference made is manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are conflicting; (6) when in making its findings, the Court of Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to those of the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; and (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record.[24] Several of the enumerated exceptions pertain to the Petition at bar. It is indubitable that the Court of Appeals made factual findings that are contrary to those of the RTC,*25+ thus, resulting in its substantial modification of the trial courts Decision, and a ruling entirely in favor of the respondent. In addition, petitioners invoked in the instant Petition for Review several exceptions that would justify this Courts review of the factual findings of the Court of Appeals, i.e., the Court of Appeals made conflicting findings of fact; findings of fact which went beyond the issues raised on appeal before it; as well as findings of fact premised on the supposed absence of evidence and contradicted by the evidence on record.

On the basis of the foregoing, this Court shall proceed to reviewing and re-evaluating the evidence on record in order to settle questions of fact raised in the Petition at bar. The fact that the trial judge who rendered the RTC Decision in Civil Case No. 11336, dated 24 August 1995, was not the same judge who heard and tried the case, does not, by itself, render the said Decision erroneous. The Decision in Civil Case No. 11336 was rendered more than 10 years from the institution of the said case. In the course of its trial, the case was presided over by four (4) different RTC judges.[26] It was Judge Victorio, the fourth judge assigned to the case, who wrote the RTC Decision, dated 24 August 1995. In his Decision,[27] Judge Victorio made the following findings
After carefully evaluating the mass of evidence adduced by the parties, this Court is not inclined to believe the plaintiffs assertion that the promissory notes as well as the deeds of assignments of her FNCB Finance money market placements were simulated. The evidence is overwhelming that the plaintiff received the proceeds of the loans evidenced by the various promissory notes she had signed. What is more, there was not an iota of proof save the plaintiffs bare testimony that she had indeed applied for loan with the Development Bank of the Philippines. More importantly, the two deeds of assignment were notarized, hence they partake the nature of a public document. It makes more than preponderant proof to overturn the effect of a notarial attestation. Copies of the deeds of assignments were actually filed with the Records Management and Archives Office.

Finally, there were sufficient evidence wherein the plaintiff had admitted the existence of her loans with the defendant Bank in the total amount of P1,920,000.00 exclusive of interests and penalty charges (Exhibits 28, 31, 32, and 33).
In fine, this Court hereby finds that the defendants had established the genuineness and due execution of the various promissory notes heretofore identified as well as the two deeds of assignments of the plaintiffs money market placements with defendant FNCB Finance, on the strength of which the said money market placements were applied to partially pay the plaintiffs past due obligation with the
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money market placements were applied to partially pay the plaintiffs past due obligation with the defendant Bank. Thus, the total sum of P1,053,995.80 of the plaintiffs past due obligation was partially offset by the said money market placement leaving a balance of P1,069,847.40 as of 5 September 1979 (Exhibit 34).

Disagreeing in the foregoing findings, the Court of Appeals stressed, in its Decision in CA-G.R. CV No. 51930, dated 26 March 2002, that the ponente of the herein assailed Decision is not the Presiding Judge who heard and tried the case.*28+ This brings us to the question of whether the fact alone that the RTC Decision was rendered by a judge other than the judge who actually heard and tried the case is sufficient justification for the appellate court to disregard or set aside the findings in the Decision of the court a quo? This Court rules in the negative.
What deserves stressing is that, in this jurisdiction, there exists a disputable presumption that the RTC Decision was rendered by the judge in the regular performance of his official duties. While the said presumption is only disputable, it is satisfactory unless contradicted or overcame by other evidence.[29] Encompassed in this presumption of regularity is the presumption that the RTC judge, in resolving the case and drafting his Decision, reviewed, evaluated, and weighed all the evidence on record. That the said RTC judge is not the same judge who heard the case and received the evidence is of little consequence when the records and transcripts of stenographic notes (TSNs) are complete and available for consideration by the former.

In People v. Gazmen,[30] this Court already elucidated its position on such an issue
Accused-appellant makes an issue of the fact that the judge who penned the decision was not the judge who heard and tried the case and concludes therefrom that the findings of the former are erroneous. Accused-appellants argument does not merit a lengthy discussion. It is well -settled that the decision of a judge who did not try the case is not by that reason alone erroneous.

It is true that the judge who ultimately decided the case had not heard the controversy at all, the trial having been conducted by then Judge Emilio L. Polig, who was indefinitely suspended by this Court. Nonetheless, the transcripts of stenographic notes taken during the trial were complete and were presumably examined and studied by Judge Baguilat before he rendered his decision. It is not unusual for a judge who did not try a case to decide it on the basis of the record. The fact that he did not have the opportunity to observe the demeanor of the witnesses during the trial but merely relied on the transcript of their testimonies does not for that reason alone render the judgment erroneous.
(People vs. Jaymalin, 214 SCRA 685, 692 [1992])

Although it is true that the judge who heard the witnesses testify is in a better position to observe the witnesses on the stand and determine by their demeanor whether they are telling the truth or mouthing falsehood, it does not necessarily follow that a judge who was not present during the trial cannot render a valid decision since he can rely on the transcript of stenographic notes taken during the trial as basis of his decision.
Accused-appellants contention that the trial judge did not have the opportunity to observe the conduct and demeanor of the witnesses since he was not the same judge who conducted the hearing is also untenable. While it is true that the trial judge who conducted the hearing would be in a better position to ascertain the truth and falsity of the testimonies of the witnesses, it does not necessarily follow that a judge who was not present during the trial cannot render a valid and just decision since the latter can also rely on the transcribed stenographic notes taken during the trial as the basis of his decision. (People vs. De Paz, 212 SCRA 56, 63 [1992])

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(People vs. De Paz, 212 SCRA 56, 63 [1992]) At any rate, the test to determine the value of the testimony of the witness is whether or not such is in conformity with knowledge and consistent with the experience of mankind (People vs. Morre, 217 SCRA 219 [1993]). Further, the credibility of witnesses can also be assessed on the basis of the substance of their testimony and the surrounding circumstances (People v. Gonzales, 210 SCRA 44 [1992]). A critical evaluation of the testimony of the prosecution witnesses reveals that their testimony accords with the aforementioned tests, and carries with it the ring of truth end perforce, must be given full weight and credit.

Irrefragably, by reason alone that the judge who penned the RTC Decision was not the same judge who heard the case and received the evidence therein would not render the findings in the said Decision erroneous and unreliable. While the conduct and demeanor of witnesses may sway a trial court judge in deciding a case, it is not, and should not be, his only consideration. Even more vital for the trial court judges decision are the contents and substance of the witnesses testimonies, as borne out by the TSNs, as well as the object and documentary evidence submitted and made part of the records of the case. This Court proceeds to making its own findings of fact.
Since the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, has become final and executory as to the respondent, due to her failure to interpose an appeal therefrom within the reglementary period, she is already bound by the factual findings in the said Decision. Likewise, respondents failure to file, within the reglementary period, a Motion for Reconsideration or an appeal of the Resolution of the Court of Appeals in the same case, dated 20 November 2002, which modified its earlier Decision by deleting paragraph 3(v) of its dispositive portion, ordering petitioners to return to respondent the proceeds of her money market placement with AIDC, shall already bar her from questioning such modification before this Court. Thus, what is for review before this Court is the Decision of the Court of Appeals, dated 26 March 2002, as modified by the Resolution of the same court, dated 20 November 2002. Respondent alleged that she had several deposits and money market placements with petitioners. These deposits and money market placements, as determined by the Court of Appeals in its Decision, dated 26 March 2002, and as modified by its Resolution, dated 20 November 2002, are as follows

Deposit/Placement

Amount

Dollar deposit with Citibank-Geneva $ 149,632.99 Money market placement with Citibank, evidenced by Promissory Note (PN) No. 23356 (which cancels and supersedes PN No. 22526), earning 14.5% interest per annum (p.a.) P 318,897.34

Money market placement with Citibank, evidenced by PN No. 23357 (which cancels and supersedes PN No. 22528), earning 14.5% interest p.a. P 203,150.00
Money market placement with FNCB Finance, evidenced by PN No. 5757 (which cancels and supersedes PN No. 4952), earning 17% interest p.a. P 500,000.00 Money market placement with FNCB
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Money market placement with FNCB Finance, evidenced by PN No. 5758 (which cancels and supersedes PN No. 2962), earning 17% interest p.a. P 500,000.00 This Court is tasked to determine whether petitioners are indeed liable to return the foregoing amounts, together with the appropriate interests and penalties, to respondent. It shall trace respondents transactions with petitioners, from her money market placements with petitioner Citibank and petitioner FNCB Finance, to her savings and current accounts with petitioner Citibank, and to her dollar accounts with Citibank-Geneva. Money market placements with petitioner Citibank The history of respondents money market placements with petitioner Citibank began on 6 December 1976, when she made a placement of P500,000.00 as principal amount, which was supposed to earn an interest of 16% p.a. and for which PN No. 20773 was issued. Respondent did not yet claim the proceeds of her placement and, instead, rolled-over or re-invested the principal and proceeds several times in the succeeding years for which new PNs were issued by petitioner Citibank to replace the ones which matured. Petitioner Citibank accounted for respondents original placement and the subsequent roll overs thereof, as follows Date Cancels Maturity Date Amount Interest (mm/dd/yyyy) PN No. PN No. (mm/dd/yyyy) (P) (p.a.) 12/06/1976 01/14/1977 20773 21686 None 01/13/1977 20773 02/08/1977 500,000.00 16% 508,444.44 15%

02/09/1977 22526 21686 03/16/1977 313,952.59 15-3/4% 22528 21686 03/16/1977 200,000.00 15-3/4% 03/17/1977 23356 22526 04/20/1977 318,897.34 14-1/2% 23357 22528 04/20/1977 203,150.00 14-1/2%

Petitioner Citibank alleged that it had already paid to respondent the principal amounts and proceeds of PNs No. 23356 and 23357, upon their maturity. Petitioner Citibank further averred that respondent used the P500,000.00 from the payment of PNs No. 23356 and 23357, plus P600,000.00 sourced from her other funds, to open two time deposit (TD) accounts with petitioner Citibank, namely, TD Accounts No. 17783 and 17784.
Petitioner Citibank did not deny the existence nor questioned the authenticity of PNs No. 23356 and 23357 it issued in favor of respondent for her money market placements. In fact, it admitted the genuineness and due execution of the said PNs, but qualified that they were no longer outstanding.[31] In Hibberd v. Rohde and McMillian,[32] this Court delineated the consequences of such an admission By the admission of the genuineness and due execution of an instrument, as provided in this section, is meant that the party whose signature it bears admits that he signed it or that it was signed by another for him with his authority; that at the time it was signed it was in words and figures exactly as set out in the pleading of the party relying upon it; that the document was delivered; and that any formal requisites required by law, such as a seal, an acknowledgment, or revenue stamp, which it lacks, are waived by him. Hence, such defenses as that the signature is a forgery (Puritan Mfg. Co. vs. Toti & Gradi, 14 N. M., 425; Cox vs. Northwestern Stage Co., 1 Idaho, 376; Woollen vs. Whitacre, 73 Ind., 198; Smith vs. Ehnert, 47 Wis., 479; Faelnar vs. Escao, 11 Phil. Rep., 92); or that it was unauthorized, as in the case of an agent signing for his principal, or one signing in behalf of a partnership (Country Bank vs. Greenberg, 127 Cal., 26; Henshaw vs. Root, 60 Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or of a
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Greenberg, 127 Cal., 26; Henshaw vs. Root, 60 Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or of a corporation (Merchant vs. International Banking Corporation, 6 Phil Rep., 314; Wanita vs. Rollins, 75 Miss., 253; Barnes vs. Spencer & Barnes Co., 162 Mich., 509); or that, in the case of the latter, that the corporation was authorized under its charter to sign the instrument (Merchant vs. International Banking Corporation, supra); or that the party charged signed the instrument in some other capacity than that alleged in the pleading setting it out (Payne vs. National Bank, 16 Kan., 147); or that it was never delivered (Hunt vs. Weir, 29 Ill., 83; Elbring vs. Mullen, 4 Idaho, 199; Thorp vs. Keokuk Coal Co., 48 N.Y., 253; Fire Association of Philadelphia vs. Ruby, 60 Neb., 216) are cut off by the admission of its genuineness and due execution. The effect o the admission is such that in the case of a promissory note a prima facie case is made for the plaintiff which dispenses with the necessity of evidence on his part and entitles him to a judgment on the pleadings unless a special defense of new matter, such as payment, is interposed by the defendant (Papa vs. Martinez, 12 Phil. Rep., 613; Chinese Chamber of Commerce vs. Pua To Ching, 14 Phil. Rep., 222; Banco Espaol -Filipino vs. McKay & Zoeller, 27 Phil. Rep., 183). x x x

Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested, respondent was able to establish prima facie that petitioner Citibank is liable to her for the amounts stated therein. The assertion of petitioner Citibank of payment of the said PNs is an affirmative allegation of a new matter, the burden of proof as to such resting on petitioner Citibank. Respondent having proved the existence of the obligation, the burden of proof was upon petitioner Citibank to show that it had been discharged.[33] It has already been established by this Court that As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment. The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in the record, the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such defense to the claim of the creditor. Where the debtor introduces some evidence of payment, the burden of going forward with the evidence as distinct from the general burden of proof shifts to the creditor, who is then under the duty of producing some evidence of non-payment.[34] Reviewing the evidence on record, this Court finds that petitioner Citibank failed to satisfactorily prove that PNs No. 23356 and 23357 had already been paid, and that the amount so paid was actually used to open one of respondents TD accounts with petitioner Citibank. Petitioner Citibank presented the testimonies of two witnesses to support its contention of payment: (1) That of Mr. Herminio Pujeda,[35] the officer-in-charge of loans and placements at the time when the questioned transactions took place; and (2) that of Mr. Francisco Tan,[36] the former Assistant VicePresident of Citibank, who directly dealt with respondent with regard to her deposits and loans. The relevant portion*37+ of Mr. Pujedas testimony as to PNs No. 23356 and 23357 (referred to therein as Exhibits No. 47 and 48, respectively) is reproduced below Atty. Mabasa: Okey [sic]. Now Mr. Witness, you were asked to testify in this case and this case is [sic] consist [sic] of several documents involving transactions between the plaintiff and the defendant. Now, were you able to make your own memorandum regarding all these transactions? A Yes, based on my recollection of these facts, I did come up of [sic] the outline of the chronological sequence of events.

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sequence of events.
Court: Are you trying to say that you have personal knowledge or participation to these transactions? A Yes, your Honor, I was the officer-in charge of the unit that was processing these transactions. Some of the documents bear my signature. Court: And this resume or summary that you have prepared is based on purely your recollection or documents? A Based on documents, your Honor.

Court: Are these documents still available now? A Yes, your honor.

Court:

Better present the documents.

Atty. Mabasa:

Yes, your Honor, that is why your Honor.

Atty. Mabasa: Q Now, basing on the notes that you prepared, Mr. Witness, and according to you basing also on your personal recollection about all the transactions involved between Modesta Sabeniano and defendant City Bank [sic] in this case. Now, would you tell us what happened to the money market placements of Modesta Sabeniano that you have earlier identified in Exhs. 47 and 48? A Q A Q A Q The transactions which I said earlier were terminated and booked to time deposits. And you are saying time deposits with what bank? With First National Citibank. Is it the same bank as Citibank, N.A.? Yes, sir. And how much was the amount booked as time deposit with defendant Citibank?

In the amount of P500,000.00.

Q And outside this P500,000.00 which you said was booked out of the proceeds of Exhs. 47 and 48, were there other time deposits opened by Mrs. Modesta Sabeniano at that time. A Yes, she also opened another time deposit for P600,000.00.

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Yes, she also opened another time deposit for P600,000.00.

Q So all in all Mr. Witness, sometime in April of 1978 Mrs. Modesta Sabeneano [sic] had time deposit placements with Citibank in the amount of P500,000.00 which is the proceeds of Exh. 47 and 48 and another P600,000.00, is it not?

Yes, sir.

Q And would you know where did the other P600,000 placed by Mrs. Sabeneano [sic] in a time deposit with Citibank, N.A. came [sic] from? A She funded it directly.

Q What are you saying Mr. Witness is that the P600,000 is a [sic] fresh money coming from Mrs. Modesta Sabeneano [sic]? A That is right.

In his deposition in Hong Kong, Mr. Tan recounted what happened to PNs No. 23356 and 23357 (referred to therein as Exhibits E and F, respectively), as follows Atty. Mabasa : Now from the Exhibits that you have identified Mr. Tan from Exhibits A to F, which are Exhibits of the plaintiff. Now, do I understand from you that the original amount is Five Hundred Thousand and thereafter renewed in the succeeding exhibits? Mr. Tan : Yes, Sir.

Atty. Mabasa : Alright, after these Exhibits E and F matured, what happened thereafter? Mr. Tan : Split into two time deposits.

Atty. Mabasa : Exhibits E and F?

Before anything else, it should be noted that when Mr. Pujedas testimony before the RTC was made on 12 March 1990 and Mr. Tans deposition in Hong Kong was conducted on 3 September 1990, more than a decade had passed from the time the transactions they were testifying on took place. This Court had previously recognized the frailty and unreliability of human memory with regards to figures after the lapse of five years.[38] Taking into consideration the substantial length of time between the transactions and the witnesses testimonies, as well as the undeniable fact that bank officers deal with multiple clients and process numerous transactions during their tenure, this Court is reluctant to give much weight to the testimonies of Mr. Pujeda and Mr. Tan regarding the payment of PNs No. 23356 and 23357 and the use by respondent of the proceeds thereof for opening TD accounts. This Court finds it implausible that they should remember, after all these years, this particular transaction with respondent involving her PNs No. 23356 and 23357 and TD accounts. Both witnesses did not give any reason as to why, from among all the clients they had dealt with and all the transactions they had processed as officers of petitioner Citibank, they specially remembered respondent and her PNs No. 23356 and 23357. Their testimonies likewise lacked details on the circumstances surrounding the payment of the two PNs and the opening of the time deposit accounts by respondent, such as the date of payment of the two PNs, mode of payment, and the manner and context by which respondent relayed her instructions to the officers of petitioner Citibank to use the proceeds of her two PNs in opening the TD accounts.

Moreover, while there are documentary evidences to support and trace respondents money market placements with petitioner Citibank, from the original PN No. 20773, rolled-over several times to, finally, PNs No. 23356 and 23357, there is an evident absence of any documentary evidence on the payment of these last two PNs and the use of the proceeds thereof by respondent for opening TD accounts. The
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these last two PNs and the use of the proceeds thereof by respondent for opening TD accounts. The paper trail seems to have ended with the copies of PNs No. 23356 and 23357. Although both Mr. Pujeda and Mr. Tan said that they based their testimonies, not just on their memories but also on the documents on file, the supposed documents on which they based those portions of their testimony on the payment of PNs No. 23356 and 23357 and the opening of the TD accounts from the proceeds thereof, were never presented before the courts nor made part of the records of the case. Respondents money market placements were of substantial amounts consisting of the principal amount of P500,000.00, plus the interest it shoul have earned during the years of placement and it is difficult for this Court to believe that petitioner Citibank would not have had documented the payment thereof. When Mr. Pujeda testified before the RTC on 6 February 1990,*39+ petitioners counsel attempted to present in evidence a document that would supposedly support the claim of petitioner Citibank that the proceeds of PNs No. 23356 and 23357 were used by respondent to open one of her two TD accounts in the amount of P500,000.00. Respondents counsel objected to the presentation of the document since it was a mere xerox" copy, and was blurred and hardly readable. Petitioners counsel then asked for a continuance of the hearing so that they can have time to produce a better document, which was granted by the court. However, during the next hearing and continuance of Mr. Pujedas testimony on 12 March 1990, petitioners counsel no longer referred to the said document. As respondent had established a prima facie case that petitioner Citibank is obligated to her for the amounts stated in PNs No. 23356 and 23357, and as petitioner Citibank failed to present sufficient proof of payment of the said PNs and the use by the respondent of the proceeds thereof to open her TD accounts, this Court finds that PNs No. 23356 and 23357 are still outstanding and petitioner Citibank is still liable to respondent for the amounts stated therein.

The significance of this Courts declaration that PNs No. 23356 and 23357 are still outstanding becomes apparent in the light of petitioners next contentions that respondent used the proceeds of PNs No. 23356 and 23357, together with additional money, to open TD Accounts No. 17783 and 17784 with petitioner Citibank; and, subsequently, respondent pre-terminated these TD accounts and transferred the proceeds thereof, amounting to P1,100,000.00, to petitioner FNCB Finance for money market placements. While respondents money market placements with petitioner FNCB Finance may be traced back with definiteness to TD Accounts No. 17783 and 17784, there is only flimsy and unsubstantiated connection between the said TD accounts and the supposed proceeds paid from PNs No. 23356 and 23357. With PNs No. 23356 and 23357 still unpaid, then they represent an obligation of petitioner Citibank separate and distinct from the obligation of petitioner FNCB Finance arising from respondents money market placements with the latter.
According to petitioners, respondents TD Accounts No. 17783 and 17784, in the total amount of P1,100,000.00, were supposed to mature on 15 March 1978. However, respondent, through a letter dated 28 April 1977,[40] pre-terminated the said TD accounts and transferred all the proceeds thereof to petitioner FNCB Finance for money market placement. Pursuant to her instructions, TD Accounts No. 17783 and 17784 were pre-terminated and petitioner Citibank (then still named First National City Bank) issued Managers Checks (MC) No. 199253*41+ and 199251*42+ for the amounts of P500,000.00 and P600,00.00, respectively. Both MCs were payable to Citifinance (which, according to Mr. Pujeda,[43] was one with and the same as petitioner FNCB Finance), with the additional notation that A/C MODESTA R. SABENIANO. Typewritten on MC No. 199253 is the phrase Ref. Proceeds of TD 17783, and on MC No. 199251 is a similar phrase, Ref. Proceeds of TD 17784. These phrases purportedly established that the MCs were paid from the proceeds of respondents pre -terminated TD accounts with petitioner Citibank. Upon receipt of the MCs, petitioner FNCB Finance deposited the same to its account with Feati Bank and Trust Co., as evidenced by the rubber stamp mark of the latter found at the back of both MCs. In exchange, petitioner FNCB Finance booked the amounts received as money market placements, and accordingly issued PNs No. 4952 and 4962, for the amounts of P500,000.00 and P600,000.00, respectively, payable to respondents savings account with petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once again, respondent rolled-over several times the
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25-13703-4, upon their maturity on 1 June 1977. Once again, respondent rolled-over several times the principal amounts of her money market placements with petitioner FNCB Finance, as follows Date Cancels Maturity Date Amount Interest (mm/dd/yyyy) PN No. PN No. (mm/dd/yyyy) (P) (p.a.) 04/29/1977 4952 None 06/01/1977 500,000.00 17% 4962 None 06/01/1977 600,000.00 17%

06/02/1977 5757 4952 08/31/1977 500,000.00 17% 5758 4962 08/31/1977 500,000.00 17%
08/31/1977 8167 5757 08/25/1978 500,000.00 14% 8169 5752 08/25/1978 500,000.00 14% As presented by the petitioner FNCB Finance, respondent rolled-over only the principal amounts of her money market placements as she chose to receive the interest income therefrom. Petitioner FNCB Finance also pointed out that when PN No. 4962, with principal amount of P600,000.00, matured on 1 June 1977, respondent received a partial payment of the principal which, together with the interest, amounted to P102,633.33;[44] thus, only the amount of P500,000.00 from PN No. 4962 was rolled-over to PN No. 5758. Based on the foregoing records, the principal amounts of PNs No. 5757 and 5758, upon their maturity, were rolled over to PNs No. 8167 and 8169, respectively. PN No. 8167[45] expressly canceled and superseded PN No. 5757, while PN No. 8169[46] also explicitly canceled and superseded PN No. 5758. Thus, it is patently erroneous for the Court of Appeals to still award to respondent the principal amounts and interests covered by PNs No. 5757 and 5758 when these were already canceled and superseded. It is now incumbent upon this Court to determine what subsequently happened to PNs No. 8167 and 8169.

Petitioner FNCB Finance presented four checks as proof of payment of the principal amounts and interests of PNs No. 8167 and 8169 upon their maturity. All the checks were payable to respondents savings account with petitioner Citibank, with the following details
Date of Issuance Check Amount (mm/dd/yyyy) No. (P) Notation

09/01/1978
09/01/1978

76962 12,833.34 Interest payment on PN#08167

76961 12,833.34 Interest payment on PN#08169

09/05/1978

77035 500,000.00 Full payment of principal on PN#08167 which is hereby cancelled 77034 500,000.00 Full payment of principal on PN#08169 which is hereby cancelled

09/05/1978

Then again, Checks No. 77035 and 77034 were later returned to petitioner FNCB Finance together with a memo,[47] dated 6 September 1978, from Mr. Tan of petitioner Citibank, to a Mr. Bobby Mendoza of petitioner FNCB Finance. According to the memo, the two checks, in the total amount of P1,000,000.00, were to be returned to respondents account with instructions to book the said amount in money market placements for one more year. Pursuant to the said memo, Checks No. 77035 and 77034 were invested by petitioner FNCB Finance, on behalf of respondent, in money market placements for which it issued PNs No. 20138 and 20139. The PNs each covered P500,000.00, to earn 11% interest per annum, and to mature on 3 September 1979.
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and to mature on 3 September 1979.

On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the order of Citibank N.A. A/C Modesta Sabeniano, in the amount of P1,022,916.66, as full payment of the principal amounts and interests of both PNs No. 20138 and 20139 and, resultantly, canceling the said PNs.[48] Respondent actually admitted the issuance and existence of Check No. 100168, but with the qualification that the proceeds thereof were turned over to petitioner Citibank.[49] Respondent did not clarify the circumstances attending the supposed turn over, but on the basis of the allegations of petitioner Citibank itself, the proceeds of PNs No. 20138 and 20139, amounting to P1,022,916.66, was used by it to liquidate respondents outstanding loans. Therefore, the determination of whether or not respondent is still entitled to the return of the proceeds of PNs No. 20138 and 20139 shall be dependent on the resolution of the issues raised as to the existence of the loans and the authority of petitioner Citibank to use the proceeds of the said PNs, together with respondents other deposits and money market placements, to pay for the same.
Savings and current accounts with petitioner Citibank Respondent presented and submitted before the RTC deposit slips and bank statements to prove deposits made to several of her accounts with petitioner Citibank, particularly, Accounts No. 00484202, 59091, and 472-751, which would have amounted to a total of P3,812,712.32, had there been no withdrawals or debits from the said accounts from the time the said deposits were made. Although the RTC and the Court of Appeals did not make any definitive findings as to the status of respondents savings and current accounts with petitioner Citibank, the Decisions of both the trial and appellate courts effectively recognized only the P31,079.14 coming from respondents savings account which was used to off-set her alleged outstanding loans with petitioner Citibank.[50] Since both the RTC and the Court of Appeals had consistently recognized only the P31,079.14 of respondents savings account with petitioner Citibank, and that respondent failed to move for reconsideration or to appeal this particular finding of fact by the trial and appellate courts, it is already binding upon this Court. Respondent is already precluded from claiming any greater amount in her savings and current accounts with petitioner Citibank. Thus, this Court shall limit itself to determining whether or not respondent is entitled to the return of the amount of P31,079.14 should the off-set thereof by petitioner Citibank against her supposed loans be found invalid. Dollar accounts with Citibank-Geneva

Respondent made an effort of preparing and presenting before the RTC her own computations of her money market placements and dollar accounts with Citibank-Geneva, purportedly amounting to a total of United States (US) $343,220.98, as of 23 June 1985.[51] In her Memorandum filed with the RTC, she claimed a much bigger amount of deposits and money market placements with Citibank-Geneva, totaling US$1,336,638.65.[52] However, respondent herself also submitted as part of her formal offer of evidence the computation of her money market placements and dollar accounts with CitibankGeneva as determined by the latter.[53] Citibank-Geneva accounted for respondents money market placements and dollar accounts as follows

MODESTA SABENIANO &/OR

=== == = == = == == = == ==

US$ 30000.-- Principal Fid. Placement + US$ 339.06 Interest at 3,875% p.a. from 12.07. 25.10.79 - US$ 95.-Commission (minimum)
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from 12.07. 25.10.79 - US$ 95.-Commission (minimum) ---------------US$ 30244.06 Total proceeds on 25.10.1979

US$ 114000.-- Principal Fid. Placement + US$ 1358.50 Interest at 4,125% p.a. from 12.07. 25.10.79 - US$ 41.17 Commission ---------------US$ 115317.33 Total proceeds on 25.10.1979

US$ 145561.39 Total proceeds of both placements on 25.10.1979 + US$ 11381.31 total of both current accounts --------------US$ 156942.70 Total funds available
- US$ 149632.99 Transfer to Citibank Manila on 26.10.1979 (counter value of Pesos 1102944.78) US$ 7309.71 Balance in current accounts

- US$ 6998.84 Transfer to Citibank Zuerich ac no. 121359 on March 13, 1980

US$ 310.87

various charges including closing charges

According to the foregoing computation, by 25 October 1979, respondent had a total of US$156,942.70, from which, US$149,632.99 was transferred by Citibank-Geneva to petitioner Citibank in Manila, and was used by the latter to off-set respondents outstanding loans. The balance of respondents accounts with Citibank-Geneva, after the remittance to petitioner Citibank in Manila, amounted to US$7,309.71, which was subsequently expended by a transfer to another account with Citibank-Zuerich, in the amount of US$6,998.84, and by payment of various bank charges, including closing charges, in the amount of US$310.87. Rightly so, both the RTC and the Court of Appeals gave more credence to the computation of Citibank-Geneva as to the status of respondents accounts with the said bank, rather than the one prepared by respondent herself, which was evidently self-serving. Once again, this Court shall limit itself to determining whether or not respondent is entitled to the return of the amount of US $149,632.99 should the off-set thereof by petitioner Citibank against her alleged outstanding loans be found invalid. Respondent cannot claim any greater amount since she did not perfect an appeal of the Decision of the Court of Appeals, dated 26 March 2002, which found that she is entitled only to the return of the said amount, as far as her accounts with Citibank-Geneva is concerned.

III
Petitioner Citibank was able to establish by preponderance of evidence the existence of respondents loans. Petitioners version of events In sum, the following amounts were used by petitioner Citibank to liquidate respondents purported outstanding loans

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Description

Amount

Principal and interests of PNs No. 20138 and 20139

(money market placements with petitioner FNCB Finance) P 1,022,916.66 Savings account with petitioner Citibank

31,079.14

Dollar remittance from Citibank-Geneva (peso equivalent Of US$149,632.99)

1,102,944.78

Total P 2,156,940.58

According to petitioner Citibank, respondent incurred her loans under the circumstances narrated below. As early as 9 February 1978, respondent obtained her first loan from petitioner Citibank in the principal amount of P200,000.00, for which she executed PN No. 31504.[54] Petitioner Citibank extended to her several other loans in the succeeding months. Some of these loans were paid, while others were rolledover or renewed. Significant to the Petition at bar are the loans which respondent obtained from July 1978 to January 1979, appropriately covered by PNs (first set).[55] The aggregate principal amount of these loans was P1,920,000.00, which could be broken down as follows PN No. Date of Issuance (mm/dd/yyyy)
32935 33751 33798 34025 07/20/1978 10/13/1978 10/19/1978 11/15/1978

Date of Maturity Principal Date of Release MC No. (mm/dd/yyyy) Amount (mm/dd/yyyy)

09/18/1978 12/12/1978 11/03/1978 01/15/1979 P 400,000.00 100,000.00 100,000.00 150,000.00 07/20/1978 220701

Unrecovered 10/19/1978 11/16/1978 226285 226439

34079
34192

11/21/1978
12/04/1978

01/19/1979
01/18/1979

250,000.00
100,000.00

11/21/1978
12/05/1978

226467
228057

34402
34534 34609 34740

12/26/1978
01/09/1979 01/17/1979 01/30/1979

02/23/1979
03/09/1979 03/19/1979 03/30/1979

300,000.00
150,000.00 150,000.00 220,000.00

12/26/1978
01/09/1979 01/17/1979 01/30/1979

228203
228270 228357 228400

Total P 1,920,000.00

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Total P 1,920,000.00 When respondent was unable to pay the first set of PNs upon their maturity, these were rolled-over or renewed several times, necessitating the execution by respondent of new PNs in favor of petitioner Citibank. As of 5 April 1979, respondent had the following outstanding PNs (second set),[56] the principal amount of which remained at P1,920,000.00

PN No. Date of Issuance Date of Maturity (mm/dd/yyyy) (mm/dd/yyyy) Principal Amount 34510 34509 34534 01/01/1979 01/02/1979 01/09/1979 03/02/1979 03/02/1979 03/09/1979 P 400,000.00 100,000.00 150,000.00

34612
34741

01/19/1979
01/26/1979

03/16/1979
03/12/1979

150,000.00
100,000.00

35689
35694 35695 356946 35697

02/23/1979
03/19/1979 03/19/1979 03/20/1979 03/30/1979

05/29/1979
05/29/1979 05/29/1979 05/29/1979 05/29/1979

300,000.00
150,000.00 100,000.00 250,000.00 220,000.00

Total

P 1,920,000.00

All the PNs stated that the purpose of the loans covered thereby is To liquidate existing obligation, except for PN No. 34534, which stated for its purpose personal investment. Respondent secured her foregoing loans with petitioner Citibank by executing Deeds of Assignment of her money market placements with petitioner FNCB Finance. On 2 March 1978, respondent executed in favor of petitioner Citibank a Deed of Assignment[57] of PN No. 8169, which was issued by petitioner FNCB Finance, to secure payment of the credit and banking facilities extended to her by petitioner Citibank, in the aggregate principal amount of P500,000.00. On 9 March 1978, respondent executed in favor of petitioner Citibank another Deed of Assignment,[58] this time, of PN No. 8167, also issued by petitioner FNCB Finance, to secure payment of the credit and banking facilities extended to her by petitioner Citibank, in the aggregate amount of P500,000.00. When PNs No. 8167 and 8169, representing respondents money market placements with petitioner FNCB Finance, matured and were rolled-over to PNs No. 20138 and 20139, respondent executed new Deeds of Assignment,[59] in favor of petitioner Citibank, on 25 August 1978. According to the more recent Deeds, respondent assigned PNs No. 20138 and 20139, representing her rolled-over money market placements with petitioner FNCB Finance, to petitioner Citibank as security for the banking and credit facilities it extended to her, in the aggregate principal amount of P500,000.00 per Deed.

In addition to the Deeds of Assignment of her money market placements with petitioner FNCB Finance, respondent also executed a Declaration of Pledge,*60+ in which she supposedly pledged *a+ll present and future fiduciary placements held in my personal and/or joint name with Citibank, Switzerland, to secure all claims the petitioner Citibank may have or, in the future, acquire against respondent. The
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secure all claims the petitioner Citibank may have or, in the future, acquire against respondent. The petitioners copy of the Declaration of Pledge is undated, while that of the respondent, a copy certified by a Citibank-Geneva officer, bore the date 24 September 1979.[61] When respondent failed to pay the second set of PNs upon their maturity, an exchange of letters ensued between respondent and/or her representatives, on one hand, and the representatives of petitioners, on the other. The first letter[62] was dated 5 April 1979, addressed to respondent and signed by Mr. Tan, as the manager of petitioner Citibank, which stated, in part, that Despite our repeated requests and follow-up, we regret you have not granted us with any response or payment. We, therefore, have no alternative but to call your loan of P1,920,000.00 plus interests and other charges due and demandable. If you still fail to settle this obligation by 4/27/79, we shall have no other alternative but to refer your account to our lawyers for legal action to protect the interest of the bank. Respondent sent a reply letter[63] dated 26 April 1979, printed on paper bearing the letterhead of respondents company, MC Adore International Palace, the body of which reads This is in reply to your letter dated April 5, 1979 inviting my attention to my loan which has become due. Pursuant to our representation with you over the telephone through Mr. F. A. Tan, you allow us to pay the interests due for the meantime. Please accept our Comtrust Check in the amount of P62,683.33. Please bear with us for a little while, at most ninety days. As you know, we have a pending loan with the Development Bank of the Philippines in the amount of P11-M. This loan has already been recommended for approval and would be submitted to the Board of Governors. In fact, to further facilitate the early release of this loan, we have presented and furnished Gov. J. Tengco a xerox copy of your letter.

You will be doing our corporation a very viable service, should you grant us our request for a little more time.
A week later or on 3 May 1979, a certain C. N. Pugeda, designated as Executive Secretary, sent a letter[64] to petitioner Citibank, on behalf of respondent. The letter was again printed on paper bearing the letterhead of MC Adore International Palace. The pertinent paragraphs of the said letter are reproduced below Per instructions of Mrs. Modesta R. Sabeniano, we would like to request for a re-computation of the interest and penalty charges on her loan in the aggregate amount of P1,920,000.00 with maturity date of all promissory notes at June 30, 1979. As she has personally discussed with you yesterday, this date will more or less assure you of early settlement. In this regard, please entrust to bearer, our Comtrust check for P62,683.33 to be replaced by another check with amount resulting from the new computation. Also, to facilitate the processing of the same, may we request for another set of promissory notes for the signature of Mrs. Sabeniano and to cancel the previous ones she has signed and forwarded to you.

This was followed by a telegram,[65] dated 5 June 1979, and received by petitioner Citibank the following day. The telegram was sent by a Dewey G. Soriano, Legal Counsel. The telegram acknowledged receipt of the telegram sent by petitioner Citibank regarding the re-past due obligation of McAdore International Palace. However, it reported that respondent, the President and Chairman of
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of McAdore International Palace. However, it reported that respondent, the President and Chairman of MC Adore International Palace, was presently abroad negotiating for a big loan. Thus, he was requesting for an extension of the due date of the obligation until respondents arrival on or before 31 July 1979.

The next letter,[66] dated 21 June 1979, was signed by respondent herself and addressed to Mr. Bobby Mendoza, a Manager of petitioner FNCB Finance. Respondent wrote therein
Re: PN No. 20138 for P500,000.00 & PN No. 20139 for P500,000.00 totalling P1 Million, both PNs will mature on 9/3/1979. This is to authorize you to release the accrued quarterly interests payment from my captioned placements and forward directly to Citibank, Manila Attention: Mr. F. A. Tan, Manager, to apply to my interest payable on my outstanding loan with Citibank. Please note that the captioned two placements are continuously pledged/hypothecated to Citibank, Manila to support my personal outstanding loan. Therefore, please do not release the captioned placements upon maturity until you have received the instruction from Citibank, Manila.

On even date, respondent sent another letter[67] to Mr. Tan of petitioner Citibank, stating that
Re: S/A No. 25-225928 and C/A No. 484-946

This letter serves as an authority to debit whatever the outstanding balance from my captioned accounts and credit the amount to my loan outstanding account with you. Unlike respondents earlier letters, both letters, dated 21 June 1979, are printed on plain paper, without the letterhead of her company, MC Adore International Palace.

By 5 September 1979, respondents outstanding and past due obligations to petitioner Citibank totaled P2,123,843.20, representing the principal amounts plus interests. Relying on respondents Deeds of Assignment, petitioner Citibank applied the proceeds of respondents money market placements with petitioner FNCB Finance, as well as her deposit account with petitioner Citibank, to partly liquidate respondents outstanding loan balance,*68+ as follows
Respondents outstanding obligation (principal and interest) P 2,123,843.20 Less: Proceeds from respondents money market placements with petitioner FNCB Finance (principal and interest) (1,022,916.66)

Deposits in respondents bank accounts with petitioner Citibank (31,079.14) Balance of respondents obligation P 1,069,847.40

Mr. Tan of petitioner Citibank subsequently sent a letter,[69] dated 28 September 1979, notifying respondent of the status of her loans and the foregoing compensation which petitioner Citibank effected. In the letter, Mr. Tan informed respondent that she still had a remaining past-due obligation in the amount of P1,069,847.40, as of 5 September 1979, and should respondent fail to pay the amount by 15 October 1979, then petitioner Citibank shall proceed to off-set the unpaid amount with respondents other collateral, particularly, a money market placement in Citibank-Hongkong. On 5 October 1979, respondent wrote Mr. Tan of petitioner Citibank, on paper bearing the letterhead of MC Adore International Palace, as regards the P1,920,000.00 loan account supposedly of MC Adore
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MC Adore International Palace, as regards the P1,920,000.00 loan account supposedly of MC Adore Finance & Investment, Inc., and requested for a statement of account covering the principal and interest of the loan as of 31 October 1979. She stated therein that the loan obligation shall be paid within 60 days from receipt of the statement of account.

Almost three weeks later, or on 25 October 1979, a certain Atty. Moises Tolentino dropped by the office of petitioner Citibank, with a letter, dated 9 October 1979, and printed on paper with the letterhead of MC Adore International Palace, which authorized the bearer thereof to represent the respondent in settling the overdue account, this time, purportedly, of MC Adore International Palace Hotel. The letter was signed by respondent as the President and Chairman of the Board.
Eventually, Atty. Antonio Agcaoili of Agcaoili & Associates, as counsel of petitioner Citibank, sent a letter to respondent, dated 31 October 1979, informing her that petitioner Citibank had effected an off-set using her account with Citibank-Geneva, in the amount of US$149,632.99, against her outstanding, overdue, demandable and unpaid obligation to petitioner Citibank. Atty. Agcaoili claimed therein that the compensation or off-set was made pursuant to and in accordance with the provisions of Articles 1278 through 1290 of the Civil Code. He further declared that respondents obligation to petitioner Citibank was now fully paid and liquidated.

Unfortunately, on 7 October 1987, a fire gutted the 7th floor of petitioner Citibanks building at Paseo de Roxas St., Makati, Metro Manila. Petitioners submitted a Certification[70] to this effect, dated 17 January 1991, issued by the Chief of the Arson Investigation Section, Fire District III, Makati Fire Station, Metropolitan Police Force. The 7th floor of petitioner Citibanks building housed its Control Division, which was in charge of keeping the necessary documents for cases in which it was involved. After compiling the documentary evidence for the present case, Atty. Renato J. Fernandez, internal legal counsel of petitioner Citibank, forwarded them to the Control Division. The original copies of the MCs, which supposedly represent the proceeds of the first set of PNs, as well as that of other documentary evidence related to the case, were among those burned in the said fire.[71]
Respondents version of events Respondent disputed petitioners narration of the circumstances surrounding her loans with petitioner Citibank and the alleged authority she gave for the off-set or compensation of her money market placements and deposit accounts with petitioners against her loan obligation. Respondent denied outright executing the first set of PNs, except for one (PN No. 34534 in particular). Although she admitted that she obtained several loans from petitioner Citibank, these only amounted to P1,150,000.00, and she had already paid them. She secured from petitioner Citibank two loans of P500,000.00 each. She executed in favor of petitioner Citibank the corresponding PNs for the loans and the Deeds of Assignment of her money market placements with petitioner FNCB Finance as security.[72] To prove payment of these loans, respondent presented two provisional receipts of petitioner Citibank No. 19471,[73] dated 11 August 1978, and No. 12723,[74] dated 10 November 1978 both signed by Mr. Tan, and acknowledging receipt from respondent of several checks in the total amount of P500,744.00 and P500,000.00, respectively, for liquidation of loan. She borrowed another P150,000.00 from petitioner Citibank for personal investment, and for which she executed PN No. 34534, on 9 January 1979. Thus, she admitted to receiving the proceeds of this loan via MC No. 228270. She invested the loan amount in another money market placement with petitioner FNCB Finance. In turn, she used the very same money market placement with petitioner FNCB Finance as security for her P150,000.00 loan from petitioner Citibank. When she failed to pay the loan when it became due, petitioner Citibank allegedly forfeited her money market placement with petitioner FNCB Finance and, thus, the loan was already paid.[75] Respondent likewise questioned the MCs presented by petitioners, except for one (MC No. 228270 in particular), as proof that she received the proceeds of the loans covered by the first set of PNs. As
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particular), as proof that she received the proceeds of the loans covered by the first set of PNs. As recounted in the preceding paragraph, respondent admitted to obtaining a loan of P150,000.00, covered by PN No. 34534, and receiving MC No. 228270 representing the proceeds thereof, but claimed that she already paid the same. She denied ever receiving MCs No. 220701 (for the loan of P400,000.00, covered by PN No. 33935) and No. 226467 (for the loan of P250,000.00, covered by PN No. 34079), and pointed out that the checks did not bear her indorsements. She did not deny receiving all other checks but she interposed that she received these checks, not as proceeds of loans, but as payment of the principal amounts and/or interests from her money market placements with petitioner Citibank. She also raised doubts as to the notation on each of the checks that reads RE: Proceeds of PN#*corresponding PN No.+, saying that such notation did not appear on the MCs when she originally received them and that the notation appears to have been written by a typewriter different from that used in writing all other information on the checks (i.e., date, payee, and amount).[76] She even testified that MCs were not supposed to bear notations indicating the purpose for which they were issued. As to the second set of PNs, respondent acknowledged having signed them all. However, she asserted that she only executed these PNs as part of the simulated loans she and Mr. Tan of petitioner Citibank concocted. Respondent explained that she had a pending loan application for a big amount with the Development Bank of the Philippines (DBP), and when Mr. Tan found out about this, he suggested that they could make it appear that the respondent had outstanding loans with petitioner Citibank and the latter was already demanding payment thereof; this might persuade DBP to approve respondents loan application. Mr. Tan made the respondent sign the second set of PNs, so that he may have something to show the DBP investigator who might inquire with petitioner Citibank as to respondents loans with the latter. On her own copies of the said PNs, respondent wrote by hand the notation, This isa (sic) simulated non-negotiable note, signed copy given to Mr. Tan., (sic) per agreement to be shown to DBP representative. itwill (sic) be returned to me if the P11=M (sic) loan for MC Adore Palace Hotel is approved by DBP.*77+ Findings of this Court as to the existence of the loans After going through the testimonial and documentary evidence presented by both sides to this case, it is this Courts assessment that respondent did indeed have outstanding loans with petitioner Citibank at the time it effected the off-set or compensation on 25 July 1979 (using respondents savings deposit with petitioner Citibank), 5 September 1979 (using the proceeds of respondents money market placements with petitioner FNCB Finance) and 26 October 1979 (using respondents dollar accounts remitted from Citibank-Geneva). The totality of petitioners evidence as to the existence of the said loans preponderates over respondents. Preponderant evidence means that, as a whole, the evidence adduced by one side outweighs that of the adverse party.[78] Respondents outstanding obligation for P1,920,000.00 had been sufficiently documented by petitioner Citibank. The second set of PNs is a mere renewal of the prior loans originally covered by the first set of PNs, except for PN No. 34534. The first set of PNs is supported, in turn, by the existence of the MCs that represent the proceeds thereof received by the respondent. It bears to emphasize that the proceeds of the loans were paid to respondent in MCs, with the respondent specifically named as payee. MCs checks are drawn by the banks manager upon the bank itself and regarded to be as good as the money it represents.[79] Moreover, the MCs were crossed checks, with the words Payees Account Only. In general, a crossed check cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payees bank which, in turn, must present it for payment against the drawee bank in the course of normal banking hours. The crossed check cannot be presented for payment, but it can only be deposited and the drawee bank may only pay to another bank in the payees or indorsers account.*80+ The effect of crossing a check was described by this Court in Philippine
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or indorsers account.*80+ The effect of crossing a check was described by this Court in Philippine Commercial International Bank v. Court of Appeals[81] *T+he crossing of a check with the phrase Payees Account Only is a warning that the check should be deposited in the account of the payee. Thus, it is the duty of the collecting bank PCI Bank to ascertain that the check be deposited in payees account only. It is bound to scrutinize the check and to know its depositors before it can make the clearing indorsement all prior indorsements and/or lack of indorsement guaranteed.

The crossed MCs presented by petitioner Bank were indeed deposited in several different bank accounts and cleared by the Clearing Office of the Central Bank of the Philippines, as evidenced by the stamp marks and notations on the said checks. The crossed MCs are already in the possession of petitioner Citibank, the drawee bank, which was ultimately responsible for the payment of the amount stated in the checks. Given that a check is more than just an instrument of credit used in commercial transactions for it also serves as a receipt or evidence for the drawee bank of the cancellation of the said check due to payment,*82+ then, the possession by petitioner Citibank of the said MCs, duly stamped Paid gives rise to the presumption that the said MCs were already paid out to the intended payee, who was in this case, the respondent. This Court finds applicable herein the presumptions that private transactions have been fair and regular,[83] and that the ordinary course of business has been followed.[84] There is no question that the loan transaction between petitioner Citibank and the respondent is a private transaction. The transactions revolving around the crossed MCs from their issuance by petitioner Citibank to respondent as payment of the proceeds of her loans; to its deposit in respondents accounts with several different banks; to the clearing of the MCs by an independent clearing house; and finally, to the payment of the MCs by petitioner Citibank as the drawee bank of the said checks are all private transactions which shall be presumed to have been fair and regular to all the parties concerned. In addition, the banks involved in the foregoing transactions are also presumed to have followed the ordinary course of business in the acceptance of the crossed MCs for deposit in respondents accounts, submitting them for clearing, and their eventual payment and cancellation.
The afore-stated presumptions are disputable, meaning, they are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence.[85] Respondent, however, was unable to present sufficient and credible evidence to dispute these presumptions. It should be recalled that out of the nine MCs presented by petitioner Citibank, respondent admitted to receiving one as proceeds of a loan (MC No. 228270), denied receiving two (MCs No. 220701 and 226467), and admitted to receiving all the rest, but not as proceeds of her loans, but as return on the principal amounts and interests from her money market placements.

Respondent admitted receiving MC No. 228270 representing the proceeds of her loan covered by PN No. 34534. Although the principal amount of the loan is P150,000.00, respondent only received P146,312.50, because the interest and handling fee on the loan transaction were already deducted therefrom.[86] Stamps and notations at the back of MC No. 228270 reveal that it was deposited at the Bank of the Philippine Islands (BPI), Cubao Branch, in Account No. 0123-0572-28.[87] The check also bore the signature of respondent at the back.[88] And, although respondent would later admit that she did sign PN No. 34534 and received MC No. 228270 as proceeds of the loan extended to her by petitioner Citibank, she contradicted herself when, in an earlier testimony, she claimed that PN No. 34534 was among the PNs she executed as simulated loans with petitioner Citibank.[89]
Respondent denied ever receiving MCs No. 220701 and 226467. However, considering that the said checks were crossed for payees account only, and that they were actually deposited, cleared, and paid, then the presumption would be that the said checks were properly deposited to the account of respondent, who was clearly named the payee in the checks. Respondents bare allegations that she did not receive the two checks fail to convince this Court, for to sustain her, would be for this Court to
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not receive the two checks fail to convince this Court, for to sustain her, would be for this Court to conclude that an irregularity had occurred somewhere from the time of the issuance of the said checks, to their deposit, clearance, and payment, and which would have involved not only petitioner Citibank, but also BPI, which accepted the checks for deposit, and the Central Bank of the Philippines, which cleared the checks. It falls upon the respondent to overcome or dispute the presumption that the crossed checks were issued, accepted for deposit, cleared, and paid for by the banks involved following the ordinary course of their business. The mere fact that MCs No. 220701 and 226467 do not bear respondents signature at the back does not negate deposit thereof in her account. The liability for the lack of indorsement on the MCs no longer fall on petitioner Citibank, but on the bank who received the same for deposit, in this case, BPI Cubao Branch. Once again, it must be noted that the MCs were crossed, for payees account only, and the payee named in both checks was none other than respondent. The crossing of the MCs was already a warning to BPI to receive said checks for deposit only in respondents account. It was up to BPI to verify whether it was receiving the crossed MCs in accordance with the instructions on the face thereof. If, indeed, the MCs were deposited in accounts other than respondents, then the respondent would have a cause of action against BPI.[90] BPI further stamped its guarantee on the back of the checks to the effect that, All prior endorsement and/or Lack of endorsement guaranteed. Thus, BPI became the indorser of the MCs, and assumed all the warranties of an indorser,[91] specifically, that the checks were genuine and in all respects what they purported to be; that it had a good title to the checks; that all prior parties had capacity to contract; and that the checks were, at the time of their indorsement, valid and subsisting.[92] So even if the MCs deposited by BPI's client, whether it be by respondent herself or some other person, lacked the necessary indorsement, BPI, as the collecting bank, is bound by its warranties as an indorser and cannot set up the defense of lack of indorsement as against petitioner Citibank, the drawee bank.[93] Furthermore, respondents bare and unsubstantiated denial of receipt of the MCs in question and their deposit in her account is rendered suspect when MC No. 220701 was actually deposited in Account No. 0123-0572-28 of BPI Cubao Branch, the very same account in which MC No. 228270 (which respondent admitted to receiving as proceeds of her loan from petitioner Citibank), and MCs No. 228203, 228357, and 228400 (which respondent admitted to receiving as proceeds from her money market placements) were deposited. Likewise, MC No. 226467 was deposited in Account No. 0121-002-43 of BPI Cubao Branch, to which MCs No. 226285 and 226439 (which respondent admitted to receiving as proceeds from her money market placements) were deposited. It is an apparent contradiction for respondent to claim having received the proceeds of checks deposited in an account, and then deny receiving the proceeds of another check deposited in the very same account. Another inconsistency in respondents denial of receipt of MC No. 226467 and her deposit of the same in her account, is her presentation of Exhibit HHH, a provisional receipt which was supposed to prove that respondent turned over P500,000.00 to Mr. Tan of petitioner Citibank, that the said amount was split into three money market placements, and that MC No. 226467 represented the return on her investment from one of these placements.*94+ Because of her Exhibit HHH, respondent effectively admitted receipt of MC No. 226467, although for reasons other than as proceeds of a loan. Neither can this Court give credence to respondents contention that the notations on the MCs, stating that they were the proceeds of particular PNs, were not there when she received the checks and that the notations appeared to be written by a typewriter different from that used to write the other information on the checks. Once more, respondents allegations were uncorroborated by any other evidence. Her and her counsels observation that the notations on the MCs appear to be written by a typewriter different from that used to write the other information on the checks hardly convinces this Court considering that it constitutes a mere opinion on the appearance of the notation by a witness who does not possess the necessary expertise on the matter. In addition, the notations on the MCs were written using both capital and small letters, while the other information on the checks were written using capital letters only, such difference could easily confuse an untrained eye and lead to a hasty
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using capital letters only, such difference could easily confuse an untrained eye and lead to a hasty conclusion that they were written by different typewriters. Respondents testimony, that based on her experience transacting with banks, the MCs were not supposed to include notations on the purpose for which the checks were issued, also deserves scant consideration. While respondent may have extensive experience dealing with banks, it still does not qualify her as a competent witness on banking procedures and practices. Her testimony on this matter is even belied by the fact that the other MCs issued by petitioner Citibank (when it was still named First National City Bank) and by petitioner FNCB Finance, the existence and validity of which were not disputed by respondent, also bear similar notations that state the reason for which they were issued. Respondent presented several more pieces of evidence to substantiate her claim that she received MCs No. 226285, 226439, 226467, 226057, 228357, and 228400, not as proceeds of her loans from petitioner Citibank, but as the return of the principal amounts and payment of interests from her money market placements with petitioners. Part of respondents exhibits were personal checks*95+ drawn by respondent on her account with Feati Bank & Trust Co., which she allegedly invested in separate money market placements with both petitioners, the returns from which were paid to her via MCs No. 226285 and 228400. Yet, to this Court, the personal checks only managed to establish respondents issuance thereof, but there was nothing on the face of the checks that would reveal the purpose for which they were issued and that they were actually invested in money market placements as respondent claimed. Respondent further submitted handwritten notes that purportedly computed and presented the returns on her money market placements, corresponding to the amount stated in the MCs she received from petitioner Citibank. Exhibit HHH-1*96+ was a handwritten note, which respondent attributed to Mr. Tan of petitioner Citibank, showing the breakdown of her BPI Check for P500,000.00 into three different money market placements with petitioner Citibank. This Court, however, noticed several factors which render the note highly suspect. One, it was written on the reversed side of Provisional Receipt No. 12724 of petitioner Citibank which bore the initials of Mr. Tan acknowledging receipt of respondents BPI Check No. 120989 for P500,000.00; but the initials on the handwritten note appeared to be that of Mr. Bobby Mendoza of petitioner FNCB Finance.[97] Second, according to Provisional Receipt No. 12724, BPI Check No. 120989 for P500,000.00 was supposed to be invested in three money market placements with petitioner Citibank for the period of 60 days. Since all these money market placements were made through one check deposited on the same day, 10 November 1978, it made no sense that the handwritten note at the back of Provisional Receipt No. 12724 provided for different dates of maturity for each of the money market placements (i.e., 16 November 1978, 17 January 1979, and 21 November 1978), and such dates did not correspond to the 60 day placement period stated on the face of the provisional receipt. And third, the principal amounts of the money market placements as stated in the handwritten note P145,000.00, P145,000.00 and P242,000.00 totaled P532,000.00, and was obviously in excess of the P500,000.00 acknowledged on the face of Provisional Receipt No. 12724.

Exhibits III and III-1, the front and bank pages of a handwritten note of Mr. Bobby Mendoza of petitioner FNCB Finance,[98] also did not deserve much evidentiary weight, and this Court cannot rely on the truth and accuracy of the computations presented therein. Mr. Mendoza was not presented as a witness during the trial before the RTC, so that the document was not properly authenticated nor its contents sufficiently explained. No one was able to competently identify whether the initials as appearing on the note were actually Mr. Mendozas. Also, going by the information on the front page of the note, this Court observes that payment of respondents alleged money market placements with petitioner FNCB Finance were made using Citytrust Checks; the MCs in question, including MC No. 228057, were issued by petitioner Citibank. Although Citytrust (formerly Feati Bank & Trust Co.), petitioner FNCB Finance, and petitioner Citibank may be affiliates of one another, they each remained separate and distinct corporations, each having its own financial system and records. Thus, this Court cannot simply assume that one corporation, such as petitioner Citibank or Citytrust, can issue a check to discharge an obligation of petitioner FNCB Finance. It should be recalled that when petitioner FNCB Finance paid for respondents money market
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It should be recalled that when petitioner FNCB Finance paid for respondents money market placements, covered by its PNs No. 8167 and 8169, as well as PNs No. 20138 and 20139, petitioner FNCB Finance issued its own checks. As a last point on this matter, if respondent truly had money market placements with petitioners, then these would have been evidenced by PNs issued by either petitioner Citibank or petitioner FNCB Finance, acknowledging the principal amounts of the investments, and stating the applicable interest rates, as well as the dates of their of issuance and maturity. After respondent had so meticulously reconstructed her other money market placements with petitioners and consolidated the documentary evidence thereon, she came surprisingly short of offering similar details and substantiation for these particular money market placements.

Since this Court is satisfied that respondent indeed received the proceeds of the first set of PNs, then it proceeds to analyze her evidence of payment thereof.
In support of respondents assertion that she had already paid whatever loans she may have had with petitioner Citibank, she presented as evidence Provisional Receipts No. 19471, dated 11 August 1978, and No. 12723, dated 10 November 1978, both of petitioner Citibank and signed by Mr. Tan, for the amounts of P500,744.00 and P500,000.00, respectively. While these provisional receipts did state that Mr. Tan, on behalf of petitioner Citibank, received respondents checks as payment for her loans, they failed to specifically identify which loans were actually paid. Petitioner Citibank was able to present evidence that respondent had executed several PNs in the years 1978 and 1979 to cover the loans she secured from the said bank. Petitioner Citibank did admit that respondent was able to pay for some of these PNs, and what it identified as the first and second sets of PNs were only those which remained unpaid. It thus became incumbent upon respondent to prove that the checks received by Mr. Tan were actually applied to the PNs in either the first or second set; a fact that, unfortunately, cannot be determined from the provisional receipts submitted by respondent since they only generally stated that the checks received by Mr. Tan were payment for respondents loans. Mr. Tan, in his deposition, further explained that provisional receipts were issued when payment to the bank was made using checks, since the checks would still be subject to clearing. The purpose for the provisional receipts was merely to acknowledge the delivery of the checks to the possession of the bank, but not yet of payment.[99] This bank practice finds legitimacy in the pronouncement of this Court that a check, whether an MC or an ordinary check, is not legal tender and, therefore, cannot constitute valid tender of payment. In Philippine Airlines, Inc. v. Court of Appeals, [100] this Court elucidated that: Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco, v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3). In the case at bar, the issuance of an official receipt by petitioner Citibank would have been dependent on whether the checks delivered by respondent were actually cleared and paid for by the drawee banks. As for PN No. 34534, respondent asserted payment thereof at two separate instances by two different means. In her formal offer of exhibits, respondent submitted a deposit slip of petitioner Citibank, dated 11 August 1978, evidencing the deposit of BPI Check No. 5785 for P150,000.00.[101] In her Formal Offer of Documentary Exhibits, dated 7 July 1989, respondent stated that the purpose for the presentation of the said deposit slip was to prove that she already paid her loan covered by PN No. 34534.[102] In her testimony before the RTC three years later, on 28 November 1991, she changed her story. This time she narrated that the loan covered by PN No. 34534 was secured by her money market placement with
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narrated that the loan covered by PN No. 34534 was secured by her money market placement with petitioner FNCB Finance, and when she failed to pay the said PN when it became due, the security was applied to the loan, therefore, the loan was considered paid.*103+ Given the foregoing, respondents assertion of payment of PN No. 34534 is extremely dubious. According to petitioner Citibank, the PNs in the second set, except for PN No. 34534, were mere renewals of the unpaid PNs in the first set, which was why the PNs stated that they were for the purpose of liquidating existing obligations. PN No. 34534, however, which was part of the first set, was still valid and subsisting and so it was included in the second set without need for its renewal, and it still being the original PN for that particular loan, its stated purpose was for personal investment.[104] Respondent essentially admitted executing the second set of PNs, but they were only meant to cover simulated loans. Mr. Tan supposedly convinced her that her pending loan application with DBP would have a greater chance of being approved if they made it appear that respondent urgently needed the money because petitioner Citibank was already demanding payment for her simulated loans. Respondents defense of simulated loans to escape liability for the second set of PNs is truly a novel one. It is regrettable, however, that she was unable to substantiate the same. Yet again, respondents version of events is totally based on her own uncorroborated testimony. The notations on the second set of PNs, that they were non-negotiable simulated notes, were admittedly made by respondent herself and were, thus, self-serving. Equally self-serving was respondents letter, written on 7 October 1985, or more than six years after the execution of the second set of PNs, in which she demanded return of the simulated or fictitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her to execute. Respondent further failed to present any proof of her alleged loan application with the DBP, and of any circumstance or correspondence wherein the simulated or fictitious PNs were indeed used for their supposed purpose.

In contrast, petitioner Citibank, as supported by the testimonies of its officers and available documentation, consistently treated the said PNs as regular loans accepted, approved, and paid in the ordinary course of its business. The PNs executed by the respondent in favor of petitioner Citibank to cover her loans were duly-filled out and signed, including the disclosure statement found at the back of the said PNs, in adherence to the Central Bank requirement to disclose the full finance charges to a loan granted to borrowers.
Mr. Tan, then an account officer with the Marketing Department of petitioner Citibank, testified that he dealt directly with respondent; he facilitated the loans; and the PNs, at least in the second set, were signed by respondent in his presence.[105] Mr. Pujeda, the officer who was previously in charge of loans and placements, confirmed that the signatures on the PNs were verified against respondents specimen signature with the bank.*106+

Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan processor, was responsible for booking respondents loans. Booking the loans means recording it in the General Ledger. She explained the procedure for booking loans, as follows: The account officer, in the Marketing Department, deals directly with the clients who wish to borrow money from petitioner Citibank. The Marketing Department will forward a loan booking checklist, together with the borrowing clients PNs and other supporting documents, to the loan pre-processor, who will check whether the details in the loan booking checklist are the same as those in the PNs. The documents are then sent to Signature Control for verification of the clients signature in the PNs, after which, they are returned to the loan pre processor, to be forwarded finally to the loan processor. The loan processor shall book the loan in the General Ledger, indicating therein the client name, loan amount, interest rate, maturity date, and the corresponding PN number. Since she booked respondents loans personally, Ms. Dondoyano testified that she saw the original PNs. In 1986, Atty. Fernandez of petitioner Citibank requested her to prepare an accounting of respondents loans, which she did, and which was presented as Exhibit 120 for the petitioners. The figures from the said exhibit were culled from the bookings in the General Ledger, a
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petitioners. The figures from the said exhibit were culled from the bookings in the General Ledger, a fact which respondents counsel was even willing to stipulate.*107+ Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the Control Department of petitioner Citibank. She was presented by petitioner Citibank to expound on the microfilming procedure at the bank, since most of the copies of the PNs were retrieved from microfilm. Microfilming of the documents are actually done by people at the Operations Department. At the end of the day or during the day, the original copies of all bank documents, not just those pertaining to loans, are microfilmed. She refuted the possibility that insertions could be made in the microfilm because the microfilm is inserted in a cassette; the cassette is placed in the microfilm machine for use; at the end of the day, the cassette is taken out of the microfilm machine and put in a safe vault; and the cassette is returned to the machine only the following day for use, until the spool is full. This is the microfilming procedure followed everyday. When the microfilm spool is already full, the microfilm is developed, then sent to the Control Department, which double checks the contents of the microfilms against the entries in the General Ledger. The Control Department also conducts a random comparison of the contents of the microfilms with the original documents; a random review of the contents is done on every role of microfilm.[108] Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from the ranks, initially working as a secretary in the Personnel Group; then as a secretary to the Personnel Group Head; a Service Assistant with the Marketing Group, in 1972 to 1974, dealing directly with corporate and individual clients who, among other things, secured loans from petitioner Citibank; the Head of the Collection Group of the Foreign Department in 1974 to 1976; the Head of the Money Transfer Unit in 1976 to 1978; the Head of the Loans and Placements Unit up to the early 1980s; and, thereafter, she established operations training for petitioner Citibank in the Asia-Pacific Region responsible for the training of the officers of the bank. She testified on the standard loan application process at petitioner Citibank. According to Ms. Rubio, the account officer or marketing person submits a proposal to grant a loan to an individual or corporation. Petitioner Citibank has a worldwide policy that requires a credit committee, composed of a minimum of three people, which would approve the loan and amount thereof. There can be no instance when only one officer has the power to approve the loan application. When the loan is approved, the account officer in charge will obtain the corresponding PNs from the client. The PNs are sent to the signature verifier who would validate the signatures therein against those appearing in the signature cards previously submitted by the client to the bank. The Operations Unit will check and review the documents, including the PNs, if it is a clean loan, and securities and deposits, if it is collateralized. The loan is then recorded in the General Ledger. The Loans and Placements Department will not book the loans without the PNs. When the PNs are liquidated, whether they are paid or rolledover, they are returned to the client.[109] Ms. Rubio further explained that she was familiar with respondents accounts since, while she was still the Head of the Loan and Placements Unit, she was asked by Mr. Tan to prepare a list of respondents outstanding obligations.*110+ She thus calculated respondents outstanding loans, which was sent as an attachment to Mr. Tans letter to respondent, dated 28 September 1979, and presented before the RTC as Exhibits 34-B and 34-C.*111+ Lastly, the exchange of letters between petitioner Citibank and respondent, as well as the letters sent by other people working for respondent, had consistently recognized that respondent owed petitioner Citibank money. In consideration of the foregoing discussion, this Court finds that the preponderance of evidence supports the existence of the respondents loans, in the principal sum of P1,920,000.00, as of 5 September 1979. While it is well-settled that the term preponderance of evidence should not be wholly dependent on the number of witnesses, there are certain instances when the number of witnesses become the determining factor The preponderance of evidence may be determined, under certain conditions, by the number of witnesses testifying to a particular fact or state of facts. For instance, one or two witnesses may testify to a given state of facts, and six or seven witnesses of equal candor, fairness, intelligence, and
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to a given state of facts, and six or seven witnesses of equal candor, fairness, intelligence, and truthfulness, and equally well corroborated by all the remaining evidence, who have no greater interest in the result of the suit, testify against such state of facts. Then the preponderance of evidence is determined by the number of witnesses. (Wilcox vs. Hines, 100 Tenn. 524, 66 Am. St. Rep., 761.)[112] Best evidence rule
This Court disagrees in the pronouncement made by the Court of Appeals summarily dismissing the documentary evidence submitted by petitioners based on its broad and indiscriminate application of the best evidence rule. In general, the best evidence rule requires that the highest available degree of proof must be produced. Accordingly, for documentary evidence, the contents of a document are best proved by the production of the document itself,[113] to the exclusion of any secondary or substitutionary evidence.[114] The best evidence rule has been made part of the revised Rules of Court, Rule 130, Section 3, which reads SEC. 3. Original document must be produced; exceptions. When the subject of inquiry is the contents of a document, no evidence shall be admissible other than the original document itself, except in the following cases: (a) When the original has been lost or destroyed, or cannot be produced in court, without bad faith on the part of the offeror; (b) When the original is in the custody or under the control of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice; (c) When the original consists of numerous accounts or other documents which cannot be examined in court without great loss of time and the fact sought to be established from them is only the general result of the whole; and (d) When the original is a public record in the custody of a public officer or is recorded in a public office. As the afore-quoted provision states, the best evidence rule applies only when the subject of the inquiry is the contents of the document. The scope of the rule is more extensively explained thus

But even with respect to documentary evidence, the best evidence rule applies only when the content of such document is the subject of the inquiry. Where the issue is only as to whether such document was actually executed, or exists, or on the circumstances relevant to or surrounding its execution, the best evidence rule does not apply and testimonial evidence is admissible (5 Moran, op. cit., pp. 76-66; 4 Martin, op. cit., p. 78). Any other substitutionary evidence is likewise admissible without need for accounting for the original. Thus, when a document is presented to prove its existence or condition it is offered not as documentary, but as real, evidence. Parol evidence of the fact of execution of the documents is allowed (Hernaez, et al. vs. McGrath, etc., et al., 91 Phil 565). x x x [115]
In Estrada v. Desierto,[116] this Court had occasion to rule that It is true that the Court relied not upon the original but only copy of the Angara Diary as published in the Philippine Daily Inquirer on February 4-6, 2001. In doing so, the Court, did not, however, violate the best evidence rule. Wigmore, in his book on evidence, states that:

Production of the original may be dispensed with, in the trial courts discretion, whenever in the case in hand the opponent does not bona fide dispute the contents of the document and no other useful purpose will be served by requiring production.24

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purpose will be served by requiring production.24 x x x x In several Canadian provinces, the principle of unavailability has been abandoned, for certain documents in which ordinarily no real dispute arised. This measure is a sensible and progressive one and deserves universal adoption (post, sec. 1233). Its essential feature is that a copy may be used unconditionally, if the opponent has been given an opportunity to inspect it. (Emphasis supplied.) This Court did not violate the best evidence rule when it considered and weighed in evidence the photocopies and microfilm copies of the PNs, MCs, and letters submitted by the petitioners to establish the existence of respondents loans. The terms or contents of these documents were never the point of contention in the Petition at bar. It was respondents position that the PNs in the first set (with the exception of PN No. 34534) never existed, while the PNs in the second set (again, excluding PN No. 34534) were merely executed to cover simulated loan transactions. As for the MCs representing the proceeds of the loans, the respondent either denied receipt of certain MCs or admitted receipt of the other MCs but for another purpose. Respondent further admitted the letters she wrote personally or through her representatives to Mr. Tan of petitioner Citibank acknowledging the loans, except that she claimed that these letters were just meant to keep up the ruse of the simulated loans. Thus, respondent questioned the documents as to their existence or execution, or when the former is admitted, as to the purpose for which the documents were executed, matters which are, undoubtedly, external to the documents, and which had nothing to do with the contents thereof. Alternatively, even if it is granted that the best evidence rule should apply to the evidence presented by petitioners regarding the existence of respondents loans, it should be borne in mind that the rule admits of the following exceptions under Rule 130, Section 5 of the revised Rules of Court SEC. 5. When the original document is unavailable. When the original document has been lost or destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence and the cause of its unavailability without bad faith on his part, may prove its contents by a copy, or by a recital of its contents in some authentic document, or by the testimony of witnesses in the order stated. The execution or existence of the original copies of the documents was established through the testimonies of witnesses, such as Mr. Tan, before whom most of the documents were personally executed by respondent. The original PNs also went through the whole loan booking system of petitioner Citibank from the account officer in its Marketing Department, to the pre-processor, to the signature verifier, back to the pre-processor, then to the processor for booking.[117] The original PNs were seen by Ms. Dondoyano, the processor, who recorded them in the General Ledger. Mr. Pujeda personally saw the original MCs, proving respondents receipt of the proceeds of her loans from petitioner Citibank, when he helped Attys. Cleofe and Fernandez, the banks legal counsels, to reconstruct the records of respondents loans. The original MCs were presented to Atty. Cleofe who used the same during the preliminary investigation of the case, sometime in years 1986-1987. The original MCs were subsequently turned over to the Control and Investigation Division of petitioner Citibank.[118]

It was only petitioner FNCB Finance who claimed that they lost the original copies of the PNs when it moved to a new office. Citibank did not make a similar contention; instead, it explained that the original copies of the PNs were returned to the borrower upon liquidation of the loan, either through payment or roll-over. Petitioner Citibank proffered the excuse that they were still looking for the documents in their storage or warehouse to explain the delay and difficulty in the retrieval thereof, but not their absence or loss. The original documents in this case, such as the MCs and letters, were destroyed and, thus, unavailable for presentation before the RTC only on 7 October 1987, when a fire broke out on the 7th floor of the office building of petitioner Citibank. There is no showing that the fire was intentionally set. The fire destroyed relevant documents, not just of the present case, but also of other cases, since the 7th floor housed the Control and Investigation Division, in charge of keeping the necessary documents for cases in which petitioner Citibank was involved.
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documents for cases in which petitioner Citibank was involved.

The foregoing would have been sufficient to allow the presentation of photocopies or microfilm copies of the PNs, MCs, and letters by the petitioners as secondary evidence to establish the existence of respondents loans, as an exception to the best evidence rule.
The impact of the Decision of the Court of Appeals in the Dy case In its assailed Decision, the Court of Appeals made the following pronouncement Besides, We find the declaration and conclusions of this Court in CA-G.R. CV No. 15934 entitled Sps. Dr. Ricardo L. Dy and Rosalind O. Dy vs. City Bank, N.A., et al, promulgated on 15 January 1990, as disturbing taking into consideration the similarities of the fraud, machinations, and deceits employed by the defendant-appellant Citibank and its Account Manager Francisco Tan. Worthy of note is the fact that Our declarations and conclusions against Citibank and the person of Francisco Tan in CA-G.R. CV No. 15934 were affirmed in toto by the Highest Magistrate in a Minute Resolution dated 22 August 1990 entitled Citibank, N.A., vs. Court of Appeals, G.R. 93350. As the factual milieu of the present appeal created reasonable doubts as to whether the nine (9) Promissory Notes were indeed executed with considerations, the doubts, coupled by the findings and conclusions of this Court in CA-G.R. CV No. 15934 and the Supreme Court in G.R. No. 93350. should be construed against herein defendants-appellants Citibank and FNCB Finance. What this Court truly finds disturbing is the significance given by the Court of Appeals in its assailed Decision to the Decision[119] of its Third Division in CA-G.R. CV No. 15934 (or the Dy case), when there is an absolute lack of legal basis for doing such. Although petitioner Citibank and its officer, Mr. Tan, were also involved in the Dy case, that is about the only connection between the Dy case and the one at bar. Not only did the Dy case tackle transactions between parties other than the parties presently before this Court, but the transactions are absolutely independent and unrelated to those in the instant Petition. In the Dy case, Severino Chua Caedo managed to obtain loans from herein petitioner Citibank amounting to P7,000,000.00, secured to the extent of P5,000,000.00 by a Third Party Real Estate Mortgage of the properties of Caedos aunt, Rosalind Dy. It turned out that Rosalind Dy and her husband were unaware of the said loans and the mortgage of their properties. The transactions were carried out exclusively between Caedo and Mr. Tan of petitioner Citibank. The RTC found Mr. Tan guilty of fraud for his participation in the questionable transactions, essentially because he allowed Caedo to take out the signature cards, when these should have been signed by the Dy spouses personally before him. Although the Dy spouses signatures in the PNs and Third Party Real Estate Mortgage were forged, they were approved by the signature verifier since the signature cards against which they were compared to were also forged. Neither the RTC nor the Court of Appeals, however, categorically declared Mr. Tan personally responsible for the forgeries, which, in the narration of the facts, were more likely committed by Caedo. In the Petition at bar, respondent dealt with Mr. Tan directly, there was no third party involved who could have perpetrated any fraud or forgery in her loan transactions. Although respondent attempted to raise suspicion as to the authenticity of her signatures on certain documents, these were nothing more than naked allegations with no corroborating evidence; worse, even her own allegations were replete with inconsistencies. She could not even establish in what manner or under what circumstances the fraud or forgery was committed, or how Mr. Tan could have been directly responsible for the same. While the Court of Appeals can take judicial notice of the Decision of its Third Division in the Dy case, it should not have given the said case much weight when it rendered the assailed Decision, since the
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should not have given the said case much weight when it rendered the assailed Decision, since the former does not constitute a precedent. The Court of Appeals, in the challenged Decision, did not apply any legal argument or principle established in the Dy case but, rather, adopted the findings therein of wrongdoing or misconduct on the part of herein petitioner Citibank and Mr. Tan. Any finding of wrongdoing or misconduct as against herein petitioners should be made based on the factual background and pieces of evidence submitted in this case, not those in another case. It is apparent that the Court of Appeals took judicial notice of the Dy case not as a legal precedent for the present case, but rather as evidence of similar acts committed by petitioner Citibank and Mr. Tan. A basic rule of evidence, however, states that, Evidence that one did or did not do a certain thing at one time is not admissible to prove that he did or did not do the same or similar thing at another time; but it may be received to prove a specific intent or knowledge, identity, plan, system, scheme, habit, custom or usage, and the like.*120+ The rationale for the rule is explained thus The rule is founded upon reason, public policy, justice and judicial convenience. The fact that a person has committed the same or similar acts at some prior time affords, as a general rule, no logical guaranty that he committed the act in question. This is so because, subjectively, a mans mind and even his modes of life may change; and, objectively, the conditions under which he may find himself at a given time may likewise change and thus induce him to act in a different way. Besides, if evidence of similar acts are to be invariably admitted, they will give rise to a multiplicity of collateral issues and will subject the defendant to surprise as well as confuse the court and prolong the trial.[121] The factual backgrounds of the two cases are so different and unrelated that the Dy case cannot be used to prove specific intent, knowledge, identity, plan, system, scheme, habit, custom or usage on the part of petitioner Citibank or its officer, Mr. Tan, to defraud respondent in the present case.

IV The liquidation of respondents outstanding loans were valid in so far as petitioner Citibank used respondents savings account with the bank and her money market placements with petitioner FNCB Finance; but illegal and void in so far as petitioner Citibank used respondents dollar accounts with Citibank-Geneva.
Savings Account with petitioner Citibank Compensation is a recognized mode of extinguishing obligations. Relevant provisions of the Civil Code provides

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Art. 1279. In order that compensation may be proper, it is necessary;
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

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communicated in due time to the debtor.

There is little controversy when it comes to the right of petitioner Citibank to compensate respondents outstanding loans with her deposit account. As already found by this Court, petitioner Citibank was the creditor of respondent for her outstanding loans. At the same time, respondent was the creditor of petitioner Citibank, as far as her deposit account was concerned, since bank deposits, whether fixed, savings, or current, should be considered as simple loan or mutuum by the depositor to the banking institution.*122+ Both debts consist in sums of money. By June 1979, all of respondents PNs in the second set had matured and became demandable, while respondents savings account was demandable anytime. Neither was there any retention or controversy over the PNs and the deposit account commenced by a third person and communicated in due time to the debtor concerned. Compensation takes place by operation of law,[123] therefore, even in the absence of an expressed authority from respondent, petitioner Citibank had the right to effect, on 25 June 1979, the partial compensation or offset of respondents outstanding loans with her deposit account, amounting to P31,079.14. Money market placements with FNCB Finance

Things though are not as simple and as straightforward as regards to the money market placements and bank account used by petitioner Citibank to complete the compensation or off-set of respondents outstanding loans, which came from persons other than petitioner Citibank.
Respondents money market placements were with petitioner FNCB Finance, and after several roll overs, they were ultimately covered by PNs No. 20138 and 20139, which, by 3 September 1979, the date the check for the proceeds of the said PNs were issued, amounted to P1,022,916.66, inclusive of the principal amounts and interests. As to these money market placements, respondent was the creditor and petitioner FNCB Finance the debtor; while, as to the outstanding loans, petitioner Citibank was the creditor and respondent the debtor. Consequently, legal compensation, under Article 1278 of the Civil Code, would not apply since the first requirement for a valid compensation, that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other, was not met.

What petitioner Citibank actually did was to exercise its rights to the proceeds of respondents money market placements with petitioner FNCB Finance by virtue of the Deeds of Assignment executed by respondent in its favor.
The Court of Appeals did not consider these Deeds of Assignment because of petitioners failure to produce the original copies thereof in violation of the best evidence rule. This Court again finds itself in disagreement in the application of the best evidence rule by the appellate court. To recall, the best evidence rule, in so far as documentary evidence is concerned, requires the presentation of the original copy of the document only when the context thereof is the subject of inquiry in the case. Respondent does not question the contents of the Deeds of Assignment. While she admitted the existence and execution of the Deeds of Assignment, dated 2 March 1978 and 9 March 1978, covering PNs No. 8169 and 8167 issued by petitioner FNCB Finance, she claimed, as defense, that the loans for which the said Deeds were executed as security, were already paid. She denied ever executing both Deeds of Assignment, dated 25 August 1978, covering PNs No. 20138 and 20139. These are again issues collateral to the contents of the documents involved, which could be proven by evidence other than the original copies of the said documents. Moreover, the Deeds of Assignment of the money market placements with petitioner FNCB Finance were notarized documents, thus, admissible in evidence. Rule 132, Section 30 of the Rules of Court provides that SEC. 30. Proof of notarial documents. Every instrument duly acknowledged or proved and certified as provided by law, may be presented in evidence without further proof, the certificate of acknowledgement being prima facie evidence of the execution of the instrument or document involved.
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acknowledgement being prima facie evidence of the execution of the instrument or document involved. Significant herein is this Courts elucidation in De Jesus v. Court of Appeals,*124+ which reads
On the evidentiary value of these documents, it should be recalled that the notarization of a private document converts it into a public one and renders it admissible in court without further proof of its authenticity (Joson vs. Baltazar, 194 SCRA 114 [1991]). This is so because a public document duly executed and entered in the proper registry is presumed to be valid and genuine until the contrary is shown by clear and convincing proof (Asido vs. Guzman, 57 Phil. 652 [1918]; U.S. vs. Enriquez, 1 Phil 241 [1902]; Favor vs. Court of Appeals, 194 SCRA 308 [1991]). As such, the party challenging the recital of the document must prove his claim with clear and convincing evidence (Diaz vs. Court of Appeals, 145 SCRA 346 [1986]). The rule on the evidentiary weight that must be accorded a notarized document is clear and unambiguous. The certificate of acknowledgement in the notarized Deeds of Assignment constituted prima facie evidence of the execution thereof. Thus, the burden of refuting this presumption fell on respondent. She could have presented evidence of any defect or irregularity in the execution of the said documents*125+ or raised questions as to the verity of the notary publics acknowledgment and certificate in the Deeds.[126] But again, respondent admitted executing the Deeds of Assignment, dated 2 March 1978 and 9 March 1978, although claiming that the loans for which they were executed as security were already paid. And, she assailed the Deeds of Assignment, dated 25 August 1978, with nothing more than her bare denial of execution thereof, hardly the clear and convincing evidence required to trounce the presumption of due execution of a notarized document. Petitioners not only presented the notarized Deeds of Assignment, but even secured certified literal copies thereof from the National Archives.[127] Mr. Renato Medua, an archivist, working at the Records Management and Archives Office of the National Library, testified that the copies of the Deeds presented before the RTC were certified literal copies of those contained in the Notarial Registries of the notary publics concerned, which were already in the possession of the National Archives. He also explained that he could not bring to the RTC the Notarial Registries containing the original copies of the Deeds of Assignment, because the Department of Justice (DOJ) Circular No. 97, dated 8 November 1968, prohibits the bringing of original documents to the courts to prevent the loss of irreplaceable and priceless documents.[128] Accordingly, this Court gives the Deeds of Assignment grave importance in establishing the authority given by the respondent to petitioner Citibank to use as security for her loans her money her market placements with petitioner FNCB Finance, represented by PNs No. 8167 and 8169, later to be rolledover as PNs No. 20138 and 20139. These Deeds of Assignment constitute the law between the parties, and the obligations arising therefrom shall have the force of law between the parties and should be complied with in good faith.[129] Standard clauses in all of the Deeds provide that The ASSIGNOR and the ASSIGNEE hereby further agree as follows:

xxx x
2. In the event the OBLIGATIONS are not paid at maturity or upon demand, as the case may be, the ASSIGNEE is fully authorized and empowered to collect and receive the PLACEMENT (or so much thereof as may be necessary) and apply the same in payment of the OBLIGATIONS. Furthermore, the ASSIGNOR agrees that at any time, and from time to time, upon request by the ASSIGNEE, the ASSIGNOR will promptly execute and deliver any and all such further instruments and documents as may be necessary to effectuate this Assignment. xxx x

This Assignment shall be considered as sufficient authority to FNCB Finance to pay and deliver the
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This Assignment shall be considered as sufficient authority to FNCB Finance to pay and deliver the PLACEMENT or so much thereof as may be necessary to liquidate the OBLIGATIONS, to the ASSIGNEE in accordance with terms and provisions hereof.[130] Petitioner Citibank was only acting upon the authority granted to it under the foregoing Deeds when it finally used the proceeds of PNs No. 20138 and 20139, paid by petitioner FNCB Finance, to partly pay for respondents outstanding loans. Strictly speaking, it did not effect a legal compensation or off -set under Article 1278 of the Civil Code, but rather, it partly extinguished respondents obligations through the application of the security given by the respondent for her loans. Although the pertinent documents were entitled Deeds of Assignment, they were, in reality, more of a pledge by respondent to petitioner Citibank of her credit due from petitioner FNCB Finance by virtue of her money market placements with the latter. According to Article 2118 of the Civil Code ART. 2118. If a credit has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. PNs No. 20138 and 20139 matured on 3 September 1979, without them being redeemed by respondent, so that petitioner Citibank collected from petitioner FNCB Finance the proceeds thereof, which included the principal amounts and interests earned by the money market placements, amounting to P1,022,916.66, and applied the same against respondents outstanding loans, leaving no surplus to be delivered to respondent. Dollar accounts with Citibank-Geneva Despite the legal compensation of respondents savings account and the total application of the proceeds of PNs No. 20138 and 20139 to respondents outstanding loans, there still remained a balance of P1,069,847.40. Petitioner Citibank then proceeded to applying respondents dollar accounts with Citibank-Geneva against her remaining loan balance, pursuant to a Declaration of Pledge supposedly executed by respondent in its favor. Certain principles of private international law should be considered herein because the property pledged was in the possession of an entity in a foreign country, namely, Citibank-Geneva. In the absence of any allegation and evidence presented by petitioners of the specific rules and laws governing the constitution of a pledge in Geneva, Switzerland, they will be presumed to be the same as Philippine local or domestic laws; this is known as processual presumption.[131] Upon closer scrutiny of the Declaration of Pledge, this Court finds the same exceedingly suspicious and irregular.

First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court would think that petitioner Citibank would take greater cautionary measures with the preparation and execution of the Declaration of Pledge because it involved respondents all present and future fiduciary placements with a Citibank branch in another country, specifically, in Geneva, Switzerland. While there is no express legal requirement that the Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the same prima facie presumption of due execution that is extended to notarized documents, and petitioner Citibank must discharge the burden of proving due execution and authenticity of the Declaration of Pledge. Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge was actually executed. The photocopy of the Declaration of Pledge submitted by petitioner Citibank before the RTC was undated.[132] It presented only a photocopy of the pledge because it already forwarded the original copy thereof to Citibank-Geneva when it requested for the remittance of respondents dollar accounts pursuant thereto. Respondent, on the other hand, was able to secure a copy of the
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dollar accounts pursuant thereto. Respondent, on the other hand, was able to secure a copy of the Declaration of Pledge, certified by an officer of Citibank-Geneva, which bore the date 24 September 1979.[133] Respondent, however, presented her passport and plane tickets to prove that she was out of the country on the said date and could not have signed the pledge. Petitioner Citibank insisted that the pledge was signed before 24 September 1979, but could not provide an explanation as to how and why the said date was written on the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed by respondent personally before him, he could not give the exact date when the said signing took place. It is important to note that the copy of the Declaration of Pledge submitted by the respondent to the RTC was certified by an officer of Citibank-Geneva, which had possession of the original copy of the pledge. It is dated 24 September 1979, and this Court shall abide by the presumption that the written document is truly dated.[134] Since it is undeniable that respondent was out of the country on 24 September 1979, then she could not have executed the pledge on the said date. Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed form. It was constituted in favor of Citibank, N.A., otherwise referred to therein as the Bank. It should be noted, however, that in the space which should have named the pledgor, the name of petitioner Citibank was typewritten, to wit

The pledge right herewith constituted shall secure all claims which the Bank now has or in the future acquires against Citibank, N.A., Manila (full name and address of the Debtor), regardless of the legal cause or the transaction (for example current account, securities transactions, collections, credits, payments, documentary credits and collections) which gives rise thereto, and including principal, all contractual and penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a mistake made by whoever filled-out the form? Yes, it could be a possibility. Nonetheless, considering the value of such a document, the mistake as to a significant detail in the pledge could only be committed with gross carelessness on the part of petitioner Citibank, and raised serious doubts as to the authenticity and due execution of the same. The Declaration of Pledge had passed through the hands of several bank officers in the country and abroad, yet, surprisingly and implausibly, no one noticed such a glaring mistake.

Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimed that the signature was a forgery. When a document is assailed on the basis of forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject of inquiry is the contents of a document, no evidence is admissible other than the original document itself except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of documents are inadmissible pursuant to the best evidence rule. This is especially true when the issue is that of forgery. As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing evidence and the burden of proof lies on the party alleging forgery. The best evidence of a forged signature in an instrument is the instrument itself reflecting the alleged forged signature. The fact of forgery can only be established by a comparison between the alleged forged signature and the authentic and genuine signature of the person whose signature is theorized upon to have been forged. Without the original document containing the alleged forged signature, one cannot make a definitive comparison which would establish forgery. A comparison based on a mere xerox copy or reproduction of the document under controversy cannot produce reliable results.[135] Respondent made several attempts to have the original copy of the pledge produced before the RTC so as to have it examined by experts. Yet, despite several Orders by the RTC,[136] petitioner Citibank failed to comply with the production of the original Declaration of Pledge. It is admitted that Citibank-Geneva had possession of the original copy of the pledge. While petitioner Citibank in Manila and its branch in
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had possession of the original copy of the pledge. While petitioner Citibank in Manila and its branch in Geneva may be separate and distinct entities, they are still incontestably related, and between petitioner Citibank and respondent, the former had more influence and resources to convince CitibankGeneva to return, albeit temporarily, the original Declaration of Pledge. Petitioner Citibank did not present any evidence to convince this Court that it had exerted diligent efforts to secure the original copy of the pledge, nor did it proffer the reason why Citibank-Geneva obstinately refused to give it back, when such document would have been very vital to the case of petitioner Citibank. There is thus no justification to allow the presentation of a mere photocopy of the Declaration of Pledge in lieu of the original, and the photocopy of the pledge presented by petitioner Citibank has nil probative value.[137] In addition, even if this Court cannot make a categorical finding that respondents signature on the original copy of the pledge was forged, it is persuaded that petitioner Citibank willfully suppressed the presentation of the original document, and takes into consideration the presumption that the evidence willfully suppressed would be adverse to petitioner Citibank if produced.[138] Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of respondents dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct and separate entity. As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the debtor; and as for the outstanding loans, petitioner Citibank was the creditor and respondent was the debtor. The parties in these transactions were evidently not the principal creditor of each other.

Therefore, this Court declares that the remittance of respondents dollar accounts from Citibank-Geneva and the application thereof to her outstanding loans with petitioner Citibank was illegal, and null and void. Resultantly, petitioner Citibank is obligated to return to respondent the amount of US$149,632,99 from her Citibank-Geneva accounts, or its present equivalent value in Philippine currency; and, at the same time, respondent continues to be obligated to petitioner Citibank for the balance of her outstanding loans which, as of 5 September 1979, amounted to P1,069,847.40. V The parties shall be liable for interests on their monetary obligations to each other, as determined herein. In summary, petitioner Citibank is ordered by this Court to pay respondent the proceeds of her money market placements, represented by PNs No. 23356 and 23357, amounting to P318,897.34 and P203,150.00, respectively, earning an interest of 14.5% per annum as stipulated in the PNs,[139] beginning 17 March 1977, the date of the placements.
Petitioner Citibank is also ordered to refund to respondent the amount of US$149,632.99, or its equivalent in Philippine currency, which had been remitted from her Citibank-Geneva accounts. These dollar accounts, consisting of two fiduciary placements and current accounts with Citibank-Geneva shall continue earning their respective stipulated interests from 26 October 1979, the date of their remittance by Citibank-Geneva to petitioner Citibank in Manila and applied against respondents outstanding loans. As for respondent, she is ordered to pay petitioner Citibank the balance of her outstanding loans, which amounted to P1,069,847.40 as of 5 September 1979. These loans continue to earn interest, as stipulated in the corresponding PNs, from the time of their respective maturity dates, since the supposed payment thereof using respondents dollar accounts from Citibank-Geneva is deemed illegal, null and void, and, thus, ineffective. VI Petitioner Citibank shall be liable for damages to respondent. Petitioners protest the award by the Court of Appeals of moral damages, exemplary damages, and
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Petitioners protest the award by the Court of Appeals of moral damages, exemplary damages, and attorneys fees in favor of respondent. They argued that the RTC did not award any damages, and respondent, in her appeal before the Court of Appeals, did not raise in issue the absence of such. While it is true that the general rule is that only errors which have been stated in the assignment of errors and properly argued in the brief shall be considered, this Court has also recognized exceptions to the general rule, wherein it authorized the review of matters, even those not assigned as errors in the appeal, if the consideration thereof is necessary in arriving at a just decision of the case, and there is a close inter-relation between the omitted assignment of error and those actually assigned and discussed by the appellant.[140] Thus, the Court of Appeals did not err in awarding the damages when it already made findings that would justify and support the said award.

Although this Court appreciates the right of petitioner Citibank to effect legal compensation of respondents local deposits, as well as its right to the proceeds of PNs No. 20138 and 20139 by virtue of the notarized Deeds of Assignment, to partly extinguish respondents outstanding loans, it finds that petitioner Citibank did commit wrong when it failed to pay and properly account for the proceeds of respondents money market placements, evidenced by PNs No. 23356 and 23357, and when it sought the remittance of respondents dollar accounts from Citibank-Geneva by virtue of a highly-suspect Declaration of Pledge to be applied to the remaining balance of respondents outstanding loans. It bears to emphasize that banking is impressed with public interest and its fiduciary character requires high standards of integrity and performance.[141] A bank is under the obligation to treat the accounts of its depositors with meticulous care whether such accounts consist only of a few hundred pesos or of millions of pesos.[142] The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible.[143] Petitioner Citibank evidently failed to exercise the required degree of care and transparency in its transactions with respondent, thus, resulting in the wrongful deprivation of her property.
Respondent had been deprived of substantial amounts of her investments and deposits for more than two decades. During this span of years, respondent had found herself in desperate need of the amounts wrongfully withheld from her. In her testimony[144] before the RTC, respondent narrated Q By the way Mrs. Witness will you kindly tell us again, you said before that you are a businesswoman, will you tell us again what are the businesses you are engaged into [sic]? A I am engaged in real estate. I am the owner of the Modesta Village 1 and 2 in San Mateo, Rizal. I am also the President and Chairman of the Board of Macador [sic] Co. and Business Inc. which operates the Macador [sic] International Palace Hotel. I am also the President of the Macador [sic] International Palace Hotel, and also the Treasures Home Industries, Inc. which I am the Chairman and president of the Board and also operating affiliated company in the name of Treasures Motor Sales engaged in car dealers [sic] like Delta Motors, we are the dealers of the whole Northern Luzon and I am the president of the Disto Company, Ltd., based in Hongkong licensed in Honkong [sic] and now operating in Los Angeles, California. Q A What is the business of that Disto Company Ltd.? Disto Company, Ltd., is engaged in real estate and construction.

Q Aside from those businesses are you a member of any national or community organization for social and civil activities? A Yes sir. Q What are those? A I am the Vice-President of thes [sic] Subdivision Association of the Philippines in 1976, I am also an officer of the Chamber of Real Estate Business Association; I am also an officer of the Chatholic *sic+ Womens League and I am also a member of the CMLI, I forgot the definition. Q How about any political affiliation or government position held if any?
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Q A Q A Q A

How about any political affiliation or government position held if any? I was also a candidate for Mayo last January 30, 1980. Where? In Dagupan City, Pangasinan. What else? I also ran as an Assemblywoman last May, 1984, Independent party in Regional I, Pangasinan.

Q What happened to your businesses you mentioned as a result of your failure to recover you [sic] investments and bank deposits from the defendants? A They are not all operating, in short, I was hampered to push through the businesses that I have. A [sic] Of all the businesses and enterprises that you mentioned what are those that are paralyzed and what remain inactive? A Of all the company [sic] that I have, only the Disto Company that is now operating in California.

Q How about your candidacy as Mayor of Dagupan, [sic] City, and later as Assemblywoman of Region I, what happened to this? A I won by voting but when election comes on [sic] the counting I lost and I protested this, it is still pending and because I dont have financial resources I was not able to push through the case. I just have it pending in the Comelec. Q A Now, do these things also affect your social and civic activities? Yes sir, definitely.

Q How? A I was embarrassed because being a businesswoman I would like to inform the Honorable Court that I was awarded as the most outstanding businesswoman of the year in 1976 but when this money was not given back to me I was not able to comply with the commitments that I have promised to these associations that I am engaged into [sic], sir.
For the mental anguish, serious anxiety, besmirched reputation, moral shock and social humiliation suffered by the respondent, the award of moral damages is but proper. However, this Court reduces the amount thereof to P300,000.00, for the award of moral damages is meant to compensate for the actual injury suffered by the respondent, not to enrich her.[145]

Having failed to exercise more care and prudence than a private individual in its dealings with respondent, petitioner Citibank should be liable for exemplary damages, in the amount of P250,000.00, in accordance with Article 2229[146] and 2234[147] of the Civil Code.
With the award of exemplary damages, then respondent shall also be entitled to an award of attorneys fees.[148] Additionally, attorney's fees may be awarded when a party is compelled to litigate or to incur expenses to protect his interest by reason of an unjustified act of the other party.[149] In this case, an award of P200,000.00 attorneys fees shall be satisfactory. In contrast, this Court finds no sufficient basis to award damages to petitioners. Respondent was compelled to institute the present case in the exercise of her rights and in the protection of her interests. In fact, although her Complaint before the RTC was not sustained in its entirety, it did raise meritorious points and on which this Court rules in her favor. Any injury resulting from the exercise of ones rights is damnum absque injuria.*150+ IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already modified by its Resolution,
Banking Page 203

Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already modified by its Resolution, dated 20 November 2002, is hereby AFFIRMED WITH MODIFICATION, as follows 1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding. Petitioner Citibank is ORDERED to return to respondent the principal amounts of the said PNs, amounting to Three Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos (P318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00), respectively, plus the stipulated interest of Fourteen and a half percent (14.5%) per annum, beginning 17 March 1977;

2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US Dollars and Ninety-Nine Cents (US$149,632.99) from respondents Citibank-Geneva accounts to petitioner Citibank in Manila, and the application of the same against respondents outstanding loans with the latter, is DECLARED illegal, null and void. Petitioner Citibank is ORDERED to refund to respondent the said amount, or its equivalent in Philippine currency using the exchange rate at the time of payment, plus the stipulated interest for each of the fiduciary placements and current accounts involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of Three Hundred Thousand Pesos (P300,000.00); exemplary damages in the amount of Two Hundred Fifty Thousand Pesos (P250,000.00); and attorneys fees in the amount of Two Hundred Thousand Pesos (P200,000.00); and 4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans, which, from the respective dates of their maturity to 5 September 1979, was computed to be in the sum of One Million Sixty-Nine Thousand Eight Hundred Forty-Seven Pesos and Forty Centavos (P1,069,847.40), inclusive of interest. These outstanding loans shall continue to earn interest, at the rates stipulated in the corresponding PNs, from 5 September 1979 until payment thereof. SO ORDERED. MINITA V. CHICO-NAZARIO Associate Justice

WE CONCUR: ARTEMIO V. PANGANIBAN Chief Justice Chairperson

CONSUELO YNARES-SANTIAGO Associate Justice

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice ROMEO J. CALLEJO, SR. Associate Justice

CE R T I F I C AT I O N Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.
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opinion of the Courts Division. ARTEMIO V. PANGANIBAN Chief Justice

[1]

Rollo, pp. 165-325.

[2] Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Conrado M. Vasquez, Jr. and Amelita G. Tolentino, concurring; id. at 327-366. [3] [4] [5] [6] [7] [8] Id. at 368-374. TSN, Deposition of Mr. Francisco Tan, 3 September 1990, pp. 9-10. Records, Vol. I, pp. 1-8. Id. at 148-157. Id. at 40-51. Id. at 208-227.

[9] 346.
[10]

Order, dated 11 December 1985, penned by Judge Ansberto P. Paredes, Records, Vol. I, p.

Penned by Judge Manuel D. Victorio, Records, Vol. III, pp. 1607-1621.

[11] Civil Case No. 11336 was raffled and re-reffled to four different Judges of the Makati RTC before it was finally resolved. It was originally raffled to Makati RTC, Branch 140, presided by Judge Ansberto P. Paredes. On 4 February 1987, before the termination of the re-direct examination of herein respondent (plaintiff before the RTC), the case was transferred to Makati RTC, Branch 57, presided by Judge Francisco X. Velez, for reasons not disclosed in the Records. Judge Velez was able to try and hear the case until the presentation of the evidence by herein petitioners (defendants before the RTC). Respondent again took the stand to present rebuttal evidence, but even before she could finish her testimony, Judge Velez inhibited himself upon petitioners motion (Order, dated 10 April 1992, penned by Judge Francisco X. Velez, Records, Vol. 11, p. 1085). The case was transferred to Makati RTC, Branch 141, presided by Judge Marcelino F. Bautista, Jr. For reasons not disclosed in the Records, Judge Manuel D. Victorio took over Makati RTC, Branch 141. After the parties submitted their respective Memoranda, Judge Victorio declared the case submitted for decision (Order, dated 9 December 1994, penned by Judge Manuel D. Victorio, Records, Vol. III, p. 1602). Judge Victorio rendered his Decision in Civil Case No. 11336 on 24 August 1995 (Records, Vol. III, pp. 1607-1621). [12] [13] Rollo, pp. 365-366. Rollo of G.R. No. 152985, pp. 3-4.

[14] The filing of a motion for extension does not automatically suspend the running of the period for appeal, since the purpose of such motion is to merely ask the court to grant an enlargement of the time fixed by law. The movant, therefore, has no right to assume that his motion would be granted, and should check with the court as to the outcome of his motion, so that if the same is denied, he can still perfect his appeal. (Hon. Bello and Ferrer v. Fernando, 114 Phil. 101, 104 [1962].) [15] Rollo of G.R. No. 156132, p. 1227.

Banking Page 205

[16] [17]

Rollo, p. 374. Resolution, dated 29 January 2003; rollo, pp. 980-A-B.

[18]

Resolution, dated 23 June 2003; id. at 1311-1312.

[19] Firestone Tire and Rubber Company of the Philippines v. Tempongko, 137 Phil. 239, 244 (1969); Singh v. Liberty Insurance Corp., 118 Phil. 532, 535 (1963). [20] Rollo, pp. 1443-1445.

[21] See the case of Borromeo v. Court of Appeals (162 Phil. 430, 438 [1976]) wherein this Court pronounced that a partys right to appeal shall not be affected by the perfection of another appeal from the same decision; otherwise, it would lead to the absurd proposition that one party may be deprived of the right to appeal from the portion of a decision against him just because the other party who had been notified of the decision ahead had already perfected his appeal in so far as the said decision adversely affects him. If the perfection of an appeal by one party would not bar the right of the other party to appeal from the same decision, then an unperfected appeal, as in the case at bar, would have far less effect. [22] The Executive Secretary v. Gordon, 359 Phil. 266, 271 (1998).

[23]
[24]

Young v. John Keng Seng, 446 Phil. 823, 833 (2003).

Sps. Sta. Maria v. Court of Appeals, 349 Phil. 275, 282-283 (1998).

*25+ The Court of Appeals modified the trial courts findings and conclusions, as follows: (1) By declaring the P1,069,847.40 alleged indebtedness of Ms. Sabeniano as non-existing for failure of Citibank to substantiate its allegations; (2) By declaring that there are unpaid money market placements, current accounts and savings account of Ms. Sabeniano; and (3) The awarding of damages in favor of Ms. Sabeniano and against Citibank.

[26]
[27]

Supra note 11.

Records, Vol. III, pp. 1612-1613.

[28] Penned by Associate Justice Andres B. Reyes with Associate Justices Conrado M. Vasquez, Jr. and Amelita G. Tolentino, concurring; rollo, p. 344.
[29] Section 3(m) of Rule 131 of the Revised Rules of Court reads

SEC. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence: xxx x (m) That official duty has been regularly performed. [30] 317 Phil. 495, 501-503 (1995).

[31]
[32]

Records, Vol. I, p. 515.

32 Phil. 476, 478-479.

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[32] [33] [34]

32 Phil. 476, 478-479. Behn, Meyer & Co. v. Rosatzin, 5 Phil. 660, 662 (1906). Jimenez v. National Labor Relations Commission, 326 Phil. 89, 95 (1996).

[35] Mr. Herminio Pujeda, at the time he testified before the RTC in 1990, was already the Vice President of petitioner Citibank.
[36] Mr. Francisco Tan, at the time of his deposition in 1990, was already working as Assistant General Manager for Dai-Chi Kangyo Bank in Hong Kong. [37] [38] [39] *40+ *41+ *42+ TSN, 12 March 1990, pp. 6-10. Lichauco v. Atlantic Gulf & Pacific Co., 84 Phil. 330, 346 (1949). TSN, 6 February 1990, Vol. V, pp. 16-24. Exhibit 37, defendants folder of exhibits, p. 106. Exhibit 37-C, id. at 107. Exhibit 37-F, id. at 108.

[43]
*44+

TSN, 12 March 1990, p. 13.

Exhibit 104-C, defendants folder of exhibits, p. 111.

*45+
*46+ *47+ *48+ [49] *50+ *51+

Exhibit 105, id. at 112.

Exhibit 106, id. at 114. Exhibit 108, id. at 118. Exhibits 112 and 119, id. at 121-A, 124. Records, Vol. III, p. 1367. Exhibit 34-B, petitioners folder of exhibits, p. 102. Exhibit G, plaintiffs folder of exhibits, pp. 4-15.

[52]
*53+

Records, Vol. III, p. 1,562.

Exhibit J, plaintiffs folder of exhibits, p. 49.

*54+
*55+ *56+ *57+ *58+

Exhibit 120-H, defendants folder of exhibits, pp. 131.

Exhibits 1 to 9, id. at 44-52. Exhibits 18 to 26, id. at 83-92. Exhibit 13-E, id. at 65-67. Exhibit 14-G, id. at 72-74.

Banking Page 207

*59+ *60+ *61+ *62+

Exhibit 15 and Exhibit 17-D, id. at 77-78, 81-82. Exhibit 38, id. at 109-110. Exhibit K-1, plaintiffs folder of exhibits, pp. 54-55 Exhibit 27, defendants folder of exhibits, p. 93.

*63+
*64+

Exhibit 28, id. at 94.

Exhibit 29, id. at 95.

*65+
*66+ *67+ *68+ *69+

Exhibit 30, id. at 96.

Exhibit 31, id. at 97. Exhibit 32, id. at 98. Exhibits 34-B and 34-C, id. at 102-103. Exhibit 34, id. at 100.

*70+
[71]

Exhibit 121, id. at 207.

TSN, 14 May 1991, Vol. XI , pp. 12-14.

[72]
*73+ *74+ [75] [76] [77] [78]

TSN, 28 November 1991, Vol. XIII, pp. 5, 15, 23, 28-29.

Exhibit QQQ, plaintiffs folder of exhibits, p. 117. Exhibit AAAA, id. at 124. TSN, 28 November 1991, Vol. XIII, pp. 7-8, 23. Id. at 16-23. TSN, 7 May 1986, Vol. II, pp. 42-52; TSN, 19 May 1986, Vol. II, pp. 3-28. Sarmiento v. Court of Appeals, 364 Phil. 613, 621 (1999).

[79] Bank of the Philippine Islands v. Court of Appeals, 383 Phil. 538, 553 (2000), with reference to Tan v. Court of Appeals, 239 Phil. 310, 322 (1994).
[80] [81] Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 695. 403 Phil. 361, 383 (2001).

[82]
[83]

Moran v. Court of Appeals, G.R. No. 105836, 7 March 1994, 230 SCRA 799, 311-312.
Revised Rules of Court, Rule 131, Section 3(p).

[84]
[85]

Id., Rule 131, Section 3(q).

Id., Section 3.
Banking Page 208

[85]

Id., Section 3.

*86+
*87+ *88+ [89] [90]

Exhibit 19, defendants folder of exhibits, p. 84.

Exhibits 9-D and 9-G, id. at 52. Exhibit 9-F, id. at 52. TSN, 19 May 1986, Vol. II, p. 10. Associated Bank v. Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 469-471.

[91] Banco de Oro Savings and Mortgage Bank v Equitable Banking Corporation, G.R. No. 74917, 20 January 1988, 157 SCRA 188, 199. [92] Negotiable Instruments Law, Section 66, in connection with Section 65.

[93] Associated Bank v. Court of Appeals, 322 Phil. 677, 697 (1996); Associated Bank v. Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 472.

*94+ Plaintiffs Formal Offer of Documentary Exhibits, records, Vol. I, pp. 504-505; plaintiffs folder of exhibits, p. 110. *95+
*96+

Exhibits GGG and JJJ, plaintiffs folder of exhibits, pp. 109, 113.
Plaintiffs folder of exhibits, p. 110.

*97+
*98+ [99] [100] *101+ [102] [103]

See the initials on Exhibit III-1, plaintiffs folder of exhibits, p. 112.

Plaintiffs folder of exhibits, p. 112. TSN, deposition of Mr. Francisco Tan, 3 September 1990, p. 118. G.R. No. 49188, 30 January 1990, 181 SCRA 557, 568. Exhibit MMM, plaintiffs folder of exhibits, p. 115. Records, Vol. I, p. 507. TSN, 28 November 1991, Vol. XIII, pp. 7-8.

[104]
[105]

TSN, deposition of Mr. Francisco Tan, 3 September 1990, p. 96.

TSN, deposition of Mr. Francisco A. Tan, 3 September 1990, pp. 13-16.

[106]
[107] [108] [109] [110]

TSN, 22 May 1990, Vol. V, pp. 31-61.

TSN, 7 March 1991, Vol. IX, pp. 15-19; TSN, 13 March 1991, Vol X, pp. 7-9. TSN, 19 March 1991, Vol. X, pp. 17-21; TSN, 8 April 1991, Vol. X, pp. 31-34. TSN, 18 April 1991, Vol. X, pp. 3-13. Id. at 15-23.

Banking Page 209

[110] *111+ [112]

Id. at 15-23. Folder of defendants exhibits, pp. 102-103. Municipality of Moncada v. Cajuigan, 21 Phil 184, 190 (1912).

[113]
[114]

J.A.R. Sibal and J.N. Salazar, Jr., Compendium on Evidence 31 (4th ed., 1995).
F.D. Regalado, Remedial Law Compendium, Vol. II, p. 571 (8th ed., 2000).

[115]
[116] [117] [118]

F.D. Regalado, Remedial Law Compendium, Vol. II, 571 (8th ed., 2000).
G.R. Nos. 146710-15, 3 April 2001, 356 SCRA 108, 137-138. TSN, 13 March 1991, Vol X, pp. 7-9. TSN, 22 May 1990, Vol. V, pp. 14-17.

[119] Dr. Ricardo L. Dy and Rosalind O. Dy vs. Citibank, N.A.,CA-G.R. CV No. 15934, 15 January 1990, penned by Associate Justice Nicolas P. Lapea, Jr. with Associate Justices Santiago M. Kapunan and Emeterio C. Cui, concurring. [120] Revised Rules of Court, Rule 130, Section 34.

[121]
[122]

J.A.R. Sibal and J.N. Salazar, Jr., Compendium on Evidence 199-200 (4th ed., 1995).
Civil Code, Article 1980; Guingona, Jr. v. City Fiscal of Manila, 213 Phil. 516,523-524 (1984).

[123]
[124]

Civil Code, Article 1286.

G.R. No. 57092, 21 January 1993, 217 SCRA 307, 313-314.

[125] Anachuelo v. Intermediate Appellate Court, G.R. No. L-71391, 29 January 1987, 147 SCRA 434, 441-442.

[126]

Antillon v. Barcelon, 37 Phil. 148, 150-151 (1917).

*127+ See Exhibits 13-E, 14-G, 15- D,and 17-D, defendants folder of exhibits, pp. 65-67, 72-74, 77-78, 81-82. [128] TSN, 7 March 1991, Vol. IX, pp. 3-6.

[129]

Cuizon v. Court of Appeals, 329 Phil. 456, 482 (1996).

*130+ Exhibits 13-E, 14-G, 15-D, and 17-D, defendants folder of exhibits, pp. 65-66, 72-73, 77-78, 81-82. [131] Wildvalley Shipping Co., Ltd. v. Court of Appeals, 396 Phil. 383, 396 (2000).

*132+
*133+

Exhibit 38, defendants folder of exhibits, pp. 109-110.

Exhibit K-1, plaintiffs folder of exhibits, 54-55.

[134]
[135]

Revised Rules of Court, Rule 131, Section 3(u).

Heirs of Severa P. Gregorio v. Court of Appeals, 360 Phil. 753, 763 (1998).
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[135]

Heirs of Severa P. Gregorio v. Court of Appeals, 360 Phil. 753, 763 (1998).

[136] Order, dated 12 November 1985, penned by Judge Ansberto P. Paredes, records, Vol. I, p. 310; Order, dated 2 September 1988, id. at penned by Judge Francisco X. Velez, records, Vol. I, p. 449; Order, dated 24 November 1988, penned by Judge Francisco X. Velez, records, Vol. I, p. 458; Order, dated 25 April 1989, penned by Judge Francisco X. Velez, records, Vol. I, pp. 476-477
[137] Security Bank & Trust Co. v. Triumph Lumber and Construction Corporation, 361 Phil. 463, 477 (1999). [138] Revised Rules of Court, Rule 131, Section 3(e).

[139] The stipulated interest shall apply as indemnity for the damages incurred in the delay of payment as provided in Article 2209 of the Civil Code which reads ART. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of a stipulation, the legal interest, which is six percent per annum. [Emphasis supplied.] Note, however, that the legal interest has been increased from six percent to twelve percent per annum by virtue of Central Bank Circulars No. 416, dated 29 July 1974, and No. 905, dated 10 December 1982. [140] Radio Communications of the Philippines, Inc. v. National Labor Relations Commission, G.R. Nos. 101181-84, 22 June 1992, 210 SCRA 222, 226-227; Ortigas, Jr. v. Lufthansa German Airlines, G.R. No. L-28773, 30 June 1975, 64 SCRA 610, 633-634; Hernandez v. Andal, 78 Phil. 196, 209-210 (1947). [141] The General Banking Law of 2000, Section 2.

[142]

Philippine National Bank v. Court of Appeals, 373 Phil. 942, 948 (1999).

[143] Simex International (Manila), Inc, vs. Court of Appeals, G.R. No. 88013, 19 March 1990, 183 SCRA 360, 367; Bank of Philippine Islands vs. Intermediate Appellate Court, G.R. No. 69162, 21 February 1992, 206 SCRA 408, 412-413. [144] TSN, 28 January 1986, Vol. I, pp. 5-7.

[145] Tiongco v. Atty. Deguma, 375 Phil. 978, 994-995 (1999); Zenith Insurance Corporation v. Court of Appeals, G.R. No. 85296, 14 May 1990, 185 SCRA 398, 402-403.

[146] Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. [147] While the amount of exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded. x x x [148]
[149]

Civil Code, Article 2208(1).

Ching Sen Ben vs. Court of Appeals, 373 Phil. 544, 555 (1999).

[150] ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 498, 531-532 (1999); Tierra International Construction Corp. v. National Labor Relations Commission, G.R. No. 88912, 3 July 1992, 211 SCRA 73, 81; Saba v. Court of Appeals, G.R. No. 77950, 24 August 1990, 189 SCRA 50, 55.

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Banking Page 212

Digest: Citibank vs. Sabeniano

Saturday, July 11, 2009 12:09 PM

Citibank vs Sabeniano Date: October 12 2006 Petitioner: Citibank and Investors Finance Corporation (under the name and style FNCB Finance) Respondent: Modesta Sabeniano Ponente: Chico Nazario Facts: Modesta Sabeniano was a client of both Citibank and FNCB Finance. Sabeniano filed a complaint against petitioners claiming that she made substantial deposits and money market placements with petitioners. The proceeds were supposedly deposited automatically to Sabenianos account with Citibank. However, petitioners refused to return her deposits despite her repeated demands. Hence, this present action. Petitioners, however, claimed that Sabeniano obtained several loans from Citibank. When Sabeniano failed to pay, Citibank exercisted its right to off set Sabenianos outstanding loans with her deposits and money market placements pursuant to the Declaration of Pledge and the Deeds of Assignment executed by Sabeniano. The lower court declared the compensation illegal and ordered Citibank to refund the amount of US $149,632.99 to Sabeniano. Sabeniano was also declared indebted to Citibank in the amount of P1,069,847.40. The CA affirmed. Upon MR, the CA deleted the portion where it ordered petitioners to return to Sabeniano the proceeds of her money market placement with AIDC. Issue: As to the money market placements Ratio: This Court is tasked to determine whether petitioners are indeed liable to return the foregoing amounts, together with the appropriate interests and penalties, to respondent. Money market placements with petitioner Citibank The history of respondent's money market placements with petitioner Citibank began on 6 December 1976, when she made a placement of P500,000.00 as principal amount, which was supposed to earn an interest of 16% p.a. and for which PN No. 20773 was issued. Respondent did not yet claim the proceeds of her placement and, instead, rolled-over or re-invested the principal and proceeds several times in the succeeding years for which new PNs were issued by Citibank to replace the ones which matured. Citibank did not deny the existence nor questioned the authenticity of PNs No. 23356 and 23357 it issued in favor of respondent for her money market placements. In fact, it admitted the genuineness and due execution of the said PNs, but qualified that they were no longer outstanding. Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested, respondent was able to establish prima facie that Citibank is liable to her for the amounts stated. Reviewing the evidence, the SC found that Citibank failed to satisfactorily prove that PNs No. 23356 and 23357 had already been paid, and that the amount so paid was actually used to open one of respondent's TD accounts with Citibank. Moreover, while there are documentary evidences to support and trace respondent's money market placements with petitioner Citibank, from the original PN No. 20773, rolled over several times to, finally, PNs No. 23356 and 23357, there is an evident absence of any documentary evidence on the payment of these last two PNs and the use of the proceeds thereof by respondent for opening TD accounts. The paper trail seems to have ended with the copies of PNs No. 23356 and 23357. The significance of this Court's declaration that PNs No. 23356 and 23357 are still outstanding becomes apparent in the light of petitioners' next contentions that respondent used the proceeds of PNs No. 23356 and 23357, together with additional money, to open TD Accounts No. 17783 and 17784 with petitioner Citibank; and, subsequently, respondent pre-terminated these TD accounts and transferred the proceeds thereof, amounting to P1,100,000.00, to petitioner FNCB Finance for money market placements. While respondent's money market placements with petitioner FNCB Finance may be traced back with definiteness to TD Accounts No. 17783 and 17784, there is only flimsy and unsubstantiated connection between the said TD accounts and the supposed proceeds paid from PNs No. 23356 and 23357. With PNs No. 23356 and 23357 still unpaid, then they represent an obligation of petitioner Citibank separate and distinct from the obligation of petitioner FNCB Finance arising from respondent's money market placements with the latter. Money market placements with FNCB Finance According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total amount of

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According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total amount of P1,100,000.00, were supposed to mature on 15 March 1978. However, respondent, through a letter, preterminated the said TD accounts and transferred all the proceeds thereof to FNCB Finance for money market placement. Pursuant to her instructions, TD Accounts No. 17783 and 17784 were pre-terminated and Citibank issued Manager's Checks (MC) No. 19925341 and 19925142 for the amounts of P500,000.00 and P600,00.00, respectively. Both MCs were payable to Citifinance, with the additional notation that "A/C MODESTA R. SABENIANO." Typewritten on MC No. 199253 is the phrase "Ref. Proceeds of TD 17783," and on MC No. 199251 is a similar phrase, "Ref. Proceeds of TD 17784." These phrases purportedly established that the MCs were paid from the proceeds of respondent's pre-terminated TD accounts with Citibank. Upon receipt of the MCs, FNCB Finance deposited the same to its account with Feati Bank and Trust Co., as evidenced by the rubber stamp mark of the latter found at the back of both MCs. In exchange, petitioner FNCB Finance booked the amounts received as money market placements, and accordingly issued PNs No. 4952 and 4962, for the amounts of P500,000.00 and P600,000.00, respectively, payable to respondent's savings account with petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once again, respondent rolled-over several times the principal amounts of her money market placements with petitioner FNCB Finance. As presented by the petitioner FNCB Finance, respondent rolled-over only the principal amounts of her money market placements as she chose to receive the interest income therefrom. Petitioner FNCB Finance also pointed out that when PN No. 4962, with principal amount of P600,000.00, matured on 1 June 1977, respondent received a partial payment of the principal which, together with the interest, amounted to P102,633.33;44 thus, only the amount of P500,000.00 from PN No. 4962 was rolled -over to PN No. 5758. Based on the foregoing records, the principal amounts of PNs No. 5757 and 5758, upon their maturity, were rolled over to PNs No. 8167 and 8169, respectively. PN No. 816745 expressly canceled and superseded PN No. 5757, while PN No. 816946 also explicitly canceled and superseded PN No. 5758. Thus, it is patently erroneous for the Court of Appeals to still award to respondent the principal amounts and interests covered by PNs No. 5757 and 5758 when these were already canceled and superseded. It is now incumbent upon this Court to determine what subsequently happened to PNs No. 8167 and 8169. Petitioner FNCB Finance presented four checks as proof of payment of the principal amounts and interests of PNs No. 8167 and 8169. Then again, Checks No. 77035 and 77034 were later returned to FNCB Finance together with a memo. According to the memo, the two checks, in the total amount of P1,000,000.00, were to be returned to respondent's account with instructions to book the said amount in money market placements for one more year. On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the order of "Citibank N.A. A/C Modesta Sabeniano," in the amount of P1,022,916.66, as full payment of the principal amounts and interests of both PNs No. 20138 and 20139 and, resultantly, canceling the said PNs. Respondent actually admitted the issuance and existence of Check No. 100168, but with the qualification that the proceeds thereof were turned over to Citibank. Respondent did not clarify the circumstances attending the supposed turn over, but on the basis of the allegations of petitioner Citibank itself, the proceeds of PNs No. 20138 and 20139, amounting to P1,022,916.66, was used by it to liquidate respondent's outstanding loans. Therefore, the determination of whether or not respondent is still entitled to the return of the proceeds of PNs No. 20138 and 20139 shall be dependent on the resolution of the issues raised as to the existence of the loans and the authority of petitioner Citibank to use the proceeds of the said PNs, together with respondent's other deposits and money market placements, to pay for the same. Savings and current accounts with petitioner Citibank Respondent presented and submitted before the RTC deposit slips and bank statements to prove deposits made to several of her accounts with Citibank, particularly, Accounts No. 00484202, 59091, and 472 -751, which would have amounted to a total of P3,812,712.32, had there been no withdrawals or debits from the said accounts from the time the said deposits were made. Since both the RTC and the Court of Appeals had consistently recognized only the P31,079.14 of respondent's savings account with petitioner Citibank, and that respondent failed to move for reconsideration or to appeal this particular finding of fact by the trial and appellate courts, it is already binding upon this Court. Respondent is already precluded from claiming any greater amount in her savings and current accounts with petitioner Citibank. Thus, this Court shall limit itself to determining whether or not respondent is entitled to the return of the amount of P31,079.14 should the off -set thereof by petitioner Citibank against her supposed loans be found invalid. Dollar accounts with Citibank-Geneva Respondent made an effort of preparing and presenting before the RTC her own computations of her money market placements and dollar accounts with Citibank-Geneva, purportedly amounting to a total of

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money market placements and dollar accounts with Citibank-Geneva, purportedly amounting to a total of United States $343,220.98. According to the foregoing computation, by 25 October 1979, respondent had a total of US$156,942.70, from which, US$149,632.99 was transferred by Citibank-Geneva to petitioner Citibank in Manila, and was used by the latter to off-set respondent's outstanding loans. The balance of respondent's accounts with Citibank-Geneva, after the remittance to petitioner Citibank in Manila, amounted to US$7,309.71, which was subsequently expended by a transfer to another account with Citibank-Zuerich, in the amount of US $6,998.84, and by payment of various bank charges, including closing charges, in the amount of US$310.87. Rightly so, both the RTC and the Court of Appeals gave more credence to the computation of Citibank Geneva as to the status of respondent's accounts with the said bank, rather than the one prepared by respondent herself, which was evidently self-serving. Once again, this Court shall limit itself to determining whether or not respondent is entitled to the return of the amount of US$149,632.99 should the off -set thereof by petitioner Citibank against her alleged outstanding loans be found invalid. Issue: As to the loans procured by respondent Ratio: Citibank was able to establish by preponderance of evidence the existence of respondent's loans. Respondent did indeed have outstanding loans with Citibank at the time it effected the off -set or compensation on 25 July 1979 (using respondent's savings deposit with Citibank), 5 September 1979 (using the proceeds of respondent's money market placements with FNCB Finance) and 26 October 1979 (using respondent's dollar accounts remitted from Citibank-Geneva). The totality of petitioners' evidence as to the existence of the said loans preponderates over respondent's. It bears to emphasize that the proceeds of the loans were paid to respondent in MCs, with the respondent specifically named as payee. MCs checks are drawn by the bank's manager upon the bank itself and regarded to be as good as the money it represents.79 Moreover, the MCs were crossed checks, with the words "Payee's Account Only." In general, a crossed check cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which, in turn, must present it for payment against the drawee bank in the course of normal banking hours. The crossed check cannot be presented for payment, but it can only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's account. The crossed MCs presented by petitioner Bank were indeed deposited in several different bank accounts and cleared by the Clearing Office of the Central Bank. The crossed MCs are already in the possession of Citibank, the drawee bank, which was ultimately responsible for the payment of the amount stated in the checks. Given that a check is more than just an instrument of credit used in commercial transactions for it also serves as a receipt or evidence for the drawee bank of the cancellation of the said check due to payment, then, the possession by Citibank of the said MCs, duly stamped "Paid" gives rise to the presumption that the said MCs were already paid out to the intended payee, who was in this case, the respondent. The presumptions are disputable, meaning, they are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence. Respondent, however, was unable to present sufficient and credible evidence to dispute these presumptions. It should be recalled that out of the nine MCs presented by Citibank, respondent admitted to receiving one as proceeds of a loan (MC No. 228270), denied receiving two (MCs No. 220701 and 226467), and admitted to receiving all the rest, but not as proceeds of her loans, but as return on the principal amounts and interests from her money market placements. The mere fact that MCs No. 220701 and 226467 do not bear respondent's signature at the back does not negate deposit thereof in her account. The liability for the lack of indorsement on the MCs no longer fall on petitioner Citibank, but on the bank who received the same for deposit, in this case, BPI Cubao Branch. Once again, it must be noted that the MCs were crossed, for payee's account only, and the payee named in both checks was none other than respondent. The crossing of the MCs was already a warning to BPI to receive said checks for deposit only in respondent's account. It was up to BPI to verify whether it was receiving the crossed MCs in accordance with the instructions on the face thereof. If, indeed, the MCs were deposited in accounts other than respondent's, then the respondent would have a cause of action against BPI. BPI further stamped its guarantee on the back of the checks to the effect that, "All prior endorsement and/or Lack of endorsement guaranteed." Thus, BPI became the indorser of the MCs, and assumed all the warranties of an indorser, specifically, that the checks were genuine and in all respects what they purported to be; that it had a good title to the checks; that all prior parties had capacity to contract; and that the checks were, at the time of their indorsement, valid and subsisting. So even if the MCs deposited by BPI's client, whether it be by respondent herself or some other person, lacked the necessary indorsement, BPI, as the collecting bank, is bound by its warranties as an indorser and cannot set up the defense of lack of indorsement as against petitioner Citibank, the drawee bank.

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indorsement as against petitioner Citibank, the drawee bank. Furthermore, respondent's bare and unsubstantiated denial of receipt of the MCs in question and their deposit in her account is rendered suspect when MC No. 220701 was actually deposited in Account No. 0123-0572-28 of BPI Cubao Branch, the very same account in which MC No. 228270 (which respondent admitted to receiving as proceeds of her loan from petitioner Citibank), and MCs No. 228203, 228357, and 228400 (which respondent admitted to receiving as proceeds from her money market placements) were deposited. Likewise, MC No. 226467 was deposited in Account No. 0121 -002-43 of BPI Cubao Branch, to which MCs No. 226285 and 226439 (which respondent admitted to receiving as proceeds from her money market placements) were deposited. It is an apparent contradiction for respondent to claim having received the proceeds of checks deposited in an account, and then deny receiving the proceeds of another check deposited in the very same account. Another inconsistency in respondent's denial of receipt of MC No. 226467 and her deposit of the same in her account, is her presentation of Exhibit "HHH," a provisional receipt which was supposed to prove that respondent turned over P500,000.00 to Mr. Tan of petitioner Citibank, that the said amount was split into three money market placements, and that MC No. 226467 represented the return on her investment from one of these placements. Because of her Exhibit "HHH," respondent effectively admitted receipt of MC No. 226467, although for reasons other than as proceeds of a loan. Respondent presented several more pieces of evidence to substantiate her claim that she received MCs No. 226285, 226439, 226467, 226057, 228357, and 228400, not as proceeds of her loans from petitioner Citibank, but as the return of the principal amounts and payment of interests from her money market placements with petitioners. Part of respondent's exhibits were personal checks drawn by respondent on her account with Feati Bank & Trust Co., which she allegedly invested in separate money market placements with both petitioners, the returns from which were paid to her via MCs No. 226285 and 228400. Yet, to this Court, the personal checks only managed to establish respondent's issuance thereof, but there was nothing on the face of the checks that would reveal the purpose for which they were issued and that they were actually invested in money market placements as respondent claimed. As a last point on this matter, if respondent truly had money market placements with petitioners, then these would have been evidenced by PNs issued by either petitioner Citibank or petitioner FNCB Finance, acknowledging the principal amounts of the investments, and stating the applicable interest rates, as well as the dates of their of issuance and maturity. After respondent had so meticulously reconstructed her other money market placements with petitioners and consolidated the documentary evidence thereon, she came surprisingly short of offering similar details and substantiation for these particular money market placements. Since this Court is satisfied that respondent indeed received the proceeds of the first set of PNs, then it proceeds to analyze her evidence of payment thereof. Respondent has not yet paid the loans she had with Citibank In support of respondent's assertion that she had already paid whatever loans she may have had with petitioner Citibank, she presented as evidence Provisional Receipts No. 19471 and No. 12723 both of Citibank and signed by Mr. Tan, for the amounts of P500,744.00 and P500,000.00, respectively. While these provisional receipts did state that Mr. Tan, on behalf of petitioner Citibank, received respondent's checks as payment for her loans, they failed to specifically identify which loans were actually paid. Petitioner Citibank was able to present evidence that respondent had executed several PNs in the years 1978 and 1979 to cover the loans she secured from the said bank. Citibank did admit that respondent was able to pay for some of these PNs, and what it identified as the first and second sets of PNs were only those which remained unpaid. It thus became incumbent upon respondent to prove that the checks received by Mr. Tan were actually applied to the PNs in either the first or second set; a fact that, unfortunately, cannot be determined from the provisional receipts submitted by respondent since they only generally stated that the checks received by Mr. Tan were payment for respondent's loans. Mr. Tan, in his deposition, further explained that provisional receipts were issued when payment to the bank was made using checks, since the checks would still be subject to clearing. The purpose for the provisional receipts was merely to acknowledge the delivery of the checks to the possession of the bank, but not yet of payment. This bank practice finds legitimacy in the pronouncement of this Court that a check, whether an MC or an ordinary check, is not legal tender and, therefore, cannot constitute valid tender of payment. (recall PAL vs CA) In the case at bar, the issuance of an official receipt by Citibank would have been dependent on whether the checks delivered by respondent were actually cleared and paid for by the drawee banks. As for PN No. 34534, respondent asserted payment thereof at two separate instances by two different means. In her formal offer of exhibits, respondent submitted a deposit slip of petitioner Citibank, dated 11 August 1978,

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formal offer of exhibits, respondent submitted a deposit slip of petitioner Citibank, dated 11 August 1978, evidencing the deposit of BPI Check No. 5785 for P150,000.00. In her Formal Offer of Documentary Exhibits, dated 7 July 1989, respondent stated that the purpose for the presentation of the said deposit slip was to prove that she already paid her loan covered by PN No. 34534.102 In her testimony before the RTC three years later, on 28 November 1991, she changed her story. This time she narrated that the loan covered by PN No. 34534 was secured by her money market placement with petitioner FNCB Finance, and when she failed to pay the said PN when it became due, the security was applied to the loan, therefore, the loan was considered paid.103 Given the foregoing, respondent's assertion of payment of PN No. 34534 is extremely dubious. According to Citibank, the PNs in the second set, except for PN No. 34534, were mere renewals of the unpaid PNs in the first set, which was why the PNs stated that they were for the purpose of liquidating existing obligations. PN No. 34534, however, which was part of the first set, was still valid and subsisting and so it was included in the second set without need for its renewal, and it still being the original PN for that particular loan, its stated purpose was for personal investment. Respondent essentially admitted executing the second set of PNs, but they were only meant to cover simulated loans. Mr. Tan supposedly convinced her that her pending loan application with DBP would have a greater chance of being approved if they made it appear that respondent urgently needed the money because petitioner Citibank was already demanding payment for her simulated loans. Respondent's defense of simulated loans to escape liability for the second set of PNs is truly a novel one. It is regrettable, however, that she was unable to substantiate the same. Yet again, respondent's version of events is totally based on her own uncorroborated testimony. The notations on the second set of PNs, that they were non-negotiable simulated notes, were admittedly made by respondent herself and were, thus, self-serving. Equally self-serving was respondent's letter, written on 7 October 1985, or more than six years after the execution of the second set of PNs, in which she demanded return of the simulated or fictitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her to execute. Respondent further failed to present any proof of her alleged loan application with the DBP, and of any circumstance or correspondence wherein the simulated or fictitious PNs were indeed used for their supposed purpose. In contrast, Citibank, as supported by the testimonies of its officers and available documentation, consistently treated the said PNs as regular loans accepted, approved, and paid in the ordinary course of its business. The PNs executed by the respondent in favor of Citibank to cover her loans were duly -filled out and signed, including the disclosure statement found at the back of the said PNs, in adherence to the Central Bank requirement to disclose the full finance charges to a loan granted to borrowers. Lastly, the exchange of letters between Citibank and respondent, as well as the letters sent by other people working for respondent, had consistently recognized that respondent owed petitioner Citibank money. In consideration of the foregoing discussion, this Court finds that the preponderance of evidence supports the existence of the respondent's loans, in the principal sum of P1,920,000.00, as of 5 September 1979. Issue: WON the Court violated the Best Evidence Rule when it accepted photocopies and microfilm copies of the PNs, etc Ratio: This Court did not violate the best evidence rule when it considered and weighed in evidence the photocopies and microfilm copies of the PNs, MCs, and letters submitted by the petitioners to establish the existence of respondent's loans. The terms or contents of these documents were never the point of contention in the Petition at bar. It was respondent's position that the PNs in the first set (with the exception of PN No. 34534) never existed, while the PNs in the second set (again, excluding PN No. 34534) were merely executed to cover simulated loan transactions. As for the MCs representing the proceeds of the loans, the respondent either denied receipt of certain MCs or admitted receipt of the other MCs but for another purpose. Respondent further admitted the letters she wrote personally or through her representatives to Mr. Tan of petitioner Citibank acknowledging the loans, except that she claimed that these letters were just meant to keep up the ruse of the simulated loans. Thus, respondent questioned the documents as to their existence or execution, or when the former is admitted, as to the purpose for which the documents were executed, matters which are, undoubtedly, external to the documents, and which had nothing to do with the contents thereof. Alternatively, even if it is granted that the best evidence rule should apply to the evidence presented by petitioners regarding the existence of respondent's loans, it should be borne in mind that the rule admits of the following exceptions under Rule 130, Section 5 (When the original document is unavailable). The execution or existence of the original copies of the documents was established through the testimonies of witnesses, such as Mr. Tan, before whom most of the documents were personally executed by respondent. The original PNs also went through the whole loan booking system of Citibank from the account officer in its Marketing Department, to the pre-processor, to the signature verifier, back to the pre-

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account officer in its Marketing Department, to the pre-processor, to the signature verifier, back to the preprocessor, then to the processor for booking. It was only FNCB Finance who claimed that they lost the original copies of the PNs when it moved to a new office. Citibank did not make a similar contention; instead, it explained that the original copies of the PNs were returned to the borrower upon liquidation of the loan, either through payment or roll -over. Citibank proffered the excuse that they were still looking for the documents in their storage or warehouse to explain the delay and difficulty in the retrieval thereof, but not their absence or loss. The original documents in this case, such as the MCs and letters, were destroyed and, thus, unavailable for presentation before the RTC only on 7 October 1987, when a fire broke out on the 7th floor of the office building of Citibank. There is no showing that the fire was intentionally set. The fire destroyed relevant documents, not just of the present case, but also of other cases, since the 7th floor housed the Control and Investigation Division, in charge of keeping the necessary documents for cases in which petitioner Citibank was involved. Issue: The impact of the Decision of the Court of Appeals in the Dy case Ratio: In the Dy case, Severino Chua Caedo managed to obtain loans from herein petitioner Citibank amounting to P7,000,000.00, secured to the extent of P5,000,000.00 by a Third Party Real Estate Mortgage of the properties of Caedo's aunt, Rosalind Dy. It turned out that Rosalind Dy and her husband were unaware of the said loans and the mortgage of their properties. The transactions were carried out exclusively between Caedo and Mr. Tan of petitioner Citibank. The RTC found Mr. Tan guilty of fraud for his participation in the questionable transactions, essentially because he allowed Caedo to take out the signature cards, when these should have been signed by the Dy spouses personally before him. Although the Dy spouses' signatures in the PNs and Third Party Real Estate Mortgage were forged, they were approved by the signature verifier since the signature cards against which they were compared to were also forged. Neither the RTC nor the Court of Appeals, however, categorically declared Mr. Tan personally responsible for the forgeries, which, in the narration of the facts, were more likely committed by Caedo. In the Petition at bar, respondent dealt with Mr. Tan directly, there was no third party involved who could have perpetrated any fraud or forgery in her loan transactions. Although respondent attempted to raise suspicion as to the authenticity of her signatures on certain documents, these were nothing more than naked allegations with no corroborating evidence; worse, even her own allegations were replete with inconsistencies. She could not even establish in what manner or under what circumstances the fraud or forgery was committed, or how Mr. Tan could have been directly responsible for the same. The factual backgrounds of the two cases are so different and unrelated that the Dy case cannot be used to prove specific intent, knowledge, identity, plan, system, scheme, habit, custom or usage on the part of petitioner Citibank or its officer, Mr. Tan, to defraud respondent in the present case. Issue: WON the compensation was valid Ratio: The liquidation of respondent's outstanding loans were valid in so far as Citibank used respondent's savings account with the bank and her money market placements with FNCB Finance; but illegal and void in so far as Citibank used respondent's dollar accounts with Citibank-Geneva. Savings Account with petitioner Citibank There is little controversy when it comes to the right of Citibank to compensate respondent's outstanding loans with her deposit account. As already found by this Court, Citibank was the creditor of respondent for her outstanding loans. At the same time, respondent was the creditor of Citibank, as far as her deposit account was concerned, since bank deposits, whether fixed, savings, or current, should be considered as simple loan or mutuum by the depositor to the banking institution. Both debts consist in sums of money. By June 1979, all of respondent's PNs in the second set had matured and became demandable, while respondent's savings account was demandable anytime. Neither was there any retention or controversy over the PNs and the deposit account commenced by a third person and communicated in due time to the debtor concerned. Compensation takes place by operation of law, therefore, even in the absence of an expressed authority from respondent, Citibank had the right to effect, on 25 June 1979, the partial compensation or off-set of respondent's outstanding loans with her deposit account, amounting to P31,079.14. Money market placements with FNCB Finance Respondent's money market placements were with FNCB Finance, and after several roll -overs, they were ultimately covered by PNs No. 20138 and 20139, which, by 3 September 1979, the date the check for the proceeds of the said PNs were issued, amounted to P1,022,916.66, inclusive of the principal amounts and

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proceeds of the said PNs were issued, amounted to P1,022,916.66, inclusive of the principal amounts and interests. As to these money market placements, respondent was the creditor and petitioner FNCB Finance the debtor; while, as to the outstanding loans, petitioner Citibank was the creditor and respondent the debtor. Consequently, legal compensation, under Article 1278 CC, would not apply since the first requirement for a valid compensation, that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other, was not met. What petitioner Citibank actually did was to exercise its rights to the proceeds of respondent's money market placements with FNCB Finance by virtue of the Deeds of Assignment executed by respondent in its favor. The SC gave the Deeds of Assignment grave importance in establishing the authority given by the respondent to petitioner Citibank to use as security for her loans her money her market placements with FNCB Finance, represented by PNs No. 8167 and 8169, later to be rolled-over as PNs No. 20138 and 20139. These Deeds of Assignment constitute the law between the parties, and the obligations arising therefrom shall have the force of law between the parties and should be complied with in good faith. Citibank was only acting upon the authority granted to it under the foregoing Deeds when it finally used the proceeds of PNs No. 20138 and 20139, paid by FNCB Finance, to partly pay for respondent's outstanding loans. Strictly speaking, it did not effect a legal compensation or off-set under Article 1278 of the Civil Code, but rather, it partly extinguished respondent's obligations through the application of the security given by the respondent for her loans. Although the pertinent documents were entitled Deeds of Assignment, they were, in reality, more of a pledge by respondent to Citibank of her credit due from petitioner FNCB Finance by virtue of her money market placements with the latter. PNs No. 20138 and 20139 matured on 3 September 1979, without them being redeemed by respondent, so that Citibank collected from petitioner FNCB Finance the proceeds thereof, which included the principal amounts and interests earned by the money market placements, amounting to P1,022,916.66, and applied the same against respondent's outstanding loans, leaving no surplus to be delivered to respondent. Dollar accounts with Citibank-Geneva Despite the legal compensation of respondent's savings account and the total application of the proceeds of PNs No. 20138 and 20139 to respondent's outstanding loans, there still remained a balance of P1,069,847.40. Petitioner Citibank then proceeded to applying respondent's dollar accounts with Citibank Geneva against her remaining loan balance, pursuant to a Declaration of Pledge supposedly executed by respondent in its favor. Certain principles of private international law should be considered herein because the property pledged was in the possession of an entity in a foreign country, namely, Citibank -Geneva. In the absence of any allegation and evidence presented by petitioners of the specific rules and laws governing the constitution of a pledge in Geneva, Switzerland, they will be presumed to be the same as Philippine local or domestic laws; this is known as processual presumption. Upon closer scrutiny of the Declaration of Pledge, this Court finds the same exceedingly suspicious and irregular. First of all, it escapes this Court why Citibank took care to have the Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court would think that petitioner Citibank would take greater cautionary measures with the preparation and execution of the Declaration of Pledge because it involved respondent's "all present and future fiduciary placements" with a Citibank branch in another country, specifically, in Geneva, Switzerland. While there is no express legal requirement that the Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the same prima facie presumption of due execution that is extended to notarized documents, and petitioner Citibank must discharge the burden of proving due execution and authenticity of the Declaration of Pledge. Second, Citibank was unable to establish the date when the Declaration of Pledge was actually executed. The photocopy of the Declaration of Pledge submitted by petitioner Citibank before the RTC was undated. It presented only a photocopy of the pledge because it already forwarded the original copy thereof to Citibank-Geneva when it requested for the remittance of respondent's dollar accounts pursuant thereto. Respondent, on the other hand, was able to secure a copy of the Declaration of Pledge, certified by an officer of Citibank-Geneva, which bore the date 24 September 1979. Respondent, however, presented her passport and plane tickets to prove that she was out of the country on the said date and could not have signed the pledge. Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed form. It was constituted in favor of Citibank, N.A., otherwise referred to therein as the Bank. It should be noted, however, that in the space which should have named the pledgor, the name of Citibank was typewritten. The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a mistake made by whoever filled-out the form? Yes, it could be a possibility. Nonetheless, considering the value of such a document, the mistake as to a significant detail in the pledge could only be committed with gross carelessness on the part of petitioner Citibank, and raised serious doubts as to the authenticity and due

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carelessness on the part of petitioner Citibank, and raised serious doubts as to the authenticity and due execution of the same. The Declaration of Pledge had passed through the hands of several bank officers in the country and abroad, yet, surprisingly and implausibly, no one noticed such a glaring mistake. Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimed that the signature was a forgery. When a document is assailed on the basis of forgery, the best evidence rule applies. Citibank presented only photocopies of the Deed. Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of respondent's dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct and separate entity. As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the debtor; and as for the outstanding loans, Citibank was the creditor and respondent was the debtor. The parties in these transactions were evidently not the principal creditor of each other. Therefore, this Court declares that the remittance of respondent's dollar accounts from Citibank -Geneva and the application thereof to her outstanding loans with petitioner Citibank was illegal, and null and void. Resultantly, petitioner Citibank is obligated to return to respondent the amount of US$149,632,99 from her Citibank-Geneva accounts, or its present equivalent value in Philippine currency; and, at the same time, respondent continues to be obligated to petitioner Citibank for the balance of her outstanding loans which, as of 5 September 1979, amounted to P1,069,847.40. In summary, Citibank is ordered by this Court to pay respondent the proceeds of her money market placements, represented by PNs No. 23356 and 23357, amounting to P318,897.34 and P203,150.00, respectively, earning an interest of 14.5% per annum as stipulated in the PNs,139 beginning 17 March 1977, the date of the placements. Citibank is also ordered to refund to respondent the amount of US$149,632.99, or its equivalent in Philippine currency, which had been remitted from her Citibank-Geneva accounts. These dollar accounts, consisting of two fiduciary placements and current accounts with Citibank-Geneva shall continue earning their respective stipulated interests from 26 October 1979, the date of their remittance by Citibank-Geneva to petitioner Citibank in Manila and applied against respondent's outstanding loans. As for respondent, she is ordered to pay petitioner Citibank the balance of her outstanding loans, which amounted to P1,069,847.40 as of 5 September 1979. These loans continue to earn interest, as stipulated in the corresponding PNs, from the time of their respective maturity dates, since the supposed payment thereof using respondent's dollar accounts from Citibank-Geneva is deemed illegal, null and void, and, thus, ineffective. Issue: WON Citibank is liable for damages Ratio: Although this Court appreciates the right of petitioner Citibank to effect legal compensation of respondent's local deposits, as well as its right to the proceeds of PNs No. 20138 and 20139 by virtue of the notarized Deeds of Assignment, to partly extinguish respondent's outstanding loans, it finds that petitioner Citibank did commit wrong when it failed to pay and properly account for the proceeds of respondent's money market placements, evidenced by PNs No. 23356 and 23357, and when it sought the remittance of respondent's dollar accounts from CitibankGeneva by virtue of a highly-suspect Declaration of Pledge to be applied to the remaining balance of respondent's outstanding loans. It bears to emphasize that banking is impressed with public interest and its fiduciary character requires high standards of integrity and performance. A bank is under the obligation to treat the accounts of its depositors with meticulous care whether such accounts consist only of a few hundred pesos or of millions of pesos.142 The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible.143 Petitioner Citibank evidently failed to exercise the required degree of care and transparency in its transactions with respondent, thus, resulting in the wrongful deprivation of her property. Respondent had been deprived of substantial amounts of her investments and deposits for more than two decades. During this span of years, respondent had found herself in desperate need of the amounts wrongfully withheld from her. For the mental anguish, serious anxiety, besmirched reputation, moral shock and social humiliation suffered by the respondent, the award of moral damages is but proper. However, this Court reduces the amount thereof to P300,000.00, for the award of moral damages is meant to compensate for the actual injury suffered by the respondent, not to enrich her. Having failed to exercise more care and prudence than a private individual in its dealings with respondent, Citibank should be liable for exemplary damages, in the amount of P250,000.00, in accordance with Article 2229 and 2234 of the Civil Code. With the award of exemplary damages, then respondent shall also be entitled to an award of attorney's

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2229 and 2234 of the Civil Code. With the award of exemplary damages, then respondent shall also be entitled to an award of attorney's fees. Additionally, attorney's fees may be awarded when a party is compelled to litigate or to incur expenses to protect his interest by reason of an unjustified act of the other party.149 In this case, an award of P200,000.00 attorney's fees shall be satisfactory. In contrast, this Court finds no sufficient basis to award damages to petitioners. Respondent was compelled to institute the present case in the exercise of her rights and in the protection of her interests. In fact, although her Complaint before the RTC was not sustained in its entirety, it did raise meritorious points and on which this Court rules in her favor. Any injury resulting from the exercise of one's rights is damnum absque injuria.
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Digest: Fidelity Savings and Mortgage Bank vs. Cenzon

Saturday, July 11, 2009 12:10 PM

Fidelity Savings and Mortgage Bank vs Cenzon Date: April 5, 1990 Petitioner: Fidelity Savings and Mortgage Bank Respondents: Hon Pedro Cenzon and Spouses Timoteo and Olimpia Santiago Ponente: Regalado Facts: Private respondents instituted this present action for a sum of money with damages against Fidelity Savings and Mortgage Bank , Central Bank of the Philippines , Eusebio Lopez, Jr., Arsenio M. Lopez, Sr., Arsenio S. Lopez, Jr., Bibiana E. Lacuna, Jose C. Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi and Ernani A. Pacana. The court dismissed the complaint as against Central Bank of the Philippines, Eusebio Lopez, Jr., Arsenio S. Lopez, Jr., Arsenio M. Lopez, Sr. and Bibiana S. Lacuna. The private respondents deposited with the Fidelity Savings Bank the amount of P50,000 (savings account). Also, private respondents deposited another P50,000 under Certificate of Time Deposit No. 0210. The Monetary Board found the bank insolvent and issued Resolution No. 350, (a) forbidding to do business in the Philippines and (b) instructing the Acting Superintendent of Banks to take charge of the assets. The PDIC paid the private respondents P10,000 on the aggregate deposits of P100,000. The MB later issued its Resolution No. 2124 directing the liquidation of the affairs of the bank. The liquidation proceeding is presently pending in the CFI of Manila. Issue: WON an insolvent bank may be adjudged to pay interest on unpaid deposits even after its closure by the Central Bank by reason of insolvency without violating the provisions of the Civil Code on preference of credits Held: No Ratio: It is settled jurisprudence that a banking institution which has been declared insolvent and subsequently ordered closed by the Central Bank of the Philippines cannot be held liable to pay interest on bank deposits which accrued during the period when the bank is actually closed and non-operational. The Overseas Bank of Manila vs. CA: "It is a matter of common knowledge, which We take Judicial notice of, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional wisdom dictates this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are aware of such a simple economic proposition. Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank." Petitioner cannot be held liable for interest on bank deposits which accrued from the time it was prohibited by the Central Bank to continue with its banking operations, that is, when Resolution No. 350 to that effect was issued on February 18, 1969. The order, therefore, of the Central Bank as receiver/liquidator of petitioner bank allowing the claims of depositors and creditors to earn interest up to the date of its closure on February 18, 1969, is in line with the doctrine laid down in the jurisprudence above cited. Issue: WON an insolvent bank may be adjudged to pay moral and exemplary damages, attorney's fees and costs when the insolvency is caused by the anomalous real estate transactions without violating the provisions on preference of credits. Held: No Ratio: The trial court found, and it is not disputed, that there was no fraud or bad faith on the part of petitioner bank and the other defendants in accepting the deposits of private respondents. The bank could not even be faulted in not immediately returning the amount claimed by private respondents considering that the demand to pay was made and Civil Case No. 84800 was filed in the trial court several months after the Central Bank had ordered petitioner's closure. By that time, the bank was no longer in a position to comply with its obligations to its creditors, including herein private respondents. Even the trial court had to admit that the bank failed to pay private respondents because it was already insolvent. Further, this case is not one of the specified or analogous cases wherein moral damages may be recovered. There is no valid basis for the award of exemplary damages which is supposed to serve as a warning to other banks from dissipating their assets in anomalous transactions. It was not proven by private respondents, and neither was there a categorical finding made by the trial court, that the bank actually engaged in anomalous real estate transactions. The same were raised only during the testimony of the bank examiner of the Central Bank, but no documentary evidence was ever presented. Hence, it was error for the lower court to impose exemplary damages upon the bank
Cenzon deposited with Fidelity Savings Bank the total amount of P100k - P50k in its Savings account and another P50 in its Time Deposit Account.
However, Fidelity Savings bank was declared to be insolvent. PDIC paid P10,000 on the aggregate deposits of "100k. MB ordered the liquidationof the affairs of the bank. ISSUE: WON Insolvent bank could be ordered to pay

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Hence, it was error for the lower court to impose exemplary damages upon the bank since, in contracts, such sanction requires that the offending party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Neither does this case present the situation where attorney's fees may be awarded. In the absence of fraud, bad faith, malice or wanton attitude, petitioner bank may, therefore, not be held responsible for damages which may be reasonably attributed to the non-performance of the obligation. Consequently, we reiterate that under the premises and pursuant to the provisions of law, it is apparent that private respondents are not justifiably entitled to the payment of moral and exemplary damages and attorney's fees. While we tend to agree with petitioner bank that private respondents' claims should have been filed in the liquidation proceedings in Civil Case No. 86005, entitled "In Re: Liquidation of the Fidelity Savings and Mortgage Bank," pending before Branch XIII of the then Court of First Instance of Manila, we do not believe that the decision rendered in the instant case would be violative of the legal provisions on preference and concurrence of credits.
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Digest: Cancio vs. CA

Saturday, July 11, 2009 12:12 PM

Cancio vs CA Date: October 22, 1987 Petitioner: Rosa Cancio Respondents: CA and CTA Ponente: Melencio Herrera Facts: Mrs. Rosa Cancio, while clearing through the Pre-Boarding (AVSECOM) Area of MIA to board PR 306 for Hongkong was apprehended with US$102,900 in cash, US$600 in two travelers checks, and one P500. Mrs. Cancio did not declare her currency had already passed the Customs inspection area. In view of claimant's failure to present the Central Bank Authority, the said currencies were accordingly confiscated and a seizure Receipt No. 013 was issued to her; hence, this seizure proceedings. Cancio presented certified xerox copy of her Bank Book for foreign currency deposit with the PCIB, dollar remittances in telegraphic transfers from abroad for deposits and withdrawal cards, attesting to the fact that Cancio had withdrawn from her FCDU Account a certain amount of United States currency which tended to show that claimant herein was a foreign currency depositor pursuant to the provisions of RA 6426. The money intended principally for such medical purpose and for other miscellaneous and necessary expenses, and, that the subject currencies were concealed and hidden by them inside the two chocolate boxes solely for security reasons. The Commissioner of Customs denied. Cancio appealed to CTA. The CTA affirmed the forfeiture of the US$102,900 in cash, and US$600 in traveller's checks for having been in violation of CB Circulars 265 and 534, in relation to Section 2530(f) of the Tariff and Customs Code. It reversed the forfeiture of P1,500 limit that each traveller is allowed to bring out of the country without a CB permit pursuant to paragraph 4 of CB Circular No. 383. Issue: WON the CTA erred in upholding the forfeiture of the foreign currencies in question. Held: Yes Ratio: It is true that in so far as the exportation or taking out of foreign currency from the country is concerned, Central Bank Circular No. 265 par 3, issued on November 20, 1968,. Similarly, Central Bank Circular No. 534, issued on July 19, 1976. However, peculiar to the present controversy is the fact that, as stated previously, petitioner is a foreign currency depositor. Relevant and applicable to her is the following provision of the "Foreign Currency Deposit Act of the Philippines" (RA 6426): "SEC. 5. Withdrawability and transferability of deposits. There shall be no restriction on the
withdrawal by the depositor of his deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank."

Under the provision, the transferability abroad of foreign currency deposits is unrestricted. Only one exception is provided for therein, which is, any restriction "arising from the contract between the depositor and the bank." Neither is a Central Bank authority required for the transferability abroad of foreign currency deposits. Attention is called, however, to the implementing rules and regulations to said Republic Act 6426, as embodied in CB Circular No. 343 issued on April 24, 1972, which provides:
"SEC. 11.b. Subject only to the terms of the contract between the bank and the depositor, the latter shall have a general license to withdraw his deposit, notwithstanding any change in policy or regulations.

The CA has taken the position that the provision limits the right of the depositor to that of withdrawal and withholds from him the right of transferability abroad. That is not so. Circular -Letter, dated August 3, 1978, issued by the Central Bank reads in explicit terms: "Effective immediately, the banks authorized to accept foreign currency
deposits xxx are hereby instructed to advise their foreign currency depositors who are withdrawing funds for travel purposes to carry with them the certificate of withdrawal that the banks shall issue. The travellers shall present the certifications to the Customs and Central Bank personnel at the MIA, if requested.

It is a fact that petitioner could not present a certificate of withdrawal at the Manila International Airport when she was about to depart. As she had explained she was unaware of this requirement. And if she had wrapped her dollar currency inside a chocolate box it was for "security reasons." Besides, as instructed in the Circular-Letter, it is the authorized depository bank which should advise its depositors to carry with them the certificate of withdrawal. At any rate, the CA has found that petitioner has presented in evidence her foreign currency bank book and her withdrawal cards. These may be considered as substantial compliance for purposes of this case. Indeed, given the underlying objective of the Foreign Currency Deposit Act, as amended, which is to attract

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compliance for purposes of this case. Indeed, given the underlying objective of the Foreign Currency Deposit Act, as amended, which is to attract and invite the deposit of foreign currencies which are acceptable as part of the international reserve in duly authorized banks in order that they may be put into the stream of the banking system, it would be to defeat the very purpose of the law to place undue restrictions on the transferability of such funds. The countervailing effect would be to discourage prospective foreign currency depositors to the detriment of the banking system. In fine, Central Bank Circulars Nos. 265 and 534 requiring prior Central Bank authority for the taking out of the country of foreign currency should not be made to encompass foreign currency depositors whose rights are expressly defined and guaranteed in a special law, the Foreign Currency Deposit Act (RA 6426). As a foreign currency depositor, therefore, petitioner cannot be adjudged to have violated the Central Bank Circulars. It follows that neither is there room for the application of Section 2530(f) of the Tariff and Customs Code, as amended, which provides for the forfeiture of any article and other objects, the exportation of which is effected or attempted contrary to law.
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Digest: Salvacion vs. CB

Saturday, July 11, 2009 12:12 PM

Salvacion vs CA Date: August 21, 1997 Petitioners: Karen Salvacion, Federico Salvacion Jr and Evelina Salvacion Respondents: Central Bank of the Philippines, China Banking Corporation and Greg Bartelli

Ponente: Torres Jr
Facts: Greg Bartelli, an American tourist, coaxed and lured Karen Salvacion, then 12 years old to go with him to his apartment. Therein, Greg Bartelli detained Karen Salvacion for four days and was able to rape the child. After policemen and people living nearby, rescued Karen, Bartelli was arrested and detained at the Makati Municipal Jail. The policemen recovered from Bartelli the following items: 1.) Dollar Check No. 368, US 3,903.20; 2.) COCOBANK Bank Book No. 104-108758-8 (Peso Acct.); 3.) Dollar Account China Banking Corp., US$/A#54105028-2; 4.) ID-122-30-8877; 5.) Philippine Money (P234.00) cash; 6.) Door Keys 6 pieces; 7.) Stuffed Doll (Teddy Bear) used in seducing the complainant. A criminal case and a civil case were filed before the RTC against Bartelli. Bartelli was able to escape from jail during a scheduled hearing for his petition for bail. The criminal case was archived. Meanwhile, in the civil case, the Judge issued an Order dated February 22, 1989 granting the application of herein petitioners, for the issuance of the writ of preliminary attachment. After petitioners gave Bond No. JCL (4) 1981 by FGU Insurance Corporation in the amount of P100,000 a Writ of Preliminary Attachment was issued by the trial court on February 28, 1989. A notice of Garnishment was issued on China Banking Corporation. The bank invoked RA 1405 andSection 113 of Central Bank Circular No. 960 to the effect that the dollar deposits or defendant Greg Bartelli are exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body, whatsoever. In an inquiry with the Central Bank, the latter said that Section 113, CB Circular No. 960 (1983) is absolute in application. It does not admit of any exception, nor has the same been repealed nor amended. Meanwhile, in the civil case, Bartelli was declared in default. The court ruled in favor of the plaintiffs and ordered Bartelli to pay moral damages, exemplary damages, attorneys fees, litigation expenses and costs. Issue: WON the Court can entertain the instant petition despite the fact that original jurisdiction in petitions for declaratory relief rests with the lower court

Held: Yes
Ratio: Petitioner deserves to receive the damages awarded to her by the court. But this petition for declaratory relief can only be entertained and treated as a petition for mandamus to require respondents to honor and comply with the writ of execution in Civil Case No. 89-3214. This Court has no original and exclusive jurisdiction over a petition for declaratory relief. 2 However, exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications and raises questions that should be resolved, it may be treated as one for mandamus. Issue: Should Section 113 of CB Circular No. 960 and Section 8 of R.A. 6426, as amended by P.D. 1246, otherwise known as the Foreign Currency Deposit Act be made applicable to a foreign transient? Held: No

Ratio: If Karen's sad fate had happened to anybody's own kin, it would be difficult for him to fathom how the incentive for foreign currency deposit could be more important than his child's rights to said award of damages; in this case, the victim's claim for damages from this alien who had the gall to wrong a child of tender years of a country where he is a mere visitor. This further illustrates the flaw in the
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a child of tender years of a country where he is a mere visitor. This further illustrates the flaw in the questioned provisions. It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the country's economy was in a shambles; when foreign investments were minimal and presumably, this was the reason why said statute was enacted. But the realities of the present times show that the country has recovered economically; and even if not, the questioned law still denies those entitled to due process of law for being unreasonable and oppressive. The intention of the questioned law may be good when enacted. The law failed to anticipate the iniquitous effects producing outright injustice and inequality such as the case before us. The purpose of PD 1246 in according protection against attachment, garnishment and other court process to foreign currency deposits is stated in its whereases. One of the principal purposes of the protection accorded to foreign currency deposits is "to assure the development and speedy growth of the Foreign Currency Deposit system and the Offshore Banking in the Philippines" (3rd Whereas). It is evident from the [Whereas clauses] that the Offshore Banking System and the Foreign Currency Deposit System were designed to draw deposits from foreign lenders and investors (Vide second Whereas of PD No. 1034; third Whereas of PD No. 1035). It is these deposits that are induced by the two laws and given protection and incentives by them. Obviously, the foreign currency deposit made by a transient or a tourist is not the kind of deposit encouraged by PD Nos. 1034 and 1035 and given incentives and protection by said laws because such depositor stays only for a few days in the country and, therefore, will maintain his deposit in the bank only for a short time. Bartelli, as stated, is just a tourist or a transient. He deposited his dollars with China Banking Corporation only for safekeeping during his temporary stay in the Philippines. For the reasons stated above, the Solicitor General thus submits that the dollar deposit of respondent Greg Bartelli is not entitled to the protection of Section 113 of Central Bank Circular No. 960 and PD No. 1246 against attachment, garnishment or other court processes. In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that the questioned Section 113 of Central Bank Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli. This would negate Article 10 of the New Civil Code which provides that "in case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail. "Ninguno non deue enriquecerse tortizeramente con dano de otro." Simply stated, when the statute is silent or ambiguous, this is one of those fundamental solutions that would respond to the vehement urge of conscience. It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used as a device by accused Greg Bartelli for wrongdoing, and in so doing, acquitting the guilty at the expense of the innocent. Call it what it may but is there no conflict of legal policy here? Dollar against Peso? Upholding the final and executory judgment of the lower court against the Central Bank Circular protecting the foreign depositor? Shielding or protecting the dollar deposit of a transient alien depositor against injustice to a national and victim of a crime? This situation calls for fairness against legal tyranny. We definitely cannot have both ways and rest in the belief that we have served the ends of justice.
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Agan vs. PIATCO

Wednesday, July 08, 2009 9:36 AM

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\

[2003V454ES] [1/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001D E C I S I O N
PUNO, J.: Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and the Department of Transportation and Communications (DOTC) and its Secretary from implementing the following agreements executed by the Philippine Government through the DOTC and the MIAA and the Philippine International Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2) the Amended and Restated Concession Agreement dated November 26, 1999, (3) the First Supplement to the Amended and Restated Concession Agreement dated August 27, 1999, (4) the Second Supplement to the Amended and Restated Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the Amended and Restated Concession Agreement dated June 22, 2001 (collectively, the PIATCO Contracts). The facts are as follows: In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether the present airport can cope with the traffic development up to the year 2010. The study consisted of two parts: first, traffic forecasts, capacity of existing facilities, NAIA future requirements, proposed master plans and development plans; and second, presentation of the preliminary design of the passenger terminal building. The ADP submitted a Draft Final Report to the DOTC in December 1989. Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to explore the possibility of investing in the construction and operation of a new international airport terminal. To signify their commitment to pursue the project, they formed the Asias Emerging Dragon Corp. (AEDC) which was registered with the Securities and Exchange Commission (SEC) on September 15, 1993.

On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law).[1] On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III project.
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and Awards Committee (PBAC) for the implementation of the NAIA IPT III project. On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the National Economic and Development Authority (NEDA). A revised proposal, however, was forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating Council (NEDA ICC) - Technical Board favorably endorsed the project to the ICC - Cabinet Committee which approved the same, subject to certain conditions, on January 19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project. On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an invitation for competitive or comparative proposals on AEDCs unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required to submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope should contain the Prequalification Documents, the second envelope the Technical Proposal, and the third envelope the Financial Proposal of the proponent. On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid Documents and the submission of the comparative bid proposals. Interested firms were permitted to obtain the Request for Proposal Documents beginning June 28, 1996, upon submission of a written application and payment of a non-refundable fee of P50,000.00 (US$2,000).

The Bid Documents issued by the PBAC provided among others that the proponent must have adequate capability to sustain the financing requirement for the detailed engineering, design, construction, operation, and maintenance phases of the project. The proponent would be evaluated based on its ability to provide a minimum amount of equity to the project, and its capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference on July 29, 1996. On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The following amendments were made on the Bid Documents: a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial proposal an additional percentage of gross revenue share of the Government, as follows: i. First 5 years 5.0%

ii.
iii.

Next 10 years
Next 10 years

7.5%
10.0%

b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price challenge. Proponent may offer an Annual Guaranteed Payment which need not be of equal amount, but payment of which shall start upon site possession. c. The project proponent must have adequate capability to sustain the financing requirement for the detailed engineering, design, construction, and/or operation and maintenance phases of the project as the case may be. For purposes of pre-qualification, this capability shall be measured in terms of: i. Proof of the availability of the project proponent and/or the consortium to provide the minimum amount of equity for the project; and ii. a letter testimonial from reputable banks attesting that the project proponent and/or the members of the consortium are banking with them, that the project proponent and/or the members are of good financial standing, and have adequate resources.
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financial standing, and have adequate resources. d. The basis for the prequalification shall be the proponents compliance with the minimum technical and financial requirements provided in the Bid Documents and the IRR of the BOT Law. The minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time. Said amendments shall only cover items that would not materially affect the preparation of the proponents proposal.

On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were made. Upon the request of prospective bidder Peoples Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of the BOT Law, only the proposed Annual Guaranteed Payment submitted by the challengers would be revealed to AEDC, and that the challengers technical and financial proposals would remain confidential. The PBAC also clarified that the list of revenue sources contained in Annex 4.2a of the Bid Documents was merely indicative and that other revenue sources may be included by the proponent, subject to approval by DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges denominated as Public Utility Fees would be subject to regulation, and those charges which would be actually deemed Public Utility Fees could still be revised, depending on the outcome of PBACs query on the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to the Queries of PAIRCARGO as Per Letter Dated September 3 and 10, 1996." Paircargos queries and the PBACs responses were as follows: 1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the capitalization of each member company is so structured to meet the requirements and needs of their current respective business undertaking/activities. In order to comply with this equity requirement, Paircargo is requesting PBAC to just allow each member of (sic) corporation of the Joint Venture to just execute an agreement that embodies a commitment to infuse the required capital in case the project is awarded to the Joint Venture instead of increasing each corporations current authorized capital stock just for prequalification purposes. In prequalification, the agency is interested in ones financial capability at the time of prequalification, not future or potential capability. A commitment to put up equity once awarded the project is not enough to establish that "present" financial capability. However, total financial capability of all member companies of the Consortium, to be established by submitting the respective companies audited financial statements, shall be acceptable. 2. At present, Paircargo is negotiating with banks and other institutions for the extension of a Performance Security to the joint venture in the event that the Concessions Agreement (sic) is awarded to them. However, Paircargo is being required to submit a copy of the draft concession as one of the documentary requirements. Therefore, Paircargo is requesting that theyd (sic) be furnished copy of the approved negotiated agreement between the PBAC and the AEDC at the soonest possible time. A copy of the draft Concession Agreement is included in the Bid Documents. Any material changes would be made known to prospective challengers through bid bulletins. However, a final version will be issued before the award of contract. The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required Bid Security.
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Bid Security. On September 20, 1996, the consortium composed of Peoples Air Cargo and Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On September 23, 1996, the PBAC opened the first envelope containing the prequalification documents of the Paircargo Consortium. On the following day, September 24, 1996, the PBAC prequalified the Paircargo Consortium. On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the Paircargo Consortium, which include: a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount that Security Bank could legally invest in the project; d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in the operation of a public utility. The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues raised by the latter, and that based on the documents submitted by Paircargo and the established prequalification criteria, the PBAC had found that the challenger, Paircargo, had prequalified to undertake the project. The Secretary of the DOTC approved the finding of the PBAC. The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium which contained its Technical Proposal.

On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargos financial capability, in view of the restrictions imposed by Section 21-B of the General Banking Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial Intermediaries. On October 7, 1996, AEDC again manifested its objections and requested that it be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation report where each of the issues they raised were addressed. On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo Consortium containing their respective financial proposals. Both proponents offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and to pay the government: 5% share in gross revenues for the first five years of operation, 7.5% share in gross revenues for the next ten years of operation, and 10% share in gross revenues for the last ten years of operation, in accordance with the Bid Documents. However, in addition to the foregoing, AEDC offered to pay the government a total of P135 million as guaranteed payment for 27 years while Paircargo Consortium offered to pay the government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within which to match the said bid, otherwise, the project would be awarded to Paircargo. As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDCs failure to match the
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on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDCs failure to match the proposal. On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals Co., Inc. (PIATCO). AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its objections as regards the prequalification of PIATCO.

On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval of the NEDA-ICC. On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the Chairman of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a noobjection basis, of the BOT agreement between the DOTC and PIATCO. As the ad referendum gathered only four (4) of the required six (6) signatures, the NEDA merely noted the agreement. On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.

On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO, through its President, Henry T. Go, signed the "Concession Agreement for the Build-Operate-and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III" (1997 Concession Agreement). The Government granted PIATCO the franchise to operate and maintain the said terminal during the concession period and to collect the fees, rentals and other charges in accordance with the rates or schedules stipulated in the 1997 Concession Agreement. The Agreement provided that the concession period shall be for twenty-five (25) years commencing from the in-service date, and may be renewed at the option of the Government for a period not exceeding twenty-five (25) years. At the end of the concession period, PIATCO shall transfer the development facility to MIAA. On November 26, 1998, the Government and PIATCO signed an Amended and Restated Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that were amended by the ARCA were: Sec. 1.11 pertaining to the definition of "certificate of completion"; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the assignment by Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires insurance; Sec. 5.10 with respect to the temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts that may be levied on the Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility fees and charges; the entire Article VIII concerning the provisions on the termination of the contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute or controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000; and the Third Supplement on June 22, 2001 (collectively, Supplements). The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining "Revenues" or "Gross Revenues"; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for the upkeep, maintenance, repair and/or replacement of all airport facilities and equipment which are owned or operated by MIAA; and further providing additional special obligations on the part of GRP aside from those already enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided a

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stipulation as regards the construction of a surface road to connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing Runway 13/31; the swapping of obligations between GRP and PIATCO regarding the improvement of Sales Road; and the changes in the timetable. It also amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal, demolition or disposal of subterranean structures uncovered or discovered at the site of the construction of the terminal by the Concessionaire. It defined the scope of works; it provided for the procedure for the demolition of the said structures and the consideration for the same which the GRP shall pay PIATCO; it provided for time extensions, incremental and consequential costs and losses consequent to the existence of such structures; and it provided for some additional obligations on the part of PIATCO as regards the said structures. Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the construction of the surface road connecting Terminals II and III. Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA Terminals I and II, had existing concession contracts with various service providers to offer international airline airport services, such as in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing, and other services, to several international airlines at the NAIA. Some of these service providers are the Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group. Miascor, DNATA and MacroAsia, together with Philippine Airlines (PAL), are the dominant players in the industry with an aggregate market share of 70%.

On September 17, 2002, the workers of the international airline service providers, claiming that they stand to lose their employment upon the implementation of the questioned agreements, filed before this Court a petition for prohibition to enjoin the enforcement of said agreements.[2]
On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a motion for intervention and a petition-in-intervention.

On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a similar petition with this Court.[3] On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality of the various agreements.[4]
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as Respondents-Intervenors. They filed their Comment-In-Intervention defending the validity of the assailed agreements and praying for the dismissal of the petitions. During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacaang Palace, stated that she will not "honor (PIATCO) contracts which the Executive Branchs legal offices have concluded (as) null and void."[5]

Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002. The Office of the Solicitor General and the Office of the Government Corporate Counsel filed their respective Comments in behalf of the public respondents. On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the Court
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On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the Court then resolved in open court to require the parties to file simultaneously their respective Memoranda in amplification of the issues heard in the oral arguments within 30 days and to explore the possibility of arbitration or mediation as provided in the challenged contracts.

In their consolidated Memorandum, the Office of the Solicitor General and the Office of the Government Corporate Counsel prayed that the present petitions be given due course and that judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the Supplements thereto void for being contrary to the Constitution, the BOT Law and its Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO commenced arbitration proceedings before the International Chamber of Commerce, International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of the ICC against the Government of the Republic of the Philippines acting through the DOTC and MIAA.

In the present cases, the Court is again faced with the task of resolving complicated issues made difficult by their intersecting legal and economic implications. The Court is aware of the far reaching fall out effects of the ruling which it makes today. For more than a century and whenever the exigencies of the times demand it, this Court has never shirked from its solemn duty to dispense justice and resolve "actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction."[6] To be sure, this Court will not begin to do otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will bar the resolution of the instant controversy. Petitioners Legal Standing to File the present Petitions a. G.R. Nos. 155001 and 155661

In G.R. No. 155001 individual petitioners are employees of various service providers[7] having separate concession contracts with MIAA and continuing service agreements with various international airlines to provide in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing and other services. Also included as petitioners are labor unions MIASCOR Workers Union-National Labor Union and Philippine Airlines Employees Association. These petitioners filed the instant action for prohibition as taxpayers and as parties whose rights and interests stand to be violated by the implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing and other services to several international airlines at the Ninoy Aquino International Airport. Petitioners-Intervenors allege that as tax-paying international airline and airport-related service operators, each one of them stands to be irreparably injured by the implementation of the PIATCO Contracts. Each of the petitionersintervenors have separate and subsisting concession agreements with MIAA and with various international airlines which they allege are being interfered with and violated by respondent PIATCO. In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive bargaining agent of all the employees in MIAA. Petitioners anchor their petition for prohibition on the nullity of the contracts entered into by the Government and PIATCO regarding the build-operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in the
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III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in the implementation of the PIATCO Contracts. Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which directly contravene numerous provisions of the Constitution, specific provisions of the BOT Law and its Implementing Rules and Regulations, and public policy. Petitioners contend that the DOTC and the MIAA, by entering into said contracts, have committed grave abuse of discretion amounting to lack or excess of jurisdiction which can be remedied only by a writ of prohibition, there being no plain, speedy or adequate remedy in the ordinary course of law. In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA which grant PIATCO the exclusive right to operate a commercial international passenger terminal within the Island of Luzon, except those international airports already existing at the time of the execution of the agreement. The contracts further provide that upon the commencement of operations at the NAIA IPT III, the Government shall cause the closure of Ninoy Aquino International Airport Passenger Terminals I and II as international passenger terminals. With respect to existing concession agreements between MIAA and international airport service providers regarding certain services or operations, the 1997 Concession Agreement and the ARCA uniformly provide that such services or operations will not be carried over to the NAIA IPT III and PIATCO is under no obligation to permit such carry over except through a separate agreement duly entered into with PIATCO.[8] With respect to the petitioning service providers and their employees, upon the commencement of operations of the NAIA IPT III, they allege that they will be effectively barred from providing international airline airport services at the NAIA Terminals I and II as all international airlines and passengers will be diverted to the NAIA IPT III. The petitioning service providers will thus be compelled to contract with PIATCO alone for such services, with no assurance that subsisting contracts with MIAA and other international airlines will be respected. Petitioning service providers stress that despite the very competitive market, the substantial capital investments required and the high rate of fees, they entered into their respective contracts with the MIAA with the understanding that the said contracts will be in force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning service providers to recoup their investments and obtain a reasonable return thereon. Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on the other hand allege that with the closure of the NAIA Terminals I and II as international passenger terminals under the PIATCO Contracts, they stand to lose employment. The question on legal standing is whether such parties have "alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions."[9] Accordingly, it has been held that the interest of a person assailing the constitutionality of a statute must be direct and personal. He must be able to show, not only that the law or any government act is invalid, but also that he sustained or is in imminent danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers thereby in some indefinite way. It must appear that the person complaining has been or is about to be denied some right or privilege to which he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act complained of.[10]

We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners have a direct and substantial interest to protect by reason of the implementation of the PIATCO Contracts. They stand to lose their source of livelihood, a property right which is zealously protected by the Constitution. Moreover, subsisting concession agreements between MIAA and petitioners-intervenors and service contracts between international airlines and petitioners-intervenors stand to be nullified or terminated by the operation of the NAIA IPT III under the PIATCO Contracts. The financial prejudice brought about by the PIATCO Contracts on petitioners and petitioners-intervenors in these cases are legitimate interests sufficient to confer on them the requisite standing to file the instant petitions.
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interests sufficient to confer on them the requisite standing to file the instant petitions.

b. G.R. No. 155547

In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of Representatives, citizens and taxpayers. They allege that as members of the House of Representatives, they are especially interested in the PIATCO Contracts, because the contracts compel the Government and/or the House of Representatives to appropriate funds necessary to comply with the provisions therein.[11] They cite provisions of the PIATCO Contracts which require disbursement of unappropriated amounts in compliance with the contractual obligations of the Government. They allege that the Government obligations in the PIATCO Contracts which compel government expenditure without appropriation is a curtailment of their prerogatives as legislators, contrary to the mandate of the Constitution that "[n]o money shall be paid out of the treasury except in pursuance of an appropriation made by law."[12] Standing is a peculiar concept in constitutional law because in some cases, suits are not brought by parties who have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest. Although we are not unmindful of the cases of Imus Electric Co. v. Municipality of Imus[13] and Gonzales v. Raquiza[14] wherein this Court held that appropriation must be made only on amounts immediately demandable, public interest demands that we take a more liberal view in determining whether the petitioners suing as legislators, taxpayers and citizens have locus standi to file the instant petition. In Kilosbayan, Inc. v. Guingona,[15] this Court held "[i]n line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of Congress, and even association of planters, and non-profit civic organizations were allowed to initiate and prosecute actions before this Court to question the constitutionality or validity of laws, acts, decisions, rulings, or orders of various government agencies or instrumentalities."[16] Further, "insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of discretion as to whether or not it should be entertained."[17] As such ". . . even if, strictly speaking, they [the petitioners] are not covered by the definition, it is still within the wide discretion of the Court to waive the requirement and so remove the impediment to its addressing and resolving the serious constitutional questions raised."[18] In view of the serious legal questions involved and their impact on public interest, we resolve to grant standing to the petitioners.

Other Procedural Matters

Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO alleges that submission of this controversy to this Court at the first instance is a violation of the rule on hierarchy of courts. They contend that trial courts have concurrent jurisdiction with this Court with respect to a special civil action for prohibition and hence, following the rule on hierarchy of courts, resort must first be had before the trial courts. After a thorough study and careful evaluation of the issues involved, this Court is of the view that the crux of the instant controversy involves significant legal questions. The facts necessary to resolve these legal questions are well established and, hence, need not be determined by a trial court. The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the cases at bar. The said rule may be relaxed when the redress desired cannot be obtained in the appropriate courts or where exceptional and compelling circumstances justify availment of a remedy within and calling for the exercise of this Courts primary jurisdiction.*19+

It is easy to discern that exceptional circumstances exist in the cases at bar that call for the relaxation of the rule. Both petitioners and respondents agree that these cases are of transcendental importance as they involve the construction and operation of the countrys premier international airport. Moreover, the crucial issues submitted for resolution are of first impression and they entail the proper legal
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the crucial issues submitted for resolution are of first impression and they entail the proper legal interpretation of key provisions of the Constitution, the BOT Law and its Implementing Rules and Regulations. Thus, considering the nature of the controversy before the Court, procedural bars may be lowered to give way for the speedy disposition of the instant cases.

Legal Effect of the Commencement

of Arbitration Proceedings by

PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this Court of its jurisdiction over the cases at bar.

In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the arbitration clause in the Distributorship Agreement in question is valid and the dispute between the parties is arbitrable, this Court affirmed the trial courts decision denying petitioners Motion to Suspend Proceedings pursuant to the arbitration clause under the contract. In so ruling, this Court held that as contracts produce legal effect between the parties, their assigns and heirs, only the parties to the Distributorship Agreement are bound by its terms, including the arbitration clause stipulated therein. This Court ruled that arbitration proceedings could be called for but only with respect to the parties to the contract in question. Considering that there are parties to the case who are neither parties to the Distributorship Agreement nor heirs or assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal Realty Corporation,[21] held that to tolerate the splitting of proceedings by allowing arbitration as to some of the parties on the one hand and trial for the others on the other hand would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary delay.[22] Thus, we ruled that the interest of justice would best be served if the trial court hears and adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented legitimate interests in the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they cannot be bound by the arbitration clause provided for in the ARCA and hence, cannot be compelled to submit to arbitration proceedings. A speedy and decisive resolution of all the critical issues in the present controversy, including those raised by petitioners, cannot be made before an arbitral tribunal. The object of arbitration is precisely to allow an expeditious determination of a dispute. This objective would not be met if this Court were to allow the parties to settle the cases by arbitration as there are certain issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not be equipped to resolve. Now, to the merits of the instant controversy. I Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a duly prequalified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to meet the financial capability required under the BOT Law and the Bid Documents. They allege that in computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the project, the entire net worth of Security Bank, a member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a
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by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the project. The said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the Paircargo Consortium on the ground that it does not have the financial resources to put up the required minimum equity of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as amended or the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount more than 15% of its net worth. In the said Memorandum, Undersecretary Cal opined:

The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial capability will be evaluated based on total financial capability of all the member companies of the [Paircargo] Consortium. In this connection, the Challenger was found to have a combined net worth of P3,926,421,242.00 that could support a project costing approximately P13 Billion.
It is not a requirement that the net worth must be "unrestricted." To impose that as a requirement now will be nothing less than unfair. The financial statement or the net worth is not the sole basis in establishing financial capability. As stated in Bid Bulletin No. 3, financial capability may also be established by testimonial letters issued by reputable banks. The Challenger has complied with this requirement. To recap, net worth reflected in the Financial Statement should not be taken as the amount of the money to be used to answer the required thirty percent (30%) equity of the challenger but rather to be used in establishing if there is enough basis to believe that the challenger can comply with the required 30% equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract (Section 12.1 IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the same document).[23] Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be awarded to the bidder "who, having satisfied the minimum financial, technical, organizational and legal standards" required by the law, has submitted the lowest bid and most favorable terms of the project.[24] Further, the 1994 Implementing Rules and Regulations of the BOT Law provide: Section 5.4 Pre-qualification Requirements. . c. Financial Capability: The project proponent must have adequate capability to sustain the financing requirements for the detailed engineering design, construction and/or operation and maintenance phases of the project, as the case may be. For purposes of pre-qualification, this capability shall be measured in terms of (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. The government agency/LGU concerned shall determine on a project-to-project basis and before pre-qualification, the minimum amount of equity needed. (emphasis supplied) Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996 amending the financial capability requirements for pre-qualification of the project proponent as follows: 6. Basis of Pre-qualification

The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical and financial requirements provided in the Bid Documents and in the IRR of the BOT Law, R.A. No. 6957, as amended by R.A. 7718.

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No. 6957, as amended by R.A. 7718. The minimum amount of equity to which the proponents financial capability will be based shall be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project financing should not exceed 70% of the actual project cost. Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to undertake the project in the minimum amount of 30% of the project cost through (i) proof of the ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. As the minimum project cost was estimated to be US$350,000,000.00 or roughly P9,183,650,000.00,[25] the Paircargo Consortium had to show to the satisfaction of the PBAC that it had the ability to provide the minimum equity for the project in the amount of at least P2,755,095,000.00. Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth of P2,783,592.00 and P3,123,515.00 respectively.*26+ PAGS Audited Financial Statements as of 1995 indicate that it has approximately P26,735,700.00 to invest as its equity for the project.[27] Security Banks Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the amount of P3,523,504,377.00.[28] We agree with public respondents that with respect to Security Bank, the entire amount of its net worth could not be invested in a single undertaking or enterprise, whether allied or non-allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act: Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary Board, whenever it shall deem appropriate and necessary to further national development objectives or support national priority projects, may authorize a commercial bank, a bank authorized to provide commercial banking services, as well as a government-owned and controlled bank, to operate under an expanded commercial banking authority and by virtue thereof exercise, in addition to powers authorized for commercial banks, the powers of an Investment House as provided in Presidential Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services: Provided, That (a) the total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank; (b) the equity investment in any one enterprise whether allied or nonallied shall not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the bank, or of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the equity investment in other banks shall be deducted from the investing bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets. ,,,.

Further, the 1993 Manual of Regulations for Banks provides:

SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also apply regarding equity investments of banks. a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec. X121.5.
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Subsec. X121.5. Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the Paircargo Consortium, after considering the maximum amounts that may be validly invested by each of its members is P558,384,871.55 or only 6.08% of the project cost,[29] an amount substantially less than the prescribed minimum equity investment required for the project in the amount of P2,755,095,000.00 or 30% of the project cost. The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity, the ability of the bidder to undertake the project. Thus, with respect to the bidders financial capacity at the pre-qualification stage, the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder may invest in the project at the time of pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine the maximum amounts that each member of the consortium may commit for the construction, operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to Security Bank, the maximum amount which may be invested by it would only be 15% of its net worth in view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the project. Further, the determination of whether or not a bidder is pre-qualified to undertake the project requires an evaluation of the financial capacity of the said bidder at the time the bid is submitted based on the required documents presented by the bidder. The PBAC should not be allowed to speculate on the future financial ability of the bidder to undertake the project on the basis of documents submitted. This would open doors to abuse and defeat the very purpose of a public bidding. This is especially true in the case at bar which involves the investment of billions of pesos by the project proponent. The relevant government authority is duty-bound to ensure that the awardee of the contract possesses the minimum required financial capability to complete the project. To allow the PBAC to estimate the bidders future financial capability would not secure the viability and integrity of the project. A restrictive and conservative application of the rules and procedures of public bidding is necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the financial and technical reliability of the project. It has been held that:

The basic rule in public bidding is that bids should be evaluated based on the required documents submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the bidding process is the only safeguard to a fair, honest and competitive public bidding.[30]
Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualified. Considering that at the pre-qualification stage, the maximum amounts which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void. While it would be proper at this juncture to end the resolution of the instant controversy, as the legal effects of the disqualification of respondent PIATCOs predecessor would come into play and necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of the project, the Court
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result in the nullity of all the subsequent contracts entered by it in pursuance of the project, the Court feels that it is necessary to discuss in full the pressing issues of the present controversy for a complete resolution thereof.
II Is the 1997 Concession Agreement valid? Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it contains provisions that substantially depart from the draft Concession Agreement included in the Bid Documents. They maintain that a substantial departure from the draft Concession Agreement is a violation of public policy and renders the 1997 Concession Agreement null and void. PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is intended to be a draft, i.e., subject to change, alteration or modification, and that this intention was clear to all participants, including AEDC, and DOTC/MIAA. It argued further that said intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states: 6. Amendments to the Draft Concessions Agreement Amendments to the Draft Concessions Agreement shall be issued from time to time. Said amendments shall only cover items that would not materially affect the preparation of the proponents proposal.

By its very nature, public bidding aims to protect the public interest by giving the public the best possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law, competition requires, not only `bidding upon a common standard, a common basis, upon the same thing, the same subject matter, the same undertaking,' but also that it be legitimate, fair and honest; and not designed to injure or defraud the government.[31] An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not simply in terms of application of the procedural rules and regulations imposed by the relevant government agency, but more importantly, on the contract bidded upon. Each bidder must be able to bid on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or modify certain provisions in the contract awarded such that the contract is altered in any material respect, then the essence of fair competition in the public bidding is destroyed. A public bidding would indeed be a farce if after the contract is awarded, the winning bidder may modify the contract and include provisions which are favorable to it that were not previously made available to the other bidders. Thus: It is inherent in public biddings that there shall be a fair competition among the bidders. The specifications in such biddings provide the common ground or basis for the bidders. The specifications should, accordingly, operate equally or indiscriminately upon all bidders.[32] The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:

The law is well settled that where, as in this case, municipal authorities can only let a contract for public work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to permit free and full competition. Nor can they enter into a contract with the best bidder containing substantial provisions beneficial to him, not included or contemplated in the terms and specifications upon which the bids were invited.[33]
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft concession agreement is subject to amendment, the pertinent portion of which was quoted above, the PBAC also
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agreement is subject to amendment, the pertinent portion of which was quoted above, the PBAC also clarified that "[s]aid amendments shall only cover items that would not materially affect the preparation of the proponents proposal." While we concede that a winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. Hence, the determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether the contract, when taken as a whole, would contain substantially different terms and conditions that would have the effect of altering the technical and/or financial proposals previously submitted by other bidders. The alterations and modifications in the contract executed between the government and the winning bidder must be such as to render such executed contract to be an entirely different contract from the one that was bidded upon. In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,[34] this Court quoted with approval the ruling of the trial court that an amendment to a contract awarded through public bidding, when such subsequent amendment was made without a new public bidding, is null and void:

The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract after public bidding is a limitation upon the right of the contracting parties to alter or amend it without another public bidding, for otherwise what would a public bidding be good for if after the execution of a contract after public bidding, the contracting parties may alter or amend the contract, or even cancel it, at their will? Public biddings are held for the protection of the public, and to give the public the best possible advantages by means of open competition between the bidders. He who bids or offers the best terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible advantages to the public will disappear if the parties to a contract executed after public bidding may alter or amend it without another previous public bidding.[35]
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same agreement that was offered for public bidding, i.e., the draft Concession Agreement attached to the Bid Documents? A close comparison of the draft Concession Agreement attached to the Bid Documents and the 1997 Concession Agreement reveals that the documents differ in at least two material respects: a. Modification on the Public Utility Revenues and Non-Public Utility Revenues that may be

collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession Agreement and the 1997 Concession Agreement may be classified into three distinct categories: (1) fees which are subject to periodic adjustment of once every two years in accordance with a prescribed parametric formula and adjustments are made effective only upon written approval by MIAA; (2) fees other than those included in the first category which maybe adjusted by PIATCO whenever it deems necessary without need for consent of DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as amended. The glaring distinctions between the draft Concession Agreement and the 1997 Concession Agreement lie in the types of fees included in each category and the extent of the supervision and regulation which MIAA is allowed to exercise in relation thereto.

For fees under the first category, i.e., those which are subject to periodic adjustment in accordance with
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For fees under the first category, i.e., those which are subject to periodic adjustment in accordance with a prescribed parametric formula and effective only upon written approval by MIAA, the draft Concession Agreement includes the following:[36] (1) aircraft parking fees; (2) aircraft tacking fees; (3) groundhandling fees; (4) rentals and airline offices; (5) check-in counter rentals; and (6) porterage fees.

Under the 1997 Concession Agreement, fees which are subject to adjustment and effective upon MIAA approval are classified as "Public Utility Revenues" and include:[37]
(1) aircraft parking fees; (2) aircraft tacking fees;

(3) check-in counter fees; and

(4) Terminal Fees.

The implication of the reduced number of fees that are subject to MIAA approval is best appreciated in relation to fees included in the second category identified above. Under the 1997 Concession Agreement, fees which PIATCO may adjust whenever it deems necessary without need for consent of DOTC/MIAA are "Non-Public Utility Revenues" and is defined as "all other income not classified as Public Utility Revenues derived from operations of the Terminal and the Terminal Complex."[38] Thus, under the 1997 Concession Agreement, groundhandling fees, rentals from airline offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be imposed by PIATCO. Such regulation may be made by periodic adjustment and is effective only upon written approval of MIAA. The full text of said provision is quoted below: Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees, aircraft tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals and porterage fees shall be allowed only once every two years and in accordance with the Parametric Formula attached hereto as Annex F. Provided that adjustments shall be made effective only after the written express approval of the MIAA. Provided, further, that such approval of the MIAA, shall be contingent only on the conformity of the adjustments with the above said parametric formula. The first adjustment shall be made prior to the In-Service Date of the Terminal.

The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of Section 6.01 if in its judgment the users of the airport shall be deprived of a free option for the services they cover.[39]
On the other hand, the equivalent provision under the 1997 Concession Agreement reads: Section 6.03 Periodic Adjustment in Fees and Charges.
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Section 6.03 Periodic Adjustment in Fees and Charges.

.
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and justify the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable deprivation of End Users of such services.[40] Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to explain and justify the fees set by PIATCO. In the draft Concession Agreement, vehicular parking fee is subject to MIAA regulation and approval under the second paragraph of Section 6.03 thereof while porterage fee is covered by the first paragraph of the same provision. There is an obvious relaxation of the extent of control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO. Moreover, with respect to the third category of fees that may be imposed and collected by PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I, under Section 6.03 of the draft Concession Agreement MIAA has reserved the right to regulate the same under the same conditions that MIAA may regulate fees under the first category, i.e., periodic adjustment of once every two years in accordance with a prescribed parametric formula and effective only upon written approval by MIAA. However, under the 1997 Concession Agreement, adjustment of fees under the third category is not subject to MIAA regulation. With respect to terminal fees that may be charged by PIATCO,[41] as shown earlier, this was included within the category of "Public Utility Revenues" under the 1997 Concession Agreement. This classification is significant because under the 1997 Concession Agreement, "Public Utility Revenues" are subject to an "Interim Adjustment" of fees upon the occurrence of certain extraordinary events specified in the agreement.[42] However, under the draft Concession Agreement, terminal fees are not included in the types of fees that may be subject to "Interim Adjustment."[43] Finally, under the 1997 Concession Agreement, "Public Utility Revenues," except terminal fees, are denominated in US Dollars[44] while payments to the Government are in Philippine Pesos. In the draft Concession Agreement, no such stipulation was included. By stipulating that "Public Utility Revenues" will be paid to PIATCO in US Dollars while payments by PIATCO to the Government are in Philippine currency under the 1997 Concession Agreement, PIATCO is able to enjoy the benefits of depreciations of the Philippine Peso, while being effectively insulated from the detrimental effects of exchange rate fluctuations. When taken as a whole, the changes under the 1997 Concession Agreement with respect to reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect, clearly gives PIATCO more favorable terms than what was available to other bidders at the time the contract was bidded out. It is not very difficult to see that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for PIATCO which were not available at the time the contract was offered for bidding. It cannot be denied that under the 1997 Concession Agreement only "Public Utility Revenues" are subject to MIAA regulation. Adjustments of all other fees imposed and collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the 1997 Concession Agreement, the same is further subject to "Interim Adjustments" not previously stipulated in the draft Concession Agreement. Finally, the change in the currency stipulated for "Public Utility Revenues" under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit
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Revenues" under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit which was not available at the time of bidding.
b. Assumption by the Government of the liabilities of PIATCO in the event of the latters

default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors who have provided, loaned or advanced funds for the NAIA IPT III project does not result in the assumption by the Government of these liabilities. In fact, nowhere in the said contract does default of PIATCOs loans figure in the agreement. Such default does not directly result in any concomitant right or obligation in favor of the Government. However, the 1997 Concession Agreement provides: Section 4.04 . Assignment.

(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire and operator of the Development Facility in accordance with the terms and conditions hereof, or designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of this Agreement; Provided that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall form and organize a concession company qualified to take over the operation of the Development Facility. If the concession company should elect to designate an operator for the Development Facility, the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs written notice. If the concession company, acting in good faith and with due diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. The term "Attendant Liabilities" under the 1997 Concession Agreement is defined as: Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors. Under the above quoted portions of Section 4.04 in relation to the definition of "Attendant Liabilities," default by PIATCO of its loans used to finance the NAIA IPT III project triggers the occurrence of certain
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default by PIATCO of its loans used to finance the NAIA IPT III project triggers the occurrence of certain events that leads to the assumption by the Government of the liability for the loans. Only in one instance may the Government escape the assumption of PIATCOs liabilities, i.e., when the Government so elects and allows a qualified operator to take over as Concessionaire. However, this circumstance is dependent on the existence and availability of a qualified operator who is willing to take over the rights and obligations of PIATCO under the contract, a circumstance that is not entirely within the control of the Government. Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04 of the 1997 Concession Agreement may be considered a form of security for the loans PIATCO has obtained to finance the project, an option that was not made available in the draft Concession Agreement. Section 4.04 is an important amendment to the 1997 Concession Agreement because it grants PIATCO a financial advantage or benefit which was not previously made available during the bidding process. This financial advantage is a significant modification that translates to better terms and conditions for PIATCO.

PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft Concession Agreement is subject to amendment because the Bid Documents permit financing or borrowing. They claim that it was the lenders who proposed the amendments to the draft Concession Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the project proponent or the winning bidder to obtain financing for the project, especially in this case which involves the construction, operation and maintenance of the NAIA IPT III. Expectedly, compliance by the project proponent of its undertakings therein would involve a substantial amount of investment. It is therefore inevitable for the awardee of the contract to seek alternate sources of funds to support the project. Be that as it may, this Court maintains that amendments to the contract bidded upon should always conform to the general policy on public bidding if such procedure is to be faithful to its real nature and purpose. By its very nature and characteristic, competitive public bidding aims to protect the public interest by giving the public the best possible advantages through open competition.[45] It has been held that the three principles in public bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a basis for the exact comparison of bids. A regulation of the matter which excludes any of these factors destroys the distinctive character of the system and thwarts the purpose of its adoption.[46] These are the basic parameters which every awardee of a contract bidded out must conform to, requirements of financing and borrowing notwithstanding. Thus, upon a concrete showing that, as in this case, the contract signed by the government and the contract-awardee is an entirely different contract from the contract bidded, courts should not hesitate to strike down said contract in its entirety for violation of public policy on public bidding. A strict adherence on the principles, rules and regulations on public bidding must be sustained if only to preserve the integrity and the faith of the general public on the procedure. Public bidding is a standard practice for procuring government contracts for public service and for furnishing supplies and other materials. It aims to secure for the government the lowest possible price under the most favorable terms and conditions, to curtail favoritism in the award of government contracts and avoid suspicion of anomalies and it places all bidders in equal footing.[47] Any government action which permits any substantial variance between the conditions under which the bids are invited and the contract executed after the award thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which warrants proper judicial action. In view of the above discussion, the fact that the foregoing substantial amendments were made on the 1997 Concession Agreement renders the same null and void for being contrary to public policy. These amendments convert the 1997 Concession Agreement to an entirely different agreement from the contract bidded out or the draft Concession Agreement. It is not difficult to see that the amendments on (1) the types of fees or charges that are subject to MIAA regulation or control and the extent thereof

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and (2) the assumption by the Government, under certain conditions, of the liabilities of PIATCO directly translates concrete financial advantages to PIATCO that were previously not available during the bidding process. These amendments cannot be taken as merely supplements to or implementing provisions of those already existing in the draft Concession Agreement. The amendments discussed above present new terms and conditions which provide financial benefit to PIATCO which may have altered the technical and financial parameters of other bidders had they known that such terms were available.
III

Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement provides: Section 4.04 Assignment

.
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. GRP shall within one hundred eighty (180) days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as concessionaire and operator of the Development facility in accordance with the terms and conditions hereof, or designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of this Agreement; Provided, that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities. (c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall form and organize a concession company qualified to takeover the operation of the Development Facility. If the concession company should elect to designate an operator for the Development Facility, the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs written notice. If the concession company, acting in good faith and with due diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. . Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.[48]
It is clear from the above-quoted provisions that Government, in the event that PIATCO defaults in its loan obligations, is obligated to pay "all amounts recorded and from time to time outstanding from the books" of PIATCO which the latter owes to its creditors.[49] These amounts include "all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses."*50+ This obligation of the Government to pay PIATCOs creditors upon PIATCOs default
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expenses."*50+ This obligation of the Government to pay PIATCOs creditors upon PIATCOs default would arise if the Government opts to take over NAIA IPT III. It should be noted, however, that even if the Government chooses the second option, which is to allow PIATCOs unpaid creditors operate NAIA IPT III, the Government is still at a risk of being liable to PIATCOs creditors should the latter be unable to designate a qualified operator within the prescribed period.[51] In effect, whatever option the Government chooses to take in the event of PIATCOs failure to fulfill its loan obligations, the Government is still at a risk of assuming PIATCOs outstanding loans. This is due to the fact that the Government would only be free from assuming PIATCOs debts if the unpaid creditors would be able to designate a qualified operator within the period provided for in the contract. Thus, the Governments assumption of liability is virtually out of its control. The Government under the circumstances provided for in the 1997 Concession Agreement is at the mercy of the existence, availability and willingness of a qualified operator. The above contractual provisions constitute a direct government guarantee which is prohibited by law. One of the main impetus for the enactment of the BOT Law is the lack of government funds to construct the infrastructure and development projects necessary for economic growth and development. This is why private sector resources are being tapped in order to finance these projects. The BOT law allows the private sector to participate, and is in fact encouraged to do so by way of incentives, such as minimizing the unstable flow of returns,[52] provided that the government would not have to unnecessarily expend scarcely available funds for the project itself. As such, direct guarantee, subsidy and equity by the government in these projects are strictly prohibited.[53] This is but logical for if the government would in the end still be at a risk of paying the debts incurred by the private entity in the BOT projects, then the purpose of the law is subverted. Section 2(n) of the BOT Law defines direct guarantee as follows:

(n) Direct government guarantee An agreement whereby the government or any of its agencies or local government units assume responsibility for the repayment of debt directly incurred by the project proponent in implementing the project in case of a loan default. Clearly by providing that the Government "assumes" the attendant liabilities, which consists of PIATCOs unpaid debts, the 1997 Concession Agreement provided for a direct government guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It is of no moment that the relevant sections are subsumed under the title of "assignment". The provisions providing for direct government guarantee which is prohibited by law is clear from the terms thereof.
The fact thet the ARCA superseded the 1997 Concession Agreement did not cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides: Section 4.04 Security . (c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia, to the following parameters: . (iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to any other rights of the Senior Lenders or any Senior Lenders agent may have (including without limitation under security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a
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security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a nominee which is qualified under sub-clause (viii)(y) below to operate the Development Facility [NAIA Terminal 3+ or transfer the Concessionaires *PIATCO+ rights and obligations under this Agreement to a transferee which is qualified under sub-clause (viii) below;

.
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above, then GRP and the Senior Lenders shall endeavor in good faith to enter into any other arrangement relating to the Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180) days. If no agreement relating to the Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180day period, then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon the transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto; .

Section 1.06.

Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any other persons or entities who have provided, loaned, or advanced funds or provided financial facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all principal, interest, associated fees, charges, reimbursements, and other related expenses (including the fees, charges and expenses of any agents or trustees of such persons or entities), whether payable at maturity, by acceleration or otherwise, and further including amounts owed by Concessionaire [PIATCO] to its professional consultants and advisers, suppliers, contractors and sub-contractors.[54] It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and enter into an agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to appoint a qualified nominee or transferee who will take the place of PIATCO. If the Senior Lenders and the Government are unable to enter into an agreement after the prescribed period, the Government must then pay PIATCO, upon transfer of NAIA IPT III to the Government, termination payment equal to the appraised value of the project or the value of the attendant liabilities whichever is greater. Attendant liabilities as defined in the ARCA includes all amounts owed or thereafter may be owed by PIATCO not only to the Senior Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who may have loaned, advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT III. The amount of PIATCOs debt that the Government would have to pay as a result of PIATCOs default in its loan obligations -- in case no qualified nominee or transferee is appointed by the Senior Lenders and no other agreement relating to NAIA IPT III has been reached between the Government and the Senior Lenders -- includes, but is not limited to, "all principal, interest, associated fees, charges, reimbursements, and other related expenses . . . whether payable at maturity, by acceleration or otherwise."[55]

It is clear from the foregoing that the ARCA provides for a direct guarantee by the government to pay PIATCOs loans not only to its Senior Lenders but all other entities who provided PIATCO funds or services upon PIATCOs default in its loan obligation with its Senior Lenders. The fact that the Governments obligation to pay PIATCOs lenders for the latters obligation would only arise after the
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Governments obligation to pay PIATCOs lenders for the latters obligation would only arise after the Senior Lenders fail to appoint a qualified nominee or transferee does not detract from the fact that, should the conditions as stated in the contract occur, the ARCA still obligates the Government to pay any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT III. Worse, the conditions that would make the Government liable for PIATCOs debts is triggered by PIATCOs own default of its loan obligations to its Senior Lenders to which loan contracts the Government was never a party to. The Government was not even given an option as to what course of action it should take in case PIATCO defaulted in the payment of its senior loans. The Government, upon PIATCOs default, would be merely notified by the Senior Lenders of the same and it is the Senior Lenders who are authorized to appoint a qualified nominee or transferee. Should the Senior Lenders fail to make such an appointment, the Government is then automatically obligated to "directly deal and negotiate" with the Senior Lenders regarding NAIA IPT III. The only way the Government would not be liable for PIATCOs debt is for a qualified nominee or transferee to be appointed in place of PIATCO to continue the construction, operation and maintenance of NAIA IPT III. This "pre-condition", however, will not take the contract out of the ambit of a direct guarantee by the government as the existence, availability and willingness of a qualified nominee or transferee is totally out of the governments control. As such the Government is virtually at the mercy of PIATCO (that it would not default on its loan obligations to its Senior Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or agree to some other arrangement with the Government) and the existence of a qualified nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT III. The proscription against government guarantee in any form is one of the policy considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the Government to pay for all loans, advances and obligations arising out of financial facilities extended to PIATCO for the implementation of the NAIA IPT III project should PIATCO default in its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee or transferee. This in effect would make the Government liable for PIATCOs loans should the conditions as set forth in the ARCA arise. This is a form of direct government guarantee. The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a BOT project may be accepted, the following conditions must first be met: (1) the project involves a new concept in technology and/or is not part of the list of priority projects, (2) no direct government guarantee, subsidy or equity is required, and (3) the government agency or local government unit has invited by publication other interested parties to a public bidding and conducted the same.[56] The failure to meet any of the above conditions will result in the denial of the proposal. It is further provided that the presence of direct government guarantee, subsidy or equity will "necessarily disqualify a proposal from being treated and accepted as an unsolicited proposal."[57] The BOT Law clearly and strictly prohibits direct government guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of a provision to that effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a proposal can be denied by reason of the existence of direct government guarantee, then its inclusion in the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract itself. A prohibited provision, the inclusion of which would result in the denial of a proposal cannot, and should not, be allowed to later on be inserted in the contract resulting from the said proposal. The basic rules of justice and fair play alone militate against such an occurrence and must not, therefore, be countenanced particularly in this instance where the government is exposed to the risk of shouldering hundreds of million of dollars in debt.

This Court has long and consistently adhered to the legal maxim that those that cannot be done directly cannot be done indirectly.[58] To declare the PIATCO contracts valid despite the clear statutory prohibition against a direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent -- which is to expose the government to the risk of incurring a monetary obligation resulting from a contract of loan between the project proponent and its lenders and to which the Government is not a party to -- but would also render the BOT Law useless for what it seeks to achieve -to make use of the resources of the private sector in the "financing, operation and maintenance of infrastructure and development projects"[59] which are necessary for national growth and development
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infrastructure and development projects"[59] which are necessary for national growth and development but which the government, unfortunately, could ill-afford to finance at this point in time. IV Temporary takeover of business affected with public interest Article XII, Section 17 of the 1987 Constitution provides:

Section 17. In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest.
The above provision pertains to the right of the State in times of national emergency, and in the exercise of its police power, to temporarily take over the operation of any business affected with public interest. In the 1986 Constitutional Commission, the term "national emergency" was defined to include threat from external aggression, calamities or national disasters, but not strikes "unless it is of such proportion that would paralyze government service."[60] The duration of the emergency itself is the determining factor as to how long the temporary takeover by the government would last.[61] The temporary takeover by the government extends only to the operation of the business and not to the ownership thereof. As such the government is not required to compensate the private entity-owner of the said business as there is no transfer of ownership, whether permanent or temporary. The private entityowner affected by the temporary takeover cannot, likewise, claim just compensation for the use of the said business and its properties as the temporary takeover by the government is in exercise of its police power and not of its power of eminent domain. Article V, Section 5.10 (c) of the 1997 Concession Agreement provides: Section 5.10 Temporary Take-over of operations by GRP.

.
(c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or any part thereof, become the subject matter of or be included in any notice, notification, or declaration concerning or relating to acquisition, seizure or appropriation by GRP in times of war or national emergency, GRP shall, by written notice to Concessionaire, immediately take over the operations of the Terminal and/or the Terminal Complex. During such take over by GRP, the Concession Period shall be suspended; provided, that upon termination of war, hostilities or national emergency, the operations shall be returned to Concessionaire, at which time, the Concession period shall commence to run again. Concessionaire shall be entitled to reasonable compensation for the duration of the temporary take over by GRP, which compensation shall take into account the reasonable cost for the use of the Terminal and/or Terminal Complex, (which is in the amount at least equal to the debt service requirements of Concessionaire, if the temporary take over should occur at the time when Concessionaire is still servicing debts owed to project lenders), any loss or damage to the Development Facility, and other consequential damages. If the parties cannot agree on the reasonable compensation of Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved in accordance with Section 10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire shall be offset from the amount next payable by Concessionaire to GRP.[62] PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on temporary government takeover and obligate the government to pay "reasonable cost for the use of the Terminal and/or Terminal Complex."[63] Article XII, section 17 of the 1987 Constitution envisions a situation wherein the exigencies of the times necessitate the government to "temporarily take over or direct the operation of any privately owned public utility or business affected with public interest." It is the

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welfare and interest of the public which is the paramount consideration in determining whether or not to temporarily take over a particular business. Clearly, the State in effecting the temporary takeover is exercising its police power. Police power is the "most essential, insistent, and illimitable of powers."[64] Its exercise therefore must not be unreasonably hampered nor its exercise be a source of obligation by the government in the absence of damage due to arbitrariness of its exercise.[65] Thus, requiring the government to pay reasonable compensation for the reasonable use of the property pursuant to the operation of the business contravenes the Constitution.
V Regulation of Monopolies A monopoly is "a privilege or peculiar advantage vested in one or more persons or companies, consisting in the exclusive right (or power) to carry on a particular business or trade, manufacture a particular article, or control the sale of a particular commodity."[66] The 1987 Constitution strictly regulates monopolies, whether private or public, and even provides for their prohibition if public interest so requires. Article XII, Section 19 of the 1987 Constitution states: Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to aid the government in carrying on an enterprise or to aid in the performance of various services and functions in the interest of the public.[67] Nonetheless, a determination must first be made as to whether public interest requires a monopoly. As monopolies are subject to abuses that can inflict severe prejudice to the public, they are subject to a higher level of State regulation than an ordinary business undertaking. In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted the "exclusive right to operate a commercial international passenger terminal within the Island of Luzon" at the NAIA IPT III.[68] This is with the exception of already existing international airports in Luzon such as those located in the Subic Bay Freeport Special Economic Zone ("SBFSEZ"), Clark Special Economic Zone ("CSEZ") and in Laoag City.*69+ As such, upon commencement of PIATCOs operation of NAIA IPT III, Terminals 1 and 2 of NAIA would cease to function as international passenger terminals. This, however, does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any other manner as it may deem appropriate except those activities that would compete with NAIA IPT III in the latters operation as an international passenger terminal.*70+ The right granted to PIATCO to exclusively operate NAIA IPT III would be for a period of twenty-five (25) years from the In-Service Date[71] and renewable for another twenty-five (25) years at the option of the government.[72] Both the 1997 Concession Agreement and the ARCA further provide that, in view of the exclusive right granted to PIATCO, the concession contracts of the service providers currently servicing Terminals 1 and 2 would no longer be renewed and those concession contracts whose expiration are subsequent to the In-Service Date would cease to be effective on the said date.[73]

The operation of an international passenger airport terminal is no doubt an undertaking imbued with public interest. In entering into a Build-Operate-and-Transfer contract for the construction, operation and maintenance of NAIA IPT III, the government has determined that public interest would be served better if private sector resources were used in its construction and an exclusive right to operate be granted to the private entity undertaking the said project, in this case PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation and supervision by the Government through the MIAA, which is the government agency authorized to operate the NAIA complex, as well as DOTC, the department to which MIAA is attached.[74]
This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation
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regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation by "providing a climate of minimum government regulations,"[76] the same does not mean that Government must completely surrender its sovereign power to protect public interest in the operation of a public utility as a monopoly. The operation of said public utility can not be done in an arbitrary manner to the detriment of the public which it seeks to serve. The right granted to the public utility may be exclusive but the exercise of the right cannot run riot. Thus, while PIATCO may be authorized to exclusively operate NAIA IPT III as an international passenger terminal, the Government, through the MIAA, has the right and the duty to ensure that it is done in accord with public interest. PIATCOs right to operate NAIA IPT III cannot also violate the rights of third parties. Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:

3.01 Concession Period

.

(e) GRP confirms that certain concession agreements relative to certain services and operations currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a validity period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that these services and operations shall not be carried over to the Terminal and the Concessionaire is under no legal obligation to permit such carry-over except through a separate agreement duly entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on full indemnity basis from and against any loss and/or any liability resulting from any such litigation, including the cost of litigation and the reasonable fees paid or payable to Concessionaires counsel of choice, all such amounts shall be fully deductible by way of an offset from any amount which the Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-in-intervention for G.R. No. 155001 stated that there are two service providers whose contracts are still existing and whose validity extends beyond the In-Service Date. One contract remains valid until 2008 and the other until 2010.[77]

We hold that while the service providers presently operating at NAIA Terminal 1 do not have an absolute right for the renewal or the extension of their respective contracts, those contracts whose duration extends beyond NAIA IPT IIIs In-Service-Date should not be unduly prejudiced. These contracts must be respected not just by the parties thereto but also by third parties. PIATCO cannot, by law and certainly not by contract, render a valid and binding contract nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate, cannot require the Government to break its contractual obligations to the service providers. In contrast to the arrastre and stevedoring service providers in the case of Anglo-Fil Trading Corporation v. Lazaro[78] whose contracts consist of temporary hold-over permits, the affected service providers in the cases at bar, have a valid and binding contract with the Government, through MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its right to supervise the operation of the whole NAIA complex, including NAIA IPT III. As the primary government agency tasked with the job,*79+ it is MIAAs responsibility to ensure that whoever by contract is given the right to operate NAIA IPT III will do so within the bounds of the law and with due regard to the rights of third parties and above all, the interest of the public. VI

CONCLUSION
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CONCLUSION

In sum, this Court rules that in view of the absence of the requisite financial capacity of the Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the contract for the construction, operation and maintenance of the NAIA IPT III is null and void. Further, considering that the 1997 Concession Agreement contains material and substantial amendments, which amendments had the effect of converting the 1997 Concession Agreement into an entirely different agreement from the contract bidded upon, the 1997 Concession Agreement is similarly null and void for being contrary to public policy. The provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a direct government guarantee expressly prohibited by, among others, the BOT Law and its Implementing Rules and Regulations are also null and void. The Supplements, being accessory contracts to the ARCA, are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession Agreement and the Supplements thereto are set aside for being null and void. SO ORDERED. Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, and CarpioMorales, JJ., concur. Vitug, J., see separate (dissenting) opinion. Panganiban, J., please see separate opinion. Quisumbing, J., no jurisdiction, please see separate opinion of J. Vitug in which he concurs. Carpio, J., no part.

Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.

Azcuna, J., joins the separate opinion of J. Vitug.

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\

[2003V454ES] [3/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001SEPARATE OPINION VITUG, J.:
This Court is bereft of jurisdiction to hear the petitions at bar. The Constitution provides that the
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This Court is bereft of jurisdiction to hear the petitions at bar. The Constitution provides that the Supreme Court shall exercise original jurisdiction over, among other actual controversies, petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.[1] The cases in question, although denominated to be petitions for prohibition, actually pray for the nullification of the PIATCO contracts and to restrain respondents from implementing said agreements for being illegal and unconstitutional. Section 2, Rule 65 of the Rules of Court states: "When the proceedings of any tribunal, corporation, board, officer or person, whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other plain, speedy and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that the judgment be rendered commanding the respondent to desist from further proceedings in the action or matter specified therein, or otherwise granting such incidental reliefs as law and justice may require."

The Rule is explicit. A petition for prohibition may be filed against a tribunal, corporation, board, officer or person, exercising judicial, quasi-judicial or ministerial functions. What the petitions seek from respondents do not involve judicial, quasi-judicial or ministerial functions. In prohibition, only legal issues affecting the jurisdiction of the tribunal, board or officer involved may be resolved on the basis of undisputed facts.[2] The parties allege, respectively, contentious evidentiary facts. It would be difficult, if not anomalous, to decide the jurisdictional issue on the basis of the contradictory factual submissions made by the parties.[3] As the Court has so often exhorted, it is not a trier of facts.
The petitions, in effect, are in the nature of actions for declaratory relief under Rule 63 of the Rules of Court. The Rules provide that any person interested under a contract may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to determine any question of construction or validity arising, and for a declaration of his rights or duties thereunder.[4] The Supreme Court assumes no jurisdiction over petitions for declaratory relief which are cognizable by regional trial courts.[5] As I have so expressed in Tolentino vs. Secretary of Finance[6], reiterated in Santiago vs. Guingona, Jr.[7], the Supreme Court should not be thought of as having been tasked with the awesome responsibility of overseeing the entire bureaucracy. Pervasive and limitless, such as it may seem to be under the 1987 Constitution, judicial power still succumbs to the paramount doctrine of separation of powers. The Court may not at good liberty intrude, inn the guise of sovereign imprimatur, into every affair of government. What significance can still then remain of the time-honored and widely acclaimed principle of separation of powers if, at every turn, the Court allows itself to pass upon at will the disposition of a co-equal, independent and coordinate branch in our system of government. I dread to think of the so varied uncertainties that such an undue interference can lead to. Accordingly, I vote for the dismissal of the petition. [1] Article VIII, Section 5(1), 1987 Constitution. [2] Matuguina Integrated Products, Inc. vs. CA, 263 SCRA 490; Mafinco Trading Corporation vs. Ople, 70 SCRA 139. [3] Mafinco Trading Corporation vs. Ople, supra.

[4] Section 1, Rule 63, Rules of Court.

[5] In re: Bermudez, 145 SCRA 160.

[6] 235 SCRA 630, 720.

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[6] 235 SCRA 630, 720.

[7] 298 SCRA 795.

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\ [2003V454ES] [4/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[1/3] SEPARATE OPINION

PANGANIBAN, J.: The five contracts for the construction and the operation of Ninoy Aquino International Airport (NAIA) Terminal III, the subject of the consolidated Petitions before the Court, are replete with outright violations of law, public policy and the Constitution. The only proper thing to do is declare them all null and void ab initio and let the chips fall where they may. Fiat iustitia ruat coelum. The facts leading to this controversy are already well presented in the ponencia. I shall not burden the readers with a retelling thereof. Instead, I will cut to the chase and directly address the two sets of gut issues: 1. The first issue is procedural: Does the Supreme Court have original jurisdiction to hear and decide the Petitions? Corollarily, do petitioners have locus standi and should this Court decide the cases without any mandatory referral to arbitration? 2. The second one is substantive in character: Did the subject contracts violate the Constitution, the laws, and public policy to such an extent as to render all of them void and inexistent? My answer to all the above questions is a firm "Yes."

The Procedural Issue:

Jurisdiction, Standing and Arbitration Definitely and surely, the issues involved in these Petitions are clearly of transcendental importance and of national interest. The subject contracts pertain to the construction and the operation of the countrys premiere international airport terminal -- an ultramodern world-class public utility that will play a major role in the countrys economic development and serve to project a positive image of our country abroad. The five build-operate-&-transfer (BOT) contracts, while entailing the investment of billions of pesos in capital and the availment of several hundred millions of dollars in loans, contain provisions that tend to establish a monopoly, require the disbursements of public funds sans
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provisions that tend to establish a monopoly, require the disbursements of public funds sans appropriations, and provide government guarantees in violation of statutory prohibitions, as well as other provisions equally offensive to law, public policy and the Constitution. Public interest will inevitably be affected thereby.

Thus, objections to these Petitions, grounded upon (a) the hierarchy of courts, (b) the need for arbitration prior to court action, and (c) the alleged lack of sufficient personality, standing or interest, being in the main procedural matters, must now be set aside, as they have been in past cases. This Court must be permitted to perform its constitutional duty of determining whether the other agencies of government have acted within the limits of the Constitution and the laws, or if they have gravely abused the discretion entrusted to them.[1] Hierarchy
of Courts

The Court has, in the past, held that questions relating to gargantuan government contracts ought to be settled without delay.[2] This holding applies with greater force to the instant cases. Respondent Piatco is partly correct in averring that petitioners can obtain relief from the regional trial courts via an action to annul the contracts.
Nevertheless, the unavoidable consequence of having to await the rendition and the finality of any such judgment would be a prolonged state of uncertainty that would be prejudicial to the nation, the parties and the general public. And, in light of the feared loss of jobs of the petitioning workers, consequent to the inevitable pretermination of contracts of the petitioning service providers that will follow upon the heels of the impending opening of NAIA Terminal III, the need for relief is patently urgent, and therefore, direct resort to this Court through the special civil action of prohibition is thus justified.[3] Contrary to Piatcos argument that the resolution of the issues raised in the Petitions will require delving into factual questions,[4] I submit that their disposition ultimately turns on questions of law.[5] Further, many of the significant and relevant factual questions can be easily addressed by an examination of the documents submitted by the parties. In any event, the Petitions raise some novel questions involving the application of the amended BOT Law, which this Court has seen fit to tackle. Arbitration Should the dispute be referred to arbitration prior to judicial recourse? Respondent Piatco claims that Section 10.02 of the Amended and Restated Concession Agreement (ARCA) provides for arbitration under the auspices of the International Chamber of Commerce to settle any dispute or controversy or claim arising in connection with the Concession Agreement, its amendments and supplements. The government disagrees, however, insisting that there can be no arbitration based on Section 10.02 of the ARCA, since all the Piatco contracts are void ab initio. Therefore, all contractual provisions, including Section 10.02 of the ARCA, are likewise void, inexistent and inoperative. To support its stand, the government cites Chavez v. Presidential Commission on Good Government:[6] "The void agreement will not be rendered operative by the parties alleged performance (partial or full) of their respective prestations. A contract that violates the Constitution and the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all." As will be discussed at length later, the Piatco contracts are indeed void in their entirety; thus, a resort to the aforesaid provision on arbitration is unavailing. Besides, petitioners and petitioners-inintervention have pointed out that, even granting arguendo that the arbitration clause remained a valid provision, it still cannot bind them inasmuch as they are not parties to the Piatco contracts. And in the final analysis, it is unarguable that the arbitration process provided for under Section 10.02 of the ARCA, to be undertaken by a panel of three (3) arbitrators appointed in accordance with the Rules of Arbitration of the International Chamber of Commerce, will not be able to address, determine and
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Arbitration of the International Chamber of Commerce, will not be able to address, determine and definitively resolve the constitutional and legal questions that have been raised in the Petitions before us. Locus Standi Given this Courts previous decisions in cases of similar import, no one will seriously doubt that, being taxpayers and members of the House of Representatives, Petitioners Baterina et al. have locus standi to bring the Petition in GR No. 155547. In Albano v. Reyes,[7] this Court held that the petitioner therein, suing as a citizen, taxpayer and member of the House of Representatives, was sufficiently clothed with standing to bring the suit questioning the validity of the assailed contract. The Court cited the fact that public interest was involved, in view of the important role of the Manila International Container Terminal (MICT) in the countrys economic development and the magnitude of the financial consideration. This, notwithstanding the fact that expenditure of public funds was not required under the assailed contract.

In the cases presently under consideration, petitioners personal and substantial interest in the controversy is shown by the fact that certain provisions in the Piatco contracts create obligations on the part of government (through the DOTC and the MIAA) to disburse public funds without prior congressional appropriations.
Petitioners thus correctly assert that the injury to them has a twofold aspect: (1) they are adversely affected as taxpayers on account of the illegal disbursement of public funds; and (2) they are prejudiced qua legislators, since the contractual provisions requiring the government to incur expenditures without appropriations also operate as limitations upon the exclusive power and prerogative of Congress over the public purse. As members of the House of Representatives, they are actually deprived of discretion insofar as the inclusion of those items of expenditure in the budget is concerned. To prevent such encroachment upon the legislative privilege and obviate injury to the institution of which they are members, petitioners-legislators have locus standi to bring suit.

Messrs. Agan et al. and Lopez et al., are likewise taxpayers and thus possessed of standing to challenge the illegal disbursement of public funds. Messrs. Agan et al., in particular, are employees (or representatives of employees) of various service providers that have (1) existing concession agreements with the MIAA to provide airport services necessary to the operation of the NAIA and (2) service agreements to furnish essential support services to the international airlines operating at the NAIA.
On the other hand, Messrs. Lopez et al. are employees of the MIAA. These petitioners (Messrs. Agan et al. and Messrs. Lopez et al.) are confronted with the prospect of being laid off from their jobs and losing their means of livelihood when their employer-companies are forced to shut down or otherwise retrench and cut back on manpower. Such development would result from the imminent implementation of certain provisions in the contracts that tend toward the creation of a monopoly in favor of Piatco, its subsidiaries and related companies.

Petitioners-in-intervention are service providers in the business of furnishing airport-related services to international airlines and passengers in the NAIA and are therefore competitors of Piatco as far as that line of business is concerned. On account of provisions in the Piatco contracts, petitioners-inintervention have to enter into a written contract with Piatco so as not to be shut out of NAIA Terminal III and barred from doing business there. Since there is no provision to ensure or safeguard free and fair competition, they are literally at its mercy. They claim injury on account of their deprivation of property (business) and of the liberty to contract, without due process of law.
And even if petitioners and petitioners-in-intervention were not sufficiently clothed with legal standing, I have at the outset already established that, given its impact on the public and on national interest, this controversy is laden with transcendental importance and constitutional significance. Hence, I do not hesitate to adopt the same position as was enunciated in Kilosbayan v. Guingona Jr.[8] that "in cases of
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hesitate to adopt the same position as was enunciated in Kilosbayan v. Guingona Jr.[8] that "in cases of transcendental importance, the Court may relax the standing requirements and allow a suit to prosper even when there is no direct injury to the party claiming the right of judicial review."[9] The Substantive Issue: Violations of the Constitution and the Laws From the Outset, the Bidding

Process Was Flawed and Tainted

After studying the documents submitted and arguments advanced by the parties, I have no doubt that, right at the outset, Piatco was not qualified to participate in the bidding process for the Terminal III project, but was nevertheless permitted to do so. It even won the bidding and was helped along by what appears to be a series of collusive and corrosive acts.

The build-operate-and-transfer (BOT) project for the NAIA Passenger Terminal III comes under the category of an "unsolicited proposal,"which is the subject of Section 4-A of the BOT Law.[10] The unsolicited proposal was originally submitted by the Asias Emerging Dragon Corporation (AEDC) to the Department of Transportation and Communications (DOTC) and the Manila International Airport Authority (MIAA), which reviewed and approved the proposal.
The draft of the concession agreement as negotiated between AEDC and DOTC/MIAA was endorsed to the National Economic Development Authority (NEDA-ICC), which in turn reviewed it on the basis of its scope, economic viability, financial indicators and risks; and thereafter approved it for bidding. The DOTC/MIAA then prepared the Bid Documents, incorporating therein the negotiated Draft Concession Agreement, and published invitations for public bidding, i.e., for the submission of comparative or competitive proposals. Piatcos predecessor-in-interest, the Paircargo Consortium, was the only company that submitted a competitive bid or price challenge. At this point, I must emphasize that the law requires the award of a BOT project to the bidder that has satisfied the minimum requirements; and met the technical, financial, organizational and legal standards provided in the BOT Law. Section 5 of this statute states: "Sec. 5. Public bidding of projects. - x x x

"In the case of a build-operate-and-transfer arrangement, the contract shall be awarded to the bidder who, having satisfied the minimum financial, technical, organizational and legal standards required by this Act, has submitted the lowest bid and most favorable terms for the project, based on the present value of its proposed tolls, fees, rentals and charges over a fixed term for the facility to be constructed, rehabilitated, operated and maintained according to the prescribed minimum design and performance standards, plans and specifications. x x x." ( mphasis supplied.) The same provision requires that the price challenge via public bidding "must be conducted under a two-envelope/two-stage system: the first envelope to contain the technical proposal and the second envelope to contain the financial proposal." Moreover, the 1994 Implementing Rules and Regulations (IRR) provide that only those bidders that have passed the prequalification stage are permitted to have their two envelopes reviewed.
In other words, prospective bidders must prequalify by submitting their prequalification documents for evaluation; and only the pre-qualified bidders would be entitled to have their bids opened, evaluated
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evaluation; and only the pre-qualified bidders would be entitled to have their bids opened, evaluated and appreciated. On the other hand, disqualified bidders are to be informed of the reason for their disqualification. This procedure was confirmed and reiterated in the Bid Documents, which I quote thus: "Prequalified proponents will be considered eligible to move to second stage technical proposal evaluation. The second and third envelopes of pre-disqualified proponents will be returned."[11] Aside from complying with the legal and technical requirements (track record or experience of the firm and its key personnel), a project proponent desiring to prequalify must also demonstrate its financial capacity to undertake the project. To establish such capability, a proponent must prove that it is able to raise the minimum amount of equity required for the project and to procure the loans or financing needed for it. Section 5.4(c) of the 1994 IRR provides:

"Sec. 5.4. Prequalification Requirements. - To prequalify, a project proponent must comply with the following requirements: xxx xx x xx x

"c. Financial Capability. The project proponent must have adequate capability to sustain the financing requirements for the detailed engineering design, construction, and/or operation and maintenance phases of the project, as the case may be. For purposes of prequalification, this capability shall be measured in terms of: (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. The government Agency/LGU concerned shall determine on a project-to-project basis, and before pre-qualification, the minimum amount of equity needed. x x x." talics supplied) Since the minimum amount of equity for the project was set at 30 percent[12] of the minimum project cost of US$350 million, the minimum amount of equity required of any proponent stood at US$105 million. Converted to pesos at the exchange rate then of P26.239 to US$1.00 (as quoted by the Bangko Sentral ng Pilipinas), the peso equivalent of the minimum equity was P2,755,095,000. However, the combined equity or net worth of the Paircargo consortium stood at only P558,384,871.55.[13] This amount was only slightly over 6 percent of the minimum project cost and very much short of the required minimum equity, which was equivalent to 30 percent of the project cost. Such deficiency should have immediately caused the disqualification of the Paircargo consortium. This matter was brought to the attention of the Prequalification and Bidding Committee (PBAC). Notwithstanding the glaring deficiency, DOTC Undersecretary Primitivo C. Cal, concurrent chair of the PBAC, declared in a Memorandum dated 14 October 1996 that "the Challenger (Paircargo consortium) was found to have a combined net worth of P3,926,421,242.00 that could support a project costing approximately P13 billion." To justify his conclusion, he asserted: "It is not a requirement that the networth must be unrestricted. To impose this as a requirement now will be nothing less than unfair." He further opined, "(T)he networth reflected in the Financial Statement should not be taken as the amount of money to be used to answer the required thirty (30%) percent equity of the challenger but rather to be used in establishing if there is enough basis to believe that the challenger can comply with the required 30% equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract (Sec. 12.1 of IRR of the BOT Law) but not for prequalification (Sec. 5.4 of same document)."

On the basis of the foregoing dubious declaration, the Paircargo consortium was deemed prequalified and thus permitted to proceed to the other stages of the bidding process. By virtue of the prequalified status conferred upon the Paircargo, Undersecretary Cals findings in effect relieved the consortium of the need to comply with the financial capability requirement imposed by the
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relieved the consortium of the need to comply with the financial capability requirement imposed by the BOT Law and IRR. This position is unmistakably and squarely at odds with the Supreme Courts consistent doctrine emphasizing the strict application of pertinent rules, regulations and guidelines for the public bidding process, in order to place each bidder -- actual or potential -- on the same footing. Thus, it is unarguably irregular and contrary to the very concept of public bidding to permit a variance between the conditions under which bids are invited and those under which proposals are submitted and approved. Republic v. Capulong[14] teaches that if one bidder is relieved from having to conform to the conditions that impose some duty upon it, that bidder is not contracting in fair competition with those bidders that propose to be bound by all conditions. The essence of public bidding is, after all, an opportunity for fair competition and a basis for the precise comparison of bids.[15] Thus, each bidder must bid under the same conditions; and be subject to the same guidelines, requirements and limitations. The desired result is to be able to determine the best offer or lowest bid, all things being equal. Inasmuch as the Paircargo consortium did not possess the minimum equity equivalent to 30 percent of the minimum project cost, it should not have been prequalified or allowed to participate further in the bidding. The Prequalification and Bidding Committee (PBAC) should therefore not have opened the two envelopes of the consortium containing its technical and financial proposals; required AEDC to match the consortiums bid;*16+ or awarded the Concession Agreement to the consortiums successor-ininterest, Piatco. As there was effectively no public bidding to speak of, the entire bidding process having been flawed and tainted from the very outset, therefore, the award of the concession to Paircargos successor Piatco was void, and the Concession Agreement executed with the latter was likewise void ab initio. For this reason, Piatco cannot and should not be allowed to benefit from that Agreement.[17] AEDC Was Deprived of the

Right to Match PIATCOs

Price Challenge

In DOTC PBAC Bid Bulletin No. 4 (par. 3), Undersecretary Cal declared that, for purposes of matching the price challenge of Piatco, AEDC as originator of the unsolicited proposal would be permitted access only to the schedule of proposed Annual Guaranteed Payments submitted by Piatco, and not to the latters financial and technical proposals that constituted the basis for the price challenge in the first place. This was supposedly in keeping with Section 11.6 of the 1994 IRR, which provides that proprietary information is to be respected, protected and treated with utmost confidentiality, and is therefore not to form part of the bidding/tender and related documents.
This pronouncement, I believe, was a grievous misapplication of the mentioned provision. The "proprietary information"referred to in Section 11.6 of the IRR pertains only to the proprietary information of the originator of an unsolicited proposal, and not to those belonging to a challenger. The reason for the protection accorded proprietary information at all is the fact that, according to Section 4A of the BOT Law as amended, a proposal qualifies as an "unsolicited proposal"when it pertains to a project that involves "a new concept or technology", and/or a project that is not on the governments list of priority projects. To be considered as utilizing a new concept or technology, a project must involve the possession of exclusive rights (worldwide or regional) over a process; or possession of intellectual property rights over a design, methodology or engineering concept.[18] Patently, the intent of the BOT Law is to encourage individuals and groups to come up with creative innovations, fresh ideas and new technology. Hence, the significance and necessity of protecting proprietary information in connection with unsolicited

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proposals. And to make the encouragement real, the law also extends to such individuals and groups what amounts to a "right of first refusal"to undertake the project they conceptualized, involving the use of new technology or concepts, through the mechanism of matching a price challenge.
A competing bid is never just any figure conjured from out of the blue; it is arrived at after studying economic, financial, technical and other factors; it is likewise based on certain assumptions as to the nature of the business, the market potentials, the probable demand for the product or service, the future behavior of cost items, political and other risks, and so on. It is thus self-evident that in order to be able to intelligently match a bid or price challenge, a bidder must be given access to the assumptions and the calculations that went into crafting the competing bid. In this instance, the financial and technical proposals of Piatco would have provided AEDC with the necessary information to enable it to make a reasonably informed matching bid. To put it more simply, a bidder unable to access the competitors assumptions will never figure out how the competing bid came about; requiring him to "counter-propose"is like having him shoot at a target in the dark while blindfolded. By withholding from AEDC the challengers financial and technical proposals containing the critical information it needed, Undersecretary Cal actually and effectively deprived AEDC of the ability to match the price challenge. One could say that AEDC did not have the benefit of a "level playing field." It seems to me, though, that AEDC was actually shut out of the game altogether. At the end of the day, the bottom line is that the validity and the propriety of the award to Piatco had been irreparably impaired. Delayed Issuance of the Notice of Award Violated the BOT Law and the IRR Section 9.5 of the IRR requires that the Notice of Award must indicate the time frame within which the winner of the bidding (and therefore the prospective awardee) shall submit the prescribed performance security, proof of commitment of equity contributions, and indications of sources of financing (loans); and, in the case of joint ventures, an agreement showing that the members are jointly and severally responsible for the obligations of the project proponent under the contract. The purpose of having a definite and firm timetable for the submission of the aforementioned requirements is not only to prevent delays in the project implementation, but also to expose and weed out unqualified proponents, who might have unceremoniously slipped through the earlier prequalification process, by compelling them to put their money where their mouths are, so to speak. Nevertheless, this provision can be easily circumvented by merely postponing the actual issuance of the Notice of Award, in order to give the favored proponent sufficient time to comply with the requirements. Hence, to avert or minimize the manipulation of the post-bidding process, the IRR not only set out the precise sequence of events occurring between the completion of the evaluation of the technical bids and the issuance of the Notice of Award, but also specified the timetables for each such event. Definite allowable extensions of time were provided for, as were the consequences of a failure to meet a particular deadline. In particular, Section 9.1 of the 1994 IRR prescribed that within 30 calendar days from the time the second-stage evaluation shall have been completed, the Committee must come to a decision whether or not to award the contract and, within 7 days therefrom, the Notice of Award must be approved by the head of agency or local government unit (LGU) concerned, and its issuance must follow within another 7 days thereafter.
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days thereafter.

Section 9.2 of the IRR set the procedure applicable to projects involving substantial government undertakings as follows: Within 7 days after the decision to award is made, the draft contract shall be submitted to the ICC for clearance on a no-objection basis. If the draft contract includes government undertakings already previously approved, then the submission shall be for information only.
However, should there be additional or new provisions different from the original government undertakings, the draft shall have to be reviewed and approved. The ICC has 15 working days to act thereon, and unless otherwise specified, its failure to act on the contract within the specified time frame signifies that the agency or LGU may proceed with the award. The head of agency or LGU shall approve the Notice of Award within seven days of the clearance by the ICC on a no-objection basis, and the Notice itself has to be issued within seven days thereafter. The highly regulated time-frames within which the agents of government were to act evinced the intent to impose upon them the duty to act expeditiously throughout the process, to the end that the project be prosecuted and implemented without delay. This regulated scenario was likewise intended to discourage collusion and substantially reduce the opportunity for agents of government to abuse their discretion in the course of the award process. Despite the clear timetables set out in the IRR, several lengthy and still-unexplained delays occurred in the award process, as can be observed from the presentation made by the counsel for public respondents,[19] quoted hereinbelow: "11 Dec. 1996 - The Paircargo Joint Venture was informed by the PBAC that AEDC failed to match and that negotiations preparatory to Notice of Award should be commenced. This was the decision to award that should have commenced the running of the 7-day period to approve the Notice of Award, as per Section 9.1 of the IRR, or to submit the draft contract to the ICC for approval conformably with Section 9.2. "01 April 1997 - The PBAC resolved that a copy of the final draft of the Concession Agreement be submitted to the NEDA for clearance on a no-objection basis. This resolution came more than 3 months too late as it should have been made on the 20th of December 1996 at the latest. "16 April 1997 - The PBAC resolved that the period of signing the Concession Agreement be extended by 15 days. "18 April 1997 - NEDA approved the Concession Agreement. Again this is more than 3 months too late as the NEDAs decision should have been released on the 16th of January 1997 or fifteen days after it should have been submitted to it for review. "09 July 1997 - The Notice of Award was issued to PIATCO. Following the provisions of the IRR, the Notice of Award should have been issued fourteen days after NEDAs approval, or the 28th of January 1997. In any case, even if it were to be assumed that the release of NEDAs approval on the 18th of April was timely, the Notice of Award should have been issued on the 9th of May 1997. In both cases, therefore, the release of the Notice of Award occurred in a decidedly less than timely fashion."

This chronology of events bespeaks an unmistakable disregard, if not disdain, by the persons in charge of the award process for the time limitations prescribed by the IRR. Their attitude flies in the face of this Courts solemn pronouncement in Republic v. Capulong*20+ that "strict observance of the rules, regulations and guidelines of the bidding process is the only safeguard to a fair, honest and competitive public bidding."
From the foregoing, the only conclusion that can possibly be drawn is that the BOT law and its IRR were repeatedly violated with unmitigated impunity - and by agents of government, no less! On account of
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repeatedly violated with unmitigated impunity - and by agents of government, no less! On account of such violation, the award of the contract to Piatco, which undoubtedly gained time and benefited from the delays, must be deemed null and void from the beginning. Further Amendments Resulted in a Substantially Different Contract, Awarded Without Public Bidding But the violations and desecrations did not stop there. After the PBAC made its decision on December 11, 1996 to award the contract to Piatco, the latter negotiated changes to the Contract bidded out and ended up with what amounts to a substantially new contract without any public bidding. This Contract was subsequently further amended four more times through negotiation and without any bidding. Thus, the contract actually executed between Piatco and DOTC/MIAA on July 12, 1997 (the Concession Agreement or "CA") differed from the contract bidded out (the draft concession agreement or "DCA") in the following very significant respects: 1. The CA inserted stipulations creating a monopoly in favor of Piatco in the business of providing airport-related services for international airlines and passengers.[21]

2. The CA provided that government is to answer for Piatcos unpaid loans and debts (lumped under the term Attendant Liabilities) in the event Piatco fails to pay its senior lenders.[22] 3. The CA provided that in case of termination of the contract due to the fault of government, government shall pay all expenses that Piatco incurred for the project plus the appraised value of the Terminal.[23] 4. The CA imposed new and special obligations on government, including delivery of clean possession of the site for the terminal; acquisition of additional land at the governments expense for construction of road networks required by Piatcos approved plans and specifications; and assistance to Piatco in securing site utilities, as well as all necessary permits, licenses and authorizations.[24]
5. Where Section 3.02 of the DCA requires government to refrain from competing with the contractor with respect to the operation of NAIA Terminal III, Section 3.02(b) of the CA excludes and prohibits everyone, including government, from directly or indirectly competing with Piatco, with respect to the operation of, as well as operations in, NAIA Terminal III. Operations in is sufficiently broad to encompass all retail and other commercial business enterprises operating within Terminal III, inclusive of the businesses of providing various airport-related services to international airlines, within the scope of the prohibition. 6. Under Section 6.01 of the DCA, the following fees are subject to the written approval of MIAA: lease/rental charges, concession privilege fees for passenger services, food services, transportation utility concessions, groundhandling, catering and miscellaneous concession fees, porterage fees, greeter/well-wisher fees, carpark fees, advertising fees, VIP facilities fees and others. Moreover, adjustments to the groundhandling fees, rentals and porterage fees are permitted only once every two years and in accordance with a parametric formula, per DCA Section 6.03. However, the CA as executed with Piatco provides in Section 6.06 that all the aforesaid fees, rentals and charges may be adjusted without MIAAs approval or intervention. Neither are the adjustments to these fees and charges subject to or limited by any parametric formula.[25] 7. Section 1.29 of the DCA provides that the terminal fees, aircraft tacking fees, aircraft parking fees, check-in counter fees and other fees are to be quoted and paid in Philippine pesos. But per Section 1.33
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check-in counter fees and other fees are to be quoted and paid in Philippine pesos. But per Section 1.33 of the CA, all the aforesaid fees save the terminal fee are denominated in US Dollars. 8. Under Section 8.07 of the DCA, the term attendant liabilities refers to liabilities pertinent to NAIA Terminal III, such as payment of lease rentals and performance of other obligations under the Land Lease Agreement; the obligations under the Tenant Agreements; and payment of all taxes, fees, charges and assessments of whatever kind that may be imposed on NAIA Terminal III or parts thereof. But in Section 1.06 of the CA, Attendant Liabilities refers to unpaid debts of Piatco: "All amounts recorded and from time to time outstanding in the books of [Piatco] as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by [Piatco] to its suppliers, contractors and subcontractors." 9. Per Sections 8.04 and 8.06 of the DCA, government may, on account of the contractors breach, rescind the contract and select one of four options: (a) take over the terminal and assume all its attendant liabilities; (b) allow the contractors creditors to assign the Project to another entity acceptable to DOTC/MIAA; (c) pay the contractor rent for the facilities and equipment the DOTC may utilize; or (d) purchase the terminal at a price established by independent appraisers. Depending on the option selected, government may take immediate possession and control of the terminal and its operations. Government will be obligated to compensate the contractor for the "equivalent or proportionate contract costs actually disbursed,"but only where government is the one in breach of the contract. But under Section 8.06(a) of the CA, whether on account of Piatcos breach of contract or its inability to pay its creditors, government is obliged to either (a) take over Terminal III and assume all of Piatcos debts or (b) permit the qualified unpaid creditors to be substituted in place of Piatco or to designate a new operator. And in the event of governments breach of contract, Piatco may compel it to purchase the terminal at fair market value, per Section 8.06(b) of the CA. 10. Under the DCA, any delay by Piatco in the payment of the amounts due the government constitutes breach of contract. However, under the CA, such delay does not necessarily constitute breach of contract, since Piatco is permitted to suspend payments to the government in order to first satisfy the claims of its secured creditors, per Section 8.04(d) of the CA. It goes without saying that the amendment of the Contract bidded out (the DCA or draft concession agreement) -- in such substantial manner, without any public bidding, and after the bidding process had been concluded on December 11, 1996 -- is violative of public policy on public biddings, as well as the spirit and intent of the BOT Law. The whole point of going through the public bidding exercise was completely lost. Its very rationale was totally subverted by permitting Piatco to amend the contract for which public bidding had already been concluded. Competitive bidding aims to obtain the best deal possible by fostering transparency and preventing favoritism, collusion and fraud in the awarding of contracts. That is the reason why procedural rules pertaining to public bidding demand strict observance.[26] In a relatively early case, Caltex v. Delgado Brothers,[27] this Court made it clear that substantive amendments to a contract for which a public bidding has already been finished should only be awarded after another public bidding: "The due execution of a contract after public bidding is a limitation upon the right of the contracting parties to alter or amend it without another public bidding, for otherwise what would a public bidding be good for if after the execution of a contract after public bidding, the contracting parties may alter or amend the contract, or even cancel it, at their will? Public biddings are held for the protection of the public, and to give the public the best possible advantages by means of open competition between the bidders. He who bids or offers the best terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible advantages to the public will disappear if the parties to a contract executed after public bidding may alter or amend it without another previous public bidding."[28]
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bidding."[28]

The aforementioned case dealt with the unauthorized amendment of a contract executed after public bidding; in the situation before us, the amendments were made also after the bidding, but prior to execution. Be that as it may, the same rationale underlying Caltex applies to the present situation with equal force. Allowing the winning bidder to renegotiate the contract for which the bidding process has ended is tantamount to permitting it to put in anything it wants. Here, the winning bidder (Piatco) did not even bother to wait until after actual execution of the contract before rushing to amend it. Perhaps it believed that if the changes were made to a contract already won through bidding (DCA) instead of waiting until it is executed, the amendments would not be noticed or discovered by the public.
In a later case, Mata v. San Diego,[29] this Court reiterated its ruling as follows: "It is true that modification of government contracts, after the same had been awarded after a public bidding, is not allowed because such modification serves to nullify the effects of the bidding and whatever advantages the Government had secured thereby and may also result in manifest injustice to the other bidders. This prohibition, however, refers to a change in vital and essential particulars of the agreement which results in a substantially new contract."

Piatcos counter-argument may be summed up thus: There was nothing in the 1994 IRR that prohibited further negotiations and eventual amendments to the DCA even after the bidding had been concluded. In fact, PBAC Bid Bulletin No. 3 states: "[A]mendments to the Draft Concession Agreement shall be issued from time to time. Said amendments will only cover items that would not materially affect the preparation of the proponents proposal."
I submit that accepting such warped argument will result in perverting the policy underlying public bidding. The BOT Law cannot be said to allow the negotiation of contractual stipulations resulting in a substantially new contract after the bidding process and price challenge had been concluded. In fact, the BOT Law, in recognition of the time, money and effort invested in an unsolicited proposal, accords its originator the privilege of matching the challengers bid. Section 4-A of the BOT Law specifically refers to a "lower price proposal"by a competing bidder; and to the right of the original proponent "to match the price"of the challenger. Thus, only the price proposals are in play. The terms, conditions and stipulations in the contract for which public bidding has been concluded are understood to remain intact and not be subject to further negotiation. Otherwise, the very essence of public bidding will be destroyed - there will be no basis for an exact comparison between bids. Moreover, Piatco misinterpreted the meaning behind PBAC Bid Bulletin No. 3. The phrase amendments from time to time refers only to those amendments to the draft concession agreement issued by the PBAC prior to the submission of the price challenge; it certainly does not include or permit amendments negotiated for and introduced after the bidding process has been terminated. Piatcos Concession Agreement Was Further

Amended, (ARCA) Again

Without Public Bidding

Not satisfied with the Concession Agreement, Piatco -- once more without bothering with public bidding -- negotiated with government for still more substantial changes. The result was the Amended and Restated Concession Agreement (ARCA) executed on November 26, 1998. The following changes were introduced:
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were introduced:

1. The definition of Attendant Liabilities was further amended with the result that the unpaid loans of Piatco, for which government may be required to answer, are no longer limited to only those loans recorded in Piatcos books or loans whose proceeds were actually used in the Terminal III project.*30+
2. Although the contract may be terminated due to breach by Piatco, it will not be liable to pay the government any Liquidated Damages if a new operator is designated to take over the operation of the terminal.[31] 3. The Liquidated Damages which government becomes liable for in case of its breach of contract were substantially increased.[32] 4. Governments right to appoint a comptroller for Piatco in case the latter encounters liquidity problems was deleted.[33]

5. Government is made liable for Incremental and Consequential Costs and Losses in case it fails to comply or cause any third party under its direct or indirect control to comply with the special obligations imposed on government.[34]
6. The insurance policies obtained by Piatco covering the terminal are now required to be assigned to the Senior Lenders as security for the loans; previously, their proceeds were to be used to repair and rehabilitate the facility in case of damage.[35] 7. Government bound itself to set the initial rate of the terminal fee, to be charged when Terminal III begins operations, at an amount higher than US$20.[36] 8. Government waived its defense of the illegality of the contract and even agreed to be liable to pay damages to Piatco in the event the contract was declared illegal.[37]

9. Even though government may be entitled to terminate the ARCA on account of breach by Piatco, government is still liable to pay Piatco the appraised value of Terminal III or the Attendant Liabilities, if the termination occurs before the In-Service Date.[38] This condition contravenes the BOT Law provision on termination compensation.
10. Government is obligated to take the administrative action required for Piatcos imposition, collection and application of all Public Utility Revenues.[39] No such obligation existed previously. 11. Government is now also obligated to perform and cause other persons and entities under its direct or indirect control to perform all acts necessary to perfect the security interests to be created in favor of Piatcos Senior Lenders.*40+ No such obligation existed previously. 12. DOTC/MIAAs right of intervention in instances where Piatcos Non-Public Utility Revenues become exorbitant or excessive has been removed.[41] 13. The illegality and unenforceability of the ARCA or any of its material provisions was made an event of default on the part of government only, thus constituting a ground for Piatco to terminate the ARCA.[42] 14. Amounts due from and payable by government under the contract were made payable on demand -net of taxes, levies, imposts, duties, charges or fees of any kind except as required by law.[43]

15. The Parametric Formula in the contract, which is utilized to compute for adjustments/increases to the public utility revenues (i.e., aircraft parking and tacking fees, check-in counter fee and terminal fee), was revised to permit Piatco to input its more costly short-term borrowing rates instead of the longerterms rates in the computations for adjustments, with the end result that the changes will redound to
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terms rates in the computations for adjustments, with the end result that the changes will redound to its greater financial benefit. 16. The Certificate of Completion simply deleted the successful performance-testing of the terminal facility in accordance with defined performance standards as a pre- condition for governments acceptance of the terminal facility.[44] In sum, the foregoing revisions and amendments as embodied in the ARCA constitute very material alterations of the terms and conditions of the CA, and give further manifestly undue advantage to Piatco at the expense of government. Piatco claims that the changes to the CA were necessitated by the demands of its foreign lenders. However, no proof whatsoever has been adduced to buttress this claim.

In any event, it is quite patent that the sum total of the aforementioned changes resulted in drastically weakening the position of government to a degree that seems quite excessive, even from the standpoint of a businessperson who regularly transacts with banks and foreign lenders, is familiar with their mind-set, and understands what motivates them. On the other hand, whatever it was that impelled government officials concerned to accede to those grossly disadvantageous changes, I can only hazard a guess. There is no question in my mind that the ARCA was unauthorized and illegal for lack of public bidding and for being patently disadvantageous to government.
/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\ [2003V454ES] [5/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[2/3] SEPARATE OPINION

The Three Supplements Imposed New Obligations on Government, Also Without Prior Public Bidding

After Piatco had managed to breach the protective rampart of public bidding, it recklessly went on a rampage of further assaults on the ARCA.
The First Supplement Is as Void as the ARCA

In the First Supplement ("FS") executed on August 27, 1999, the following changes were made to the
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In the First Supplement ("FS") executed on August 27, 1999, the following changes were made to the ARCA: 1. The amounts payable by Piatco to government were reduced by allowing additional exceptions to the Gross Revenues in which government is supposed to participate.[45] 2. Made part of the properties which government is obliged to construct and/or maintain and keep in good repair are (a) the access road connecting Terminals II and III -- the construction of this access road is the obligation of Piatco, in lieu of its obligation to construct an Access Tunnel connecting Terminals II and III; and (b) the taxilane and taxiway -- these are likewise part of Piatcos obligations, since they are part and parcel of the project as described in Clause 1.3 of the Bid Documents.[46] 3. The MIAA is obligated to provide funding for the maintenance and repair of the airports and facilities owned or operated by it and by third persons under its control. It will also be liable to Piatco for the latters losses, expenses and damages as well as liability to third persons, in case MIAA fails to perform such obligations. In addition, MIAA will also be liable for the incremental and consequential costs of the remedial work done by Piatco on account of the formers default.*47+ 4. The FS also imposed on government ten (10) "Additional Special Obligations,"including the following: (a) Working for the removal of the general aviation traffic from the NAIA airport complex[48] (b) Providing through MIAA the land required by Piatco for the taxilane and one taxiway at no cost to Piatco[49] (c) Implementing the governments existing storm drainage master plan*50+

(d) Coordinating with DPWH the financing, the implementation and the completion of the following works before the In-Service Date: three left-turning overpasses (EDSA to Tramo St., Tramo to Andrews Ave., and Manlunas Road to Sales Ave.);[51] and a road upgrade and improvement program involving widening, repair and resurfacing of Sales Road, Andrews Avenue and Manlunas Road; improvement of Nichols Interchange; and removal of squatters along Andrews Avenue.[52]
(e) Dealing directly with BCDA and the Phil. Air Force in acquiring additional land or right of way for the road upgrade and improvement program.[53] 5. Government is required to work for the immediate reversion to MIAA of the Nayong Pilipino National Park.[54] 6. Governments share in the terminal fees collected was revised from a flat rate of P180 to 36 percent thereof; together with governments percentage share in the gross revenues of Piatco, the amount will be remitted to government in pesos instead of US dollars.[55] This amendment enables Piatco to benefit from the further erosion of the peso-dollar exchange rate, while preventing government from building up its foreign exchange reserves. 7. All payments from Piatco to government are now to be invoiced to MIAA, and payments are to accrue to the latters exclusive benefit.*56+ This move appears to be in support of the funds MIAA advanced to DPWH. I must emphasize that the First Supplement is void in two respects. First, it is merely an amendment to the ARCA, upon which it is wholly dependent; therefore, since the ARCA is void, inexistent and not capable of being ratified or amended, it follows that the FS too is void, inexistent and inoperative. Second, even assuming arguendo that the ARCA is somehow remotely valid, nonetheless the FS, in imposing significant new obligations upon government, altered the fundamental terms and stipulations

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of the ARCA, thus necessitating a public bidding all over again. That the FS was entered into sans public bidding renders it utterly void and inoperative.
The Second Supplement Is

Similarly Void and Inexistent

The Second Supplement ("SS") was executed between the government and Piatco on September 4, 2000. It calls for Piatco, acting not as concessionaire of NAIA Terminal III but as a public works contractor, to undertake -- in the governments stead -- the clearing, removal, demolition and disposal of improvements, subterranean obstructions and waste materials at the project site.[57]

The scope of the works, the procedures involved, and the obligations of the contractor are provided for in Parts II and III of the SS. Section 4.1 sets out the compensation to be paid, listing specific rates per cubic meter of materials for each phase of the work -- excavation, leveling, removal and disposal, backfilling and dewatering. The amounts collectible by Piatco are to be offset against the Annual Guaranteed Payments it must pay government.
Though denominated as Second Supplement, it was nothing less than an entirely new public works contract. Yet it, too, did not undergo any public bidding, for which reason it is also void and inoperative. Not surprisingly, Piatco had to subcontract the works to a certain Wintrack Builders, a firm reputedly owned by a former high-ranking DOTC official. But that is another story altogether. The Third Supplement Is Likewise Void and Inexistent The Third Supplement ("TS"), executed between the government and Piatco on June 22, 2001, passed on to the government certain obligations of Piatco as Terminal III concessionaire, with respect to the surface road connecting Terminals II and III. By way of background, at the inception of and forming part of the NAIA Terminal III project was the proposed construction of an access tunnel crossing Runway 13/31, which would connect Terminal III to Terminal II. The Bid Documents in Section 4.1.2.3[B][i] declared that the said access tunnel was subject to further negotiation; but for purposes of the bidding, the proponent should submit a bid for it as well. Therefore, the tunnel was supposed to be part and parcel of the Terminal III project. However, in Section 5 of the First Supplement, the parties declared that the access tunnel was not economically viable at that time. In lieu thereof, the parties agreed that a surface access road (now called the T2-T3 Road) was to be constructed by Piatco to connect the two terminals. Since it was plainly in substitution of the tunnel, the surface road construction should likewise be considered part and parcel of the same project, and therefore part of Piatcos obligation as well. While the access tunnel was estimated to cost about P800 million, the surface road would have a price tag in the vicinity of about P100 million, thus producing significant savings for Piatco. Yet, the Third Supplement, while confirming that Piatco would construct the T2-T3 Road, nevertheless shifted to government some of the obligations pertaining to the former, as follows: 1. Government is now obliged to remove at its own expense all tenants, squatters, improvements and/or waste materials on the site where the T2-T3 road is to be constructed.[58] There was no similar obligation on the part of government insofar as the access tunnel was concerned. 2. Should government fail to carry out its obligation as above described, Piatco may undertake it on governments behalf, subject to the terms and conditions (including compensation payments) contained
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governments behalf, subject to the terms and conditions (including compensation payments) contained in the Second Supplement.[59] 3. MIAA will answer for the operation, maintenance and repair of the T2-T3 Road.[60]

The TS depends upon and is intended to supplement the ARCA as well as the First Supplement, both of which are void and inexistent and not capable of being ratified or amended. It follows that the TS is likewise void, inexistent and inoperative. And even if, hypothetically speaking, both ARCA and FS are valid, still, the Third Supplement -- imposing as it does significant new obligations upon government -would in effect alter the terms and stipulations of the ARCA in material respects, thus necessitating another public bidding. Since the TS was not subjected to public bidding, it is consequently utterly void as well. At any rate, the TS created new monetary obligations on the part of government, for which there were no prior appropriations. Hence it follows that the same is void ab initio.
In patiently tracing the progress of the Piatco contracts from their inception up to the present, I noted that the whole process was riddled with significant lapses, if not outright irregularity and wholesale violations of law and public policy. The rationale of beginning at the beginning, so to speak, will become evident when the question of what to do with the five Piatco contracts is discussed later on.

In the meantime, I shall take up specific provisions or changes in the contracts and highlight the more prominent objectionable features.
Government Directly Guarantees Piatco Debts

Certainly the most discussed provision in the parties arguments is the one creating an unauthorized, direct government guarantee of Piatcos obligations in favor of the lenders.
Section 4-A of the BOT Law as amended states that unsolicited proposals, such as the NAIA Terminal III Project, may be accepted by government provided inter alia that no direct government guarantee, subsidy or equity is required. In short, such guarantee is prohibited in unsolicited proposals. Section 2(n) of the same legislation defines direct government guarantee as "an agreement whereby the government or any of its agencies or local government units (will) assume responsibility for the repayment of debt directly incurred by the project proponent in implementing the project in case of a loan default."

Both the CA and the ARCA have provisions that undeniably create such prohibited government guarantee. Section 4.04 (c)(iv) to (vi) of the ARCA, which is similar to Section 4.04 of the CA, provides thus:
"(iv) that if Concessionaire is in default under a payment obligation owed to the Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same x x x; (v) x x x the Senior Lenders may after written notification to GRP, transfer the Concessionaires rights and obligations to a transferee x x x; (vi) if the Senior Lenders x x x are unable to x x x effect a transfer x x x, then GRP and the Senior Lenders shall endeavor x x x to enter into any other arrangement relating to the Development Facility x x x. If no agreement relating to the Development Facility is arrived at by GRP and the Senior Lenders within the said 180-day period, then at the end thereof the Development Facility shall be transferred by the Concessionaire to GRP or its designee and GRP shall make a termination payment to Concessionaire equal to the Appraised Value (as hereinafter defined) of the Development Facility or the sum of the Attendant Liabilities, if greater. x x x ."
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Attendant Liabilities, if greater. x x x ."

In turn, the term Attendant Liabilities is defined in Section 1.06 of the ARCA as follows:
"Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to time owed or which may become owing by Concessionaire to Senior Lenders or any other persons or entities who have provided, loaned or advanced funds or provided financial facilities to Concessionaire for the Project, including, without limitation, all principal, interest, associated fees, charges, reimbursements, and other related expenses (including the fees, charges and expenses of any agents or trustees of such persons or entities), whether payable at maturity, by acceleration or otherwise, and further including amounts owed by Concessionaire to its professional consultants and advisers, suppliers, contractors and sub-contractors."

Governments agreement to pay becomes effective in the event of a default by Piatco on any of its loan obligations to the Senior Lenders, and the amount to be paid by government is the greater of either the Appraised Value of Terminal III or the aggregate amount of the moneys owed by Piatco -- whether to the Senior Lenders or to other entities, including its suppliers, contractors and subcontractors. In effect, therefore, this agreement already constitutes the prohibited assumption by government of responsibility for repayment of Piatcos debts in case of a loan default. In fine, a direct government guarantee.
It matters not that there is a roundabout procedure prescribed by Section 4.04(c)(iv), (v) and (vi) that would require, first, an attempt (albeit unsuccessful) by the Senior Lenders to transfer Piatcos rights to a transferee of their choice; and, second, an effort (equally unsuccessful) to "enter into any other arrangement"with the government regarding the Terminal III facility, before government is required to make good on its guarantee. What is abundantly clear is the fact that, in the devious labyrinthine process detailed in the aforesaid section, it is entirely within the Senior Lenders power, prerogative and control -- exercisable via a mere refusal or inability to agree upon "a transferee"or "any other arrangement"regarding the terminal facility -- to push the process forward to the ultimate contractual cul-de-sac, wherein government will be compelled to abjectly surrender and make good on its guarantee of payment. Piatco also argues that there is no proviso requiring government to pay the Senior Lenders in the event of Piatcos default. This is literally true, in the sense that Section 4.04(c)(vi) of ARCA speaks of government making the termination payment to Piatco, not to the lenders. However, it is almost a certainty that the Senior Lenders will already have made Piatco sign over to them, ahead of time, its right to receive such payments from government; and/or they may already have had themselves appointed its attorneys-in-fact for the purpose of collecting and receiving such payments. Nevertheless, as petitioners-in-intervention pointed out in their Memorandum,[61] the termination payment is to be made to Piatco, not to the lenders; and there is no provision anywhere in the contract documents to prevent it from diverting the proceeds to its own benefit and/or to ensure that it will necessarily use the same to pay off the Senior Lenders and other creditors, in order to avert the foreclosure of the mortgage and other liens on the terminal facility. Such deficiency puts the interests of government at great risk. Indeed, if the unthinkable were to happen, government would be paying several hundreds of millions of dollars, but the mortgage liens on the facility may still be foreclosed by the Senior Lenders just the same. Consequently, the Piatco contracts are also objectionable for grievously failing to adequately protect governments interests. More accurately, the contracts would consistently weaken and do away with protection of government interests. As such, they are therefore grossly lopsided in favor of Piatco and/or its Senior Lenders. While on this subject, it is well to recall the earlier discussion regarding a particularly noticeable alteration of the concept of "Attendant Liabilities." In Section 1.06 of the CA defining the term, the
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alteration of the concept of "Attendant Liabilities." In Section 1.06 of the CA defining the term, the Piatco debts to be assumed/paid by government were qualified by the phrases recorded and from time to time outstanding in the books of the Concessionaire and actually used for the project. These phrases were eliminated from the ARCAs definition of Attendant Liabilities.

Since no explanation has been forthcoming from Piatco as to the possible justification for such a drastic change, the only conclusion possible is that it intends to have all of its debts covered by the guarantee, regardless of whether or not they are disclosed in its books. This has particular reference to those borrowings which were obtained in violation of the loan covenants requiring Piatco to maintain a minimum 70:30 debt-to-equity ratio, and even if the loan proceeds were not actually used for the project itself. This point brings us back to the guarantee itself. In Section 4.04(c)(vi) of ARCA, the amount which government has guaranteed to pay as termination payment is the greater of either (i) the Appraised Value of the terminal facility or (ii) the aggregate of the Attendant Liabilities. Given that the Attendant Liabilities may include practically any Piatco debt under the sun, it is highly conceivable that their sum may greatly exceed the appraised value of the facility, and government may end up paying very much more than the real worth of Terminal III. (So why did government have to bother with public bidding anyway?)
In the final analysis, Section 4.04(c)(iv) to (vi) of the ARCA is diametrically at odds with the spirit and the intent of the BOT Law. The law meant to mobilize private resources (the private sector) to take on the burden and the risks of financing the construction, operation and maintenance of relevant infrastructure and development projects for the simple reason that government is not in a position to do so. By the same token, government guarantee was prohibited, since it would merely defeat the purpose and raison dtre of a build-operate-and-transfer project to be undertaken by the private sector. To the extent that the project proponent is able to obtain loans to fund the project, those risks are shared between the project proponent on the one hand, and its banks and other lenders on the other. But where the proponent or its lenders manage to cajol or coerce the government into extending a guarantee of payment of the loan obligations, the risks assumed by the lenders are passed right back to government. I cannot understand why, in the instant case, government cheerfully assented to reassuming the risks of the project when it gave the prohibited guarantee and thus simply negated the very purpose of the BOT Law and the protection it gives the government. Contract Termination

Provisions in the Piatco

Contracts Are Void The BOT Law as amended provides for contract termination as follows: "Sec. 7. Contract Termination. - In the event that a project is revoked, cancelled or terminated by the government through no fault of the project proponent or by mutual agreement, the Government shall compensate the said project proponent for its actual expenses incurred in the project plus a reasonable rate of return thereon not exceeding that stated in the contract as of the date of such revocation, cancellation or termination: Provided, That the interest of the Government in this instances [sic] shall be duly insured with the Government Service Insurance System or any other insurance entity duly accredited by the Office of the Insurance Commissioner: Provided, finally, That the cost of the insurance coverage shall be included in the terms and conditions of the bidding referred to above. "In the event that the government defaults on certain major obligations in the contract and such failure is not remediable or if remediable shall remain unremedied for an unreasonable length of time, the project proponent/contractor may, by prior notice to the concerned national government agency or
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project proponent/contractor may, by prior notice to the concerned national government agency or local government unit specifying the turn-over date, terminate the contract. The project proponent/contractor shall be reasonably compensated by the Government for equivalent or proportionate contract cost as defined in the contract." The foregoing statutory provision in effect provides for the following limited instances when termination compensation may be allowed:
1. Termination by the government through no fault of the project proponent 2. Termination upon the parties mutual agreement 3. Termination by the proponent due to governments default on certain major contractual obligations To emphasize, the law does not permit compensation for the project proponent when contract termination is due to the proponents own fault or breach of contract. This principle was clearly violated in the Piatco Contracts. The ARCA stipulates that government is to pay termination compensation to Piatco even when termination is initiated by government for the following causes: "(i) Failure of Concessionaire to finish the Works in all material respects in accordance with the Tender Design and the Timetable; (ii) Commission by Concessionaire of a material breach of this Agreement x x x; (iii) x x x a change in control of Concessionaire arising from the sale, assignment, transfer or other disposition of capital stock which results in an ownership structure violative of statutory or constitutional limitations;

(iv) A pattern of continuing or repeated non-compliance, willful violation, or non-performance of other terms and conditions hereof which is hereby deemed a material breach of this Agreement x x x."[62]
As if that were not bad enough, the ARCA also inserted into Section 8.01 the phrase "Subject to Section 4.04." The effect of this insertion is that in those instances where government may terminate the contract on account of Piatcos breach, and it is nevertheless required under the ARCA to make termination compensation to Piatco even though unauthorized by law, such compensation is to be equivalent to the payment amount guaranteed by government -- either a) the Appraised Value of the terminal facility or (b) the aggregate of the Attendant Liabilities, whichever amount is greater! Clearly, this condition is not in line with Section 7 of the BOT Law. That provision permits a project proponent to recover the actual expenses it incurred in the prosecution of the project plus a reasonable rate of return not in excess of that provided in the contract; or to be compensated for the equivalent or proportionate contract cost as defined in the contract, in case the government is in default on certain major contractual obligations. Furthermore, in those instances where such termination compensation is authorized by the BOT Law, it is indispensable that the interest of government be duly insured. Section 5.08 the ARCA mandates insurance coverage for the terminal facility; but all insurance policies are to be assigned, and all proceeds are payable, to the Senior Lenders. In brief, the interest being secured by such coverage is that of the Senior Lenders, not that of government. This can hardly be considered compliance with law. In essence, the ARCA provisions on termination compensation result in another unauthorized government guarantee, this time in favor of Piatco.

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government guarantee, this time in favor of Piatco.

A Prohibited Direct Government Subsidy, Which at the Same Time Is an Assault on the

National Honor
Still another contractual provision offensive to law and public policy is Section 8.01(d) of the ARCA, which is a "bolder and badder"version of Section 8.04(d) of the CA. It will be recalled that Section 4-A of the BOT Law as amended prohibits not only direct government guarantees, but likewise a direct government subsidy for unsolicited proposals. Section 13.2. b. iii. of the 1999 IRR defines a direct government subsidy as encompassing "an agreement whereby the Government x x x will x x x postpone any payments due from the proponent." Despite the statutory ban, Section 8.01(d) of the ARCA provides thus: "(d) The provisions of Section 8.01(a) notwithstanding, and for the purpose of preventing a disruption of the operations in the Terminal and/or Terminal Complex, in the event that at any time Concessionaire is of the reasonable opinion that it shall be unable to meet a payment obligation owed to the Senior Lenders, Concessionaire shall give prompt notice to GRP, through DOTC/MIAA and to the Senior Lenders. In such circumstances, the Senior Lenders (or the Senior Lenders Representative) may ensure that after making provision for administrative expenses and depreciation, the cash resources of Concessionaire shall first be used and applied to meet all payment obligations owed to the Senior Lenders. Any excess cash, after meeting such payment obligations, shall be earmarked for the payment of all sums payable by Concessionaire to GRP under this Agreement. If by reason of the foregoing GRP should be unable to collect in full all payments due to GRP under this Agreement, then the unpaid balance shall be payable within a 90-day grace period counted from the relevant due date, with interest per annum at the rate equal to the average 91-day Treasury Bill Rate as of the auction date immediately preceding the relevant due date. If payment is not effected by Concessionaire within the grace period, then a spread of five (5%) percent over the applicable 91-day Treasury Bill Rate shall be added on the unpaid amount commencing on the expiry of the grace period up to the day of full payment. When the temporary illiquidity of Concessionaire shall have been corrected and the cash position of Concessionaire should indicate its ability to meet its maturing obligations, then the provisions set forth under this Section 8.01(d) shall cease to apply. The foregoing remedial measures shall be applicable only while there remains unpaid and outstanding amounts owed to the Senior Lenders." talics supplied) By any manner of interpretation or application, Section 8.01(d) of the ARCA clearly mandates the indefinite postponement of payment of all of Piatcos obligations to the government, in order to ensure that Piatcos obligations to the Senior Lenders are paid in full first. That is nothing more or less than the direct government subsidy prohibited by the BOT Law and the IRR. The fact that Piatco will pay interest on the unpaid amounts owed to government does not change the situation or render the prohibited subsidy any less unacceptable. But beyond the clear violations of law, there are larger issues involved in the ARCA. Earlier, I mentioned that Section 8.01(d) of the ARCA completely eliminated the proviso in Section 8.04(d) of the CA which gave government the right to appoint a financial controller to manage the cash position of Piatco during situations of financial distress. Not only has government been deprived of any means of monitoring and managing the situation; worse, as can be seen from Section 8.01(d) above-quoted, the Senior Lenders

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have effectively locked in on the right to exercise financial controllership over Piatco and to allocate its cash resources to the payment of all amounts owed to the Senior Lenders before allowing any payment to be made to government.
In brief, this particular provision of the ARCA has placed in the hands of foreign lenders the power and the authority to determine how much (if at all) and when the Philippine government (as grantor of the franchise) may be allowed to receive from Piatco. In that situation, government will be at the mercy of the foreign lenders. This is a situation completely contrary to the rationale of the BOT Law and to public policy. The aforesaid provision rouses mixed emotions - shame and disgust at the parties (especially the government officials) docile submission and abject servitude and surrender to the imperious and excessive demands of the foreign lenders, on the one hand; and vehement outrage at the affront to the sovereignty of the Republic and to the national honor, on the other. It is indeed time to put an end to such an unbearable, dishonorable situation. The Piatco Contracts Unarguably Violate Constitutional Injunctions I will now discuss the manner in which the Piatco Contracts offended the Constitution. The Exclusive Right Granted to

Piatco to Operate a Public Utility

Is Prohibited by the Constitution

While Section 2.02 of the ARCA spoke of granting to Piatco "a franchise to operate and maintain the Terminal Complex,"Section 3.02(a) of the same ARCA granted to Piatco, for the entire term of the concession agreement, "the exclusive right to operate a commercial international passenger terminal within the Island of Luzon" with the exception of those three terminals already existing[63] at the time of execution of the ARCA.
Section 11 of Article XII of the Constitution prohibits the grant of a "franchise, certificate, or any other form of authorization for the operation of a public utility"that is "exclusive in character." In its Opinion No. 078, Series of 1995, the Department of Justice held that "the NAIA Terminal III which x x x is a terminal for public use is a public utility." Consequently, the constitutional prohibition against the exclusivity of a franchise applies to the franchise for the operation of NAIA Terminal III as well. What was granted to Piatco was not merely a franchise, but an "exclusive right"to operate an international passenger terminal within the "Island of Luzon." What this grant effectively means is that the government is now estopped from exercising its inherent power to award any other person another franchise or a right to operate such a public utility, in the event public interest in Luzon requires it. This restriction is highly detrimental to government and to the public interest. Former Secretary of Justice Hernando B. Perez expressed this point well in his Memorandum for the President dated 21 May 2002: "Section 3.02 on Exclusivity "This provision gives to PIATCO (the Concessionaire) the exclusive right to operate a commercial international airport within the Island of Luzon with the exception of those already existing at the time of the execution of the Agreement, such as the airports at Subic, Clark and Laoag City. In the case of the
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of the execution of the Agreement, such as the airports at Subic, Clark and Laoag City. In the case of the Clark International Airport, however, the provision restricts its operation beyond its design capacity of 850,000 passengers per annum and the operation of new terminal facilities therein until after the new NAIA Terminal III shall have consistently reached or exceeded its design capacity of ten (10) million passenger capacity per year for three (3) consecutive years during the concession period. "This is an onerous and disadvantageous provision. It effectively grants PIATCO a monopoly in Luzon and ties the hands of government in the matter of developing new airports which may be found expedient and necessary in carrying out any future plan for an inter-modal transportation system in Luzon.
"Additionally, it imposes an unreasonable restriction on the operation of the Clark International Airport which could adversely affect the operation and development of the Clark Special Economic Zone to the economic prejudice of the local constituencies that are being benefited by its operation." talics supplied)

While it cannot be gainsaid that an enterprise that is a public utility may happen to constitute a monopoly on account of the very nature of its business and the absence of competition, such a situation does not however constitute justification to violate the constitutional prohibition and grant an exclusive franchise or exclusive right to operate a public utility.
Piatcos contention that the Constitution does not actually prohibit monopolies is beside the point. As correctly argued,[64] the existence of a monopoly by a public utility is a situation created by circumstances that do not encourage competition. This situation is different from the grant of a franchise to operate a public utility, a privilege granted by government. Of course, the grant of a franchise may result in a monopoly. But making such franchise exclusive is what is expressly proscribed by the Constitution. Actually, the aforementioned Section 3.02 of the ARCA more than just guaranteed exclusivity; it also guaranteed that the government will not improve or expand the facilities at Clark -- and in fact is required to put a cap on the latters operations -- until after Terminal III shall have been operated at or beyond its peak capacity for three consecutive years.[65] As counsel for public respondents pointed out, in the real world where the rate of influx of international passengers can fluctuate substantially from year to year, it may take many years before Terminal III sees three consecutive years operations at peak capacity. The Diosdado Macapagal International Airport may thus end up stagnating for a long time. Indeed, in order to ensure greater profits for Piatco, the economic progress of a region has had to be sacrificed. The Piatco Contracts

Violate the Time Limitation

on Franchises

Section 11 of Article XII of the Constitution also provides that "no franchise, certificate or any other form of authorization for the operation of a public utility shall be x x x for a longer period than fifty years." After all, a franchise held for an unreasonably long time would likely give rise to the same evils as a monopoly.
The Piatco Contracts have come up with an innovative way to circumvent the prohibition and obtain an extension. This fact can be gleaned from Section 8.03(b) of the ARCA, which I quote thus: "Sec. 8.03. Termination Procedure and Consequences of Termination. -

a)

x xx

xx x

xx x
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a)

x xx

xx x

xx x

b) In the event the Agreement is terminated pursuant to Section 8.01(b) hereof, Concessionaire shall be entitled to collect the Liquidated Damages specified in Annex G. The full payment by GRP to Concessionaire of the Liquidated Damages shall be a condition precedent to the transfer by Concessionaire to GRP of the Development Facility. Prior to the full payment of the Liquidated Damages, Concessionaire shall to the extent practicable continue to operate the Terminal and the Terminal Complex and shall be entitled to retain and withhold all payments to GRP for the purpose of offsetting the same against the Liquidated Damages. Upon full payment of the Liquidated Damages, Concessionaire shall immediately transfer the Development Facility to GRP on as-is-where-is basis."
The aforesaid easy payment scheme is less beneficial than it first appears. Although it enables government to avoid having to make outright payment of an obligation that will likely run into billions of pesos, this easy payment plan will nevertheless cost government considerable loss of income, which it would earn if it were to operate Terminal III by itself. Inasmuch as payments to the concessionaire (Piatco) will be on "installment basis,"interest charges on the remaining unpaid balance would undoubtedly cause the total outstanding balance to swell. Piatco would thus be entitled to remain in the drivers seat and keep operating the terminal for an indefinite length of time.

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\

[2003V454ES] [6/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[3/3] SEPARATE OPINION

The Contracts Create Two Monopolies for Piatco By way of background, two monopolies were actually created by the Piatco contracts. The first and more obvious one refers to the business of operating an international passenger terminal in Luzon, the business end of which involves providing international airlines with parking space for their aircraft, and airline passengers with the use of departure and arrival areas, check-in counters, information systems, conveyor systems, security equipment and paraphernalia, immigrations and customs processing areas; and amenities such as comfort rooms, restaurants and shops.

In furtherance of the first monopoly, the Piatco Contracts stipulate that the NAIA Terminal III will be the only facility to be operated as an international passenger terminal;[66] that NAIA Terminals I and II will no longer be operated as such;[67] and that no one (including the government) will be allowed to compete with Piatco in the operation of an international passenger terminal in the NAIA Complex.[68] Given that, at this time, the government and Piatco are the only ones engaged in the business of operating an international passenger terminal, I am not acutely concerned with this particular monopolistic situation.

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There was however another monopoly within the NAIA created by the subject contracts for Piatco -- in the business of providing international airlines with the following: groundhandling, in-flight catering, cargo handling, and aircraft repair and maintenance services. These are lines of business activity in which are engaged many service providers (including the petitioners-in-intervention), who will be adversely affected upon full implementation of the Piatco Contracts, particularly Sections 3.01(d)[69] and (e)[70] of both the ARCA and the CA. On the one hand, Section 3.02(a) of the ARCA makes Terminal III the only international passenger terminal at the NAIA, and therefore the only place within the NAIA Complex where the business of providing airport-related services to international airlines may be conducted. On the other hand, Section 3.01(d) of the ARCA requires government, through the MIAA, not to allow service providers with expired MIAA contracts to renew or extend their contracts to render airport-related services to airlines. Meanwhile, Section 3.01(e) of the ARCA requires government, through the DOTC and MIAA, not to allow service providers -- those with subsisting concession agreements for services and operations being conducted at Terminal I -- to carry over their concession agreements, services and operations to Terminal III, unless they first enter into a separate agreement with Piatco. The aforementioned provisions vest in Piatco effective and exclusive control over which service provider may and may not operate at Terminal III and render the airport-related services needed by international airlines. It thereby possesses the power to exclude competition. By necessary implication, it also has effective control over the fees and charges that will be imposed and collected by these service providers. This intention is exceedingly clear in the declaration by Piatco that it is "completely within its rights to exclude any party that it has not contracted with from NAIA Terminal III."[71]

Worse, there is nothing whatsoever in the Piatco Contracts that can serve to restrict, control or regulate the concessionaires discretion and power to reject any service provider and/or impose any term or condition it may see fit in any contract it enters into with a service provider. In brief, there is no safeguard whatsoever to ensure free and fair competition in the service-provider sector.
In the meantime, and not surprisingly, Piatco is first in line, ready to exploit the unique business opportunity. It announced[72] that it has accredited three groundhandlers for Terminal III. Aside from the Philippine Airlines, the other accredited entities are the Philippine Airport and Ground Services Globeground, Inc. ("PAGSGlobeground") and the Orbit Air Systems, Inc. ("Orbit"). PAGSGlobeground is a wholly-owned subsidiary of the Philippine Airport and Ground Services, Inc. or PAGS,[73] while Orbit is a wholly-owned subsidiary of Friendship Holdings, Inc.,[74] which is in turn owned 80 percent by PAGS.[75] PAGS is a service provider owned 60 percent by the Cheng Family;[76] it is a stockholder of 35 percent of Piatco*77+ and is the latters designated contractor-operator for NAIA Terminal III.[78] Such entry into and domination of the airport-related services sector appear to be very much in line with the following provisions contained in the First Addendum to the Piatco Shareholders Agreement,[79] executed on July 6, 1999, which appear to constitute a sort of master plan to create a monopoly and combinations in restraint of trade: "11. a. The Shareholders shall ensure: xx x xx x x x x;

b. That (Phil. Airport and Ground Services, Inc.) PAGS and/or its designated Affiliates shall, at all times during the Concession Period, be exclusively authorized by (PIATCO) to engage in the provision of ground-handling, catering and fueling services within the Terminal Complex. c. That PAIRCARGO and/or its designated Affiliate shall, during the Concession Period, be the only
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c. That PAIRCARGO and/or its designated Affiliate shall, during the Concession Period, be the only entities authorized to construct and operate a warehouse for all cargo handling and related services within the Site." Precisely, proscribed by our Constitution are the monopoly and the restraint of trade being fostered by the Piatco Contracts through the erection of barriers to the entry of other service providers into Terminal III. In Tatad v. Secretary of the Department of Energy,[80] the Court ruled: "x x x *S+ection 19 of Article XII of the Constitution x x x mandates: The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.

"A monopoly is a privilege or peculiar advantage vested in one or more persons or companies, consisting in the exclusive right or power to carry on a particular business or trade, manufacture a particular article, or control the sale or the whole supply of a particular commodity. It is a form of market structure in which one or only a few firms dominate the total sales of a product or service. On the other hand, a combination in restraint of trade is an agreement or understanding between two or more persons, in the form of a contract, trust, pool, holding company, or other form of association, for the purpose of unduly restricting competition, monopolizing trade and commerce in a certain commodity, controlling its production, distribution and price, or otherwise interfering with freedom of trade without statutory authority. Combination in restraint of trade refers to the means while monopoly refers to the end. "x x x x xx x xx

"Section 19, Article XII of our Constitution is anti-trust in history and in spirit. It espouses competition. The desirability of competition is the reason for the prohibition against restraint of trade, the reason for the interdiction of unfair competition, and the reason for regulation of unmitigated monopolies. Competition is thus the underlying principle of [S]ection 19, Article XII of our Constitution, x x x."[81]

Gokongwei Jr. v. Securities and Exchange Commission[82] elucidates the criteria to be employed: "A monopoly embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public. In short, it is the concentration of business in the hands of a few. The material consideration in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired."[83] mphasis supplied) The Contracts Encourage
Monopolistic Pricing, Too Aside from creating a monopoly, the Piatco contracts also give the concessionaire virtually limitless power over the charging of fees, rentals and so forth. What little "oversight function"the government might be able and minded to exercise is less than sufficient to protect the public interest, as can be gleaned from the following provisions: "Sec. 6.06 Adjustment of Non-Public Utility Fees and Charges "For fees, rentals and charges constituting Non-Public Utility Revenues, Concessionaire may make any adjustments it deems appropriate without need for the consent of GRP or any government agency subject to Sec. 6.03(c)." Section 6.03 (c) in turn provides:

"(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility
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"(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the vehicular parking fee, porterage fee and greeter/wellwisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP may require Concessionaire to explain and justify the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable deprivation of End Users of such services." It will be noted that the above-quoted provision has no teeth, so the concessionaire can defy the government without fear of any sanction. Moreover, Section 6.06 -- taken together with Section 6.03(c) of the ARCA -- falls short of the standard set by the BOT Law as amended, which expressly requires in Section 2(b) that the project proponent is "allowed to charge facility users appropriate tolls, fees, rentals and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract x x x." The Piatco Contracts Violate Constitutional Prohibitions Against Impairment of Contracts

and Deprivation of Property

Without Due Process

Earlier, I discussed how Section 3.01(e)[84] of both the CA and the ARCA requires government, through DOTC/MIAA, not to permit the carry-over to Terminal III of the services and operations of certain service providers currently operating at Terminal I with subsisting contracts.
By the In-Service Date, Terminal III shall be the only facility to be operated as an international passenger terminal at the NAIA;[85] thus, Terminals I and II shall no longer operate as such,[86] and no one shall be allowed to compete with Piatco in the operation of an international passenger terminal in the NAIA.[87] The bottom line is that, as of the In-Service Date, Terminal III will be the only terminal where the business of providing airport-related services to international airlines and passengers may be conducted at all. Consequently, government through the DOTC/MIAA will be compelled to cease honoring existing contracts with service providers after the In-Service Date, as they cannot be allowed to operate in Terminal III. In short, the CA and the ARCA obligate and constrain government to break its existing contracts with these service providers. Notably, government is not in a position to require Piatco to accommodate the displaced service providers, and it would be unrealistic to think that these service providers can perform their service contracts in some other international airport outside Luzon. Obviously, then, these displaced service providers are -- to borrow a quaint expression -- up the river without a paddle. In plainer terms, they will have lost their businesses entirely, in the blink of an eye. What we have here is a set of contractual provisions that impair the obligation of contracts and contravene the constitutional prohibition against deprivation of property without due process of law.[88] Moreover, since the displaced service providers, being unable to operate, will be forced to close shop, their respective employees - among them Messrs. Agan and Lopez et al. -- have very grave cause for concern, as they will find themselves out of employment and bereft of their means of livelihood. This
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concern, as they will find themselves out of employment and bereft of their means of livelihood. This situation comprises still another violation of the constitution prohibition against deprivation of property without due process. True, doing business at the NAIA may be viewed more as a privilege than as a right. Nonetheless, where that privilege has been availed of by the petitioners-in-intervention service providers for years on end, a situation arises, similar to that in American Inter-fashion v. GTEB.[89] We held therein that a privilege enjoyed for seven years "evolved into some form of property right which should not be removed x x x arbitrarily and without due process."Said pronouncement is particularly relevant and applicable to the situation at bar because the livelihood of the employees of petitioners-intervenors are at stake. The Piatco Contracts Violate Constitutional Prohibition Against Deprivation of Liberty

Without Due Process

The Piatco Contracts by locking out existing service providers from entry into Terminal III and restricting entry of future service providers, thereby infringed upon the freedom -- guaranteed to and heretofore enjoyed by international airlines -- to contract with local service providers of their choice, and vice versa. Both the service providers and their client airlines will be deprived of the right to liberty, which includes the right to enter into all contracts,*90+ and/or the right to make a contract in relation to ones business.[91] By Creating New Financial Obligations for Government,

Supplements to the ARCA Violate

the Constitutional Ban on

Disbursement of Public Funds

Without Valid Appropriation Clearly prohibited by the Constitution is the disbursement of public funds out of the treasury, except in pursuance of an appropriation made by law.[92] The immediate effect of this constitutional ban is that all the various agencies of government are constrained to limit their expenditures to the amounts appropriated by law for each fiscal year; and to carefully count their cash before taking on contractual commitments. Giving flesh and form to the injunction of the fundamental law, Sections 46 and 47 of Executive Order 292, otherwise known as the Administrative Code of 1987, provide as follows: "Sec. 46. Appropriation Before Entering into Contract. - (1) No contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to cover the proposed expenditure; and x x x "Sec. 47. Certificate Showing Appropriation to Meet Contract. - Except in the case of a contract for personal service, for supplies for current consumption or to be carried in stock not exceeding the estimated consumption for three (3) months, or banking transactions of government-owned or controlled banks, no contract involving the expenditure of public funds by any government agency shall be entered into or authorized unless the proper accounting official of the agency concerned shall have
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be entered into or authorized unless the proper accounting official of the agency concerned shall have certified to the officer entering into the obligation that funds have been duly appropriated for the purpose and that the amount necessary to cover the proposed contract for the current calendar year is available for expenditure on account thereof, subject to verification by the auditor concerned. The certificate signed by the proper accounting official and the auditor who verified it, shall be attached to and become an integral part of the proposed contract, and the sum so certified shall not thereafter be available for expenditure for any other purpose until the obligation of the government agency concerned under the contract is fully extinguished." Referring to the aforequoted provisions, this Court has held that "(I)t is quite evident from the tenor of the language of the law that the existence of appropriations and the availability of funds are indispensable pre-requisites to or conditions sine qua non for the execution of government contracts. The obvious intent is to impose such conditions as a priori requisites to the validity of the proposed contract."[93] Notwithstanding the constitutional ban, statutory mandates and jurisprudential precedents, the three Supplements to the ARCA, which were not approved by NEDA, imposed on government the additional burden of spending public moneys without prior appropriation. In the First Supplement ("FS") dated August 27, 1999, the following requirements were imposed on the government: To construct, maintain and keep in good repair and operating condition all airport support services, facilities, equipment and infrastructure owned and/or operated by MIAA, which are not part of the Project or which are located outside the Site, even though constructed by Concessionaire including the access road connecting Terminals II and III and the taxilane, taxiways and runways

To obligate the MIAA to provide funding for the upkeep, maintenance and repair of the airports and facilities owned or operated by it and by third persons under its control in order to ensure compliance with international standards; and holding MIAA liable to Piatco for the latters losses, expenses and damages as well as for the latters liability to third persons, in case MIAA fails to perform such obligations; in addition, MIAA will also be liable for the incremental and consequential costs of the remedial work done by Piatco on account of the formers default.
Section 4 of the FS imposed on government ten (10) "Additional Special Obligations,"including the following:

Providing thru MIAA the land required by Piatco for the taxilane and one taxiway, at no cost to Piatco
Implementing the governments existing storm drainage master plan

Coordinating with DPWH the financing, implementation and completion of the following works before the In-Service Date: three left-turning overpasses (Edsa to Tramo St., Tramo to Andrews Ave., and Manlunas Road to Sales Ave.) and a road upgrade and improvement program involving widening, repair and resurfacing of Sales Road, Andrews Avenue and Manlunas Road; improvement of Nichols Interchange; and removal of squatters along Andrews Avenue

Dealing directly with BCDA and the Philippine Air Force in acquiring additional land or right of way for the road upgrade and improvement program Requiring government to work for the immediate reversion to MIAA of the Nayong Pilipino National Park, in order to permit the building of the second west parallel taxiway
Section 5 of the FS also provides that in lieu of the access tunnel, a surface access road (T2-T3) will
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 Section 5 of the FS also provides that in lieu of the access tunnel, a surface access road (T2-T3) will be constructed. This provision requires government to expend funds to purchase additional land from Nayong Pilipino and to clear the same in order to be able to deliver clean possession of the site to Piatco, as required in Section 5(c) of the FS. On the other hand, the Third Supplement ("TS") obligates the government to deliver, within 120 days from date thereof, clean possession of the land on which the T2-T3 Road is to be constructed. The foregoing contractual stipulations undeniably impose on government the expenditures of public funds not included in any congressional appropriation or authorized by any other statute. Piatco however attempts to take these stipulations out of the ambit of Sections 46 and 47 of the Administrative Code by characterizing them as stipulations for compliance on a "best-efforts basis"only.

To determine whether the additional obligations under the Supplements may really be undertaken on a best-efforts basis only, the nature of each of these obligations must be examined in the context of its relevance and significance to the Terminal III Project, as well as of any adverse impact that may result if such obligation is not performed or undertaken on time. In short, the criteria for determining whether the best-efforts basis will apply is whether the obligations are critical to the success of the Project and, accordingly, whether failure to perform them (or to perform them on time) could result in a material breach of the contract.
Viewed in this light, the "Additional Special Obligations"set out in Section 4 of the FS take on a different aspect. In particular, each of the following may all be deemed to play a major role in the successful and timely prosecution of the Terminal III Project: the obtention of land required by PIATCO for the taxilane and taxiway; the implementation of governments existing storm drainage master plan; and coordination with DPWH for the completion of the three left-turning overpasses before the In-Service Date, as well as acquisition and delivery of additional land for the construction of the T2-T3 access road. Conversely, failure to deliver on any of these obligations may conceivably result in substantial prejudice to the concessionaire, to such an extent as to constitute a material breach of the Piatco Contracts. Whereupon, the concessionaire may outrightly terminate the Contracts pursuant to Section 8.01(b)(i) and (ii) of the ARCA and seek payment of Liquidated Damages in accordance with Section 8.02(a) of the ARCA; or the concessionaire may instead require government to pay the Incremental and Consequential Losses under Section 1.23 of the ARCA.[94] The logical conclusion then is that the obligations in the Supplements are not to be performed on a best-efforts basis only, but are unarguably mandatory in character.

Regarding MIAAs obligation to coordinate with the DPWH for the complete implementation of the road upgrading and improvement program for Sales, Andrews and Manlunas Roads (which provide access to the Terminal III site) prior to the In-Service Date, it is essential to take note of the fact that there was a pressing need to complete the program before the opening of Terminal III.[95] For that reason, the MIAA was compelled to enter into a memorandum of agreement with the DPWH in order to ensure the timely completion of the road widening and improvement program. MIAA agreed to advance the total amount of P410.11 million to DPWH for the works, while the latter was committed to do the following:
"2.2.8. Reimburse all advance payments to MIAA including but not limited to interest, fees, plus other costs of money within the periods CY2004 and CY2006 with payment of no less than One Hundred Million Pesos (PhP100M) every year. "2.2.9. Perform all acts necessary to include in its CY2004 to CY2006 budget allocation the repayments for the advances made by MIAA, to ensure that the advances are fully repaid by CY2006. For this purpose, DPWH shall include the amounts to be appropriated for reimbursement to MIAA in the "Not Needing Clearance"column of their Agency Budget Matrix (ABM) submitted to the Department of Budget and Management."

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It can be easily inferred, then, that DPWH did not set aside enough funds to be able to complete the upgrading program for the crucially situated access roads prior to the targeted opening date of Terminal III; and that, had MIAA not agreed to lend the P410 million, DPWH would not have been able to complete the program on time. As a consequence, government would have been in breach of a material obligation. Hence, this particular undertaking of government may likewise not be construed as being for best-efforts compliance only. They also Infringe on the

Legislative Prerogative and

Power Over the Public Purse But the particularly sad thing about this transaction between MIAA and DPWH is the fact that both agencies were maneuvered into (or allowed themselves to be maneuvered into) an agreement that would ensure delivery of upgraded roads for Piatcos benefit, using funds not allocated for that purpose. The agreement would then be presented to Congress as a done deal. Congress would thus be obliged to uphold the agreement and support it with the necessary allocations and appropriations for three years, in order to enable DPWH to deliver on its committed repayments to MIAA. The net result is an infringement on the legislative power over the public purse and a diminution of Congress control over expenditures of public funds -- a development that would not have come about, were it not for the Supplements. Very clever but very illegal!

EPILOGUE
What Do We Do Now? In the final analysis, there remains but one ultimate question, which I raised during the Oral Argument on December 10, 2002: What do we do with the Piatco Contracts and Terminal III?[96] (Feeding directly into the resolution of the decisive question is the other nagging issue: Why should we bother with determining the legality and validity of these contracts, when the Terminal itself has already been built and is practically complete?)

Prescinding from all the foregoing disquisition, I find that all the Piatco contracts, without exception, are void ab initio and therefore inoperative. Even the very process by which the contracts came into being -- the bidding and the award -- has been riddled with irregularities galore and blatant violations of law and public policy, far too many to ignore. There is thus no conceivable way, as proposed by some, of saving one (the original Concession Agreement) while junking all the rest.
Neither is it possible to argue for the retention of the Draft Concession Agreement (referred to in the various pleadings as the Contract Bidded Out) as the contract that should be kept in force and effect to govern the situation, inasmuch as it was never executed by the parties. What Piatco and the government executed was the Concession Agreement which is entirely different from the Draft Concession Agreement. Ultimately, though, it would be tantamount to an outrageous, grievous and unforgivable mutilation of public policy and an insult to ourselves if we opt to keep in place a contract -- any contract -- for to do so would assume that we agree to having Piatco continue as the concessionaire for Terminal III. Despite all the insidious contraventions of the Constitution, law and public policy Piatco perpetrated, keeping Piatco on as concessionaire and even rewarding it by allowing it to operate and profit from Terminal III -- instead of imposing upon it the stiffest sanctions permissible under the laws -- is unconscionable.

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unconscionable. It is no exaggeration to say that Piatco may not really mind which contract we decide to keep in place. For all it may care, we can do just as well without one, if we only let it continue and operate the facility. After all, the real money will come not from building the Terminal, but from actually operating it for fifty or more years and charging whatever it feels like, without any competition at all. This scenario must not be allowed to happen. If the Piatco contracts are junked altogether as I think they should be, should not AEDC automatically be considered the winning bidder and therefore allowed to operate the facility? My answer is a stone-cold No. AEDC never won the bidding, never signed any contract, and never built any facility. Why should it be allowed to automatically step in and benefit from the greed of another?

Should government pay at all for reasonable expenses incurred in the construction of the Terminal? Indeed it should, otherwise it will be unjustly enriching itself at the expense of Piatco and, in particular, its funders, contractors and investors -- both local and foreign. After all, there is no question that the State needs and will make use of Terminal III, it being part and parcel of the critical infrastructure and transportation-related programs of government.
In Melchor v. Commission on Audit,[97] this Court held that even if the contract therein was void, the principle of payment by quantum meruit was found applicable, and the contractor was allowed to recover the reasonable value of the thing or services rendered (regardless of any agreement as to the supposed value), in order to avoid unjust enrichment on the part of government. The principle of quantum meruit was likewise applied in Eslao v. Commission on Audit,[98] because to deny payment for a building almost completed and already occupied would be to permit government to unjustly enrich itself at the expense of the contractor. The same principle was applied in Republic v. Court of Appeals.[99] One possible practical solution would be for government -- in view of the nullity of the Piatco contracts and of the fact that Terminal III has already been built and is almost finished -- to bid out the operation of the facility under the same or analogous principles as build-operate-and-transfer projects. To be imposed, however, is the condition that the winning bidder must pay the builder of the facility a price fixed by government based on quantum meruit; on the real, reasonable -- not inflated -- value of the built facility. How the payment or series of payments to the builder, funders, investors and contractors will be staggered and scheduled, will have to be built into the bids, along with the annual guaranteed payments to government. In this manner, this whole sordid mess could result in something truly beneficial for all, especially for the Filipino people. WHEREFORE, I vote to grant the Petitions and to declare the subject contracts NULL and VOID. [1] See Kilosbayan, Inc. v. Guingona Jr., 232 SCRA 110, May 5, 1994; and Basco v. Phil. Amusements and Gaming Corporation, 197 SCRA 52, May 14, 1991.

[2] COMELEC v. Quijano-Padilla, GR No. 151992, September 18, 2002.

[3] Vide: ABS-CBN Broadcasting Corp. v. Commission on Elections, 323 SCRA 811, January 28, 2000; likewise, COMELEC v. Quijano-Padilla, supra. *4+ See Respondent PIATCOs Memorandum, pp. 25-26. *5+ See public respondents Memorandum, p. 24. [6] 307 SCRA 394, 399, May 19, 1999, per Panganiban, J.

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[7] 175 SCRA 264, July 11, 1989. [8] Supra, Paras, J. [9] As reiterated in Bayan (Bagong Alyansang Makabayan) v. Zamora, 342 SCRA 449, 480-481, October 10, 2000. [10] RA No. 6957 as amended by RA No. 7718. [11] Par. 3.6.1 on page 8 of the Bid Documents. [12] Initially the minimum equity was set at 20%, per Sec. 3.6.4 of the Bid Documents. However, this was later clarified in Bid Bulletin No. 3(B)(6) to read 30% of Project Cost, to bring the same in line with the draft concession agreements Art. II Sec. 2.01(a), which specifically set the projects debt-to-equity ratio at 70:30, thereby requiring a minimum equity of 30% of project cost. *13+ The consortium was composed of Paircargo, PAGS and Security Bank. Paircargos audited financial statements as of 1993 and 1994 showed a net worth of P2,783,592 and P3,123,515 respectively. PAGS audited financial statements as of 1995 showed a paid-up capital of P5,000,000 and deposits on future subscriptions of P21,735,700, or an aggregate of P26,735,700 of equity available to invest in the project. Security Banks audited statements for 1995 showed a net worth of P3,523,504,377. However, the banks entire net worth was not available for investment in the project since Sec. 21-B of the General Banking Act provides inter alia that a commercial banks equity investment in any one enterprise, whether allied or non-allied, should not exceed 15% of the net worth of the investing bank. This limitation is reiterated in Sec. 1381.1.a. of the Manual for Banks and Other Financial Intermediaries. Thus, the maximum amount which Security Bank could have legally invested in the project was only P528,525,656.55. And consequently, the maximum amount of equity which the consortium could have put up was only P558,384,871.55.

[14] 199 SCRA 134, July 12, 1991.

[15] Malaga v. Penachos Jr., 213 SCRA 516, September 3, 1992.

[16] Part of the bid process under the BOT Law is the right of the originator of an unsolicited proposal to match a price challenge. Pursuant to Sec. 4-A, "in the event another proponent submits a lower price proposal, the original proponent shall have the right to match that price within thirty (30) working days."
[17] Cf. Malaga v. Penachos, Jr., supra. *18+ 11.2, 1994 IRR. *19+ Public respondents Memorandum, pp. 86-87; prepared jointly by the solicitor general, the acting government corporate counsel, and their respective deputies and assistants.

[20] Supra, note 14, per Medialdea, J.

*21+ 3.01(d), 3.01(e), 3.02(a), 3.02(b) and 5.15 of the CA. *22+ See 1.06 of the CA. *23+ 3.02 of the CA. *24+ 2.05 of the CA.

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[25] The parametric formula referred to in the CA applies only to the following so-called public utility fees: aircraft parking and tacking fees, check-in counter fees and terminal fees. [26] Fernandez, A Treatise on Government Contracts under Philippine Law, 2001 ed., p. 70. [27] 96 Phil. 368, December 29, 1954. [28] Id., p. 375, per Paras, CJ.

[29] 63 SCRA 170, 177-178, March 21, 1975, per Antonio, J.

*30+ Cf. 1.06 of the ARCA vis--vis 1.06 of the CA.

*31+ 4.04 and 8.01 of the ARCA vis--vis 8.04 of the CA.
[32] As cf. Annex "G"of the ARCA vis--vis Annex "G"of the CA. *33+ Cf. 8.04(d) of the ARCA vis--vis 9.01(d) of the CA.

*34+ Cf. 2.05 of the ARCA vis--vis 2.05 of the CA.

*35+ Cf. 5.08(a) of the ARCA vis--vis 5.08(a) of the CA.

*36+ Cf. 6.03(a)(i) of the ARCA vis--vis 6.03(a) of the CA.

*37+ Cf. 8.01(b) and 12.09 of the ARCA vis- -vis 8.04(b) and 12.09 of the CA. *38+ Cf. 8.03(a)(i) of the ARCA vis--vis 8.06(a)(i) of the CA. *39+ 2.05(g) of the ARCA. *40+ 4.04(b) of the ARCA. *41+ 6.03(c) of the ARCA vis-- vis 6.03(c) of the CA. *42+ Cf. 8.01(b) of the ARCA vis--vis 8.04(b) of the CA. *43+ 12.14 of the ARCA. *44+ Cf. 1.11(b) and 5.06 of the ARCA vis--vis 1.11(b) and 5.06 of the CA.

*45+ 2 of the FS, amending 1.36 of the ARCA.

*46+ 3 of the FS, amending 2.05(d) of the ARCA.

[47] Ibid.
*48+ 4 of the FS, adding 2.05(h) to ARCA. *49+ 4 of the FS, adding 2.05(i) to ARCA.

*50+ 4 of the FS, adding 2.05(p) to ARCA.

*51+ Per 4 of the FS, adding 2.05(n) to ARCA.
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*51+ Per 4 of the FS, adding 2.05(n) to ARCA. *52+ Per 4 of the FS, adding 2.05(o) to ARCA. *53+ Per 4 of the FS, adding 2.05(p) to ARCA. *54+ Per 4 of the FS, adding 2.05(j) to ARCA. *55+ 8 of the FS, amending 6.01(c) of the ARCA. *56+ 9 of the FS, amending 6.02 of the ARCA. *57+ Sec. 2.1 of the SS. *58+ Per 3.1 of the TS.

*59+ Vide 3.4 of the TS.

*60+ 4.2 of the TS.

[61] Page 37.

*62+ 8.01 (a) of the ARCA. [63] Namely, the airports at the Subic Bay Freeport Special Economic Zone, the Clark Special Economic Zone, and Laoag City.

[64] Memorandum, pp. 5-7, of the petitioners-in-intervention.

*65+ 3.02 a): "x x x. With regard to CSEZ, GRP shall ensure that, until such time as the Development Facility Capacity shall have been consistently reached or exceeded for three (3) consecutive years during the Concession Period, (i) Clark International Airport shall not be operated beyond its design capacity of Eight Hundred Fifty Thousand (850,000) passengers per annum and (ii) no new terminal facilities shall be operated therein. "Development Facility Capacity"refers to the ten million (10,000,000) passenger capacity per year of the Development Facility." *66+ 3.02(a) of the ARCA and 3.02(a) of the CA. *67+ 3.02(b) and (c) of the ARCA, and 3.02(b) of the CA. *68+ 3.02(b) and (c) of the ARCA and 3.02(b) of the CA. Pertinent portions of 3.02(b) of the ARCA are quoted hereinbelow: "(b) On the In-Service Date, GRP shall cause the closure of the Ninoy Aquino International Airport Passenger Terminals I and II as international passenger terminals in order to allow Concessionaire, during the entire Concession Period, to exclusively operate a commercial international passenger terminal within the island of Luzon; provided that the aforesaid exclusive right to operate a commercial international passenger terminal shall be without prejudice to the international passenger terminal operations already existing on the date of this Agreement in SBFSEZ, CSEZ and Laoag City (but subject to the limitation with regard to CSEZ referred to in Section 3.02[a]). Neither shall GRP, DOTC or MIAA use or permit the use of Terminals I and/or II under any arrangement or scheme, for compensation or otherwise, with any party which would directly or indirectly compete with Concessionaire in the latters operation of and the operations in the Terminal and Terminal Complex, including without limitation the use of Terminals I and/or II for the handling of international traffic; provided that if Terminals I and/or II are operated as domestic passenger terminals, the conduct of any activity therein which under the
Banking Page 289

are operated as domestic passenger terminals, the conduct of any activity therein which under the ordinary course of operating a domestic passenger terminal is normally undertaken, shall not be considered to be in direct or indirect competition with Concessionaire in its operation of the Development Facility."
[69] Sec. 3.01(d) of the ARCA and the CA reads as follows: "(d) For the purpose of an orderly transition, MIAA shall not renew any expired concession agreement relative to any service or operation currently being undertaken at the Ninoy Aquino International Airport Passenger Terminal I, or extend any concession agreement which may expire subsequent hereto, except to the extent that the continuation of existing services and operations shall lapse on or before the In-Service Date. Nothing herein shall be construed to prohibit MIAA from maintaining arrangements for the uninterrupted provision of essential services at the Ninoy Aquino International Airport Passenger Terminal I until the Terminal shall have commenced operations on the In-Service Date, and thereafter, from making such arrangements as are necessary for the utilization of NAIA Passenger Terminal I as a domestic passenger terminal or as a facility other than an international passenger terminal.

[70] Sec. 3.01(e) of the ARCA and the CA reads as follows:

"(e) GRP confirms that certain concession agreements relative to certain services or operations currently being undertaken at the Ninoy Aquino International Airport Passenger Terminal I have a validity period extending beyond the In-Service Date. GRP, through DOTC/MIAA, confirms that these services and operations shall not be carried over to the Terminal and that Concessionaire is under no legal obligation to permit such carry-over except through a separate agreement duly entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on a full indemnity basis from and against any loss and/or liability resulting from any such litigation, including the cost of litigation and the reasonable fees paid or payable to Concessionaires counsel of choice, all such amounts being fully deductible by way of an offset from any amount which Concessionaire is bound to pay GRP under this Agreement."

[71] PIATCO Comment, par. 9, on p. 6.

[72] PIATCO letter dated October 14, 2002 addressed to the Board of Airline Representatives, copy attached as Annex "OO-Service Providers". [73] Based on the PAGSGlobeground GIS as of July 2000, attached as Annex "LL-Service Providers"to the Memorandum of petitioners-in-intervention. [74] Based on the Orbit GIS as of August 2000, attached as Annex "MM-Service Providers"to the Memorandum of petitioners-in-intervention. [75] Based on the Friendship Holdings, Inc. GIS as of December 2001, attached as Annex "NN-Service Providers"to the Memorandum of petitioners-in-intervention.

[76] Per the Articles of Incorporation of PAGS, attached as Annex "Y-Service Providers"to the petition-inintervention.
[77] Per the GIS of Piatco as of May 2000. *78+ Per 5.15 of both the CA and the ARCA.

[79] Copy of which was presented by Piatco to the Senate Blue Ribbon Committee during committee hearings.

Banking Page 290

[80] 281 SCRA 330, November 5, 1997. [81] Id., pp. 355-358, per Puno, J. [82] 89 SCRA 336, April 11, 1979. [83] Id., p. 376, per Antonio, J. [84] Please see footnote 70 supra. *85+ 3.02(a) of the CA and 3.02(a) of the ARCA.

*86+ 3.02(b) of the CA and 3.02(b) and (c) of the ARCA.

[87] Ibid.

*88+ 1, Art. III, Constitution.

[89] 197 SCRA 409, May 23, 1991, per Gutierrez Jr., J. [90] See Rubi v. Provincial Board of Mindoro, 39 Phil. 660, March 7, 1919. *91+ Davao Stevedores Mutual Benefit Association v. Compaia Maritima, 90 Phil. 847, February 29, 1952. *92+ 29(1), Article VI, 1987 Constitution. [93] Commission on Elections v. Quijano-Padilla, GR No. 151992, September 18, 2002, p. 20, per Sandoval-Gutierrez, J.

*94+ 1.23 of the ARCA defines Incremental and Consequential Costs as "additional costs properly documented and reasonably incurred by Concessionaire (including without limitation additional overhead costs, cost of any catch-up program, demobilization, re-mobilization, storage costs, termination penalties, increase in construction costs, additional interest expense, costs, fees and other expenses and increase in the cost of financing) in excess of a budgeted or contracted amount, occasioned by, among other things, delay in the prosecution of Works by reason not attributable to Concessionaire or a deviation from the Tender Design or any suspension or interference with the operation of the Terminal Complex by reason not attributable to Concessionaire. x x x"
[95] Memorandum of Agreement between the Manila International Airport Authority and the Department of Public Works and Highways, p. 2. [96] When I asked this question, Atty. Jose A. Bernas replied that if Piatco is deemed a builder in good faith then it may be entitled to some form of compensation under the principle barring unjust enrichment. But if it is found to be a builder in bad faith then it may not be entitled to compensation. (See TSN, December 10, 2002, pp. 58-71.) Faced with the same question, Solicitor General Alfredo L. Benipayo responded that the facility will not be torn down but taken over by government by virtue of police power or eminent domain. (Id., pp. 94-99.) When asked the same question, Atty. Eduardo delos Angeles explained that under the provision on Step in Rights, the senior lenders can designate a qualified operator to operate the facility. (Id., pp. 225-226.) This solution, however, assumes that this contractual provision is valid. [97] 200 SCRA 704, August 16, 1991.

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[97] 200 SCRA 704, August 16, 1991. [98] 195 SCRA 730, April 8, 1991. [99] 299 SCRA 199, November 25, 1998.

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\ [2003V454ES] [7/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[1] An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector. [2] G.R. No. 155001. [3] G.R. No. 155547. [4] G.R. No. 155661.

*5+ An international airport is any nations gateway to the world, the first contact of foreigners with the Philippine Republic, especially those foreigners who have not been in contact with the wonderful exports of the Philippine economy, those foreigners who have not had the benefit of enjoying Philippine export products. Because for them, when they see your products, that is the face of the Philippines they see. But if they are not exposed to your products, then its the airport thats the first face of the Philippines they see. Therefore, its not only a matter of opening yet, but making sure that it is a world class airport that operates without any hitches at all and without the slightest risk to travelers. But its also emerging as a test case of my administrations commitment to fight corruption to rid our state from the hold of any vested interest, the Solicitor General, and the Justice Department have determined that all five agreements covering the NAIA Terminal 3, most of which were contracted in the previous administration, are null and void. I cannot honor contracts which the Executive Branchs legal offices have concluded (as) null and void.
I am, therefore, ordering the Department of Justice and the Presidential Anti-Graft Commission to investigate any anomalies and prosecute all those found culpable in connection with the NAIA contract. But despite all of the problems involving the PIATCO contracts, I am assuring our people, our travelers, our exporters, my administration will open the terminal even if it requires invoking the whole powers of the Presidency under the Constitution and we will open a safe, secure and smoothly functioning airport, a world class airport, as world class as the exporters we are honoring today. (Speech of President Arroyo, mphasis supplied)

[6] Art. VIII, Sec. 1, Philippine Constitution.

[7] MIASCOR, MACROASIA-EUREST, MACROASIA OGDEN and Philippine Airlines.

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[7] MIASCOR, MACROASIA-EUREST, MACROASIA OGDEN and Philippine Airlines. [8] Sections 3.01 (a) and 3.02, 1997 Concession Agreement; Sections 3.01 (d) and (e) and 3.02, ARCA. [9] Kilosbayan, Inc. v. Morato, G.R. No. 118910, July 17, 1995, 246 SCRA 540, 562-563, citing Baker v. Carr, 369 U.S. 186, 7 L. Ed. 633 (1962). [10] Id.; Bayan v. Zamora, G.R. No. 138570, October 10, 2000; 342 SCRA 449, 478.

[11] Rollo, G.R. No. 155547, p.12.

[12] Article VI, Section 29 (1).

[13] G.R. No. 39842, March 28, 1934, 59 Phil 823.

[14] G.R. No. 29627, December 19, 1989; 180 SCRA 254, 260-261.

[15] G. R. No. 113375, May 5, 1994.

[16] Id. [17] Id. citing Tan vs. Macapagal, 43 SCRA 677, 680 [1972]. [18] Association of Small Landowners in the Philippines, Inc. vs. Secretary of Agrarian Reform, G. R. No. 78742, July 14, 1989; 175 SCRA 343, 364-365 [1989]. [19] Santiago v. Vasquez, G.R. Nos. 99289-90, January 27, 1993; 217 SCRA 633, 652. [20] G.R. No. 136154, February 7, 2001; 351 SCRA 373, 381. [21] G.R. No. 135362, December 13, 1999; 320 SCRA 610. [22] Del Monte Corporation-USA v. Court of Appeals, G.R. No. 136154, February 7, 2001; 351 SCRA 373, 382. [23] Rollo, G.R. No.155001, pp. 2487-2488.

[24] Section 5, R.A. No. 7718.

[25] At the United States Dollar-Philippine Peso exchange rate of US$1:P26.239 quoted by the Bangko Sentral ng Pilipinas at that time. [26] Rollo, G.R. No.155001, pp. 2471-2474.

[27] Id. at 2475-2477. Derived from the figures on the authorized capital stock and the shares of stock that are subscribed and paid-up.
[28] Id. at 2478-2484. [29] Member Maximum Amount of Equity

Security Bank
PAGS

P528,525,656.55
26,735,700.00

Paircargo

3,123,515.00
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Paircargo

3,123,515.00

TOTAL

P558,384,871.55

[30] Republic of the Philippines vs. Hon. Ignacio C. Capulong, G.R. No. 93359, July 12, 1991; 199 SCRA 134, 146-147. mphasis supplied. [31] Danville Maritime, Inc. v. Commission on Audit, G.R. No. 85285, July 28, 1989, 175 SCRA 701, 713. Citations omitted. [32] A. Cobacha & D. Lucenario, Law on Public Bidding and Government Contracts 13 (1960).

[33] Diamond v. City of Mankato, et al., 93 N.W. 912.

[34] G.R. No. L-5439, December 29, 1954; 96 Phil 368.

[35] Id. at 375.

[36] Section 6.03, draft Concession Agreement. [37] Sections 1.33 and 6.03(b), 1997 Concession Agreement. [38] Sections 1.27 and 6.06, 1997 Concession Agreement. [39] mphasis supplied.

[40] mphasis supplied.

[41] Referred to as "Passenger Service Fee" under the draft Concession Agreement. [42] Section 6.05 Interim Adjustment (a) Concessionaire may apply for and, if warranted, may be granted an interim adjustment of the fees and charges constituting Public Utility Revenues upon the occurrence of extraordinary events resulting from any of the following: a depreciation since the last adjustment by at least fifteen percent (15%) of the value of the Philippine Peso relative to the US Dollar using the exchange rates published by the Philippine Dealing System as reference;

an increase since the last adjustment by at least fifteen percent (15%) in the Metro Manila Consumer Price Index based on National Census and Statistics Office publications; an increase since the last adjustment in MERALCO power rates billing by at least fifteen percent (15%);
an increase since the last adjustment in the 180-day Treasury Bill interest rates by at least thirty (30%).

. . ..
[43] Section 6.05, draft Concession Agreement. [44] Section 1.33, 1997 Concession Agreement. [45] Supra note 31.

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[46] Malaga v. Penachos, Jr., G.R No. 86695, September 3, 1992; 213 SCRA 516, 526. [47] A. Cobacha & D. Lucenario, Law on Public Bidding and Government Contracts 6-7 (1960). [48] mphasis supplied. [49] Concession Agreement, Art. 4, Sec. 4.04 (b) and (c), Art. 1, Sec. 1.06, July 12, 1997.

[50] Ibid.
[51] Id. at Art. 4, Sec. 4.04 (c). [52] Record of the Senate Second Regular Session 1993-1994, vol. III, no. 42, p. 362. [53] Republic Act No. 7718, Secs. 2 and 4-A, Implementing Rules and Regulations, Rule 11, Secs. 11.1 and 11.3. [54] Emphasis and caption supplied. [55] Sec. 1.06, ARCA. [56] Republic Act No. 7718, as amended, Sec. 4-A, May 5, 1994; Implementing Rules and Regulations, Rule 10, Sec. 10.1. [57] Implementing Rules and Regulations, Rule 10, Sec. 10.4. [58] North Negros Sugar Co., Inc. v. Hidalgo, G.R. No. 42334, October 31, 1936; Intestate estate of the deceased Florentino San Gil. Josefa R. Oppus v. Bonifacio San Gil, G.R. No. 48115, October 12, 1942; San Diego v. Municipality of Naujan, G.R. No. L- 9920, February 29, 1960; Favis vs. Municipality of Sabagan, G.R. No. L-26522, 27 February 1969; City of Manila vs. Tarlac Development Corporation, L-24557, L-24469 & L-24481, 31 July 1968; In the matter of the Petition for Declaratory Judgment on Title to Real Property (Quieting of Title) Pechueco Sons Company v. Provincial Board of Antique, G.R. No. L-27038, January 30, 1970; Fornilda v. The Branch 164, Regional Trial Court IVth Judicial Region, Pasig, G.R. No. L-72306, October 5, 1988; Laurel v. Civil Service Commission, G.R. No. 71562, October 28, 1991; Davac v. Court of Appeals, G.R. No. 106105, April 21, 1994. [59] Republic Act No. 7718, Sec. 1. [60] III Record of the Constitutional Commission, pp. 266-267 (1986). [61] Id. [62] Except for providing for the suspension of all payments due to the Government for the duration of the takeover, Article V, Section 5.10(b) of the ARCA contains the same provision. Emphasis and caption supplied.

[63] Id.
[64] Bataan Shipyard and Engineering Co., Inc. v. Presidential Commission on Good Government, G.R. No. 75885, May 27, 1987 citing Freund, The Police Power (Chicago, 1904). [65] Genuino v. Court of Agrarian Relations, G.R. No. L-25035, February 26, 1968. *66+ Blacks Law Dictionary, 4th Ed., p. 1158.
Banking Page 295

*66+ Blacks Law Dictionary, 4th Ed., p. 1158.

[67] 36 Am Jur 480 citing Slaughter-House Cases, 16 Wall. (US) 36, 21 L ed 394.
[68] Concession Agreement ("CA") dated July 12, 1997, Art. III, Sec. 3.02(a); Amended and Restated Concession Agreement ("ARCA") dated November 26, 1998, Art. III, Sec. 3.02(a). [69] Ibid.

[70] Id. at CA, Art. III, Sec. 3.02(b); ARCA, Art. III, Sec. 3.02(b).
[71] The day immediately following the day on which the Certificate of Completion is issued or deemed to be issued. [72] Id. at CA, Art. III, Sec. 3.01(a) and (b); ARCA, Art. III, Sec. 3.01 (a) and (b).

[73] Id. at CA, Art. III, Sec. 3.01(d) and (e); ARCA, Art. III, Sec. 3.01(d) and (e).
[74] Executive Order No. 903, as amended, Sec. 4 (b) and (c). [75] Art. XII, Sec. 19, Philippine Constitution. [76] Republic Act No. 7718, Sec. 1. [77] Transcript of Oral Arguments, p. 157, December 10, 2002.

[78] G.R. No. L-54958, September 2, 1983; 09 Phil. 400.

[79] Executive Order No. 903, July 21, 1983, provides:

Section 5. Functions, Powers, and Duties. - The Authority shall have the following functions, powers and duties: .. .
(b) To control, supervise, construct, maintain, operate and provide such facilities or services as shall be necessary for the efficient functioning of the Airport; (c) To promulgate rules and regulations governing the planning, development, maintenance, operation and improvement of the Airport and to control and/or supervise as may be necessary the construction of any structure or the rendition of any service within the Airport;

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Digest: Agan vs. PIATCO

Saturday, July 11, 2009 12:16 PM

Agan vs PIATCO Issue: WON PIATCO is a qualified bidder Held: No Ratio: Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a duly prequalified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to meet the financial capability required under the BOT Law and the Bid Documents. They allege that in computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the project, the entire net worth of Security Bank, a member of the consortium, should not be considered. PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the project. The said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the Paircargo Consortium on the ground that it does not have the financial resources to put up the required minimum equity of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as amended or the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount more than 15% of its net worth. The minimum amount of equity to which the proponents financial capability will be based shall be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project financing should not exceed 70% of the actual project cost. Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to undertake the project in the minimum amount of 30% of the project cost through (i) proof of the ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. As the minimum project cost was estimated to be US$350,000,000.00 or roughly P9,183,650,000, the Paircargo Consortium had to show to the satisfaction of the PBAC that it had the ability to provide the minimum equity for the project in the amount of at least P2,755,095,000.00. Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth of P2,783,592.00 and P3,123,515.00 respectively. PAGS Audited Financial Statements as of 1995 indicate that it has approximately P26,735,700 to invest as its equity for the project. Security Banks Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the amount of P3,523,504,377. We agree with public respondents that with respect to Security Bank, the entire amount of its net worth could not be invested in a single undertaking or enterprise, whether allied or non -allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary Board, whenever it shall deem appropriate and necessary to further national development objectives or support national priority projects, may authorize a commercial bank, a bank authorized to provide commercial banking services, as well as a government-owned and controlled bank, to operate under an expanded commercial banking authority and by virtue thereof exercise, in addition to powers authorized for commercial banks, the powers of an Investment House as provided in Presidential Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services: Provided, That (a) the total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank; (b) the equity investmentin any one enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the bank, or of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the equity investment in other banks shall be deducted from the investing bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets.

Further, the 1993 Manual of Regulations for Banks provides: SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also apply regarding
equity investments of banks. a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec. X121.5.

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worth of the investing bank as defined in Sec. X106 and Subsec. X121.5.

Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the Paircargo Consortium, after considering the maximum amounts that may be validly invested by each of its members is P558,384,871.55 or only 6.08% of the project cost, an amount substantially less than the prescribed minimum equity investment required for the project in the amount of P2,755,095,000.00 or 30% of the project cost. The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity, the ability of the bidder to undertake the project. Thus, with respect to the bidders financial capacity at the pre qualification stage, the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder may invest in the project at the time of pre-qualification. The PBAC has determined that any prospective bidder for the construction, operation and maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine the maximum amounts that each member of the consortium may commit for the construction, operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to Security Bank, the maximum amount which may be invested by it would only be 15% of its net worth in view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the project. Further, the determination of whether or not a bidder is pre-qualified to undertake the project requires an evaluation of the financial capacity of the said bidder at the time the bid is submitted based on the required documents presented by the bidder. The PBAC should not be allowed to speculate on the future financial ability of the bidder to undertake the project on the basis of documents submitted. This would open doors to abuse and defeat the very purpose of a public bidding. This is especially true in the case at bar which involves the investment of billions of pesos by the project proponent. The relevant government authority is duty-bound to ensure that the awardee of the contract possesses the minimum required financial capability to complete the project. To allow the PBAC to estimate the bidders future financial capability would not secure the viability and integrity of the project. A restrictive and conservative application of the rules and procedures of public bidding is necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the financial and technical reliability of the project. It has been held that: The basic rule in public bidding is that bids should be evaluated based on the required documents submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the bidding process is the only safeguard to a fair, honest and competitive public bidding. Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualified. Considering that at the pre-qualification stage, the maximum amounts which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.
Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI72.015\Agan%20vs%20PIATCO.docx>

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Class Notes for Saturday, July 11

Saturday, July 11, 2009 12:59 PM

(the day when we were supposed NOT to have a class!)

Last time: CORE BANKING FUNCTION (wah! I cannot hear nor see the writings on the board!!!) Bank <--------------------------------------> CLIENT (depositor/placer of funds) ' ' ' ' BORROWER DEPOSITS Fixed-time deposits = Time Deposit Checking = Current Deposit Savings = -sometimes there could be an automatic transfer between your checking and savings account. E.g. if your checking account lacks funds, the bank would automatically debit from your savings account to make the check good. *now you could access your account through the internet

*deposit substitutes *the relationship between the bank and client is creditor (BANK) -debtor (CLIENT-DEPOSITOR) Or in the flipside: Creditor: Borrower :: Debtor: Bank
WITHOUT RECOURSE: not a deposit-substitute, not a deposit transaction; most likely it's a savingspurchase transaction -bank gives a certificate of participation WITH RECOURSE: you could run after the bank SECTION 29, GBL: Banking has a goal no longer confined with the core banking function Cf: Section 29 covers different aspects of Banking activities Section 53 of GBL: WON these other resources are restricted to the trust department of the bank: NO because Section 53 applies to the regular banking unit and to the trust department *Bank no longer need authority from SEC: no need to be a securities broker -but there's a MOA that to be a securities broker, bank must register first with SEC (in spite of Section 53.2

53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; -a bank can perform acts as long as it is not incompatible with GBL -general counsel of BSP issued an opinion to the effect that other services not incompatible with banking business must be related to collection and payments - sir says it is not the correct interpretation!

53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and -bank acting as managing agent -this function can also be regularly taken by RBU of a bank -in practice, the BSP confines these activities to the trust department -A trust department can act as an investment manager IMA (industrial Management Account) -trust department is an agent acting for a principal (not a trustee) -a trust department, however, is supposed to be a trustee! That is why in other banks, the trust departments are called "asset-management divisions" -3 parties involved in a trust relationship: Trustor Trustee Beneficiary -in this situation, the trustor and beneficiary are the same
53.5. Rent out safety deposit boxes. *good grasp of section 53: bank can offer services to non-residents which are not allowed under normal banking functions (in concept of deposit) *Section 53 is a weird provision because the last paragraph is completely out of place: Gives power to Monetary Board.

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power to Monetary Board. Cf: Section 5, last sentence: Monetary board still given power

-Degree of diligence required on banks -in civil code: if no diligence required, diligence of a good father of a family required GLA of 1949: no language providing for degree of diligence for banks GBL, Section 2: provides degree of diligence: "The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. " -before GBL, jurisprudence provided the gap for the diligence required. SC has not seemed to know the difference between different levels in comparison. SIMEX International vs. CA F: Simex deposited to its account P100k for payment of checks issued to different companies. The checks were dishonored, thus the companies to which it was issued threatened to sue Simex for the dishonor. Simex complained to the bank, blah blah blah. Mali nga bank! Simex sued for moral damages

H: Bank negligent. So grant moral damages! -utmost fidelity -meticulous care, always having in mind the fiduciary nature of their relationship SIR: SC did not cite A1173, NCC - no proper contextualization of the case!!!
BPI vs. IAC F: teller of petitioner bank miscredited to a different checking account a deposit made by a married couple: mistake led to the dishonor of a check H: Bank liable. Bank not only required to observe A1173 degree of diligence of a good father of a family. Followed SIMEX SIR: SC finally contextualized SIMEX. Bank argued A1173, NCC. SC brushed aside this argument. That is not the case because the bank required to observe "utmost fidelity", citing SIMEX. Beyond bonus pater familias. BPI vs. CA F: Bank allowed the withdrawal of a deposit without requiring the presentation of the depositor's passbook and in disregard of the clearance requirement of the banking system H: Bank negligent -highest degree of care SIR: SC used the phrase "Highest degree of care" In the characterizing degree which is higher than Bonus pater familias. The bank allowed withdrawal of the check without waiting for the clearing of the check! -SC Clarified "utmost care" = highest degree of care

Consolidated Bank and Trust Corporation (Solidbank) vs. CA F: Messanger of company left the passbook of the client at the bank with the teller (who was taking so long to process the deposit). Teller gave the passbook to another person, and there were withdrawals of the funds of the said account which was also allowed by the bank.
H: Bank liable. But liability mitigated by Client's own negligence! SIR: SC finally took notice of existence of Section 2 of GBL -bank only obligated to observe high standards of integrity and performance -Only Justice Carpio interpreted GBL correctly -Justice Carpio explained the difference between culpa contractual and culpa aquiliana -Justice Carpio was Sir's classmate in his 1st three years in College of Law PBC vs. CA F: Time deposit account opened with the bank. Bank failed to issue receipt. When client wanted to withdraw the amount deposited, bank instead convinced him to apply for loans, part of it paid through the time deposit. Bank failed to record the offsetting of the loan with the time deposit account. Also, the court produced merely photocopies of the promissory notes allegedly executed by their client to claim that the client even owes them amounts of money! H: Bank liable! Bank liable for offsetting his time deposit w/ a fictitious PN SIR: Decision consistent with Consolidated Bank decision because the same ponente wrote it!!! Samsung Construction Company Philippines vs. Far East Bank and Trust Company F: forged check presented to the bank. Company only found out about the missing blank check the next day, reported it to the bank immediately. Bank tried to present proof of diligence on its part, by showing that they checked the signature on the check 3x before allowing the check to be encashed. During trial, both parties presented handwriting experts, NBI finding that there was forgery vs. PNP only saying that differences were due to "natural variations" H: Bank liable for the forgery under Section 23 of the NIL. Forgery is a real defense by the drawer

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whose signature is forged. Also used PNB vs. NY to rule that the one who was negligent among those innocent should shoulder the lost.

SIR: Tinga decision. No consultation among the different divisions of SC! GBL not mentioned, but still held that the bank should observe the highest degree of diligence! -Sir met with J. Carpio at Caticlan Airport; If J. Carpio would become CJ, all decisions would be circulated among the divisions so that they would know the decisions of other departments
HEIRS OF EDUARDO MANLAPAT vs. CA F: Sellers mortgaged the land even after they had already sold it to another. The buyers found out about the morgaged, used the tiles with the bank to obtain the cancellation of the title, and did obtain a new title. H: Bank negligent in lending the document of its clients, w/o the consent of its clients, to strangers! This is a dangerous practice!!! SIR: The highest degree of diligence is expectedCourt used the words highest in high in one sentence!!!! PNB vs Pike F: Gay performer has a US Dollar account with PNB in Manila. He left his passbook in Manila but when he came back, the passbook was gone and unauthorized withdrawals were already made from his account. PNB argued that Pike did authorize the person who made the withdrawals before he went to Japan. H: PNB negligent when they did not see signature of Pike in the withdrawals made by the alleged agent of Pike. "With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more than that
of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. Thus, 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. Section 2 of Republic Act No. 8791,[25] which took effect on 13 June 2000, makes a categorical declaration that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance.

SIR: when the ponente cited J. Carpio, even the mali was copied! Highest and high! CADIZ vs. CA F: H: SIR: "high degree of diligence" J. Tinga already citing GBL? Prudential bank vs. Lim F: 2 accounts. The client availed of the automatic transfer agreement with the bank. He made two deposits on the same day, one with his savings account and one with his checking accounts. Client then issued 2 checks which would be sufficient, if not for the bank's refusal of crediting the deposit made to his other account. Bank claimed that only one deposit was made. TC and CA held that there were 2 deposits made. H: 2 deposits were made!
From another perspective, the negligence of the bank constitutes a breach of duty to its client. It is worthy of note that the banking industry is impressed with public interest. As such, it must observe a high degree of diligence and observe lofty standards of integrity and performance. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them. With the attending factual milieu, the imposition of damages on the errant bank is in order. Presaging this course of action is the ruling in Simex International v. CA where this Court rendered a telling discourse on the fiduciary responsibility of depository banks, thus:
The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every c ivilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and com merce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith , usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordi nary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the runni ng of their affairs, not only in the form of loans when needed but more often in the conduct of their day -to-day transactions like the issuance or encashment of checks. The concept of moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, woun ded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.

Needless to say, the banks wrongful act caused injury to respondent. Credit is very important to businessmen, and its loss or impairment needs to be recognized and compensated. This Court in Araneta v. Bank of America highlights the importance of good credit in the business community:
The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his bu siness. Any adverse reflection thereon constitutes some material loss to him. As stated in the case Atlanta National Bank vs. Davis, supr a, citing 2 Morse Banks, Sec. 458, "it can hardly be possible that a customer's check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot, from the nature of the case, furnish ind ependent, distinct proof thereof."

SIR:
Far East Bank and Trust Company vs. Pacilan Jr. SIR: Customer was negligent. He had insufficient accounts. Only deposited account to make good the check 1 day before check was due.

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Citibank NA vs. Cabamongan

F: A forger, a person who presented herself to be one Carmelita, pre-terminated the account of the Sps Luis and Carmelita Cabamongan
H: The Court has repeatedly emphasized that, since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is "under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship." In this case, it has been sufficiently shown that the signatures of Carmelita in the forms for pretermination of deposits are forgeries. Citibank, with its signature verification procedure, failed to detect the forgery. Its negligence consisted in the omission of that degree of diligence required of banks. The Court has held that a bank is "bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged." Such principle equally applies here. Citibank cannot label its negligence as mere mistake or human error. Banks handle daily transactions involving millions of pesos. By the very nature of their works the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro, openly courted disaster when despite noticing discrepancies in the signature and photograph of the person claiming to be Carmelita and the failure to surrender the original certificate of time deposit, the pretermination of the account was allowed. Even the waiver document was not notarized, a procedure meant to protect the bank. For not observing the degree of diligence required of banking institutions, whose business is impressed with public interest, Citibank is liable for damages.

SIR: Highest degree of diligence Citibank NA vs. Sabeniano F: Client wanted to withdraw all his money from Citibank. Citibank allegedly unlawfully refused to give him the money he deposited with Citibank! Bank claimed that Sabeniano executed PNs evidencing loans he had with Citibank. Loans became overdue, Sabeniano failed to pay inspite of demands, Citibank offsetted the loans. TC and CA held bank liable for damages, failing to make proper accounting with the moneymarking placements???
H: Citibank and petitioners had right to offset said account BUT citibank liable for failure to account for the said money-market business. Bank has high standard of integrity and performance to meet, which it did not meet in this case. Public interest. Fiduciary relationship. Meticulous in every transaction. SIR: Citibank of Geneva and Citibank of Manila NOT THE SAME! Just 2 branches of the same juridical entity!!!! This is a sweeping statement of the SC, incorrect!!! What the SC is probably trying to say is that Citibank Geneva and Citibank Manila are two different units, not branches!!!? -good source of principles such as the booo! Read it! -just don't accept the decisions of SC! -in fact, during the moratorium days, CBP prohibited manila branches of foreign banks from paying off deposits. e.g. Citibank manila and Citibank Ny are just units of the same juridical entity. NY liable to pay deposit of Wells Cargo in Manila. Except if stipulation that only assets of Manila branch responsible for the liabilities of Manila branch.

RING-FENCING Provision "the FCDU deposit in Manila is only payable out of the assets of the Manila branch" - w/o this provision, all other branches (even outside RP) would be liable precisely because the separate branches are one and the same entity!!! -the case of Wells Cargo summarized in Sir's book, under section 74? Check sir's book. Or better yet, photocopy it!!!
Fidelity Savings Bank vs. Cenzon F: Fidelity savings bank was declared insolvent and was placed under the supervision of the MB. Santiago, a depositor, who deposited a total of P100k, wanted payment of interest. H: A banking institution which has been declared insolvent and subsequently ordered closed by the Central Bank cannot be held liable to pay interest on bank deposits which accrued during the period when the bank is actually closed and non-operational. Unless a bank engages in transactions, it cannot carry out its role as depository obligated to pay stipulated interest. SIR: Isn't this unfair? Cancio vs. CA F: Mrs. Rosa Cancio, while clearing through the Pre-Boarding (AVSECOM) Area of MIA to board PR 306 for
Hongkong was apprehended with US$102,900 in cash, US$600 in two travelers checks, and one P500. Mrs. Cancio did not declare her currency had already passed the Customs inspection area. In view of claimant's failure to present the Central Bank Authority, the said currencies were accordingly confiscated and a seizure Receipt No. 013 was issued to her; hence, this seizure proceedings. Cancio presented certified xerox copy of her Bank Book for foreign currency deposit with the PCIB, dollar remittances in telegraphic transfers from abroad for deposits and withdrawal cards, attesting to the fact that Cancio had withdrawn from her FCDU Account a certain amount of United States currency which tended to show that claimant herein was a foreign currency depositor pursuant to the provisions of RA 6426. The money intended principally for such medical purpose and for other miscellaneous and necessary expenses, and, that the subject currencies were concealed and hidden by them inside the two chocolate boxes solely for security reasons. The Commissioner of Customs denied. Cancio appealed to CTA. The CTA affirmed the forfeiture of the US$102,900 in cash, and US$600 in traveller's checks for having been in violation of CB Circulars 265 and 534, in relation to Section 2530(f) of the Tariff and Customs Code. It reversed the forfeiture of P1,500 limit that each traveller is allowed to bring

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out of the country without a CB permit pursuant to paragraph 4 of CB Circular No. 383.

H: Carrying of foreign currency allowed if the traveller is a FCDU depositor

It is true that in so far as the exportation or taking out of foreign currency from the country is concerned, Central Bank Circular No. 265 par 3 , issued on November 20, 1968,. Similarly, Central Bank Circular No. 534, issued on July 19, 1976. However, peculiar to the present controversy is the fact that, as stated previously, petitioner is a foreign currency depositor. -At any rate, the CA has found that petitioner has presented in evidence her foreign currency bank book and her withdrawal cards. -Indeed, given the underlying objective of the Foreign Currency Deposit Act, as amended, which is to attract and invite the deposit of foreign currencies which are acceptable as part of the international reserve in duly authorized banks in order that they may be put into the stream of the banking system, it would be to defeat the very purpose of the law to place undue restrictions on the transferability of such funds. The countervailing effect would be to discourage prospective foreign currency depositors to the detriment of the banking system. SIR: No restriction on FCDU depositors. Buy a box of chocolates! Now, if more than $10,00.00, you have to present an authorization! - confirm!!!

Salvacion vs. CB F: Foreigner, a transcient tourist, raped a 12 year old girl. There was a writ of preliminary attachment was issued on his FCD accounts. Bank claimed that the said accounts were exempted from garnishment, invoking Section 113, CBC 960. Final judgment provided for execution of garnishment over the same accounts.

H: This is an exemption of Section 113, CBC 960. -objective of FCD Act is to attract and invite deposit of foreign currencies, foreign investors - not TRANSCIENTS!!! Who are even rapists!!!
SIR: This is a special case. Not a precedent. FCD Accounts still maintain the exemption from garnishment and levies.

*** DOSRI Section 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and their Related Interests SIR: insiders were the cause why banks went under. -insider lending -provides Ceilings -read definition: DOSRI loan: if supported by collateral -has to waive secrecy of deposits with bank. Without the waiver, bank not supposed to lend DOSRI -read annotation Loan-loss Provision Akin to a reserve requirement; bank is to set aside a percentage. To that extent, what is set aside is restricted. Not declarable as part of dividends. - remember daw!!!

(Shet! I was called. Di naman marinig si Sir!!!)

-section 49 of Annotation -there are supposedly different amounts that have to be set aside for each of those categorieshay boo see the annotation
SPV Act of 2002 already expired -attempt of congress to reduce the non-performing assets of banks. ROPOA: real and other properties Owned or acquired by the banks. Should be disposed of the banks within 5 years -the bank has to sell down the Sin a big discount. Problem: Buyer sells those goods at a higher price. -leigman brothers. Yung pinangbili nila, kiknuha nila. It amounted to millions of pesos? -hay nako, you really have to read on your own, you cannot understand a word sir says!!! -it's a good thing this expired. It was also discarded in US -loan -loss provision is there in the case that bank becomes bankrupt? PDIC insurance -fully protected up to P250k Ratio for less than 100% insurance: Moral hazard. You would not take care of your affairs if you're fully insured. -recently, charter of PDIC was amended. PDIC officers and employees are given immunities from civil liabilities. CAPITAL ADEQUACY (BASE II CAPITAL ACCORD) SECTION 34. Risk-Based Capital. The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. For purposes of this Section, the Monetary Board may require that such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for International Settlements (BIS), relating to risk-based capital requirements: Provided, further, That it may alter orsuspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided, finally, That such ratio shall be applied uniformly to banks of the same category.

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uniformly to banks of the same category. In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, the Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe. Before the effectivity of the rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force. (22a) Banks have to maintain capital adequacy measure aside from the capital required to set up a bank. The banks have to set aside money corresponding to the risk-weight If an asset is risk- weighted10% for every 100 units International standard is 8% History of Section 34: Act of 1944: Allied powers were about to be victorious. Meeting at New Hampshire. Planned how to rule the world. So they created 3 institutions: World Bank, International trade Organization (not ratified by Senate of US, so now GATT which provided the rules of trade among nations until WTO charter was passed a few years ago), IMF (supposed to provide countries assistance during times of crisis).

-During that time, exchange rates were changing minute by minute. But under the IMF, currencies were supposed to be pegged with the dollar, Dollar was in turn pegged into gold. In pesos, it was 2 pesos to 1 dollar. Now it is 48 pesos to a dollar. And there's a plan with restoring it to 2 is to 1.
Since Dollars were pegged to the gold, you could exchange at Fort Knox your dollars to gold! US incurred a lot of deficit after that. In 1970s, Nixon announced that US was closed. US dollar was devalued. Oil contracts with OPEC was denominated in dollars, OPEC incurred losses. Therefore, Oil prices increased to recover the loss. People deposited their dollars with international banks then the international banks would give them dollar in term. Their was excess liquidity. There was a lending streak. The moment the borrowers would get a huge amount of money In 1983, there was a moratorium in RP, other countries followed suit. International banks found out that they were practically insolvent. Solution: impose the capital adequacy something Basel We now have the capital asset. BASEL I We now have BASEL II

There is now a credit assessmentEach borrower has a rating that is standard. But rating agencies have conflict of interest. They are paid by the banking companies themselves. The name of the game is how to mitigate your risks. Credit-risk mitigators: *guarantee: to the extent of the guarantee, you don't have to set aside a portion as reserve.
If you have been reading the papers, RP issued warrantsbondsIOU bonds payable in dollars 20% risk weighting but coupled with warrant which makes the bond payable in pesos. Obligation becomes peso payable. In the Philippines, we adopted 10% capital adequacy ratio. Illustration: Under Bassel I: If lent to Republic = 0 risk If lent to Province of Cebu = 50% risk weight Under Bassel II: Even if it is the Republic which borrowed, loan is subject to 20% risk weight if denominated in US$. For this purpose, bank capital has been classified under: Tier I: common stock Tier II: subordinating debt (at least 5 years; must not exceed 100% of Tier I)

(vii) Equity Investment Limit: every investment of a bank must be approved by the Monetary Board; it

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may not invest all its net worth in a single transaction, whether allied or non-allied. See Agan case for what are allied and non-allied enterprises. The importance of the difference lies in the fact that only UB may invest in non-allied enterprises. An example of a non-allied enterprise is an airport terminal. ForEx Liberalization 1940s-1950s: period of control 1960s: decontrol 1970s: floating rate of exchange 1980s: moratorium (restructuring of external debts) 1992: end of moratorium; issuance of Brady Bonds to change credit schedules (IOUs and PNs); dollar salting[1] took place 1997: Asian Financial Crisis BSP Circular 1389, as amended Uniform Currency Act was repealed by RA8183. The Act mandated that all obligations be denominated in PhP, otherwise void. Sec. 72, New CB Act[2]: provision answer to exchange crisis.

Equity Investment Limits -banks not allowed to enter allied enterprises

AGAN v. PIATCO WON the PIATCo is an allied undertaking SIR: problem: SC is not very scholarly, cites 1993 manual when in fact, they were already citing the new manual. Numbering begins with X. There are limits to the foreign exchange that a bank can buy There is a limit to real estate it can enter

Foreign Exchange Liberalization -there is actually a new manual replacing BSP Circular No. 1389. But it's not really new because even the numbering was adopted. 1940s and 50s: period of control -war -there is a need for reconstruction, rehabilitation, there was a huge deficit in our balance because we need to import a lot of materials for our economic development and our exports are unstable -CB at that time wanted to uphold the foreign exchangeyou have to surrender to BSP your foreign exchange holdings 1960: period of limited control? -Under Pres. Macapagal: Free market rate is higher. Pegged exchange rate (fixed exchange rate) If you were the exporter, you need to surrender part of your earnings at the official rate. If you're going to import essential items, you buy your dollar requirements at the official rate. If luxury items, free market rate since you spend more for this.

-now exporters maintain 100% of all their earnings

1970: floating rates because of nixon. Fixed rate system abandoned 1980s: moratorium. We were cut off access with voluntary market. Revolving trade facility If you wanted to open a LC, you need to bring your cash with youin a plastic bag! 1992: we graduated from the moratorium When Cory ended her term, decided to liberalized the foreign exchange system with BSP circular, legalizing dollar accounts??? (dollar solding daw) Black market was legalized! RA 8183: All domestic contracts should be denominated in pesos, otherwise the obligation is void. (sir: not actually void, but can't be enforced) - but this is repealed. Now, parties can agree on the currency that they want Section 72, CBA If there's an exchange crisis or emergency which requires the bank to use up its international reserves for its dollar holdingsresidents may be required to surrender their dollar holdings to the current exchange ratesdollars to be surrendered to BSP Exemption: FCDUs Balikan natin Section 72

Next meeting: Loan Transactions - until Truth-In lending Act!!!

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BSP Circular No. 1389

Saturday, July 11, 2009 3:50 PM

Date Issued: 04.13.1993 Number: 001389

CBP CIRCULAR NO. 1389

Series of 1993 CONSOLIDATED FOREIGN EXCHANGE RULES AND REGULATIONS Pursuant to Monetary Board Resolution No. 246 dated March 26, 1993 the foreign exchange rules and regulations on current accounts, capital accounts, foreign currency deposit units, offshore banking units and representative offices of foreign banks are hereby consolidated as follows: PART I Current Accounts CHAPTER I Non-Trade Foreign Exchange Receipts and Disbursements, Transfers of Local Currencies and Gold Transactions SECTION 1. Disposition of Foreign Exchange Receipts. Foreign exchange receipts, acquisitions or earnings of residents from non-trade sources may, at the option of said residents, be sold for pesos to Authorized Agent Banks (AABS) or outside the banking system, retained, or deposited in foreign currency accounts, whether in the Philippines or abroad. All categories of banks (except Offshore Banking Units [OBUs]), duly licensed by the Central Bank shall be considered as AABs. SECTION 2. Sales of Foreign Exchange by AABs. AABS may sell foreign exchange to residents, (including the Government, its political subdivisions and instrumentalities and government-owned and controlled corporations, upon the latter's written application for any non-trade purpose without need of prior Central Bank approval. However, foreign exchange for payment of obligations that are foreign loan- or foreign-investment related, may be sold by AABs to residents upon showing that Central Bank approval and/or registration has been obtained for the loan or investment, whenever required by these regulations. AABs selling foreign exchange for remittance abroad shall ensure that taxes, when required, have been paid and that the remittance is net of such taxes. SECTION 3. Purchases of Foreign Exchange by Non-Residents. Non-residents may purchase foreign exchange from AABs only to the extent of the amount shown to have been sold by them for pesos to AABs. Departing non-residents may reconvert at airports or other ports of exit unspent pesos of up to a maximum of US$200 or an equivalent amount in any other foreign currency calculated at prevailing exchange rates, without need of showing proof of previous sale by them of foreign exchange to AABs. SECTION 4. Import/Export of Philippine Currency. No person may import or export nor bring with him into or out of the country, or electronically transfer legal tender Philippine notes and coins, checks, money order and other bills of exchange drawn in pesos against banks operating in the Philippines in an amount exceeding P5,000.00 without authorization by the Central Bank. The term "electronic transfer" as used herein shall mean a system where the authority to debit or credit an account (bank, business or individual) is provided by wire, without a source document being mailed to evidence the authority. SECTION 5. Buying and Selling of Foreign Exchange and of Gold by Residents. 1. Foreign exchange may be freely bought and sold outside the banking system. 2. Except as provided in this Circular, gold and gold-bearing metals may likewise be bought and sold without specific approval of the Central Bank. 3. Gold from small-scale miners shall be sold to Central Bank. All other forms or types of gold may, at the option of the owner or producer thereof and with the consent of Central Bank, be sold and delivered to the Central Bank. The Central Bank may sell gold grains/pellets/bars and sheets to local jewelry manufacturers and other industrial users upon application, or to banks exclusively for resale to jewelry manufacturers/industrial users, at the Central Bank gold-selling price plus a service fee to cover costs including cost of conversion and packaging.
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and packaging. CHAPTER II Foreign Trade Transactions A. Import Trade Transactions SECTION 6. General Policy. As a general rule, all kinds of merchandise imports are allowed. However, the importation of certain commodities are regulated or prohibited for reasons of public health and safety, national security, international commitments, and development/rationalization of local industry. SECTION 7. Classification of Imports. Imports are classified as follows: 1. Freely Importable Commodities. These are commodities the importation of which is neither regulated nor prohibited as defined under (2) and (3) hereunder. The importation may be effected without the prior approval of or clearance from any government agency. 2. Regulated Commodities. These are commodities the importation of which requires clearances/permits from appropriate government agencies including the Central Bank. They are enumerated under Appendix I of this Circular. 3. Prohibited Commodities. These are commodities the importation of which is not allowed under existing laws. They are enumerated under Appendix 2 of this Circular. SECTION 8. Modes of Payment for Imports. Commercial banks may sell foreign exchange to service payments for imports under any of the following arrangements without prior CB approval subject to the provisions of Section 9 to 12: 1. Letter of Credit (L/C); 2. Documents Against Payment (D/P); 3. Documents Against Acceptance (D/A); 4. Open Account Arrangement (O/A); and 5. Direct Remittance. SECTION 9. Letter of Credit 1. Requirements for L/C Opening. All L/Cs must be opened on or before the date of shipment with maximum validity of one (1) year. Likewise, only one L/C should be opened for each import transaction. For purposes of opening an L/C, importers shall submit to the commercial bank the following documents: a. The duly accomplished L/C application; b. Firm offer/proforma invoice which shall contain information on specific quantity of the importation, unit cost and total cost, complete description/specification of the commodity and Philippine Standard Commodity Classification statistical code; c. Permits/clearances from appropriate government agencies, whenever applicable; and d. Duly accomplished Import Entry Declaration (IED) Form which shall serve as basis for payment of advance duties as required under PD 1853. 2. Amendments of L/Cs. L/C amendments need not be referred to the Central Bank for prior approval. However, amendments extending the total validity period of an L/C for more than one (1) year, if payment of the L/C is to be sourced from the banking system, shall be referred to the Central Bank for prior approval. 3. Negotiation of L/Cs. L/Cs shall be negotiated in accordance with the terms and conditions set forth in the L/C and shall be governed by the Uniform Customs and Practices on Documentary Credits. The requirement of pre-shipment inspection/Clean Report of Findings (CRF) shall be strictly observed, whenever applicable. SECTION 10. Documents Against Payment (D/P) 1. Under the D/P arrangement, commercial banks shall advise the importer of the receipt of the complete original shipping documents (inclusive of the CRF whenever applicable) and shall effect the release of said documents to the importer upon receipt of payment. 2. Commercial banks shall remit payment to the supplier through the correspondent bank abroad. SECTION 11. Documents Against Acceptance (D/A) and Open Account (O/A) Arrangements. Under a D/A arrangement, the shipping documents are released to the importer by the local bank concerned thru the seller's bank upon the importers acceptance of the seller's bill of exchange obligating the importer to pay for the shipment of some future date. Under an O/A arrangement, the shipping documents are sent and released by the seller directly to the importer without coursing the documents

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thru the banks, upon the importer's promise to pay at some future date after shipment. 1. Eligible Firms. Producers/manufacturers whether for the domestic or export market, oil firms, franchised public utility concerns and importers-traders importing raw materials required by domestic manufacturers are allowed to import under D/A and O/A arrangements. 2. Registration and Payment of D/A and O/A imports. a. Importations under D/A and O/A arrangements shall be covered by a Central Bank Release Certificate (CBRC) and registered with the Central Bank upon availment for monitoring purposes. Commercial banks are authorized to issue the CBRC upon receipt of the complete shipping documents inclusive of the CRF, if applicable, and submission by the importer of the duly accomplished Record of Goods Imported (RGI) and the pertinent import permit (if applicable); b. Payments sourced from the commercial banking system shall not be effected for unregistered DA/OA imports. Payments prior to maturity date can be made provided these have already been registered. Payments subsequent to the original maturity date may be allowed without prior Central Bank approval provided that: 1) the importers report the extension of the maturity period to a specific date; and 2) the cumulative length of the maturity periods, including all extensions, does not in any case exceed one (1) year from date of draft acceptance for D/A and B/L (Bill of Lading) date for O/A. c. Payments of D/A and O/A obligations, the maturities of which shall have exceeded 360 days from date of draft acceptance in case of D/A or B/L date in case of O/A shall be referred to the Central Bank for approval; and d. Mechanics of Registration Appendix 3 of this Circular contains the mechanics of reporting and registration of D/A and O/A imports. SECTION 12. Direct Remittance. Commercial banks may service applications for direct remittance of import payments effected through modes other than those under L/D, D/P, D/A or O/A only upon presentation of the complete original shipping documents as well as copy of the CRF and/or imports clearance for regulated items issued by concerned government agencies, if applicable. SECTION 13. Other Import Arrangements. Import arrangements not involving payments using foreign exchange purchased from the banking system are also allowed without prior Central Bank approval. These include: 1. Self-Funded/(No-Dollar) Imports. These are imports funded from importer's foreign currency deposit accounts or those sent by suppliers abroad for which no payment in foreign exchange will be made whether immediate or potential. 2. Importations on Consignment Basis. These are importations by export producers of raw materials and accessories/supplies from foreign suppliers/buyers abroad for the manufacture or processing of products destined for export to said foreign suppliers/buyers. These shall also include machinery/equipment and spare parts consigned to the local manufacturer/processor for eventual reexport to the consignor, provided that the equipment involved shall be used only in connection with the processing of products for export. SECTION 14. Comprehensive Import Supervision Scheme (CISS). Goods destined for importation into the Philippines shall be subject to inspection by the inspector(s) duly authorized by the Government in the countries of supply, as to the quality, quantity, price/HCV, verification of Tariff and Customs Code, classification and verification of Tariff rate, under a Comprehensive Import Supervision Scheme (CISS). Pursuant to Joint Order 1-91 (Appendix 4) which governs the implementation of the CISS, the following commodities are subject to inspection: 1. Goods sold and/or supplied from all countries with FOB value of US$500.00 and above. 2. Goods invoiced or declared in the shipping documents as off-quality under such descriptive terms as stocklots, side-runs, call rolls, seconds, mill lots, scraps, off-grade, reconditioned, used, junk or similar terms conveying or purporting to convey the condition of the article as not being brand-new or first quality, regardless of value. B. Export Trade Transactions SECTION 15. General Policy. It is the policy of the Central Bank to encourage commodity exports which generate foreign exchange earnings for the country. Accordingly, commodity exports are allowed without restriction except for certain commodities which are regulated or prohibited for reasons of national interest or by provision of law. SECTION 16. Classification of Exports
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national interest or by provision of law. SECTION 16. Classification of Exports 1. Freely Exportable Commodities. These are commodities the exportation of which is neither regulated nor prohibited. They may be effected without prior approval of or clearance from any government agency. 2. Regulated Commodities. These are commodities the exportation of which requires clearances/permits from appropriate government agencies. The list of these products and the appropriate government agencies/offices is shown in Appendix 5. 3. Prohibited Exports. These are commodities the exportation or sale of which is prohibited/penalized by law. SECTION 17. Export Declaration (ED) 1. Individual Export Declaration a. With Foreign Exchange Proceeds. For every export shipment with foreign exchange proceeds, exporters must accomplish Form (CBP 6-21-02, Revised 1991 (ED With Foreign Exchange Proceeds). Exporters to ASEAN countries must likewise accomplish this ED even if the shipment is paid for in Philippine pesos. The duly accomplished ED shall be submitted to the commercial bank which shall in turn forward the same to the Bureau of Customs (BOC); and b. Without Foreign Exchange Proceeds. Every export shipment without foreign exchange proceeds shall be covered by an Export Declaration Without Foreign Exchange Proceeds, issued by a commercial bank using CBP Form No. 6-21-04. Household and personal effects forming part of the accompanied baggage of an outgoing passenger leaving the Philippines shall be exempted from this requirement. 2. Monthly Export Declaration (MED). The use of a MED may be allowed by the commercial bank for exports with or without foreign exchange proceeds that are frequent and recurring, using the same form for ED under Section 17 but adding the word "Monthly" to the form title provided that the exporter shall submit a summary report to the commercial bank of all shipments effected under the said MED. The authority to use such a MED shall be valid for a period of one (1) year. 3. Registration and Issuance. The commercial bank shall register all EDs it issues and shall adopt a control number for each ED as prescribed by the Central Bank attached herewith as Appendix 6. No ED shall be issued unless the Letter of Credit (L/C), Purchase Order (P. O.) or Sales Contract (S.C.) is submitted to the commercial bank. 4. Validity Period. An ED shall have a maximum validity period of ninety (90) days from date of issue, inclusive of extensions, provided that the expiry date does not go beyond the delivery period specified in the L/C, P. O. or S.C. 5. Amendments. Amendments to the ED may be allowed by commercial banks at any time before export negotiation without prior Central Bank approval. 6. Cancellation of ED. Requests for cancellation of an ED may be given due course by the commercial bank upon submission by the exporter of the original ED1 thereon or Certificate of Non-Shipment issued by the Bureau of Customs. SECTION 18. Modes and Currency of Payment 1. Authorized Modes. Payments for exports may be made under any of the following modes without prior Central Bank approval. a. Letter of Credit (L/C); b. Documents Against Payment (D/P)/Cash Against Document (CAD); c. Documents Against Acceptance (D/A); d. Open Account (O/A); e. Intercompany Open Account Offset (Interco O/A) Arrangement (can be availed of only by firms with parent/affiliate relationship abroad); and f. Consignment. 2. Other Authorized Modes. Payments for exports may also be made under the following modes without prior Central Bank approval: a. Export Advance if the remittance is received more than thirty (30) days before shipment; and b. Prepayment if the remittance is received within thirty (30) days before shipment. To enable the commercial bank to determine whether the remittance received is a prepayment or an export advance, the exporter upon receipt of such remittance shall disclose to the commercial bank the date the shipment is to be effected. Bank draft/telegraphic transfer, buyer's checks, traveller's checks or
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date the shipment is to be effected. Bank draft/telegraphic transfer, buyer's checks, traveller's checks or acceptable foreign currency notes may be used in prepayment/export advance, but for buyer's checks, the same shall be cleared before shipment. 3. Acceptable Currencies a. Payments for exports may be made in the following currencies:
1) U.S. Dollar 2) Japanese Yen 3) Pound Sterling 4) Deutsche Mark 5) Hongkong Dollar 6) Swiss Franc 7) French Franc 8) Canadian Dollar 13) Australian Dollar 14) Ringgit Malaysia 15) Italian Lira 16) Saudi Rial 17) Kuwaiti Dinar 18) Bahrain Dinar 19) Brunei Dollar 20) Indonesian Rupiah

9) Netherlands Guilder 10) Austrian Schilling 11) Singapore Dollar

21) Thai Baht 22) United Arab Emirates Dirham 23) Such other currencies that may be

12) Belgian Franc declared acceptable by Central Bank

b. Payments may, however, be made in Philippine pesos for the following: 1) Exports to ASEAN countries provided that Central Bank shall not be asked to intervene in the clearing of any balances from this payment scheme; and 2) Gold sales to Central Bank which are considered as constructive exports. SECTION 19. Negotiation and Payment Procedures 1. Negotiation. The exporter shall negotiate his bill of exchange/account with the commercial bank together with the bill of lading/airway bill, signed commercial invoice and other documents as required. The commercial bank shall certify to the said negotiation in the ED2 copy which shall form part of the commercial banks Daily Report on Export Negotiations. In case of availments of export advances, the commercial bank thru which the availment was made must also be the same bank to negotiate the export documents. In cases where a shipment is fully prepaid, or is on O/A basis, the exporter may send the documents directly to the buyer. However, copies of these documents must be submitted to the commercial bank which issued the ED. 2. Payment. Payment shall be subject to the guidelines set forth under Appendix 7 of this Circular. Upon receipt of the export proceeds, the commercial bank shall certify to such receipt on the ED5 copy thereof. SECTION 20. Disposition of Export Proceeds. Foreign Exchange receipts, acquisitions or earnings of residents from exports may, at the option of said exporter, be sold for pesos to AABs or outside the banking system, retained, or deposited in foreign currency accounts, whether in the Philippines or abroad and may be used freely for any purpose. SECTION 21. Gold and Constructive Exports 1. Gold. All exports of gold in any form may be allowed except for gold from small-scale mining which is required to be sold to the Central Bank pursuant to Republic Act No. 7076 dated June 27, 1991. Gold from small-scale mining includes panned gold. 2. Constructive Exports. In addition to gold sales to the Central Bank, the following sales of residents paid for in foreign currency shall be considered as constructive exports: a. Gold sales to the Central Bank even if paid for in Philippine currency; b. Sales of residents paid for in foreign currency to the following entities: 1) Bonded manufacturing warehouses of export producers/manufacturers; 2) Export Processing Zones; 3) BOI-registered export traders operating bonded trading warehouses supplying raw materials
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3) BOI-registered export traders operating bonded trading warehouses supplying raw materials used in the manufacture of export products; 4) Diplomatic missions in the Philippines; 5) Duty Free Philippines Inc. (DFP); and 6) Foreign buyers of goods/products to be delivered directly to local consumers at the instruction of the former and paid for in foreign currency. An ED for each sale shall be accomplished, provided that the exporter shall submit a delivery receipt signed by the buyer in lieu of the bill of lading/airway bill. For sales of DFP, a MED shall be accomplished instead of an ED. PART II Capital Accounts CHAPTER I Foreign Currency Loans & Guarantees SECTION 22. General Policy. The Central Bank shall regulate foreign currency loans to ensure that interest and principal owed to creditors can be serviced in an orderly manner and with due regard to the economy's overall debt servicing capacity. Pursuant to Article VII Section 20 of the Constitution, all public and private sector publicly guaranteed obligations from foreign creditors, Offshore Banking Units (OBUs) and Foreign Currency Deposit Units (FCDUs) shall be referred to the Central Bank for prior approval. Other private sector loans from these creditors and other financing schemes/arrangements shall require prior approval and/or registration by the Central Bank if to be serviced using foreign exchange purchased from the banking system. SECTION 23. Loans Requiring Prior Central Bank Approval. Prior Central Bank approval shall be required for the following loans: 1. Loans of the following public sector entities irrespective of maturity, creditor and the source of foreign exchange for servicing thereof. a. National Government, its agencies and instrumentalities; b. Government-owned/controlled corporations; c. Government financial institutions, except short-term normal interbank borrowings; and d. Local governments. Central Bank approvals shall be obtained even before commencement of actual negotiations. 2. Loans of the private sector irrespective of maturity, creditor and the source of foreign exchange for servicing thereof if: a. guaranteed by government corporations and/or government financial institutions; b. covered by foreign exchange guarantees issued by local commercial banks; and c. to be granted by FCDUs and specifically or directly funded from, or collateralized by offshore loans or deposits. 3. Loans with maturities in excess of one (1) year to be obtained by private commercial banks and financial institutions intended for relending to public or private sector enterprises. 4. Loans to be extended by participating creditor banks under the Revolving Trade Facility (RTF) Agreement to a Philippine obligor, having a long-term tenor and is for the purpose of the purchase and importation into the Philippines of tangible personal property (Capital Asset Purchase Credit), pursuant to Article VI (Relending Option of said Agreement. 5. Other private sector loans, irrespective of maturity if to be serviced using foreign exchange purchased from the banking system and not covered by Section 24 hereof. Loan applications shall be filed using the prescribed forms. SECTION 24. Loans not Requiring Prior Central Bank Approval. The following loans may be granted without prior approval of the Central Bank: 1. Loans of the private sector from FCDUs/offshore sources irrespective of maturity to be serviced using foreign exchange purchased from outside of the banking system. 2. Short-term (with maturity not exceeding one [1] year) loans of financial institutions, both public and private, for normal interbank transactions, e.g., interbank call loans and general liquidity loans. 3. Short-term loans of the private sector in the form of export advances from buyers abroad. 4. Short-term loans of the following private sector borrowers from FCDUs: a. Commodity and service exporters provided these loans are used to finance export-related import costs of goods and services as well as peso cost requirements.
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import costs of goods and services as well as peso cost requirements. Service exporters shall refer to Philippine residents engaged or proposing to engage in rendering technical, professional or other services which are paid for in foreign exchange. b. Producers/manufacturers, including oil companies and public utility concerns provided the loans are used to finance import costs of goods and services necessary in the production of goods by the borrower concerned. Producers/manufacturers shall refer to any person or entity who undertakes the processing/conversion of raw materials into marketable form through physical, mechanical, chemical, or other means or by special treatment or a series of actions that results in a change in the nature or state of the products. Public utility firms shall refer to any business organization which regularly supplies the public with commodities or services such as electricity, gas, water, transportation, telegraph/telephone services and the like. Proceeds of FCDU loans shall not be eligible for deposit in an FCDU account if to be serviced using foreign exchange purchased from the banking system. 5. Short-term loans of private sector exporters/importers from participating creditor banks under the Revolving Trade Facility (RTF) Agreement, provided that: a. The loans are not covered by a guarantee from a government financial institution/corporation; b. The loans shall be exclusively used to finance specific trade transactions in an amount equivalent to the import bills to be liquidated and/or in the case of export financing transactions, to the borrower's pre-export financing requirements; c. The advice or notification on the loans to be obtained together with the pertinent documents cited in Appendix 8 have been submitted to the Central Bank at least five (5) days prior to drawdown date; d. Drawdown and registration requirements under Sections 27 and 28 hereof shall be complied with; and e. Any assignment of the loan by the creditor concerned shall require prior Central Bank approval. SECTION 25. Projects/Costs Eligible for Foreign Financing. 1. Loans requiring prior Central Bank approval shall as much as possible finance the following types of projects: a. Export-oriented projects; b. BOI-registered projects; c. Projects listed in the Investment Priorities Plan (IPP); d. Projects listed in the Medium-Term Public Investment Program; and e. Other projects that may be declared priority under the country's socio-economic development plan by the National Economic and Development Authority or by Congress. 2. Short-term loans shall finance exclusively foreign exchange requirements of projects except as may be specifically allowed under this Circular. 3. Medium and long-term loans may finance foreign exchange costs and local costs (excluding working capital) of eligible projects. SECTION 26. Terms of Loans 1. Loans shall have terms reflective of those prevailing in the international capital markets. 2. Terms of loans to be obtained by the National Government shall be in accordance with the provisions of pertinent laws governing National Government borrowings. 3. The Monetary Board may require longer grace/maturity periods for medium and long-term loans involving large amounts to reduce the impact thereof on debt servicing. SECTION 27. Drawdown/Availment on Loans. Loans intended to be services using foreign exchange purchased from the banking system shall comply with the following procedures/conditions for drawdown. 1. Drawdowns shall be made not earlier than two (2) days prior to the intended utilization of the loan. 2. Loan proceeds shall be inwardly-remitted and sold to the banking system and shall not therefore be eligible for deposit in FCDU accounts. However, amounts intended to finance foreign exchange costs may be remitted directly to the supplier as may be specifically allowed by the Central Bank. SECTION 28. Registration of Loans 1. Only loans which have been duly registered with the Central Bank shall be eligible for servicing using foreign exchange purchases from the banking system. Applications for registration shall be filed by the
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foreign exchange purchases from the banking system. Applications for registration shall be filed by the borrower with the Central Bank within three (3) banking days from drawdown date for short-term loans and fifteen (15) banking days for medium and long-term loans using the prescribed forms. 2. Private sector loans granted pursuant to Sections 24.4 and 24.5 shall be reported to the Central Bank for registration purposes, using forms prescribed for the purpose. 3. Compliance with the provisions of Section 27 above shall be a precondition for registration of loans with the Central Bank. 4. Loans requiring prior Central Bank approval which have been drawn/availed of without the requisite approval shall not be eligible for registration and subsequent servicing using foreign exchange purchases from the banking system. SECTION 29. Servicing of Loans 1. Payments for principal, interest, fees and related charges on loans duly registered with the Central Bank may be remitted as they fall due through commercial banks without prior Central Bank approval. 2. Payments for the following shall, however be subject to prior Central Bank approval; a. Prepayment/acceleration of payments on medium and long-term (MLT) loans; b. Loans past due for more than thirty (30) calendar days reckoned as follows: 1) For short-term loans, from the 360th day after availment; and 2) For MLT loans, from original maturity date. c. Other loan-related fees/charges not authorized by the Central Bank; and d. Loans covered by official rescheduling with Paris Club creditors listed in Appendix 9. 3. Applications for servicing of loan-related transactions shall be submitted to any commercial bank duly supported by the following documents: a. Central Bank registration letter indicating the charges/costs payable on the due dates cited in the application for remittance and specifically authorizing servicing of the payments involved without prior Central Bank approval; b. Billing from the foreign creditor showing amounts payable and due dates, and where applicable, the detailed computation (including basis) of the charges to be paid; and c. Proof of compliance with relevant Bureau of Internal Revenue (BIR) regulations on foreign loanrelated payments. 4. Borrowers with existing Central Bank-registered credits shall apply with the Central Bank for a onetime authority to service their outstanding credits using the prescribed forms. SECTION 30. Approval/Registration and Servicing of Guarantees 1. Guarantees for account of the public sector as well as those to be issued by government-owned and controlled corporations in favor of non-residents shall continue to be referred to the Central Bank for prior approval. 2. The following guarantees for account of the private sector shall not require prior Central Bank approval but should be reported to the Central Bank, for registration purposes, to be eligible for servicing using foreign exchange purchases from the banking system in the event of a default, by the principal obligor provided that proceeds of guarantees where the beneficiary is a resident shall be inwardly remitted and sold to the banking system: a. Guarantees to be issued by local banks and financial institutions including government financial institutions in favor of non-residents such as: 1) Payment guarantees (e.g. bid bonds, performance bonds, advance payment bonds); and 2) Guarantees to secure foreign obligations of residents which do not partake the nature of a foreign loan. b. Guarantees to be issued by foreign banks and financial institutions as well as other foreign entities to secure peso as well as foreign obligations (which do not partake the nature of a foreign loan) of local firms; and c. Guarantees and other forms of contingent liabilities chargeable against the participating creditor banks' commitment under the RTF. 3. Other guarantees or similar arrangements which may give rise to actual foreign obligations shall require prior Central Bank approval to be eligible for servicing using foreign exchange purchased from the banking system. 4. Fees and charges on guarantees shall be reflective of prevailing market terms, provided that guarantees issued by parent companies to their affiliates shall not be charged any fee.
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guarantees issued by parent companies to their affiliates shall not be charged any fee. 5. Any payments relative to Central Bank registered guarantees may be remitted by commercial banks as they fall due without prior Central Bank approval. Payments on any foreign liability arising from a call on the guarantee shall require prior Central Bank approval, if to be serviced using foreign exchange purchases from the banking system. SECTION 31. Approval and Servicing of Other Financing Schemes/Arrangements. 1. Financing schemes requiring total foreign exchange commitment in excess of US one million dollars such as, but not limited to Build-Operate-Transfer (BOT), Build and Transfer (BT) shall require prior approval of the Central Bank to be eligible for servicing using foreign exchange purchases from the banking system. 2. Payments related to financing schemes involving foreign exchange commitments of less than US one million dollars as well as Central Bank-approved transactions under paragraph 1 above may be serviced, as they fall due without prior Central Bank approval. CHAPTER II Foreign Investments SECTION 32. General Policy. Foreign investments need not be registered with the Central Bank. The registration of a foreign investment with the Central Bank is only required if the foreign exchange needed to service the repatriation of capital and the remittance of dividends, profits and earnings which accrue thereon shall be sourced from the banking system. Foreign exchange needed for capital repatriation and remittance of dividends, profits and earnings of unregistered foreign investments may be sourced outside of the banking system. Foreign investments shall be registered by the Central Bank only upon submission of proof that the foreign exchange funding the investment has been sold to the banking system for pesos, or that there has been an actual transfer of assets to the Philippines, in the case of investments in kind and the required endorsement of the Securities and Exchange Commission (SEC) or Bureau of Trade Regulation and Consumer Protection (BTRCP) has been obtained. SECTION 33. Categories of Foreign Investments. For purposes of registration, foreign investments may either be: (1) direct foreign equity investments in Philippine firms or enterprises; (2) investments in government securities and/or securities listed in the Philippine Stock Exchange; or (3) investments in money market instruments and/or bank deposits. SECTION 34. Direct Foreign Equity Investments. Direct foreign equity investment may be in cash or in kind. Assets eligible for registration as investment in kind shall include: (1) machinery and equipment; and (2) raw materials, supplies, spare parts, and other items including intangible assets necessary for the operation of the investee firm. The value of these investments in kind shall be assessed and appraised by the Central Bank before their registration. Expenses incurred by foreign firms pursuant to government-approved service contracts for oil/geothermal energy exploration/developments may be capitalized and registered as foreign investment with the Central Bank. SECTION 35. Investments in Government/Listed Securities. 1. Investments in government securities shall mean investments in certificates of indebtedness, issued by the Philippine Government, or its political subdivisions, agencies or instrumentalities. 2. Investments in listed securities shall mean investments in securities listed in the Philippine Stock Exchange, including securities traded over-the-counter. SECTION 36. Investments in Monetary Market Instruments and/or Bank Deposits. Investments in money market instruments shall include all debt instruments, such as but not limited to bonds and bills payable, issued by private domestic firms, not included in Section 23 Part Two, Chapter I of this Circular. Investments in bank deposits shall mean both peso savings and time deposits with an AAB. SECTION 37. Registration by Custodian Banks. The foreign investments described in Sections 35 and 36 above may be registered directly with the Central Bank or with an investor's designated custodian bank which shall issue a Central Bank Registration Document on behalf of the Central Bank. A custodian bank may be a commercial bank or an OBU appointed by the foreign investor to register his investments and to hold shares for and in his behalf and to represent him in all the necessary actions in connection with his investments in the Philippines. SECTION 38. Registration Procedures. The procedure for registration of foreign investments including
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SECTION 38. Registration Procedures. The procedure for registration of foreign investments including the supporting documents is outlined in Appendix 10 hereto. SECTION 39. Imports and Exports of Stock Certificates of Philippine Firms. No prior Central Bank authority shall be required for the import/export of stock certificates of Philippine firms issued to foreign investors, including investments prior to March 15, 1973 under Section 43 hereof. SECTION 40. Repatriation and Remittance Privileges 1. Foreign investments duly registered with the Central Bank or with a custodian bank duly designated by the foreign investor, shall be entitled to full and immediate repatriation of capital and remittance of dividends, profits and earnings. 2. Without prior Central Bank approval, commercial banks are authorized to sell and to remit the equivalent foreign exchange representing sales/divestment proceeds or dividends, profits or earnings of duly registered foreign investments in accordance with the procedures outlined in Appendix 11 hereof entitled, "Capital Repatriation/Dividend/Profits/Earnings Remittance Procedure." SECTION 41. Deposit of Divestment/Sales Proceeds. Pending reinvestment or repatriation, divestment/sales proceeds of duly registered foreign investments, including dividends, profits, earnings may be deposited temporarily with any bank. The eventual repatriation thereof including interest earned net of taxes, shall be remittable in full thru any commercial bank without prior Central Bank approval in accordance with the procedures outlined in Appendix 11 hereof. SECTION 42. Reinvestment. Foreign investors may reinvest divestment/sales proceeds or remittable dividends/profits or earnings of duly registered investments. The reinvestments shall be registered with the Central Bank or the investors' designated custodian banks. SECTION 43. Investments. Prior to March 15, 1973. Foreign investments certified by the stock transfer agents to have been made prior to March 15, 1973, may be serviced through the banking system, without prior Central Bank approval. SECTION 44. Outward Investments by Philippine Residents. A resident may invest abroad only if. 1. the investment are funded by withdrawals from foreign currency deposit units (FCDUs); or 2. the funds to be invested are not among those required to be sold to AABs for pesos; or 3. the funds to be invested are sourced from AABs but in amounts of less than $1 million per investor per year.

PART III OBUs, Representative Offices and FCDUs CHAPTER I Offshore Banking Units of Foreign Banks SECTION 45. Definition of Terms. As used in this Chapter, the following terms shall have the meaning indicated unless the context clearly indicates otherwise: 1. "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external sources and, as allowed in this Circular, from internal sources and utilization of such funds, as provided herein. 2. "Offshore Banking Unit" or "OBU" shall refer to a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines. 3. "Net office funds" shall refer to the net credit balance of the "Due to Head Office (HO)/Branches/Parent Company Account" after deducting the "Due from HO/Branches/Parent Company Account", as shown in the following computation: Due to HO/Branches/Parent Company Remittances/Advances/Deposits to OBU by HO/Branches/Parent Company Unremitted earnings of OBU Total Less: Due from HO/Branches/Parent Company Remittances/Advances/ Deposits of OBU with its HO/Branches/Parent Company
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xxxxx xxxxx $xxxxx xxxxx

xxxxx its HO/Branches/Parent Company Net Office Funds $xxxxx

4. "Deposits" shall refer to funds in foreign currencies which are accepted and held by an OBU in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. 5. "Resident" shall mean a. an individual citizen of the Philippines residing therein; or b. an individual who is not a citizen of the Philippines but is permanently residing therein; or c. a corporation or other juridical person organized under the laws of the Philippines; or d. a branch, subsidiary, affiliate, extension office or any other unit of corporations or juridical persons which are organized under the laws of any country and operating in the Philippines. 6. "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "resident". 7. "Foreign currency deposit unit" or "FCDU" shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Central Bank to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. "Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended. 8. "Acceptable foreign exchange" comprise those foreign currencies which are acceptable to and exchangeable at the Central Bank and which form part of the international reserves of the country. SECTION 46. Approvals Required. A foreign bank may operate an offshore banking unit (OBU) in the Philippines, after issuance to it of a Certificate of Authority to operate by the Monetary Board and registration with the Securities and Exchange Commission. SECTION 47. Criteria for Selection. The following factors shall serve as basis for the issuance of certificate of authority to operate an offshore banking unit: (1) liquidity and solvency positions; (2) networth and resources base; (3) managerial and international banking expertise of applicant bank (4) contribution to the Philippine economy; and (5) other relevant factors, such as participation in the equity of local commercial banks and appropriate geographic representations. SECTION 48. Pre-Operation Requirements. Upon advice from the Central Bank, a qualified bank shall submit a sworn undertaking of its head office, or parent company, through any of its duly authorized officers, supported by an appropriate resolution of its board of directors, to the effect that it shall: 1. on demand, provide the necessary currencies to cover liquidity needs that may arise or other shortfall that its OBU may incur. 2. manage the operations of its OBU soundly and with prudence. 3. train continually a specific number of Filipinos in international banking and foreign exchange trading with a view to reducing the number of expatriates; 4. provide and maintain in its offshore banking unit at all times net office funds in the minimum amount of US$1 million. 5. start operations of its OBU within one hundred eighty (180) days from receipt of its certificate of authority to operate such unit. 6. comply with applicable local laws relating to labor and employment. 7. submit before start of operations, other documents as may be required by the Central Bank such as certification or similar documents showing that it is duly authorized by the proper Government entity of its country to engage in offshore banking business in the Philippines. SECTION 49. Annual Fee. Upon issuance of a certificate of authority to operate an OBU in the Philippines, and yearly thereafter, the authorized bank shall pay the Central Bank a fee of not less than US$20,000.00. SECTION 50. Transactions with Non-Residents and/or with OBUs. An OBU may freely engage in all normal banking transactions with non-residents and/or with other OBUs, involving any currency other than the Philippine peso. SECTION 51. Transactions with Foreign Currency Deposit Units (FCDUs). Subject to Central Bank regulations, an OBU may engage in the following transactions with local banks incorporated or registered in the Philippines as FCDU(s) in any currency other than the Philippine peso:
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registered in the Philippines as FCDU(s) in any currency other than the Philippine peso: 1. Accept time, demand and call deposits or issue negotiable certificates of time deposits. 2. Borrow with maturities not exceeding 360 days. 3. Deposit. 4. Extend loans and advances. 5. Deal in foreign currency instruments. 6. Discount bills, acceptances, and negotiable certificates of deposits. 7. Engage in foreign exchange trading. 8. Engage in such other transactions as are authorized under this section between OBUs and resident banks authorized to accept foreign currency deposits under the provisions of R.A. No. 6426, as amended. Interbank short-term transactions of not exceeding 360 days such as credit lines of Philippine banks with correspondent banks, interbank call loans and interbank loans for general liquidity purposes shall not require prior Central Bank approval. SECTION 52. Transactions with Residents which are not Banks. An OBU may engage in the following transactions with residents which are not banks: 1. Deal in foreign currency instruments. 2. Extend foreign currency loans and advances, subject to existing regulations on foreign borrowings. 3. Open letters of credit (L/Cs) for importations of resident-borrowers provided such importations shall be funded by a Central Bank-approved OBU foreign currency loan to the resident borrower involved. 4. Negotiate inward (export) Letters of Credit (L/Cs) and handle other export transactions (including documents against acceptance [D/A] and documents against payments ([D/P] and open account arrangements [O/A]) coursed thru their worldwide network of branches and correspondents subject to the following conditions: a. OBUs shall bring in foreign exchange sourced outside of the Trade Facility which shall be sold to the domestic banking system; and b. OBUs' share in the total export L/C negotiation business shall be limited to of the growth (incremental) element in the country's total annual export. This limit shall be observed yearly until this equals 10 percent of total exports. Exports not covered by L/Cs, i.e., done thru documents against acceptance/open account arrangements shall be considered subject to this overall limit; 5. Provide full foreign exchange service for all foreign currency non-trade remittances and trade remittances resulting from or related to their own negotiations of export L/Cs. 6. Render financial, advisory and related services. 7. Refinance trust receipts without prior Central Bank approval arising from import transactions of Philippine residents in U.S. dollars or in other acceptable foreign currencies. The refinancing shall be evidenced by bankers acceptances. SECTION 53. Peso Deposits. OBUs may open and maintain peso deposit accounts with domestic agent banks exclusively for the following purposes: 1. To meet administrative and other operating expenses, such as salaries, rentals and the like. 2. To pay the peso equivalent of foreign exchange sold by beneficiaries of inward remittances of Filipino overseas workers or of Filipino or multinational companies, coursed through the OBUs' correspondent banks abroad. 3. To pay to the designated beneficiaries in the Philippines the peso equivalent of foreign exchange inward remittances other than remittances related to trade. 4. To pay the peso equivalent of foreign exchange sold by beneficiaries of export L/Cs negotiated with the OBUs. The peso deposit accounts shall be funded exclusively by inward remittances of foreign exchange eligible to form part of the Philippine international reserves. OBUs may also sell inward remittances of foreign exchange for pesos to the Central Bank through the Treasury Department, for credit to the demand deposit account of the designated commercial bank for account of the OBU. SECTION 54. Financial Assistance to Officers/Employees. OBUs may extend financial assistance (real estate, car, personal loans, etc.) in local or foreign currency to their Filipino officers and employees as part of their fringe benefit program. They may likewise grant foreign currency loans to their expatriate officers without need of Central Bank
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part of their fringe benefit program. They may likewise grant foreign currency loans to their expatriate officers without need of Central Bank approval. SECTION 55. Secrecy of Deposits. The provisions of R.A. No. 6426 (Foreign Currency Deposit Act), as amended, shall apply to deposits in OBUs; Provided, however, that numbered deposit accounts shall not be used. SECTION 56. Exemption from Certain Laws. The provisions of Act No. 2655 (Usury Law) as amended, R.A. No. 529 (Uniform Currency Law) as amended, and R.A. No. 3591 (Deposit Insurance Law) as amended, shall not apply to transactions and/or deposits in OBUs in the Philippines. SECTION 57. Accounting and Reporting. OBUs shall maintain an accounting system in accordance with guidelines prescribed by the Central Bank. Periodically or as required, existing reports shall continue to be submitted in the prescribed forms to the Central Bank. SECTION 58. Supervision. The operations and activities of offshore banking units shall be conducted under the supervision of the Central Bank of the Philippines. SECTION 59. Taxes, Customs Duties. Transactions of OBUs in the Philippines shall be subject to such taxes as are prescribed in Presidential Decree No. 1034, as implemented by regulations of the Bureau of Internal Revenue. SECTION 60. Revocation/Suspension. The Monetary Board, by the recommendation of the Governor, may revoke or suspend the authority of an Offshore Banking Unit to operate in the Philippines for violation of P. D. No. 1034 or these regulations. CHAPTER II Representative Offices of Foreign Banks SECTION 61. Definition of Terms. As used in this Chapter, the following terms shall have the meaning indicated unless the context clearly indicates otherwise: 1. "Foreign Bank" shall refer to a bank or banking corporation formed, organized and existing under any foreign law. 2. "Representative Office" shall refer to a liaison office of a foreign bank which deals directly with the public by promoting and giving information about the foreign bank's services offered. It does not include the regional or area headquarters of a foreign bank registered and licensed under existing laws. SECTION 62. Criteria for Approval. The Monetary Board may authorize qualified foreign banks to open representative offices in the Philippines if, in its judgment, the public interest and economic conditions, both general and local, justify the establishment of such office. The following factors, among others, shall serve as basis for issuance of authority to open a representative office in the Philippines: (1) liquidity and solvency Positions; (2) net worth and resources base; (3) financial and credit standing in the international banking community; (4) exposure in the Philippines; and (5) other relevant factors, such as Philippine commercial and financial relationships with the country where applicant bank is bank is based. SECTION 63. Authorized Activities of Representative Offices. Authorized representative offices may promote and provide information about the services/products offered by the foreign banks but may not transact banking business, such as acceptance of deposits, issuance of letters of credit and foreign exchange trading. Transactions generated through the promotional efforts of the representative office may be booked only by the foreign bank abroad. SECTION 64. Fees. Banks with representative offices to be established after the effectivity of this Circular shall, upon issuance by the Central Bank of a Certificate of Authority, pay the Central Bank a license fee of US$2,000.00. SECTION 65. Use of the Term "Representative Office". Foreign banks authorized to operate representative offices shall, in their representation with the public, carry with their name the additional term "Representative Office" to properly guide the public on the nature and extent of their activities. SECTION 66. Licensing. The licensing and operations of representative offices including the implementation of these regulations and such other rules and regulations that may be issued from time to time shall be the responsibility of FERD. SECTION 67. Visitorial Power. The Central Bank may, from time to time, look into the affairs of the representative offices to determine the extent of their compliance with this regulation and/or other related Central Bank issuances. SECTION 68. Reporting. Representative Offices shall submit to the Central Bank annual reports of their Head Office and, periodically as may be required, reports on the transactions of their Head Office
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their Head Office and, periodically as may be required, reports on the transactions of their Head Office in the Philippines in such form as may be prescribed for the purpose. SECTION 69. Revocation of License. The Monetary Board may revoke the license of a representative office if it finds after due investigation that: (1) the representative office or its officers have violated the provisions of this Circular and any other applicable rules and regulations of the Central Bank of the Philippines; or (2) its Head Office is found to be in imminent danger of insolvency or that its continuance in business will involve probable loss to those transacting business with it, pursuant to Section 16 of R.A. 337, as amended. CHAPTER III Foreign Currency Deposit System SECTION 70. Definition of Terms. As used in this Chapter, the following terms shall have the meaning indicated unless the context clearly indicates otherwise: 1. "Foreign Currency Deposit Unit" or "FCDU" shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Central Bank to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337 as amended). 2. "Short-term" loans and securities shall refer to credit accommodations with maturities of one (1) year or less. 3. "Medium-term" loans and securities shall refer to credit accommodations with maturities of more than one year but not more than five (5) years. 4. "Long-term" loan and securities shall refer to credit accommodations with maturities of more than five (5) years. The definition of such other terms used in this Chapter shall be consistent with the definition of terms used under the Chapter on Offshore Banking Units of Foreign Banks. SECTION 71. Qualification Requirements 1. Only commercial banks can be authorized to function under the expanded foreign currency deposit system, pursuant to the provisions of R.A. 6426, as amended, provided, that they meet the following minimum qualifications: a. Its networth or combined capital accounts are at least equal to the minimum capital requirement for commercial banks as may be prescribed by the Monetary Board from time to time. Networth or combined capital accounts as used herein shall refer to the total of unimpaired paid-in capital, surplus, and undivided profits, net of such valuation reserves and other capital adjustments as may be required by the Central Bank; b. It has shown profitable operations for a period of two (2) consecutive business year immediately preceding the date of application. Its profitability, solvency, and liquidity ratios must be satisfactory; c. It has substantially complied with applicable laws and existing Central Bank rules and regulations; and d. Bank officers shall have at least two (2) years of actual experience in foreign exchange operations or related activities or have undergone training in foreign exchange operations acceptable to the Central Bank. 2. Thrift banks may also be authorized to operate an FCDU, provided that they have networth or combined capital accounts of at least P50 million and have the other minimum qualifications prescribed above for commercial banks. SECTION 72. Authorized Transactions 1. Thrift banks which are granted a certificate of authority to operate an FCDU are authorized to engage in the following transactions in any acceptable foreign currency: a. Accept deposits and trust accounts (for banks authorized to engage in trust operations) from residents and non-residents; b. Deposit, on short-term maturity, with foreign banks abroad, OBUs, and other FCDUs; c. Invest in foreign currency denominated debt instruments, which are of short-term maturity and are readily marketable; d. Grant short-term foreign currency loans as may be allowed by Central Bank regulations;
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are readily marketable; d. Grant short-term foreign currency loans as may be allowed by Central Bank regulations; e. Borrow, on short-term maturity, from other FCDUs, and from foreign banks abroad and OBUs subject to existing rules on foreign borrowings; and f. Engage in foreign currency-foreign currency swap with the Central Bank, OBUs and other FCDUs. 2. Commercial banks, which are authorized to operate under the expanded foreign currency deposit system under Section 71 hereof, may engage in the following transactions in any acceptable foreign currency: a. Accept deposits and trust accounts (for banks authorized to engage in trust operations) from residents and non-residents; b. Deposit with foreign banks abroad, OBUs and other FCDUs; c. Invest in foreign currency-denominated debt instruments; d. Grant foreign currency loans as may be allowed by the Central Bank; e. Borrow from other FCDUs, and from non-residents and OBUs, subject to existing rules on foreign borrowings; f. Engage in foreign currency-foreign currency swap with the Central Bank, other FCDUs, and OBUs; g. Engage in foreign exchange trading; and with prior Central Bank approval, engage in financial futures and options trading; and h. On request/instructions of its foreign correspondent bank it may: 1) issue letters of credit for a non-resident importer in favor of a non-resident exporter; 2) pay, accept, or negotiate draft/bills of exchange drawn under the letter of credit; and 3) make payment to the order of the non-resident exporter. Provided, that the foreign correspondent bank shall deposit sufficient foreign exchange with the FCDU issuing the letter of credit to cover all drawings. SECTION 73. Foreign Currency Cover Requirements. FCDUs shall maintain at all times, a one hundred percent (100%) cover for their foreign currency liabilities. For purposes of complying with this requirement, the principal offices in the Philippines of the authorized banks and all its branches located therein shall be considered as a single unit. The foreign currency cover shall consist of the following: 1. For Thrift Banks a. Foreign currency deposits with the Central Bank; b. Foreign currency deposits of short-term maturity, with foreign banks abroad, OBUs and other FCDUs; c. Short-term foreign currency loans authorized by the Central Bank except those classified by the Central Bank as bad or uncollectible debts; d. Investments in foreign currency-denominated debt instruments, which, are of short-term maturities and are readily marketable; e. Foreign currency notes and coins on hand; f. Foreign currency swapped with the Central Bank, OBUs and other FCDUs; g. Foreign currency interests receivable; and h. Such other assets, as may be determined by the Monetary Board as eligible cover. 2. Commercial Banks In addition to the above, the following shall also be considered as eligible asset cover: a. Foreign currency loans maturing beyond one (1) year granted with prior Central Bank approval, except those classified by the Central Bank as bad or uncollectible debts; and b. Investments in foreign currency-denominated debt instruments, irrespective of maturity. For purposes of this Section, only real accounts shall qualify as eligible asset cover. SECTION 74. Foreign Currency Deposit with the Central Bank. FCDUs of thrift banks shall maintain at all times foreign currency deposits with the Central Bank equivalent to at least fifteen percent (15%) of their foreign currency deposit liabilities. The Central Bank may pay interest on the foreign currency deposit and if requested shall exchange the foreign currency notes and coins into foreign currency instruments drawn on its depository banks. FCDUs of commercial banks shall be exempt from maintaining fifteen percent (15%) of the cover in the form of foreign currency deposit with the Central Bank. SECTION 75. Currency Composition of the Cover. FCDUs of thrift banks shall maintain the foreign currency cover in the same currency as that of the corresponding foreign currency deposit liability.
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currency cover in the same currency as that of the corresponding foreign currency deposit liability. FCDUs of commercial banks shall maintain not less than seventy percent (70%) of the foreign currency cover in the same currency liability and thirty percent (30%) or less, at the option of the FCDU, may be denominated in other acceptable foreign currencies. SECTION 76. Secrecy of Deposits. Pursuant to R.A. No. 6426, as amended, all foreign currency deposits are declared and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall such foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial, administrative or legislative, or any other entity whether public or private. SECTION 77. Numbered Accounts. Authorized banks may adopt a numbered account system. SECTION 78. Withdrawability and Transferability of Deposits. There shall be no restrictions on the withdrawal by the depositor of his deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank. SECTION 79. Insurance Coverage. Foreign currency deposits shall be insured under the provisions of R.A. No. 3591, as amended. Depositors are entitled to receive payment in the same currency in which the insured deposits are denominated. SECTION 80. Rates of Interest. Authorized banks are free to pay any rate of interest on foreign currency deposits. SECTION 81. Eligibility as Collateral. Deposits under the Foreign Currency Deposit System are eligible as collateral for peso loans or for foreign currency loans to both domestic juridical entities and/or resident individuals. SECTION 82. Taxes. All foreign currency deposits made under this chapter, including interest and all other income or earnings of such deposits, are exempt from any and all taxes whatsoever irrespective of whether or not these deposits are made by residents or non-residents so long as the deposits are eligible or allowed under aforementioned laws and in the case of non-residents, irrespective of whether or not they are engaged in trade or business in the Philippines. The transactions of FCDUs shall, however, be subject to such taxes as are provided by law and regulations of the Bureau of Internal Revenue. SECTION 83. Exemption from Court Order or Process. Foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. SECTION 84. Inapplicability of Certain Law. The provisions of R.A. No. 529 (Uniform Currency Law) as amended, and R.A. No. 2655 (Usury Law) as amended, shall not apply to banks in respect to their foreign currency transactions under this Chapter. SECTION 85. Accounting. The foreign currency deposits and their corresponding cover shall be considered as funds separate and distinct from the regular assets and liabilities of the authorized banks. Authorized banks shall maintain a separate accounting for transactions covered by this Chapter that will enable preparation of the Balance Sheet and Profit and Loss Statement covering said funds. Periodically or as required, existing reports shall continue to be submitted in the prescribed forms to the Central Bank of the Philippines. SECTION 86. Supervision. The Governor or the head of the appropriate department of the Central Bank personally, or by deputies, are authorized to verify the books of account and transactions of each authorized bank, to verify the eligible cover as well as review all other requirements under these regulations and the bank's compliance with the provisions of law and these regulations. SECTION 87. Prospective Effect of Regulations. In the event a new enactment or regulation is issued decreasing the rights hereunder granted, such new enactment or regulations shall not apply to foreign currency deposits already made or existing at the time of issuance of such new enactment or regulation, but such new enactment or regulation shall apply only to foreign currency deposits made after its issuance. SECTION 88. Sanctions. Any willful violation of R.A. 6426, as amended, or any regulation duly promulgated by the Monetary Board pursuant thereto shall subject the offender upon conviction to an imprisonment of not less than one year nor more than five (5) years or a fine of not less than five thousand pesos nor more than twenty-five thousand pesos, or both such fine and imprisonment at the discretion of the court. The Central Bank may revoke or suspend the authority of a bank to accept new foreign currency
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discretion of the court. The Central Bank may revoke or suspend the authority of a bank to accept new foreign currency deposits for violation of R.A. No. 6426 or these regulations, or if such bank ceases to possess the minimum qualifications required. PART IV General Provisions CHAPTER I Reports and Post-Verification SECTION 89. Reportorial Requirements. The following reports are required to be submitted to the CB by the AABS and by OBUs, when applicable: Title of Report Submission Frequency/Deadline A. Consolidated Report on Foreign Exchange Assets and Liabilities 1. For commercial banks: IOS Form 1, Schedules 1-17
IOS Form 1, Schedules 2. For thrift banks: IOS Form 1A, Schedules 1-5 3. For rural banks: IOS Form 1B, Schedules 1-5 B. Foreign Exchange Trade Transactions 1. Report on Export Negotiations, IOS Form 1 Schedule 10 2. Report on Export Proceeds Received, IOS Form 1 Schedule 11 Daily, within two (2) banking days after reference date Daily, within two (2) banking days after reference date

Daily, within two (2) banking days after reference date

18 Monthly, within ten (10) banking days after end of reference month Monthly, within ten (10) banking days after end of reference month Monthly, within ten (10) banking days after end of reference month

3. Report on Export Declaration Issued (With and Without Foreign Exchange Proceeds)CBP Form 6-21-23
4. Report on Red Clause and Other Export Advances CBP Form 6-21-21-A 5. Report on Regular L/Cs opened, IOS Form 1 Schedule 12 and 12A

Monthly, within ten (10) banking days after end reference month
Monthly, within ten (10) banking days after end reference month Daily, within two (2) banking days after reference date

6. Report on Negotiations on Regular L/Cs, IOS Form 1 Schedule 13

7. Report on Confirmation/Amendments of L/Cs, IOS Form 1 Schedule 14 8. Report on DA/OA Availments, with Accomplished Record of Goods Imported, IOS Form 1 Schedule 15 9. Report on DA/OA Repayments, IOS Form 1 Schedule 16

Daily, within two (2) banking days after reference date

Daily, within two (2) banking days after reference date Daily, within two (2) banking days after reference date Daily, within two (2) banking days after reference date

10. Report on FX Remittances under D/P Imports, including Direct Remittances, CBP Form 60-15-09
C. Foreign Currency Loans and Related Transactions 1. Consolidated Report on Foreign Exchange Assets and Liabilities, IOS Form 1, Schedules 1, 3, 4, 7 and 8 2. Consolidated Report on Loans Granted by FCDUS, IOS Form 4 after
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Daily, within two (2) banking days after reference date

Daily, within two (2) banking days after reference date Monthly, within ten (10) calendar days end of reference month

4 after 3. Consolidated Report on Loans Granted by OBUs to Residents end CBP Form 6-24-24 4. Report on Foreign Guarantees Securing Peso Loans of Residents from from Local Banks and Financial Institutions (FIs)

days end of reference month Monthly, within ten (10) banking days after of reference month Quarterly, within ten (10) banking days end of reference quarter

5. Report on Guarantees Issued by Local Banks and FIs in favor of from end of reference quarter Non-Residents
D. For Foreign Currency Deposit Units (FCDUs) 1. Consolidated Statement of Assets and Liabilities (For FCDUs of TBs), CBP 6.40.03 2. Statement of Condition (For FCDUs of KBs/EKBs), SES I/VI Form 2

Quarterly, within ten (10) banking days

Monthly, within ten (10) banking days after end of reference month. Monthly, within ten (10) banking days after end of reference month

3. Statement of Earnings and Expenses, CBP 6.40.04

4. Report on Spot and Forward FX Transactions of FCDUS, CBP 8.40.06 5. Report on FCDU Outstanding Long-Term Investment in Debt Instruments 6. Report on Inventory of Philippine Debt Paper

Semestral, within ten (10) banking daysafter end of reference semester

Monthly, within ten (10) banking days after end of reference month Monthly, within ten (10) banking days after end of reference month Weekly, within three (3) banking days after reference week

7. Report on Options Transactions

8. Report on Financial Futures Transactions

Bi-monthly, within two (2) banking days after reference week

Monthly, within ten (10) banking days after after end of reference month

E. Offshore Banking Units 1. Statement of Assets and Liabilities, CBP 6.40.01

2. Statement of Earnings and Expenses, CBP 6.40.02 after 3. Report on Spot and Forward FX Transactions of OBUS, CBP 6.40.06 4. Financial Assistance and Training Granted by OBUs to its Filipino Staff

Monthly, within ten (10) banking days after end of reference month
Semestral, within ten (10) banking days end of reference semester Monthly, within ten (10) banking days after end of reference month Annually, within ten (10) banking days after end of year

5. FX Cash Receipts and Cash Disbursements 6. Updated List and Bio-Data of Expatriates F. Representative Offices of Foreign Banks
1. FX Cash Receipts and Cash Disbursements

Monthly, within ten (10) banking days after end of reference month Annually, within ten (10) banking days end of year

Monthly, within ten (10) banking days after end of reference month

2. Annual Report of Head Office

G. Custodian Banks/Remitting AABs

Within five (5) months after end of fiscal/calendar year Daily, within two (2) banking days after

1. Report of Central Bank Registration Documents

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1. Report of Central Bank Registration Documents for Foreign Investments 2. Statement of Remittance together with supporting documents mentioned in Appendix 11 of this Circular.

Daily, within two (2) banking days after registration date Daily, within two (2) banking days after from date of actual remittance

SECTION 90. Procedures for Reporting. Reports shall be filed with the CB Main Office or with the CB Regional Offices or by sending them by mail or special delivery, unless otherwise specified. The date of acknowledgment of receipt on the copy of the report (if filed directly) or the postmark date on the envelope or registry receipt (if mailed) shall be considered as the date of submission. SECTION 91. Fines and Penalties. 1. The following schedule of fines for late and/or incomplete submission of reports shall apply: a. P10 per banking day for the first five successive banking days of delay; b. P150 per banking day for the next five successive banking days of delay; and c. P200 per banking day for the successive banking days of delay until the particular report has been filed. 2. Manner of payment or collection of fines: a. Fines shall be collected thru debit to the AAB's current account deposit maintained with the CB by the Accounting Department upon receipt of notice from the IOS (International Operations Sector) Department involved; or b. In case payment of fines is effected thru check or cash, the same shall be remitted to the Cash Department of the Central Bank thru the IOS Department involved. SECTION 92. Post-Verification. Post-verification of foreign exchange transactions covered by this Circular and reported under Section 89 hereof shall be undertaken by the Central Bank to verify compliance with the provisions of this Circular and for monitoring purposes. CHAPTER II Final Provisions SECTION 93. Penal Sanctions. Any person violating the provisions of this Circular shall suffer the penalties prescribed under Sections 33 and 34 of R.A. No. 265, as amended. Administrative sanctions may also be imposed upon banking institutions found violating this Circular, including their directors and officers responsible for such violation. SECTION 94. Repealing Clause. All existing provisions of Circular No. 1284 dated April 25, 1991, Circular No. 1318 dated January 3, 1992, Circular No. 1348 dated July 25, 1992, Circular No. 1351 dated August 21, 1992, Circular No. 1353 dated September 1, 1992, Circular No. 1356 dated September 25, 1992, Circular No. 1362 dated October 23, 1992, Circular No. 1368, dated November 23, 1992, Circular No. 1373 dated December 23, 1992 and Circular No. 1376 dated January 4, 1993, including amendments thereto, and other Central Bank rules and regulations on current accounts, capital accounts, foreign currency deposit units, offshore banking units and representative offices of foreign banks, as well as all other existing Central Bank rules and regulations or parts thereof which are inconsistent with or contrary to the provisions of this Circular are hereby repealed or modified accordingly. Provided, however, that regulations, violations of which are the subject of pending actions or investigations, shall not be considered repealed insofar as such pending actions or investigations are concerned, it being understood that as to such pending actions or investigations, the regulations existing at the time the cause of action accrued shall govern. SECTION 95. Separability Clause. Nothing therein is intended nor shall be construed, to repeal or amend any law or statute. Should any provision of this Circular be declared unconstitutional or invalid, the remaining provisions or parts thereof shall remain in full force and effect, and continue to be valid and binding. SECTION 96. Effectivity. This Circular shall take effect fifteen (15) days after its publication in a newspaper of general circulation. For the Monetary Board: EDGARDO P. ZIALCITA Officer-in-Charge
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Pasted from <http://www.bsp.gov.ph/regulations/regulations.asp?type=1&id=1563>

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- NOTES AT THE RIGHT SIDE ARE FROM THE CLASS DISCUSSION

Thursday, July 16, 2009 10:42 PM

Analysis of Parts of a Loan Agreement

O r igin of the Eurodollar Market -Eurodollar: US Dollar, but credited in a bank outside of the US -Remember: what IMF did to the exchange system Dollar pegged to gold, US government promised to exchange dollars with Gold if a country would like to do so (Gold Bullion) But in 1948, the commitment of the US to make that exchange was put into question when US Treasury blocked the transfer of $1 0Mby gold to Czechoslovakia (Czech at that time was a communist state - no longer around, subdivided into different states) 1949: China was then a new communist state. China was concerned to what happened to US -Czech so transferred US deposits to USSR to a bank in Paris. The address of that bank was "Euro -bank" "Narotny?" bank Marshall plan: used to reconstruct Europe, named after George Marshall, US secretary of State at that time -US dollars were placed in banksBillions! 1956: US treasury froze assets of Egyptian government in US
Communist countries worried about US freezing their assets *there was a ceiling in banking deposits in US So deposits were placed outside US to earn more dollars

*1970s: currency used in trade is "pound sterling" but were limited to members of the British Commonwealth so by default, Dol lars became the currency outside the US???weirdmali lang siguro notes ko "by the way, this is not based on Wikepedia" - Sir

What's a matching deposit?

Eurobank: *First syndicated loan in $ was in 1958 "Syndicate is an honorable term in banking" - Sir Syndicate is a group of banks 1988: the total volume of Eurocurrency loans increased! Remember: 1982: there was a moratorium declared iN RP? Some other countries, like Argentina, was one of the 1st one who impos ed the moratorium Because of this moratorium and the poor record of developing countries, there was a time when the euroloans volume increased? -rather than have loan from Int'l banks, loaned using Eurobonds
InterestActs: imposed on investors in the US investing in bonds issued by nonresidents in the US -naturally there is a tax -nonresidents did not like to raise bonds in US so they did so OUTSIDE US

Two Concepts in relation to Euro-dollar Loans: 1. Matched Funding Illustration: December 24: value date, drawdown date December 22: trade date (loan to be approved in two days); bank agrees to deposit Value date : between borrowing and lending banks in the interbank market Drawdown date : between borrowing bank and its own individual borrower; there is twoday notice rule Reprising date : after a period (end of funding agreement), bank will look for another lending bank to provide funds Roll-over: takes place when original lending bank agrees to extend period.

1988: total issues of eurobonds amounted to US $175 B (and increasing in 1990s) -60% of which was in London When we declared a moratorium in 1983 (term used was not moratorium to avoid default situation, CB declared a "standstill" bu t it amounts to the same thing)
Capital Flight from the Philippines during moratorium, CB issued "JOBO Bills" JOBO: nickname of governor of CB (JOSE B. FERNANDEZ) JOBO Bills: covered 30% interest (I didn't get this part) -this was the reason why CB incurred Billions of Losses, aside from the so called "back to back loans" (Swap loans)

Interest v. Lumpsum

Interest period: borrower to pay interest to bank every after a given period Lumpsum: at the end of agreement , principal and interest

Back to back loans: foreign bank would lend dollars to FCDU, FCDU would now loan it in Pesos. The BSP considered the FCDU pes o loan as an acceptable asset of the FCDU (because there was a corresponding FOrEx arrangement between FCDU and CB). When repayment comes, FCDU would take the peso amount paid, then bring it to CB, CB would convert it to dollars (any loss would be incurred by CB)
Who were the beneficiaries of this swap loans? Mostly cronies of Marcos -accumulated loss P330B

What is a prime rate? Its the T-bill rate.

Pari Passu: Equal Pace : commitment by a borrower that the loan agreement will rank equally with other unsecured obligations of the borrower save those with statutory preference. Note: Dont notarize dollar loan agreement so as not to violate the pari passu clause. The notarization will give the agreement preference. Negative Pledge: enforcer of pari passu clause as it prohibits borrower from giving security interests to its other lenders without giving specific lender a share in the collateral . The borrower cannot encumber upon his property in favor of a select lender without including specific lenders. This extends to any security interest arrangement. Prepayment: GR: Bank may not coerce borrowers to prepay. Exception: However, borrowers may voluntarily do so. When there is prepayment, the payment is applied in the inverse order of maturities so as to insure regular investment flow for the bank. Prepaid amount may not be reborrowed since it is not a revolving facility. : In case of diversion of loan proceeds, there could be mandatory prepayment. Hence, it is important to state the purposes for which the loan will be used. 2. Net Lending Parts of Euro-Dollar Loan Agreement: (Refer to SyCip handout of Sir) - waaah! I don't have it yet!!!

CB would even borrow dollars from International banks for domestic borrowers, then if these borrowers would not be able to pa y, CB would incur the loss - JUMBO Loans

I. a. b. c.

ON LOAN AGREEMENT (other comments written on the sample loan agreement) Introduction Title Whereas Definition Draw Tranches? Slice in French? Hanapin yung slice in french! *Advances - sometimes used to denote the loan itself LEGAL OPINION: always sentence: "All terms used in this legal opinion are used in this legal opinion with the meaning as used in the loan agreement"then Recite the terms in the Loan Agreement plus sections Draw down: to effect it, borrower needs to give notice to lender in advance so that the lender could arrange for borrowing (so borrowing usually defined) Interest period: in time of maturity, example 10 yearsit is divided into several interest periods, example 6 monthsso 20 interest payments in the 10 years, the last one corresponding to the deadline of the principal -normally interest payable at the end of each interest period *in the sample loan agreement, it has a 3 year loan Form of Notice of Borrowing -in the Eurodollar market, normal is 2 London (?) banking days prior to proposed drawdown date -in usual London market, when the lending bank finds a bank for banking, and it gets one, the usual days allowed is 2 days later on PN -usually included in Loan agreement -but you can sue even w/o PN Prepayments -voluntary or mandatory -in loan agreement sample (Section 2.05) -in relation to term-structure risk: while a depositor may withdraw his money anytime, the bank cannot collect anytime from the loan! But the borrower has right to pay in advance the loan. If the prepayment

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collect anytime from the loan! But the borrower has right to pay in advance the loan. If the prepayment is made on a day which is not an interest payment day, normally, there is a penalty! There was an issue before WON those penalties are lawful. After GBL, there is a provision SECTION 45, see page 121 of sir's book: borrower may pay anytime, subject to terms of bank... Clause iii. "each partial prepayment shall be applied against the repayment installments of the loan in the inverse order of their maturities

In the instant case, the CA found that the 5% interest rate per month and 5% penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum . This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable. We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate. Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract. What then should the interest and penalty rates be? The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. STILL, For the succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per annum and the penalty rate to 1% per month, in accordance with Article 2227 of the Civil Code. *SIR: SC disregarded the stipulated interest rate, but when there is intention to impose interest rate, SC would impose 12% interest rate

Example: paid P5M as prepayment Jan 1, 2010 1st installment 2nd installment 3rd
6 10th installment Jan 1, 1010 Prepayment would be applied on the 6th to 10th installment so that flow of funds would not be bothered Amortization: derived from term ad morte = to kill -"kill the loan, not the lender" - sir Clause IV. Not a revolving facility (where borrower could borrow, prepay, borrow, prepaywithin the term of the facility). Once you made prepayment, you cannot reborrow what you've prepaid. (okay, henceforth, refer muna to the loan agreement. I'll type it later with comments)

Civil code provision: when you have mortgages, pledges, etc. in a loan agreement, don't foreclose pledge first or else other securities mawawala?

Pertinent provision of the trust receipt agreement of the parties:

I. WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% per month until the amount/s or instalments/s due and unpaid under the trust receipt on the reverse side hereof is/are fully paid.

- While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates. A provision may be upheld notwithstanding that it may partake of the nature of an escalation clause , because at the same time it provides for the decrease in the interest rate in case the prevailing market rates dictate its reduction. In other words, unlike the stipulation subject of the instant case, acceptable floating interest is designed to be based on the prevailing market rate. On the other hand, a stipulation ostensibly signifying an agreement to "any increase or decrease in the interest rate," without more, cannot be accepted by this Court as valid for it leaves solely to the creditor the determination of what interest rate to charge against an outstanding loan.

2.

- The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to wit: 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.

- Similarly, the Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has it been shown that it has evaded payment of its obligations: a. it continually endeavored to meet the same, as shown by the various receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal amount of only P681,075.93 negates any badge of dishonesty , abuse of confidence or mishandling of funds on the part of respondent Corporation, which are the gravamen of a trust receipt violation. b. Furthermore, the Corporation is not an importer , which acquired the bunker fuel oil for re-sale; it needed the oil for its own operations. c. More importantly, at no time did title over the oil pass to petitioner, but directly to respondent Corporation to which the oil was directly delivered long before the trust receipt was executed. The fact that ownership of the oil belonged to the Corporation, through its President, Gregory Lim, was acknowledged by petitioner's own account officer on the witness stand

SIR: There's a reference rateThis case is significant in trust receiptsReiterates Colinares

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G. EVENTS OF DEFAULT (MAC CLAUSE CROSS-DEFAULT/CROSSACCELERATION CLAUSE) -events which would enable the lender to make the instrument/loan a demand loan Two Important Elements: 1. occurrence of event of default 2. acceleration of lender of the loan (without this, the term loan remains a term loan)

Types of Default: 1. Payment: *note that it is not usual to give grace period for principal; its usually just for the interest. 2. Covenant:

3. Representation

4. Cross: breach in one agreement is deemed breach in another

5. Cross-Acceleration: breach in one agreement is not default in another, unless the default caused the acceleration of the maturity of the other loan. This is more beneficial to borrower. Illustration: There are two agreements, I and II where Bank A and Borrower B are parties. There was default in Agreement I. In Cross Default, there is also default in Agreement II. In Cross-Acceleration Default, there is only a grant to Bank to accelerate obligation in Agreement II.

Drawdown date : between borrowing bank and its own individual borrower; there is two day notice rule

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Well-settled is the rule that since a cause of action requires, as essential elements, not only a legal right of the plaintiff and a correlative duty of the defendant but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty. -A cause of action has three elements, to wit, (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff. -It bears stressing that it is only when the last element occurs that a cause of action arises. Accordingly, a cause of action on a written contract accrues only when an actual breach or violation thereof occurs. -The subject Home Notes, in fact, specifically states that payment of the principal and interest due on the notes shall be made only upon presentation for notation and/or surrender for cancellation of the notes. Thus, the maturity date of the Home Notes is not controlling as far as accrual of cause of action is concerned. What said date indicates is the time when the obligation matures, when payment on the Notes would commence, subject to presentation, notation and/or cancellation of those Notes. The date for computing when prescription of the action for collection begins to set in is properly a function related to the date of actual demand by the holder of the Notes for payment by the obligor , herein petitioner bank. Since the demand was made only on July 20, 1995, while the civil action for collection of a sum of money was filed on September 24, 1996, within a period of not more than ten years, such action was not yet barred by prescription.

SIR: PN is not up to date in terms of drafting. When PN Not yet presented, naturally prescription would not yet accrue

Loan Transfers A1178 A1311 A1624 - consignment -you'll get the impression that this is the case when it comes to banks BUT X238 expressly requires SEC registration!!!! -When the bank is going to assign on a w/o recourse basis, receivables should be registered with SEC first X: Gov't X238 purchaser - can fend for themselves, no need for SEC registration Cf. Section 10.1 L of Securities regulation: same X238 enumeration Are only Government securities excluded from Section X238? Rationale for exempting: Government securities are exempt securities (but so? Dapat covered rin yung other exempt securities!) SEC: qualified individual and institutional buyers under category I -test: amount of networks, listed securities, securitites listed with SEC Financial test Participation and Assignment

Closing Opinion

Closing Opinion: Issued by lenders counsel to provide for qualifications regarding provisions in the loan agreement and apprise lender of possible issues which may arise regarding the same. (cf: that after warranties of the borrower)
Qualifications in Euro-Dollar Loan Agreement Closing Opinion (for it to be enforceable): 1. exceptions to payment of scheduled installments due to bankruptcy, rehabilitation, etc. 2. possible requirements of BSP approval 3. exchange crisis provision in CB Act 4. conflict of laws provision in Civil Code 5. Rules of Court provisions on enforcement of foreign judgment 6. on pari passu provision 7. enforcement of obligations subject to equity: RP court might require the parties to act reasonably! A19 of Civil Code (on abuse of rights) 8. Corporation Code provision on foreign corporations right to sue 9. effect of injunctions and court orders to covenants effectivity 10. waiver of sovereign immunity: (in the future) 11. judgment currency clause (Dont express any opinion due to res judicata issue): if subject to another suit, 2 actions under 2 jurisdictionsplitting of COA -sir would leave a copy! Yey! Why was CB closed? (it was closed???) 1. high interest payment in Jobo bills 2. Jumbo loans: syndicating of debtors 3. Swap loans

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2.

Loan Transfers and Participations

Section X238. Without Recourse Transactions. No bank shall ...sell, ...discount, ...assign, or ...negotiate, in whole or in part, ...such as thru syndications, participations and other similar arrangements, ANY notes receivables loans debt instruments and any type of financial asset or claim X: government securities OR Be a party in any capacity in any of the above transactions, on a without recourse basis UNLESS such receivables, notes, loans, debt instruments and financial assets or claims are registered with SEC. This prohibition includes transactions between a bank and its trust department.

a.

GR: No without recourse assignment or transfer of financial assets, Unless:

1. SEC registration Except: Government securities 2. Buyers are one of those specified in Section X238. Who are these buyers? Qualified buyers under Section 10.1 of SRC. Sir: Exception must include all other exempt securities. (Note: See SEC Memo 06 -2007 for discussion of qualified buyer.) - so even if bank goes to SEC to register it, SEC would not register the same because it's already exempt! (SEC 9.a, Securities regulation Code) What are the other types of exempt securities: Also in Section 9.a of SRC e.g. securities in foreign countries in which RP has diplomatic relations Securities issued by insurance companies. Securities issued by banks, except shares of stocks -receivables and non-exposures may be thought to be easily transferable. However, Section X238 imposes an additional requirement Creditor PARTICIPANT

Party to the loan agreement which provides for the commitment; commits Beneficial owner of the to lend to the borrower; but eventually the lender may divest itself of the participated portion of entire/part of the loan exposure to the participant the transaction Lender Commitment Involvement *basta may chicken sandwich with egg. :( Merely involved

Section 10.i vs. 10.l (SRC): verbatim except for reference to Qbanks and funds managed by trust entities (I and h) - refer to sir's book to get this PAGES 68-71
Type of purchasers under Section 10.1l of src: exempt transactions: not to be registered to SEC

b.

NOTE: why "Without Recourse Transactions" not allowed?

SUBPARTICIPATION. In participation, participant may sub-participate its obligation and right, unless it is prohibited by the principal bank.

Silent Participation: this occurs when the borrower is not notified of the participation.

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This is used to hide from borrower the fact that it(bank) lessens its exposure to show that there is full trust on borrowers creditworthiness. - hahaha! Meaning walang tiwala bank kay borrower pero ayaw nya sabihin kay borrower. Plastic si bank! Plastic!!! :D
Illustration: Bank loans out to Company A. X is participant. If A goes under, X cannot directly sue A since there is no privity of contract between them. Thus, X must rely on Bank to collect from A.

Difference between Assignment of Note & Novation:

In assignment, assignee merely steps into shoes, no change in instrument. It does not attract DST. In novation, whole PN is changed so there is new transaction and DST is collected.

Other Issues

b.
Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively.

ON DST -2 different opinions when to pay -now, 5 days following the month of execution (so convince your client to execute agreement at the start of the month)

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Section 179, NIRC Stamp Tax on Bank Checks, Drafts, Certificates of Deposit not Bearing Interest, and Other Instruments On each ...bank check draft or certificate of deposit not drawing interest or order of payment of any sum of money drawn upon or issued by any >bank > trust company >or any person or persons >companies or corporations At sight or on demand There shall be collected a DST of P1.50.

*Rate of DST is .5% of loan. This is imposed wherever the loan is executed. If short term, it is prorated. -pay DST 5 days of following month. It is arguable that DST is to be paid upon execution of PN as the loan agreement is a real contract for which the object need to be delivered for its perfection. Delivery takes place when PN has been issued. apply Section 199(f), NIRC, so no DST if no change in tenor of obligation, ie silent participation.

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; Provided, that the rate of interest on the loan s hall be reduced by law or by the Monetary Board; Provided, further, that the adjustment in the rate of interest shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

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(1) the ca s h price or delivered price of the property or s ervi ce to be acquired; (2) the amounts, if any, to be credited as down payment and/or trade -in; (3) the di fference between the amounts s et forth under clauses (1) and (2); (4) the cha rges, indivi dually i temized, which a re paid or to be paid by s uch person i n connection with the tra ns action but which a re not i ncident to the extension of credit; (5) the tota l amount to be financed; (6) the fi nance charges expressed i n terms of pesos and centavos; a nd (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.

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D: Dio v. Japor
Thursday, July 16, 2009 11:03 PM

Dio vs Japor Date: July 8, 2005 Petitioner: Teresita Dio Respondents: Spouses Virgilio and Luz Roces Japor and Marta Japor Ponente: Quisumbing Facts: Spouses Virgilio Japor and Luz Roces Japor were the owners of a residential lot and improvements in Lucena City. Adjacent to the Japors lot is another lot owned by Marta Japor. The respondents obtained a loan of P90,000 from the Quezon Development Bank (QDB), and as security, they mortgaged the lots to QDB. Later, the respondents admitted the deed of REM by increasing the loan to P128,000. The respondents failed to pay their loans. However, before the bank could foreclose on the mortgage, respondents, thru their broker, offered to mortgage their properties to Teresita Dio. Dio prepared a Deed of Real Estate Mortgage, whereby respondents mortgaged the two properties with QDB to secure the timely payment of a P350,000 loan that respondents had from Dio. Under the terms of the deed, respondents agreed to pay Dio interest at the rate of 5% a month, within a period of two months. In the event of default, an additional interest equivalent to 5% of the amount then due, for every month of delay, would be charged on them. The respondents failed to settle their obligation despite repeated demands. Dio applied for extrajudicial foreclosure of the mortgage. Meanwhile, respondents filed an action for Fixing of Contractual Obligation with Prayer for Preliminary Mandatory Injunction/Restraining Order with the RTC. Respondents prayed that judgment be rendered fixing the contractual obligations of plaintiffs with Dio plus legal or allowable interests thereon. The respondents filed a motion to admit amended complaint praying that the deed of real estate mortgage be declared null and void. The court denied the motion. The CA affirmed and ruled that the Deed executed between Dio and respondents is valid and binding. It dissolved the writ of preliminary injunction previously issued by the Court. During the auction, Dio was the sole bidder and was able to purchase the property for P3500000. 1. Issue: WON the stipulations on interest and penalty in the Deed of Real Estate Mortgage are contrary to morals, if not illegal Held: Yes Ratio: CB Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants lenders carte blanche authority to impose interest rates which would result in the enslavement of their borrowers or to the hemorrhaging of their assets. While a stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury now being legally non -existent in our jurisdiction, nonetheless, said rate may be equitably reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law. What is iniquitous, unconscionable, and exorbitant shall depend upon the factual circumstances of each case. In the instant case, the CA found that the 5% interest rate per month and 5% penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable. We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate. Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract.
What then should the interest and penalty rates be? The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per annum and the penalty rate to 1% per month, in accordance with Article 2227 of the Civil Code. 2. Issue: WON respondents are entitled to the surplus of P2,247,326 as a result of the overpricing in the auction Ratio: We note that the surplus was the result of the computation by the Court of Appeals of respondents outstanding liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month. The court a quo then proceeded to apply our ruling in Sulit v. Court of Appeals, to the effect that in case of surplus in the purchase price, the mortgagee is liable for such surplus as actually comes into his hands, but where he sells on credit instead of cash, he must still account for the proceeds as if the price were paid in cash, for such surplus stands in the place of the land itself with respect to liens thereon or vested rights therein particularly those of the mortgagor or his assigns. In the instant case, however, there is no surplus to speak of. In adjusting the interest and penalty rates to equitable and conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale. The amount of the petitioners bid merely represented the true amount of the mortgage debt. No surplus in the purchase price was thus created to which the respondents as the mortgagors have a vested right.
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Sps Japor obtained a P90k loan fro the Quezon Development Bank (QDB), with their lots mortgaged. They increased their loan to P128k. Loans were not paid. -But before QDB could mortgage the lot, Dio offered to mortgage the properties so that the Japors could pay their obli from QDB. -In the DEED OF REAL ESTATE MORTGAGE, Japors mortgaged their properties to Dio and they agreed to pay Dio interest of 5% per month, w/n a period of 2ms. In the event of default, additional interest of 5% of the amount due for every month delay. -Japors failed to settle their obligation w/ Dio. Dio applied for extrajudicial foreclosure of the mortgage -Japors filed ACTION FOR FIXING THE CONTRACTUAL OBLIGATION AND INTERESTS -RTC, CA ruled that the deed of real estate mortgage was valid and binding -Foreclosure of the property was conduted, Dio was the sole bidder, buying the property for P3.5M.

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D: CBTC V. CA
Friday, July 17, 2009 6:28 AM

Consolidated Bank vs CA Date: April 19, 2001 Petitioner: The Consolidated Bank and Trust Corporation Respondents: Court of Appeals, Continental Cement Corporation, Gregory Lim and spouse Ponente: Ynares- Santiago Facts: - On July 13, 1982, Continental Cement Corporation and Gregory T. Lim obtained from Consolidated Bank and Trust Corporation a letter of credit in the amount of P 1,068,150. On the same date, Corporation paid a marginal deposit of P320,445.00 to petitioner. The letter of credit was used to purchase around 500,000 liters of bunker fuel oil from Petrophil Corporation. In relation to the same transaction, a trust receipt for the amount of P 1,001,520.93 was executed by the Corporation, with Lim as signatory. - Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds thereof, petitioner filed a complaint for sum of money with application for preliminary attachment before the RTC. Respondents averred that the transaction between them was a simple loan and not a trust receipt transaction, and that the amount claimed by petitioner did not take into account payments already made by them. The trial court dismissed the complaint and ordered petitioner to pay respondents P490,228.90 representing overpayment of respondent Corporation, with interest thereon at the legal rate from July 26, 1988. The CA affirmed but deleted the award of attorneys fees. Issue: WON the floating rate of interest exhorted by petitioner is valid Held: No Ratio: Neither do we find error when the lower court and the CA set aside as invalid the floating rate of interest exhorted by petitioner to be applicable. The pertinent provision in the trust receipt agreement of the parties fixing the interest rate states: I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1,
1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% per month until the amount/s or instalments/s due and unpaid under the trust receipt on the reverse side hereof is/are fully paid.

- We agree with the CA that the foregoing stipulation is invalid, there being no reference rate set either by it or by the Central Bank, leaving the determination thereof at the sole will and control of petitioner. - While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates. A provision may be upheld notwithstanding that it may partake of the nature of an escalation clause, because at the same time it provides for the decrease in the interest rate in case the prevailing market rates dictate its reduction. In other words, unlike the stipulation subject of the instant case, acceptable floating interest is designed to be based on the prevailing market rate. On the other hand, a stipulation ostensibly signifying an agreement to "any increase or decrease in the interest rate," without more, cannot be accepted by this Court as valid for it leaves solely to the creditor the determination of what interest rate to charge against an outstanding loan. Issue: WON the parties entered into a simple loan Ratio: - Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted. - The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to wit:
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 paymen t of the loan.

- Similarly, the Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has it been shown that it has evaded payment of its obligations. Indeed, it continually endeavored to meet the same, as shown by the various receipts issued by petitioner acknowledging payment on the loan. Certainly,

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same, as shown by the various receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal amount of only P681,075.93 negates any badge of dishonesty , abuse of confidence or mishandling of funds on the part of respondent Corporation, which are the gravamen of a trust receipt violation. Furthermore, the Corporation is not an importer, which acquired the bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly, at no time did title over the oil pass to petitioner, but directly to respondent Corporation to which the oil was directly delivered long before the trust receipt was executed. The fact that ownership of the oil belonged to the Corporation, through its President, Gregory Lim, was acknowledged by petitioner's own account officer on the witness stand, to wit: - By all indications, then, it is apparent that there was really no trust receipt transaction that took place. Evidently, the Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended to the former.
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D: CHINA BANKING CORP V. CA

Friday, July 17, 2009 8:58 AM

China Banking Corp vs CA Date: June 23, 2005 Petitioner: China Banking Corporation Respondents: CA and Armed Forces and Police Savings and Loan Association Inc Ponente: Quisumbing Facts: Private respondent filed a complaint for a sum of money against petitioner with the QC RTC. In its Answer, the petitioner admitted being the registered owner of the Home Notes, the subject matter of the complaint. These are instruments of indebtedness issued in favor of Fund Centrum Finance, Inc. (FCFI) and were sold, transferred and assigned to private respondent. Thus, the petitioner filed a Motion to Dismiss alleging that the real party in interest was FCFI, which was not joined in the complaint, and that petitioner was a mere trustee of FCFI. The motion was denied. Petitioner filed another Motion to Dismiss, this time invoking prescription. The lower court denied said motion to dismiss for lack of merit. It held that it was not apparent in the complaint whether or not prescription had set in. Thus, the judge directed petitioner to present its evidence. However, petitioner instead filed an MR, which the trial court denied, ratiocinating thus: This Court finds that there are conflicting claims on the issue of whether or not the action has already prescribed. A full blown trial is in order to determine fully the rights of the contending parties. The CA dismissed the petition ruling that the action of the trial judge was not grave abuse of discretion correctible by writ of certiorari. Issue: WON the date of maturity of the instruments is the date of accrual of cause of action Held: No Ratio: Petitioner insists that upon the face of the complaint, prescription has set in. It claims that the Home Notes annexed to the pleading bearing a uniform maturity date of December 2, 1983 indicate the date of accrual of the cause of action. Hence, argues petitioner, private respondents filing of the complaint for sum of money on September 24, 1996, is way beyond the prescriptive period of ten years under Article 1144 of the Civil Code. However, private respondent counters that prescription is not apparent in the complaint because the maturity date of the Home Notes attached thereto is not the time of accrual of petitioners action. Private respondent insists that the action accrued only on July 20, 1995, when demand to pay was made on petitioner. Private respondent also points out that since both the trial court and the appellate court found that prescription is not apparent on the face of the complaint, such factual finding should therefore be binding on this Court. Well-settled is the rule that since a cause of action requires, as essential elements, not only a legal right of the plaintiff and a correlative duty of the defendant but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty. A cause of action has three elements, to wit, (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff. It bears stressing that it is only when the last element occurs that a cause of action arises. Accordingly, a cause of action on a written contract accrues only when an actual breach or violation thereof occurs. We rule that private respondents cause of action accrued only on July 20, 1995, when its demand for payment of the Home Notes was refused by petitioner. It was only at that time, and not before that, when the written contract was breached and private respondent could properly file an action in court. The cause of action cannot be said to accrue on the uniform maturity date of the Home Notes as petitioner posits because at that point, the third essential element of a cause of action, namely, an act or omission on the part of petitioner violative of the right of private respondent or constituting a breach of the obligation of petitioner to private respondent, had not yet occurred. The subject Home Notes, in fact, specifically states that payment of the principal and interest due on the

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The subject Home Notes, in fact, specifically states that payment of the principal and interest due on the notes shall be made only upon presentation for notation and/or surrender for cancellation of the notes. Thus, the maturity date of the Home Notes is not controlling as far as accrual of cause of action is concerned. What said date indicates is the time when the obligation matures, when payment on the Notes would commence, subject to presentation, notation and/or cancellation of those Notes. The date for computing when prescription of the action for collection begins to set in is properly a function related to the date of actual demand by the holder of the Notes for payment by the obligor, herein petitioner bank. Since the demand was made only on July 20, 1995, while the civil action for collection of a sum of money was filed on September 24, 1996, within a period of not more than ten years, such action was not yet barred by prescription.

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Truth in Lending Act

Friday, July 17, 2009 10:40 AM

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT.1963 June 223765REPUBLIC ACT NO. 3765 June 22, 1963
AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT. Sec. 1. This Act shall be known as the "Truth in Lending Act." Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.

Sec. 3. As used in this Act, the term

(1) "Board" means the Monetary Board of the Central Bank of the Philippines. (2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of 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) "Finance charge" includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Board may be regulation prescribe. (4) "Creditor" means 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. (5) "Person" means any individual, corporation, partnership, association, or other organized group of persons, or the legal successor or representative of the foregoing, and includes the Philippine Government or any agency thereof, or any other government, or of any of its political subdivisions, or any agency of the foregoing. Sec. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, 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 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. Sec. 5. The Board shall prescribe such rules and regulations as may be necessary or proper in carrying out the provisions of this Act. Any rule or regulation prescribed hereunder may contain such classifications and differentiations as in the judgment of the Board are necessary or proper to effectuate the purposes of this Act or to prevent circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or regulation issued thereunder. Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court costs as determined by the court. (b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation contained in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or transactions. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. (d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof. (e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto. Sec. 7. This Act shall become effective upon approval.

(good luck naman, 1963! Ano naman ang P2k ngayon?)

No effect on validity or enforceability of any contract or transactions

Approved: June 22, 1963

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Approved: June 22, 1963

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D: DBP v. Arcilla
Friday, July 17, 2009 11:23 AM

DBP vs Arcilla Date: June 30, 2005 Petitioner: DBP Respondent: Felipe Arcilla

Ponente: Callejo Sr
Facts: Atty. Felipe P. Arcilla, Jr. was employed by the DBP. He decided to avail of a loan under the Individual Housing Project (IHP) of the bank. DBP and Arcilla executed a Deed of Conditional Sale over a parcel of land, as well as the house to be constructed thereon, for P160,000.00. Arcilla borrowed the amount from DBP for the purchase of the lot and the construction of a residential building. He obliged himself to pay the loan in 25 years, with a monthly amortization of P1,417.91, with 9% interest per annum, to be deducted from his monthly salary. DBP obliged itself to transfer the title of the property upon the payment of the loan, including any increments thereof. It was also agreed therein that if Arcilla availed of optional retirement, he could elect to continue paying the loan, provided that the loan/amount would be converted into a regular real estate loan account with the prevailing interest assigned on real estate loans, payable within the remaining term of the loan account.

Arcilla opted to resign from the bank in December 1986. Conformably with the Deed of Conditional Sale, the bank informed him that the balance of his loan account with the bank had been converted to a regular housing loan. Arcilla signed three PNs for the total amount of P186,364.15. Arcilla also agreed to pay to DBP insurance premiums, taxes, etc.
However, Arcilla also agreed to the reservation by the DBP of its right to increase (with notice to him) the ra te of i nterest on the loan, as well as all other fees a nd charges on l oans and advances pursuant to s uch
pol icy a s it may a dopt from time to time during the period of the l oan; Provi ded, that the ra te of interest on the loan s hall be reduced by l aw or by the Monetary Board; Provi ded, further, that the a djustment in the rate of interest shall ta ke effect on or after the effectivity of the i ncrease or decrease in the maximum rate of i nterest. Upon his request,

DBP agreed to grant Arcilla an additional cash advance of P32,000.00. Thereafter, a Supplement to the Conditional Sale Agreement was executed

However, he failed to pay his loan account, advances, penalty charges and interests which, as of October 31, 1990, amounted to P241,940.93. DBP rescinded the Deed of Conditional Sale by notarial act on November 27, 1990. DBP tried to give Arcilla a chance to repurchase the property. Arcilla failed to respond. Consequently, the property was advertised for sale at public bidding on February 14, 1994.
Arcilla filed a complaint against DBP with the RTC. He alleged that DBP failed to furnish him with the disclosure statement required by RA 3765 and CB Circular No. 158 prior to the execution of the deed of conditional sale and the conversion of his loan account with the bank into a regular housing loan account. Despite this, DBP immediately deducted the account from his salary as early as 1984. Moreover, the bank applied its own formula and imposed its usurious interests, penalties and charges on his loan account and advances. DBP alleged that it substantially complied with R.A. No. 3765 and CB Circular No. 158 because the details required in said statements were particularly disclosed in the promissory notes, deed of conditional sale and the required notices sent to Arcilla. In any event, its failure to comply strictly with R.A. No. 3765 did not affect the validity and enforceability of the subject contracts or transactions. DBP interposed a counterclaim for the possession of the property. The trial court
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transactions. DBP interposed a counterclaim for the possession of the property. The trial court ruled in favor of Arcilla and nullified the notarial rescission of the deeds. The CA reversed. Issue: WON DBP complied with the disclosure requirement

Held: Yes
Ratio: On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the DBP, as the creditor bank, was mandated to furnish him with the requisite information in such form prescribed by the Central Bank before the commutation of the loan transaction. He avers that the disclosure of the details of the loan contained in the deed of conditional sale and the supplement thereto, the promissory notes and release sheet, do not constitute substantial compliance with the law and the CB Circular. DBP, on the other hand, avers that all the information required by R.A. No. 3765 was already contained in the loan transaction documents. Also, even if it failed to comply strictly with the disclosure requirement of R.A. No. 3765, nevertheless, under Section 6(b) of the law, the validity and enforceability of any action or transaction is not affected. It asserts that Arcilla was estopped from invoking R.A. No. 3765 because he failed to demand compliance with R.A. No. 3765 from the bank before the consummation of the loan transaction, until the time his complaint was filed with the trial court. 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 ca s h price or delivered price of the property or s ervi ce to be acquired; (2) the a mounts, if a ny, to be credited as down payment a nd/or tra de-in; (3) the di fference between the amounts s et forth under clauses (1) and (2); (4) the cha rges, indivi dually i temized, which a re paid or to be paid by s uch person i n connection with the tra nsaction but which a re not i ncident to the extension of credit; (5) the tota l amount to be financed; (6) the fi nance charges expressed i n terms of pesos and centavos; a nd (7) the percentage that the finance charge bears to the total amount to be financed expressed a s a simple annual rate on the outs tanding unpaid balance of the obligation.

Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be included in the contract covering the credit transaction or any other document to be acknowledged and signed by the debtor. 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. In the present case, DBP failed to disclose the requisite information in the disclosure statement form authorized by the Central Bank, but did so in the loan transaction documents between it and Arcilla. There is no evidence on record that DBP sought to collect or collected any interest, penalty or other charges, from Arcilla other than those disclosed in the said deeds/documents. The Court is convinced that Arcillas claim of not having been furnished the data/information required by R.A. No. 3765 and CB Circular No. 158 was but an afterthought. Despite the notarial rescission of the conditional sale in 1990, and DBPs subsequent repeated offers to repurchase the property, the latter maintained his silence. Moreover, Arcilla, a lawyer, would not be so gullible or negligent as to sign documents without knowing fully well the legal implications and consequences of his actions, and that appellee was a former employee of appellant. As such employee, he is as well presumed knowledgeable with matters relating to appellants business and fully cognizant of the terms of the loan he applied for, including the charges that had to be paid.
Issue: WON Arcilla, Jr. is mandated to vacate the property and pay rentals for his occupation thereof after the notarial rescission of the deed of conditional sale was rescinded by notarial act, as well as the supplement executed by DBP.

Ratio: Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor from
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Ratio: Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor from 1990, a review of the records has shown that it failed to adduce evidence on the reasonable amount of rentals for Arcillas occupancy of the property. Hence, the Court orders a remand of the case to the court of origin, for the parties to adduce their respective evidence on the banks counterclaim.
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Deposit Transactions
Friday, July 24, 2009 11:53 PM

1.

Savings, Current and Time Deposits

Deposits: *savings (demand or current) *time *Fixed

Civil Code: Deposits as loans from the depositor to the bank DEMAND DEPOSITS GR: Only a UB or KB can accept or create demand deposits WHY: because they are functionally suited and geared to managing these funds for optimum use X: other banks with PRIOR AUTHORIZATION from Monetary Board e.g. RURAL BANKS under RA 7353: only if they have NET ASSETS OF AT LEAST P5M THRIFT BANKS under RA 7906: only if they have NET ASSETS OF AT LEAST P20M a.

DEPOSITORY (RBU/FCDU)
---accepts peso deposits; known as the bank proper ---a nonresident cannot open a peso account unless it is funded by a remittance of foreign exchange *bank as the debtor/borrower of the depositor in respect of the latter's deposits *bank acquires OWNERSHIP of such deposits *bank can use the same for its operations, simply paying to the depositor the STIPULATED INTEREST on the portion of the unwithdrawn deposit (IN SHORT, ONCE YOU DEPOSIT, THE BANK ACQUIRES OWNERSHIP OVER YOUR MONEY AND CAN USE IT FOR THEIR OPERATIONS, THEN THE BANK WOULD JUST PAY YOU THE INTEREST FOR THE MONEY THAT IS WITH THEM)
BASIS: Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. And other jurisprudence

---peso deposits may be garnished and the depositary bank ought to comply with the order of garnishment w/o violating the Secrecy of Bank Deposits Law

---authorized to accept deposits in foreign currency (which is acceptable as part of the international reserve of the country) ----required to maintain (meaning AT ALL TIMES) 100% cover for their foreign currency liabilities ---any person - natural or juridical, resident or nonresident - can open an FCDU Account GR: ( SECTION 8, FCD Act) FCDU is exempt from: >attachment >Garnishment >any other order or process of any court, legislative body, or other government agency X: Salvacion vs. CB (rape case: objective of FCD Act is to attract and invite deposit of foreign currencies, foreign investors - not TRANSCIENTS!!! Who are even rapists!!!) b.

TAX
Peso Deposits: Subject to 20% tax FCDU: If resident: 7.5% tax If nonresident: tax exempt NO estate tax in case of survivorship contract.

C.

SECRECY OF BANK DEPOSITS

There is a distinction between peso deposits and FCDU deposits in secrecy rules Peso deposits - under RA 1405 FCDU deposits - under RA 6426 Exceptions all apply Only allow disclosure if with WRITTEN PERMISSION OF THE DEPOSITOR When disclosure allowed (see 1-5 exceptions below) - other AMLA WHY: to encourage people to deposit their money + economy would not be affected

RA 1405 Secrecy of Bank Deposits Law

This protects the confidentiality only in PhP deposits and investments in government bonds/securities. This includes bonds in foreign currency (so these government bonds covers both Peso and foreign currency investments). OTHER EXCEPTIONS to the Secrecy of Bank Deposits Law 1. Prosecution for unexplained wealth under RA 3019 2. Upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001, when it has been established that there is probable cause that the deposits or investments involved are in any way related to an unlawful activity or a money laudering offense X to X: when no court order

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a. b. c. d.

Kidnapping for ransom Unlawful activities under Comprehensive Dangerous Drugs Act Hijacking and other violations of RA 6235 Destructive arson and murder

3. BSP's inquiry into or examination of deposits or investments w/ any bank made in the course of periodic or special examination 4. Inquiry by CIR into deposits of decedent to determine GROSS ESTATE 5. Disclosure of info about bank deposits dormant for at least 10 years to the Treasurer of the Philippines in a sworn statement 6. Under RA 3779 (Savings and Loan Association Act): MB or official of CB in charge of savings and loan associations or his deputies may examine all deposits of whatever nature w/ savings and loan associations in the Philippines 7. Ombudsman can examine bank accounts (Marquez vs. Desierto), provided: a. Before in camera inspection b. There's a pending case before a court of competent jurisdiction c. Account clearly identified d. Inspection limited to the subject matter of the pending case e. Notice to bank personnel and account holder f. Both in letter e should be present during the inspection g. Inspection only covers account identified 8. PCGG can compel banks to disclose or produce bank records 9. Davide Commission could ask monetary board to disclose info and/or grant authority to examine any bank deposits, trust or investment funds, or banking transactions in the name of and/or utilized by a person.see page 153 of sir's book 10. When prior waiver of secrecy is required to be given by depositor in favor of lending bank: a. Loans secured by hold-out or assignment of certificates of time deposit b. In case f DOSri loans 11. Tax payer offers to compromise his tax liabilities on the ground of financial incapacity

EJERCITO vs. CA
--trust placements were characterized as deposits as the money was deemed as for the boosting of economic development. The SC said that RA1405 is broad enough to cover trust department. Sir: The decision is very unconvincing. Take note that trust department has no depository character and when the law referred to investment, it meant investment in bonds. What happened? Criminal case for Plunder was filed against Erap. In relation to this, a special prosecution panel was organized to try the case vs. him. The said panel requested several documents and information from Export and Industry Bank (EIB) and Equitable-PCI bank regarding the Trust Account and Savings Account of Erap. Erap filed Motion to quash and Urgent Motion to quash the said requests for issuance of subpoena duces tecum/ad testificandum but Sandiganbayan denied the said motions to quash. Reconsideration was also denied. People (represented by the Special Prosecution Panel) argues that the Trust Account is not covered by RA 1405 upon which Erap relies on because it is not included in the term "Deposits" H: ON WON Trust Account is included under the term DEPOSITS: 1405, by the mere fact that they do not entail a creditor-debtor relationship between the trustor and the bank, does not lie. An examination of the law shows that the term "deposits" used therein is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank. --If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country. --Trust Account No. 858 is, without doubt, one such account. 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. 6 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. --Also, SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation. (Emphasis and underscoring supplied) >gave broad interpretation of the law

ON WON THE CASE FALLS UNDER THE TERMS BRIBERY OR DERELICTION OF DUTY (THIS BEING PLUNDER) YES. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential --Indeed, all the above-enumerated overt acts are similar to bribery such that, in each case, it may be said that "no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential." --The crime of bribery and the overt acts constitutive of plunder are crimes committed by public officers, and in either case the noble idea that "a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny" applies with equal force.
WON the the money deposited or invested is the subject matter of the litigation Union Bank vs. CA: "the subject of the action is the matter or thing with respect to which the controversy has arisen, concerning which the wrong has been done, and this ordinarily is the property or the contract and its

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subject matter, or the thing in dispute." Melon Bank vs. Magsino: an inquiry into the whereabouts of the illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons other than the one responsible for the illegal acquisition --The plunder case now pending with the Sandiganbayan necessarily involves an inquiry into the whereabouts of the amount purportedly acquired illegally by former President Joseph Estrada. In light then of this Courts pronouncement in Union Bank, the subject matter of the litigation cannot be limited to bank accounts under the name of President Estrada alone, but must include those accounts to which the money purportedly acquired illegally or a portion thereof was alleged to have been transferred. Trust Account No. 858 and Savings Account No. 0116-17345-9 in the name of petitioner fall under this description and must thus be part of the subject matter of the litigation.

WON fruit of the poisonous tree doctrine applies, it being that the specificity of the bank account necessarily entails that the Special Prosecution Panel has already made an initial illegality to acquire the information on his bank accounts NO. Ra 1405 does not provide that if the information is acquired through violation of said law, it would be inadmissible as evidence. --plus, the specifics were obtained from previous valid subpoena duces tecum from the impeachment proceedings and investigation of the Ombudsman who has the power to examine even bank accounts

*COMMENTS NI SIR: Intention of SC: Law of bank deposits covers trust placements. SC EXPANDED definition of deposits. +on SC's ruling that the last portion of Section 2, there is INVESTED (so not only deposits): SC failed to consider the initial portion of Section 2, in which the reference of investments is on the bonds issued by the government. Invested refers NOT TO TRUST PLACEMENTS +SC: money deposited under a trust accounts for authorized loans to 3rd persons, then such account falls under category protected by bank: SIR: trust placements are not necessarily used by banks for loans. There's a list of investment outlets. Outside it, the trustor-beneficiary's consent should be obtained before the bank lends it to 3rd persons. *Trust placements are already covered by RA 1405 under EJERCITO vs. SB
--this is a step backwards in the fight vs. money laundering

RA 6426, as amended Foreign Currency Deposit Act

This is for non-Php denominated deposits. For FCDU Only 1 exemption to confidentiality here: with consent of depositor + AMLA

CBC v. CA:
a co-payee is deemed a co-depositor. F: A US dollar check, payable to a father and/or his daughter, was deposited by her in an FCDU account under her name. When the father wanted to look into such FCDU account, he was not allowed to do so by the depository bank as he was not a depositor of record thereof. H: He is considered a "co-depositor" of the account since he was a co-payee of the check deposited in that account. So he can look w/o written consent of his daughter. *this is pro hac vice

SECTION 55.1.a, GBL

SECTION 55. Prohibited Transactions. 55.1. No director, officer, employee, or agent of any bank shall (a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person;

SIR: It covers funds which are not deposits! False entries in bank reports or statements distort the true financial condition of the bank concerned, and may mislead not only the BSP but also the general public. -UP TO WHAT EXTENT LIABLE: to extent that such falsity causes damage to the bank itself or to any person -punishes any individual who participates in any fraudulent transaction affecting the financial interest of the bank or a third person
---Section 25, New Central Bank Act clarifies authority fo BSP to compel persons to produce documents under Section 6, GBL, providing that this is subject to existing law 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. This refers to RA 1405 and RA 6426. However, BSP May still inquire into or examine deposits ONLY if made in the course of periodic or special examination in accordance with Section 11 of the Anti-Money Laundering Act of 2001
2.

Floating Rate Certificate of Deposit (FRCD) vs. Floating Rate Note (FRN)
FRCD FRN Easily traded *FCDUs usually issue FRCDs for depositsbut now investors want FRNs PROBLEM: Regulation in manual which freely authorizes FCDUs But consent if borrowing other than deposit taking So pede ba issue FRNs w/o BSP approvals: solution: FRN include provision that the funds received by FCDU would be booked as deposits - and this seem to be acceptable to BSP Certificate of time deposits with the floating rate Similar, issuances by FCDUs

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FCDU would be booked as deposits - and this seem to be acceptable to BSP *CDs not subject to DST but notes are; at that time, FCDUs were deemed not subject to DST which is contrary to position of BIR -official contemplation: exempt FCDUs from all taxes except INCOME TAX --these were replaced bywah! 3.

Overdrafts
Checking Account (current/demand) Def: checks not sufficiently funded -may be used as a loan facility with a term -in respect of current accounts, overdrafts are not permitted. Mas maganda if there's automatic transfer of funds to current account, or through cash sweeping CASH Sweeping -when: MNC w/ several subsidiaries all over the world e.g. there's a current account in RP then another current account in NY. Then there is a master account, say, kept in NY. At the end of the day, all balances are transferred to master account, minimal balance kept to current accounts. When there is a need to replenish funds in RP, it would be debited from the master account. It would be easier if these accounts are maintained in 1 bank.

UNDER MANUAL: Banks are prohibited from allowing overdrafts Lusot: Banks may extend loan to the customer so that the check can still be honored 4.

Survivorship Issue
*if you look at the w/drawal slip, when the depositor has a co-depositor, there is a statement for authorized representation? WHY? Section 97 -but no actual implementation -see pages 74-75 of sir's book: Section 97 does not apply when there is a survivorship agreement between the co-depositors and it is known to the bank. -A survivorship agreement may also apply to shares of stock. It is a good method of estate planning. Section 97, NIRC
If a bank has knowledge of the death of a person, who has a deposit account with it alone or jointly with another, it must not allow any withdrawal from said account, unless the Commissioner of Internal Revenue certified that the estate tax thereon has been paid

Ana Rivera vs Peoples Bank and Trust Co

F: Ana Rivera, the housekeeper of Edgar Stephenson, was made by the latter as co-depositor of the funds in PBTC. Upon the latter's death, Ana Rivera claims the amount left in the account. Bank refused to comply, doubting the validity of the survivorship agreement. So Ana River filed complaint for collection. Administratix of the Estate intervened, claiming the amount to be theirs. TC: Ana Rivera was a mere atty-in-fact, and such relationship ended upon death of Stephenson. H: A survivorship agreement is an aleatory contract supported y a lawful consideration - the mutual agreement of the joint depositors permitting either of them to withdraw the whole during their lifetime, and transferring the balance to the survivor upon the death of one of them. But while the survivorship agreement is per se not contrary to law, its operation or effect may be violative of law where it is shown that such agreement is a mere cloak to hide an inofficious donation to transfer property in fraud of creditors, or to defeat the legitime of a forced heir. *it doesn't mean that when the relationship between the co-depositors is that of a master-servant, the servant doesn't have the capacity to make deposits. It is not uncommon for other people to make deposits for others, or open accounts for others. Ana Rivera has been the housekeeper of Stephenson for 19 years!

Vitug vs. CA
F: Vitug and his wife had a savings account and had a survivorship contract wherein, upon the death of one of them, the remaining alive spouse would be the sole owner of the proceeds of the savings account. His wife died, and pending probate of the estate, he asked for authority to sell certain shares of stock and real properties belonging to estate of his wife to cover allegedly his advances to the estate (P667,731.66) which he claimed were personal funds. -Corona opposed the motion to sell: funds w/drawn from savings account were conjugal partnership property and part of the estate TC: Granted VITUG's prayer CA: Reversed TC: (1) survivorship agreement = conveyance mortis causa - did not comply with the formalities of a valid will as prescribed in A805, NCC (2) if mere donation inter vivos, it is a prohibited donation under A133, NCC H: The survivorship agreement is neither a donation mortis causa or inter vivos. It is an aleatory contract in reality the contract imposed a mere obligation w/ a term - the term being death. (1) WHY NOT A WILL? Because for it to be a will, the property should belong solely to the testator. The funds involved here belong to both Vitug and his wife (2)WHY NOT A DONATION INTER VIVOS? Because it was to take effect after the death of one of the spouses AND the other spouse could not donate what is not solely his/hers. -the savings account being part of Vitug's separate property, it does not belong to the estate.

BIR RULING No. 010-2003 *eto baligtad. It ruled that even if with a survivorship agreement, the account is deemed a joint account, 50-50 share and the survivorship agreement is deemed a donation mortis cause, subject

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account, 50-50 share and the survivorship agreement is deemed a donation mortis cause, subject to estate tax. 50% of the proceeds in the account are subject to estate tax and may not be w/drawn.
ISSUE: WON a Survivorship Agreement executed by the joint depositors under a joint deposit account expressly stipulating that upon death of any one of the joint depositors, the entire remaining balance of the deposit shall belong to the surviving depositor/s and, in effect, may be forthwith withdrawn by the latter notwithstanding the provisions of Section 97 of the 1997 Tax Code. HELD: As can be readily gleaned from the Survivorship Agreement, the funds deposited in the joint deposit account are under co-ownership because the ownership or right over the same belong to different persons, the joint depositors. The share or portion belonging to the joint depositors in the joint deposit account shall be presumed equal and the benefits as well as the charges in the joint account shall be proportional to their respective shares. [Arts. 484 and 485, Civil Code] In the Survivorship Agreement, the joint depositors cannot withdraw any portion of the said deposit account without the consent of the other. However, upon death of any of them, the whole amount of the funds shall belong to the surviving co-depositor/s, and mayforthwith be withdrawn by the latter. The said provision contained in the agreement is valid and binding between the joint depositors but it has an effect of a gift or donation morits causa made by the deceased co-depositor during his lifetime but effective upon death because the acquisition by the survivor of the share of the decedent in the joint account is considered to be acquired by bequest and hence subject to estate tax under Section 84 of the 1997 Tax Code. Considering that the joint account is co-owned by the depositors, there is a presumption that they owned it equally or in 50/50 shares, in which case, the transfer of the remaining balance of the whole deposit to the surviving co-depositor/s upon death of the other co-depositor pursuant to their Survivorship Agreement is a transfer made by the said depositor in contemplation of death , as provided under Section 85(B) of the 1997 Tax Code, viz: (B) Transfer in Contemplation of Death To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or moneys worth. Thus, upon the death of the co-depositors, the 50% share of the deceased co-depositor in the deposit shall be included in computing the value of his gross estate. Hence, the funds in the joint deposit account cannot be withdrawn by the surviving co-depositor/s unless the Commissioner has certified that the taxes imposed thereon by Title III of the 1997 Tax Code have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the deceased co-depositor may, upon the authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000.00) without the said certification. SIR: this ruling in conflict with SC decisions! (VITUG vs. CA also involves a conjugal propertywhich applies co-ownership rules!) ON citation of 85B in the Ruling: it shows doubt as to the validity of the survivorship agreement because it evades estate tax! But there is no harm in coming up with a survivorship agreement

Deposit substitute activities

1. Quasi-banking
Section 6, GBL
SECTION 6. Authority to Engage in Banking and Quasi-Banking Functions. No person or entity shall engage in ...banking operations or quasi -banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions. (UB/KB = can engage in quasi-banking) The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, theMonetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, >examine, >inspect >or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking functions and shall continue to do so ...unless such authority is sooner >surrendered, >revoked, >suspended or

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>annulled by the Bangko Sentral in accordance with this Act or other special laws. The department head and the examiners of the appropriate supervising and examining department are hereby authorized ...to administer oaths to any such person, employee, officer, or director of any such entity and ...to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act. Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws. (4a)

SIR: *Section 6 reaffirms role of BSP as the gatekeeper of the banking system *ONLY a stock corporation can be licensed as a bank or quasi -bank *UB and KB have the inherent authority to engage in quasi -banking activities. Othe banks and financial institutions (Quasi-banks) have to apply for a quasi-banking authority from the BSP. QUASI-BANKS: (a) obtain deposit substitutes (b) through the i. issuance Ii. endorsement Iii. or acceptance WITH RECOURSE to it Of debt instruments: *banker's acceptance in trade transactions *promissory notes *participations *certificates of assignment *other similar instruments WITH RECOURSE *repurchase agreements (c) for the purpose of i. relending ii. purchasing of receivables and other obligations

2. Reserves
SIR: Purpose: to control the volume of money created by the credit operations of the banking system -it is maintained against their deposit and deposit-substitute liabilities (Section 94, NCBA) -reserve requirements may vary from time to time (depends on the Monetary Board) -because a fraction of the deposit and deposit substitute is set aside as reserve, the country is said to adhere to the "fractional reserve" banking system. KINDS 1. Liquidity reserve -NOW: maintained by placing term deposits w/ BSP B4: maintained in the form of short-term market yielding government securities purchased directly from the BS's Treasury Department then the interest goes to the banks -reserve requirement: 11% of the PESO deposit and deposit substitute liabilities of UB and KB (BSP Circ No. 491, July 12, 2003) 2. Regular reserve (a.k.a. statutory or legal reserve) -maintained as deposits with BSP -regular reserve requirement: 10% (BSP Circ No. 491, July 12, 2003) -only 40% of it is credited interest quarterly at 4% per annum based on their average daily balance (INTERPRETATION: 40% of the regular interest yields interest. The rate of interest is 4% per annum) ...what happens to the other 60%? It does not earn interest: Section 94, NCBA

Letters of Credit (L/C)

SIR: -means of settling obligations arising from trade transactions -it's a question of trust when you enter into commercial transactions -normal way of settling transactions: through cash: DP (delivery against payment) -if there are previous transactions between the parties, the seller may be content with accepting a bank draft (DA: documents against acceptance) -if the acceptor is a bank: banker's acceptance (pages 60-61)

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-if the acceptor is a bank: banker's acceptance (pages 60-61) - even if there's no immediate receipt of cash, the seller would be comfortable to depart with goods -but in cross-border transactions, normal way of payment is through L/C -on types of contract: see below
-if W/O TRUST RECEIPT: 3 Buyer-seller - CONTRACT OF SALE: BUYER Buyer-bank: the BUYER (ACCOUNT PARTY Bank-seller: the bank agrees to pay TYPES OF BANKS in a L/C

"Shipside bond" - item G of Section 4 of GBA - quoted in Section 78 of the book...boo! Di ko makita! -basta, from narinig ko, if kulang L/C or di pa naiissue, bank would issue this bond para marelease na from customs -A joint undertaking of the Bank and client-importer issued in favor of the shipping line for the delivery
of cargo without submission of the original Bill of Lading (B/L).

(pages 61-68) -usually with Banker's Acceptance -by issuing letters of credit, a bank performs its basic function "to facilitate the exchange of goods and services between the sellers and buyers" -definition in Bank of America vs. CA, 228 SCRA 357: is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and the buyer, who wants to have control fo the goods before paying... *Unless 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. -if W/O TRUST RECEIPT: 3 intertwined contracts: 1. Buyer-seller - CONTRACT OF SALE: BUYER (account party) agrees to pay money to the SELLER (beneficiary) 2. Buyer-bank: the BUYER (ACCOUNT PARTY) applies to the issuing bank for a specified L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to the L/C. 3. Bank-seller: the bank agrees to pay the seller (BENEFICIARY) to support contract # 1 (between seller and buyer)

1. Types
According to purpose a. Trade i. Import ii. Export b. Standby According to commitment a. Revocable b. Irrevocable According to the terms of payment a. SLIGHT L/C: payable upon demand or on sight b. Time of usance - with a term
According to transferability a. Transferable b. Non-tranferable

TYPES OF BANKS in a L/C As found in FEATI BANK CASE: NOTIFYING BANK: assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit NEGOTIATING BANK : a correspondent bank which buys or discounts a draft under the letter of credit. -LIABILITY: dependent upon the stage of the negotiation >before negotiation: no liability w/ respect to the seller >after negotiation: a contractual relationship will then prevail between the negotiating bank and the seller CONFIRMING BANK: 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 *when the credit of the initial bank is not satisfactory to the seller

1. UCP 500/ISP 98
ISP 98 applicable to standby L/Cs, but now, not all standby L/Cs are governed by ISP 98

ICC no. 600/UCP 600

UCP 500

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ICC no. 600/UCP 600

UCP 500

CREDIT: any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation "COMPLYING PRESENTATION": a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of and international standard banking practice Considers L/C as CREDIT: described as "documentary" because the parties thereto only deal with documents to demand or make payment, w/o regard to the underlying transaction involving goods or services

CREDIT: Any arrangement, however named or described whereby a bank (the Issuing bank) acting at the request and on the instruction of a customer ("The Applicant") or on its own behalf 1. is to make a payment or to the order of a third party (the BENEFICIARY), or is to accept and pay bills of exchange (Drafts) drawn by the Beneficiary Ii. Authorizes another bank to effect such payment, or to accept and pay such bills of exchange (drafts) Iii. Authorizes another bank to negotiate

*a basta, both contain INDEPENDENCE PRINCIPLE ....Credit operations as only dealing with documents TRANSFIELD PHILIPPINES INC. VS. LUZON HYDRO CORPORATION: the untruthfulness of a certificate accompanying a demand for payment under a standby L/C may qualify as fraud sufficient to support an injunction against payment.
WHY ARE STANDBY LETTERS OF CREDIT THE CHOICE OF LENDERS AND OTHER PARTIES WHOSE CREDITS OR OTHER ENTITLEMENTS ARE TO BE SECURED? *as standby letters of credit are also governed by UCP500, they are covered by the "independence principle" which serves to separate the undertakings under the standby letter of credit from those arising from the contract being secured *the rules applicable to standby letters of credit are updated regularly to keep pace w/ market practices and developments (ISP 98)

INDEPENDENCE PRINCIPLE A L/C transaction is described as "documentary" because the parties thereto only deal with documents to demand or make payment, w/o regard to the underlying transaction involving goods or services In other words, the obligations of the parties to the L/C are independent of the obligations of the parties to the underlying transaction (walang pakialam ang bank if ever may problema ang contract ng buyer-seller) GR: if strictly complied, has to pay the seller X: fraud: the beneficiary fraudulently presents to the issuing or confirming bank documents that contain material facts that, to his knowledge, are untrue, then payment under the L/C may be prevented RULE of STRICT COMPLIANCE: The documents tendered must strictly conform to the terms of the L/C. 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 >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.
FEATI Bank: -must strictly conform to the terms of the letter of credit; once the seller complies with the terms of the L/C, the bank has no choice but to comply with the terms of the agreement

FEATI Bank and Trust Co vs. CA

F: Villaluz agreed to sell to Christiansen lauan logs. Accordingly, Villaluz shipped the lauan logs to the consignee. However, Christiansen refused to issue a certification, stating that the logs have been approved prior to the shipment. Certification was required as a documentary requirement that must be presented to FEATI before the L/C in favor of Villauz (seller) could be negotiated. FEATI refused to negotiate the L/C because of the absence of certification from Christiansen H: In commercial transactions involving L/C, the documents tendered must strictly conform to the terms of the L/C. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent banks which departs from what has been stipulated under the L/C as when it accepts a faulty tender ACTS ON ITS OWN RISK and 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. [RULE OF STRICT COMPLIANCE] Four Contracts in relation to L/C: 1. issuing bank and buyer

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1. issuing bank and buyer 2. buyer and seller 3. issuing bank and confirming bank 4. confirming bank and seller

* significant: it explains that an L/C transaction is a documentary transaction. As long as the beneficiary is able to submit documents to the bank set out under the terms of the LC, the bank has no recourse but to pay under the L/C *problem: exporter agreed that the document be issued by the broker (but it should be issued by the certifier...?) *another: applicability of the UCP: now UCP 600 (updated every 10 years or so) *SC cited Art2, Code of Commerce: use customs - since UCP used "customs", then that must be it! Transfield Philippines vs. Luzon Hydro Corporation
F: Transfield, a Turnkey contractor, and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract wherein Transfield would construct a power station. To secure performance of its obligation, Transfield opened in favor of LHC 2 standby letters of credit each in the amount of US$8,988,907. -however, due to force majeure, Transfield delayed in the construction and its requests for extensions were denied by LHC. -The parties first underwent arbitration before CIAC and another in ICC. -Foreseeing that LHC would claim the standby letters of credit which are their securities for the performance of the obligation, Transfield advised respondents banks of the arbitration proceedings already pending and asserted THAT LHC had no right to call on the securities until the resolution of the disputes before the arb tribunals and any transfer, release, or disposition of the Securities in favor of LHC would constrain it to hold respondent banks liable for liquidated damages. - banks said that they would pay LHC when it calls on them (HAHA! Wala kaming paki sa inyo!) -LHC declared Transfield in default, so it served notice to the banks that it would call on the securities. -Transfield filed complaint for injunction w/TRO vs. banks and LHC, praying that LHC refrain from calling on the securities and the banks from disposing any securities RTC: DENY, employ, "independent contract" doctrine CA: Affirm H:
Nature of LC. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits. Commercial vs Standby Credits. There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto. Independence Principle. Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank. Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever. The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the

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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. Issue: Would injunction be the proper remedy to restrain the wrongful draws on the Securities?

Ratio: Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment. The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the 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 or the recovery of damages would be seriously damaged. In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of 253 days which would move the target completion date. If its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages. Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law. Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage. Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation. In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs call on the Securities which would justify the issuance of preliminary injunction. By petitioners own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract. Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default. The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. What petitioner did assert before the courts below was the fact that LHCs draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal. The lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHCs call upon the Securities. Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code, petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHCs certification that default has occurred. Neither were they bound by petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent banks undertaking was simply to pay once the required documents are presented by the beneficiary. At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law. Moreover, in a Manifestation, dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition. Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act. In Ticzon v. Video Post Manila, Inc. this Court ruled that where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employer the very purpose of the preliminary injunction has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned. In the instant case, the consummation of the act sought to be restrained had rendered the instant petition mootfor any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy. The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.

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it, could properly be threshed out in a separate proceeding.

*A basta, in short on fraud, Transfield was arguing that the LHC would be fraudulently demanding the proceeds of the standby L/H when the dispute is not resolved yet in the arbitration proceedings. The court held that the injunction would not lie, Transfield failing to show that it has a right to restrain the banks from claiming the funds and that the right of LHC to claim rests on their contract plus it is premature to say that there is fraud.

*Important because this is the 1st judicial declaration of an exemption from the independence principle: FRAUD *SC: if there is fraud on the part of the beneficiary (seller), then it might be possible to prevent the payment under the L/C by filing a petition for injunction, provided the requisites for such be satisfied first 3 requisites: (4 daw sabi ng PLJ) 1. Clear proof of fraud 2. Fraud constitute abuse of the independent purpose of the L/C 3. Irreparable injury might follow if injunction not granted Sir's problem: SC citing Prof. Dolan about surety that it could mislead civil students (e.g. page 331 of scra version, 3rd part of quotation from Prof. Dolan -under NCC: a surety only pays a certain amount -we'll take this up again under security devices (GUARANTEE)

PNP vs. Pineda

F: TCC filed w/PNB an application for L/C for $7M to cover the importation of cement plant machinery and equipment. The application for L/C was approved w/ the Arroyo spouses as surety (Arroyo Sps own a controlling interest in TCC). TCC drew against the L/C, but later failed to pay the drawings made. -PNB took possession of the imported machinery and equipment pursuant to the TRUST RECEIPT AGREEMENT executed by PNB and TCC which gave the former the unqualified right to the possession and disposal of all property shipped under the L/C. H: PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the L/C, said possession itself CANNOT BE CONSIDERED PAYMENT OF THE LOAN SECURED THEREBY. -payment would LEGALLY RESULT ONLY AFTER >PNB HAD FORECLOSED ON SAID SECURITIES > sold the same >applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure; foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself -Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. In CAB, no dacion en pago was ever accomplished because the repossession was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership therof to PNB. *In an L/C with TR transaction, the L/C represents the loan while the TR the security. The fact that goods have been delivered to the bank does not extinguish the liability under the TR, foreclosure is necessary. *

Commercial Papers
CP: -evidence of indebtedness of corporation REVISED SECURITIES ACT (BP78): CPs are included in the enumeration of securities -under the SECURITIES REGULATION CODE, CPs are not expressly mentioned as securities. BUT they can qualify as such under the CATCH ALL PROVISION GR: before CPs can be sold to the public, they must first be registered w/ the SEC X: 1. Exempt securities 2. They are sold in exempt transactions SEC rules regarding registration of CP: 1 . Rules on registration of short-term CP (w/ maturity of less than 365days) 2 . Rules on registration of long-term CP (w/maturity of more than 365 days) these 2 rules are attached as appendix to MANUAL OF REGULATION OF BANKS Coverage of next week: til Comfort letter

Security Devices and Other Credit Supports/Enhancements

1. Types
2 general types of security devices: (1) personal security
-obligation secured by the personal commitment of another e.g. guaranty, surety

(2) real security

-obligation secured by AN ENCUMBRANCE OF REAL PROPERTY

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-obligation secured by AN ENCUMBRANCE OF REAL PROPERTY -requires the execution of a public instrument or corresponding deed encumbering the property in the form prescribed by law e.g. pledge, mortgage, antichresis

(a) Real Estate Mortgage

-Requisites: (1) mortgagor must be the owner of the real property (2) constituted to secure the fulfilment of an obligation (3) person constituting mortgage has free disposal of his property (4) execution of a public instrument acknowledged before a notary public (5) must cover IMMOVABLE PROPERTY, if land, state the description and location thereof (6) registration in the Register of Deeds where the property is located

(b) Chattel Mortgage

Requisites: (1) must cover PERSONAL PROPERTY

(c) Mortgage Trust Indenture (d) Pledge (e) Guarantee/suretyship/standby letter of credit
Insular Bank of Asia & America vs. IAC Transfield Philippines vs. Luzon Hydro Corp, supra Ong vs. PCIB Intrnational Finance Corporation vs. Imperial Textile Mills IN Development Corp vs. Phil Export and Foreign Loan Guarantee Corporation

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RA 1405
Friday, August 07, 2009 10:29 PM

[1955 RA 1405] PROHIBITING DISCLOSURE OF OR INQUIRY DEPOSITS1955 Sep 91405REPUBLIC ACT NO. 1405 September 9, 1955 AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO, DEPOSITS WITH ANY BANKING INSTITUTION AND PROVIDING PENALTY THEREFOR. Sec. 1. It is hereby declared to be the policy of the Government to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country.

Sec. 2. All deposits ...of whatever nature ...with banks or banking institutions in the Philippines ...including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature ...and may not be >examined, >inquired or looked into by any person, government official, bureau or office, except 1. upon written permission of the depositor, 2. or in cases of impeachment, 3. or upon order of a competent court a. in cases of >bribery or >dereliction of duty of public officials, b.or in cases where the money deposited or invested is the subject matter of the litigation.
Sec. 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits. Sec. 4. All Acts or parts of Acts, Special Charters, Executive Orders, Rules and Regulations which are inconsistent with the provisions of this Act are hereby repealed. Sec. 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. Sec. 6. This Act shall take effect upon its approval. Approved: September 9, 1955

RA 1405

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EJERCITO vs. CA
Friday, August 07, 2009 10:43 PM

Joseph Victor G. Ejercito, Petitioner, vs. Sandiganbayan (Special Division) and People of the Philippines, Respondents. DEC ISIO N CARPIO MORALES, J.: The present petition for certiorari under Rule 65 assails the Sandiganbayan Resolutions dated February 7 and 12, 2003 denying petitioner Joseph Victor G. Ejercitos Motions to Quash Subpoenas Duces Tecum/Ad Testificandum, and Resolution dated March 11, 2003 denying his Motion for Reconsideration of the first two resolutions. The three resolutions were issued in Criminal Case No. 26558, "People of the Philippines v. Joseph Ejercito Estrada, et al.," for plunder, defined and penalized in R.A. 7080, "AN ACT DEFINING AND PENALIZING THE CRIME OF PLUNDER." In above-stated case of People v. Estrada, et al., the Special Prosecution Panel 1 filed on January 20, 2003 before the Sandiganbayan a Request for Issuance of Subpoena Duces Tecum 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 the following documents during the hearings scheduled on January 22 and 27, 2003: I. For Trust Account No. 858; 1. Account Opening Documents; 2. Trading Order No. 020385 dated January 29, 1999; 3. Confirmation Advice TA 858; 4. Original/Microfilm copies, including the dorsal side, of the following: a. Bank of Commerce MC # 0256254 in the amount of P2,000,000.00; b. Urban bank Corp. MC # 34181 dated November 8, 1999 in the amount of P10,875,749.43; c. Urban Bank MC # 34182 dated November 8, 1999 in the amount of P42,716,554.22; d. Urban Bank Corp. MC # 37661 dated November 23, 1999 in the amount of P54,161,496.52; 5. Trust Agreement dated January 1999: Trustee: Joseph Victor C. Ejercito Nominee: URBAN BANK-TRUST DEPARTMENT Special Private Account No. (SPAN) 858; and 6. Ledger of the SPAN # 858. II. For Savings Account No. 0116-17345-9 SPAN No. 858 1. Signature Cards; and 2. Statement of Account/Ledger III. Urban Bank Managers Check and their corresponding Urban Bank Managers Check Application Forms, as follows: 1. MC # 039975 dated January 18, 2000 in the amount of P70,000,000.00; 2. MC # 039976 dated January 18, 2000 in the amount of P2,000,000.00; 3. MC # 039977 dated January 18, 2000 in the amount of P2,000,000.00; 4. MC # 039978 dated January 18, 2000 in the amount of P1,000,000.00; The Special Prosecution Panel also filed on January 20, 2003, a Request for Issuance of Subpoena Duces Tecum/Ad Testificandum directed to the authorized representative of Equitable-PCI Bank to produce statements of account pertaining to certain accounts in the name of "Jose Velarde" and to testify thereon. The Sandiganbayan granted both requests by Resolution of January 21, 2003 and subpoenas were accordingly issued. The Special Prosecution Panel filed still another Request for Issuance of Subpoena Duces Tecum/Ad Testificandum dated January 23, 2003 for the President of EIB or his/her authorized representative to produce the same documents subject of the Subpoena Duces Tecum dated January 21, 2003 and to testify thereon on the hearings scheduled on January 27 and 29, 2003 and subsequent dates until completion of the testimony. The request was likewise granted by the Sandiganbayan. A Subpoena Duces Tecum/Ad Testificandum was accordingly issued on January 24, 2003. Petitioner, claiming to have learned from the media that the Special Prosecution Panel had requested for the issuance of subpoenas for the examination of bank accounts belonging to him,

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requested for the issuance of subpoenas for the examination of bank accounts belonging to him, attended the hearing of the case on January 27, 2003 and filed before the Sandiganbayan a letter of even date expressing his concerns as follows, quoted verbatim:
Your Honors: It is with much respect that I write this court relative to the concern of subpoenaing the undersigneds bank account which I have learned through the media. I am sure the prosecution is aware of our bank ing secrecy laws everyone supposed to observe. But, instead of prosecuting those who may have breached such laws, it seems it is even going to use supposed evidence which I have reason to believe could only have been illegally obtained. The prosecution was not content with a general request. It ev en lists and identifies s pecific documents

meaning s omeone else in the bank illegally released c onfidential information.

If this can be done to me, it can happen to anyone. Not that anything can still shock our family. Nor that I have anything to hide. Your Honors. But, I am not a lawyer and need time to consult one on a situation that affects every bank depositor in the country and should interest the bank itself, the Bangko Sentral ng Pilipinas, and maybe the Ombudsman himself, who may want to investigate, not exploit, t he serious breach that can only harm t he economy, a c onsequence t hat may have been overlooked. There appears to have been deplorable connivance. xxxx I hope and pray, Your Honors, that I will be given time to retain the services of a lawyer to help me protect my rights and those of every banking depositor. But the one I have in mind is out of the country right now. May I, therefore, ask your Honors, that in the meantime, the issuance of the subpoena be held in abeyance for at least ten (10) days to enable me to take appropriate legal steps in connection with the prosecutions request for the issuance of subpoena concerning my accounts. (Emphasis supplied)

From the present petition, it is gathered that the "accounts" referred to by petitioner in his above-quoted letter are Trust Account No. 858 and Savings Account No. 0116-17345-9. 2 In open court, the Special Division of the Sandiganbayan, through Associate Justice Edilberto Sandoval, advised petitioner that his remedy was to file a motion to quash, for which he was given up to 12:00 noon the following day, January 28, 2003. Petitioner, unassisted by counsel, thus filed on January 28, 2003 a Motion to Quash Subpoena Duces Tecum/Ad Testificandum praying that the subpoenas previously issued to the President of the EIB dated January 21 and January 24, 2003 be quashed. 3 In his Motion to Quash, petitioner claimed that 1. his bank accounts are covered by R.A. No. 1405 (The Secrecy of Bank Deposits Law) and do not fall under any of the exceptions stated therein. 2. He further claimed that the specific identification of documents in the questioned subpoenas, including details on dates and amounts, could only have been made possible by an earlier illegal disclosure thereof by the EIB and the Philippine Deposit Insurance Corporation (PDIC) in its capacity as receiver of the then Urban Bank. The disclosure being illegal, petitioner concluded, the prosecution in the case may not be allowed to make use of the information. Before the Motion to Quash was resolved by the Sandiganbayan, the prosecution filed another Request for the Issuance of Subpoena Duces Tecum/Ad Testificandum dated January 31, 2003, again to direct the President of the EIB to produce, on the hearings scheduled on February 3 and 5, 2003, the same documents subject of the January 21 and 24, 2003 subpoenas with the exception of the Bank of Commerce MC #0256254 in the amount of P2,000,000 as Bank of Commerce MC #0256256 in the amount of P200,000,000 was instead requested. Moreover, the request covered the following additional documents: IV. For Savings Account No. 1701-00646-1: 1. Account Opening Forms; 2. Specimen Signature Card/s; and 3. Statements of Account. The prosecution also filed a Request for the Issuance of Subpoena Duces Tecum/Ad Testificandum bearing the same date, January 31, 2003, directed to Aurora C. Baldoz, Vice President-CR-II of the PDIC for her to produce the following documents on the scheduled hearings on February 3 and 5, 2003: 1. Letter of authority dated November 23, 1999 re: SPAN [Special Private Account Number] 858; 2. Letter of authority dated January 29, 2000 re: SPAN 858; 3. Letter of authority dated April 24, 2000 re: SPAN 858; 4. Urban Bank check no. 052092 dated April 24, 2000 for the amount of P36, 572, 315.43; 5. Urban Bank check no. 052093 dated April 24, 2000 for the amount of P107,191,780.85; and 6. Signature Card Savings Account No. 0116-17345-9. (Underscoring supplied)

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6. Signature Card Savings Account No. 0116-17345-9. (Underscoring supplied)

The subpoenas prayed for in both requests were issued by the Sandiganbayan on January 31, 2003.
On February 7, 2003, petitioner, this time assisted by counsel, filed an Urgent Motion to Quash Subpoenae Duces Tecum/Ad Testificandum praying that the subpoena dated January 31, 2003 directed to Aurora Baldoz be quashed for the same reasons which he cited in the Motion to Quash 4 he had earlier filed.

On the same day, February 7, 2003, the Sandiganbayan issued a Resolution denying petitioners Motion to Quash Subpoenae Duces Tecum/Ad Testificandum dated January 28, 2003.
Subsequently or on February 12, 2003, the Sandiganbayan issued a Resolution denying petitioners Urgent Motion to Quash Subpoena Duces Tecum/Ad Testificandum dated February 7, 2003.

Petitioners Motion for Reconsideration dated February 24, 2003 seeking a reconsideration of the Resolutions of February 7 and 12, 2003 having been denied by Resolution of March 11, 2003, petitioner filed the present petition.
Raised as issues are: 1. Whether petitioners Trust Account No. 858 is covered by the term "deposit" as used in R.A. 1405; 2. Whether petitioners Trust Account No. 858 and Savings Account No. 0116-17345-9 are excepted from the protection of R.A. 1405; and 3. Whether the "extremely- detailed" information contained in the Special Prosecution Panels requests for subpoena was obtained through a prior illegal disclosure of petitioners bank accounts, in violation of the "fruit of the poisonous tree" doctrine. Respondent People posits that Trust Account No. 858 5 may be inquired into, not merely because it falls under the exceptions to the coverage of R.A. 1405, but because it is not even contemplated therein. For, to respondent People, the law applies only to "deposits" which strictly means the money delivered to the bank by which a creditor-debtor relationship is created between the depositor and the bank. The contention that trust accounts are not covered by the term "deposits," as used in R.A. 1405, by the mere fact that they do not entail a creditor-debtor relationship between the trustor and the bank, does not lie. An examination of the law shows that the term "deposits" used therein is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank.

Issues

The policy behind the law is laid down in Section 1: SECTION 1. It is hereby declared to be the policy of the Government to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country. (Underscoring supplied)
If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country.

Trust Account No. 858 is, without doubt, one such account. 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. 6 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" was intended to be understood broadly: SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the

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public officials, or in cases where the money deposited or invested is the subject matter of the litigation. (Emphasis and underscoring supplied) The phrase "of whatever nature" proscribes any restrictive interpretation of "deposits." Moreover, it is clear from the immediately quoted provision that, generally, the law applies not only to money which is deposited but also to those which are invested. This further shows that the law was not intended to apply only to "deposits" in the strict sense of the word. Otherwise, there would have been no need to add the phrase "or invested."

Clearly, therefore, R.A. 1405 is broad enough to cover Trust Account No. 858.
The protection afforded by the law is, however, not absolute, there being recognized exceptions thereto, as above-quoted Section 2 provides. In the present case, two exceptions apply, to wit: (1) the examination of bank accounts is upon order of a competent court in cases of bribery or dereliction of duty of public officials, and (2) the money deposited or invested is the subject matter of the litigation.

Petitioner contends that since plunder is neither bribery nor dereliction of duty, his accounts are not excepted from the protection of R.A. 1405. Philippine National Bank v. Gancayco 7 holds otherwise: Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential. The policy as to one cannot be different from the policy as to the other. This policy expresses the notion that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny.
Undoubtedly, cases for plunder involve unexplained wealth. Section 2 of R.A. No. 7080 states so. SECTION 2. Definition of the Crime of Plunder; Penalties. Any public officer who, by himself or in connivance with members of his family, relatives by affinity or consanguinity, business associates, subordinates or other persons, amasses, accumulates or acquires ill-gotten wealth through a combination or series of overt or criminal acts as described in Section 1(d) hereof, in the aggregate amount or total value of at least Seventy- five million pesos (P75,000,000.00), shall be guilty of the crime of plunder and shall be punished by life imprisonment with perpetual absolute disqualification from holding any public office. Any person who participated with said public officer in the commission of plunder shall likewise be punished. In the imposition of penalties, the degree of participation and the attendance of mitigating and extenuating circumstances shall be considered by the court. The court shall declare any and all ill- gotten wealth and their interests and other incomes and assets including the properties and shares of stock derived from the deposit or investment thereof forfeited in favor of the State. (Emphasis and underscoring supplied) An examination of the "overt or criminal acts as described in Section 1(d)" of R.A. No. 7080 would make the similarity between plunder and bribery even more pronounced since bribery is essentially included among these criminal acts. Thus Section 1(d) states: d) "Ill-gotten wealth" means any asset, property, business enterprise or material possession of any person within the purview of Section Two (2) hereof, acquired by him directly or indirectly through dummies, nominees, agents, subordinates and or business associates by any combination or series of the following means or similar schemes. 1) Through misappropriation, conversion, misuse, or malversation of public funds or raids on the public treasury; 2) By receiving, directly or indirectly, any commission, gift, share, percentage, kickbacks or any other form of pecuniary benefit from any person and/or entity in connection with any government contract or project or by reason of the office or position of the public officer concerned; 3) By the illegal or fraudulent conveyance or disposition of assets belonging to the National Government or any of its subdivisions, agencies or instrumentalities or government-owned or controlled corporations and their subsidiaries; 4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation including promise of future employment in any business enterprise or undertaking; 5) By establishing agricultural, industrial or commercial monopolies or other combinations and/or implementation of decrees and orders intended to benefit particular persons or special interests; or 6) By taking undue advantage of official position, authority, relationship, connection or influence to unjustly enrich himself or themselves at the expense and to the damage and prejudice of the Filipino people and the Republic of the Philippines. (Emphasis supplied)

RA 1405

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Indeed, all the above-enumerated overt acts are similar to bribery such that, in each case, it may be said that "no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential." 8
The crime of bribery and the overt acts constitutive of plunder are crimes committed by public officers, and in either case the noble idea that "a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny" applies with equal force. Plunder being thus analogous to bribery, the exception to R.A. 1405 applicable in cases of bribery must also apply to cases of plunder. Respecting petitioners claim that the money in his bank accounts is not the "subject matter of the litigation," the meaning of the phrase "subject matter of the litigation" as used in R.A. 1405 is explained in Union Bank of the Philippines v. Court of Appeals, 9 thus: Petitioner contends that the Court of Appeals confuses the "cause of action" with the "subject of the action". In Yusingco v. Ong Hing Lian, petitioner points out, this Court distinguished the two concepts. x x x "The cause of action is the legal wrong threatened or committed, while the object of the action is to prevent or redress the wrong by obtaining some legal relief; but the subject of the action is neither of these since it is not the wrong or the relief demanded, the subject of the action is the matter or thing with respect to which the controversy has arisen, concerning which the wrong has been done, and this ordinarily is the property or the contract and its subject matter, or the thing in dispute." The argument is well-taken. We note with approval the difference between the subject of the action from the cause of action. We also find petitioners definition of the phrase subject matter of the action is consistent with the term subject matter of the litigation, as the latter is used in the Bank Deposits Secrecy Act. In Mellon Bank, N.A. v. Magsino, where the petitioner bank inadvertently caused the transfer of the amount of US$1,000,000.00 instead of only US$1,000.00, the Court sanctioned the examination of the bank accounts where part of the money was subsequently caused to be deposited: x x x Section 2 of [Republic Act No. 1405] allows the disclosure of bank deposits in cases where the money deposited is the subject matter of the litigation. Inasmuch as Civil Case No. 26899 is aimed at recovering the amount converted by the Javiers for their own benefit, necessarily, an inquiry into the whereabouts of the illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons other than the one responsible for the illegal acquisition. " Clearly, Mellon Bank involved a case where the money deposited was the subject matter of the litigation since the money deposited was the very thing in dispute. x x x" (Emphasis and underscoring supplied)
RA 1405

The plunder case now pending with the Sandiganbayan necessarily involves an inquiry into the whereabouts of the amount purportedly acquired illegally by former President Joseph Estrada. In light then of this Courts pronouncement in Union Bank , the subject matter of the litigation cannot be limited to bank accounts under the name of President Estrada alone, but must include those accounts to which the money purportedly acquired illegally or a portion thereof was alleged to have been transferred. Trust Account No. 858 and Savings Account No. 0116-17345-9 in the name of petitioner fall under this description and must thus be part of the subject matter of the litigation.

In a further attempt to show that the subpoenas issued by the Sandiganbayan are invalid and may not be enforced, petitioner contends, as earlier stated, that the information found therein, given their "extremely detailed" character, could only have been obtained by the Special Prosecution Panel through an illegal disclosure by the bank officials concerned. Petitioner thus claims that, following the "fruit of the poisonous tree" doctrine, the subpoenas must be quashed.
Petitioner further contends that even if, as claimed by respondent People, the "extremelydetailed" information was obtained by the Ombudsman from the bank officials concerned during a previous investigation of the charges against President Estrada, such inquiry into his bank accounts would itself be illegal.

Petitioner relies on Marquez v. Desierto 10 where the Court held: We rule that before an in camera inspection may be allowed there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to be present during the inspection, and

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such inspection may cover only the account identified in the pending case. (Underscoring supplied) As no plunder case against then President Estrada had yet been filed before a court of competent jurisdiction at the time the Ombudsman conducted an investigation, petitioner concludes that the information about his bank accounts were acquired illegally, hence, it may not be lawfully used to facilitate a subsequent inquiry into the same bank accounts. Petitioners attempt to make the exclusionary rule applicable to the instant case fails. R.A. 1405, it bears noting, nowhere provides that an unlawful examination of bank accounts shall render the evidence obtained therefrom inadmissible in evidence. Section 5 of R.A. 1405 only states that "[a]ny violation of this law will subject the 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." The case of U.S. v. Frazin, [11] involving the Right to Financial Privacy Act of 1978 (RFPA) of the United States, is instructive. Because the statute, when properly construed, excludes a suppression remedy, it would not be appropriate for us to provide one in the exercise of our supervisory powers over the administration of justice. Where Congress has both established a right and provided exclusive remedies for its violation, we would "encroach upon the prerogatives" of Congress were we to authorize a remedy not provided for by statute. United States v. Chanen, 549 F.2d 1306, 1313 (9th Cir.), cert. denied, 434 U.S. 825, 98 S.Ct. 72, 54 L.Ed.2d 83 (1977). The same principle was reiterated in U.S. v. Thompson: [12] x x x When Congress specifically designates a remedy for one of its acts, courts generally presume that it engaged in the necessary balancing of interests in determining what the appropriate penalty should be. See Michaelian, 803 F.2d at 1049 (citing cases); Frazin, 780 F.2d at 1466. Absent a specific reference to an exclusionary rule, it is not appropriate for the courts to read such a provision into the act. Even assuming arguendo, however, that the exclusionary rule applies in principle to cases involving R.A. 1405, the Court finds no reason to apply the same in this particular case. Clearly, the "fruit of the poisonous tree" doctrine [13] presupposes a violation of law. If there was no violation of R.A. 1405 in the instant case, then there would be no "poisonous tree" to begin with, and, thus, no reason to apply the doctrine. How the Ombudsman conducted his inquiry into the bank accounts of petitioner is recounted by respondent People of the Philippines, viz: x x x [A]s early as February 8, 2001, long before the issuance of the Marquez ruling, the Office of the Ombudsman, acting under the powers granted to it by the Constitution and R.A. No. 6770, and acting on information obtained from various sources, including impeachment (of then Pres. Joseph Estrada) related reports, articles and investigative journals, issued a Subpoena Duces Tecum addressed to Urban Bank. (Attachment "1-b") It should be noted that the description of the documents sought to be produced at that time included that of numbered accounts 727, 737, 747, 757, 777 and 858 and included such names as Jose Velarde, Joseph E. Estrada, Laarni Enriquez, Guia Gomez, Joy Melendrez, Peachy Osorio, Rowena Lopez, Kevin or Kelvin Garcia. The subpoena did not single out account 858. xx x x Thus, on February 13, 2001, PDIC, as receiver of Urban Bank, issued a certification as to the availability of bank documents relating to A/C 858 and T/A 858 and the non-availability of bank records as to the other accounts named in the subpoena. (Attachments "2", "2-1" and "2-b) Based on the certification issued by PDIC, the Office of the Ombudsman on February 16, 2001 again issued a Subpoena Duces Tecum directed to Ms. Corazon dela Paz, as Interim Receiver, directing the production of documents pertinent to account A/C 858 and T/C 858. (Attachment "3") In compliance with the said subpoena dated February 16, 2001, Ms. Dela Paz, as interim receiver, furnished the Office of the Ombudsman certified copies of documents under cover latter dated February 21, 2001: 1. Transaction registers dated 7-02-99, 8-16-99, 9-17-99, 10-18-99, 11-22-99, 1-07-00, 04-03-00 and 04-24-00; 2. Report of Unregularized TAFs & TDs for UR COIN A & B Placements of Various Branches as of February 29, 2000 and as of December 16, 1999; and 3. Trading Orders Nos. A No. 78102 and A No. 078125. Trading Order A No. 07125 is filed in two copies a white copy which showed "set up" information; and a yellow copy which showed "reversal" information. Both copies have been reproduced and are enclosed with this letter.

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We are continuing our search for other records and documents pertinent to your request and we will forward to you on Friday, 23 February 2001, such additional records and documents as we might find until then. (Attachment "4") The Office of the Ombudsman then requested for the mangers checks, detailed in the Subpoena Duces Tecum dated March 7, 2001. (Attachment "5") PDIC again complied with the said Subpoena Duces Tecum dated March 7, 2001 and provided copies of the managers checks thus requested under cover letter dated March 16, 2001. (Attachment "6") [14] (Emphasis in the original)

The Sandiganbayan credited the foregoing account of respondent People. [15] The Court finds no reason to disturb this finding of fact by the Sandiganbayan. The Marquez ruling notwithstanding, the above-described examination by the Ombudsman of petitioners bank accounts, conducted before a case was filed with a court of competent jurisdiction, was lawful.
For the Ombudsman issued the subpoenas bearing on the bank accounts of petitioner about four months before Marquez was promulgated on June 27, 2001. While judicial interpretations of statutes, such as that made in Marquez with respect to R.A. No. 6770 or the Ombudsman Act of 1989, are deemed part of the statute as of the date it was originally passed, the rule is not absolute.

Columbia Pictures, Inc. v. Court of Appeals [16] teaches: It is consequently clear that a judicial interpretation becomes a part of the law as of the date that law was originally passed, subject only to the qualification that when a doctrine of this Court is overruled and a different view is adopted, and more so when there is a reversal thereof, the new doctrine should be applied prospectively and should not apply to parties who relied on the old doctrine and acted in good faith. (Emphasis and underscoring supplied)
When this Court construed the Ombudsman Act of 1989, in light of the Secrecy of Bank Deposits Law in Marquez, that "before an in camera inspection may be allowed there must be a pending case before a court of competent jurisdiction", it was, in fact, reversing an earlier doctrine found in Banco Filipino Savings and Mortgage Bank v. Purisima [17]. Banco Filipino involved subpoenas duces tecum issued by the Office of the Ombudsman, then known as the Tanodbayan, [18] in the course of its preliminary investigation of a charge of violation of the Anti-Graft and Corrupt Practices Act.

While the main issue in Banco Filipino was whether R.A. 1405 precluded the Tanodbayans issuance of subpoena duces tecum of bank records in the name of persons other than the one who was charged, this Court, citing P.D. 1630, [19] Section 10, the relevant part of which states: (d) He may issue a subpoena to compel any person to appear, give sworn testimony, or produce documentary or other evidence the Tanodbayan deems relevant to a matter under his inquiry, held that "The power of the Tanodbayan to issue subpoenae ad testificandum and subpoenae duces tecum at the time in question is not disputed, and at any rate does not admit of doubt." [20]
As the subpoenas subject of Banco Filipino were issued during a preliminary investigation, in effect this Court upheld the power of the Tandobayan under P.D. 1630 to issue subpoenas duces tecum for bank documents prior to the filing of a case before a court of competent jurisdiction. Marquez, on the other hand, practically reversed this ruling in Banco Filipino despite the fact that the subpoena power of the Ombudsman under R.A. 6770 was essentially the same as that under P.D. 1630. Thus Section 15 of R.A. 6770 empowers the Office of the Ombudsman to (8) Administer oaths, issue subpoena and subpoena duces tecum, and take testimony in any investigation or inquiry, including the power to examine and have access to bank accounts and records; A comparison of this provision with its counterpart in Sec. 10(d) of P.D. 1630 clearly shows that it is only more explicit in stating that the power of the Ombudsman includes the power to examine and have access to bank accounts and records which power was recognized with respect to the Tanodbayan through Banco Filipino. The Marquez ruling that there must be a pending case in order for the Ombudsman to validly inspect bank records in camera thus reversed a prevailing doctrine. [21] Hence, it may not be retroactively applied. The Ombudsmans inquiry into the subject bank accounts prior to the filing of any case before a court of competent jurisdiction was therefore valid at the time it was conducted.

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Likewise, the Marquez ruling that "the account holder must be notified to be present during the inspection" may not be applied retroactively to the inquiry of the Ombudsman subject of this case. This ruling is not a judicial interpretation either of R.A. 6770 or R.A. 1405, but a "judgemade" law which, as People v. Luvendino [22] instructs, can only be given prospective application: x x x The doctrine that an uncounselled waiver of the right to counsel is not to be given legal effect was initially a judge-made one and was first announced on 26 April 1983 in Morales v. Enrile and reiterated on 20 March 1985 in People v. Galit. x x x

While the Morales-Galit doctrine eventually became part of Section 12(1) of the 1987 Constitution, that doctrine affords no comfort to appellant Luvendino for the requirements and restrictions outlined in Morales and Galit have no retroactive effect and do not reach waivers made prior to 26 April 1983 the date of promulgation of Morales. (Emphasis supplied)
In fine, the subpoenas issued by the Ombudsman in this case were legal, hence, invocation of the "fruit of the poisonous tree" doctrine is misplaced.

At all events, even if the challenged subpoenas are quashed, the Ombudsman is not barred from requiring the production of the same documents based solely on information obtained by it from sources independent of its previous inquiry.
In particular, the Ombudsman, even before its inquiry, had already possessed information giving him grounds to believe that (1) there are bank accounts bearing the number "858," (2) that such accounts are in the custody of Urban Bank, and (3) that the same are linked with the bank accounts of former President Joseph Estrada who was then under investigation for plunder. Only with such prior independent information could it have been possible for the Ombudsman to issue the February 8, 2001 subpoena duces tecum addressed to the President and/or Chief Executive Officer of Urban Bank, which described the documents subject thereof as follows: (a) bank records and all documents relative thereto pertaining to all bank accounts (Savings, Current, Time Deposit, Trust, Foreign Currency Deposits, etc) under the account names of Jose Velarde, Joseph E. Estrada, Laarni Enriquez, Guia Gomez, Joy Melendrez, Peach Osorio, Rowena Lopez, Kevin or Kelvin Garcia, 727, 737, 747, 757, 777 and 858. (Emphasis and underscoring supplied)

The information on the existence of Bank Accounts bearing number "858" was, according to respondent People of the Philippines, obtained from various sources including the proceedings during the impeachment of President Estrada, related reports, articles and investigative journals. [23] In the absence of proof to the contrary, this explanation proffered by respondent must be upheld. To presume that the information was obtained in violation of R.A. 1405 would infringe the presumption of regularity in the performance of official functions.
Thus, with the filing of the plunder case against former President Estrada before the Sandiganbayan, the Ombudsman, using the above independent information, may now proceed to conduct the same investigation it earlier conducted, through which it can eventually obtain the same information previously disclosed to it by the PDIC, for it is an inescapable fact that the bank records of petitioner are no longer protected by R.A. 1405 for the reasons already explained above. Since conducting such an inquiry would, however, only result in the disclosure of the same documents to the Ombudsman, this Court, in avoidance of what would be a time-wasteful and circuitous way of administering justice, [24] upholds the challenged subpoenas. Respecting petitioners claim that the Sandiganbayan violated his right to due process as he was neither notified of the requests for the issuance of the subpoenas nor of the grant thereof, suffice it to state that the defects were cured when petitioner ventilated his arguments against the issuance thereof through his earlier quoted letter addressed to the Sandiganbayan and when he filed his motions to quash before the Sandiganbayan. IN SUM, the Court finds that the Sandiganbayan did not commit grave abuse of discretion in issuing the challenged subpoenas for documents pertaining to petitioners Trust Account No. 858 and Savings Account No. 0116-17345-9 for the following reasons: 1. These accounts are no longer protected by the Secrecy of Bank Deposits Law, there being two exceptions to the said law applicable in this case, namely: (1) the examination of bank accounts is upon order of a competent court in cases of bribery or dereliction of duty of public officials, and (2) the money deposited or invested is the subject matter of the litigation. Exception (1) applies since the plunder case pending against former President Estrada is analogous to bribery or dereliction of duty, while exception (2) applies because the money deposited in petitioners bank accounts is said to form part of the subject matter of the same plunder case. 2. The "fruit of the poisonous tree" principle, which states that once the primary source (the

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"tree") is shown to have been unlawfully obtained, any secondary or derivative evidence (the "fruit") derived from it is also inadmissible, does not apply in this case. In the first place, R.A. 1405 does not provide for the application of this rule. Moreover, there is no basis for applying the same in this case since the primary source for the detailed information regarding petitioners bank accounts the investigation previously conducted by the Ombudsman was lawful. 3. At all events, even if the subpoenas issued by the Sandiganbayan were quashed, the Ombudsman may conduct on its own the same inquiry into the subject bank accounts that it earlier conducted last February-March 2001, there being a plunder case already pending against former President Estrada. To quash the challenged subpoenas would, therefore, be pointless since the Ombudsman may obtain the same documents by another route. Upholding the subpoenas avoids an unnecessary delay in the administration of justice. WHEREFORE, the petition is DISMISSED. The Sandiganbayan Resolutions dated February 7 and 12, 2003 and March 11, 2003 are upheld. The Sandiganbayan is hereby directed, consistent with this Courts ruling in Marquez v. Desierto, to notify petitioner as to the date the subject bank documents shall be presented in court by the persons subpoenaed.
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b. RA 6426, as amended
Saturday, August 08, 2009 3:33 AM

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\ [1972 RA 6426] AN ACT INSTITUTING A FOREIGN CURRENCY DEPOSIT SYSTEM IN THE PHILIPPINES, AND FOR OTHER PURPOSES.1972 Sep 26426REPUBLIC ACT NO. 6426 April 4, 1972 AN ACT INSTITUTING A FOREIGN CURRENCY DEPOSIT SYSTEM IN THE PHILIPPINES, AND FOR OTHER PURPOSES. Sec. 1. Title. This Act shall be known the "Foreign Currency Deposit Act of the Philippines." Sec. 2. Authority to deposit foreign currencies. Any person, natural or juridical, may in accordance with the provisions of this Act, deposit with such Philippine banks in good standing, as may, upon application, be designated by the Central Bank for the purpose, foreign currencies which are acceptable as part of the international reserve, except those which are required by the Central Bank to be surrendered in accordance with the provisions of Republic Act Numbered Two hundred sixty-five. Sec. 3. Authority of banks to accept foreign currency deposits. The banks designated by the Central Bank under Section two hereof shall have the authority: 1) To accept deposits and to accept foreign currencies in trust: Provided, That numbered accounts for recording and servicing of said deposits shall be allowed; 2) To issue certificates to evidence such deposits; 3) To discount said certificates; 4) To accept said deposits as collateral for loans subject to such rules and regulations as may be promulgated by the Central Bank from time to time; and 5) To pay interest in foreign currency on such deposits. Sec. 4. Foreign currency cover requirements. Except as the Monetary Board, by a unanimous vote of all incumbent members, may otherwise prescribe or allow, GR : the depository banks shall maintain at all times a one hundred percent foreign currency cover for their deposit liabilities, of which cover at least fifteen seventy-one. Thereafter, such sum as may be necessary for the same purpose shall be included in the annual General Appropriations Act. Sec. 5. This Act shall take effect upon its approval. Approved: April 4, 1972
b. RA 6426, as amended This is for non-Php denominated deposits,

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Ana Rivera vs Peoples Bank and Trust Co

Saturday, August 08, 2009 4:52 AM

Rivera vs Peoples Bank and Trust Co Date: April 17, 1947 Plaintiff Appellant: Ana Rivera Defendant Appellee: People Bank and Trust Co
Ponente: Ozaeta

Facts: The question raised in this appeal is the validity of the survivorship agreement made by and between Edgar Stephenson, deceased, and Ana Rivera. Ana Rivera was employed by Edgar Stephenson as housekeeper. Stephenson opened an account in his name with the Peoples Bank by depositing therein the sum of P1,000. On October 17, 1931, when there was a balance of P2,072 in said account, the survivorship agreement in question was executed and the said account was transferred to the name of "Edgar Stephenson and/or Ana Rivera." At the time of Stephenson's death Ana Rivera held the deposit book, and there was a balance in said account of P701.43, which Ana Rivera claimed but which the bank refused to pay to her upon advice of its attorneys, who gave the opinion that the survivorship agreement was of doubtful validity. Thereupon Ana Rivera instituted the present action against the bank, and Minnie Stephenson, administratrix of the estate of the deceased, intervened and claimed the amount for the estate, alleging that the money deposited in said account was and is the exclusive property of the deceased. The trial court held that the agreement in question was a mere power of attorney authorizing Ana Rivera to withdraw the deposit, which power terminated upon the death of Stephenson. Viewed from its effect after the death of either of the parties, the agreement was a donation mortis causa with reference to the balance remaining at the death of one of them, which, not having been executed with the formalities of a testamentary disposition as required by article 620 CC, was of no legal effect.
Issue: WON the survivorship agreement was valid

Ana Rivera vs Peoples Bank and Trust

Held: Yes
Ratio: We find no basis for the conclusion that the survivorship agreement was a mere power of attorney from Stephenson to Ana Rivera, or that it is a gift mortis causa of the bank account in question from him to her. Such conclusion is evidently predicated on the assumption that Stephenson was the exclusive owner of the funds deposited in the bank, which assumption was in turn based on the facts (1) that the account was originally opened in the name of Stephenson alone and (2) that Ana Rivera "served only as housemaid of the deceased." But it not infrequently happens that a person deposits money in the bank in the name of another; and in the instant case it also appears that Ana Rivera served her master for about nineteen years without actually receiving her salary from him. The fact that subsequently Stephenson transferred the account to the name of himself and/or Ana Rivera and executed with the latter the survivorship agreement in question although there was no relation of kinship between them but only that of master and servant, nullifies the assumption that Stephenson was the exclusive owner of the bank account. In the absence, then, of clear proof to the contrary, we must give full faith and credit to the certificate of deposit, which recites in effect that the funds in question belonged to Edgar Stephenson and Ana Rivera; that they were joint owners thereof; and that either of them could withdraw any part or the whole of said account during the lifetime of both, and the balance, if any, upon the death of either, belonged to the survivor. Is the survivorship agreement valid? Prima facie, we think it is valid. It is an aleatory contract supported by a lawful consideration the mutual agreement of the joint depositors permitting 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. The trial court said that the Civil Code "contains no provisions sanctioning such an agreement." We think it is covered by article 1790 of the Civil Code. The case of Macam vs. Gatmaitan is in point: "This court is of the opinion that Exhibit C is an aleatory contract whereby,
according to article 1790 of the Civil Code, one of the parties or both reciprocally bind themselves to give or do something as an equivalent for that which the other party is to give or do in case of the occurrence of an event which is uncertain or will happen at an indeterminate time. As already stated, Leonarda was the owner of the house and Juana of the Buick automobile and most of the furniture. By virtue of Exhibit C, Juana would become the owner of the house in case Leonarda died first, and Leonarda would become the owner of the automobile and the furniture if Juana were to die first. In this manner Leonarda and Juana reciprocally assigned their respective property to one another conditioned upon who might die first, the time of death determining the event upon which the acquisition of such right by the one or the other depended. This contract, as any other contract, is binding upon the parties thereto. Inasmuch as Leonarda had died before Juana, the latter thereupon acquired the ownership of the house, in the same manner as Leonarda would have acquired the ownership of the automobile and of the furniture if Juana had died first." Furthermore, "it is well established that a bank account may be so created that two persons shall be joint owners thereof during their mutual lives, and the survivor take the whole on the death of the other. The right to make such joint deposits has generally been held not to be done away with by statutes abolishing joint tenancy and survivorship generally as they existed at common law."

But although the survivorship agreement is per se not contrary to law, its operation or effect may be violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and annulled upon such grounds. No such vice has been imputed and established against the agreement involved in this case.
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Vitug vs. CA
Saturday, August 08, 2009 5:01 AM

Vitug vs CA Date: March 29, 1990 Petitioner: Romarico Vitug Respondents: CA and Rowena Fausta-Corona Facts: Sarmiento Facts: Romarico G. Vitug filed a motion asking for authority from the probate court to sell certain shares of stock and real properties belonging to the estate of the deceased (wife) to cover allegedly his advances to the estate in the sum of P667,731.66 which he claimed were personal funds. Rowena Corona opposed the motion to sell on the ground that the same funds withdrawn from savings account No. 35342-038 were conjugal partnership properties and part of the estate, and hence, there was allegedly no ground for reimbursement. Vitug insists that the said funds are his exclusive property having acquired the same through a survivorship agreement executed with his late wife and the bank on June 19, 1970. The trial court upheld the validity of this agreement and granted Vitugs prayer. The CA ruled that the survivorship agreement constitutes a conveyance mortis causa "did not comply with the formalities of a valid will as prescribed by Article 805 CC," and secondly, assuming that it is a mere donation inter vivos, it is a prohibited donation under the provisions of Article 133 of the Civil Code. Issue: WON the survivorship agreement was valid Held: Yes Ratio: The conveyance in question is not, first of all, one of mortis causa, which should be embodied in a will. A will has been defined as "a personal, solemn, revocable and free act by which a capacitated person disposes of his property and rights and declares or complies with duties to take effect after his death." In other words, the bequest or device must pertain to the testator. In this case, the monies subject of savings account No. 35342-038 were in the nature of conjugal funds. In the case relied on, Rivera v. People's Bank and Trust Co., we rejected claims that a survivorship agreement purports to deliver one party's separate properties in favor of the other, but simply, their joint holdings. Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was to take effect after the death of one party. Secondly, it is not a donation between the spouses because it involved no conveyance of a spouse's own properties to the other. It is also our opinion that the agreement involves no modification of the conjugal partnership, as held by the Court of Appeals, by "mere stipulation," and that it is no "cloak" to circumvent the law on conjugal property relations. Certainly, the spouses are not prohibited by law to invest conjugal property, say, by way of a joint and several bank account, more commonly denominated in banking parlance as an "and/or" account. In the case at bar, when the spouses Vitug opened savings account No. 35342-038, they merely put what rightfully belonged to them in a money-making venture. They did not dispose of it in favor of the other, which would have arguably been sanctionable as a prohibited donation. And since the funds were conjugal, it can not be said that one spouse could have pressured the other in placing his or her deposits in the money pool. The validity of the contract seems debatable by reason of its "survivor -take-all" feature, but in reality, that contract imposed a mere obligation with a term, the term being death. Such agreements are permitted by Article 2010 Civil Code. Under the provision, the fulfillment of an aleatory contract depends on either the happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time." A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value of currency, and insurance have been held to fall under the first category, while a contract for life annuity or pension under Article 2021, et sequentia, has been categorized under the second. 25 In either case, the element of risk is present. In the case at bar, the risk was the death of one party and survivorship of the other. There is no demonstration here that the survivorship agreement had been executed for such unlawful purposes, or, as held by the respondent court, in order to frustrate our laws on wills, donations, and conjugal partnership. The conclusion is accordingly unavoidable that Mrs. Vitug having predeceased her husband, the latter has

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conjugal partnership. The conclusion is accordingly unavoidable that Mrs. Vitug having predeceased her husband, the latter has acquired upon her death a vested right over the amounts under savings account No. 35342 -038 of the Bank of America. Insofar as the respondent court ordered their inclusion in the inventory of assets left by Mrs. Vitug, we hold that the court was in error. Being the separate property of petitioner, it forms no more part of the estate of the deceased.

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BIR RULING No. 010-2003

Saturday, August 08, 2009 12:41 PM

REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Quezon City Bureau of Internal Revenue Ruling 85; 97; 98 000-00 010-2003 Person to Contact: Chief, Law Division Tel. Nos. 926-55-36 / 927-09-63 September 08, 2003 Date: ___________________ ISHIWATA GATMAYTAN & ASSOCIATES No. 12, ADB Avenue, Ortigas Center 1550 Mandaluyong City, Metro Manila

Attention: Atty. Ma. Cecilia Salazar-Santos Partner Gentlemen: This refers to your letter dated June 18, 2001 requesting on behalf of your client, Banco de Oro Universal Bank, for a confirmation of your opinion that a Survivorship Agreement executed by the joint depositors under a joint deposit account expressly stipulating that upon death of any one of the joint depositors, the entire remaining balance of the deposit shall belong to the surviving depositor/s and, in effect, may be forthwith withdrawn by the latter notwithstanding the provisions of Section 97 of the 1997 Tax Code. In reply, please be informed that the second paragraph of Section 97 of the 1997 Tax Code, which provides to wit: If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. (Emphasis supplied) As can be readily gleaned from the Survivorship Agreement, the funds deposited in the joint deposit account are under co-ownership because the ownership or right over the same belong to different persons, the joint depositors. The share or portion belonging to the joint depositors in the joint deposit account shall be presumed equal and the benefits as well as the charges in the joint account shall be proportional to their respective shares. [Arts. 484 and 485, Civil Code] In the Survivorship Agreement, the joint depositors cannot withdraw any portion of the said deposit account without the consent of the other. However, upon death of any of 2 010-2003 September 08, 2003
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010-2003 September 08, 2003 them, the whole amount of the funds shall belong to the surviving co-depositor/s, and may forthwith be withdrawn by the latter. The said provision contained in the agreement is valid and binding between the joint depositors but it has an effect of a gift or donation morits causa made by the deceased co-depositor during his lifetime but effective upon death because the acquisition by the survivor of the share of the decedent in the joint account is considered to be acquired by bequest and hence subject to estate tax under Section 84 of the 1997 Tax Code. Considering that the joint account is co-owned by the depositors, there is a presumption that they owned it equally or in 50/50 shares, in which case, the transfer of the remaining balance of the whole deposit to the surviving co-depositor/s upon death of the other co-depositor pursuant to their Survivorship Agreement is a transfer made by the said depositor in contemplation of death, as provided under Section 85(B) of the 1997 Tax Code, viz: (B) Transfer in Contemplation of Death To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or moneys worth. Thus, upon the death of the co-depositors, the 50% share of the deceased co-depositor in the deposit shall be included in computing the value of his gross estate. Hence, the funds in the joint deposit account cannot be withdrawn by the surviving co-depositor/s unless the Commissioner has certified that the taxes imposed thereon by Title III of the 1997 Tax Code have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the deceased co-depositor may, upon the authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000.00) without the said certification. Very truly yours, (Original Signed) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue L-1

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FEATI Bank and Trust Co vs. CA

Saturday, August 08, 2009 5:54 AM

FEATI Bank and Trust vs CA Date: April 30, 1991 Petitioner: FEATI Bank and Trust Company Respondents: CA and Bernardo Villaluz Ponente: Gutierrez Facts: Bernardo E. Villaluz agreed to sell to Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54,000. 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 further provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by several documents. The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs were inspected by custom inspectors and representatives of the Bureau of Forestry all of whom certified to the good condition and exportability of the logs. After the loading of the logs was completed, the Chief Mate issued a mate receipt of the cargo which stated the same are in good condition. However, Christiansen refused to issue the certification as required in par 4 of the letter of credit, despite several requests made by the private respondent. 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. The letter of credit lapsed on June 30, 1971 without the private respondent receiving any certification from Christiansen. The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before the Central Bank. The Central Bank ruled that any provision in any letter of credit covering log exports requiring certification of buyer's agent that said logs have been approved for shipment as a condition precedent to negotiation of shipping documents shall not be allowed. Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company, to whom Christiansen sold the logs. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. 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 the Feati Bank and Trust Company the CFI. The trial court ruled that the private respondents have a right to demand payment. It also ruled that Christiansen acted in bad faith and with intent to deceit in his refusal to issue the certification. Feati should be held liable together with the co-defendant. The said letter of credit, as may be seen on its face, is irrevocable and the issuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of the letter of credit.The Court likewise agrees with the plaintiff that the bank may also be held liable under the principles and laws on both trust and estoppel. When the bank accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable for damages and loss resulting to the plaintiff from its failure to perform that obligation. The CA affirmed Issue: WON the bank is liable on the letter of credit despite private respondents non compliance with the terms Held: No Ratio: It is a settled rule in commercial transactions involving letters 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

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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 of strict compliance. In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same holds true. Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer. Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties. And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us like BPI vs De Nery. Under the foregoing provisions of the U.C.P (Arts 3, 7 and 8)., 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 documents, 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. Issue: WON the bank assumed the obligations of a guarantor of the issuing bank Held: No Ratio: In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank, we find the same erroneous. The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that the 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. The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa. An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit. Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court and the CA made was to confuse the obligation assumed by the petitioner. 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." 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. 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

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simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary. Since the petitioner 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. The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit. 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. In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit. The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit. The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him. The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of credit." The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them be construed as an act of confirmation is rather far fetched, for it depends principally on speculative reasoning. As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its own. The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit. Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act" should be construed as an act of confirmation. The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to satisfy this need was to borrow money from the petitioner which the latter granted. From these circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a collateral. 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 the private respondent, the refusal by the petitioner to accept the tender of the private respondent is justified. In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the beneficiary of the letter of credit," the same has no legal basis. A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain in this case. The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank. Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the existence of the letter of credit. How then can such create estoppel when that is its only duty under the law? We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the

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We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen." It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter. The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should not likewise be charged to the issuing bank. As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit. The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-avis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's 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. The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship. In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and/or transmit to the seller the letter of credit. Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit. The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the bank's problem. We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex . Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private respondent to submit under the letter of credit, has become insignificant. In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it for certiorari and prohibition with preliminary injunction, to wit: There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen first issued the required certification that the logs had been approved by him to be in accordance with the terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs without taking all due precautions to assure that all the terms and conditions of the letter of credit had been strictly complied with, so that there would be no hitch in its negotiation.

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strictly complied with, so that there would be no hitch in its negotiation.

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PNP vs. Pineda

Saturday, August 08, 2009 12:52 PM

PNB vs Pineda Date: May 13, 1991 Petitioner: PNB Respondents: Hon. Gregorio Pineda and Tayabas Cement Company Inc Ponente: Fernan Facts: In 1963, Ignacio Arroyo, married to Lourdes Arroyo, obtained a loan of P580,000 from PNB to purchase 60% of the subscribed capital stock and acquire the controlling interest of Tayabas Cement Company, Inc. As security for said loan, the spouses Arroyo executed a real estate mortgage land known as the La Vista property. TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year deferred L/C for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement plant machinery and equipment. Upon approval of said application and opening of an L/C, the Arroyo spouses executed the following documents to secure this loan accommodation: Surety Agreement and Covenant. Upon arrival of the machinery, Toyo Menka Kaisha, Ltd. made the drawings against the L/C. TCC, however, failed to remit and/or pay the amount covered by the drawings. PNB notified TCC of its intention to repossess, as it later did, the imported machinery and equipment for failure of TCC to settle its obligations under the L/C. The personal accounts of the spouses Arroyo, which included another loan of P160,000.00 secured by a real estate mortgage over parcels of agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental, had likewise become due. The spouses Arroyo having failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor. PNB filed with the City Sheriff of Quezon City a petition for extra -judicial foreclosure of the real estate mortgage over the properties at the La Vista property. PNB likewise filed a similar petition with the City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties located at Isabela, Negros Occidental. At the auction sale, PNB was the highest bidder with a bid price of P1,000,001.00. However, when said property was about to be awarded to PNB, the representative of the mortgagor -spouses objected and demanded from the PNB the difference between the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on their personal account. It was the contention of the spouses Arroyo's representative that the foreclosure proceedings referred only to the personal account of the mortgagor spouses without reference to the account of TCC. To remedy the situation, PNB filed a supplemental petition requesting the Sheriffs Office to proceed with the sale of the subject real properties to satisfy not only the amount of P499,060.25 owed by the spouses Arroyos on their personal account but also the amount of P35,019,901.49 exclusive of interest, commission charges and other expenses owed by said spouses as sureties of TCC. Said petition was opposed by the spouses Arroyo and the other bidder, Jose L. Araneta. The Ex Officio sheriff said that they cannot proceed with the foreclosure sale unless there be court ruling on the issues. PNB filed with the CFI of Quezon City a petition for mandamus against said Diana Dungca in her capacity as City Sheriff of Quezon City to compel her to proceed with the foreclosure sale of the mortgaged properties. The petition was granted. Before the decision could attain finality, TCC filed before the CFI of Rizal, Pasig, Branch XXI a complaint against PNB, Dungca, and the Provincial Sheriff of Negros Occidental and Ex -Officio Sheriff of Bacolod City seeking, inter alia, the issuance of a writ of preliminary injunction to restrain the foreclosure of the mortgages over the La Vista property and Hacienda Bacon as well as a declaration that its obligation with PNB had been fully paid by reason of the latter's repossession of the imported machinery and equipment. Issue: WON TCC's liability has been extinguished by the repossession of PNB of the imported cement plant machinery and equipment. Held: No

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Ratio: We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported cement plant machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to the possession and disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under said letter had been discharged. (Vintola vs. Insular Bank of Asia and America). PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. As aforesaid, the repossession of the machinery and equipment in question was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished. Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo as sureties of TCC. A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. As sureties, the Arroyo spouses are primarily liable as original promissors and are bound immediately to pay the creditor the amount outstanding. Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial institutions like herein petitioner PNB are required to foreclose on the collaterals and/or securities for any loan, credit or accommodation whenever the arrearages on such account amount to at least twenty percent (20%) of the total outstanding obligations, including interests and charges, as appearing in the books of account of the financial institution concerned. It is further provided therein that "no restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties . . ." It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses were in compliance with the mandate of P.D. 385. This being the case, the respondent judge acted in excess of his jurisdiction in issuing the injunction specifically proscribed under said decree. Another reason for striking down the writ of preliminary injunction complained of is that it interfered with the order of a co-equal and coordinate court. Since Branch V of the CFI of Rizal had already acquired jurisdiction over the question of foreclosure of mortgage over the La Vista property and rendered judgment in relation thereto, then it retained jurisdiction to the exclusion of all other coordinate courts over its judgment, including all incidents relative to the control and conduct of its ministerial officers, namely the sheriff thereof. The foreclosure sale having been ordered by Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings with Branch XXI of the same CFI, but instead should have first sought relief by proper motion and application from the former court which had exclusive jurisdiction over the foreclosure proceeding. This doctrine of non-interference is premised on the principle that a judgment of a court of competent jurisdiction may not be opened, modified or vacated by any court of concurrent jurisdiction. Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can only enforce their writs of injunction within their respective designated territories. 28

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Transfield Philippines vs. Luzon Hydro Corporation

Saturday, August 08, 2009 12:52 PM

Transfield Philippines Inc vs Luzon Hydro Corp Date: November 22, 2004 Petitioner: Transfield Philippines Inc Respondents: Luzon Hydro Corporation, Australia and New Zealand Banking Group Limited and Security Bank Corporation Ponente: Tinga Facts: Petitioner and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a power station at the Bakun River in the provinces of Benguet and Ilocos Sur. To secure performance of petitioners obligation, petitioner opened in favor of LHC two standby letters of credit both dated 20 March 2000, with the local branch of respondent Australia and New Zealand Banking Group Limited and Security Bank Corporation each in the amount of US$8,988,907. Petitioner sought various EOT to complete the Project due to force majeure. LHC denied the request for extension. This gave rise to a series of legal actions between the parties. The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission. This was followed by another Request for Arbitration filed by petitioner before the International Chamber of Commerce. Foreseeing that LHC would call on the Securities, petitioner advised respondent banks of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC would constrain it to hold respondent banks liable for liquidated damages. However, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them. Later on, LHC declared petitioner in default of its obligations under the Turnkey contract. LHC also served notice that it would call on the securities. Petitioner filed a complaint for injunction with TRO against the defendants before the RTC, praying that LHC refrain from calling on the securities and the banks from disposing any securities. The RTC denied petitioners application for a writ of preliminary injunction. Employing the principle of independent contract in letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked petitioners contention that the principle of independent contract could be invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims. The appellate court expressed conformity with the trial courts decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that the trial courts denial of petitioners application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction. Ratio: Nature of LC. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits. Commercial vs Standby Credits. There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto. Independence Principle. Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank. Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and

Transfield, a Turnkey contractor, and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract wherein Transfield would construct a power station. To secure performance of its obligation, Transfield opened in favor of LHC 2 standby letters of credit each in the amount of US$8,988,907. -however, due to force majeure, Transfield delayed in the construction and its requests for extensions were denied by LHC. The parties first underwent arbitration before CIAC and another in ICC. Foreseeing that LHC would claim the standby letters of credit which are their securities for the performance of the obligation, Transfield advised respondents banks of the arbitration proceedings already pending and asserted THAT LHC had no right to call on the securities until the resolution of the disputes before the arb tribunals and any transfer, release, or disposition of the Securities in favor of LHC would constrain it to hold respondent banks liable for liquidated damages. - banks said that they would pay LHC when it calls on them (HAHA! Wala kaming paki sa inyo!) -LHC declared Transfield in default, so it served notice to the banks that it would call on the securities. -Transfield filed complaint for injunction w/TRO vs. banks and LHC, praying that LHC refrain from calling on the securities and the banks from disposing any securities RTC: DENY, employ, "independent contract" doctrine CA: Affirm

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the required documents are presented to it. The so-called independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever. The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. Issue: Can the beneficiary invoke the independence principle? Yes Ratio: In a letter of credit transaction where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with. Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principles nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke the independence principle on letters of creditdoes not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called beneficiary. Petitioners argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions. Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
Surety vs Standby Credit. The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination of documents. Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance, usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the suretys performance takes time. The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of th e applicants performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation. In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of t he obligors performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance. In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiarys presentation of those doc uments is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary.

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioners posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself. Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was ministerial for them to honor the call for payment. Furthermore, LHC has a right rooted in the Contract to call on the Securities. A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even without the use of the independence principle, the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default. Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the fraud exception exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare

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the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of defaultsuch issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement. Issue: Would injunction be the proper remedy to restrain the wrongful draws on the Securities? Ratio: Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the 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 or the recovery of damages would be seriously damaged. In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of 253 days which would move the target completion date. If its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages. Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law. Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage. Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation. In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs call on the Securities which would justify the issuance of preliminary injunction. By petitioners own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract. Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default. The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. What petitioner did assert before the courts below was the fact that LHCs draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal. The lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHCs call upon the Securities. Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code, petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction. With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHCs certification that default has occurred. Neither were they bound by petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent banks undertaking was simply to pay once the required documents are presented by the beneficiary. At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law. Moreover, in a Manifestation, dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition. Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act. In Ticzon v. Video Post Manila, Inc. this Court ruled that where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employerthe very purpose of the preliminary injunction has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned. In the instant case, the consummation of the act sought to be restrained had rendered the instant petition mootfor any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy. The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.

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Ong vs. PCIB

Saturday, August 08, 2009 1:59 PM

Ong vs PCIB Date: January 15, 2005 Petitioners: Spouses Alfredo and Susana Ong Respondent: Philippine Commercial International Bank Ponente: Puno
Facts: - In 1991, Baliwag Mahogany Corp needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent bank. Alfredo (President) and Susana Ong (Treasurer) acted as sureties for these loans and issued 3 promissory notes for the purpose. It was stipulated in the notes that the bank may consider BMC in default and demand payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a state of suspension of payments. Thereafter, BMC filed a petition for rehabilitation and suspension of payments with SEC after the creditors attached its properties. The bank then sought the collection of the payment of the debt from the petitioners as sureties. - On April 20, 1992, PCIB filed a case for collection of a sum of money against petitionersspouses. On October 13, 1992, a MOA was executed by BMC, the petitioners, and the consortium of creditor banks of BMC (including PBIC). Petitioners then moved to dismiss the complaint arguing that the MOA suspended any pending civil action against BMC. Hence, the benefits of the MOA should also be extended to the petitioners as sureties. The trial court denied the motion to dismiss. The CA affirmed the trial courts ruling that a creditor can proceed against petitioners as surety independently of its right to proceed against BMC.

Issue: Held:

WON the suit against the spouses should be dismissed No

Ratio: - Reliance of petitioners on Articles 2063 and 2081 CC is misplaced as these provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners are not guarantors but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning. - Under the suretyship contract entered into by petitioners with the bank, the former obligated themselves to be solidarily bound with BMC for the payment of its debts to the bank. Under Article 1216 CC, the bank as creditor may proceed against petitioners as sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC. The banks right to collect payment from the surety exists independently of its right to proceed directly against the principal debtor. In
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surety exists independently of its right to proceed directly against the principal debtor. In fact, the bank may go against the surety alone without prior demand for payment on the principal debtor. - The provisions of the MOA regarding the suspension of payments by BMC and the nonfiling of collection suits by the creditor banks pertain only to the property of BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC. Secondly, there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over the properties of BMCs officers or sureties.
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Intrnational Finance Corporation vs. Imperial Textile Mills

Saturday, August 08, 2009 1:59 PM

International Finance vs Imperial Textile Date: November 15, 2005 Petitioner: International Finance Corporation Respondent: Imperial Textile Mills Inc Ponente: Panganiban
Facts: - On December 17, 1974, IFC and Philippine Polyamide Industrial Corporation entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000 payable in sixteen (16) semi-annual installments of US$437,500.00 each, with 10% interest. The interest shall be paid in US dollars semi- annually. A Guarantee Agreement was executed with ITM, Grand Textile Manufacturing Corporation and IFC as parties. ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement. PPIC defaulted payments. By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all improvements owned by PPIC. During the public sale, IFCs bid was for P99,269,100 which was equivalent to US$5,250,000. The outstanding loan, however, amounted to US$8,083,967, thus leaving a balance of US$2,833,967 PPIC failed to pay the remaining balance. Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, the two failed to pay. - IFC filed a complaint against PPIC and ITM for the payment of the outstanding balance plus interests and attorneys fees. The trial court dismissed the complaint against ITM. The CA reversed and held that ITM bound itself under the Guarantee Agreement. The CA, however, held that ITMs liability as a guarantor would arise only if and when PPIC could not pay. Since PPICs inability to comply with its obligation was not sufficiently established, ITM could not immediately be made to assume the liability.

Issue: WON ITM and Grandtex are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan. Held: Yes

Ratio: - IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs obligations proceeding from the Loan Agreement. For its part, ITM asserts that, by the terms of the Guarantee Agreement, it was merely a guarantor and not a surety. Moreover, any ambiguity in the Agreement should be construed against IFC -- the party that drafted it. - The Agreement uses guarantee and guarantors, prompting ITM to base its argument on those words. This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety. - Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latters obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable. - Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability commenced only when it guaranteed PPICs obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the applicable law is Art 2047 CC.
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bound itself solidarily with the principal obligor. Thus, the applicable law is Art 2047 CC. Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent. - The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term jointly and severally, the use of the word guarantor to refer to a surety does not violate the law. As Art 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- as primary obligor and not merely as surety -- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship. - The use of the word guarantee does not ipso facto make the contract one of guaranty. This Court has recognized that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation. The very terms of a contract govern the obligations of the parties or the extent of the obligors liability. Thus, this Court has ruled in favor of suretyship, even though contracts were denominated as a Guarantors Undertaking or a Continuing Guaranty. - Indeed, the finding of solidary liability is in line with the premise provided in the Whereas clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of PPICs loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of the contract are clear and there is no doubt as to the intention of the parties. - We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor. The appellate court opined that ITMs undertaking was collateral to and distinct from the Loan Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation. Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter. - With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable. A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter. Evidently, the dispositive portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.
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JN Development Corp vs. Phil Export and Foreign Loan Guarantee Corporation
Saturday, August 08, 2009 2:00 PM

JN Development Corporation vs Philippine Export and Foreign Loan Guarantee Corporation Date: August 31, 2005 Petitioners: JN Development Corporation and Spouses Rodrigo and Leonor Sta Ana Respondent: Philippine Export and Foreign Loan Guarantee Corporation Ponente: Tinga Facts: - On 13 December 1979, JN Development Corporation and Traders Royal Bank entered into an agreement whereby TRB would extend to JN an Export Packing Credit Line for P2,000,000. The loan was covered by several securities, including a real estate mortgage and a letter of guarantee from respondent covering 70% of the credit line. JN, spouses Rodrigo and Leonor Sta. Ana and Narciso Cruz executed a Deed of Undertaking to assure repayment to PhilGuarantee. - JN failed to pay the loan to TRB upon its maturity; thus TRB requested PhilGuarantee to make good its guarantee. PhilGuarantee paid TRB P934,824.34. Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay. JN proposed to settle the obligation by way of development and sale of the mortgaged property. PhilGuarantee, however, rejected the proposal. - PhilGuarantee filed a Complaint for collection of money and damages against herein petitioners. The RTC dismissed the complaint and ruled that TRB already foreclosed the real estate mortgage and this extinguished JNs debt. So, PhilGuarantee should not have paid the debt. Moreover, the guarantee was already expired. The RTC also held that Cruz cannot be held liable under the Undertaking since he was not the one who signed the document, in line with its finding that his signature found in the records is totally different from the signature on the Undertaking. -The CA reversed the RTC and ordered petitioners to pay PhilGuarantee P934,624.34, plus service charge and interest. It held that there was no factual basis to say that the loan was extinguished by virtue of the foreclosure sale. It also ruled that the debt became due and demandable while the guarantee was still existing. Under Article 2058, the guarantor cannot be compelled to pay unless the properties of the debtor are exhausted, the guarantor is not precluded from waiving the benefit of excussion and paying the obligation altogether. Also, Cruz failed to show that his signature was forged. Issue: WON JN is obliged to reimburse Philguarantee

Held: Yes
Ratio: - Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise known as the benefit of excussion. It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, for obviously the exhaustion of the principals property cannot even begin to take place before judgment has been obtained. The law imposes conditions precedent for the invocation of the defense. Thus, in order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latters demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt.
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amount of the debt. - While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him. Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it. PhilGuarantees waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the guarantor what the latter has paid. - Petitioners claim that PhilGuarantee had no more obligation to pay TRB because of the alleged expiration of the contract of guarantee is untenable. The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment was actually made only on 10 March 1981 does not take it out of the terms of the guarantee. What is controlling is that default and demand on PhilGuarantee had taken place while the guarantee was still in force. - There is likewise no merit in petitioners claim that PhilGuarantees failure to give its express consent to the alleged extensions granted by TRB to JN had extinguished the guarantee. The requirement that the guarantor should consent to any extension granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such, it is likewise waivable by the guarantor. Thus, even assuming that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to such extensions. Indeed, a guarantor is not precluded from waiving his right to be notified of or to give his consent to extensions obtained by the debtor. Such waiver is not contrary to public policy as it is purely personal and does not affect public interest. In the instant case, PhilGuarantees waiver can be inferred from its actual payment to TRB after the latters demand, despite JNs failure to pay the renewal/guarantee fee as indicated in the guarantee. - For the above reasons, there is no basis for petitioners claim that PhilGuarantee was a mere volunteer payor and had no legal obligation to pay TRB. The law does not prohibit the payment by a guarantor on his own volition, heedless of the benefit of excussion. In fact, it recognizes the right of a guarantor to recover what it has paid, even if payment was made before the debt becomes due, or if made without notice to the debtor,] subject of course to some conditions. - The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of these defenses when it paid its obligation according to the tenor of the guarantee once demand was made on it. What is peculiar in the instant case is that petitioners, the principal debtors themselves, are muddling the issues and raising the same defenses against the guarantor, which only the guarantor may invoke against the creditor, to avoid payment of their own obligation to the guarantor. The Court cannot countenance their self seeking desire to be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee. - Petitioners assert that TRBs alleged foreclosure of the real estate mortgage over the land executed as security for the loan agreement had extinguished PhilGuarantees obligation; thus, PhilGuarantees recourse should be directed against TRB, as per the pari -passu provision in the contract of guarantee. We disagree. - The foreclosure was made on 27 August 1993, after the case was submitted for decision in 1992 and before the issuance of the decision of the court in 1998. Thus, foreclosure was resorted to by TRB against JN when they both had become aware that PhilGuarantee had already paid TRB and that there was a pending case filed by PhilGuarantee against petitioners. This matter was not raised and proved court, but raised for the first time in petitioners motion for reconsideration in the CA. In their appellants Brief, petitioners claimed that there was no need for the JN to present any evidence before the lower court to show that indeed foreclosure of the REM took place. - Besides, the complaint was filed by PhilGuarantee as guarantor for JN, and its cause of action was premised on its payment of JNs obligation after the latters default. PhilGuarantee was well within its rights to demand reimbursement for such payment made, regardless of whether the creditor, TRB, was subsequently able to obtain payment from JN. If double payment was indeed made, then it is JN which should go after TRB, and not PhilGuarantee. Petitioners have no one to

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blame but themselves, having allowed the foreclosure of the property for the full value of the loan despite knowledge of PhilGuarantees payment to TRB. Having been aware of such payment, they should have opposed the foreclosure, or at the very least, filed a supplemental pleading with the trial court informing the same of the foreclosure sale. Likewise, petitioners cannot invoke the pari passu clause in the guarantee, not being parties to the said agreement. The clause is clearly for the benefit of the guarantor and no other. - The Court notes the letter of Rodrigo Sta. Ana offering, by way of settlement of JNs obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the loan agreement. This further weakens the position of petitioners, since it becomes obvious that they acknowledged the payment made by PhilGuarantee on their behalf and that they were in fact willing to negotiate with PhilGuarantee for the settlement of the said obligation before the filing of the complaint a quo.

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Comml papers to comfort letter

Wednesday, July 15, 2009 12:42 AM

Commercial Papers
CP: -evidence of indebtedness of corporation REVISED SECURITIES ACT (BP78): CPs are included in the enumeration of securities -under the SECURITIES REGULATION CODE, CPs are not expressly mentioned as securities. BUT they can qualify as such under the CATCH ALL PROVISION GR: before CPs can be sold to the public, they must first be registered w/ the SEC X: 1. Exempt securities 2. They are sold in exempt transactions SEC rules regarding registration of CP: 1 . Rules on registration of short-term CP (w/ maturity of less than 365days) 2 . Rules on registration of long-term CP (w/maturity of more than 365 days) these 2 rules are attached as appendix to MANUAL OF REGULATION OF BANKS Commercial papers (CPs) -no longer stated in SRC, but you cannot draw the conclusion that *it's not included anymore+ ...There a term in SRC "evidence of indebtedness" -there's a provision that require registration of CPs if it is long term. Sir said that to prevent registration requirement, short term na lang? -next version of SRC would not contain anymore dapat long term CPs but the person who drafted it forgot to define CPs in the SRC -Rules in registration of short term and long term CPs, CPs are supposed to be issued by Corporations BUT in SRC, even individuals could issue CPs -SRC created certain exemption from registration

Security Devices and Other Credit Supports/Enhancements

-Further obligation of the obligor to support its credit

3. Types
2 general types of security devices: (1) personal security
-obligation secured by the personal commitment of another -person would provide the guaranty to support the credit of the obligor/debtor/borrower e.g. guaranty, surety

(2) real security (res = property)

-obligation secured by AN ENCUMBRANCE OF REAL PROPERTY -requires the execution of a public instrument or corresponding deed encumbering the property in the form prescribed by law -collateral e.g. pledge, mortgage, antichresis
MORTGAGE (MOR- Gage) -really a debt pledge -a pledge to forfeit a property in case of default -debt: if the borrower is unable to fulfill the principal obligation, the borrower's property is forfeited in favor of the lender; but if able to pay off the principal obligation, wala na. "By the way, it's silent 'T', mor-gage, not morTgage"

1. REAL SECURITIES (a) Real Estate Mortgage (REM)

-Requisites: (1) mortgagor must be the owner of the real property (2) constituted to secure the fulfilment of an obligation

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(2) constituted to secure the fulfilment of an obligation (3) person constituting mortgage has free disposal of his property (4) execution of a public instrument acknowledged before a notary public (5) must cover IMMOVABLE PROPERTY , if land, state the description and location thereof (6) registration in the Register of Deeds where the property is located *note: there is some formality in REM (see numbers 4 and 6) Look at SEC 112 of Property Registration Act? If mortgage is over parcels of land, notary public has to mention that in notarial 2 witnesses must sign On the left hand margin of each and every page sign It should be mentioned by the notary public in the notarial accounts: Notary public should state that *it is a REM *location of property *signatories *that it was signed in each and every page Note the new rules of notarial practice provides stringent requirements for something like that What is the effect if the notary public fails to mention those details in the notarial accounts??? >>>Still arguable that it is valid, binding to 3rd persons (registration would bind them)
No registration of REM if DST not paid (payable w/n 5 months after the month of execution - 2%)

LC not a contract of suretyship

(b) Chattel Mortgage

Requisites: (1) must cover PERSONAL PROPERTY (2) constituted to secure the fulfillment of an obligation (3) person constituting mortgage has free disposal of his property (4) mortgagor must be the owner of the personal property (5) execution of a public instrument acknowledged before a notary public (6) the instrument must contain an AFFIDAVIT OF GOOD FAITH -there's a form! -in its absence, the instrument is still binding BETWEEN THE PARTIES BUT NOT AGAINST 3RD PERSONS (7) registration in the Register of Deeds where the property is located and/or where mortgagor resides *double registration requirement: where the mortgagor and morgagee's domicile is not the same! If the mortgagor is outside the RP, register in the place where property is located X: when the property is more than P5k ??? --no registration if DST not paid

(c) Mortgage Trust Indenture

(add from reviewer) -REM/chattel mortgage -only difference: In a bilateral mortgage document, the mortgagee is the obligee of the lender but in an MTI, the morgagee is not necessarily a lender but a trustee (usu, trust dept of a bank) - trustee acting in the benefit of the lenders -Mortgage Participation Certificate issued to represent interest in the mortgage collateral -lenders would come and go but the MTI is supposed to remain there e.g. borrower was able to obtain a loan facility, then wanted more. There would be a supplementary mortgage trust indenture with a second set of lenders (listed in the supplement) and so on But it is not necessarily the case that when the borrower borrows, a second set of lenders allowed to be joined (because the property of the borrower may not be enough) so there is a requirement to preserve the collateral to a percentage of the outstanding obligations (150% collateral maintained as to 100% outstanding obligation) or else, borrower would provide additional property as collateral.

Natural security devices -mentioned in the civil code

(d) Pledge
-there is a requirment to deliver the property being pledged to the pledgee Must describe the pledge properly Must be dated *to bind 3P -if the property being pledge is an incorporeal right, then it must be endorsed to the pledgee! In a stock certificate, the dorsal side of it may contain endorsement form so that the pledgor would just sign the form to endorse it -afterwards, stock certificates delivered to the pledgee IS IT ALWAYS THE CASE THAT DELIVERY REQUIRED? NO MORE SECTION 45 OF SECURITIES REGISTRATION CODE -you can constitute a pledge by entries in the book, that entry is deemed to be delivery under the civil code so in a sense, Civil code is deemed amended There is even a procedure for pledging uncertificated securiities: entries needed You can uplift the shares in a scriptless (?) system?: shareholder given the physical stock certificate If you are able to payoff the obligation, you could re -enter the same into the scriptless system

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2. PERSONAL SECURITIES (e) Guarantee/suretyship/standby letter of credit

Tri-Party 1. Lender 2. Borrower 3. Guarantor/surety Guarantor SURETY

Benefit of excusion (should go after the guaranteed party first No benefit of excussion

Standby LC -EXAMPLE OF A SURETY -GUARANTEE PAID ON 1ST DEMAND -used as guarantee prior to enactment of GBL -section 74 of sir's book (78-79): there was a prohibition against the bank being able to extend guarantee except in certain cases So in Item e, there's a reference to standby arrangement (construed as standby L/C) -now, section 74 no longer found so it is arguable that a bank may issue a guarantee now (and not just standby L/C)

Insular Bank of Asia & America vs CA

F: Mendoza sps obtained 2 loans from Philam Life for P600k to finance construction of their residential house. -as security for payment, Philam Life required that the amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Thus, Mendoza Sps. Contracted with IBAA for the issuance of 2 irrevocable standby letters of credit for a total of P600k. These standby letters of credit were secured by real estate mortgage for the same amount. -Mendoza sps executed PNs in favor of IBAA which authorized IBAA to sell the real estate securities for purpose of applying their proceeds to such payments of Mendoza to IBAA -Mendozas failed to pay Philam Life for June amortization so Philam Life demanded from IBAA but IBAA contested the default. Mendoza sps failed again to pay for September the next year so Philam Life again demanded from IBAA> -IBAA claimed that AS GUARANTOR, its remaining outstanding balance was the balance not paid by the sps. Later it even claimed overpayment -IBAA foreclosed the securities of the standby letter of credit. -Philam filed collection suit vs. IBAA and the sps for revocery of P274k allegedly still owed under the loan RTC: IBAA was a surety, and discharged of its liability to the extent of the payment made by Mendozas CA: reversed RTC. IBAA's liability was not reduced by payments made by Mendoza Sps. H: Affirm CA -Even if its a 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. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument.". They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA'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. Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows: ... In the summary of application of payments (Exhibit "KK") the plaintiff applied Pl,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the principal. The P58,000.00 which is covered by OR No. 74396 was also applied "against the total loan." Since plaintiff applied P378,000.00 against the total indebtedness of P600,000.00 there still remains an outstanding balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest until the whole amount is fully paid. ... (Decision, Trial Court, p. 50, Rollo) The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA 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. As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to Philam Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2 standby L/Cs plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing its clean loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the

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and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to ... payments" of their obligations to IBAA!
SO final decision: IBAA lang magbabayad!!!

*"That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act)." - sabi ni sir, dapat daw INTRA VIRES, not ultra vires *accessory contract: sir said that SL/C is not an accessory contract, court probably refers to the independence principle, there's even a UN Convention on standby L/Cs.it is not accessory to anything but it is actually a guarantee; it is an accessory in the sense that it cannot exist without a valid obligation L/Cs are not covered by NCC lang, also covered by ICP 80 etc.

Transfield Philippines vs. Luzon Hydro Corp, supra

F: Transfield, a Turnkey contractor, and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract wherein Transfield would construct a power station. To secure performance of its obligation, Transfield opened in favor of LHC 2 standby letters of credit each in the amount of US$8,988,907. -however, due to force majeure, Transfield delayed in the construction and its requests for extensions were denied by LHC. -The parties first underwent arbitration before CIAC and another in ICC. -Foreseeing that LHC would claim the standby letters of credit which are their securities for the performance of the obligation, Transfield advised respondents banks of the arbitration proceedings already pending and asserted THAT LHC had no right to call on the securities until the resolution of the disputes before the arb tribunals and any transfer, release, or disposition of the Securities in favor of LHC would constrain it to hold respondent banks liable for liquidated damages. - banks said that they would pay LHC when it calls on them (HAHA! Wala kaming paki sa inyo!) -LHC declared Transfield in default, so it served notice to the banks that it would call on the securities. -Transfield filed complaint for injunction w/TRO vs. banks and LHC, praying that LHC refrain from calling on the securities and the banks from disposing any securities RTC: DENY, employ, "independent contract" doctrine CA: Affirm ON L/C
Nature of LC. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract , because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee , because it entails a primary liability following a default . Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. Commercial vs Standby Credits. Commercial credits Involve the payment of money under a contract of sale. Such credits become payable upon presentation by seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. Standby credits The credit is payable upon certification of a party's nonperformance of the agreement.

Beneficiary must demonstrate by documents that he has performed his contract

Documents would tend to show that the applicant has not performed. Beneficiary must certify that his obligor has not performed.

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto.
SC here was citing Prof. Dolan; but it is not applicable to Philippine situation. A surety obligation is a monetary obligation

Ong vs. PCIB

F: Ong (treasurer) and Alfredo (President) acted as SURETIES for the loan acquired by the BMC. BMC defaulted. PCIB filed a collection suit. BMC applied for rehabilitation and suspension of payments with SEC. PCIB and BMC executed a MOA. BMC filed MTD the complaint, arguing that the MOA suspended any pending civil action against BMC. RTC: denied CA: affirm: a creditor can proceed against petitioners Ong and Alfredo as surety independently of its right to proceed vs. BMC

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H: Ong and Alfredo acted as principal obligors. As sureties, even if the principal debtor was granted suspension of payments, they are not affected by it. -the provisions they are citing are for guarantors, not sureties. (difference between surety and guarantors) Guarantee vs. suretyship.
Suretyship in NCC (A2476) solidarily bound with principal debtor. Therefore, a surety is a principal debtor in the beginning. Guarantor has benefit of principle of excussion. Should collect from Principal borrower first. Not a primary obligor.

On contracts saying "not only a primary obligor, more than a surety" -so what is it? A surety is a primary obligor! This contract is actually a suretyship.

International Finance Corporation vs. Imperial Textile Mills

F: IFC granted a P7M loan obligation of PPIC, PPIC executed REM. Also, ITM and Grantex guaranteed it (primarily bound) but contract called guaranty. -PPIC defaulted. IFC foreclosed REM but kulang, so demand from ITM and Grantex ITM and Grantex: used guarantors and guarantee SC: for IFC -"jointly and severally liable daw", even if called guarantors. SC did not really explained meaning of the phrase commented on by sir: "primary obligor and not merely as surety". Just said primary obligor and surety have same legal consequences. What should have been stated is that ITC was acting as a primary obligor and surety and not merely as a guarantor to be consistent with NCC. IFC is the investment arm of the World Bank. So it was couched in language familiar with the world bank.

JN Dev't Corp vs. Phil Export and Foreign Loan Guarantee Corp
F: Credit line covered by REM and a guarantee. Letter of guaranty covers 70% of credit line. JN failed to pay traders royal bank. Pursuant to L/C, Traders collected from Phil Guaranty. Phil Guaranty collected from JN. SO collection case filed by Phil Guaranty vs. JN. JN: 1. the guaranty letter, by the time that Phil Guaranty paid, was already expired. SO at the time Phil Guaranty paid the obligation to Traders, it has actually no obligation to pay such 2. Failure to object of Phil Guaranty to the extension precluded it to collect SC: the obligation fell w/n the period for guaranty. So payment by Phil Guaranty's payment was warranted. -on failure to object: it was not a defense. Failure to object is not a defense available to JN -while the guarantor enjoys the benefit of excussion, it is a benefit that can be waived. FOR Phil GUARANTY. Can collect from JN The benefit of excussion is waivable. It is in favor of the guarantor so it is up to him to exercise this right. If the guarantor chooses to pay immediately without resorting to remedies against borrower, guarantor could still collect from principal debtor

(f) Aval
(Insert notes from reviewer) -a French word for "foot or bottom" -a 2nd layer of guaranty over and above that provided by acceptor (BoE draft accepted, acceptor would be primary liable) SEC 74 (page 78): among the permissible forms of guarantee is acceptance of drafts or BOE; according to ARTICLE 487, Code of Commerce, the obligation of the avalista is that of a guarantor and is independent (486) of that contracted by the acceptor. *Avalista signs "for aval", it is signed at the foot of a BOE. But there are avalistas signing at the side, not anymore at the bottom. So does that make the "avalista" a "sidelista"?

(g) Hold-out
-term was injected into banking laws through the PD 71? -there's a holdout if the depositor cannot withdraw WHY: if there's a deposit held-out, the bank can easily settle off -guaranteed party able to fulfill its obligations with the bank -normally if you look a a holdout document, in addition to holdout provision, it is coupled with a set off provision (which looks redundant. But it assumes significance when the depositor agreed to a holdout

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provision (which looks redundant. But it assumes significance when the depositor agreed to a holdout when it is a mere accommodation party) - there's no legal compensation because not creditor-debtor relation -under NY banking law, no more term "holdout" Term is not an original from RP, it is borrowed from US

(h) Assignment by way of security

In cases, you'll notice that this was characterized as a "pledge" under chattel mortgage because justices' mindset is tied to what is found in civil code -but there is NCC provision on freedom to contract, and obscure provision (A1454) which states that an absolute conveyance of property is made to secure an obligation there is an implied trust. If the obligation is fulfilled by the grantor, he may demand conveyance of property. - Article 1454 remains obscure

People's Bank and Trust Co. vs. Odom

F: H: the parties intended the assignment to be security. Odom still liable to pay SC paid attention to wording of document. Language found in chattel mortgage loan -if obli fulfilled then mortgage becomes null and void SC said it sounds like a chattel mortgage so it is not an absolute assignment Case is replete with citation from US Sources. At that time, decision of SC RP were appealable to US SC.

Lopez vs. CA
F: Lopez applied for a loan, and was required to secure it with a surety bond. Philamgen executed a surety in favor of Lopez. Lopez signed "stock assignment separate from Certificate" which provided the 4k shares of lopez sold, transferred and assigned to Philamgen inconsideration of the surety bond Lopez defaulted, Philamgen was ordered to pay by Court. Philamgen sued Lopez to recover amount. LOPEZ: obli already extinguished by stock assignment (dacion en pago) H: Lopez stock assignment IS NOT DACION EN PAGO. Lopez' obligation would only arise only when he would default in the payment of the loan and the surety had to pay for it. -no express provision in the stock assignment that the loan is immediately extinguished by reason of assignment -this is an absolute conveyance? No. There's a continuous obligation which is not extinguished. -all the requisite of pledge is available This case could have been decided the other way: when the stock certificates were cancelled and issued to Philamgen, you cannot just issue a stock certificate to replace an old one unless the incoming shareholder (buyer/transferee) is able to submit proof that the shares of stocks have been paid. Evidence of payment is CAR (certificate of Arising Registration?) + DST

Manila Banking Corporation vs. Teodoro

F: Teodoros, in order to comply with a loan contract, they executed a deed of assigment of receivables in favor of MBC -Teodoros defaulted. MBC sued for recovery. H: Assignment did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dacion en pago. -the intention of the parties is primordial Court characterized the assignment as a collateral (vs. ODON: chattel mortgage; vs. LOPEZ: pledge) Sir: Odon is a male. But court referred to Odon here as a female Note: Concurring opinion of Justice Feliciano: absolute conveyance of credit + security arrangement (A1454 to but not able to pinpoint said provision): purpose of the document was to sell upfront the receivables to sidestep the provision of pactum promissorium.? Referred to Continuing Guaranty

Integrated Realty Corp vs. PNB

F: IRC acquired loan from PNB. To secure loan, a deed of assignment over time deposits of President was made. IRC unable to pay. PNB demanded payment IRC, President: deed of assignment already payment H: Deed of Assignment is a pledge, citing Lopez vs. CA Liability of OBM: not liable for interest during time it was suspended by CB Time deposit assigned to PNB. Deposit secured PNB's loan.

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Was the loan subjected to "Single Borrower's Limit"? Here, the loan is a risk item because the deposit used as a security is not contained in the lending bank but with another bank. If the deposit used as a collateral is w/ PNB, it is not covered by the SBL (SEC 35.5 c) Legal rate of Interest: 6%, not 12% - it is difficult to find the precise legal citation of the 12% X305.1

Yau Chu vs. CA

F: Mrs. Chua executed Deed of Assignment w/ Family savings bank as security Mrs Chua filed a case vs. bank for restoration of her money in Time deposit H: Pledge! Pactum Commissorium does not apply. Money involved here is lower than the amount of debt. What is pledged is already in liquid form so no need to resort to sale by public auction. Foreclosure dispensed with A2118, NCC? It is there that was stated that what is pledged is credit and it is due, collect amount of credit and apply amount of proceeds in payment of the loan (so no foreclosure needed) A2112 cited by SC: question arises is it always the case that the foreclosure must always be done in a public auction??? SIR: You can argue that a private sale is permissible. "creditor may proceed" if auction done privately in the pledge contract, allowed.

Caltex Phil vs. CA

F: A certain de la cruz opened a loan with bank and opened time deposit there. De la cruz also had an obligation in favor of Caltex, and assigned the certificate of time deposit. De la cruz alleged that he los the certificate of time deposit so he was issued new ones. He assigned it to the bank.

(i) Trust Receipt

security involved in the issuance of letters of credit where the entrustor (bank) releases to the entrustee (borrower) goods for the latter to sell in order and such proceeds shall be used to pay obligation with entrustor. Sir: this is not a good solution. What would the bank do with the goods? What if the goods were shells? Would they put up a Hawaiian something??? (to that effect) Violation of trust receipts law is malum prohibitum. However, it is prosecuted in relation to estafa under Section 315(1)(b), RPC.

Allied Banking Corp vs. Ordonez

F: L/C issued in favor of seller, seller issued drafts in favor of PBM. PBM issued trust receipts. -Trust receipt agreement recognized bank's ownership over goods and PBM's obligation to deliver proceeds to bank WON PD 115 covers goods that do not form finished products H: nonpayment of amount covered by trust receipt which gives rise to liability, regardless of the product covered (regardless if it is to be sold or just used by trustor in its trade) Trust receipt transaction: transaction between trustor and trustee wherein trustor who has absolute title over object transfers such title to trustee upon execution of trust receipt wherein trustee undertakes to keep such title in trust to the trustor and the proceeds delivered to the trustor SC expanded the coverage of trust receipts law. Even goods ultimately not for sale deemed included. (The doctrine was reiterated in DBP v. Prudential Bank) Sir: This is wrong. The law is clear and penal laws must be strictly construed. As a consequence, trust receipts have been used to burden or frighten debtors with possible penal indictment. Not all trust receipts should be covered by trust receipt law. There's no annotation of trust receipt law. Difficult to understand this. SC even more confused! On reference to Estafa: it is malum in se. But trust receipt law is malum prohibitum!

Colinares vs. CA
Consolidated vs. CA DBP vs. Prudential Bank
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DBP vs. Prudential Bank

F: Litex opened a L/C w/ prudential Bank for importation of spindles, and were released to Litex under Trust receipt agreement. Litex obtained loan from DBP and executed REM and Chattel Mortgage over spindles under trust receipt agreement with Prudential Bank. DBP wanted to foreclose the REM and Chattel Mortgage so Prudential Bank protested to DBP. Still, DBP continued with the foreclosure. So Prudential Bank filed action vs. DBP. TC: DBP liable to Prudential Bank CA: Affirm H: There was a trust receipt agreement! Litex only a entrustee of DBP, cannot assign the products to another. Can only sell it then pay the proceeds to Prudential Bank. (1)SC did not even bother to ask why spindles are subject to trust receipts which were not meant to be sold (but used by Litex)! (2) Prudential banks forever the owner attached to the machines? Pano yun, di nila pede gamitin?if the goods not intended to be sold, here the bank would be forever the owner. Something on security interest. Under trust receipts law, absolute ownership may also mean security interest.

Rosario Textile Mills vs. Home Bankers Savings and Trust Company
H: Trust receipt merely as a security interest. What the bank here has is only a security interest, a property interest on the goods to secure the obligation. SC undermined Trust Receipts Law pROBLEM: Section 4 lang ata nabasa ng SC! Section 10 clearly answers the problem! The risk of law shall be bourne by the entrustee!

Vintola vs. IBAA

The transaction has two features: 1) loan feature and 2) security feature. Given the definition of security interest, it was necessary for the law in Section 10, PD 115 to provide that it is the entrustee who bears the loss.

People vs. Nitafan

Acts involving the violation of the trust receipts agreement occurring after the enactment of PD 115 would make accused criminally liable for estafa pursuant to Section 13, PD 115. Sir: The statement in the case that provides that the title of the bank to the security is the one sought to be protected is WRONG. The TR is not separate from the L/C, it is but an accessory to the loan transaction.

(j) Set-off/Netting
This refers to the concept of compensation in the Civil Code. This is a mode of extinguishment of obligations usually used in a hold-out. To be able to use this in a conventional manner, all requisites of legal compensation must exist.
The ISDA Master Agreement is a good example where set-off or netting is used. This has been upheld in our jurisdiction.

(k) Comfort Letter

Comfort letters are usually sent by a parent company for a subsidiary to the would -be lender bank that it will maintain fiscal integrity and/or controlling interest in the subsidiary. The loan secured by a comfort letter is an unsecured, clean loan. This is not a guarantee but rather more of a moral obligation imposed by parent company unto itself to ensure that subsidiary will not default. Why issue a comfort letter? 1. parent company may be prohibited to issue guarantees under contract 2. comfort letters do not affect credit standing of parent company since it is not required to be footnoted in statement of assets and liabilities 3. company policy may prohibit the issuance of guarantees These letters may not be enforced in Philippine courts. But in case subsidiary defaults and parent does not help out, reputation of letter-issuer is affected. Thus, parent company usually make good their moral duties. Section 41, GBL SECTION 41. Unsecured Loans or Other Credit Accommodations. The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or

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to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks. Til Before Part III. Other blah.Bukidnon Doctor's Hospital case. (16 cases)

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Insular Bank of Asia & America vs. IAC

Saturday, August 08, 2009 1:59 PM

Insular Bank of Asia vs IAC Date: November 17, 1988 Petitioner: Insular Bank of Asia and America Respondents: IAC, Philippine American Life Insurance Co, Sps Ben Mendoza and Juanita Mendoza Ponente: Melencio Herrera Facts: Spouses Ben and Juanita Mendoza obtained two (2) loans from Philippine American Life Insurance Co. in the total amount of P600,000 to finance the construction of their residential house at Mandaue City. To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Thus, the Mendozas contracted with Insular Bank of Asia and America for the issuance of two (2) irrevocable standby Letters of Credit in favor of Philam Life for the total amount of P600,000. These two (2) irrevocable standby L/Cs were, in turn, secured by a real estate mortgage for the same amount on the property of Respondent Spouses in favor of IBAA. The Mendozas executed a promissory notes in favor of IBAA. Both Notes authorized IBAA "to sell at public or private sale such securities or things for the purpose of applying their proceeds to such payments" of many particular obligation or obligations" the Mendozas may have to IBAA.
The Mendozas failed to pay Philam Life the amortization that fell due on 1 June 1978 so that Philam Life informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded payment of P492,996.30. However, because IBAA contested the propriety of calling ill the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing on them for five (5) more amortizations. Because the Mendozas defaulted on their amortization due on 1 September 1979, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a melee guarantor of the Mendozas who are the principal debtors, its remaining outstanding obligation under the two (2) standby L/Cs was only P30,100.60. Later, IBAA corrected the latter amount and showed instead an overpayment arrived. The Real Estate Mortgage, which secured the two (2) standby L/Cs. was extrajudicially foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder. The bid price of P775,000.00 by IBAA was arrived at. Philam Life filed suit against the Spouses and IBAA before the RTC of Manila for the recovery of the sum of P274,779.56, the amount allegedly still owing under the loan. After trial, said Court rendered a Decision finding that IBAA had paid Philam Life only P342,127.05 and not P372,227.65, as claimed by IBAA, because of a stale IBAA Manager's check in the amount of P30,100.60, which had to be deducted. In so deciding, the Trial Court took the position that IBAA, "as surety" was discharged of its liability to the extent of the payment made by the Mendozas, as the principal debtors, to the creditor, Philam Life. Both Philam Life and Respondent Spouses appealed to the IAC, which reversed the Trial Court and ruled instead that IBAA's liability was not reduced by virtue of the payments made by the Mendozas.

default1

Default2

RTC: IBAA had some amount due (P30K) because of a stale IBAA Manager's check which had to be deducted -IBAA, as a surety, was discharged of its liability to the extent of payment made by Mendozas CA: IBAA's liability not reduced by payments made by Mendozas

Issue: WON IBAAs obligation under said two (2) L/Cs is original and primary and is not reduced by the direct payments made by the Mendozas to Philam Life.
Held: Yes

Ratio: In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern. Letters of credit and contracts for the issuance of such letters are subject to the same rules of construction as are ordinary commercial contracts. They are to receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit, they are to be construed with reference to all the surrounding facts and circumstances, to the particular and often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the particular trade of business contemplated. 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. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument.". They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA'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. Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows: ... In the summary of application of payments (Exhibit "KK") the plaintiff applied Pl,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the principal. The P58,000.00 which is covered by OR No. 74396 was also applied "against the total loan." Since plaintiff applied P378,000.00 against the total indebtedness of P600,000.00 there still remains an outstanding balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest until the whole amount is fully paid. ... (Decision, Trial Court, p. 50, Rollo) The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA 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. As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to IBAA for any payment that the latter

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may remit to Philam Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2 standby L/Cs plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing its clean loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to ... payments" of their obligations to IBAA.
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Ong vs. PCIB

Wednesday, July 15, 2009 12:56 AM

Ong vs PCIB Date: January 15, 2005 Petitioners: Spouses Alfredo and Susana Ong Respondent: Philippine Commercial International Bank Ponente: Puno Facts: - In 1991, Baliwag Mahogany Corp needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent bank. Alfredo (President) and Susana Ong (Treasurer) acted as sureties for these loans and issued 3 promissory notes for the purpose. It was stipulated in the notes that the bank may consider BMC in default and demand payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a state of suspension of payments. Thereafter, BMC filed a petition for rehabilitation and suspension of payments with SEC after the creditors attached its properties. The bank then sought the collection of the payment of the debt from the petitioners as sureties. - On April 20, 1992, PCIB filed a case for collection of a sum of money against petitionersspouses. On October 13, 1992, a MOA was executed by BMC, the petitioners, and the consortium of creditor banks of BMC (including PBIC). Petitioners then moved to dismiss the complaint arguing that the MOA suspended any pending civil action against BMC. Hence, the benefits of the MOA should also be extended to the petitioners as sureties. The trial court denied the motion to dismiss. The CA affirmed the trial courts ruling that a creditor can proceed against petitioners as surety independently of its right to proceed against BMC. Issue: Held: WON the suit against the spouses should be dismissed No

Ratio: - Reliance of petitioners on Articles 2063 and 2081 CC is misplaced as these provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners are not guarantors but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning. - Under the suretyship contract entered into by petitioners with the bank, the former obligated themselves to be solidarily bound with BMC for the payment of its debts to the bank. Under Article 1216 CC, the bank as creditor may proceed against petitioners as sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC. The banks right to collect payment from the surety exists independently of its right to proceed directly against the principal debtor. In fact, the bank may go against the surety alone without prior demand for payment on the principal debtor. - The provisions of the MOA regarding the suspension of payments by BMC and the nonfiling of collection suits by the creditor banks pertain only to the property of BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were
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in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC. Secondly, there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over the properties of BMCs officers or sureties.
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International Finance Corporation vs. Imperial Textile Mills

Wednesday, July 15, 2009 12:57 AM

International Finance vs Imperial Textile Date: November 15, 2005 Petitioner: International Finance Corporation Respondent: Imperial Textile Mills Inc
Ponente: Panganiban Facts: - On December 17, 1974, IFC and Philippine Polyamide Industrial Corporation entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000 payable in sixteen (16) semi-annual installments of US$437,500.00 each, with 10% interest. The interest shall be paid in US dollars semi- annually. A Guarantee Agreement was executed with ITM, Grand Textile Manufacturing Corporation and IFC as parties. ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement. PPIC defaulted payments. By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all improvements owned by PPIC. During the public sale, IFCs bid was for P99,269,100 which was equivalent to US$5,250,000. The outstanding loan, however, amounted to US$8,083,967, thus leaving a balance of US$2,833,967 PPIC failed to pay the remaining balance. Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, the two failed to pay. - IFC filed a complaint against PPIC and ITM for the payment of the outstanding balance plus interests and attorneys fees. The trial court dismissed the complaint against ITM. The CA reversed and held that ITM bound itself under the Guarantee Agreement. The CA, however, held that ITMs liability as a guarantor would arise only if and when PPIC could not pay. Since PPICs inability to comply with its obligation was not sufficiently established, ITM could not immediately be made to assume the liability. Issue: WON ITM and Grandtex are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan. Held: Yes

Ratio: - IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs obligations proceeding from the Loan Agreement. For its part, ITM asserts that, by the terms of the Guarantee Agreement, it was merely a guarantor and not a surety. Moreover, any ambiguity in the Agreement should be construed against IFC -- the party that drafted it. - The Agreement uses guarantee and guarantors, prompting ITM to base its argument on those words. This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety. - Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latters obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable. - Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability commenced only when it guaranteed PPICs obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the applicable law is Art 2047 CC. Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent. - The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term jointly and severally, the use of the word guarantor to refer
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When qualified by the term jointly and severally, the use of the word guarantor to refer to a surety does not violate the law. As Art 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- as primary obligor and not merely as surety -- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship. - The use of the word guarantee does not ipso facto make the contract one of guaranty. This Court has recognized that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation. The very terms of a contract govern the obligations of the parties or the extent of the obligors liability. Thus, this Court has ruled in favor of suretyship, even though contracts were denominated as a Guarantors Undertaking or a Continuing Guaranty. - Indeed, the finding of solidary liability is in line with the premise provided in the Whereas clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of PPICs loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of the contract are clear and there is no doubt as to the intention of the parties. - We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor. The appellate court opined that ITMs undertaking was collateral to and distinct from the Loan Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation. Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter. - With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable. A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter. Evidently, the dispositive portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.

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JN Dev't Corp vs. Phil Export and Foreign Loan Guarantee Corp
Wednesday, July 15, 2009 12:59 AM

JN Development Corporation vs Philippine Export and Foreign Loan Guarantee Corporation Date: August 31, 2005 Petitioners: JN Development Corporation and Spouses Rodrigo and Leonor Sta Ana Respondent: Philippine Export and Foreign Loan Guarantee Corporation
Ponente: Tinga Facts: - On 13 December 1979, JN Development Corporation and Traders Royal Bank entered into an agreement whereby TRB would extend to JN an Export Packing Credit Line for P2,000,000. The loan was covered by several securities, including a real estate mortgage and a letter of guarantee from respondent covering 70% of the credit line. JN, spouses Rodrigo and Leonor Sta. Ana and Narciso Cruz executed a Deed of Undertaking to assure repayment to PhilGuarantee. - JN failed to pay the loan to TRB upon its maturity; thus TRB requested PhilGuarantee to make good its guarantee. PhilGuarantee paid TRB P934,824.34. Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay. JN proposed to settle the obligation by way of development and sale of the mortgaged property. PhilGuarantee, however, rejected the proposal. - PhilGuarantee filed a Complaint for collection of money and damages against herein petitioners. The RTC dismissed the complaint and ruled that TRB already foreclosed the real estate mortgage and this extinguished JNs debt. So, PhilGuarantee should not have paid the debt. Moreover, the guarantee was already expired. The RTC also held that Cruz cannot be held liable under the Undertaking since he was not the one who signed the document, in line with its finding that his signature found in the records is totally different from the signature on the Undertaking. -The CA reversed the RTC and ordered petitioners to pay PhilGuarantee P934,624.34, plus service charge and interest. It held that there was no factual basis to say that the loan was extinguished by virtue of the foreclosure sale. It also ruled that the debt became due and demandable while the guarantee was still existing. Under Article 2058, the guarantor cannot be compelled to pay unless the properties of the debtor are exhausted, the guarantor is not precluded from waiving the benefit of excussion and paying the obligation altogether. Also, Cruz failed to show that his signature was forged.

Issue: WON JN is obliged to reimburse Philguarantee Held: Yes Ratio: - Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise known as the benefit of excussion. It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, for obviously the exhaustion of the principals property cannot even begin to take place before judgment has been obtained. The law imposes conditions precedent for the invocation of the defense. Thus, in order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latters demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt. - While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him. Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it. PhilGuarantees waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the guarantor what the latter has paid.

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- Petitioners claim that PhilGuarantee had no more obligation to pay TRB because of the alleged expiration of the contract of guarantee is untenable. The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment was actually made only on 10 March 1981 does not take it out of the terms of the guarantee. What is controlling is that default and demand on PhilGuarantee had taken place while the guarantee was still in force. - There is likewise no merit in petitioners claim that PhilGuarantees failure to give its express consent to the alleged extensions granted by TRB to JN had extinguished the guarantee. The requirement that the guarantor should consent to any extension granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such, it is likewise waivable by the guarantor. Thus, even assuming that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to such extensions. Indeed, a guarantor is not precluded from waiving his right to be notified of or to give his consent to extensions obtained by the debtor. Such waiver is not contrary to public policy as it is purely personal and does not affect public interest. In the instant case, PhilGuarantees waiver can be inferred from its actual payment to TRB after the latters demand, despite JNs failure to pay the renewal/guarantee fee as indicated in the guarantee. - For the above reasons, there is no basis for petitioners claim that PhilGuarantee was a mere volunteer payor and had no legal obligation to pay TRB. The law does not prohibit the payment by a guarantor on his own volition, heedless of the benefit of excussion. In fact, it recognizes the right of a guarantor to recover what it has paid, even if payment was made before the debt becomes due, or if made without notice to the debtor,] subject of course to some conditions. - The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of these defenses when it paid its obligation according to the tenor of the guarantee once demand was made on it. What is peculiar in the instant case is that petitioners, the principal debtors themselves, are muddling the issues and raising the same defenses against the guarantor, which only the guarantor may invoke against the creditor, to avoid payment of their own obligation to the guarantor. The Court cannot countenance their self seeking desire to be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee. - Petitioners assert that TRBs alleged foreclosure of the real estate mortgage over the land executed as security for the loan agreement had extinguished PhilGuarantees obligation; thus, PhilGuarantees recourse should be directed against TRB, as per the pari -passu provision in the contract of guarantee. We disagree. - The foreclosure was made on 27 August 1993, after the case was submitted for decision in 1992 and before the issuance of the decision of the court in 1998. Thus, foreclosure was resorted to by TRB against JN when they both had become aware that PhilGuarantee had already paid TRB and that there was a pending case filed by PhilGuarantee against petitioners. This matter was not raised and proved court, but raised for the first time in petitioners motion for reconsideration in the CA. In their appellants Brief, petitioners claimed that there was no need for the JN to present any evidence before the lower court to show that indeed foreclosure of the REM took place. - Besides, the complaint was filed by PhilGuarantee as guarantor for JN, and its cause of action was premised on its payment of JNs obligation after the latters default. PhilGuarantee was well within its rights to demand reimbursement for such payment made, regardless of whether the creditor, TRB, was subsequently able to obtain payment from JN. If double payment was indeed made, then it is JN which should go after TRB, and not PhilGuarantee. Petitioners have no one to blame but themselves, having allowed the foreclosure of the property for the full value of the loan despite knowledge of PhilGuarantees payment to TRB. Having been aware of such payment, they should have opposed the foreclosure, or at the very least, filed a supplemental pleading with the trial court informing the same of the foreclosure sale. Likewise, petitioners cannot invoke the pari passu clause in the guarantee, not being parties to the said agreement. The clause is clearly for the benefit of the guarantor and no other. - The Court notes the letter of Rodrigo Sta. Ana offering, by way of settlement of JNs obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the loan agreement. This further weakens the position of petitioners, since it becomes obvious that they acknowledged the payment made by PhilGuarantee on their behalf and that they were in fact willing to negotiate with PhilGuarantee for the settlement of the said obligation before the filing of the complaint a

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quo.

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People's Bank and Trust Co. vs. Odom

Wednesday, July 15, 2009 1:09 AM

Peoples Bank and Trust vs Odom Date: February 25, 1937 Plaintiff Appellee: Peoples Bank and Trust Defendant Appellant: WJ Odom
Facts: Odom entered into a contract with AD Gibbs where the latter authorized him to construct two buildings in Binondo. The Sugar News Co Building was completely constructed and the first floor was occupied by plaintiff. The other building Edward Nell Co Building was under construction. Odom bore all the expenses of construction and Gibbs assigned all the rents which the building may produce for a period of 8 years starting Nov 1926. By virtue of the contracts entered into with the plaintiff, Odom obtained an overdraft amounting to P110,000. To secure this, Odom assigned all his rights, title and interest in the contracts of lease with the Sugar News Company, Manila Machinery and Supply Co and T. Yamamoto on the various portions of the Sugar News Company Building, as well as his interest in the land on which the bulding was contracted. Odom also assigned to plaintiff his insurance policy for P100,00 issued by the Manufacturers Life Insurance Company (1). The overdraft was increased to P150,000, and to secure the payment , Odom assigned to the latter also by way of guaranty the same securities which he had given for the overdraft of P110,000 (2). The overdraft was increased to P165,000 and Odom assigned to plaintiff his interest in the contracts of lease with Edward J. Nell Company, El Progreso Inc., and France & Goulette of various portions of the "Edward J. Nell Company Building"; in whatever contracts of lease of any portion of the same building which he may enter into in the future, and the rights, title and interest which he had in the land occupied by the building (3). Odom drew funds upon plaintiff by way of overdraft. By 1934, his account showed a balance against him in the amount of P138,403.68. The plaintiff brought this action to recover from the defendant the balance of an overdraft and to foreclose the mortgage of properties to guarantee his obligation. The defendant appealed from the judgment of the CFI of Manila ordering him to pay to the plaintiff the sum of P138,403.68. The judgment decreed that the principal and interest should be paid within three months, failing which the mortgaged properties will be sold at public auction, consisting of the rights title and interest of the defendant in the contracts of lease of the buildings known as the "Sugar News Co. Building" and "Edward J. Nell Co. Building" as well as his rights, title, and interest in the land on which the two buildings are constructed. Issue: WON the third guaranty substituted the first and second guaranties NO Ratio: The third guaranty was executed as a result of the increase of the overdraft to P165,000 as well as the additional guaranty given by Odom, consisting of the assignment by way of guaranty of his rights in the contracts of lease of the Edward J. Nell Company Building and of his rights in the land occupied by the said building. Clause 3 of said contract stipulated that the second guaranty was incorporated and also constituted a guaranty of the payment of the overdraft as increased to P65,000. In the light of all these facts, it is evident that the intention of the parties was neither to set aside the previous contracts nor to substitute Exhibit D therefor.

Issue: WON the plaintiff should have first brought an action to fix the term of the contract under Art 1128 CC NO Ratio: The contract Exhibit D is a complement of the contracts Exhibits B and C, hence, its language and the intention of the parties must be interpreted in relation to and jointly with those of the latter under the provisions of article 1285 CC. It was expressly stipulated in Exhibits B and C that the obligation contracted by the defendant shall expire and be due upon demand of the plaintiff, and in view of the fact that the latter deed was incorporated in Exhibit D as above stated and that the defendant was required by the plaintiff to pay all his indebtedness, it is plain that the obligation was without a term and that it became due and is demandable. Art 1128 of CC relied upon is not applicable.
Issue: WON the contracts are one of mortgage and an action for foreclosure is proper YES Ratio: Odom vigorously argues that none of the three contracts is one of mortgage, but an assignment of rights, because in none of said contracts did the parties intend to constitute a mortgage. A careful examination of the documents shows that they were really mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the defendant, consisting of the overdrafts or the indebtedness resulting therefrom. It positively appears in each of them that the defendant assigned to the plaintiff all his rights in the contracts of lease, in the land, and in the insurance policy to guarantee his indebtedness resulting from the overdrafts. An assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee. In Exhibits C and D it was stipulated that if Odom should comply with all the conditions of the contracts and should pay his indebtedness, together with interest at 9% pa, the assignments would become null and void, otherwise they would remain in full force. If the parties' intention were that the assignments are absolute, and not by way of guaranty or mortgage, the stipulation would not have been made because it would be inconsistent with the will of the contracting parties. As a corollary of his theory that the contracts are absolute conveyances, Odom contends that his civil liability has ceased and that he does not owe the plaintiff anything. The conclusions that we have reached in resolving the next preceding assignment of error show that this last contention of the defendant is equally untenable. The assignments he made not being absolute, and the plaintiff having established that he has not paid his total overdraft, inasmuch as he still owes the amount of money above stated, with interest, it is evident that he is not yet relieved of his obligation. Under the contracts, the plaintiff was authorized to collect the rents of the two buildings during the period of the

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yet relieved of his obligation. Under the contracts, the plaintiff was authorized to collect the rents of the two buildings during the period of the existence of the contracts of lease, which period might be that fixed in the contract entered into between Odom and Gibbs. On the other hand, the plaintiff liquidated the account of Odom up to January 4, 1934, only, and in the appealed judgment it was decreed that the mortgaged rights be sold at public auction should Odom fail to pay his indebtedness within three months. If the indebtedness has already been paid with the rents which the plaintiff failed to account for, then there would be no ground to take this step. If the indebtedness has not yet been fully paid, neither would it be proper to sell any of the rights in the mortgage contracts of lease because the latter have already matured according to the contract with Gibbs. For this reason, it is necessary to provide for the one and the other case. As to the insurance policy, nothing can be said about it as the appealed judgment is silent thereon
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Lopez vs. CA
Wednesday, July 15, 2009 1:11 AM

Lopez vs CA Date: June 29, 1982 Petitioner: Benito Lopez Respondents: CA and Philippine American General Insurance Co Inc

Ponente: Guerrero Facts Benito Lopez obtained a loan for P20,000 from Prudential Bank. He executed a promissory note for the same amount. He also executed a surety bond in which he and Philamgen bound themselves to repay prudential. Lopez also executed an indemnity agreement in favor of Philamgen. He executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from Certificate." With the execution of this deed of assignment, Lopez endorsed and delivered it to Philamgen. Lopez, Emilio Abello (AVP of Philamgen) and Atty. Timoteo Sumawang (AVP of Bonding Dept) that if he could not pay the loan, Abello and Pio Pedrosa (Prudential Bank) would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank. Lopez obligation matured without being settled. Prudential Bank filed a case against Lopez and Philamgen. Atty. Sumawang confronted Abello and Pedrosa regarding their commitment to buy the shares. Abello then instructed Sumawang to transfer the shares to Philamge and he made a commitment that they will buy the shares so the proceeds could be paid to the bank. The complaint was dismissed and later refilled. Lopez sent a letter to Philamgen inquiring about the formers shares of stock, pledged to Philamgen. Philamgen was then forced to pay Prudential Bank P27,785.89. Prudential executed a subrogation receipt on the same day. Philamgen brought an action against Lopez before the CIF of Manila. The court dismissed the complaint as Lopez already transferred to Philamgen the shares and the certificate of stock was already issued under the name of Philamgen. It is noteworthy that the transfer of stocks were initiated by the plaintiffs officers. To go after Lopez again would amount to double payment. The CA reversed and declared that the stock assignment was a mere pledge; that the transfer of the stocks to Philamgen was not intended to make it the owner; that assuming that Philamgen had appropriated the stocks, this appropriation is null and void as a stipulation authorizing it is a pactum commissorium; and that pending payment, Philamgen is merely holding the stock as a security for the payment of Lopez' obligation.
Issue: WON Philamgen can still recover from Lopez Held: Ratio: Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen "under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neither pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, it is not itself a conditional conveyance. It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause or consideration under Article 1352 CC. But this is not the case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest terms thereof, it is an absolute transfer. Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371 CC). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to

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complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez' loan to Prudential Bank. The stock assignment, is in truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the stock assignment and the admission of Lopez prove that it is in fact a pledge. The CA is correct in ruling that the following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose. (Article 2085 CC). Article 2087 CC providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) 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, further supports the CA's ruling. In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. Incorporeal rights, including shares of stock may also be pledged All these requisites are found in the transaction between the parties leading to the execution of the Stock Assignment, Exhibit C. And that it is a pledge was admitted by the defendant in his letter of November 18, 1963, Exhibit G, already quoted above, where he asked what had happened to his shares of stock 'which were pledged to your goodselves to secure the said obligation'. The testimony of the defendant-appellee that it was their agreement or understanding that if he would be unable to pay the loan to the Prudential Bank, plaintiff could sell the shares of stock or appropriate the same in full payment of his debt is a mere after-thought, conceived after he learned of the transfer of his stock to the plaintiff in the books of the Baguio Military Institute." We also do not agree with the contention of petitioner that "petitioner's 'sale, assignment and transfer' unto private respondent of the shares of stock, coupled with their endorsement in blank and delivery, comes exactly under the Civil Code's definition of dation in payment, a long recognized and deeply rooted concept in Civil Law denominated by Spanish commentators as 'adjudicacion en pago'" According to Article 1245 of the New Civil Code, dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. Assignment of property by the debtor to his creditors, provided for in article 1255, is similar to dation in payment in that both are substitute forms of performance of an obligation. Unlike the assignment for the benefit of creditors, however, dation in payment does not involve plurality of creditors, nor the whole of the property of the debtor. It does not suppose a situation of financial difficulties, for it may be made even by a person who is completely solvent. It merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily. The debt or obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests. Petitioner's argument that even assuming, arguendo that the transaction was at its inception a pledge, it gave way to a dation in payment when the obligation secured came into existence and private respondent had the stocks transferred to it in the corporate books and took a stock certificate in its name, is without merit. The fact that the execution of the stock assignment is accompanied by the delivery of the shares of stock, duly endorsed in blank to Philamgen is no proof that the transaction is a dation in payment. Likewise, the fact that Philamgen had the shares of stock transferred to it in the books of the corporation and took a certificate in its name in lieu of Lopez which was cancelled does not amount to conversion of the stock to one's own use. The transfer of title to incorporeal property is generally an essential part of the delivery of the same in pledge. It merely constitutes evidence of the pledgee's right of property in the thing pledged.
Issue: WON the CA erred in not holding that since Lopez entered into an agreement with determinate third persons, there was novation of the obligation by substitution of debtor Held: No Ratio: Under Article 1291 CC, obligations may be modified by: (1) changing their object or principal condition; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292)Novation which consists in substituting a new debtor in the place of the original one, may be made

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(Article 1292)Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1293) "In this kind of novation, it is not enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly. In the case at bar, the undertaking of Abello and Pedrosa that they would buy the shares of stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence, Philamgen may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Abello to Atty. Sumawang that he and Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second assignment of error must be rejected. In fine, We hold and rule that the transaction entered into by and between petitioner and respondent under the Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and the Indemnity Agreement, all executed and dated June 2, 1959, constitutes a pledge of the 40,000 shares of stock by the petitioner-pledgor in favor of the private respondent-pledgee, and not a dacion en pago. It is also Our ruling that upon the facts established, there was no novation of the obligation by substitution of debtor. The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized and no action was taken against the two by said respondent who chose instead to sue the petitioner on the Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore, release or return the same to the petitioner -pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement. It must also be made clear that there is no double payment nor unjust enrichment in this case because We have ruled that the shares of stock were merely pledged. As the Court of Appeals said: "The appellant (Philam) is not enriching himself at the expense of the appellee. True, the stock certificate of the appellee had been in the name of the appellant but the transfer was merely nominal, and was not intended to make the plaintiff the owner thereof. No offer had been made for the return of the stocks to the defendant. As the appellant had stated, the appellee could have the stocks transferred to him anytime as long as he reimburses the plaintiff the amount it had paid to the Prudential Bank. Pending payment, plaintiff is merely holding the certificates as a pledge or security for the payment of defendant's obligation."
That for and in consideration of the obligations undertaken by the ASSIGNEE-SURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164, issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK & TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio military Institute, Inc. standing in the name of said Assignor on the books of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the books of the within named military institute with full power of substitution in the premises. Pasted from <file:///E:\LAW%20SCHOOL%20FILES\4y1s\Banking\Banking\Lopez%20vs%20CA.docx>

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Manila Banking Corporation vs. Teodoro

Wednesday, July 15, 2009 1:11 AM

Manila Banking vs Teodoro Date: January 13, 1989 Plaintiff Appellee: Manila Banking Corporation Defendants Appellants: Anastacio Teodoro Jr and Anna Teodoro

Ponente: Bidin Fact: Defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff a promissory note for the sum of P10,420. Defendants failed to pay the said amount inspite of repeated demands and the obligation as of September 30, 1969 stood at P 15,137.11. The defendants executed in favor of plaintiff two PNS for P8,000 and P1,000. They made partial payments but none were paid, leaving an unpaid balance of P8,934.74 as of September 30, 1969 including. It appears that the Son executed in favor of plaintiff a Deed of Assignment of Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other credit accommodations extended to defendants as security for the payment of said sum and the interest thereon, and that defendants do hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts receivables. Further, title to the AR is to remain in the assignee. Plaintiff extended loans to defendants on the basis and by reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with defendants for the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the EEA after its abolition; that non-payment of the notes was due to the failure of the Commission to pay defendants after the latter had complied with their contractual obligations; and that the President of the Bank took steps to collect from the Commission, but no collection was effected. The action was instituted against the defendants for the collection of sum on the PNs. The trial court rendered judgment adverse to the defendants.
Issue: WON the assignment of receivables has the effect of payment of all the loans Held: No Ratio: Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects. its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial relation which is the basis of the assignment: There is no question as to the validity of the assignment of receivables executed by appellants in favor of appellee bank. The issue is with regard to its legal effects. It is evident that the assignment of receivables executed did not transfer the ownership of the receivables to appellee bank and release appellants from their loans with the bank incurred under the PNs. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned. It was further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also obtain in the future, until the consideration on the loans secured by appellants from appellee bank shall have been fully paid by them. The position of appellants, however, is that the deed of assignment is a quitclaim in consideration of their indebtedness to appellee bank, not mere guaranty. The character of the transactions between the parties is not, however, determined by the language used in the document but by their intention. Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by the PNs

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been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by the PNs which are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of assignment was executed, said loans were non-existent yet. The deed of assignment was executed on January 24, 1964, while promissory note No. 11487 is dated April 25, 1966, promissory note 11515, dated May 3, 1966, promissory note 11699, on June 20, 1966. At most, it was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in the deed of assignment. At the time the assignment was executed, there was no obligation to be extinguished except the amount of P10,000.00. Moreover, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other (Article 1292 CC). Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of the deed. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests.
Issue: WON the bank must exhaust all legal remedies against PSC first Held: No Ratio: The obligation of appellants under the promissory notes not having been released by the assignment of receivables, appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed of assignment merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage 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 (2087 CC). In the instant case, appellants are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other. Appellee bank did try to collect on the pledged receivables. As the EEA which issued the receivables had been abolished, the collection had to be coursed through the Office of the President which disapproved the same. The receivable became virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that after their repeated demands made on appellants for the settlement of their obligations, appellee bank should proceed against appellants. It would be an exercise in futility to proceed against a defunct office for the collection of the receivables pledged. Feliciano, concurring: The point that appears to me to be worth making is that although in its form, the deed of assignment of receivables partakes of the nature of a complete alienation of the receivables assigned, such form should be taken in conjunction with, and indeed must be qualified and controlled by, other language showing an intent of the parties that title to the receivables shall pass to the assignee for the limited purpose of securing another, principal; obligation owed by the assignor to the assignee. Title moves from assignor to asignee but that title is defeasible being designed to collateralize the principal obligation. Operationally, what this means is that the assignee is burdened with an obligation of taking the proceeds of the receivables assigned and applying such proceeds to the satisfaction of the principal obligation and returning any balance remaining thereafter to the assignor. The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables assigned, essentially for the convenience of the assignee. Without such formally unlimited conveyance of title, the assignee would have to treat the deed of assignment as no more than a deed of pledge or of chattel mortgage. In other words, in such hypothetical case, should the assignee seek to realize upon the security given to him through the deed of assignment (which would then have to comply with the documentation and registration requirements of a pledge or chattel mortgage), the assignee would have to foreclose upon the securities or credits assigned and place them on public sale and there acquire the same. It should be recalled that under the principle which forbids a pactum commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply taking and appropriating the personal property turned over to him as security for the payment of a principal obligation. A deed of assignment by way of security avoids the necessity of a public sale impose by the rule on pactum commisorium, by in effect placing the sale of the collateral up front. (Emphasis supplied) The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to assure payment of a principal obligation.
(1) The title and right of possession to said accounts receivable is to remain in the assignee, and it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in connection with the collection of said accounts, it agrees to do as agent andrepresentative of the Assignee and in trust for said Assignee ; xxx xxx xxx (6) The Assignor guarantees the existence and legality of said accounts receivable, and the due and punctual payment thereofunto the assignee, ... on demand, ... and further, that Assignor warrants the solvency and credit worthiness of each and every account. (7) The Assignor does hereby guarantee the payment when due on all sums payable under the contracts giving rise to the accounts receivable ... including reasonable attorney's fees in enforcing any rights against the debtors of the assigned accounts receivable and willpay upon demand, the entire unpaid balance of said contract in the event of non-payment by the said debtors of any monthly sum at its due date or of any other default by said debtors; xxx xxx xxx (9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever there is or in the future therewill be justly owing

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(9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever there is or in the future therewill be justly owing from the Assignor to the Assignee ...

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Integrated Realty Corp vs. PNB

Wednesday, July 15, 2009 1:12 AM

Integrated Realty Corporation vs PNB Date: June 28, 1989 Petitioners: Integrated Realty Corporation and Raul Santos Respondents: PNB of Manila and the CA Ponente: Regalado
Facts: - Raul L. Santos made a time deposit with Overseas Bank of the Philippines in the amount of P500,000.00. Santos also made a time deposit with OBM in the amount of P200,000.00. Integrated Realty Corporation, thru its President ---- Raul L. Santos, applied for a loan and/or credit line in the amount of P700,000.00 with PNB. To secure the said loan, Santos executed a Deed of Assignment of the two time deposits in favor of plaintiff. OBM gave its conformity to the assignment. However, OBM, after the due dates of the time deposit certificates, did not pay PNB. PNB demanded payment from IRC and Santos and OBM. IRC and Santos replied that the obligation (loan) of defendant IRC was deemed paid with the irrevocable assignment of the time deposit certificates. - On April 6, 1969, PNB filed a complaint to collect from IRC and Santos the loan of P700,000.00 with interest as well as attorney's fees. In its answer to the complaint, OBM denied knowledge of the time deposit certificates because the alleged time deposit of Santos 'does not appear' in its books of account. The trial court ordered IRC and Santos to pay the plaintiff jointly and solidarily, the total amount of P700,000 plus interest. OBM was also ordered to pay cross IRC and Santos whatever amount the latter will pay to PNB. The CA affirmed but deleted the portion of the judgment ordering OBM to pay IRC and Santos whatever amounts they will pay to PNB with interest from the date of payment. Issue: WON the deed of assignment extinguished the obligations of IRC and Santos with PNB

Held: No
Ratio: - There are cogent reasons to conclude that the parties intended said deed of assignment to complement the promissory notes. The facts and circumstances leading to the execution of the deed of assignment, as found by the court a quo and the respondent court, yield said conclusion that it is in fact a pledge. The deed of assignment has satisfied the requirements of a contract of pledge (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; (3) that the persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. 1The further requirement that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement was complied with by the execution of the deed of assignment in favor of PNB. - It must also be emphasized that Santos, as assignor, made an express undertaking that he would remain liable for any outstanding balance of his obligation should PNB be unable to actually receive or collect the assigned sums resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. The term "for any cause whatsoever" is broad enough to include the situation involved in the present case. - Under the foregoing circumstances and considerations, the unavoidable conclusion is that IRC and Santos should be held liable to PNB for the amount of the loan with the corresponding interest thereon. Issue: WON the 1-1/2% interest imposed by PNB was illegal Held: No

Ratio: - We find nothing illegal in the interest of one and one-half percent (1-1/2%) imposed by PNB pursuant to the resolution of its Board which presumably was done in accordance with ordinary banking procedures. Not only did IRC and Santos fail to overcome the presumption of regularity of business transactions, but they are likewise estopped from questioning the validity thereof for the first time in this petition. There is nothing in the records to show that they raised this issue during the trial by presenting countervailing evidence. What was merely touched upon during the proceedings in the court below was the alleged lack of notice to them of the board resolution, but not the veracity or validity thereof.

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Issue: WON OBM should be held liable for interests on the time deposits of IRC and Santos from the time it ceased operations until it resumed its business
Held: No

Ratio: - It is a matter of common knowledge, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional wisdom dictates this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are aware of such a simple economic proposition. Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank. Issue: WON OBM should reimburse IRC and Santos for whatever amounts they may be adjudged to pay PNB by way of compensation for damages incurred
Held: Yes

Ratio: - When PNB demanded from OBM payment of the amounts due on the two time deposits which matured on January 11, 1968 and February 6, 1968, respectively, there was as yet no obstacle to the faithful compliance by OBM of its liabilities thereunder. (Demand made before OBM encountered liquidation problems) Consequently, for having incurred in delay in the performance of its obligation, OBM should be held liable for damages. When Santos invested his money in time deposits with OBM, they entered into a contract of simple loan or mutuum, not a contract of deposit. - While it is true that under Article 1956 CC no interest shall be due unless it has been expressly stipulated in writing, this applies only to interest for the use of money. It does not comprehend interest paid as damages. 1OBM contends that it had agreed to pay interest only up to the dates of maturity of the certificates of time deposit and that respondent Santos is not entitled to interest after the maturity dates had expired, unless the contracts are renewed. This is true with respect to the stipulated interest, but the obligations consisting as they did in the payment of money, under Article 1108 CC he has the right to recover damages resulting from the default of OBM, and the measure of such damages is interest at the legal rate of 6% per annum on the amounts due and unpaid at the expiration of the periods respectively provided in the contracts. In fine, OBM is being required to pay such interest, not as interest income stipulated in the certificates of time deposit, but as damages for failure and delay in the payment of its obligations which thereby compelled IRC and Santos to resort to the courts. - The applicable rule is that legal interest, in the nature of damages for non-compliance with an obligation to pay a sum of money, is recoverable from the date judicial or extrajudicial demand is made, which latter mode of demand was made by PNB, after the maturity of the certificates of time deposit, on March 1, 1968. The measure of such damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon in the certificates of deposit which is six and one half percent (6-1/2%). Such interest due or accrued shall further earn legal interest from the time of judicial demand.

KNOW ALL M EN BY THESE PRESENTS;

I, RAUL L. SANTOS, of legal age, Filipino, with residence and postal address at 661 Richmond St., M andaluyong, Rizal for and in consideration of certain loans, overdrafts and other credit accommodations granted or those that may hereafter be granted to me/us by the PHILIPPINE NATIONAL BANK, have assigned, transferred and conveyed and by these presents, do hereby assign, transfer and convey by way of security unto said PHILIPPINE NATIONAL BANK its successors and assigns the following Certificates of Time Deposit issued by the OVERSEAS BANK OF M ANILA, its CONFORM ITY issued on August 11, 1967, hereto enclosed as Annex ' A', in favor of RAUL L. SANTOS and/or NORA S. SANTOS, in the aggregate sum of SEVEN HUNDRED THOUSAND PESOS ONLY (P 700,000.00), Philippine Currency, .... xxx xxx xxx It is also understood that the herein Assignor/s shall remain hable for any outstanding balance of his/their obligation if the Bank is unable to actually receive or collect the above assigned sums , monies or properties resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. 6 xxx xxx xxx
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Yau Chu vs. CA

Wednesday, July 15, 2009 1:12 AM

Yau Chu vs CA Date: September 26, 1989 Petitioners: Victoria Yau Chu and Michae Chu Respondents: CA, Family Savings Bank and Cams Trading Enterprises Inc
Ponente: Grino Aquino Facts: Since 1980, Victoria Yau Chu, had been purchasing cement on credit from CAMS Trading Enterprises, Inc. To guaranty payment for her cement withdrawals, she executed in favor of Cams Trading deeds of assignment of her time deposits in the total sum of P320,000 in the Family Savings Bank. The deeds of assignment uniformly provided: ... That the assignment serves as a collateral or guarantee for the payment of my obligation with the said CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from said company, per separate contract executed between us. Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it in the sum of P314,639.75. It asked that it be allowed to encash the time deposit certificates which had been assigned to it by Mrs. Chu. It submitted to the Bank a letter of Mrs. Chu admitting that her outstanding account with Cams Trading was P404,500. After verbally advising Mrs. Chu of the assignee's request to encash her time deposit certificates and obtaining her verbal conformity thereto, the Bank agreed to encash the certificates.It delivered to Cams Trading the sum of P283,737.75 only, as one time deposit certificate (No. 0048120954) lacked the proper signatures. Upon being informed of the encashment, Mrs. Chu demanded from the Bank and Cams Trading that her time deposit be restored. When neither complied, she filed a complaint to recover the sum of P283,737.75 from them. The case was docketed in the RTC of Makati, Metro Manila. The trial court dismissed the complaint. The CA affirmed.

Issue: WON the debtor has already paid Held: Yes Ratio: The Court of Appeals found that the deeds of assignment were contracts of pledge, but, as the collateral was also money or an exchange of "peso for peso," the provision in Article 2112 of the Civil Code for the sale of the thing pledged at public auction to convert it into money to satisfy the pledgor's obligation, did not have to be followed. All that had to be done to convert the pledgor's time deposit certificates into cash was to present them to the bank for encashment after due notice to the debtor. The encashment of the deposit certificates was not a pacto commissorio which is prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for the automatic appropriation of the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. The prohibition against a pacto commissorio is intended to protect the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over property whose value is much more than the debt. Where, as in this case, the security for the debt is also money deposited in a bank, the amount of which is even less than the debt, it was not illegal for the creditor to encash the time deposit certificates to pay the debtors' overdue obligation, with the latter's consent. Whether the debt had already been paid as now alleged by the debtor, is a factual question which the Court of Appeals found not to have been proven for the evidence which the debtor sought to present on appeal, were receipts for payments made prior to July 18, 1980. Since the petitioner signed on July 18, 1980 a letter admitting her indebtedness to be in the sum of P404,500, and there is no proof of payment made by her thereafter to reduce or extinguish her debt, the application of her time deposits, which she had assigned to the creditor to secure the payment of her debt, was proper. The Court of Appeals did not commit a reversible error in holding that it was so.
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Caltex Phil vs. CA

Wednesday, July 15, 2009 1:13 AM

Caltex Inc vs CA Date: August 10, 1992 Petitioner: Caltex Inc Respondents: Court of Appeals and Security Bank and Trust Company Ponente: Regalado
Facts: - SBTC, through its Sucat Branch issued 280 certificates of time deposit in favor of Angel dela Cruz who deposited the aggregate amount of P1,120,000. Dela Cruz delivered the said certificates of time deposit (CTDs) to Caltex Inc in connection with his purchase of fuel products from the latter. - Sometime in March 1982, dela Cruz informed Mr. Tiangco, the Sucat Branch Manager, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by the bank's procedure, if he desired replacement of said lost CTDs. Upon doing so, 280 replacement CTDs were issued in favor of the dela Cruz. Dela Cruz obtained a loan from the bank in the amount of P875,000. On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit which stated, among others, that he (dela Cruz) surrenders to the bank `full control of the indicated time deposits from and after date of the assignment and further authorizes said bank to pre -terminate, set-off and 'apply the said time deposits to the payment of whatever amount or amounts may be due' on the loan upon its maturity. - In November 1982, Caltex Inc went to the bank and presented for verification the CTDs declared lost by dela Cruz. The bank then received a letter from Caltex informing it of its possession of the CTDs and of its decision to preterminate the same. However, for failure of Caltex to furnish a copy of the document evidencing the guarantee agreement between dela Cruz and Caltex, the bank rejected plaintiffs demand. - In April 1983, the loan of Angel dela Cruz with the bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan. This prompted Caltex to filed a complaint against the bank praying for the recovery of the value of the CTDs which amounted to P1.12M, plus 16% compounded interest pa. The court dismissed the complaint. The CA affirmed the dismissal claiming that the CTDs were non negotiable and that Caltex did not become the holder in due course of the CTDs. Issue: WON the CTDs are non negotiable Held: No

Ratio: - The CTDs in question are negotiable instruments. Section 1 of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer; (b) M ust contain an unconditional promise or order to pay a sum certain in money; (c) M ust be payable on demand, or at a fixed or determinable future time; (d) M ust be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

- The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. However, it is noted that Mr. Tiangco testified in open court that the depositor referred to in the CTDs is no other than Mr. Angel de la Cruz. Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. - If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs.
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stated in the CTDs.

Issue: WON petitioner can rightfully recover on the CTDs.

Held: No

Ratio: The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. - If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter. Besides, when respondent bank, as defendant in the court below, moved for a bill of particulars therein praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. - Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof, In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. - The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, which inceptively provide:
"Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed." "Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument."

- Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 CC is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. - On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of the bank was embodied in a public instrument. With regard to this other mode of transfer, the Civil Code specifically declares:
"Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property."

- The bank duly complied with this statutory requirement Contrarily, petitioner, whether as purchaser, assignee or lienholder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.
Now therefore in consideration of the foregoing premises, ASSIGNOR by virtue of these presents, does hereby irrevocably assign and transfer unto ASSIGNEE any and all funds and/or Refund of Special Fund Payments, including all its rights and benefits accruing out of the same, that ASSIGNOR might be entitled to, by virtue of and pursuant to the decision in BOE Case

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benefits accruing out of the same, that ASSIGNOR might be entitled to, by virtue of and pursuant to the decision in BOE Case No. 80-123, in payment of ASSIGNOR's outstanding obligation plus any applicable interest charges on overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in its favor
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Allied Banking Corp vs. Ordonez

Wednesday, July 15, 2009 1:13 AM

Allied Banking Corporation vs Ordonez Date: December 10, 1990 Petitioner: Allied Banking Corporation Respondents: Sedfrey Ordonez and Alfredo Ching
Nature: This is a special civil action for certiorari to review the decision of the Department of Justice regarding the interpretation of the penal provision of PD 115. Ponente: Padilla Facts: - On January 21, 1981, Philippine Blooming Mills thru Alfredo Ching applied for the issuance of commercial letters of credit with Allied Banking Corporations Makati branch to finance the purchase of 500 M/T Magtar Branch Dolomites and one Lot High Fired Refractory Sliding Nozzle Bricks which would be utilized in the operation of machinery and equipment. - ABC issued an irrevocable letter of credit in favor of Nikko Industry Co Ltd by virtue of which the latter drew 4 drafts which were accepted by PBM and paid by the bank. - To secure payment of the amount covered by the drafts and in consideration of the transfer by ABC of the possession of the goods to PBM, Ching executed four Trust Receipt Agreements acknowledging ABCs ownership of the goods and its obligation to turn over the proceeds of the sale of the goods, if sold, or to return the same, if unsold within the stated period. - Out of the said obligation resulted an overdue amount of P1,475,274.09. Despite repeated demands, PBM failed and refused to either turn over the proceeds of the sale of the goods or to return the same. - ABC filed a criminal complaint against Ching for violation of PD 115. After preliminary investigation, the fiscal found a prima facie case for violation of PD 115 on four counts and filed the corresponding information. Ching appealed the fiscals resolution alleging that the goods subject of the trust receipt agreements were dolomites which were specifically used for patching purposes over the surface of furnaces and nozzle bricks which are insulating materials in the lower portion of the ladle which do not form part of the steel product itself. - Justice Secretary Ordonez reversed the resolution saying that PD 115 contemplates or covers only goods, which have, for their ultimate destination, the sale thereof or if unsold, their surrender to the entruster, this whether the goods are in their original form or in their manufactured or processed state. Not all transactions covered by trust receipts may be considered as trust receipt transactions defined and penalized under PD 115. - ABC filed a motion for reconsideration of the Ordonez resolution. Issue: WON the penal provision of PD 115 apply when the goods covered by a Trust Receipt do not form part of the finished products which are ultimately sold but are instead utilized/used up in the operation of the equipment and machineries of the entrustee- manufacturer. Held: Yes

Ratio: - In trust receipts, there is an obligation to repay the entruster. The entrustee binds himself to sell or dispose of the entrusted goods with the obligation to turn over to the entruster the proceeds if sold, or return the goods if unsold or not otherwise disposed of, in accordance with the terms and condition specified in the trust receipt. A violation of this undertaking constitutes estafa under Sec 13 of PD 115. - The wording of Sec 13 covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods, unsold or disposed of in accordance with the terms of the trust receipts. The non payment of the amount covered by a trust receipt is an act violative of the entrustees obligation to pay. There is no reason why the law should not apply to all transactions covered by trust receipts, except those expressly excluded. - The Court takes judicial notice of customary banking and business practices where trust receipts are used for importation of heavy equipment, machineries, and supplies used in
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receipts are used for importation of heavy equipment, machineries, and supplies used in manufacturing operations. A construction should be avoided when it affords an opportunity to defeat compliance with the terms of the statute. - The penal provision of PD 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions in goods which are to be sold, reshipped, stored, or processed as a component of a product ultimately sold. To uphold the Justice Departments ruling would contravene not only the letter but the spirit of PD 115.
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Colinares vs. CA
Wednesday, July 15, 2009 1:14 AM

Colinares vs CA Date: September 5, 2000 Petitioners: Melvin Colinares and Lordino Veloso Respondents: CA and People of the Philippines
Ponente: Davide

Facts: Petitioners were contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latters convent. Petitioners obtained 5376 SF Solatone acoustical board, 300 SF tanguile wood tiles, SF Marcelo economy tiles and 2 gallons of cement from CM Builders Centre for the construction project. Petitioners applied for a commercial letter of credit with Philippine Banking Corporation in favor of CM Buiders. PBC approved the letter of credit for P22,389.80. Petitioners signed a pro forma trust receipt as security. PBC debited P6720 from Petitioners marginal deposit as partial payment. Later, PBC demanded the amount from petitioners. Instead of complying with PBCs demand, Veloso confessed that they lost P19,195.83 in the Project and requested for a grace period of until 15 June 1980 to settle the account. PBC informed petitioners that their outstanding balance was P20,824.40. Petitioners proposed[10] that the terms of payment of the loan be modified as follows: P2,000 on or before 3 December 1980, and P1,000 per month starting 31 January 1980 until the account is fully paid. Pending approval of the proposal, Petitioners paid P1,000 and P500 to PBC. However, PBC continued to demand payment of the balance. Petitioners were charged with the violation of PD 115 in relation to Article 315 RPC in an Information which was filed with the RTC of CDO. Veloso insisted that the transaction was a clean loan as per the verbal guarantee of PBCs manager. Petitioners signed the documents without reading the fine print. PBC however assured him that the trust receipt was a mere formality. The trial court convicted petitioners as the transaction between the parties was a trust receipt transaction. Petitioners use of the goods in their Carmelite monastery project an act of disposing as contemplated under Section 13, P.D. No. 115, and treated the charge invoice for goods issued by CM Builders Centre as a document within the meaning of Section 3 thereof. It concluded that the failure of Petitioners to turn over the amount they owed to PBC constituted estafa.
Issue: WON the transaction was an ordinary loan

Held: Yes Ratio: Section 4, P.D. No. 115, defines a trust receipt transaction as any transaction by and between a person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds absolute title or security interest over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a trust receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. 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,[34] without need of proving intent to defraud. A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties was a simple loan, not a trust receipt agreement. Petitioners 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

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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. Trust receipt transactions are 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. The antecedent acts in a trust receipt transaction consist of the application and approval of the letter of credit, the making of the marginal deposit and the effective importation of goods through the efforts of the importer. PBC attempted to cover up the true delivery date of the merchandise, yet the trial court took notice even though it failed to attach any significance to such fact in the judgment. Despite the Court of Appeals contrary view that the goods were delivered to Petitioners previous to the execution of the letter of credit and trust receipt, we find that the records of the case speak volubly and this fact remains uncontroverted. It is not uncommon for us to peruse through the transcript of the stenographic notes of the proceedings to be satisfied that the records of the case do support the conclusions of the trial court. PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with Petitioners, to refute Velosos testimony, yet it only presented credit investigator Grego Mutia. Nowhere from Mutias testimony can it be gleaned that PBC represented to Petitioners that the transaction they were entering into was not a pure loan but had trust receipt implications. 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. The Information charges Petitioners with intent to defraud and misappropriating the money for their personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be present in Petitioners situation. Petitioners employed no artifice in dealing with PBC and never did they evade payment of their obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to meet their obligation. Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re -sale, contrary to the express provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no time did title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of violation of its provisions. The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as manifested by its Affidavit of Desistance.

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DBP vs. Prudential Bank

Wednesday, July 15, 2009 1:16 AM

DBP vs Prudential Bank Date: November 22, 2005 Petitioner: DBP Respondent: Prudential Bank Ponente: Corona
Facts: Lirag Textile Mills, Inc. opened an irrevocable commercial letter of credit with Prudential Bank for US $498,000, in connection with its importation of 5,000 spindles for spinning machinery. These were released to Litex under covering trust receipts it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. DBP granted a foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal. Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the trust receipts. During the rehabilitation of Litex, Prudential Bank notified DBP of its claim over the items covered by the trust receipt. It informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP. For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate and chattel mortgages, including the articles claimed by Prudential Bank. During the foreclosure sale, DBP acquired the foreclosed properties as the highest bidder. Despite negotiations between Prudential and DBP, DBP sold the Litex textile mill to Lyon Textile Mills Inc. Prudential Bank filed a complaint for a sum of money with damages against DBP . TC: The trial court decided in favor of Prudential Bank. It ruled that ...DBP held no better right than Litex and is thus bound to turn over whatever amount was due to Prudential Bank. DBP is a mere trustee of Prudential Bank and an agent of Litex. The CA affirmed. It applied the provisions of PD 115 and held that ownership over the contested articles belonged to Prudential Bank as entrustor, not to Litex. Consequently, even if Litex mortgaged the items to DBP and the latter foreclosed on such mortgage, DBP was duty -bound to turn over the proceeds to Prudential Bank, being the party that advanced the payment for them. Issue: WON the transaction was a trust receipt transaction Held: Yes Ratio: The various agreements between Prudential Bank and Litex commonly denominated as trust receipts were valid. As the CA ruled, their provisions did not contravene the law, morals, good customs, public order or public policy. The articles were owned by Prudential Bank and they were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means. Article 2085 (2) CC requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their value or to return them on Prudential Banks demand. By its failure to pay or return them despite Prudential Banks repeated demands and by selling them to Lyon without Prudential Banks knowledge and conformity, DBP became a trustee ex maleficio. On the matter of actual damages adjudged by the trial court and affirmed by the Court of Appeals, DBP wants this Court to review the evidence presented during the trial and to reverse the factual findings of the trial court. With regard to the imposition of exemplary damages, the appellate court agreed with the trial court that the requirements for the award thereof had been sufficiently established. Prudential Banks entitlement to compensatory damages was likewise amply proven. It was also shown that DBP was aware of Prudential Banks claim as early as July, 1982. However, it ignored the latters demand, included the disputed articles in the mortgage foreclosure and caused their sale in a public auction held on April 19, 1983 where it was declared as the highest bidder. It smacked of bad faith, if not deceit. Thus, the award of exemplary damages was in order. Due to the award of exemplary damages, the grant of attorneys fees was proper. DBPs assertion that both the trial and appellate courts failed to address the issue of prescription is of no moment. Its claim that, under Article 1146 (1) CC, Prudential Banks cause of action had prescribed as it should be reckoned from the day the mortgage was registered, is not correct. The written extra-judicial demand by the creditor interrupted the prescription of action. Hence, the four -year prescriptive period which DBP insists should be counted from the registration of the mortgage was interrupted when Prudential Bank wrote the extra-judicial demands for the turn over of the articles or their value. Thus, contrary to DBPs claim, Prudential Banks right to enforce its action had not yet prescribed when it filed the complaint on May 24, 1988.
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Lirag opened an irrevocable commercial L/C w/ Prudential Bank in connection w/ importation of spindles for spinning machinery. These were released to Litex under trust receipts

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Rosario Textile Mills vs. Home Bankers Savings and Trust Company
Wednesday, July 15, 2009 1:16 AM

Rosario Textile Mills vs Home Bankers Savings and Trust Company Date: June 29, 2005 Petitioners: Rosario Textile Mills Corporation Respondent: Home Bankers Savings and Trust Company Ponente: Sandoval Gutierrez
Facts: Rosario Textile Mills Corporation applied from Home Bankers Savings & 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 which contains terms and conditions conformed by RTMC thru Edilberto V. Yujuico. 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 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. Despite the lapse of the respective due dates under the promissory notes and notwithstanding the banks demand letters, RTMC failed to pay its loans. Hence, the bank filed a complaint for sum of money against RTMC and Yujuico. RTMC and Yujuico claimed that the bank gave assurance that the suretyship agreement was merely a formality under which Yujuico will not be personally liable. They argue that the importation of raw materials under the credit line was with a grant of option to them to turn-over to the bank the imported raw materials should these fail to meet their manufacturing requirements. RTMC offered to make such turn-over since the imported materials did not conform to the required specifications. However, the bank refused to accept the same, until the materials were destroyed by a fire which gutted down RTMCs premises. The trial court ruled in favor of respondent. The CA affirmed, holding that the bank is merely the holder of the security for its advance payments to petitioners; and that the goods they purchased, through the credit line extended by the bank, belong to them and hold said goods at their own risk. Issue: WON the petitioners are relived from their obligation after they tried to tender the goods to the bank which refused to accept the same Held: No Ratio: On the first issue, petitioners theorize that when petitioner RTMC imported the raw materials needed for its manufacture, using the credit line, it was merely acting on behalf of the bank, the true owner of the goods by virtue of the trust receipts. Hence, under the doctrine of res perit domino, the bank took the risk of the loss of said raw materials. RTMCs role in the transaction was that of end user of the raw materials and when it did not accept those materials as they did not meet the manufacturing requirements, RTMC made a valid and effective tender of the goods to the bank. Since the bank refused to accept the raw materials, RTMC stored them in its warehouse. When the warehouse and its contents were gutted by fire, petitioners obligation to the bank was accordingly extinguished. Petitioners stance, however, conveniently ignores the true nature of its transaction with the bank. We recall that RTMC filed with the bank an application for a credit line in the amount of P10 million, but only P8 million was approved. RTMC then made withdrawals from this credit line and issued several promissory notes in favor of the bank. In banking and commerce, a credit line is that amount of money or merchandise which a banker, merchant, or supplier agrees to supply to a person on credit and generally agreed to in advance. It is the fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full extent of which the latter may avail himself of his dealings with the former but which he must not exceed and is usually intended to cover a series of transactions in which case, when the customers line of credit is nearly exhausted, he is expected to reduce his indebtedness by payments before making any further drawings. It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. RTMC used the proceeds of this loan to purchase raw materials from a supplier abroad. In order to secure the payment of the loan, RTMC delivered the raw materials to the bank as
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order to secure the payment of the loan, RTMC delivered the raw materials to the bank as collateral. Trust receipts were executed by the parties to evidence this security arrangement. Simply stated, the trust receipts were mere securities. In Vintola vs. IBAA, we elucidated further that 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. Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a security interest as follows: (h) Security Interest means a property interest in goods, documents, or instruments to secure performance of some obligation of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. Petitioners insistence that the ownership of the raw materials remained with the bank is untenable. If under the trust receipt, the bank 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 it wants, which it cannot do, just to give consistency with purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof... Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank.

Issue: WON petitioners are solidarily liable for the payment of their obligations to the bank

Held: Yes
Ratio: We reject petitioner Yujuicos contentions for two reasons. First, there is no record to support his allegation that the surety agreement is a mere formality; and Second, as correctly held by the Court of Appeals, the Suretyship Agreement signed by petitioner Yujuico binds him. The terms clearly show that he agreed to pay the bank jointly and severally with RTMC. The parole evidence rule under Section 9, Rule 130 of the Revised Rules of Court is in point. Under this Rule, the terms of a contract are rendered conclusive upon the parties and evidence aliunde is not admissible to vary or contradict a complete and enforceable agreement embodied in a document. We have carefully examined the Suretyship Agreement signed by Yujuico and found no ambiguity therein. Documents must be taken as explaining all the terms of the agreement between the parties when there appears to be no ambiguity in the language of said documents nor any failure to express the true intent and agreement of the parties. As to the third and final issue At the risk of being repetitious, we stress that the contract between the parties is a loan. What respondent bank sought to collect as creditor was the loan it granted to petitioners. Petitioners recourse is to sue their supplier, if indeed the materials were defective.
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Vintola vs. IBAA

Wednesday, July 15, 2009 1:17 AM

Vintola vs IBAA Date: May 29, 1987 Defendant Appellants: Spouses Tirso Vintola and Loreto Dy Vintola Plaintiff Appellee: Insular Bank of Asia and America
Ponente: Melencio Herrera

Facts: The spouses Vintola, doing business under the name and style "Dax Kin International," engaged in the manufacture of raw sea shells into finished products, applied for and were granted a domestic letter of credit by the IBAA, Cebu City. 1 in the amount of P40,000. The Letter of Credit authorized the bank to negotiate for their account drafts drawn by their supplier, Stalin Tan, on Dax Kin International for the purchase of puka and olive seashells. The Vintola, jointly and severally, agreed to pay the bank "at maturity the equivalent, of the amount or such portion thereof as may be drawn or paid, upon the faith of the said credit together with the usual charges." Having received from Stalin Tan the puka and olive shells worth P40,000, the VINTOLAS executed a Trust Receipt agreement with IBAA, Cebu City. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as the "latter's property with liberty to sell the same for its account, " and "in case of sale" to turn over the proceeds. Having defaulted on their obligation, IBAA demanded payment from the Vintolas. The Vintolas, who were unable to dispose of the shells, responded by offering to return the goods. IBAA refused to accept the merchandise, and due to the continued refusal of the VINTOLAS to make good their undertaking, IBAA charged them with Estafa. During the trial of the criminal case the Vintolas turned over the seashells to the custody of the Trial Court. The CFI acquitted the Vintolas after finding that the element of misappropriation was inexistent, ruling that in case of default, the bank is entitled to take possession of the goods or to recover its equivalent value together with the usual charges. In either case, the remedy of the Bank is civil and not criminal in nature. Shortly thereafter, IBAA commenced the present civil action to recover the value of the goods. Holding that the complaint was barred by the judgment of acquittal in the criminal case, said Court dismissed the complaint. However, on IBAA's motion, the Court granted reconsideration and ruled in favor of the bank.
Issue: WON the obligation to IBAA has been extinguished

Held: No
Ratio: The VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as, through no fault of their own, they were unable to dispose of the seashells, and that they have relinguished possession thereof to the IBAA, as owner of the goods, by depositing them with the Court. The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A letter of credit-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."As defined in our laws: (h) "Security Interest"means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. As elucidated in Samo vs. People "a trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported or purchased." Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a security title for the advances it had made to the VINTOLAS The goods the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor. ... for the bank has previously extended a loan which the L/C represents to the importer, and by that loan, the importer should be the real owner of the goods. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpose of

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dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof. ... Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of their obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the seashells in question does not affect IBAA's right to recover the advances it had made under the Letter of Credit. In so arguing, the VINTOLAS conveniently close their eyes to their application for a Letter of Credit wherein they expressly obligated themselves. The foregoing premises considered, it follows that the acquittal of the VINTOLAS in the Estafa case is no bar to the institution of a civil action for collection. It is inaccurate for the VINTOLAS to claim that the judgment in the estafa case had declared that the facts from which the civil action might arise, did not exist, for, it will be recalled that the decision of acquittal expressly declared that "the remedy of the Bank is civil and not criminal in nature." This amounts to a reservation of the civil action in IBAA's favor, for the Court would not have dwelt on a civil liability that it had intended to extinguish by the same decision. The VINTOLAS are liable ex contractu for breach of the Letter of Credit Trust Receipt, whether they did or they did not "misappropriate, misapply or convert" the merchandise as charged in the criminal case. Their civil liability does not arise ex delicto, the action for the recovery of which would have been deemed instituted with the criminal-action (unless waived or reserved) and where acquittal based on a judicial declaration that the criminal acts charged do not exist would have extinguished the civil action. Rather, the civil suit instituted by IBAA is based ex contractu and as such is distinct and independent from any criminal proceedings and may proceed regardless of the result of the latter.

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People vs. Nitafan

Wednesday, July 15, 2009 1:17 AM

People vs Nitafan Date: October 22, 1992 Petitioner: People of the Philippines Respondents: Hon. David Nitafan and Mariano Lim
Nature: This case is a petition for review on certiorari of the order of the RTC which quashed the information for violating BP 22 on grounds that it was unconstitutional. Ponente: Belosillo Facts: - KT Lim was charged before the RTC of Manila with violation of BP22 for having issued a worthless Philippine Trust Company check in the amount of P143,000 in favor of Fatima Cortez Sasaki. - On July 18, 1986, Lim moved to quash the Information on the ground that the facts charged did not constitute a felony as BP 22 was unconstitutional and that the check he issued was a memorandum check which was in the nature of a promissory not, perforce, civil in nature. On September 1, 1986, Judge Nitafan, ruling that BP 22 on which the Information was based was unconstitutional, issued the questioned Order quashing the Information. Issue: WON a memorandum check issued postdated in partial payment of a pre-existing obligation is within the coverage of BP 22. Held: Yes

Ratio: - A memorandum check is in the form of an ordinary check, with the word memorandum, memo or mem written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely, without condition concerning its presentment. Such check is an evidence of debt against the drawer, and although may not be intended to be presented, had the same effect as an ordinary check. - From this definition, it is clear that a memorandum check, which is in the form of an ordinary check, is still drawn on a bank and should therefore be distinguished from a promissory note, which is but a mere promise to pay. If Lim sought to equate a memorandum check with a promissory note, he could have well issued a promissory note since this is beyond the coverage of BP 22. - A memorandum check must fall within the ambit of BP 22 which does not distinguish but merely provides that any person who makes or draws and issued any check knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank, which check is subsequently dishonored, shall be punished by imprisonment. The members of the then Batasang Pambansa intended it to be comprehensive as to include all checks drawn against banks. - A memo check, upon presentment, is generally accepted by the bank. Hence, it does not matter whether the check issued is in the nature of a memorandum as evidence of indebtedness or whether it was issued in partial fulfillment of a preexisting obligation, for what the law punishes is the issuance itself of a bouncing check and not the purpose for which it was issued nor the terms and conditions relating to its issuance.
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Consolidated vs. CA
Wednesday, July 15, 2009 1:14 AM

Consolidated Bank and Trust Corporation vs CA Date: September 11, 2003 Petitioner: Consolidated Bank and Trust Corporation Respondents: CA and LC Diaz and Company, CPAs
Ponente: Carpio

Facts: L.C. Diaz opened a savings account with Solidbank. Later, L.C. Diaz through its cashier, Mercedes Macaraya, filled up a savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre to deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook. Calapre went to Solidbank. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the deposit slips. Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. When Calapre returned to Solidbank to retrieve the passbook, The teller informed him that somebody got the passbook. Calapre went back to L.C. Diaz and reported the incident to Macaraya. Macaraya prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to the teller the deposit slip and check. When Macaraya asked for the passbook, the teller told Macaraya that someone got the passbook but she could not remember to whom she gave the passbook. When Macaraya asked her if Calapre got the passbook, she answered that someone shorter than Calapre got the passbook. L.C. Diaz through its CEO, Luis C. Diaz, called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account. Diaz formally wrote Solidbank to make the same request. It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000. L.C. Diaz charged its messenger, Emerano Ilagan and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The RTC of Manila dismissed the criminal case. L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank refused. LC Diaz filed a complaint for recovery of a sum of money against Solidbank with the RTC of Manila. The trial court rendered judgment absolving Solidbank and dismissing the complaint. The court applied the rules on savings account written on the passbook (possession raises the presumption of ownership). The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the withdrawal slip were forged. Another provision of the rules on savings account states that the depositor must keep the passbook under lock and key. When another person presents the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the passbook. The trial court ruled that the passbook presented during the questioned transaction was now out of the lock and key and presumptively ready for a business transaction. The CA reversed and ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying the provision of the Civil Code on quasi -delict. The A pointed out that the teller of Solidbank who received the withdrawal slip for P300,000 allowed the withdrawal without making the necessary inquiry . The CA ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of the doctrine of last clear chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal. The CA also ruled that the degree of diligence required from Solidbank is more than that of a good father of a family. Issue: What is the nature of the relationship between petitioner and private respondent
Ratio: The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan (Article 1980 CC). 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. The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 RA 8791, declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. This new provision in the general banking law, introduced in 2000, is a statutory affirmation of SC decisions, starting with the 1990 case of Simex v. CA holding that the bank is under

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affirmation of SC decisions, starting with the 1990 case of Simex v. CA holding that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. 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. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 CC states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family. Sec 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791. However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non -bank debtors under a similar contract of simple loan. The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791. Issue: WON the bank is liable for breach of contract Held: Yes
Ratio: Art 1172 CC provides that responsibility arising from negligence in the performance of every kind of obligation is demandable. For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to its depositor. Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank. The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and kept under lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook. Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same. In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its employees. Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case. Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana. The bank must not only exercise high standards of integrity and performance, it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus

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duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the high standards of integrity and performance required of Solidbanks employees. Issue: WON the banks negligence was the proximate cause of private respondents loss
Held: Yes

Ratio: Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury and without which the result would not have occurred. L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person. Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre. We do not subscribe to the CAs theory that the proximate cause of the unauthorized withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz. There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so. Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip. We uphold the finding that a certain Noel Tamayo withdrew the P300,000. The Court is not a trier of facts. The tellers who processed the deposit of the P90,000 check and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks claim that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.
Issue: WON the doctrine of last clear chance applies in this case

Held: No
Ratio: The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable with the loss. Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the impending harm by the exercise of due diligence. We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from liability. Such contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the defendant from his breach of contract.

Issue: WON LC Diaz contributory negligence warrants mitigated damages Held: Yes
Ratio: Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the circumstances. This means that if the defendant exercised the proper diligence in the selection and supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced.

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authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced. In Philippine Bank of Commerce v. CA, where the Court held the depositor guilty of contributory negligence, we allocated the damages between the depositor and the bank on a 40 -60 ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.
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Certain Issues
Tuesday, July 21, 2009 10:54 PM

Review

Assignment by way of security

In cases, you'll notice that this was characterized as a "pledge" under chattel mortgage because justices' mindset is tied to what is found in civil code -but there is NCC provision on freedom to contract, and obscure provision (A1454) which states that an absolute conveyance of property is made to secure an obligation there is an implied trust. If the obligation is fulfilled by the grantor, he may demand conveyance of property. - Article 1454 remains obscure

From Jurisprudence, SC would either characterize "Assignment by way of security" as a pledge or a chattel mortgage, because SC justices probably has their minds set within the 4 corners of the Civil Code: mortgage or a pledge or a trust receipts (under Trust Receipts law) -when the documentation is replete with words such as "by way of security", "guaranty" SC would recharacterize the assignment as a pledge or a mortgage
In Sycip, Salazar: "Deed of Assignment without recourse by way of Security" -elements: 1. Avoids security language such as "by way of security" to secure ---in order to secure the prompt payment of the obligation, assign absolutely the receivables defined below (so absolute assignment which transfers from day one both legal and beneficial title from the assignor to the assignee) 2. Provision that would clarify that no dacion en pago intended from day 1 "notwithstanding the assignment, it is not the intention of the parties to extinguish the obligation. Principal obligation extinguished by the time the proceeds are actually applied to payment" (avoid argument that there is dacion en pago, therefore extinguishment of the obligation) 3. Reconveyance of the receivable "once the obligation is satisfied, there's an automatic reconveyance from the assignee to the assignor (in accordance with A1454 of NCC) 4. "Nothing in this assignment shall be construed as creating a pledge or a chattel mortgage" (so as to clarify the intention of the parties)

Pages 97 and 98 of the book

If assignment is construed as a pledge, foreclosure would extinguish the obligation If Chattel Mortgage, there is registration requirements. Unless satisfied, the mortgage is not valid as against third persons. There would be no affidavit of good faith in deed of assignments This kind of document is similar to a deed of assignmentWe're goint to take that up in derivative transactions

Vintola vs. IBAA F: Puca shells case: Vintola spouses who bought Puca shells executed a trust receipt agreement with IBAA. When spouses were unable to sell the sea shell products, they offered to surrender the goods to IBAA instead. IBAA refused to accept the products. -IBAA filed a crim case for estafa againste Vintola. Dismissed when Vintola SPs consigned the Puca shells to the court. -IBAA filed another case, this time a civil case for recovery of the amount under the Trust Receipt Agreement. Vintola spouses argued that IBAA is alredy barred: No reservation + res judicata H: For IBAA Letter of credit/trust receipt agreement: 2 features Loan feature + security feature Trust receipt is a security agreement where the bank acquires a right over the proceeds, not over the property. _IBAA, by the surrender of the sea shells, can still recover based on BOC of the loan contract, not the trust receipt agreement. SC made some troubling pronouncements. If you look at your SCRA version, on page 730, 1st two paragraph, last sentence: distinction between loan feature and security feature: It conveys that the trust receipt IS NOT AN ACCESSORY TO THE LOAN TRANSACTION WHEN IN FACT IT IS! It conveys the perception that it is separate and distinct but in reality it is connected with one another. A trust receipt is in the same position as a pledge and mortgage, thus, a security, which cannot exist if there is no principal obligation *the surrender of the goods extinguishes the Criminal action, but NOT THE CIVIL ACTION! People vs. Nitafan -Trust receipt agreement over plastic products. Nitafan assailed the Trust Receipts Law under 2 arguments: H: No violation of consti right against compelling to pay for nonpayment of debts: It already serves as protection of public interest.
No need for malice. It is mala prohibitum thus not an element of the crime. -punishment is a valid exercise of police power.

Dissenting opinion of CJ which proposes criminalization of trust receipt transaction. Took out penalty for

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Dissenting opinion of CJ which proposes criminalization of trust receipt transaction. Took out penalty for trust receipt violations (clarify mamaya) Read seriously the different provisions and decisions, SC confused concepts of trust receipts transactions e.g. in Vintola, court mentioned that Vintola sps hold the property at their own risk - but the bank own it, not the entrustee! Trust in Civil code: trustor has the legal title, there's a trustee, and a beneficiary. But in a trust receipt arrangement: entrustor has legal title, no passing of title to the entrustee, entrustee would just either sell the goods and deliver the proceeds of the sale to the entruster or just return it if failed to sell it. The buyer from the entrustee is free from the security interest of the entrustee over the good. The terminology in the trust receipts law is different from the concepts of Trust in the Civil Code so the SC might have just been confused...

(j) Set-off/Netting
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)
Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196)

*Banker's Lien: right to set off the deposit of its own borrower. Recognized in case of Dullas vs. PNB (P73 of book) -it is security in a sense that the bank has protection against the depositor's obligation with it if the depositor has an account with it. As a result, there is netting of the two accounts -legal compensation elements: See A1279.

This refers to the concept of compensation in the Civil Code. This is a mode of extinguishment of obligations usually used in a hold-out. To be able to use this in a conventional manner, all requisites of legal compensation must exist. The ISDA Master Agreement is a good example where set -off or netting is used. This has been upheld in our jurisdiction.

(k) Comfort Letter (a.k.a. Letter of awareness, keepwell agreement)

-not really a security interest but Sir placed it under Section 41 because there would be an "unsecured loans" Comfort letters are usually sent by a parent company for a subsidiary to the would -be lender bank that it will maintain fiscal integrity and/or controlling interest in the subsidiary.
The loan secured by a comfort letter is an unsecured, clean loan. This is not a guarantee but rather more of a moral obligation imposed by parent company unto itself to ensure that subsidiary will not default.

Why issue a comfort letter (and not a straight forward guarantee)? 1. parent company may be prohibited to issue guarantees under contract (Articles of incorporation) -there would be an issue of WON extension of guarantee is ultra vires or intra vires -WON the approval of the guarantee needs formalities (refer to Corpo Code) 2. comfort letters do not affect credit standing of parent company since it is not required to be footnoted in statement of assets and liabilities 3. company policy may prohibit the issuance of guarantees These letters may not be enforced in Philippine courts. But in case subsidiary defaults and parent does not help out, reputation of letter-issuer is affected. Thus, parent company usually make good their moral duties. -but it really depends on how the letter writer writes the letter. If strongly worded, it may give rise to a COA.
SECTION 41. Unsecured Loans or Other Credit Accommodations. The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.

*maybe you would find some comfort if the issuer of the comfort letter is the parent company of a big international financial group

Typical issue:
Scope of the Mortgage: Obligations and property covered

In Chattel Mortgage Law, AAP and AIC not included because of Section 5 and 7 of Chattel Mortgage Law: Affidavit of Good Faith is interpreted to cover only Present obligations and only the properties listed therein.

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therein.
What if the CM provides a contractual stipulation that the CM covers "future obligations"? Court said that it is an enforceable obligation for the execution of either a new document or amend the existing document Section 7: covers only PROPERTIES described in the deed. -so any provision cannot do the trick. No way out but to execute a new contract or amend the existing document. Pag hindi nakalista, wala na! Floating charge? (vs. Fixed charge) -in Philippines, fixed charged only. Specific properties are subject to a lien.

a.

Validity of "AFTER ACQUIRED PROPERTY" AND "AFTER INCURRED OBLIGATION" CLAUSES in a CHATTEL mortgage
Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations , be they pure or subject to a suspensive or resolutory condition.

-this appears to suggest that even future obligations may be covered by the CM. However, you must be careful in understanding the Civil Code provisions on Mortgage under Chapter 16. When it speaks of a mortgage, it doesn't cover both REM and CM, only REM. Chattel Mortgage is governed by another chapter! A2091 is under Chapter 16 so only concerns REM, not CM! Plus Section 5 & 7 of CM A stipulation in mortgage documents which seeks to cover properties (obligations) acquired (incurred) by mortgagor after execution of mortgage agreement.

AFTER-ACQUIRED PROPERTY (AAP)

-properties acquired/bought by the debtor after the conclusion of a chattel mortgage agreement

Is AAP valid in REM/ Chattel Mortgage?

REM: Yes, in view of Article 2085, CC.
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 ob ligation; (2) That the pledgor or mortgagor be the ab solute 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)

CM: No, in view of Section 7 of Chattel Mortgage Law. However, there are exceptions to this. -Chattel Mortgage Law provides that ONLY SUCH PERSONAL PROPERTY AS STATED IN THE MORTGAGE DOCUMENT SHALL BE COVERED BY THE SAME MORTGAGE. X: Torres vs. Limjap: revolving stock or goods which are for retail sale (accdg to Prof. Catindig): perishable goods, subjet to wear-and-tear When the Mortgage Agreement provides that after-acquired properties may be included as securities to the obligation, and a new contract or amendment of the contract is executed (as required in ACME Shoe, Rubber & Plastic Corp vs. CA) *it is still necessary to include a supplement of REM to cover after acquired properties and register it with the Registrar of deeds so that at foreclosure time, there would be no issue as to the scope of the REM.

AFTER INCURRED OBLIGATION (AIO)

Is AIO valid in REM/ chattel mortgage? REM: Article 2091, CC ("all kinds of obligations") suggests that even future properties are subject to mortgages. Note: Belgian Missionary Case (see the case na lang)
CM: No, in view of Section 5, Chattel Mortgage Law re affidavit of good faith. -Section 5, CML requires that the mortgage be made for the purpose of securing the obligation SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE. As held in Acme Shoe, Rubber & Plastic Corp, the said provision contemplates the obligation existing at the time the mortgage was executed AND NOT SUBSEQUENT ONES. If the mortgage contract provides for AIO, there should still be either a new contract or an amended contract containing the new obligation.

*Note: The Affidavit of Good Faith which specifies the properties subject to the agreement and the obligations incurred therefor. If not listed, not included in the Chattel Mortgage

Torres v. Limjap (1931)

F: Henson allegedly obtained Loans from Torres which were secured by two chattel mortgages on the drug store. Henson failed to pay the loan so the Plaintiffs wanted to take possession of the chattels and foreclose their mortgages thereon (the drugstores dito). -Henson's heirs (patay na si Henson) alleged the following defenses: (1) chattel mortgages VOID for lack of sufficient particularity in the description of the property mortgage (2) chattels sought to be recovered by the plaintiffs were not the same property described in the mortgage *NOTE: THERE WAS A STIPULATION IN THE MORTGAGE AUTHORIZING HENSON TO SELL THE GOODS COVERED BY THE MORTGAGE AND REPLACE THEM WITH THE OTHER GOODS THEREAFTER ACQUIRED TC: (1) Hensons defaulted in payment (2) mortgages became due (3) plaintiffs, as mortgagees, were entitled to the possession of the DRUG STORES
*question: If it was the drugstores, bakit revolving stock ang focus?

HELD: Affirm. Allowed AAP to be included in the mortgage; the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business

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INTENT OF CML: to promote business and trade in these Islands and to give impetus to the economic development of the country ...it could not have been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to the public for retail business, where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. 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. STIPULATION VALID AND BINDING: where 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, etc. Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after acquired and substituted chattels. -DAPAT BY EXPRESS STIPULATION: the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage This case presents exception to validity of AAP. It is practicable and sound. Joke about mortgage stamped on your sardines. "There goes your breakfast"

PEOPLE'S BANK AND TRUST CO. VS DAHICAN

F: AG&P sold and assigned all its rights to Dahican Lumber Concession to DALCO for $500k (but only $50k was paid). -1ST MORTGAGE: DALCO thereafter obtained loans from PBTC amounting to P200k. In addition, DALCO obtained from Export-Import Bank a loan of $250k evidenced by 5 PNs of $50k each. As security, DALCO executed in favor of PBTC (also as trustee for Export-Import Bank) a deed of mortgage covering 5 parcels of land in Camarines Norte + all the buildings, improvements and other personal property in DALCO's place of business. *DALCO and DAMCO pledged to bank 7,296 shares of stock of DALCO and 9,286 of DAMCO to secure same obligations. -2ND MORTGAGE: DALCO also executed on the same date ANOTHER DEED OF MORTGAGE ON THE SAME PROPERTIES in favor of AG&P *both deeds of mortgage contained a provision EXTENDING THE MORTGAGE LIEN TO PROPERTIES TO BE SUBSEQUENTLY ACQUIRED (AFTER ACQUIRED PROPERTIES) BY DALCO. *both mortgages were registered in the Office of the Register of Deeds of Camarines Norte -DEFAULT: DALCO & DAMCO failed to pay the 5th PN - but was given by PBTC up extension to pay the overdue PN -before the deadline given by PBTC, DALCO purchased various machines, equipment, and spare parts and supplies in addition to or in replacement of some of those already owned and used by it. PURSUANT TO THE AFTER ACQUIRED PROPERTIES PROVISION IN THE MORTGAGE, PBTC requested DALCO to submit the complete list of properties acquired. -DALCO failed to provide PBTC the list requested. It subsequently decided (through Board of directors) to rescind the alleged sales of property recently acquired and corresponding agreements of rescission of sale were executed. -PBTC (in its own behalf and that of AG&P) DEMANDED THE CANCELLATION OF THE RESCISSION AGREEMENTS. DAMCO refused. -PBTC & AG&P commenced foreclosure proceedings in CFI over the machineries, equipment and supplies of DALCO. The proceeds of the sale were agreed to be divided between "UNDEBATED PROPERTIES" AND "AFTER ACQUIRED PROPERTIES" and were deposited with the TC pending litigation. TC ruled in favor of PBTC & AG&P. 1. WON AFTER ACQUIRED PROPERTIES ARE INCLUDED IN THE DEED OF MORTGAGE? YES -it is clear from the provision in both deeds of mortgage that the Lumber concession "shall immediately be and become subject to the lien" of both mortgages as if already included therein at the time of execution. - It is common and logical in cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold or were intended to be used thus becoming inevitable to wear and tear -purpose: to maintain, to the extent allowed by circumstances, the original value of the properties given as security. 2. WON the mortgage of the after acquired properties is void because they were not registered in accordance with the Chattel Mortgage Law CML DOES NOT APPLY TO THIS CASE. THIS CONCERNS REAL ESTATE MORTGAGE! -The Mortgages were executed when the OLD CIVIL CODE was still in force. Still, BOTH old and new civil codes recognize that machinery, receptacles, instruments or replacements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works. SO, the properties in dispute should be deemed as real estate and the mortgages executed are REMs not CMs! *So does not need to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties. *DAVAO SAW MILL CASE not applicable because in this case both parties recognized the after acquired properties as REAL PROPERTIES and not as chattel. (ruling on other issues deleted)

This is a mortgage-trust indenture since the bank is a trustee for the foreign bank. You could actually cite this case On the discussion of perishable collateralthen goes on to say that it is not immoral, etc. poor judgment on the creditor not to include such provision in the agreement. BUT THERE's SECTION 7 WHICH PROHIBITS PRECISELY INCLUSION OF AFTER-ACQUIRED PROPERTY CLAUSE!!! How can it be poor judgment???? Plus sweeping pronouncement on exclusion of collaterals subject to wear and tear. BUT ALL PROPERTIES ARE SUBJECT TO WEAR AND TEAR!!! No need even to discuss the said exception since this involves property which was considered REAL ESTATE MORTGAGE, NOT CHATTEL MORTGAGE!!!

BELGIAN CATHOLIC MISSIONARIES VS. MAGALLANES PRESS

F: Magallanes Press obtained two loans: 1st loan: from JP Heilbronn for P14k. CHATTEL MORTGAGE on all its printing machinery and accessories was executed in favor of HEILBRONN 2nd Loan: from Belgian Catholic Missionaries for P30k. CHATTEL MORTGAGE on the same properties executed in favor of Belgian Catholic Missionaries -Heilbronn transferred all its mortgage credit to Memije Extension of 1st loan: Memije, as successor in interest of Heilbronn, extended an additional P5k loan, and the chattel mortgage executed before was made to cover the new P5k loan -fire occurred. Properties covered by the CM were burned. Since it was covered by an insurance policy, Memije could have recovered the amount due from the insurance policy but Belgian Catholic Missionaries filed a petition for writ of injunction to stop the award of the proceeds of the insurance to Memije with the action to cancel the document of transfer of mortgage

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document of transfer of mortgage WON Mortgage extension made by Memije (so that the CM would cover after incurred obligation) is void? YES -increase made by Memije in the mortgage credit and the extension made by Magallanes press of the mortgage to the additional credit, w/o the knowledge or consent of Belgian Catholic as 2nd mortgagee, prejudices the credit of the 2nd mortgagee inasmuch as the security for the payment of said credit was reduced = fraud that vitiates the contract of extension of the mortgage, VOID "The increase of P5,895.59 made by the defendant Jose Ma. Memije of the mortgage thereto, are not only subordinate to the mortgage credit of the plaintiff company, being subsequent in time and in registration, but said increase in the security is also void."

*NOTE: court recognized that the mortgage in favor of JP Heilbronn was preferenced vs. the mortgage in favor of Belgian Catholic. But as to the extension granted by Memije, Belgian Catholic would be preferred, as the said extension is void (plus prefer Belgian because the after incurred obligation was executed after the mortgage in favor of Belgian Catholic, and thus, subordinate to it.
The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage Law, the parties to the original deeds swore that the same was mortgaged "to secure the obligations specified therein and for no other purpose." Neither the increase in question, nor the extension of the mortgage to secure the payment of the same is specified in the deed, consequently said extension is void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contacted." On SC statement on p655 of SCRA: "The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase". BUT THE INCREASE IN THE FINANCIAL CREDIT ACCOMODATION WOULD NOT BE COVERED BY THE CM IF NO ADDITIONAL DOCUMENTATION! This statement by the SC gives rise to the mistaken notion that we could do away with the documentation requirements! Remember this because this case is cited in the next case!

ACME SHOE, RUBBER & PLASTIC CORP VS. CA

F: ACME SHOE obtained a loan for P3M from Producer's Bank. ACME also executed a CM which provides

that the mortgage shall also stand as security for any subsequent loans extended by the bank (Producer's Bank) to ACME SHOE. -initial P3M Loan was paid by ACME SHOE (therefore at this point, the CM was extinguished). -subsequently, ACME Shoe obtained another loan from Producer's Bank for P1M (note: NO new CM was executed) -ACME shoe defaulted on their P1M obligation so Producer's Bank sought the EXTRAJUDICIAL FORECLOSURE OF THE CHATTEL MORTGAGE
WON a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred is valid NO. Rule in favor of ACME -VOID. Should execute a new CM over the new debt OR Amend the old contract conformably with the form prescribed in the CML *Refusal to execute a new agreement by the borrower = default *the remedy of foreclosure can only cover debts extent at the time of constitution and during the life of the CM sought to be foreclosed. *SEC5, CML: Affidavit of GF: the parties must execute an oath that the mortgage is made for the purpose of SECURING THE OBLIGATION SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE the debt referred to in the law is a current, not an obligation that is yet merely contemplated.

DECISION IN ACME SHOE COULD HAVE BEEN ALRIGHT WITHOUT CITING THE BELGIAN CATHOLIC CASE. BY JUST CITING SECTION 5, ITS CLEAR. Belgian contradicts the early position. Section 5 still requires documentation but the Belgian case doesn't!!! NOTE: SIR INTENDS TO CHANGE HIS QUESTIONS! HIS STUDENTS TEND TO CITE ACME SHOE AND BELGIAN IN REM!!!!!! ACME and BELGIAN concerns CM!!!!!

ONG LIONG TIAK VS. LUNETA MOTOR CO.

F: Chao Siong purchased a Chrysler Sedan from Luneta Motors co for P1.8k, secured by 18 PNs for P100 each and a CM in favor of Luneta. CM included a clause as follows:
. . it being expressly agreed further that this mortgage shall also serve as security for the payment to the said mortgagee in addition to the aforesaid notes of the purchase price or cost of any and all gasoline, tires, automobile accessories or parts, and repairs furnished or made by the said mortgagee at any time up to the date this mortgage is completely satisfied as and when the same becomes due, and of any other indebtedness of the mortgagor in favor of the mortgagee incurred in any other manner whatever.

-Choa Siong acted as surety for P300 for a certain Angeles for paints and accessories the latter obtained from Macondray. Macondray assigned its credit to Luneta, as Choa Siong still had P140 balance. Chao Siong paid P40 so there was P100 left unpaid. -Choa Siong was able to pay all the PNs though. But since there is still P100 left unpaid arising from the surety made by Choa Siong, the credit of which was assigned to Luneta, Luneta refused to extinguish the CM. -Chao Siong sold the auto to Ong Liong Tiak. -For the nonpayment of the P100, Luneta sought the forclosure of the CM. Sheriff attached the auto (ppor Ong Liong Tiak :( ) -Ong Liong Tiak filed petition for writ of injunction and damages vs. Luneta. CFI ruled against him

WON the surety secured by Ong Liong Tiak is included in the CM executed by Ong Liong Tiak in favor of Luneta Motor Co? YES
Instruments of mortgage, as said Exhibit 2, are binding, while they subsist, not only upon the parties executing

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Instruments of mortgage, as said Exhibit 2, are binding, while they subsist, not only upon the parties executing them but also upon those who later, by purchase or otherwise, acquire the properties referred to therein. The right of those who so acquire said properties should not and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed for the formalities of the law, in good faith, and without the least indication of fraud. This is all the more true in the present case, because, when the plaintiff purchased the automobile in question on august 22, 1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument of mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said automobile was subject to a mortgage lien . In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had.

Kawawa naman si OLT! Walang napunta sa kanya. May COA ba sha against Chao Siong? SC validated an AIP w/o even explaining why. Sir included this case so that you would know that there's a SC that contradicts what is provided in law. This case supports the wrong position. But since it is also supported by SC, "legal practice becomes more interesting"

PRUDENTIAL BANK VS. ALVIAR

F: (loan 1) Sps. Alviar obtained a P250k loan from Prudential Bank and as a security, they executed a REM over their parcels of land in San Juan. The REM contained a "blanket clause/dragnet clause" (see below in the decision) (loan 2) Don Alviar executed a PN for P2,640,000 in favor of Prudential Bank secured by a "hold-out" on the mortgagor's (Alviar's) foreign currency savings account with Prudential Bank and Alviar's passbook is to be surrendered to Prudential Bank until the amount secured by the holdout is settled. (loan 3) Another PN for P545,000 was executed by Don Alviar, this time in behalf of DONALCO trading (the spouses are the Chairman and the VP of the company), in favor of Prudential Bank. This was secured by "Clean Phase out of TOD CA 3923: meaning that the temporary overdraft incurred by DONALCO trading is to be converted into an ordinary loan. Prudential bank approved the straight loan. Securities were deed of assignment on 2 PNs executed by Bancom Realty Corp.and chattel mortgage on various heavy and transpo equipment Alviars paid Prudential Bank P2M to be applied to the obligations of Alviars (as GB Alviar Realty and Development Inc) and for the release of the REM for P450k (cf P250k at the start) which covered their 2 San Juan lots. Payment was acknowledged and Prudential Bank released the mortgage over the 2 properties. STILL, PRUDENTIAL BANK MOVED FOR EXTRAJUDICIAL FORECLOSURE OF THE MORTGAGE ON THE PROPERTY, arguing that the Alviars had the total obligation of P1,608,256.68 covering 3 PNs (the first loan + another loan + 3rd loan). Alviars filed for DAMAGES + prayer for issuance of writ of preliminary injunction: claimed to have paid principal loan secured by the 2 San Juan properties by payment of P2M Vs. Prudential Bank: Payment of P2M was for the obligations of GB ALVIAR REALTY & DEV'T CORP under a separate loan secured by a separate mortgage (and not by the spouses! themselves) TC: proceed with foreclosure; MFR: reverse - even awarded damages in favor of Alviars. The REM only covers the 1st loan and not the subsequent loans. The blanket mortgage clause relied upon by Prudential Bank applies only to future loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof. CA: Affirmed: while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper. -However, it found that the spouses has not paid under the 1st obligation as the P2M payment was for the obligation of the GB Alviar Realty and Development Inc and not in their personal capacity
WON The "Blanket mortgage clause" or the "dragnet mortgage clause" expressly covers not only the 1st loan but also the 2 subsequent loans? And if it is valid? -Court held that the 3rd loan was clearly not covered by the "blanket mortgage clause" because the said loan was undertaken by the spouses in behalf of DONALCO and not in their personal capacity. No piercing of corporate veil as no evidence of evasion and fraud was shown.

blanket mortgage clause/dragnet clause: -one which is specifically phrased to subsume all debts of past or future origins . -should be carefully scrutinized and strictly construed -Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction -operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. -mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.

In this case:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .

SC: ALL OTHER LOANS INCLUDED! Parties intended the real estate mortgage to secure not only the
P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise.

The problem: Would the "blanket Mortgage clause/dragnet clause" apply when the subsequent loans are covered by separate securities?
2 SCHOOLS OF THOUGHT: 1. Dragnet clause covers ALL OTHER DEBTS, EVEN IF THE OTHER DEBT IS SECURED BY ANOTHER MORTGAGE 2. Dragnet clause would not secure a note that is otherwise secured as to its entirety. Would only cover the deficiency after exhausting the security specified therein. (so pag may natira pang obligation, yun ung under ng

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deficiency after exhausting the security specified therein. (so pag may natira pang obligation, yun ung under ng dragnet clause SC: 2nd school of thought! RELIANCE ON THE SECURITY TEST: when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather, on the new security given Ratio: the dragnet clause in the first security instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the offer *Where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security.This is recognition that while the dragnet clause subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to. *any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it, Prudential Bank. *BUT PRUDENTIAL BANK could still subject the properties to foreclosure proceedings for the unpaid P250k, which both TC and CA found to have not yet been paid. If there are deficiencies for the second loan, could also apply the proceeds as to the second loan.

Qualification to the validity of the AIO clause: Dragnet Clause Even if there is a Dragnet Clause in REM which might have secured future obligations, when the future obligations are secured separately, GR: mortgagee cannot foreclose the REM to satisfy the unpaid subsequent obligations. Exhaust first the specified collateral for the loan, not the property under the Dragnet clause! X: unless there's an explicit stipulation to the contrary! Justice Tinga, who loves to cite American jurisprudence, is saying that dragnet clause is used in mortgages to allow.he is actually describing a Mortgage Trust Indenture (the Philippine Equivalent)!

CUYCO VS. CUYCO

F: Petitioners obtained a P1.5M loan from respondents, secured by REM over their Cubao property. REM provides:
PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be subject to foreclosure in the manner and form provided by law.

-Subsequently, petitioners obtained additional loans from the respondents in the aggregate amount of P1,250,000. -Petitioners only paid P291,700 but defaulted as to the rest. -Respondents filed a complaint for foreclosure of mortgage, alleging that the loans (all of them) were secured by the REM and as of August 31, 1997, the debt amounted to P6,967,241.14 (with interest of 18% mo) Vs. Petitioners: REM only covers P1.5M loan, no agreement that the 18% interest was to be compounded mo as it was per annum! RTC: For respondents CA: REM was expressly intended to cover only the original P1.5M loan and the subsequent P150k and P500k loans, not the P150k loan, the P200k loan and P250k loan. 12% interest imposed by TC also proper WON the 12% interest rate imposed by TC Proper YES. As was held in Eastern shipping lines and in the law. Interest on judicial awards until paid. WON all five additional loans were intended to be secured by the real estate mortgage NO.

(eto ang na-gets koung P1.5M loan lang ang kasama)

GR: a mortgage liability is usually limited to the amount mentioned in the contract. X: However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is valid and binding between the parties and is known in American Jurisprudence as the blanket mortgage clause, also known as a dragnet clause. A dragnet clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. HOWEVER, it is clear from a perusal of the real estate mortgage that there is no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule above stated. What the parties could have done in order to bind the realty for the additional loans was to execute a new real estate mortgage or to amend the old mortgage conformably with the form prescribed by the law. Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the respondents in an ordinary action for collection of sums of money. WON the amount of obligation should include interest? YES. Rule 68.2 provides so.

Midterms: After Commercial Papers!!!!

No dragnet clause involved here!

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Torres v. Limjap
Tuesday, July 21, 2009 11:21 PM

Torres vs Limjap Date: September 21, 1931 Plaintiff Appellees: Alejandra Torres, et al Defendant Appellant: Francisco Limjap

Ponente: Johnson Facts: These two actions were commenced for the purpose of securing from the defendant the possession of two drug stores located in Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in favor of the plaintiffs. In the first case, plaintiffs alleged that Henson executed a chattel mortgage on his drug store to secure a loan of P7000, although it was made to appear in the instrument that the loan was P20,000. In the second case, plaintiffs claimed that Henson executed a chattel mortgage on his drug stores to secure a loan P50,000, which was later reduced to P26,000. In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that, in consequence thereof they became entitled to the possession of the chattels and to foreclose their mortgages thereon. The court issued in each case an order directing the sheriff of the City of Manila to take immediate possession of said drug stores. The defendants set up the following defenses: (1) That the chattel mortgages are void for lack of sufficient particularity in the description of the property mortgaged; and (2) That the chattels which the plaintiffs sought to recover were not the same property described in the mortgage. The judge arrived at the conclusion (a) that the defendant defaulted in the payment of interest on the loans secured by the mortgages, in violation of the terms thereof; (b) that by reason of said failure said mortgages became due, and (c) that the plaintiffs, as mortgagees, were entitled to the possession of the drug stores. Accordingly, a judgment was rendered in favor of the plaintiffs and against the defendant, confirming the attachment of said drug stores.
Issue: WON the chattel mortgages are null and void for lack of particularity in the description of the chattels mortgaged Held: No Ratio: In his second assignment of error the appellant attacks the validity of the stipulation in said mortgages authorizing the mortgagor to sell the goods covered thereby and to replace them with other goods thereafter acquired. He insists that a stipulation authorizing the disposal and substitution of the chattels mortgaged does not operate to extend the mortgage to after-acquired property, and that such stipulation is in contravention of the express provision of the last paragraph of section 7 Act No. 1508. In order to give a correct construction to the Chattel Mortgage Law, the spirit and intent of the law must first be ascertained. When said Act was placed on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim of that law-making body was undoubtedly to promote business and trade in these Islands and to give impetus to the economic development of the country. Bearing this in mind, it could not have been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to the public for retail business, where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. 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. In the interpretation and construction of a statute the intent of the law-maker should always be ascertained and given effect, and courts will not follow the letter of a statute when it leads away from the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit of the Act. A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding . . . where 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, etc. Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after -acquired and substituted chattels. His views are based on the decisions of the supreme courts of several states of the Union. He says: "A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. ... Where a mortgage covering the stock in trade,

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acquisitions shall be held as included in the mortgage. ... Where a mortgage covering the stock in trade, furniture, and fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage," the mortgage covers all after-acquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed." In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in question, extending their effect to after-acquired property, is valid and binding; and (c) that the lower court committed no error in not permitting the defendant-appellant to introduce evidence tending to show that the goods seized by the sheriff were in the nature of after-acquired property.
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PEOPLE'S BANK AND TRUST CO. VS

Wednesday, July 22, 2009 8:35 AM

Peoples Bank vs Dahican Date: May 16, 1967 Plantiffs Appellants: Peoples Bank and Trust Co and Atlantic Gulf and Pacific Co Manila Defendants Appellees: Dahican Lumber Company, Dahican American Lumber Corporation and Connel Bros Co (Phil)
Ponente: Dizon

Facts: -On September 8, 1948, Atlantic Gulf & Pacific Company of Manila sold and assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company for the total sum of $500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's Bank & Trust Company amounting, as of July 13, 1950, to P200,000. In addition, DALCO obtained, through the bank, a loan of $250,000 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000 each executed by both DALCO and the Dahican America Lumber Corporation, all payable to the bank or its order. As security for loan, DALCO executed in favor of the bank (acting for itself and as trustee for the ExportImport Bank) a deed of mortgage covering five parcels of land situated in Camarines Norte together with all the buildings and other improvements and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte. On the same date, DALCO executed a second mortgage on the same properties in favor of Atlantic to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000. Both deeds contained a provision extending the mortgage lien to properties to be subsequently acquired referred to as "after acquired properties" by the mortgagor. Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. DALCO and DAMCO also pledged to the bank 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to secure the same obligations. - Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the bank paid the same to the Export-Import Bank and the latter assigned to the former its credit and the first mortgage securing it. Subsequently, the bank gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory note. - After July 13, 1950, DALCO purchased various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used by it from Connell Bros. Pursuant to the provision of the mortgage deeds regarding "after acquired properties," the bank requested DALCO to submit complete lists of said properties but the latter failed to do so. On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed between DALCO and DAMCO, on the one hand and between DALCO and CONNELL, on the other. - The bank, in its own behalf and that of Atlantic, demanded that said agreements be cancelled but Connell and DAMCO refused to do so. As a result, Atlantic and the bank, commenced foreclosure proceedings in CFI of Camarines Norte against DALCO and DAMCO. On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was deposited in court pending final determination of the action. By a similar agreement one-half (P87,500.00) of this amount was considered as representing the proceeds obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale of the "after acquired properties". After due trial, the court ruled against Dahican Lumber Co to pay Atlantic, the bank and Connell. In a supplemental decision, the court held that: If the sums mentioned in paragraphs 1 and 2 (those payable to Atlantic and the bank) are not paid within ninety (90) days, the Court orders the sale at public auction of the lands object of the mortgages to satisfy the said mortgages and costs of foreclosure. Issue: WON the after acquired properties are subject to the deeds of mortgage
Ratio: - Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection with the premises that is, its lumber concession "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties. Suffice it to say that the stipulation referred to is common, and We might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used thus becoming

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are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the inevitable wear and tear but with the understanding express or implied that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. Indeed, if such properties were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a similar provision is included in the contract. Issue: WON the mortgage of the after acquired properties is void because they were not registered in accordance with the Chattel Mortgage Law Ratio: - The stipulation under consideration strongly belies defendants contention. As adverted to hereinbefore, it states that all property of every nature, building, machinery etc. taken in exchange or replacement by the mortgagor "shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein". No clearer language could have been chosen. Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel mortgage must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the parties and any other person to identify them, We say that such law does not apply to this case. As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force, there can be no doubt that the provisions of said code must govern their interpretation and the question of their validity. It happens however, that Articles 334 and 1877 of the old CC are substantially reproduced in Articles 415 and 2127, respectively, of the new CC. It is, therefore, immaterial in this case whether we take the former or the latter as guide in deciding the point under consideration. Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or replacements intended by owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works. On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the new CC". It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein which were registered as such did not have to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties. - The facts in the Davao Sawmill vs Castillo, are not on all fours with the ones obtaining in the present. In the former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery therein involved as personal property by executing chattel mortgages thereon in favor of third parties, while in the present case the parties had treated the "after acquired properties" as real properties by expressly and unequivocally agreeing that they shall automatically become subject to the lien of the real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact, stated that "the characterization of the property as chattels by the appellant is indicative of intention and impresses upon the property the character determined by the parties". In the present case, the characterization of the "after acquired properties" as real property was made not only by one but by both interested parties. There is, therefore, more reason to hold that such consensus impresses upon the properties the character determined by the parties who must now be held in estoppel to question it. - Moreover, in Valdez vs. Central Altagracia, Inc., it was held that while under the general law of Puerto Rico, machinery placed on property by a tenant does not become immobilized, yet, when the tenant places it there pursuant to contract that it shall belong to the owner, it then becomes immobilized as to that tenant and even as against his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it is not disputed that DALCO purchased the "after acquired properties" to be placed on, and be used in the development of its lumber concession, and agreed further that the same shall become immediately subject to the lien constituted by the questioned mortgages. There is also abundant evidence in the record that DAMCO and Connell had full notice of such stipulation and had never thought of disputed validity until the this case was filed. Consequently all of them must be deemed barred from denying that the properties in question had become immobilized.

Issue: WON DAMCO and Connel have rights over the after acquired properties superior to the mortgage lien Ratio: This contention would have validity only if it were true that DAMCO and Connell were the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did not know their exact identity and description prior to the filing of the case bar because DALCO, in violation of its obligation under the mortgages, had failed and refused theretofore to submit a complete list thereof. In the course of the proceedings, however, when defendants moved to dissolve the order of receivership and the writ of preliminary injunction issued by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after acquire

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aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after acquire properties," and engaged the services of auditors to examine the books of DALCO so as to bring out the details thereof. The report of the auditors and its annexes show that neither DAMCO nor Connell had supplied any of the goods of which they respective claimed to be the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be DAMCO or Connell that, in fact, Connell collected a 5% service charge on the net value of all items it claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the latter's general agent; that Connell had to issue its own invoices in addition to those o f the real suppliers in order to collect and justify such service charge. - Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the suppliers of the "after acquired required properties" would seem to be preposterous. The most that can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some of the purchases. But if DALCO still owes them any amount in this connection, it is clear that, as financiers, they can not claim any right over the "after acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties". The attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also because there is abundant evidence in the record showing that both DAMCO and CONNELL had known and admitted from the beginning that the "after acquired properties" of DALCO were meant to be included in the first and second mortgages under foreclosure. The claim that Belden, of Atlantc, had given his consent to the rescission, expressly or otherwise, is of no consequence and does not make the rescission valid and legally effective. It must be stated clearly, however, in justice to Belden, that, as a member of the Board of Directors of DALCO, he opposed the resolution of December 15, 1952 passed by said Board and the subsequent rescission of the sales. Issue: WON the foreclosure was premature Ratio: - The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of grace, conceded an extension of time to pay up to 1 April, 1953 while the action was filed on 12 February, 1953, but, as to this, the Court taking it that there is absolutely no debate that Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it should follow that the debtor thereby lost the benefit to the period. Very little need be added to the above. Defendants, however, contend that the lower court had no basis for finding that, when the action was commenced, DALCO was insolvent for purposes related to Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the trial court is sufficiently supported by the evidence particularly the resolution marked as Exhibit K, which shows that on December 16, 1952 in the words of the Chairman of the Board DALCO was "without funds, neither does it expect to have any funds in the foreseeable future." Issue: WON the proceeds of the sale should be exclusively awarded to the plaintiffs
Ratio: As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated properties", it is clear, in view of our opinion sustaining the validity of the mortgages in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment of the money obligations secured by the mortgages under foreclosure. The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to court to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear.

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BELGIAN CATHOLIC MISSIONARIES VS. MAGALLANES PRESS

Wednesday, July 22, 2009 8:40 AM Belgian Catholic Missionaries vs Magallanes Press Date: November 24, 1926 Plaintiff Appellee: Belgian Catholic Missionaries Inc Defendants Magallanes Press Inc Ponente: Villareal Facts: The Magallanes Press, through manager H. Camena, executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P3,472.92. Later, Magallanes Press, through Camena, also executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P10,715.77. To secure the payment of the PNs which amounted to a total of P14,188.69, H. Camena executed a chattel mortgage on all of the printing machinery and its accessories, belonging to the said Magallanes Press, in favor of J. P. Heilbronn & Co., Inc. Later, Magallanes Press executed a chattel mortgage on the same printing machinery and its accessories in favor of the Belgian Catholic Missionaries Co., Inc to secure the payment of a loan of P30,500, which Magallanes Press had obtained from the Belgian Catholic. Jose Ma. Memije made a loan in the sum of P2,000 to E. F. Clemente which was paid on account of the indebtedness of the Magallanes Press to J. P. Heilbronn & co., Inc., together with the sum of P1,641 which A. F. Mendoza owed said E. F. Clemente. All the promissory note executed by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc., having been overdue for non-payment of the installments as well as the chattel mortgage, the said J. P. Heilbronn & Co., Inc., transferred all its mortgage credit against the Magallanes Press to Jose Ma. Memije in consideration of the sum of P8,280.90, the balance of said mortgage credit. Enrique Clemente, as manager of the Megallane Press Co., Inc., executed a deed in favor of Jose Ma. Memije by virtue of which the chattel mortgage which was given by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc., and transferred by the latter to Jose Ma. Memije, was made to cover an additional loan of P5,895.79, which included the sum of P2,000 which said Jose Ma. Memije had advanced said Enrique Clemente in December, 1922. A fire occurred in the building where the pointing machinery, its accessories and other personal property of the Magallanes Press Co., Inc., were located and which were covered by said chattel mortgages. Said property was insured, and the insurance policies covering it were endorsed to J. P. Heilbronn & Co., Inc., upon the execution of the chattel mortgage thereon in favor of the latter. When J. P. Heilbronn & Co., Inc., transferred its mortgage credit to Jose Ma. Memije it, in turn, endorsed said insurance policies to him. The insurance companies were disposed to pay the respective insurance policies, which amounted to P7,686.45, but due to the issuance of the above-mentioned writ of preliminary injunction, payment could not be made. Due to the filing of the complaint in the present case on May 9, 1923, and the issuance of the writ of preliminary injunction on May 10th of the same year, Jose Ma. Memije was unable to collect the amount of the insurance policies, and when he was summoned under the complaint on May 14, 1923, he made demand on the Magallanes Press Co., Inc., for the payment of his mortgage credit on the same date the manager of said corporation, E. F. Clemente, permitted the secretary of the said corporation to place the property covered by the mortgage into the hands of the said Jose Ma. Memije in order that the same might be sold, but the sale could not be consummated due to the issuance of the said writ of preliminary injunction. Ratio: One of the grounds of said demurrer was that the complaint in this case did not allege facts sufficient to constitute a cause of action against the said defendant, in that, notwithstanding the fact that the said complaint was instituted to annul the document of transfer of the mortgage credit Exhibit C, it was not alleged in the said complaint that the defendant Jose Ma. Memije had any intention to defraud the interests of the plaintiff corporation, which was absolutely impossible due to the nature of the transaction and the preferential character of the mortgage credit of J. P. Heilbronn & Co., Inc. As to this paragraph of the complaint, the plaintiff company having known of the existence of a chattel mortgage in favor of J. P. Heilbronn & Co., Inc., the latter, either as the first or as the second mortgage, had a perfect right to transfer its mortgage credit, without the knowledge or consent of any other mortgagee, inasmuch as whoever acquired it, would have exactly the same status as the transferor with the same rights and obligations. The fact, therefore, that the Magallanes Press Co., Inc., had consented to the transfer of the mortgage credit of J. P. Heilbronn & Co., Inc., to Jose Ma. Memije, does not constitute a fraud that an vitiate the said transfer, inasmuch as the order of preference of the mortgages has not been altered, and its allegations does not constitute a cause of action to annul the said transfer. In regard to the allegation contained in the ninth paragraph of the complaint, it is very clear that the increase made by Jose Ma. Memije in the mortgage credit acquired by him from J.P. Heilbronn & Co., Inc., and the extension made by the Magallanes Press, Inc., of the mortgage to said additional credit without the knowledge or consent of the plaintiff company, as second mortgagee, prejudices the credit of the latter, inasmuch as the security for the payment of said credit was reduced as to it, and, therefore, constitute a fraud that vitiates the contract of extension of the mortgage evidence by the deed Exhibit D, rendering it void. The facts allege in par 9 of the complaint are sufficient to constitute a cause of action of nullity, and the lower court did nor err in overruling the demurrer filed by Jose Ma. Memije. In regard to the second assignment of error, it appears that Jose Ma. Memije having attempted to foreclose the mortgage, by which the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., was secured, in order to recover not only the original credit but also the increase, the Belgian Catholic Missionaries Co., Inc., filed a complaint, with a petition for a writ of preliminary injunction against the sheriff, in whose hands the foreclosure of the mortgage was placed. The writ of preliminary injunction having been issued, upon the filing of a bond in the sum of P15,000, and there being no person more interested in the conservation and custody of the property covered by the mortgage than said plaintiff company, being the largest creditor, it applied and obtained from the court the possession of the same. Contrary to the contention of the appellant, this case is not one of replevin but simply a proceeding instituted by the plaintiff for the deposit of the property in litigation, upon the filing of a bond, said plaintiff, acting as a receiver by authority of the court, being the person most interested in the conservation and care of the same. The lower court, therefore, did not err in authorizing the plaintiff company to take possession of the personal property in litigation upon the filing of a bond sufficient to secure the conservation or value thereof. The third assignment of error raises the question as to the preference of right between the plaintiff company and the defendant over the mortgaged property and the amount of the insurance policies covering a part thereof which was destroyed by fire. As we have seen in the statement of the pertinent facts necessary for the clear and accurate solution of the questions of law involved in the present appeal, the firm of J. P. Heilbronn & Co., Inc., had a mortgage credit against the Magallanes Press for the sum of P14,186.69, secured by a first chattel mortgage. The plaintiff company, the Belgian Catholic Missionaries Co., Inc., also had a mortgage credit for the amount of P30,500, secured by a second mortgage on the same personal property. After this second mortgage had been executed, the payment of the mortgage credit of J.P. Heilbronn & Co., Inc., became due, which credit had

BELGIAN CATHOLIC MISSIONARIES VS. MAGALLANES PRESS

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executed, the payment of the mortgage credit of J.P. Heilbronn & Co., Inc., became due, which credit had been reduced to the sum of P8,280,90 through partial payments, and the herein defendant -appellant Jose Ma. Memije acquired said mortgage credit and increased it by P5,895.59 of which increase P2,000 was a previous loan. There is no question but that J. P. Heilbronn & Co., Inc., at the time of the transfer of this mortgage rights to Jose Ma. Memije, had a preferential right over that of the Belgian Catholic for the remainder of the amount of the mortgage credit, that is, P8,280.90. The plaintiff company had a preferential right to the rest of the value of the mortgaged property after deducting the remaining mortgage credit of J. P. Heilbronn & Co., Inc. The increase of P5,895.59 made by the defendant Jose Ma. Memije in favor of the Magallanes Press Co., Inc., and the extension of the mortgage thereto, are not only subordinate to the mortgage credit of the plaintiff company, being subsequent in time and in registration, but said increase in the security is also void.

The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage Law, the parties to the original deeds swore that the same was mortgaged "to secure the obligations specified therein and for no other purpose." Neither the increase in question, nor the extension of the mortgage to secure the payment of the same is specified in the deed, consequently said extension is void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contacted." Briefly, therefore, we have the following: (a) That Jose Ma. Memije has a preferential right to the value of the chattels mortgage and the amount of the insurance policies up to the sum of P8,280.90; (b) That the plaintiff corporation, the Belgian Catholic Missionaries Co., Inc., has a right to the remainder of the value of said chattels and the insurance policies up to the amount of P30,500, after deducting the preferential credit of Jose Ma. Memije; (c) That as to the increase of P5,895.59, the right of the defendant Jose Ma. Memije is that of an ordinary creditor. In regard to the damages claimed by the defendant in his counterclaim and which is the subject-matter of his remaining assignments of error, said defendant has a right to interest at 12 per cent on the P8,280.90 the amount of the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., from February 26, 1923, the date of the acquisition until fully paid.

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[1926V171] THE BELGIAN CATHOLIC MISSIONARIES, INC., plaintiff -appellee, vs. MAGALLANES PRESS INC., ET AL., defendants JOSE MARIA MEMIJE, appellant.1926 Nov 241st DivisionG.R. No. 25729D E C I S I O N

VILLA-REAL, J.:

This is an appeal taken by Jose Maria Memije from a judgment of the court of First Instance of Manila the dispositive part of which is as follows: "For all the foregoing, the court is of the opinion that the plaintiff has a right to the relief prayed for in its complaint. Wherefore, judgment is rendered declaring that Exhibits C and D, that is, the mortgage deed in question in this proceeding, in so far as they prejud ice the rights of the plaintiff are null and void; that the preliminary injunction issued in this case against the defendant Jose Ma. Memije is fin al and absolute; and that the plaintiff recover the amount of the fire insurance policies of the defendant 'Magallanes Press Inc.,' which, or the repre sentatives of which, is hereby ordered to endorse said insurance policies to the plaintiff, with the costs of the proceeding against the defendants, with the exception of J. P. Heilbronn Co., Inc. It is so ordered." In support of his appeal, the appellant assigns the following supposed errors as committed by the lower court in its judgment , to wit: (1) The court erred in overruling the demurrer filed by this defendant to the complaint in this action; (2) the trial court erred in giving the plaintiff corporation possession of the property mortgaged to this appellant without following the necessary proceedings or complying with the prov isions of the law; (3) the trial court erred in issuing the writ of preliminary injunction against the appellant and E. E. Elser, restraining th e former from receiving from the latter, or the latter from delivering to the former, the amount of the insurance policies discovering the property mortga ged to the appellant, which was damaged by the fire that occurred in the establishment of the Magallanes Press, Inc.; (4) the trial court erred in giving to the unnecessary intervention of the Magallanes Press, Inc., in the execution of the deed of Exhibit C an interpretation which is neither based upon law nor upon the contract; (5) the trial court erred in ordering the suspension of the foreclosure of the appellant's mortgage on the property of the Magallanes Press, Inc.; (6) the trial court erred, under the facts proven in this case, in applying article 1297 of the Civil Code; (7) the trial court erred in finding in its decision that the defendant Jose Ma. Memije should not have executed the documents Exhibits C and D w ithout taking into account the rights of the plaintiff corporation, The Belgan Catholic Missionaries, Inc., (8) the trial court erred in declari ng Exhibits C and D and null and void in so far as they prejudice the rights of the plaintiff, over whose credit that of the herein appellant is preferent ial; in declaring the writ of preliminary injunction issued against the defendant Jose Ma. Memije final and absolute; in giving judgment for the plaintiff to recover the amount of the fire insurance policies of the defendant the Magallanes Press, Inc.; and (9) the trial court erred in not making any p ronouncement as to the counterclaim and cross-complaint of the defendant Jose Ma. Memije in this action, nor taking the same into consideration and rendering judgment thereon in favor of said defendant.
The oral evidence has not been forwarded to this court so that we are compelled to base our opinion exclusively upon the docu mentary evidence and the facts found and stated by the trial court in its judgment. It appears that on December 1, 1921, the Magallanes Press, through its manager H. Camea, executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P3,472.92, with interest at 10 per cent per annum, payable at the rate of P250 a month, plus the interest earned on the unpaid balance, until the whole amount of the indebtedness shall have been paid, the first payment to made on January 1, 1922 , with the condition that upon the failure to pay any monthly installment or the interest earned on the unpaid balance, the whole amount of the indebtedness shall become due, and the maker shall pay the payee an additional sum equivalent to 15 per cent of the total bal ance, for attorney's fee and expenses of collection, forfeiting all right of exemption. On the same date, December 1, 1921, the said Magallanes Press, through its manager H. Camea also executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P10,715. 77, with interest at 12 per cent annum, payable at the rate of P500 a month, t ogether with the interest earned on the unpaid balance, until the whole amount of the indebtedness shall have been paid, the first payment to be made on January 1, 1992, with the condition that upon the failure to pay any monthly installment or the interest earned on the unpaid balance , the whole amount

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of the indebtedness shall become due, and the maker shall pay the payee an additional sum equal to 15 per cent of the total b alance for attorney's fee and expenses of collection forfeiting all right of exemption. To secure the payment of said promissory notes which amounted to a total of P14,188.69, H. Camea, as general manager of the Magallanes Press, executed a chattel mortgage on all the printing machinery and its accessories, belonging to the said Magallanes Press, in favor of J. P. Heilbronn & Co., Inc. On June 19, 1922, the Magallanes Press, Inc., successor to the Magallanes Press, with all the latter's rights and obligations , through its duly authorized president, E. F. Clemente, executed a chattel mortgage on the same printing machinery and its accessories in favor of the Belgian Catholic Missionaries Co., Inc., which the Magallanes Press had mortgaged to J. P. Heilbronn & Co., Inc., to secure the payme nt of a loan of P30,500, with interest at 12 per cent per annum, which the said Magallanes Press & Co., Inc., had obtained from the Belgian C atholic Missionaries Co., Inc., the duration of the mortgage loan being one year from the execution of the mortgage deed.
In December, 1922 the appellant Jose Ma. Memije made a loan in the sum of P2,000 to E. F. Clemente which was paid on account of the indebtedness of the Magallanes Press to J. P. Heilbronn & co., Inc., together with the sum of P1,641 which A. F. Mendoza owed said E. F. Clemente. On the occasion of the issuance of the writ of attachment in civil cause No. 23818 of the Court of First Instance of Manila, entitled Jose Ma. Cavanna vs. The Magallanes Press Co., Inc., the defendant Jose Ma. Memije, on February 21, 1923, filed an intervention in sai d case.

All the promissory notes executed by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc., having been overdue for no n-payment of the installments, as well as the respective chattel mortgage, the said J. P. Heilbronn & Co., Inc., transferred all its mortgage credit against the Magallanes Press to Jose Ma. Memije in consideration of the sum of P8,280.90, the balance of said mortgage credit.
On March 14, 1923, Enrique Clemente, as manager of Jose Ma. Memije by virtue of which the chattel mortgage which was given by the Magallanes Press m favor of J. P. Heilbronn & Co., Inc., and transferred by the latter to Jose Ma. Memije, was made to cover an addition al loan of P5,895.79 which included the sum of P2,000 which said Jose Ma. Memije had advanced said Enrique Clemente in December, 1922. On April 21, 1923, a fire occurred in the building where the printing machinery, its accessories and other personal property of the Magallanes Press Co., Inc., were located and which were covered by said chattel mortgages. Said property was insured, and the insurance polici es covering it were endorsed to J. P. Heilbronn & Co., Inc., upon the execution of the chattel mortgage thereon in favor of the latter. When J. P . Heilbronn & Co., Inc., transferred its mortgage credit to Jose Ma. Memije it, in turn, endorsed said insurance policies to him. The insurance compan ies were disposed to pay the respective insurance policies, which amounted to P7,686.45, but due to the issuance of the above -mentioned writ of preliminary injunction payment could not be made. Due to the filing of the complaint in the present case on May 9, 1923, and the issuance of the writ of preliminary injunction on May 10th of the same year Jose Ma. Memije was unable to collect the amount of the insurance policies, and when he was summoned under the comp laint on May 14, 1923, he made demand on the Magallanes Press Co., Inc., for the payment of his mortgage credit and on the same date the m anager of said corporation, E. f. Clemente permitted the secretary of the said corporation to place the property covered by the mortgage int o the hands of the said Jose Ma. Memije in order that the same might be sold, but the sale could not be consummated due to the issuance of the s aid writ of preliminary injunction. The first question raised by the defendant and appellant has reference to the overruling of the demurrer filed by him to the complaint.

One of the grounds of said demurrer was that the complaint in this case did not allege facts sufficient to constitute a cause of action against the said defendant, in that, notwithstanding the fact that the said complaint was instituted to annul the document of transfer of the mortgage credit Exhibit C, it was not alleged in the said complaint that the defendant Jose Ma. Memije had any intention to defraud the inter ests of the plaintiff corporation, which was absolutely impossible due to the nature of the transaction and the preferential character of the mortg age credit of J. P. Heilbronn & Co., Inc. As to this paragraph of the complaint, the plaintiff company having known of the existence of a chattel mortgage in favor of J. P. Heilbronn & Co., In., the latter, either as the first or as the second mortgagee, had a perfect right to transfer its mortgage credit, without the knowledge or consent of any other mortgagee, inasmuch as whoever acquired it, would have exactly the same status as the transferor with the same r ights and obligations. The fact, therefore, that the Magallanes Press Co., Inc., had consented to the transfer of the mortgage credit o f J. P. Heilbronn & Co., Inc. to Jose Ma. Memije, does not constitute a fraud that can vitiate the said transfer, inasmuch as the order of preference of the existing mortgages has not been altered, and its allegation does not constitute a cause of action to annul the said transfer. In regard to the allegation contained in the ninth paragraph of the complaint, it is very clear that the increase made by Jos e Ma. Memije in the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., and the extension made by the Magallanes Press, inc., of th e mortgage to said additional credit without the knowledge or consent of the plaintiff company, as second mortgage, prejudices the credit latter , inasmuch as the security for the payment of said credit was reduced as to it, and, therefore, constitutes a fraud that vitiates the contract of extension of the mortgage evidences by the deed Exhibit D, rendering it void.
The facts alleged in paragraph 9 of the complaint are sufficient to constitute a cause of action of nullity, and the lower co urt did not err in overruling the demurrer filed by the defendant Jose Ma. Memije. In regard to the second assignment of error, it appears that the defendant Jose Ma. Memije having attempted to foreclose the mortgage, by which the mortgage credit acquired by him from J. P. Heilbronn & Co. Inc., was secured in order to recover not only the original cr edit but also the increase, the Belgian Catholic Missionaries Co., Inc., filed a complaint, with a petition for a writ of preliminary injunctio n against the sheriff, in whose hands the foreclosure of the mortgage was placed. The writ of preliminary injunction having been issued, upon the filin g of a bond in the sum of P15,000, and there being no person more interested in the conservation and custody of the property covered by the mort gage than said plaintiff company, being the largest creditor, it applied and obtained from the court the possession of the same. Contrary to the contention of the appellant, this case is not one of replevin but simply a proceeding instituted by the plain tiff for the deposit of the property in litigation, upon the filing of a bond, said plaintiff acting as a receiver by authority of the court, being the p erson most interested in the conservation and care of the same (sec. 174, Act No. 190; 11 C. J., 726). The lower court, therefore, did not err in authorizing the plaintiff company to take possession of the personal property in l itigation upon the filing of a bond sufficient to secure the conservation or value thereof. The third assignment of error raises the question as to the preference of right between the plaintiff company and the defenda nt over the mortgaged property and the amount of the insurance policies covering a part thereof which was destroyed by fire.

As we have seen in the statement of the pertinent facts necessary for the clear and accurate solution of the questions of law involved in the present appeal, the firm of J. P. Heilbronn & Co., Inc., had a mortgage credit against the Magallanes Press for the sum of P1 4,186.69, secured by a first chattel mortgage. The plaintiff company, the Belgian Catholic Missionaries Co., Inc., also had a mortgage credit for th e amount of P30,500, secured by a second mortgage on the same personal property. After this second mortgage had been executed, the payment of the mortgage credit of J. P. Heilbronn & Co., Inc., became due, which credit had been reduced to the sum of P8,280.90 through partial payments, a nd the herein defendant-appellant Jose Ma. Memije acquired said mortgage credit and increased it by P5,895.59, of which increase of P2,000 was a prev ious loan.

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There is no question but that J. P. Heilbronn & Co., Inc., at the time of the transfer of its mortgage rights to Jose Ma. Mem ije, had a preferential right over that of the Belgian Catholic Missionaries Co., Inc., for the remainder of the amount of the mortgage credit, that is P8,280.90. The plaintiff company had a preferential right to the rest of the value of the mortgaged property after deducting the remaining m ortgage credit of J. P. Heilbronn & Co., Inc.

The increase of P5,895.59 made by the defendant Jose Ma. Memije of the mortgage thereto, are not only subordinate to the mort gage credit of the plaintiff company, being subsequent in time and in registration, but said increase in the security is also void. The incr ease of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date the same are made an not from the dat e of the mortgage (11 C. J., 448; 5 R. C. L., 420 421). In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortga ge Law, the parties to the original deed swore that the same was mortgaged "to secure the obligations specified therein and for no other purpose." N either the increase in question, nor the extension of the mortgage to secure the payment of the same, is specified in the deed, consequently said extension is void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mor tgage cannot be made to secure a debt to be thereafter contracted." (11 C. J., 448.) Briefly, therefore, we have the following:
(a) That Jose Ma. Memije has a preferential right to the value of the chattels mortgaged and the amount of the insurance po licies up to the sum of P8,280.90; (b) That the plaintiff corporation, the Belgian Catholic Missionaries, Co., Inc., has a right to the remainder of the value of said chattels and the insurance to the remainder of the value of said chattels and the insurance policies up to the amount of P30,500, after deduct ing the preferential credit of Jose Ma. Memije; (c ) That as to the increase of P5,895.59, the right of the defendant Jose Ma. Memije is that of an ordinary creditor.

In regard to the damages claimed by the defendant in his counterclaim and which is the subject -matter of his remaining assignments of error, said defendant has a right to interest at 12 per cent of the P8,280.90, the amount of the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., from February 26, 1923, the date of the acquisition until fully paid. For the foregoing reasons, the judgment appealed from is revoked and it is ordered that another be entered declaring all the mortgages overdue, and the mortgage credit of Jose Ma. Memije preferential over that of the Belgian Catholic Missionaries Co., Inc., up to the a mount of P8,280.90, with interest at the rate of 12 per cent per annum from February 26, 1923, until fully paid; the mortgage credit of the Belgi an Catholic Missionaries Co., Inc., for the sum of P30,500 with interest at the rate of 12 per cent per annum, from June 19, 1922, until fully paid, p lus the sum of P3,000 for attorney's fees, over the additional credit of Jose Ma. Memije for P5,895.59; and ordering the foreclosure of the said mortga ges by selling the mortgaged property at public auction, to the proceeds of which shall be added the amount of the insurance policies and the ab ove-mentioned credits in the order of preference above established, without special pronouncement as to costs. So ordered.
Avancea, C.J., Johnson, Street, Ostrand, and Johns, JJ., concur.

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([1926V171] THE BELGIAN CATHOLIC MISSIONARIES, INC., plaintiff-appellee, vs. MAGALLANES PRESS INC., ET AL., defendants JOSE MARIA MEMIJE, appellant., G.R. No. 25729, 1926 Nov 24, 1st Division)

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ACME SHOE, RUBBER & PLASTIC CORP VS. CA

Wednesday, July 22, 2009 8:41 AM

Acme Shoe vs CA Date: August 22, 1996 Petitioners: Acme Shoe, Rubber and Plastic Corporation and Chua Pac Respondents: CA, BPI and Regional Sheriff of Caloocan City
Ponente: Vitug

Facts: - Chua Pac, the president and general manager of Acme Shoe, Rubber & Plastic Corp., executed for and in behalf of the company, a chattel mortgage in favor of Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of P3,000,000. A provision in the chattel mortgage agreement states that if the mortgagor of his heirs, executors or administrators shall well and truly perform their full obligations, then the mortgage shall be null and void. The mortgage shall also stand as security for the payment of subsequent promissory notes, extensions or new loans that the mortgagor shall subsequently execute, including any obligations of the mortgagor to the mortgagee, whether such obligations have been contracted before, during or after the constitution of the mortgage. - In due time, the loan of P3,000,000 was paid by the corporation. Subsequently, in 1981, it obtained from the bank additional accommodations totalling P2,700,000. These borrowings were also fully paid. - On January 1984, the bank yet again extended to the corporation a loan of P1,000,000. covered by four promissory notes for P250,000 each. Due to financial constraints, the loan was not settled at maturity. The bank applied for an extra judicial foreclosure of the chattel mortgage, with the Sheriff of Caloocan City, prompting the corporation to file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the RTC. The court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held the corporation was bound by the stipulations of the chattel mortgage. The CA affirmed. Issue: WON a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred is valid Held: No
Ratio: Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debt or is secured by the personal commitment of another. In contracts of real security, 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. 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 mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.

Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. - A chattel mortgage must comply substantially with the form prescribed by the Chattel Mortgage Law itself.

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- A chattel mortgage must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith , the fact, however, that the statute has provided that the parties to the contract must execute an oath makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000 loan which the corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, vs. Magallanes Press: . . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. - The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3,000,000 loan, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.

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ONG LIONG TIAK VS. LUNETA MOTOR CO.

Wednesday, July 22, 2009 8:41 AM

Ong Liong Tiak vs Luneta Motors Date: November 7, 1938 Plaintiff Appellant: Ong Liong Tiak Defendant Appellees: Luneta Motor Company and the Sheriff of Manila
Ponente: Diaz

Facts: S. Arellano Choa Siong, the registered owner of Chrysler Sedan automobile transferred the ownership thereof to the plaintiff-appellant, to which effect he endorsed his certificate of registration in favor of the latter. S. Arellano Choa Siong purchased said automobile from the Luneta Motor Co. However, instead of paying the price thereof, which was P1,800 he executed 18 PNs for P100 each in favor of the vendor, binding himself to redeem one after another, every month. To secure the payment of said 18 PNs and that of articles he might take from his creditor, such as gasoline, tires, automobile accessories, etc., and to secure also the payment of any other obligation that he might contract with it, he constituted a mortgage on the automobile in question, executing to that effect in favor of the Luneta Motor Co., the instrument of mortgage, Exhibit 2, one of the clauses of which reads as follows: . . . it being expressly agreed further that this
mortgage shall also serve as security for the payment to the said mortgagee in addition to the aforesaid notes of the purchas e price or cost of any and all gasoline, tires, automobile accessories or parts, and repairs furnished or made by the said mortgagee at any time up to the date this mortgage is completely satisfied as and when the same becomes due, and of any other indebtedness of the mort gagor in favor of the mortgagee incurred in any other manner whatever.

one Jeronimo Angeles obtained from Macondray & Co., Inc. paints and other merchandise of the total value of P407. For the payment of this amount, S. Arellano Choa Siong acted as surety up to the sum of P300, having paid the sum of balance P160 on account, on March 30, 1933, thereby leaving a balance against him in the sum of P140. In this state of affairs, Macondray & Co., Inc., assigned its credit against S. Arellano Choa Siong, who offered no objection thereto. On the contrary, he paid P40 on account, shortly thereafter, thereby leaving a balance of P100. About April 4, 1933, S. Arellano Choa Siong made the last payment of the eighteen promissory notes which he had executed in favor of the defendant-appellee.

However, as there still existed in its favor a credit of P100 for the paints and other merchandise taken by Jeronimo Angeles from Macondray & Co., Inc. under the personal guaranty of S. Arellano Choa Siong, which sum was assigned to it by said Macondray & Co., Inc. without any objection on the part of S. Arellano Choa Siong, the defendant-appellee refused to cancel the instrument of mortgage Exhibit 2. On the contrary, it foreclosed to mortgage constituted in its favor, causing the sheriff to attach the above -mentioned automobile. It is for the purpose of setting aside said attachment that the plaintiff filed his complaint in this case, seeking what has already been set forth hereinbefore.
Ong Liong Tiak appealed from the decision rendered by the CFI, overruling and dismissing his complaint, wherein he sought an injunction against the defendant and a judgment in his favor for damages in the sum of P500, plus the costs. Ratio: Taking into account the circumstances of the case, and particularly the obligation assumed by S. Arellano Choa Siong, according to the terms of the above-quoted clause of the instrument of mortgage Exhibit 2, this court holds that the lower court committed none of the errors attributed to it by the appellant.

It was right in holding that, by interpreting the terms of Exhibit 2, the automobile in question is still remained subject to the lien stated in said instrument, inasmuch as the account, which S. Arellano Choa Siong accepted and bound himself to pay for Jeronimo Angeles, had not been completely settled.
Instruments of mortgage, as said Exhibit 2, are binding, while they subsist, not only upon the parties executing them but also upon those who later, by purchase or otherwise, acquire the properties referred to therein. The right of those who so acquire said properties should not and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed for the formalities of the law, in good faith, and without the least indication of fraud. This is all the more true in the present case, because, when the plaintiff purchased the automobile in question on august 22, 1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument of mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such circumstances existed, it

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automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had.

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PRUDENTIAL BANK VS. ALVIAR

Wednesday, July 22, 2009 8:41 AM

Prudential Bank vs Alviar Date: July 28, 2005 Petitioner: Prudential Bank Respondents: Don Alviar and Georgia Alviar
Ponente: Tinga

Facts: The spouses Alviar are the registered owners of a parcel of land in San Juan. They executed a deed of real estate mortgage in favor of Prudential Bank to secure the payment of a loan worth P250,000. Respondents executed the corresponding PN covering the said loan. Significantly, the real estate mortgage contained the following clause: the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . Don Alviar executed a PN for P2,640,000, secured by D/A SFDX #129, signifying that the loan was secured by a hold-out on the mortgagors foreign currency savings account with the bank, and that the mortgagors passbook is to be surrendered to the bank until the amount secured by the hold -out is settled. Later, the spouses executed for Donalco Trading Inc (of which spouses were officers) PN covering P545,000. As provided in the note, the loan is secured by Clean -Phase out TOD CA 3923, which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a CB circular directing the discontinuance of overdrafts. Petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan of P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation equipment. Respondents paid petitioner P2,000,000, to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the P450,000 loan covering the 2 lots located Greenhills. The payment was acknowledged by petitioner who accordingly released the mortgage over the two properties. Petitioner moved for the extrajudicial foreclosure of the mortgage on the property. Per petitioners computation, respondents had the total obligation of P1,608,256.68, covering the 3 PNs. Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the RTC of Pasig, claiming that they have paid their principal loan secured by the mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by a separate mortgage. The trial court dismissed the complaint and ordered the sheriff to proceed with the foreclosure. The CA affirmed. It ruled that while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.
Issue: WON the blanket mortgage clause covers the two other PNs (propriety of foreclosure)

Held: No Ratio: At this point, it is important to note that one of the loans sought to be included in the blanket mortgage clause was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C -430 was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for obligations they incurred for the corporation. The mortgage contract states that the mortgage covers as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary. Well -settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing

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disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues. PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not within the contemplation of the blanket mortgage clause. Moreover, petitioner is unable to show that respondents are hiding behind the corporate structure to evade payment of their obligations. Save for the notation in the promissory note that the loan was for house construction and personal consumption, there is no proof showing that the loan was indeed for respondents personal consumption. Besides, petitioner agreed to the terms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long standing that it is, should have insisted that the note be made in the name of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity and not as officers of the corporation. A blanket mortgage clause, also known as a dragnet clause in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are carefully scrutinized and strictly construed. Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A dragnet clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. Contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise. The cases cited by petitioner, while affirming the validity of dragnet clauses or blanket mortgage clauses, are of a different factual milieu from the instant case. There, the subsequent loans were not covered by any security other than that for the mortgage deeds which uniformly contained the dragnet clause. In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a hold -out on his foreign currency savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by Clean -Phase out TOD CA 3923 and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The matter of PN BD#76/C -430 has already been discussed. Thus, the critical issue is whether the blanket mortgage clause applies even to subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C -345. Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a dragnet clause so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such other debt is secured by another mortgage. The contrary thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement. The latter school represents the better position. The parties having conformed to the blanket mortgage clause or dragnet clause, it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a corollary component of the dragnet clause. But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather, on the new security given. This is the reliance on the security test. Hence, based on the reliance on the security test, the California court in the cited case made an inquiry whether the second loan was made in reliance on the original security containing a dragnet clause. Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred, so it was held. The rationale involved, the court said, was that the dragnet clause in the first security instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the offer. In another case, it was held that a mortgage with a dragnet clause is an offer by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the offer was not accepted by the bank when a subsequent advance was made because (1) the second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage; (2) there was no reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the advance; (3) the mortgagor

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mortgage indicating a connection between the real estate mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance. Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor. It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment of all the three promissory notes. While the existence and validity of the dragnet clause cannot be denied, there is a need to respect the existence of the other security given for PN BD#76/C -345. The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD# 75/C-252, and for any amount not covered by the security for the second promissory note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security. This is recognition that while the dragnet clause subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to. One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of adhesion, to which respondents only participation was the affixing of their signatures or adhesion thereto. A contract of adhesion is one in which a party imposes a ready -made form of contract which the other party may accept or reject, but which the latter cannot modify. The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be strictly construed against the party responsible for its preparation. If the parties intended that the blanket mortgage clause shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care. To be more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it, which is the petitioner in this case. Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with even more reason since having been accomplished by respondents in the presence of petitioners personnel and approved by its manager, they could not have been unaware of the import and extent of such contracts. Petitioner, however, is not without recourse. Both the CA and the trial court found that respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of course to defenses which are available to respondents.
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/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez ---\ [2005V812] PRUDENTIAL BANK, Petitioner, versus DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.2005 Jul 282nd DivisionG.R. No. 150197D E C I S I O N

Tinga, J.: Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner Prudential Bank seeks the reversal of the Decision[1] of the Court of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure the payment of a loan worth P250,000.00.[2] This mortgage was annotated at
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Prudential Bank to secure the payment of a loan worth P250,000.00.[2] This mortgage was annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and that the note is secured by a real estate mortgage as aforementioned.[3] Significantly, the real estate mortgage contained the following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .[4]

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a hold -out on the mortgagors foreign currency savings account with the bank under Account No. 129, and that the mortgagors passbook is to be surrendered to the bank until the amount secured by the hold -out is settled.[5]

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife were President and Chairman of the Board and Vice President,[6] respectively, PN BD#76/C-430 covering P545,000.000. As provided in the note, the loan is secured by Clean -Phase out TOD CA 3923, which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a Central Bank circular directing the discontinuance of overdrafts.[7]

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan of P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation equipment.[8]

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was acknowledged by petitioner who accordingly released the mortgage over the two properties.[9]

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On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered by TCT No. 438157. Per petitioners computation, respondents had the total obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due interests and penalty charges. The public auction sale of the mortgaged property was set on 15 January 1980.[10]

Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the RTC of Pasig,[11] claiming that they have paid their principal loan secured by the mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by a separate mortgage.[12]
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the extra-judicial foreclosure.[13] Respondents sought reconsideration of the decision.[14] On 24 August 1994, the trial court issued an Order setting aside its earlier decision and awarded attorneys fees to respondents.[15] It found that only the P250,000.00 loan is secured by the mortgage on the land covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by the foreign currency deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a Central Bank circular. According to the trial court, the blanket mortgage clause relied upon by petitioner applies only to future loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof. On appeal to the Court of Appeals, petitioner made the following assignment of errors: I. The trial court erred in holding that the real estate mortgage covers only the promissory note BD#75/C-252 for the sum of P250,000.00.

II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by expressed agreement. III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.

V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorneys fees for P20,000.00.*16+

The Court of Appeals affirmed the Order of the trial court but deleted the award of attorneys fees.*17+ It ruled that while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.[18]
The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for the obligations of G.B. Alviar Realty and Development, Inc.[19]

Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of Appeals as grounds herein.

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Petitioner maintains that the blanket mortgage clause or the dragnet clause in the real estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other promissory notes included in the application for extrajudicial foreclosure of real estate mortgage.[20] Thus, it claims that it acted within the terms of the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v. Lutero,[21] Tad-Y v. Philippine National Bank,[22] Quimson v. Philippine National Bank,[23] C & C Commercial v. Philippine National Bank,[24] Mojica v. Court of Appeals,[25] and China Banking Corporation v. Court of Appeals,[26] all of which upheld the validity of mortgage contracts securing future advancements.

Anent the Court of Appeals conclusion that the parties did not intend to include PN BD#76/C -345 in the real estate mortgage because the same was specifically secured by a foreign currency deposit account, petitioner states that there is no law or rule which prohibits an obligation from being covered by more than one security.[27] Besides, respondents even continued to withdraw from the same foreign currency account even while the promissory note was still outstanding, strengthening the belief that it was the real estate mortgage that principally secured all of respondents promissory notes.*28+ As for PN BD#76/C-345, which the Court of Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the dragnet clause of the real estate mortgage covers all the obligations of the respondents.[29]

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the promissory notes were executed by them not in their personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states that there is a need to pierce the veil of corporate fiction.[30]

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and understanding of the dragnet clause, being highly educated individuals, seasoned businesspersons, and political personalities.[31] There was no oppressive use of superior bargaining power in the execution of the promissory notes and the real estate mortgage.[32]

For their part, respondents claim that the dragnet clause cannot be applied to the subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate promissory notes that expressly provide for a different form of security.[33] They reiterate the holding of the trial court that the blanket mortgage clause would apply only to loans obtained jointly by respondents, and not to loans obtained by other parties.[34] Respondents also place a premium on the finding of the lower courts that the real estate mortgage clause is a contract of adhesion and must be strictly construed against petitioner bank.[35]

The instant case thus poses the following issues pertaining to: (i) the validity of the blanket mortgage clause or the dragnet clause; (ii) the coverage of the blanket mortgage clause; and consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the non-payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the blanket mortgage clause was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C -430 was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for obligations they incurred for the corporation. The mortgage contract states that the mortgage covers as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or

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and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary. Well -settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority.[36] However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.[37] PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not within the contemplation of the blanket mortgage clause. Moreover, petitioner is unable to show that respondents are hiding behind the corporate structure to evade payment of their obligations. Save for the notation in the promissory note that the loan was for house construction and personal consumption, there is no proof showing that the loan was indeed for respondents personal consumption. Besides, petitioner agreed to the terms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long standing that it is, should have insisted that the note be made in the name of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity and not as officers of the corporation.

Now on the main issues.

A blanket mortgage clause, also known as a dragnet clause in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are carefully scrutinized and strictly construed.*38+ Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction.[39] A dragnet clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.[40] Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts,[41] and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.[42]

The blanket mortgage clause in the instant case states: That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .[43] ( mphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit

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facilities and advancements that may be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise.

The cases cited by petitioner, while affirming the validity of dragnet clauses or blanket mortgage clauses, are of a different factual milieu from the instant case. There, the subsequent loans were not covered by any security other than that for the mortgage deeds which uniformly contained the dragnet clause.

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a hold -out on his foreign currency savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by Clean-Phase out TOD CA 3923 and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The matter of PN BD# 76/C-430 has already been discussed. Thus, the critical issue is whether the blanket mortgage clause applies even to subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a dragnet clause so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such other debt is secured by another mortgage.[44] The contrary thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein,[45] such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement.[46]

The latter school represents the better position. The parties having conformed to the blanket mortgage clause or dragnet clause, it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a corollary component of the dragnet clause. But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather, on the new security given. This is the reliance on the security test.

Hence, based on the reliance on the security test, the California court in the cited case made an inquiry whether the second loan was made in reliance on the original security containing a dragnet clause. Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred, so it was held. The rationale involved, the court said, was that the dragnet clause in the first security instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the offer.[47]

In another case, it was held that a mortgage with a dragnet clause is an offer by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. Thus, it

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was concluded that the offer was not accepted by the bank when a subsequent advance was made because (1) the second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage; (2) there was no reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance.[48]

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.[49]

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment of all the three promissory notes. While the existence and validity of the dragnet clause cannot be denied, there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security.*50+ This is recognition that while the dragnet clause subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to.

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of adhesion, to which respondents only participation was the affixing of their signatures or adhesion thereto.*51+ A contract of adhesion is one in which a party imposes a ready -made form of contract which the other party may accept or reject, but which the latter cannot modify.[52]

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be strictly construed against the party responsible for its preparation.*53+ If the parties intended that the blanket mortgage clause shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care.[54] To be more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it,[55] which is the petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with even more reason since having been accomplished by respondents in the presence of petitioners personnel and approved by its manager, they could not have been unaware of the import and extent of such contracts.

Banking Page 465

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is AFFIRMED.

Costs against petitioner.

SO ORDERED.

DANTE O. TINGA

Associate Justice

WE CONCUR:

REYNATO S. PUNO Associate Justice Chairman

MA. ALICIA AUSTRIA-MARTINEZ L Associate Justice

ROMEO J. CALLEJO, SR. Associate Justice

Banking Page 466

MINITA V. CHICO-NAZARIO Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Associate Justice Chairman, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairmans Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

HILARIO G. DAVIDE, JR. Chief Justice

Banking Page 467

[1]Penned by Associate Justice Juan Q. Enriquez. Jr., Associate Justices Ruben T. Reyes and Mercedes Gozo-Dadole, concurring; Rollo, pp. 45-53.

[2]Id. at 46.

[3]Ibid.

[4]Real Estate Mortgage, RTC Records, p. 47.

[5]Rollo, p. 46.

[6]TSN, 22 October 1982, p. 6.

[7]Rollo, p. 46.

[8]Id. at 47.

[9]Ibid.

[10]Ibid.

[11]RTC Records, pp. 1-6.

[12]Id. at 60.

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[13]Id. at 575-580.

[14]Id. at 585-595.

[15]Id. at 703-709.

*16+Appellants Brief, CA Rollo, pp. 36-63.

[17]Rollo, pp. 45-53.

[18]Id. at 51.

[19]Id. at 51-52.

[20]Id. at 23-24.

[21]49 Phil. 703 (1926).

[22]120 Phil. 806 (1964).

[23]146 Phil. 629 (1970).

[24]G.R. No. 42449, July 5, 1989, 175 SCRA 1.

[25]G.R. No. 94247, September 11, 1991, 201 SCRA 517.

[26]333 Phil. 158 (1996).

[27]Rollo, p. 33.

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[28]Id. at 34.

[29]Id. at 36.

[30]Id. at 37.

[31]Id. at 39.

[32]Id. at 40.

[33]Id. at 69.

[34]Id. at 73.

[35]Id. at 74.

[36]Complex Electronics Employees Association v. National Labor Relations Commission, 369 Phil. 666, 681 (1999).

[37]Nicario v. National Labor Relations Commission, et al., 356 Phil. 936, 944 (1998), citing Pabalan v. NLRC, 184 SCRA 495 (1990).

[38]Philippine Bank of Communications v. Court of Appeals, 323 Phil. 297, 312 (1996), citing 55 Am. Jur 2d, Mortgages, 142, 283-284.

*39+54 Am Jur 2d, Mortgages, 65, 638.

[40]Newton County Bank v. Jones, 229 So.2d 215.

[41]Mojica v. Court of Appeals, supra note 25 at 522.

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[42]China Banking Corporation v. Court of Appeals, supra note 26 at 170, citing Mojica v. Court of Appeals, supra.

[43]Supra note 4.

*44+54A Am Jur 2d, Mortgages, 73, 646, citing Anglo-Californian Bank, Ltd. V. Cerf, 147 Cal 384, 81 P 1077.

*45+33 Cal Jur 2d 123, 520, citing Moran v. Gardenmeyer 82 C 102, 23 P 8.

[46]Anglo-Californian Bank, Ltd. V. Cerf, supra note 44.

[47]3 ALR4th, Dragnet Clause Modern Status, 21*b+, 741, citing Union Bank v. Wendland, 54 Cal App 3d 393, 126 Cal Rptr 549.

*48+Id. at 7, citing Nat. Bank v. Boyle, 99 NE2d 474.

[49]Emporia State Bank & Trust Co. v. Monkes, 214 Kan 178, 519 P2d 618, Decorah State Bank v. Zidlicky (Iowa) 426 NW2d 388.

[50]Anglo-Californian Bank, Ltd. V. Cerf, supra note 44.

[51]Philippine Bank of Communications v. Court of Appeals, supra note 38.

[52]Unimasters Conglomeration, Inc. v. Court of Appeals, 335 Phil. 415, 437 (1997).

[53]Prudential Bank v. Intermediate Appellate Court, G.R. No. 74886, 8 December 1992, 216 SCRA 257, 275.

[54]Garcia v. Court of Appeals, 327 Phil. 1097, 1111 (1996), citations omitted.

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[55]Ibid.

\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez ---/ ([2005V812] PRUDENTIAL BANK, Petitioner, versus DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents., G.R. No. 150197, 2005 Jul 28, 2nd Division)

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CUYCO VS. CUYCO

Wednesday, July 22, 2009 8:42 AM

Cuyco vs Cuyco Date: April 19, 2006 Petitioners: Spouses Adelina and Feliciano Cuyco Respondents: Spouses Renato and Filipina Cuyco

Ponente: Ynares Santiago Facts: Petitioners obtained a loan in the amount of P1,500,000 from respondents,secured by a Real Estate Mortgage over a parcel of land with improvements in Cubao. Subsequently, petitioners obtained additional loans from the respondents in the aggregate amount of P1,250,000. Petitioners made payments amounting to P291,700.00, but failed to settle their outstanding loan obligations. Thus, respondents filed a complaint for foreclosure of mortgage with the RTC of AC. They alleged that petitioners loans were secured by the real estate mortgage; that as of August 31, 1997, their indebtedness amounted to P6,967,241.14, inclusive of the 18% mo c; and that petitioners refusal to settle the same entitles the respondents to foreclose the real estate mortgage. Petitioners admitted their loan obligations but argued that only the original loan of P1,500,000.00 was secured by the real estate mortgage at 18% pa and that there was no agreement that the same will be compounded monthly. The RTC ruled in favor of respondents. The CA modified and ruled that by express intention of the parties, the real estate mortgage secured the original P1,500,000.00 loan and the subsequent loans of P150,000 and P500,000. As regards the loans obtained in the amounts of P150,000.00, P200,000.00 and P250,000.00, the CA held that the parties never intended the same to be secured by the real estate mortgage. The CA also found that the trial court properly imposed 12% legal interest on the stipulated interest from the date of filing of the complaint.
Issue: As to the interest rates Ratio: Petitioners contend that the imposition of the 12% legal interest per annum on the stipulated interest of 18% per annum computed from the filing of the complaint until fully paid was not provided in the real estate mortgage contract, thus, the same has no legal basis. We are not persuaded. While a contract is the law between the parties, it is also settled that an existing law enters into and forms part of a valid contract without the need for the parties expressly making reference to it. Thus, the lower courts correctly applied Article 2212 of the Civil Code as the basis for the imposition of the legal interest on the stipulated interest due. The foregoing provision has been incorporated in the comprehensive summary of existing rules on the computation of legal interest enunciated by the Court in Eastern Shipping Lines, Inc. v. CA:
1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, th e interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest fromthe time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 CC. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Co de) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim perio d being deemed to be by then an equivalent to a forbearance of credit.

In the case at bar, the evidence shows that petitioners obtained several loans from the respondent, some of which as held by the CA were secured by real estate mortgage and earned an interest of 18% per annum. Upon default thereof, respondents demanded payment from the petitioners by filing an action for foreclosure of the real estate mortgage. Clearly, the case falls under the rule stated in paragraph 1. Applying the rules in the computation of interest, the principal amount of loans subject of the real estate mortgage must earn the stipulated interest of 18% per annum, which interest, as long as unpaid, also earns legal interest of 12% per annum, computed from the date of the filing of the complaint on September 10, 1997 until finality of the Courts Decision. Such interest is not due to stipulation but due to the mandate of the law as embodied in Article 2212 of the Civil Code. From such date of finality, the total amount due shall earn interest of 12% per annum until satisfied.

Issue: WON all five additional loans were intended to be secured by the real estate mortgage

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Issue: WON all five additional loans were intended to be secured by the real estate mortgage Held: No Ratio: The RTC held that all the additional loans were secured by the real estate mortgage. The CA modified the RTC decision holding that only two were secured by the REM. In such case, the specific amount mentioned in the real estate mortgage contract no longer controls. By express intention of the mortgagors (defendants -appellants) the real estate mortgage contract, as supplemented, secures the P1,500,000.00 loan obtained on 25 November 1991; the P150,000.00 loan obtained on 01 July 1992; and the P500,000.00 loan obtained on 05 September 1992. All these loans are subject to stipulated interest of 18% per annum provided in the real estate mortgage contract.
With respect to the other subsequent loans of the defendants -appellants in the amount of P150,000.00, obtained on 31 May 1992; in the amount of P200,000.00, obtained on 29 October 1992; and, in the amount of P250,000.00, obtained on 13 January 1993, nothing in the records remotely suggests that the mortgagor (defendants-appellants), likewise, intended the said loans to be secured by the real estate mortgage contract. Consequently, we rule that the trial court did err in declaring said loans to be secured by the real estate mortgage contract. As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract. However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is valid and binding between the parties and is known in American Jurisprudence as the blanket mortgage clause, also known as a dragnet clause. A dragnet clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. The pertinent provisions of the November 26, 1991 real estate mortgage reads: PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be subject to foreclosure in the manner and form provided by law.

It is clear from a perusal of the real estate mortgage that there is no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule above stated. Even if the parties intended the additional loans of P150,000.00 obtained on May 30, 1992, P150,000.00 obtained on July 1, 1992, and P500,00.00 obtained on September 5, 1992 to be secured by the same real estate mortgage, as shown in the acknowledgement receipts, it is not sufficient in law to bind the realty for it was not made substantially in the form prescribed by law. In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry. A mortgage in legal form is not constituted by a private document, even if such mortgage be accompanied with delivery of possession of the mortgage property. Besides, by express provisions of Section 127 of Act No. 496, a mortgage affecting land, whether registered under said Act or not registered at all, is not deemed to be sufficient in law nor may it be effective to encumber or bind the land unless made substantially in the form therein prescribed. It is required, among other things, that the document be signed by the mortgagor executing the same, in the presence of two witnesses, and acknowledged as his free act and deed before a notary public. A mortgage constituted by means of a private document obviously does not comply with such legal requirements.
What the parties could have done in order to bind the realty for the additional loans was to execute a new real estate mortgage or to amend the old mortgage conformably with the form prescribed by the law. Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the respondents in an ordinary action for collection of sums of money. Issue: WON payment only of the principal and the stipulated interest of 18% pa is sufficient as the mortgage document does not contain a stipulation that the legal interest on the stipulated interest due, attorneys fees, and costs of suit must be paid first before the same may be discharged

Banking Page 474

Held: No Ratio: Section 2, Rule 68 of the Rules of Court provides: SEC. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. Indeed, the above provision of the Rules of Court provides that the mortgaged property may be charged not only for the mortgage debt or obligation but also for the interest, other charges and costs approved by the court. Thus, to discharge the real estate mortgage, petitioners must pay the respondents (1) the total amount due, as computed in accordance with the formula indicated above, that is, the principal loan of P1,500,000.00, the stipulated interest of 18%, the interest on the stipulated interest due of 12% computed from the filing of the complaint until finality of the decision less partial payments made, (2) the 12% legal interest on the total amount due from finality until fully satisfied, (3) the reasonable attorneys fees of P25,000.00 and (4) the costs of suit, within the period specified by the Rules. Should the petitioners default in the payment thereof, the property shall be sold at public auction to satisfy the judgment.

Pasted from <file:///E:\LAW%20SCHOOL%20FILES\4y1s\Banking\Banking\Cuyco%20vs%20Cuyco.docx>

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Act 1508 Chattel mortgage law

Wednesday, July 22, 2009 1:30 PM

ACT NO. 1508 - AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE REGISTRATION OF THE MORTGAGES SO EXECUTED

SECTION 1. The short title of this Act shall be "The Chattel Mortgage Law."

SECTION 2. All personal property shall be subject to mortgage, agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage. SECTION 3. Chattel mortgage defined. A chattel mortgage 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. SECTION 4. Validity. A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated: Provided, however, That if the property is situated in a different province from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.
SECTION 5. Form. A chattel mortgage shall be deemed to be sufficient when made substantially in accordance with the following form, and shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the mortgage as above stated, and the certificate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith.

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

"This mortgage made this ____ day of ______19____ by _______________, a resident of the municipality of ______________, Province of ____________, Philippine Islands mortgagor, to ____________, a resident of the municipality of ___________, Province of ______________, Philippine Islands, mortgagee, witnesseth:

"That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following described personal property situated in the municipality of ______________, Province of ____________ and now in the possession of said mortgagor, to wit: (Here insert specific description of the property mortgaged.)
"This mortgage is given as security for the payment to the said ______, mortgagee, of promissory notes for the sum of ____________ pesos, with (or without, as the case may be) interest thereon at the rate of ___________ per centum per annum, according to the terms of __________, certain promissory notes, dated _________, and in the words and figures following (here insert copy of the note or notes secured).

"(If the mortgage is given for the performance of some other obligation aside from the payment of promissory notes, describe correctly but concisely the obligation to be performed.) "The conditions of this obligation are such that if the mortgagor, his heirs, executors, or administrators shall well and truly perform the full obligation (or obligations) above stated according to the terms thereof, then this obligation shall be null and void.

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"Executed at the municipality of _________, in the Province of ________, this _____ day of 19_____
____________________ (Signature of mortgagor.) "In the presence of

"_________________ "_________________ (Two witnesses sign here.) FORM OF OATH. "We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud."
FORM OF CERTIFICATE OF OATH. "At ___________, in the Province of _________, personally appeared ____________, the parties who signed the foregoing affidavit and made oath to the truth thereof before me.

"_____________________________" (Notary public, justice of the peace, 1 or other officer, as the case may be.)
SECTION 6. Corporations. When a corporation is a party to such mortgage the affidavit required may be made and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage the affidavit may be made and subscribed by one member thereof.

SECTION 7. Descriptions of property. The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same.
If the property mortgaged be large cattle," as defined by section one of Act Numbered Eleven and forty-seven, 2 and the amendments thereof, the description of said property in the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos, or cowlicks, and other marks of ownership as described and set forth in the certificate of ownership of said animal or animals, together with the number and place of issue of such certificates of ownership.

If growing crops be mortgaged the mortgage may contain an agreement stipulating that the mortgagor binds himself properly to tend, care for and protect the crop while growing, and faithfully and without delay to harvest the same, and that in default of the performance of such duties the mortgage may enter upon the premises, take all the necessary measures for the protection of said crop, and retain possession thereof and sell the same, and from the proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. SECTION 8. Failure of mortgagee to discharge the mortgage. If the mortgagee, assign, administrator, executor, or either of them, after performance of the condition before or after the breach thereof, or after tender of the performance of the condition, at or after the time fixed for the performance, does not within ten days after being requested thereto by any person entitled to redeem, discharge the mortgage in the manner provided by law, the person entitled to redeem may recover of the person whose duty it is to discharge the same twenty pesos for his neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject-matter thereof.

SECTION 9-12. (inclusive) 3

SECTION 13. When the condition of a chattel mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the sale thereof. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it by

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mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it by the terms of this Act. SECTION 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds. The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of condition broken, 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, provided at least ten days' notice of the time, place, and purpose of such sale has been posted at two or more public places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of 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 municipality, at least ten days previous to the sale. The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the register of deeds where the mortgage is recorded, and the register of deeds shall record the same. The fees of the officer for selling the property shall be the same as in the case of sale on execution as provided in Act Numbered One hundred and ninety, 4 and the amendments thereto, and the fees of the register of deeds for registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the register of deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage.

The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as required by section sixteen of Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of the municipality where the sale was held to the purchaser thereof. SECTION 15. 6, 6a

SECTION 16. This Act shall take effect on August first, nineteen hundred and six. Enacted, July 2, 1906.

Footnotes

1. Now Municipal judge. 2. Now section 511 of the Administrative Code. 3. Repealed by Act 3815, Article 367 approved December 8, 1930. 4. Now Rule 141, section 7 of the Rules of Court. 5. Now Section 523 of the Administrative Code. 6. Superseded by section 198 of the Administrative Code. The following is the present text of section 198 as amended by RA 2711, approved June 18, 1960.
"SECTION 198. Registration of chattel mortgages and fees collectible in connection therewith. Every register of deeds shall keep a primary entry book and a registration book for the chattel mortgages; shall certify on each mortgage filed for record, as well as on its duplicate, the date, hour, and minute when the same was by him received; and shall record in such books any chattel mortgage, assignment, or discharge thereof, and any other instruments relating to a recorded mortgage, and all such instruments shall be presented to him in duplicate, the original to be filed and the duplicate to be returned to the person concerned. "The recording of a mortgage shall be effected by making an entry, which shall be given a correlative number, setting forth the names of the mortgagee, and the mortgagor, the sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving the proper file number thereof. The recording of other instruments relating to a recorded mortgage shall be effected by way of annotations on the space provided therefor in the registration book, after the same shall have been entered in the primary entry book.

"The register of deeds shall also certify the officer's return of sale upon any mortgage, making reference upon the record of such officer's return to the volume and page of the record of the mortgage, and a reference of such return on the record of the mortgage itself, and give a certified copy thereof, when requested, upon

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payment of the lawful fees for such copy; and certify upon each mortgage officer's return of sale or discharge of mortgage; and upon any other instrument relating to such a recorded mortgage, both on the original and on the duplicate, the date, hour, and minute when the same is received for record and record such certificate with the return itself and keep an alphabetical index of mortgagors and mortgagees, which record and index shall be open to public inspection.
"Duly certified copies of such records and of filed instruments shall be receivable as evidence in any court.

"The register of deeds shall collect the following fees for services rendered by him under this section:
"(a) For entry or presentation of any document in the primary entry book, one peso. Supporting papers presented together with the principal document need not be charged any entry or presentation fee unless the party in interest desires that they be likewise entered.

"(b) For filing and recording each chattel mortgage, including the necessary certificates and affidavits, the fees established in the following schedule shall be collected:
"1. When the amount of the mortgage does not exceed six thousand pesos, three pesos and fifty centavos for the first five hundred pesos or fractional part thereof, and one peso and fifty centavos for each additional five hundred pesos or fractional part thereof.

"2. When the amount of the mortgage is more than six thousand pesos but does not exceed thirty thousand pesos, twenty-four pesos for the initial amount not exceeding eight thousand pesos, and four pesos for each additional two thousand pesos or fractional part thereof. "3. When the amount of the mortgage is more than thirty thousand pesos but does not exceed one hundred thousand pesos, seventy-five pesos for the initial amount not exceeding thirty-five thousand pesos, and seven pesos for each additional five thousand pesos or fractional part thereof. "4. When the amount of the mortgage is more than one hundred thousand pesos but does not exceed five hundred thousand pesos, one hundred and seventy-six pesos for the initial amount not exceeding one hundred ten thousand pesos, and ten pesos for each additional ten thousand pesos or fractional part thereof.
"5. When the amount of the mortgage is more than five hundred thousand pesos, five hundred eightyone pesos for the initial amount not exceeding five hundred twenty thousand pesos, and fifteen pesos for each additional twenty thousand pesos or fractional part thereof: Provided, however, That registration of the mortgage in the province where the property is situated shall be sufficient registration: And provided, further, That if the mortgage is to be registered in more than one city or province, the register of deeds of the city or province where the instrument is first presented for registration shall collect the full amount of the fees due in accordance with the schedule prescribed above, and the register of deeds of the other city or province where the same instrument is also to be registered shall collect only a sum equivalent to twenty per centum of the amount of fees due and paid in the first city or province, but in no case shall the fees payable in any registry be less than the minimum fixed in said schedule. "(c) For recording each instrument of sale, conveyance, or transfer of the property which is subject of a recorded mortgage, or of the assignment of mortgage credit, the fees established in the preceding schedule shall be collected on the basis of ten per centum of the amount of the mortgage or unpaid balance thereof: Provided, That the latter is stated in the instrument.

"(d) For recording each notice of attachment, including the necessary index and annotations, four pesos.
"(e) For recording each release of mortgage, including the necessary index and references, the fees established in the schedule under paragraph (b) above shall be collected on the basis of five per centum of the amount of the mortgage.

"(f) For recording each release of attachment, including the proper annotations, two pesos.
"(g) For recording each sheriff's return of sale, including the index and references, three pesos.

"(h) For recording a power of attorney, appointment of judicial guardian, administrator, or trustee, or any other instrument in which a person is given power to act in behalf of another in connection with a mortgage, three pesos. "(i) For recording each instrument or order relating to a recorded mortgage, including the necessary index and references, for which no specific fee is provided above, two pesos.

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"(j) For certified copies of records, such fees as are allowed by law for copies kept by the register of deeds. "(k) For issuing a certificate relative to, or showing the existence or non-existence of, an entry in the registration book, or a document on file, for each such certificate containing not more than two hundred words, three pesos; if it exceeds that number, an additional fee of fifty centavos shall be collected for every one hundred words or fractional part thereof, in excess of the first two hundred words."
Pasted from <http://www.chanrobles.com/acts/actsno1508.html>

Chattel Mortgage Law (Act No. 1508)

A. Definition
By chattel mortgage, personal property is recorded in the C hattel Mortgage Registry as security for the performance of an obligation. (Art. 2140, C ivil C ode.) The old definition under Sec. 3 of Act No. 1508 which considered a chattel mortgage as a conditional sale was considered inaccurate by the C ode C ommission. (Serra v. Rodriguez, 1974). Act 1508 primarily governs chattel mortgage while the provisions of the C ivil C ode on the contract of pledge apply in so far as they are not in conflict with C ML. NOTE: The Ship Mortgage Decree of 1978 (Pres. Decree No. 1521) governs the mortgage of vessels of domestic ownership.

B. Characteristics

1. 2. 3.

Accessory contract: purpose: to secure the performance of a principal obligation;

Formal contract: registration in the C M Register is indispensable;

Unilateral contract: produces only obligations on the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation (De Leon).

C. Comparison with Pledge

CHATTEL MORTGAGE both refer to personal property Property remains in possession of debtor Delivery of the property to the mortgagee is not necessary Registration in the C hattel Mortgage Register is necessary for validity Procedure for the sale is found in Sec. 14, Act No. 1508 C an recover deficiency judgment Excess of proceeds from foreclosure goes to persons holding subsequent mortgages, then to mortgagor (S14) Debtor can redeem before the sale, when the condition of the chattel mortgage is broken. (Sec. 13) Mortgagor can sell property mortgaged, subject to the mortgage C annot secure future obligations C reditor takes possession of prop Delivery of the property to the pledgee is necessary Registration in the Registry of Property is not necessary for validity Procedure for the sale is found in Art. 2112 of the C ivil C ode No recovery of deficiency. Debtor not entitled to excess, unless stipulated No redemption Pledgor can sell thing with consent of pledgee C an secure future obligations PLEDGE

NOTE: Even if the property mortgaged is in the possession of the debtor, creditors are protected in that the chattel mortgage is made effective against third persons by the process of registration, to protect creditors against possible disposal of the property by the debtor. Land Settlement & Dev. Corp. v. Carlos (68) Should the creditor bring an action on the principal obligation, like suing on the promissory note, this amounts to a discharge of the chattel mortgage so that the debtor may now dispose of the personal property given in a chattel mortgage without the necessity of a release of the mortgage. The debtor does not thereby commit estafa . Movido v. RFC (59) A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it. ( Also Serra v. Rodriguez , 1974).

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Southern Motors v. Moscoso (61) The complaint is an ordinary civil action for recovery of the remaining unpaid balance due on the promissory note. The plaintiff had not adopted the procedure or methods outlined by Sec. 14 of the C hattel Mortgage Law but those prescribed for ordinary civil actions. Since herein appellee has chosen to exact the fulfillment of the appellant's obligation, it may enforce execution of the judgment that may be favorably rendered hereon, on all personal and real properties of the latter not exempt from execution sufficient to satisfy such judgment. CHATTEL MORTGAGE Accessory contract Title to the thing mortgaged is not transferred Affidavit of good faith is required CHATTEL MORTGAGE Personal property Affidavit of good faith is required PACTO DE RECTO SALE Principal contract Title to the subject matter is transferred to the vendee but subject to the redemption of the vendor Affidavit of good faith is not required REAL ESTATE MORTGAGE Real property Affidavit of good faith is not required

Mortgagor cannot alienate the thing Mortgagor can alienate the thing mortgaged without the mortgaged without the written consent of the written consent of the mortgagee and any such provision mortgagee is void
No right of redemption There can be a right of redemption in extrajudicial foreclosure and in judicial foreclosure by banks

C annot secure future obligations

C an secure future obligations

D. Proper Subject Matter

1.

Sec. 2, read with Sec. 7: Only personal property may be subject of chattel mortgage (personal property as defined by the C ivil C ode).

a. b. c.
d. e.

Shares of stock;
Interest in business;

Machinery treated as personal property subsequently installed on leased land (Davao Sawmill v. Castillo );
Vessels recorded in the office of the Philippine C oast Guard to be effective as to third persons; not necessary to be recorded in the Office of the Register of Deeds; Motor vehicles mortgage registered in the LTO (for vehicles used for public services);

House built on leased land; G.R.: Immovable property Exc.: Treated as movable by estoppel of parties

f. g.

House of mixed material;

a. b.

House intended to be demolished; House of strong materials, for purposes of executing a C M as between the parties to the contract if parties so agree and no innocent third party will be prejudiced.

2. Exceptions:

a.

By exercising the freedom to contract that the law gives them, parties may stipulate that as between them, real property, such as building, may be considered personal for purposes of the chattel mortgage law. But this cannot affect third persons. (Navarro v. Pineda , 63): Tumulad v. Vicencio , 71).

BUT: It shall still be executed as a real property and subject to the rules on foreclosure of real estate mortgage.

a.

Section 6: a chattel mortgage can be executed on growing crops (which under the C ivil C ode are real property).

BUT: If the creditor wants to attach growing crops, the procedure is still the same as in attachment of real property. Piansay vs David (64) Regardless of the validity of a contract constituting a chattel mortgage on a house, as between the parties to said contract, the same cannot and does not bind third persons, who are not parties to the aforementioned contract or their privies
Tumalad vs Vicencio (71) The house on rented land is not only expressly designated as C hattel Mortgage; it specifically provides that "the mortgagor ... voluntarily C EDES, SELLS and TRANSFERS by way of Chattel Mortgage the

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property together with its leasehold rights over the lot on which it is constructed and participation." Moreover, the subject house stood on a rented lot to which defendants -appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty. Makati Leasing v. Wearever Textile (83) Although machineries permanently affixed to a building are classified as real property under the C ivil C ode, the parties may validly subject such machineries to a chattel mortgage and shall be found by the validity therefore by the doctrine of estoppel. Such an arrangement however cannot prejudice the rights of third parties to whom the machineries would still be treated as real property.

E. Extent

1. 2.

Existing obligations After-acquired (future) obligations

The chattel mortgage shall cover only the property described in the deed and not any other like or substituted property. (Sec. 7)
Exception: Where the debtor gives as security, the stock or merchandise in his store and it is the intention of the parties that the mortgage shall cover the stock that will take its place in the course of the business. (Torres v. Limjap, '31) Torres v. Limjap (31) The provision of Sec. 7 is deemed not to apply to stores open to the public for retail business where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry goods stores, etc. A stipulation in the mortgage extending its coverage to properties acquired after its constitution is valid and binding where 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.

1.

After-Incurred Obligations

Acme Shoe, Rubber & Plastic Corp. v. CA (96) 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 can only cover obligations existing at the time the mortgage is constituted. Therefore, although a promise expressed in the chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with form prescribed by the C ML. This ruling is due to the requirement in the Affidavit of Good Faith which must contain an oath that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud which makes it obvious that the debt referred to in the law is current, not an obligation that is yet merely contemplated.

F. Requirements

1.

Registration Requirements to make C hattel Mortgage Binding against 3rd Parties Under Sec. 4, a chattel mortgage leaves the property in the possession of the debtor. Hence, this section lays down the requisites which must be complied with in order to make a chattel mortgage affect third parties for the protection of the creditor.

a.

G.R.: The chattel mortgage must be registered with the Register of Deeds where the debtor resides in order to bind third persons. (Sec. 4) If mortgagor resides abroad, must be registered in the province where the property is located But note: Art 2125, C C says that a chattel mortgage is binding between the mortgagor and mortgagee even if not registered ( Filipinas Marble Corp vs. IAC , 86)

a. i. ii.

Share of Stock:

Must be registered with the Register of Deeds where the debtor resides; and Must also be registered with the Register of Deeds where the corporation has its principal office. NOTE: Registration in the stock and transfer book of the corporation is not necessary. (Chua Guan v. Samahang Magsasaka, 35).

a. Motor Vehicles i. Register with the Register of Deeds where the debtor resides; ii. Register with the Register of Deeds where the motor vehicle is located; and
i.
Register with the Motor Vehicle C ommission, now Land Transportation Office. (Borlough v. Fortune Enterprises , 57)

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(Borlough v. Fortune Enterprises , 57)

Otherwise, the failure of the mortgagee to report the mortgage executed in his favor has the effect of making said mortgage ineffective against a purchaser in good faith who registers his purchase in the motor vehicle office.

a. i. i.
a.

Vessels Must also be registered in the Bureau of C ustoms in Manila (if in Manila) or in the Office of the C ollector of C ustoms in the port of entry (if outside Manila) Motor vehicle which is public utility and loan is not repayable within 1 year

Register with the Philippine C oastguard

Register with the Land Transportation Franchising and Regulatory Board

G. Formal Requirements

1.

Affidavit of Good Faith

It is an oath wherein the parties severally swear that the mortgage is made for the purpose of securing the obligations specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud. (Sec. 5)

Lilius v. Manila Railroad Co. (35) Under Sec. 5, the absence of the affidavit vitiates a mortgage as against third parties without notice, like creditors and subsequent lienholders; but not as between the parties thereto, which remains valid as to them. Where a corporation is a party, the affidavit of good faith must be subscribed by an authorized officer. (Sec. 6)

1.

Other Formal Requirements

a. b.

Must be signed in the presence of at least 2 witnesses

C ertificate of oath / Notarial acknowledgment

Sec. 198 of the RAC Sec. 198. Registration of chattel mortgages and fees collectible in connection therewith. Every register of deeds shall keep a primary entry book and a registration book for chattel mortgages. The recording of a mortgage shall be effected by making an entry, setting forth the names of the mortgages and the mortgagor, the sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving the proper file number thereof. The register of deeds shall also certify the officer's return of sale upon any mortgage, and a reference of such return on the record of the mortgage itself, and give a certified copy thereof;

H. Liabilities
1. Where the debtor performs and the creditor refuses to release the mortgage Debtor may go to court for relief. (Sec. 8) 2. Sections 9 to 12 have been repealed by Art. 319 of the Revised Penal C ode on crimes on C hattel Mortgage: a. Knowingly removing any personal property mortgaged under the C hattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage, without the written consent of the mortgagee; b. Selling or pledging personal property already mortgaged, without the consent of the mortgagee written on the back of the mortgage and duly recorded in the C hattel Mortgage Register. Note: Mortgagor remains owner of the property. He can therefore validly sell the chattel, although he will be criminally liable if he did not get consent of mortgagee . C ompare with: If the mortgagee sells the credit, he only needs to notify the mortgagor, so mortgagor knows whom to pay (Servicewide Specialists vs. CA ) Cerna v. CA (93) 3rd party mortgage or accommodation chattel mortgage does not by itself make the mortgagee personally liable for the loan that he accommodated.

I. Remedies of Creditor (Sec. 13)

1.

Extra-judicial Foreclosure

Mambulao Lumber v. PNB (68) It presupposes voluntary surrender to sheriff of personal property by debtor. C reditor then files affidavit outlining right to possession and sale. Posting of notice of sale must be made on two places in the Presidencia plus notice to debtor 10 days before the sale.

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PNB v. Manila Investment (71) Parties may agree on private sale rather than sale at public auction.
Place must be designated in the contract; otherwise the creditor is liable for conversion.

Note: SC Circular 7-2002 : GUIDELINES FOR THE ENFORC EMENT OF SC RESOLUTION OF DEC 14, 1999 IN A.M. 99-10-05-0 (RE: PROC EDURE IN EXTRA-JUDIC IAL FOREC LOSURE OF MORTGAGE) Sec. 1. All applications for extra-judicial foreclosure of mortgage shall be filed with the Executive Judge, through the C lerk of C ourt. Sec. 2. The C lerk of C ourt shall: xxx c. C ollect the appropriate filing fees and issues the corresponding official receipt. d. In case the application is for real estates and/or chattels in different locations covering one indebtedness, issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, for purposes of having the application docketed with the C lerks of C ourt in the places where the other properties are located. Sec. 4. The Sheriff shall: In case of foreclosure of a chattel mortgage, post the notice for at least 10 days in 2 or more public places in the municipality where the mortgagor resides or where the property is situated Sec. 5. C onduct of the extra-judicial foreclosure sale

a.

The bidding shall be made through sealed bids which must be submitted to the Sheriff who shall conduct the sale between 9 am and 4 pm. The property shall be awarded to the party submitting the highest bid; in case of a tie, an open bidding shall be conducted between the highest bidders. Payments shall be made in cash or managers check, in Philippine currency, within 5 days from notice.

b.

The sale shall be made at a place in the municipality where the mortgagor resides or where the property is situated Sec. 6. The C lerk of C ourts shall collect the appropriate fees, computed on the basis of the amount actually collected by him. This shall not be subject to a refund even if the foreclosed property is subsequently redeemed. Sec. 7 & 8 . The Sheriff shall, within 30 days from the sale, prepare a return and file the same in the Office of the Registry of Deeds where the mortgage is recorded. He shall report the name/s of the bidder/s to the C lerk of C ourt. Sec. 9. The C lerk of C ourt shall issue and sign the C ertificate of Sale, subject to the approval of the Executive Judge. Prior to the issuance of such, the C lerk of court shall, in extra -judicial foreclosure conducted under the sheriff, collect P300.00; in sales conducted under a notary public, the appropriate fees pursuant to Rule 141, 20(e).
Sec. 10. The C lerk of C ourt shall keep the complete records for a period of 1 year from the date of registration of the certificate of sale with the Register of Deeds, after which the records shall be archived. Juridical persons whose property is sold pursuant to an extra -judicial foreclosure shall have the right to redeem the property until, but not later than, the registration of the certificate of foreclosure sale which in no case shall be more than 3 months after foreclosure, whichever is earlier. In case the property is redeemed, the C lerk of C ourt shall assess the redemptioners fee as provided in Section 7 (k), Rule 141. If the property is not redeemed, the C lerk of C ourt shall, as a requisite for the issuance of the final Deed of Sale, assess the highest bidder the amount of P300.00.

1.

Should debtor refuse to surrender the property

C reditor may take the preliminary step of replevin and once he has possession, proceed at public auction as in remedy No. 1. Important: C reditor must seek court remedy to obtain possession (Filinvest Credit Corp vs. CA, 95). Otherwise, that would be pactum commissorium (Esguerra vs. CA, 89)

1. 2.

Judicial Foreclosure follow the same procedure as foreclosure of real estate mortgage under Sec. 8, Rule 68, Rules of C ourt. Sue on the Note waive the chattel mortgage; hence, one can levy on other properties. (Industrial Finance Corp. v. Ramirez, 77).

J. Foreclosure of Chattel Mortgage

1. Public Sale If the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of the mortgage, the creditor is permitted only to recover his credit from the proceeds of the sale of the property at public auction.
2. Private Sale There is nothing illegal, immoral or against public order in an agreement for the private sale of the

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There is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by the chattel mortgage. (De Leon)

3. Period to Foreclose Mortgage Mortgagee may, after 30 days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public officer. (Sec. 12, Act No. 1508) There must be at least 10 days notice to the mortgagor and posting of public notice of time, place and purpose of such sale and is a period of grace for the mortgagor, to discharge the mortgage obligation. (Cabral v. Evangelista) 4. Application of Proceeds of Sale

c. d. e. f.

C osts and expenses of keeping and sale; Payment of the obligation secured by the mortgage; C laims of persons holding subsequent mortgages in their order; and
The balance, if any, shall be paid to the mortgagor, or person holding under him. (Sec. 14, Act No. 1508)

K. Alternative Remedies of Mortgagee

1. Performance of the principal obligation by the mortgagor None; the C M becomes null and void 2. Default by the mortgagor a. Extra-Judicial Foreclosure (Rule 68, RoC not applicable) b. Original action for collection of money effect: waiver of the chattel mortgage

L. Criminal Liability
Art. 319, RPC

1.

Knowingly removing any personal property mortgaged under the C ML to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent of the mortgagee;
Selling or pledging personal property already mortgaged or any part thereof under the terms of the C ML without the consent of the mortgagee written on the back of the mortgage and duly recorded in the chattel mortgage registry.

2.

1.

The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full (US v. Kilayko), or the mortgagor-seller informed the purchaser that the thing sold had been mortgaged (People v. Alvares).

M. Redemption

1. 1. a. b. c.
Mortgagor;

There is no right of redemption in chattel mortgage, only an equity of redemption. Period: The following may redeem if the condition of the mortgage is broken;

A person holding a subsequent mortgage; A subsequent attaching creditor (Sec. 13, Act 1508).

N. Deficiency Judgment
1. General Rule: C reditor shall always be entitled to collect the deficiency judgement. ( Ablaza v. Ignacio , 58). State Investment House, Inc. v. CA (93) When the proceeds of the sale are insufficient to cover the debts in an extra -judicial foreclosure of chattel mortgage, the mortgagee is entitled to claim the deficiency from the debtor.

1.

Ratio: mortgages as accessory contracts serve only as securities and not for the satisfaction of the principal obligation

1.

Prescriptive Period: Ten (10) years under Art, 1142 of the C ivil C ode. (DBP v. Tomeldan, 80).

Exception: If the property was sold in installments, the mortgagee can no longer take any action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void. ( Art. 1484, Civil Code, aka the Recto Law)

O. Recto Law
The Recto law, which is now reflected in Articles 1484 -1485 of the C ivil C ode, which provides that in a contract of sale of personal property, the price of which is payable in

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provides that 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:

(a) (b)
(c)

Exact fulfillment of the obligation, should the vendee fail to pay (specific performance);
C ancel the sale, should the vendee's failure to pay cover two or more installments (Note that this is not the same as rescission because here, the vendor gets back the object of the sale and retains the installments paid. However, this is not available in the absence of stipulation in the contract.); Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover 2 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 contract is void.

The principal object of this amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. Pacific Commercial Co. v. Dela Rama These remedies are alternative, not cumulative. Filipinas Investement v. Vitug (69) When the creditor can no longer recover from the maker of the note with chattel mortgage because the deficiency is covered by the Recto Law, after the foreclosure of the mortgage, said creditor can still recover balance from the endorse who endorsed with recourse. Cruz v. Filipinas Investment (68) C sold to D a car payable on installments. The car was given as security by way of chattel mortgage to secure payment. In addition, the debtor put up a real estate mortgage as further security for the payment of the debt. D did not pay 2 or more installments and so C foreclosed the chattel mortgage. The proceeds therefrom were insufficient and so C wanted to get a deficiency judgment and satisfy it by foreclosing on the real estate mortgage. The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery (whether by judicial or extra -judicial foreclosure) by the vendor, of any balance on the purchasers outstanding obligation not so satisfied by the public sale. To allow further recovery by the foreclosure of the real estate mortgage is contrary to public policy. Northern Motors v. Sapinoso (70) Northern Motors sold a car to Sapinoso on installments. A chattel mortgage was executed on the car sold. When S failed to pay 2 or more installments, NM sought to foreclose the chattel mortgage and asked the court for a writ of replevin. Meantime, S made several payments while the replevin suit was pending. The lower court ruled that NM, by bringing the suit, was barred from accepting any further payments from S and ordered NM to reimburse the amount collected. The court a quo erred in concluding that the legal effect of the filing of the action for replevin was to bar NM from accepting further payments on the promissory note. That the ultimate objective of the action was for the foreclosure of the chattel mortgage is of no moment, for it is the fact of foreclosure and actual sale at public auction of the mortgaged chattel that bars further recovery by the vendor of any balance on the buyers outstanding obligation not satisfied by the sale. Pascual v. Universal Motors (74) When the seller imposes a double security by a chattel mortgage of the thing sold on installments and another mortgage on another property of the buyer, such is contrary to the public policy sought to be protected by the Recto Law, and the foreclosure of the chattel mortgage on the object of the sale bars recovery on any deficiency. Ridad v. Filipinas Investment (83) The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full amount of his original indebtedness. The corporation elected to foreclose its mortgage upon default by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned. Bicol Savings and Loan Asso. v. Guinhawa (90) The prohibition under the Recto Law against recovery does not apply to foreclosure of chattel mortgage constituted to secure a loan and not originating from a sales transaction. Pasted from <file:///E:\LAW%20SCHOOL%20FILES\MISC\past%20digest%20and%20reviewers\barops\UP%20Law%20Bar% 20Ops%20Reviewers%202007\7.%20Special%20Laws%20(Final).doc>

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GARRIDO V. TUASON
Wednesday, July 22, 2009 8:56 AM

Garrido vs Tuason Date: August 23, 1968 Plaintiff Appellant: Jose Garrido Defendant Appellee: Pilar Tuason
Ponente: Concepcion

Facts: Jose Garrido commenced a case for the foreclosure of a chattel mortgage, executed in his favor by Pila Tuason, to guarantee the payment of a debt in the sum of P1,000, as well as for the recovery of attorney's fees and the costs. A decision was rendered ordering the defendant to pay to plaintiff "the sum of P1,000 with interest thereon at the rate of 1% per month from June 30, 1959 until the whole amount is fully paid, plus the sum of P100 for attorney's fees, and the costs." In compliance with a writ of execution, issued on December 9, 1959, after this decision had become final, a car of the defendant was sold, by the Provincial Sheriff of Rizal, at public auction, to the plaintiff, as the highest bidder, for the sum of P550. Plaintiff filed two (2) motions, namely: one, praying that the sum of P165, allegedly spent by him to carry out said writ of execution, be added to the unsatisfied portion of the aforementioned decision, presumably as part of the costs; and another, for an alias writ of execution for the sum of P1,290.58, as the aggregate outstanding balance allegedly due under said decision. Both motions were denied. Soon later, plaintiff commenced a civil case against defendant whose husband was included, as her codefendant for the recovery of said alleged balance of P1,290.58. On motion of said defendants, plaintiff's complaint was dismissed. The CFI affirmed the dismissal pursuant to Article 2115 CC.
Issue: WON plaintiff can still recover the deficiency

Ratio: Article 2115 of said Code reads: ". . . The sale of the thing pledged shall extinguish the principal obligation, whether or not the
proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary."

The CFI must have applied this precept in view of Article 2141 CC, pursuant to which the provisions thereof on pledge shall be applicable to chattel mortgages "insofar as they are not in conflict with the Chattel Mortgage Law." We have already held, however, that said Article 2115 is inconsistent with the provisions of the Chattel Mortgage Law, and that, accordingly, the chattel mortgage creditor may maintain an action for the deficiency. Then, again, said Court would seem to have acted under the impression, that, since Case No. 71763 was one for the foreclosure of a chattel mortgage, the decision therein rendered was for such foreclosure; but such was not the nature of said decision, for it merely ordered the defendant to pay the sum of P1,000, with interest thereon. It did not order the sale of the property mortgaged to the plaintiff or of any other particular property, for the satisfaction of his credit against the defendant. It did not purport to enforce plaintiff's lien over the mortgaged property. In other words, it was an ordinary money judgment, to which said Articles 2115 and 2141 were absolutely irrelevant. The municipal court erred, therefore, in denying plaintiff's motion of January 28, 1960, for the issuance of an alias writ of execution in Case No. 71763, less than 5 years having elapsed since the decision therein was rendered on November 14, 1959. As a consequence, plaintiff could have and should have appealed from the order of denial of said motion; but, he did not do so, and, instead, he brought the case at bar, thereby allowing said order to become final. Thus, the principle of res adjudicata bars the present action, which, accordingly, was dismissed properly.

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MAGNA FINANCIAL SERVICES GROUP VS. COLARINA

Wednesday, July 22, 2009 8:56 AM

Magna Financial Services Group vs Colarina Date: December 9, 2005 Petitioner: Magna Financial Services Group Respondent: Elias Colarina
Ponente: Chico Nazario

Facts: Elias Colarina bought on installment from Magna Financial Services Group, Inc., 1 unit of Suzuki Multicab. After making a down payment, Colarina executed a PN for the balance of P229,284. To secure payment thereof, Colarina executed an integrated PN and deed of chattel mortgage over the motor vehicle. Colarina failed to pay the monthly amortization beginning January 1999, accumulating an unpaid balance of P131,607. Despite repeated demands, he failed to make the necessary payment. Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with Replevin before the MTCC. Upon filing of a bond, a writ of replevin was issued. Colarina who voluntarily surrendered physical possession of the vehicle to the Sheriff. After declaring Colarina in default, the trial court ruled against defendant and ordered him to pay the sum of P131,607 plus penalty charges, attorneys fees and cost. In case of nonpayment, the multicab shall be sold at public auction. The RTC affirmed. The CA rendered its decision ruling that the courts erred in ordering the defendant to pay the unpaid balance of the purchase price irrespective of the fact that the complaint was for the foreclosure of the chattel mortgage. Issue: What is the true nature of a foreclosure of chattel mortgage under Article 1484(3) Ratio: Our Supreme Court in Bachrach Motor Co., Inc. v. Millan held: Undoubtedly the principal object of the above amendment (referring to Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. In its complaint, Magna Financial prayed for the principal sum of P131,607, attorneys fees etc. It is further prayed that pendent lite, an Order of Replevin issue commanding the Provincial Sheriff at Legazpi City or any of his deputies to take such multicab into his custody and, after judgment, upon default in the payment of the amount adjudged due to the plaintiff, to sell said chattel at public auction in accordance with the chattel mortgage law. In its Memorandum before us, petitioner resolutely declared that it has opted for the remedy provided under Article 1484(3) CC that is, to foreclose the chattel mortgage. It is, however, unmistakable from the Complaint that petitioner preferred to avail itself of the first and third remedies under Article 1484, at the same time suing for replevin. For this reason, the Court of Appeals justifiably set aside the decision of the RTC. Perusing the Complaint, the petitioner, under its prayer number 1, sought for the payment of the unpaid amortizations which is a remedy that is provided under Article 1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment of the obligation. At the same time, petitioner prayed that Colarina be ordered to surrender possession of the vehicle so that it may ultimately be sold at public auction, which remedy is contained under Article 1484(3). Such a scheme is not only irregular but is a flagrant circumvention of the prohibition of the law. By praying for the foreclosure of the chattel, Magna Financial Services Group, Inc. renounced whatever claim it may have under the promissory note. Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, he shall have no further action against the purchaser to recover any unpaid balance of the purchase price. Any agreement to the contrary shall be void. In other words, in all proceedings for the foreclosure of chattel mortgages executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property included in the mortgage. Contrary to petitioners claim, a contract of chattel mortgage, which is the transaction involved in the present case, is in the nature of a conditional sale of personal property given as a security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. 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. On the other hand, in case of non payment, foreclosure is one of the remedies available to a mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given. Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action or by foreclosure under power of sale contained in the mortgage. It may be effected by the usual methods, including sale of goods at public auction. Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the mortgaged property to be seized by the sheriff, as agent of the mortgagee, and have it sold at public auction in the manner prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage Law. This rule governs extrajudicial foreclosure of chattel mortgage. In sum, since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for nor to ask for more. On this point, the Court of Appeals correctly set aside the trial courts decision and instead rendered a judgment of foreclosure as prayed for by the petitioner. Issue: WON there has been an actual foreclosure of the vehicle
Ratio: In the case at bar, there is no dispute that the subject vehicle is already in the possession of the petitioner, Magna Financial Services Group, Inc. However, actual foreclosure has not been pursued, commenced or concluded by it. Where the mortgagee elects a remedy of foreclosure, the law requires the actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v. Fernandez, our Supreme Court said that it is actual sale of the mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would bar the creditor (who chooses to foreclose) from recovering any unpaid balance. And it is deemed that there has been foreclosure of the mortgage when all the proceedings of the foreclosure, including the sale of the property at public auction, have been accomplished.

Colorina bought on installment from Magna Financial Services a Suzuki Multicab. He executed a PN for the balance of P229,284 and executed an integrated PN and deed of CM over the Multicab as security. -Colorina failed to pay the monthly amortization, with accumulating unpaid balance of P131,607. Colorina still failed to pay inspite of demands so MAGNA filed a COMPLAINT FOR FORECLOSURE of CHATTEL MORTGAGE w/ REPLEVIN -bond was filed by MAGNA, writ of replevin was issued TC: Colarina pay the P131,607 plus penalty + atty's fees + costs. In case of nonpayment, multicab shall be sold at public auction RTC: affrim CA: complaint was for foreclosure of the chattel mortgage so wrong to order Colorina to pay the balance due

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Be that as it may, although no actual foreclosure as contemplated under the law has taken place in this case, since the vehicle is already in the possession of Magna Financial Services Group, Inc. and it has persistently and consistently avowed that it elects the remedy of foreclosure, the Court of Appeals, thus, ruled correctly in directing the foreclosure of the said vehicle without more.
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RA NO. 133
Wednesday, July 22, 2009 9:05 AM

REPUBLIC ACT NO. 133 1947 June 14

AN ACT TO AUTHORIZE THE MORTGAGE OF PRIVATE REAL PROPERTY IN FAVOR OF ANY INDIVIDUAL, CORPORATION, OR ASSOCIATION SUBJECT TO CERTAIN CONDITIONS Sec. 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged for a period not exceeding five years, renewable for another five, in favor of any individual, corporation, or association, but the mortgagee or his successor in interest, if disqualified to acquire or hold lands of the public domain in the Philippines, shall not bid or take part in any sale of such real property as a consequence of such mortgage. Sec. 2. All laws, orders, or regulations, or parts thereof inconsistent with the provisions of this Act, are repealed or modified accordingly. Sec. 3. This Act shall take effect upon its approval. Approved: June 14, 1947

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REGISTER OF DEEDS VS. CHINA BANKING CORPORATION

Wednesday, July 22, 2009 9:10 AM

Register of Deeds vs China Banking Corporation Date: April 28, 1962 Petitioner Appellee: Register of Deeds of Manila Respondent Appellant: China Banking Corporation

Ponente: Dizon
Facts: Alfonso Pangilinan and one Guillermo Chua were charged with qualified theft of money worth P275,000 . Pangilinan and his wife, Belen Sta. Ana, executed a public instrument entitled Deed of Transfer whereby, after admitting his civil liability in favor of his employer, China Banking Corporation, he ceded and transferred to the latter a parcel of land located in Manila. The deed was presented for registration to the Register of Deeds of the City of Manila, but because CBC was alien-owned and, as such, barred from acquiring lands in the Philippines, the officer submitted the matter of its registration to the Land Registration Commission for resolution. The LRC ruled that the land is unregistrable.

Issue: WON CBC can acquire ownership of the lot by virtue of the deed of transfer Held: No
Ratio: To support its view appellant relies particularly upon paragraphs (c) and (d), Section 25 of RA 337:
"Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes: (c)Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; (d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it. But no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer period than five years."

Facts: Pangilinan and Chua were charged and convicted of qualified theft for P275k from China Banking Corporation. In furtherance of the judgment, Pangilinan executed in favor of China Banking Corporation a public instrument entitled DEED OF TRANSFER whereby he ceded and transferred to CBC a parcel of land located in Manila. -When CBC presented the document to the Registrar of Deeds, Registrar denied it because CBC was alien-owned and as such, barred from acquiring lands in the Philippines -CBC submitted matter to the Land Registration Commission for Resolution. LRC: unregistrable HELD: CBC cannot register the property in their name -Section 25, RA 337 par and (d) ARE NOT APPLICABLE TO ALIEN BANKS!

Assuming,, that under the provisions any commercial bank, whether alien-owned or controlled or not, may purchase and hold real estate for the specific purposes and in the particular cases enumerated in Section 25 thereof, we find that the case before Us does not fall under anyone of them. Par (c), Section 25 of RA 337 allows a commercial bank to purchase and hold such real estate as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings. We deem it quite clear and free from doubt that the "debts" referred to in this provision are only those resulting from previous loans and other similar transactions made or entered into by a commercial bank in the ordinary course of its business as such. Obviously, whatever "civil liability" arising from the criminal offense of qualified theft was admitted in favor of appellant bank by its former employee, Alfonso Pangilinan, was not a debt resulting from a loan or a similar transaction had between the two parties in the ordinary course of banking business. Neither do the provisions of paragraph (d) of the same section apply to the case because the deed of transfer in question can in no sense be considered as a sale made by virtue of a judgment, decree, mortgage, or trust deed held by appellant bank. In the same manner it can not be said that the real property in question was purchased by appellant "to secure debts due to it", considering that, as stated heretofore, the term debt employed in the pertinent legal provision can logically refer only to such debts as may become payable to appellant bank as a result of a banking transaction. That the constitutional prohibition under consideration has for its purpose the preservation of the patrimony of the nation can not be denied, but appellant and the amici curiae claim that it should be liberally construed so that the prohibition be limited to the permanent acquisition of real estate by aliens whether natural or juridical persons. This, of course, would make legal the ownership acquired by appellant bank by virtue of the deed of transfer mentioned heretofore, subject to its obligation to dispose of it in accordance with law, within 5 years from the date of its acquisition. We can not give assent to this contention, in view of the fact that the constitutional prohibition in question is absolute in terms. We have so held in Ong Sui Si Temple vs. The Register of Deeds of Manila where we said, inter alia, the following: "We
are of the opinion that the Court below has correctly held that in view of the absolute terms of section 5, Title XIII, of the Constitution, the provisions of Act 271 of the old Philippine Commission must be deemed repealed since the Constitution was enacted, in so far as incompatible therewith. In providing that. 'Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations or associations qualified to acquire or hold lands of the public domain in the Philippines', the Constitution makes no exception in favor of religious associations. Neither is there any such saving found in Sections 1 and 2 of Article XIII, restricting the acquisition of public agricultural lands and other natural resources to 'corporations or associations at least sixty per centum of the capital of which is owned by such citizens' (of the Philippines)."

ON PAR :
"Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes: (c)Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; -the "debts" referred to are ONLY THOSE RESULTING FROM PREVIOUS LOANS AND OTHER SIMILAR TRANSACTIONS MADE OR ENTERED INTO BY A COMMERCIAL BANK IN THE ORDINARY COURSE OF ITS BUSINESS AS SUCH -"CIVIL LIABILITY" arising from a criminal offense WAS NOT A DEBT RESULTING FROM A LOAN OR A SIMILAR TRANSACTION HAD BETWEEN TWO PARTIES IN THE ORDINARY COURSE OF BANKING BUSINESS

ON PAR (D) "Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes: (d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it. But no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer period than five years." -the deed of transfer sale made by virtue of judgment, decree, mortgage, or trust deed held by CBC -real property in question was not purchased by CBC to secure debts due it -debts: refer only to such debts as may become payable to appellant bank as a result of a banking transaction. ON Argument that consti prohibition should be liberally construed to be limited to PERMANENT ACQUISITION OF REAL ESTATE BY ALIENS: the consti prohibition is ABSOLUTE IN TERMS. Smith Bell & Co Case not applicable because what was allowed to be registered there was a 50-year LEASE which does not involve transfer of dominion over the land

Even in the case of Smith Bell & Co. vs. Register of Deeds of Davao where a lease of a parcel of land for a total period of 50 years in favor of an alien corporation was held to be registerable, the reason we gave for such ruling was that a lease unlike a sale does not involve the transfer of dominion over the land, the clear implication from this being that transfer of ownership over land, even for a limited period of time, is not permissible in view of the constitutional prohibition. The reason for this is manifestly the desire and purpose of the Constitution to place and keep in the hands of the people the ownership over private lands in order not to endanger the integrity of the nation. Inasmuch as when an alien buys land he acquires and will naturally exercise ownership over the same, either permanently or temporarily, to that extent his acquisition jeopardizes the purpose of the Constitution.
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PAREDES VS. CA
Wednesday, July 22, 2009 9:10 AM

Paderes vs CA Date: July 15, 2005 Petitioners: Spouses Rodrigo and Sonie Paderes Respondents: CA, Hon. Carlota Valenzuela

Ponente: Carpio Morales

Facts: Manila International Construction Corporation executed a REM over 21 parcels of land including the improvements thereon in favor of Banco Filipino Savings and Mortgage Bank in order to secure a loan of P1,885,000. The mortgage was registered. The 21 mortgaged properties included two lots in Paranaque. MICC sold a house a lotto the Paderes spouses. Later, MICC sold another house and lot the Bergado spouses. Neither sale was registered, however. For failure of MICC to settle its obligations, Banco Filipino filed a petition for the extrajudicial foreclosure of MICCs mortgage. At the auction sale Banco Filipino was declared the highest bidder and a certificate of sale was issued in its favor. Since there was no redemption within the reglementary period. Carlota Valenzuela, the liquidator of Banco Filipino filed a petition for the issuance of a writ of possession of the foreclosed properties with the RTC. The petition was granted. A notice to vacate was served on the spouses. However, instead of vacating, petitioners filed before the CA. The CA dismissed the petitions for lack of merit and upheld the validity of the writ of possession.

Issue: WON the spouses (buyers in good faith) have a superior right over Banco Filipino Held: No Ratio: In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of possession, which is an order commanding the sheriff to place a person in possession of the foreclosed property, is governed by Section 7 of Act No. 3135. That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took place after MICCs mortgage to Banco Filipino had been registered in accordance with Article 2125 CC and the provisions of P.D. 1529. As such, under Articles 1312 and 2126 CC, a real right or lien in favor of Banco Filipino had already been established, subsisting over the properties until the discharge of the principal obligation, whoever the possessor(s) of the land might be. As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are necessarily bound to acknowledge and respect the mortgage it had earlier executed in favor of Banco Filipino. Issue: WON the spouses have the right to redeem the property Held: No Ratio: The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-in-interest, has, one year from the date of registration of the Certificate of Sale with the Registry of Deeds, a right to redeem the foreclosed mortgage, hence, petitioners, as MICCs successors -in-interest, had one year from the registration of the Certificate of Sale on July 29, 1985 or until July 29, 1986 for the purpose. Petitioners, however, failed to do so. Ownership of the subject properties was thus consolidated in favor of Banco Filipino, and TCT Nos. 112352 and 112353 were issued in its name. F. David Enterprises v. IBAA: It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and can demand it at any time following the consolidation of ownership in his name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of the land even during the redemption period except that he has to post a bond in accordance with Section 7 of Act No. 3135 as amended. No such bond is required after the redemption period if the property is not redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court. Issue: WON a binding agreement for the repurchase of the subject properties was reached with Banco Filipino
Held: No Ratio: Under Article 1318 CC, there are three essential requisites which must concur in order to give rise to a binding contract: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established. A reading of the correspondence reveals the absence of both a definite offer and an absolute acceptance of any definite offer by any of the parties. The letters dated October 17, 1996 and November 4, 1996, signed by petitioners counsel, while ostensibly proposing to redeem the foreclosed properties and requesting Banco Filipino to suggest a price for their repurchase, made it clear that any proposal by the bank would be subject to further action on the part of petitioners. The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-President of Banco Filipino, merely invited petitioners to engage in further negotiations and does not contain a recognition of petitioners claimed right of redemption or a definite offer to sell the subject properties back to them. Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they committed to subject the properties (house and lot) to a real-estate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be redeemed. It is clear from item no. 1 of the same letter, however, that petitioners did not accept Banco Filipinos valuation of the properties at P7,500.00 per square meter and intended to have the amount *renegotiated+. Moreover, while purporting to be a memorandum of the matters taken up in the conference between petitioners and Banco Filipino Vice-President Dacasin, petitioners letter of November 8, 1996 does not contain the concurrence of Ms. Dacasin or any other authorized agent of Banco Filipino. Where the alleged contract document was signed by only one party and the record shows that the other party did not execute or sign the same, there is no perfected contract.

Facts: MICC obtained a loan from Banco Filipino Savings and Mortgage Bank and executed REM over 21 parcels of land, including 2 parcels of land in Pque which MICC sold though unregistered. -since MICC defaulted in their obligation, Banco Filipino filed PETITION FOR THE EXTRAJUDICIAL FORECLOSURE of MICC's Mortgage (question: if extrajudicial, bakit may petition?). -Auction Sale: BF declared the highest bidder. Certificate of Sale issued in favor of BF. -NO REDEMPTION W/N REGLEMENTARY PERIOD so BF filed a petition for issuance of writ of possession of foreclosed properties which was granted. Notice to vacate served on spouses who bought 2 lands from MICC. Spouses (petitioners) fiiled petition before CA - dismissed for lack of merit. 1. WON spouses have superior right over BF (alleging Buyers in GF) NO. Sale occurred AFTER MORTGAGE in favor of BF registered. A real right or lien in favor of BF had already been established, subsisting over the properties until the discharge of the principal obligation, WHOEVER POSSESSOR OF THE LAND MAY BE.
2. WON Spouses have right to redeem YES. But right already prescribed. -as successors-in-interest of MICC, they have right to redeem 1 year FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE W/ THE REGISTRY OF DEEDS. That is, from July 29, 1985 (thus, UNTIL JULY 29, 1986) But since they failed to redeem within said period, right prescribed. Ownership of the subject properties was thus consolidated in favor of BF

3. WON there was a binding AGREEMENT FOR REPURCHASE NO. (apparently there were negotiations entered by the Spouses with BF. However, the correspondence failed to show that the parties agreed to the valuation of the properties and that any of the parties agreed to the redemption on a fixed price) Court held that the correspondence between the parties reveals absence of DEFINITE OFFER AND ABSOLUTE ACCEPTANCE OF THE DEFINITE OFFER. 4. WON house should have been excluded from the auction sale NO. Article 448, NCC does not apply -The houses purchased by the spouses from MICC are improvements on the properties subjected to the REM, thus covered by the REM as improvements are deemed part of real property
5. WON writ of possession could still be enforced after 8 years from promulgation YES. Right of applicant/subsequent purchaser to request for the issuance of a writ of possession of land NEVER PRESCRIBES

Issue: WON the houses should have been excluded from the auction sale
Held: No Ratio: The provision of Article 448 CC which pertain to those who, in good faith, mistakenly build, plant or sow on the land of another, has no application to the case at bar. Here, the record clearly shows that petitioners purchased their respective houses from MICC, as evidenced by the Addendum to Deed of Sale dated October 1, 1983 and the Deed of Absolute Sale dated January 9, 1984. Being improvements on the subject properties constructed by mortgagor MICC, there is no question that they were also covered by MICCs real estate mortgage following the terms of its contract with Banco Filipino and Article 2127 of the Civil Code (mortgage extends to the improvements).

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Filipino and Article 2127 of the Civil Code (mortgage extends to the improvements).
Issue: WON the writ of possession can still be enforced after more than 8 years from promulgation Held: Yes

Ratio: In Rodil vs. Benedicto, this Court categorically held that the right of the applicant or a subsequent purchaser to request for the issuance of a writ of possession of the land never prescribes: The better rule, however, is that enunciated
in the case of Manlapas and Tolentino vs. Lorente, which has not yet been abandoned, that the right of the applicant or a subsequent purchaser to ask for the issuance of a writ of possession of the land never prescribes. . . In a later case [Sta. Ana v. Menla], the Court also ruled that the provision in the Rules of Court to the effect that judgment may be enforced within five years by motion, and after five years but within ten years by an action (Section 6, Rule 39) refers to civil actions and is not applicable to special proceedings, such as land registration cases.

The established doctrine that the issuance of a writ of possession is a ministerial function whereby the issuing court exercises neither discretion nor judgment bears reiterating. The writ issues as a matter of course upon the filing of the proper motion and, if filed before the lapse of the redemption period, the approval of the corresponding bond. Petitioners, however, are not without remedy. As reflected in the challenged CA decision, under Section 8 of Act No. 3135, petitioners, as successors-in-interest of MICC, have 30 days from the time Banco Filipino is given possession of the subject properties to question the validity of the auction sale under any of the two grounds therein stated by filing a petition to set aside the same and cancel the writ of possession.

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BANCO FILIPINO SAVINGS AND MORTGAGE BANK VS. CA

Wednesday, July 22, 2009 9:10 AM

Banco Filipino Savings and Mortgage Bank vs CA Date: July 8, 2005 Petitioner: Banco Filipino Savings and Mortgage Bank Respondents: CA and Santiago (Isabela) Memorial Park Inc

Ponente: Austria Martinez

Facts: Santiago (Isabela) Memorial Park, Inc. filed a complaint for redemption and specific performance with the RTC of Santiago, Isabela, against Banco Filipino Savings & Mortgage Bank. In 1981, Santiago mortgaged to the bank a parcel of lot to secure a loan of P500,000. Because of Santiagos default, the bank foreclosed the mortgage and a certificate of sale was issued in favor of the bank. In a letter, Santiago manifested its interest to exercise its right of redemption and offered P700,000. The Deputy Liquidator gave Santiago until the end of March 1992 to negotiate on the payment. To manifest its willingness to redeem the property, Santiago remitted P50,000 to the bank. Later, Santiago amended its offer and made an offer of P1M. Later, the Senior VP of the bank demanded P5,830,000 as purchase price of the property. MTD was filed on the ground that there was no redemption effected within one year from the date of registration. The bank claimed that it categorically denied Santiagos offer of redemption. The trial court dismissed the complaint ruling that there was no definite redemption as the offer was not coupled with tender of the price. Also, the complaint did not state that Dantiago tendered the correct redemption price within the redemption period as required under Section 30 of Rule 39 of the Rules of Court. The CA reversed and ruled that there was sufficient basis to make out a case against Banco Filipino. The complaint alleged that as early as August 6, 1991 or about six (6) months before the statutory period for redemption would expire, the appellant had exerted earnest efforts to effect the redemption of the property in question and that after an agreement had been reached by the parties, with the corresponding deposit on the redemption price had been given by the appellant, the appellee bank led the appellant to believe that the appellee was negotiating with the former in good faith. Even assuming however that the appellant is now barred from exercising its right of redemption, yet it can still repurchase the property in question based on a new contract entered into between the parties extending the period within which to purchase the property. In compliance with the CA decision, private respondent on April 27, 2000, made a tender of payment and consignation with the CA in the amount of P1,300,987.96.

Facts: Santiago Memorial Park obtained a loan with BF and executed a REM over a parcel of lot. Because of default, BF foreclosed REM and certificate of sale was issued in favor of BF. -Santiago manifested its interest to exercise its right to redemption and offered as payment P700k (loan was for P500k). Deputy liquidator gave Santiago until end of March 1992 to negotiate payment. Santiago remitted P50k to manifest willingness to redeem property. Santiago later offered P1M for the property. Senior VP demanded later P5,830,000 as purchase price of property. -Santiago filed a complaint for redemption and specific performance with RTC vs. BF -BF Filed MTD: no redemption effected w/n 1 year from date of registration. *RTC: dismissed redemption complaint a. NO DEFINITE REDEMPTION (offer was not coupled with tender of the price) b. Complaint did not state that Santiago tendered correct redemption price w/n redemption period
*CA: reversed TC: sustained complaint for redemption a. Complaint alleged that as eary as August 6, 1991 (6 months before the expiration of the statutory period for redemption), Santiago exerted earnest efforts to effect redemption b. Santiago did deposit the price which they believed was the agreed redemption price, with the belief that BF was negotiating in GF c. Granted that Santiago is barred, as the parties entered into a new contract extending period w/n which to purchase property, Santiago could still purchase property ---Santiago tendered payment and consigned amount of P1,300,987.96 in accordance with CA deci

Issue: WON Santiagos complaint for redemption and specific performance states a cause of action against petitioner. Held: No Ratio: Based on the allegations in the complaint, we find that private respondent has no cause of action for redemption against petitioner. The sheriffs certificate of sale was registered on January 21, 1991. Section 6 of Act 3135 provides for the requisites for a valid redemption. Considering that petitioner is a banking institution, the determination of the redemption price is governed by Section 78 of the General Banking Act. Clearly, the right of redemption should be exercised within the specified time limit, which is one year from the date of registration of the certificate of sale. The redemptioner should make an actual tender in good faith of the full amount of the purchase price as provided above, i.e., the amount fixed by the court in the order of execution or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property. In case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action which in every case must be filed within the one-year period of redemption. The filing of the court action to enforce redemption, being equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights and freezing the expiration of the one-year period. In this case, the period of redemption expired on January 21, 1992. The complaint was filed on December 20, 1992. Moreover, while the complaint alleges that private respondent made an offer to redeem the subject property on August 6, 1991, which was within the period of redemption, it is not alleged in the complaint that there was an actual tender of payment of the redemption price as required by the rules. It was alleged that private respondent merely made an offer of P700,000.00 as redemption price, which however, as stated under paragraph 13 of the same complaint, the redemption money was the total bank claim of P925,448.17 plus lawful interest and other allowable expenses incident to the foreclosure proceedings. Thus, the offer was even very much lower than the price paid by petitioner as the highest bidder in the auction sale. Whether or not respondents were diligent in asserting their willingness to pay is irrelevant. Redemption within the period allowed by law is not a matter of intent but a question of payment or valid tender of the full redemption price within said period. Although the letter dated January 23, 1992 gave private respondent up to the end of March 1992, to negotiate and make special arrangement for a satisfactory plan of payment for the redemption, there was no categorical allegation in the complaint that the original period of redemption had been extended. Assuming arguendo that the period for redemption had been extended, i.e., up to end of March 1992, still private respondent failed to exercise its right within said period. This is shown by private respondents allegation under paragraph 8 of its complaint that in a letter dated January 20, 1993, private respondents President amended his first offer and made an offer of P1 million as redemption price. Notably, such offer was made beyond the end of the March 1992 alleged extended period. Thus, private respondent has no more right to seek redemption by force of law which petitioner was bound to accept. We find that the CA also erred in stating that assuming appellant is now barred from exercising its right of redemption, it can still repurchase the property in question based on a new contract entered into between the parties extending the period within which to purchase the property. The allegations in the complaint do not show that a new contract was entered into between the parties. The March 12, 1992 letter referred to by the CA as well as in the complaint only directed private respondent to remit at least P50,000.00 to petitioner as a manifestation of the formers interest and willingness to redeem the property. Thus, the P50,000.00 remitted by private respondent was only the first step to show its interest in redeeming the property. In no way did it establish that a contract of sale, as found by the CA, had been perfected and that the P50,000.00 remitted by private respondent is considered as earnest money. There was no showing in the complaint that private respondent and petitioner had already agreed on the purchase price of the foreclosed property. In fact, the allegations in paragraphs 8 to 10 of the complaint show otherwise, thus: The complaint does not allege that there was already a meeting of the minds of the parties. Based on the foregoing, there is no basis for the order of the CA to allow private respondent to repurchase the foreclosed property in the amount of P925,448.17 plus the expenses incurred in the sale of the property, including the necessary and useful expenses made on the thing sold.

HELD: for BF WON Santiago's complaint for redemption and specific performance states a COA vs. BF NO. Regardless if Santiago was diligent in asserting its willingness to pay, REDEMPTION W/N THE PERIOD ALLOWED BY LAW IS NOT A MATTER OF INTENT BUT A QUESTION OF PAYMENT OR VALID TENDER OF FULL REDEMPTION PRICE W/N SAID PERIOD.

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RURAL BANKING OF CALINOG VS. CA

Wednesday, July 22, 2009 9:10 AM

Rural Bank of Calinog vs CA Date: July 8, 2005 Petitioner: Rural Bank of Calinog Inc Respondents: CA, Spouses Gregorio Cerbana and Filma Cerbo-Cerbana
Ponente: Tinga

Facts: Carmen D. Cerbo executed a REM over her property in favor of the Rural Bank of Calinog. The mortgage was foreclosed and the subject property was sold at public auction Calinog Bank as the highest bidder. The spouses redeemed the subject property by depositing the amount of P18,000 to Calinog Bank. To complete payment of the total redemption price of the subject property, the spouses obtained a loan from Rural Bank of Dingle, Iloilo, in the amount of P109,000. To secure payment of the loan obtained from Dingle Bank, the spouses mortgaged the subject property in favor of Dingle Bank. The spouses have paid the loan obtained from the bank. Later, the spouses received a Notice of Sale at public auction of the subject property allegedly for failure to pay the mortgage debt. The spouses demanded from the bank an accounting of all payments made and the holding in abeyance by Dingle Bank of the public sale. The public sale proceeded as scheduled and the subject property was adjudicated in favor of Calinog Bank. Because of the failure of the bank to account all payments made by and for the spouses the mortgaged property was unjustly foreclosed. Hence, the complaint. Calinog Bank moved for the dismissal of the complaint. It said that only Carmen Cerbo was the proper party because she was the one who executed the mortgage. Since Carmen is dead, the case should be dismissed against Calinog Bank. The spouses opposed claiming that they are the heirs of Carmen. The court ordered the dismissal of the case. The CA reversed and ruled that the spouses have both the capacity and personality to sue. Also it ruled that the spouses need not be parties to the mortgage contract in order to have a cause of action to recover the payments which they allege to have paid the bank in excess of the redemption price. Issue: WON the spouses have a cause of action Held: Yes Ratio: In determining whether the allegations of a complaint are sufficient to support a cause of action, it must be borne in mind that the complaint does not have to establish or allege the facts proving the existence of a cause of action at the outset; this will have to be done at the trial on the merits of the case. If the allegations in a complaint can furnish a sufficient basis by which the complaint can be maintained, the same should not be dismissed regardless of the defenses that may be assessed by the defendants. To sustain a motion to dismiss for lack of cause of action, the complaint must show that the claim for relief does not exist rather than that a claim has been defectively stated or is ambiguous, indefinite or uncertain. Moreover, a defendant moving to dismiss a complaint on the ground of lack of cause of action is regarded as having hypothetically admitted all the averments thereof. It is enough that private respondents allege that they made a deposit in the amount of P18,000.00 after the mortgaged property was sold to petitioner at public auction; that they subsequently applied for and obtained an agricultural loan from another rural bank, the net proceeds of which they paid to petitioner in order to discharge the obligation under the mortgage constituted on Carmen Cerbos property; that the excess amount of P392.47 was not accounted for by petitioner; and that the P18,000 deposit was not deducted from the repurchase price of the property. In fine, private respondents contend that they were the ones who paid Carmen Cerbos loan obligation with petitioner. Whether these allegations entitle private respondents to the reliefs prayed for is a question which can best be resolved after trial on the merits at which each party can present evidence to prove their respective allegations and defenses. It is significant to note that petitioner already filed an answer to the complaint at which it admitted that private respondent Gregorio Cerbaa made a deposit of P18,000 as initial payment on the redemption price, and that the latter made a total payment of P101,000. Petitioner, therefore, had acknowledged that it was Gregorio Cerbaa, Carmen Cerbos son -in-law, who was making payments on the loan obligation. In fact, petitioner referred to Gregorio Cerbaa as the redemptioner of the foreclosed property.This admission cannot be disavowed by petitioners allegation in its motion to dismiss filed 8 months after its answer, that private respondents do not have a cause of action against it just because Carmen Cerbo had already passed away. While the death of Carmen Cerbo certainly extinguished whatever cause of action she had against petitioner, private respondents cause of action, based on the allegations in the complaint, was not thereby similarly extinguished. Indeed, assuming the allegations of the complaint to be true, private respondents, having paid the redemption price, have the right to demand an accounting, to be refunded for whatever excess payments they made, and even to redeem the property. Correlatively, petitioner, having accepted payment from private respondents, has the obligation to account for such payment, to return the excess, if

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payment from private respondents, has the obligation to account for such payment, to return the excess, if any, and to allow redemption. As regards the ancillary procedural question concerning the propriety of certiorari in lieu of appeal, we find that private respondents resort to certiorari is warranted under the circumstances. While it is true that certiorari is not a substitute for appeal, jurisprudence exempts from the application of this rule cases when the trial courts decision or resolution was issued without jurisdiction or with grave abuse of discretion. Considering that the trial court in this case completely disregarded the fact that private respondents also filed the complaint on their own behalf and in so doing prevented the latter from having their day in court, it gravely abused its discretion justifying private respondents petition for certiorari.
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BUKIDNON DOCTOR'S HOSPITAL VS. METROBANK

Wednesday, July 22, 2009 9:11 AM

Bukidnon Doctors Hospital Inc vs Metropolitan Bank and Trust Date: July 8, 2005 Petitioner: Bukidnon Doctors Hospital Inc Respondent: Metropolitan Bank and Trust Co

Ponente: Davide Jr
Facts: Bukidnon Doctors Hospital, Inc., obtained a loan of P25 million from Metropolitan Bank and Trust Company to be used for the construction of its hospital. To secure this loan, the petitioner mortgaged six parcels of land located in Valencia, Bukidnon, registered in the name of Dr. Rene Sison and Rory P. Roque. Upon petitioners default, the mortgage was extrajudicially foreclosed and the mortgaged lots were sold in a public auction to the bank. The petitioner failed to redeem the properties within the period of redemption. Forthwith, the respondent consolidated its ownership over the properties and was issued new certificates of title. Earlier, in a letter, petitioner expressed its desire to continue staying in the subject premises so that the operation of the hospital erected thereon would not be disrupted. For that purpose, the petitioner proposed to pay rent in the amount of P100,000 per month for a period of three years. The respondent agreed to lease the properties but subject to the following terms: (1) the monthly rental would be P200,000 with a one month advance rental and a deposit equivalent to three months rental; (2) the effectivity of the lease contract would be from June 2001; and (3) the contract would be subject to review every six months. The terms finally agreed upon by the parties, as culled from respondents letter to the petitioner of 30 May 2002, were (1) a monthly rental of P150,000, and (2) the effectivity of the lease contract in November 2001. Afterwards, respondent asked the petitioner to vacate the leased premises within fifteen days. The petitioner refused, invoking the subsisting lease agreement. Respondent filed with the RTC of Malaybalay City an Ex Parte Motion for a Writ of Possession. The trial court granted the writ of possession. Issue: WON the former mortgagee-buyer is still entitled to a writ of possession as a matter of right despite the lease agreement between itself and the former mortgagor-seller Held: Ratio: The law and jurisprudence are clear that in extrajudicial foreclosure proceedings, an order for a writ of possession issues as a matter of course, upon proper motion, after the expiration of the redemption period without the mortgagor exercising the right of redemption, or even during the redemption period provided a bond is posted to indemnify the debtor in case the foreclosure sale is shown to have been conducted without complying with the requirements of the law or without the debtor violating the mortgage contract. The rationale for the ministerial issuance of a writ of possession is to put the foreclosure buyer in possession of the property sold without delay, since the right to possession is founded on ownership of the property. However, in the instant case, a writ of possession was not the correct remedy for the purpose of ousting the petitioner from the subject premises. It must be noted that possession is the holding of a thing or the enjoyment of a right. It is acquired by the material occupation of a thing or the exercise of a right, or by the fact that a thing or right is subject to the action of ones will, or by the proper acts and legal formalities established for acquiring such right. By material occupation of a thing, it is not necessary that the person in possession should be the occupant of the property; the occupancy can be held by another in his name. An owner of a real estate has possession, either when he himself is physically occupying the property, or when another person who recognizes his rights as owner is occupying it. In the case at bar, it is not disputed that after the foreclosure of the property in question and the issuance of new certificates of title in favor of the respondent, the petitioner and the respondent entered into a contract of lease of the subject properties. This new contractual relation presupposed that the petitioner recognized that possession of the properties had been legally placed in the hands of the respondent, and that the latter had taken such possession but delivered it to the former as lessee of the property. By paying the monthly rentals, the petitioner also recognized the superior right of the respondent to the possession of the property as owner thereof. And by accepting the monthly rentals, the respondent enjoyed the fruits of its possession over the subject property. Clearly, the respondent is in material possession of the subject premises. Thus, the trial courts issuance of a writ of possession is not only superfluous, but improper under the law. Moreover, as a lessee, the petitioner was a legitimate possessor of the subject properties under Article 525 of the Civil Code. Thus, it could not be deprived of its lawful possession by a mere ex parte motion for a writ of possession. Apropos to this case is Banco de Oro Savings and Mortgage Bank v. CA. There, the spouses Nery were not able to redeem the property they mortgaged to the bank; hence, the latter was able to consolidate the title to the property in its name. The Nerys requested the bank for more time to repurchase the subject property, obligating themselves to pay monthly rentals or reasonable compensation for the continued occupation of the premises on the ground that they had leased portions of the building to tenants. Since neither the Nerys nor their tenants vacated the subject premises nor paid reasonable compensation for the use thereof, the bank instituted three separate ejectment suits against them before the Metropolitan Trial Court of Paraaque. The Nerys argued that the proper remedy that should have been taken by the bank as mortgagee was to obtain a writ of possession and not an action for ejectment. We rejected Nerys argument and ruled that it was proper for the bank to sue for ejectment. Thus: The Nerys forget, however, that they
ha d asked the Bank for a gra ce period within which to repurchase the mortgaged property a nd to be allowed to pay monthly rentals or reasonable compensation for the use of the premises. In fa ct, they did pay rentals for s everal months. Their continued stay i n the property wa s thereby converted to one by tolerance or permission. The Nerys refus ed to va cate upon demand, the last of which was made by l etter, dated 25 Jul y 1984, a s found by the Tri al Court, a nd not 9 September 1983 a s the Nerys allege. An ejectment suit, therefore, was proper, wi th the legally prescribed peri od to institute the s ame having been complied with. Si gnificantly, too, with the consolidation of title i n the Bank, it ha d become the owner of the subject premises. As s uch, i t could bring a n action for ejectment to obtain possession a nd occupa tion. Thus, Section 1, Rule 70 provides a n a ction for unlawful detainer may be brought by a l andlord, vendor, vendee, or other person a gainst whom the possession of any l and or building is unlawfully withheld after the expiration or termi nation of the right to hold possession xxx. It i s i ndeed, correct that in ordinary extra-judicial foreclosure cases, the mortgagees remedy i s to apply for a Wri t of Pos s ession. As already i ntimated, however, the stay of the Nerys in the premises had been converted to one by permission with a corresponding commitment to pay rentals. An i mplied l ease was thereby treated between the parties. Where the question relates to the relation between landlord and tenant, the nature of the lease premises i nvolved, the

Bukidnon Doctor's Hospital obtained a P25M loan from MBTC for the construction of its hospital. It also constituted a REM over the lands over which the hospital would be built as a security. As the Bukidnon Doctor's defaulted, MBTC foreclosed the REM and then was able to buy it. No redemption made by Bukidnon Doctors so MBTC consolidated ownership over the properties. ---however, it was apparent that before the end of the redemption period, Bukidnon Doctor's and MBTC had a lease agreement so that the operation of the hospital erected on the lands mortgaged would not be disrupted. but after the consolidation of the ownership over the properties, MBTC asked Bukidnon Doctors to vacate the property. Bukidnon Doctors refused, invoking the lease agreement -MBTC filed EX PARTE MOTION FOR WRIT OF POSSESSION w/ RTC RTC: granted

WON MBTC ENTITLED TO WRIT OF POSSESSION AS A MATTER OF RIGHT DESPITE THE LEASE AGREEMENT BETWEEN ITSELF AND THE FORMER MORTGAGOR-SELLER? NO where a lease agreement, whether express or implied, is subsequently entered into by the mortgagor and the mortgagee after the expiration of the redemption period and the consolidation of title in the name of the latter, a case for ejectment or unlawful detainer, not a motion for a writ of possession, is the proper remedy in order to evict from the questioned premises a mortgagor-turned-lessee. The rationale for this rule is that a new relationship between the parties has been created. What applies is no longer the law on extrajudicial foreclosure, but the law on lease. And when an issue arises, as in the case at bar, regarding the right of the lessee to continue occupying the leased premises, the rights of the parties must be heard and resolved in a case for ejectment or unlawful detainer under Rule 70 of the Rules of Court.

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Where the question relates to the relation between landlord and tenant, the nature of the lease premises i nvolved, the rea s onableness of the rentals demanded, the ri ght or lack of ri ght of the tenant to continue occupyi ng the premises a ga inst the will of the landlord, the a pplicability of the rental l aw, etc., a ca se for ejectment is proper. Notably, too, there were other tenants i n the premises who were not privy to the foreclosure proceedings but had to be rejected as wel l.

In a nutshell, where a lease agreement, whether express or implied, is subsequently entered into by the mortgagor and the mortgagee after the expiration of the redemption period and the consolidation of title in the name of the latter, a case for ejectment or unlawful detainer, not a motion for a writ of possession, is the proper remedy in order to evict from the questioned premises a mortgagor-turned-lessee. The rationale for this rule is that a new relationship between the parties has been created. What applies is no longer the law on extrajudicial foreclosure, but the law on lease. And when an issue arises, as in the case at bar, regarding the right of the lessee to continue occupying the leased premises, the rights of the parties must be heard and resolved in a case for ejectment or unlawful detainer under Rule 70 of the Rules of Court.
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Certain Issues: Start with No deficiency claim in a pledge

Friday, August 28, 2009 10:30 PM

Pactum commisorium is not allowed under RP Laws. If you have a multiple security agreement (chattel mortgage, REM, pledge, assignment) for the same principal obligation, ALWAYS REMEMBER THAT FORECLOSURE OF THE PLEDGE SHOULD BE DONE LAST (As there's a prohibition to undergo other remedies under Article 2115) -Sir was saying something about pledge of shares of stock and the argument that the situs is not Philippines but sir said that even if it be argued that situs not in RP, RP laws would still applybasta sorry I don't know eh... A.

No deficiency claim in a pledge

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

In pledge, if there's a deficiency GR: Creditor cannot claim deficiency once foreclosure obtained X: if stipulated B.

Deficiency claim in a chattel mortgage; exception

Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

...
(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. (1454 -A-a)

Review for Article 1484

General Rule: C reditor shall always be entitled to collect the deficiency judgement. ( Ablaza v. Ignacio , 58). State Investment House, Inc. v. CA (93) When the proceeds of the sale are insufficient to cover the debts in an extra -judicial foreclosure of chattel mortgage, the mortgagee is entitled to claim the deficiency from the debtor. Ratio: mortgages as accessory contracts serve only as securities and not for the satisfaction of the principal obligation Prescriptive Period: Ten (10) years under Art, 1142 of the C ivil C ode. (DBP v. Tomeldan , 80). Exception: If the property was sold in installments, the mortgagee can no longer take any action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void. (Art. 1484, Civil Code, aka the Recto Law)

O. Recto Law
The Recto law, which is now reflected in Articles 1484-1485 of the C ivil C ode, which provides that 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:

(a) (b)
(c)

Exact fulfillment of the obligation, should the vendee fail to pay (specific performance); C ancel the sale, should the vendee's failure to pay cover two or more installments (Note that this is not the same as rescission because here, the vendor gets back the object of the sale and retains the installments paid. However, this is not available in the absence of stipulation in the contract.); Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover 2 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 contract is void. The principal object of this amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness.

Pacific Commercial Co. v. Dela Rama These remedies are alternative, not cumulative. Filipinas Investement v. Vitug (69) When the creditor can no longer recover from the maker of the note with chattel mortgage because the deficiency is covered by the Recto Law, after the foreclosure of the mortgage, said creditor can still recover balance from the endorse who endorsed with recourse. Cruz v. Filipinas Investment (68) C sold to D a car payable on installments. The car was given as security by way of chattel mortgage to secure payment. In addition, the debtor put up a real estate mortgage as further security for the payment of the debt. D did not pay 2 or more installments and so C foreclosed the chattel mortgage. The proceeds therefrom were insufficient and so C wanted to get a deficiency judgment and satisfy it by foreclosing on the real estate mortgage. The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery (whether by judicial or extra -judicial foreclosure) by the vendor, of any balance on the purchasers outstanding obligation not so satisfied by the public sale. To allow further recovery by the foreclosure of the real estate mortgage is contrary to public policy. Northern Motors v. Sapinoso (70) Northern Motors sold a car to Sapinoso on installments. A chattel mortgage was executed on the car sold. When S failed to pay 2 or more installments, NM sought to foreclose the chattel mortgage and asked the court for a writ of replevin. Meantime, S made several payments while the replevin suit was pending. The lower court ruled that NM, by bringing the suit, was barred from accepting any further payments from S and ordered NM to reimburse the amount collected. The court a quo erred in concluding that the legal effect of the filing of the action for replevin was to bar NM from accepting further payments on the promissory note. That the ultimate objective of the action was for the foreclosure of the chattel mortgage is of no moment, for it is the fact of foreclosure and actual sale at public auction of the mortgaged chattel that bars further recovery by the vendor of any balance on the

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buyers outstanding obligation not satisfied by the sale. Pascual v. Universal Motors (74) When the seller imposes a double security by a chattel mortgage of the thing sold on installments and another mortgage on another property of the buyer, such is contrary to the public policy sought to be protected by the Recto Law, and the foreclosure of the chattel mortgage on the object of the sale bars recovery on any deficiency. Ridad v. Filipinas Investment (83) The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full amount of his original indebtedness. The corporation elected to foreclose its mortgage upon default by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned. Bicol Savings and Loan Asso. v. Guinhawa (90) The prohibition under the Recto Law against recovery does not apply to foreclosure of chattel mortgage constituted to secure a loan and not originating from a sales transaction.

Differentiating Pledge and Chattel Mortgage Pledge In pledge, the pledgor cannot be made answerable for deficiency after foreclosure since the principal obligation is extinguished. Thus, foreclosure of pledge must be your last remedy. Possible Solution: Subject pledge to foreign law.

CM GR: Action for deficiency is allowed. (Chattel Mortgage Law, Garrido v. Tuason) Exception: Article 1484(3), Civil Code/ Recto Law.

GARRIDO V. TUASON (1968)

F: Pila Tuason executed a CM over her car for the sum of P1k which she owed to Jose Garrido. As she was unable to pay, Jose Garrido commenced a case for the foreclosure of the CM + atty's fees and costs (note: not for collection of the outstanding obligation!) TC: pay P1k + interests + P100 + costs (even if Garrido prayed for foreclosure!) -writ of execution issued, car of Tuason was sold at a public auction for P550 with Garrido as the highest bidder -as there was still P450 left unsatisfied + P165 allegedly spend to carry out writ of execution and P1,290.58 as aggregate outstanding balance due under decision, Garrido filed motions (for alias writ of execution) which were both denied. -Garrido commenced a civil case vs. Pila Tuason, and now with her husband, for the recovery of the alleged balance in the earlier case. MTD filed by Tuason. TC for TUASON, CFI: Affirmed dismissal of civil case in pursuance to Article 2115 of Civil Code: Article 2115 provides:
". . . The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debt or shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary ."

WON Garrido could still claim the deficiency?

NO, but based on res judicata, not because there was already foreclosure of the CM. *Article 2115 of the Civil Code does not apply to Chattel Mortgage. Article 2115 is inconsistent with the
provisions of the Chattel Mortgage Law, and that, accordingly, the chattel mortgage creditor may maintain an action for the deficiency. -TC must have applied 2115 based on Article 2141 of CC which provides that provisions on pledge shall be applicable to chattel mortgages "insofar as they are not in conflict with the Chattel Mortgage Law". But as it does conflict, it should not be applied! HOW CONFLICT? DI ko rin alam eh. Wehe. Eto sabi sa footnote sa case: The last part of the second paragraph of Section 14 of Act No. 1508, provides:

SECTION 14. Sale of property at public

". . . The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and t hen to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in t heir order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand."

Pero hellurh, this contemplates a situation where there is excess in the proceeds of the sale, and not when there's a deficiency. So how does this conflict? TC might have acted under the impression that the first case was for the foreclosure of a chattel mortgage. But the first case was an ordinary money judgment so no previous ruling on foreclosure ...(okay eto pagkagets ko a, since di pa naman judicially ordered ang foreclosure, pede pa magforeclosure on other properties to cover the deficiency of the money judgment. In this case, Garrido prayed for foreclosure and not payment but since the MTC ordered payment instead, no judicial order of foreclosure) SC: Municipal court should have NOT DENIED plaintiff's motion for issuance of alias writ of execution

-but since instead of filing an appeal to the denial of his motion, the decision of the MC have been final and executory and thus binding and res judicata on the Civil Action he later filed.
NOTE: Why did CM arise? May sale ba or may utang lang? If may sale, A1484 would apply! There's no explicit statement in the Chattel Mortgage law which provides that the creditor could recover deficiency. SC interpreted it and declared that there's such right WITHOUT EXPLAINING WHY Sir said that in previous cases, the ruling was different but he didn't assign to us the said cases because it was not assigned to him when he was a student...

MAGNA FINANCIAL SERVICES GROUP VS. COLARINA

F: Colorina bought on installment from Magna Financial Services a Suzuki Multicab. He executed a PN for the balance of P229,284 and executed an integrated PN and deed of CM over the Multicab as security. -Colorina failed to pay the monthly amortization, with accumulating unpaid balance of P131,607. Colorina still failed to pay inspite of demands so MAGNA filed a COMPLAINT FOR FORECLOSURE of CHATTEL MORTGAGE w/ REPLEVIN -bond was filed by MAGNA, writ of replevin was issued TC: Colarina pay the P131,607 plus penalty + atty's fees + costs. In case of nonpayment, multicab shall be sold at public auction RTC: affrim CA: complaint was for foreclosure of the chattel mortgage so wrong to order Colorina to pay the balance due What is the true nature of a foreclosure of chattel mortgage under Article 1484(3)

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YEY! Eto na ung sinasabi ni ma'am Chit! BACHRACH MOTOR CO. VS. MILLAN : Undoubtedly the principal object of the above amendment (referring to Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. -HERE: MAGNA PRAYED BOTH FOR PAYMENT OF THE OBLIGATION AND FORECLOSURE OF THE CHATTEL. However, by praying for the foreclosure of the chattel, Magna renounced whatever claim it may have under the PN. -Art 1484(3) PROHIBITS OTHER ACTION TO RECOVER ANY UNPAID BALANCE OF THE PURCHASE PRICE AFTER FORECLOSURE. In other words, in all proceedings for the foreclosure of chattel mortgages executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property included in the mortgage. -NATURE OF CONTRACT OF CHATTEL MORTGAGE: conditional sale of personal property given 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 OR PERFORMING THE OBLIGATION SPECIFIED.

-if condition performed: mortgage and sale immediately become void, mortgagee divested of title -if nonpayment: foreclosure one of the remedies under A1484 may either be judicial or extrajudicial *** Since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code,
it is bound by its election and thus may not be allowed to change what it has opted for nor to ask for more. On this point, the Court of Appeals correctly set aside the trial courts decision and instead rendered a judgment of foreclosure as prayed for by the petitioner. WON there has been an actual foreclosure of the vehicle Not yet, but since the vehicle is with Magna already and Magna consistently avowed that it elects the remedy of foreclosure, CA correctly directed the foreclosure of the vehicle.

SC: A contract of chattel mortgage is the nature of a conditional sale of personality. WITHOUT EXPLAINING WHY IT WAS SO EVEN AFTER SAYING IT WAS INACCURATE, IN CERRA V. RODRIGUEZ. SIR: The characterization of CM as conditional sale has been abandoned since the enactment of Civil Code (A2141 of NCC).

(pause)."Did you notice that my pauses are getting longer and longer?" (pause) C.

Dacion en pago with repurchase (as an alternative to foreclosure of mortgage)

This set-up is used to do away with foreclosure proceeding Dacion en Pago: mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor property for the satisfaction of monetary debt; extinguish up to amount of property unless w/ contrary stipulation; A special form of payment because 1 element of payment is missing: IDENTITY -result is the same, in the sense that the mortgagor ends up with the property but no foreclosure proceeding Is this a circumvention of pactum commisorium? YES. Precisely, the mortgage is set aside. NO mortgage to speak of in the first place as it's substituted with another contractual arrangement. But valid as it is under the freedom of the parties to contract.

D.

Effect of "stay order" on enforcement of security

In Petition for Rehabilitation, the Court may issue a stay order which works as a standstill order prohibiting creditors to enforce their securities. -court needs to see if the petition is sufficient in form and substance "Cram down" clause E.

Foreclosure of Real Estate Mortgage

Sir's book: REM may be foreclosed Judicially or extrajudicially: Judicially R68, Rules of Civ Pro
No right of redemption, only an equity of redemption (right of mortgagor to extinguish the mortgage and retain ownership of the property by paying the mortgage debt w/n period of not less than 90d nor more than 120d from entry of final and executory judgment)

Extrajudicially Act 3135

Right of redemption GR: 1 yr (individual/natural person) from registration of certificate of sale X: 3 months max for Juridical Persons

**If the mortgagee = bank - follow Section 47 *if mortgagee=bank >>> there's always right of redemption, regardless if judicial or extrajudicial ---w/n 1 year counted from the date of registrationof the certificate of sale in the Registry of Property (Huerta vs. CA) but period shortened under GBL if JURIDICAL PERSON: 3 months from extrajudicial foreclosure foreign banks may not benefit from the 2nd paragraph of Section 47 since it may not be able to resort to extrajudicial foreclosure and therefore, will be unable to benefit from the 2nd paragraph of A67
SECTION 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. (RIGHT TO REDEEM PROPERTY

The trick is called a Chapter 13 Lien Strip but I like to call it the Back Door Cram Down. You may have read about the proposed mortgage Cram Down legislation that would allow Chapter 13 judges to reduce or Cram Down mortgages balances to fair market value in a Chapter 13 case. This legislation has zero chance of passing until a new election and Congress are seated next January. Instead, we are Cramming Down second mortgages using the old Bankruptcy code section 1322 which states: Contents of plan (b) The plan may (2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtors principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims. Whats not obvious about this code section is a loan is not secured by your personal residence if there is no value or equity in your home that would go to the lender if the home was sold. That means the loan can be converted to unsecured or the lien stripped from the house by modifying the rights of holders of secured claims. This turns it into unsecured debt, like credit card debt,

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sale and custody of said property less the income derived therefrom. (RIGHT TO REDEEM PROPERTY W/N 1 YEAR FROM DATE OF REGISTRATION OF THE CERTIFICATE OF SALE IN THE REGISTRY OF PROPERTY) However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. (RIGHT OF THE PURCHASER TO ENTER PROPERTY AFTER SALE - HUERTA VS. CA) Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure , whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. (78a) RA NO. 133 Sec. 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged for a period not exceeding five years , renewable for another five, in favor of any individual, corporation, or association, but the mortgagee or his successor in interest, if disqualified to acquire or hold lands of the public domain in the Philippines , shall not bid or take part in any sale of such real property as a consequence of such mortgage. Sir: foreign banks can be mortgagees but cannot acquire the property in a foreclosure saleonly entitled to proceeds of the sale Note however that RA 133 specifies judicial foreclosure, not extrajudicial foreclosure (okay, I can't find it anywhere in RA 133wala namang nakaspecify kung judicial or extrajudicial basta as a consequence of such mortgage) See page 156

REGISTER OF DEEDS VS. CHINA BANKING CORPORATION

Facts: Pangilinan and Chua were charged and convicted of qualified theft for P275k from China Banking Corporation. In furtherance of the judgment, Pangilinan executed in favor of China Banking Corporation a public instrument entitled DEED OF TRANSFER whereby he ceded and transferred to CBC a parcel of land located in Manila. -When CBC presented the document to the Registrar of Deeds, Registrar denied it because CBC was alien -owned and as such, barred from acquiring lands in the Philippines -CBC submitted matter to the Land Registration Commission for Resolution. LRC: unregistrable HELD: CBC cannot register the property in their name -Section 25, RA 337 par and (d) ARE NOT APPLICABLE TO ALIEN BANKS! ON PAR : "Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes: (c)Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings ; -the "debts" referred to are ONLY THOSE RESULTING FROM PREVIOUS LOANS AND OTHER SIMILAR TRANSACTIONS MADE OR ENTERED INTO BY A COMMERCIAL BANK IN THE ORDINARY COURSE OF ITS BUSINESS AS SUCH -"CIVIL LIABILITY" arising from a criminal offense WAS NOT A DEBT RESULTING FROM A LOAN OR A SIMILAR TRANSACTION HAD BETWEEN TWO PARTIES IN THE ORDINARY COURSE OF BANKING BUSINESS ON PAR (D) "Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes: (d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it. But no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer period than five years." -the deed of transfer sale made by virtue of judgment, decree, mortgage, or trust deed held by CBC -real property in question was not purchased by CBC to secure debts due it -debts: refer only to such debts as may become payable to appellant bank as a result of a banking transaction. ON Argument that consti prohibition should be liberally construed to be limited to PERMANENT ACQUISITION OF REAL ESTATE BY ALIENS the consti prohibition is ABSOLUTE IN TERMS. Smith Bell & Co Case not applicable because what was allowed to be registered there was a 50-year LEASE which does not involve transfer of dominion over the land This is the case when SYCIP lost (SYCIP's dad was one of the founders of China Bank) SECTION 25 = SEC 52 of the NEW LAW SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances: 52.1. Such as shall be mortgaged to it in good faith by way of security for debts; 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board : Provided, however, That the bank may, after said period, continue to hold the property

unsecured debt, like credit card debt, which can be discharged!!!! This is why I call it a Back Door cram down because we are cramming down the second mortgage to unsecured status. Here is an example. You bought your home in 2006 for $500k with 100% financing using an 80/20 loan. So your first mortgage is 80% or $400k and your second mortgage is 20% or $100k. The market is down more than 20% from its peak and your house is now only worth $375k. This means if the house was sold, the first mortgage would take all $375k and the second mortgage would get nothing. In this case the second mortgage is wholly unsecured and the second clause of section 1322(b) does not apply, so we can modify the rights of the second mortgage holder and turn it into unsecured debt. What happens to the now unsecured stripped off second mortgage? It gets paid in your Chapter 13 plan but only after your other secured debts are paid. Secured debts are the first mortgage, your property taxes, and your car payments. And because a Chapter 13 plan lasts only 3-5 years (usually 5) a whole lot of that unsecured debt does not get paid . At the end of 5 years, most unsecured debts (not student loans, back income taxes, or family support payments) are discharged so you dont have to repay them. So at the end of 5 years, you are left with just your just mortgage payment on your house. Your cars and your back property taxes are paid off, your student loans and back income taxes are paid down, but your second mortgage and your credit card debt is gone! Beautiful isnt it? God bless the 80/20! It just keeps on giving. You can read more about Chapter 13 plans here so Im not go into great detail on them other than to say they are like debt consolidation inside of a bankruptcy, they last 3 to 5 years (usually 5) and you also can included student loans and back income taxes. So what is the downside? First off, you will have gone Bankrupt. Your creditors will report that for 7 years and it will appear as a public record for 10 years on your credit report. Creditors do not really distinguish between a Chapter 7 or a Chapter 13 bankruptcy so your credit will take a beating. But I like to point out to people that if they do nothing, their credit will likely take a beating anyway, so its not really any worse. The other major downside is you must make every plan payment for 3 to 5 years. If you fail, everything goes back to the way it was. You owe all that debt, and the second lien is no longer stripped off. So I always tell my clients to make a budget that will work for 5 years, not just one that looks good to the Bankruptcy Court.
Pasted from <http://74.125.113.132/search? q=cache:WqCYkQn6wZkJ:iamfacingforeclosure.c om/blog/2008/05/18/the-real-alternative-towalking-away-is-a-%E2%80%9Cback-door-cramdown%E2%80%9D/+%22Cram+down%22 +clause&cd=1 &hl=tl&ct=clnk&gl=ph&client=firefox -a>

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Monetary Board : Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section. (25a)

See sir's annotation of the section! "1st paragraph of my annotation it took me hours to put up this paragraph" El Hobar Filipino: Bank made some effort in GF to sell the property w/n 5 years. So substantial compliance with Section 52. Now there are online sales of the ROPA!

PAREDES VS. CA
Facts: MICC obtained a loan from Banco Filipino Savings and Mortgage Bank and executed REM over 21 parcels of land, including 2 parcels of land in Pque which MICC sold though unregistered. -since MICC defaulted in their obligation, Banco Filipino filed PETITION FOR THE EXTRAJUDICIAL FORECLOSURE of MICC's Mortgage (question: if extrajudicial, bakit may petition?). -Auction Sale: BF declared the highest bidder. Certificate of Sale issued in favor of BF. -NO REDEMPTION W/N REGLEMENTARY PERIOD so BF filed a petition for issuance of writ of possession of foreclosed properties which was granted. Notice to vacate served on spouses who bought 2 lands from MICC. Spouses (petitioners) fiiled petition before CA - dismissed for lack of merit. 1. WON spouses have superior right over BF (alleging Buyers in GF) NO. Sale occurred AFTER MORTGAGE in favor of BF registered. A real right or lien in favor of BF had already been established, subsisting over the properties until the discharge of the principal obligation, WHOEVER POSSESSOR OF THE LAND MAY BE. 2. WON Spouses have right to redeem YES. But right already prescribed. -as successors-in-interest of MICC, they have right to redeem 1 year FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE W/ THE REGISTRY OF DEEDS. That is, from July 29, 1985 (thus, UNTIL JULY 29, 1986) But since they failed to redeem within said period, right prescribed. Ownership of the subject properties was thus consolidated in favor of BF 3. WON there was a binding AGREEMENT FOR REPURCHASE NO. (apparently there were negotiations entered by the Spouses with BF. However, the correspondence failed to show that the parties agreed to the valuation of the properties and that any of the parties agreed to the redemption on a fixed price) Court held that the correspondence between the parties reveals absence of DEFINITE OFFER AND ABSOLUTE ACCEPTANCE OF THE DEFINITE OFFER. 4. WON house should have been excluded from the auction sale NO. Article 448, NCC does not apply -The houses purchased by the spouses from MICC are improvements on the properties subjected to the REM, thus covered by the REM as improvements are deemed part of real property 5. WON writ of possession could still be enforced after 8 years from promulgation YES. Right of applicant/subsequent purchaser to request for the issuance of a writ of possession of land NEVER PRESCRIBES

If you register your REM and have it annotated to the back of your title, subsequent buyers of the land are bound by the REM

BANCO FILIPINO SAVINGS AND MORTGAGE BANK VS. CA

Facts: Santiago Memorial Park obtained a loan with BF and executed a REM over a parcel of lot. Because of default, BF foreclosed REM and certificate of sale was issued in favor of BF. -Santiago manifested its interest to exercise its right to redemption and offered as payment P700k (loan was for P500k). Deputy liquidator gave Santiago until end of March 1992 to negotiate payment. Santiago remitted P50k to manifest willingness to redeem property. Santiago later offered P1M for the property. Senior VP demanded later P5,830,000 as purchase price of property. -Santiago filed a complaint for redemption and specific performance with RTC vs. BF -BF Filed MTD: no redemption effected w/n 1 year from date of registration. *RTC: dismissed redemption complaint a. NO DEFINITE REDEMPTION (offer was not coupled with tender of the price) b. Complaint did not state that Santiago tendered correct redemption price w/n redemption period *CA: reversed TC: sustained complaint for redemption a. Complaint alleged that as eary as August 6, 1991 (6 months before the expiration of the statutory period for redemption), Santiago exerted earnest efforts to effect redemption b. Santiago did deposit the price which they believed was the agreed redemption price, with the belief that BF was negotiating in GF c. Granted that Santiago is barred, as the parties entered into a new contract extending period w/n which to purchase property, Santiago could still purchase property ---Santiago tendered payment and consigned amount of P1,300,987.96 in accordance with CA deci HELD: for BF. NO COA for redemption. Regardless if Santiago was diligent in asserting its willingness to pay, REDEMPTION W/N THE PERIOD ALLOWED BY LAW IS NOT A MATTER OF INTENT BUT A QUESTION OF PAYMENT OR VALID TENDER OF FULL REDEMPTION PRICE W/N SAID PERIOD.

*Banco Filipino v. CA (2005): The right of redemption must be exercised within the specified time limit, which is one (1) year from date of registration of certificate of sale. In case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action which in every case must be filed within the same one (1) year. Note: Redemption amount as provided in Section 47 of GBL is different from that in Rules of Court. This is to insure that the bank will not incur losses. *Provisions of GBL are juxtaposed with ROC provisions. If non bank Bank Redemption price: foreclosure sale Redemption price: mortgage deed + interest

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e.g. loan P1M, REM, foreclosed, sold for only P500k What the mortgagor would do to redeem the property is to give you back P500k:: if non-bank P1M+ interests :: if bank

RURAL BANKING OF CALINOG VS. CA

Facts: To pay the redemption price for the mortgaged property, the owner of the subject property obtained another loan with Rural Banking of Calinog. The mortgagor died, thus, the spouses who were successors of interest of the mortgagor, paid the bank to satisfy the loan with Rural Banking of Calinog (and alleged they paid the whole obligation). However, Rural Bank of Calinog initiated foreclosure proceedings for the said property, claiming the loan was unpaid. Even after the spouses demanded the accounting of the accounts, the bank still proceeded with the foreclosure sale. -Spouses filed complaint for nullification of the sale. MTD filed by Rural Bank, arguing that since the mortgagor has already died, the payments made by the spouses were irrelevant as they were not parties to the mortgage. RTC: for bank CA: For the spouses. They had a COA and irrelevant if they were not parties to the mortgage as they were successors-in-interest HELD: for the spouses! -the spouses had COA: spouses sufficiently alleged that they made payments to discharge the obligation of Carmen Cerbo under the mortgage and that the bank failed to make an accounting of the payments made even after demand of the spouses and that if accounting was indeed made, it would show that the spouses has already discharged of the obligation with the Rural Bank. Whether these allegations entitle private respondents to the reliefs prayed for is a question which can best be resolved after trial on the merits at which each party can present evidence to prove their respective allegations and defenses. -BANK ALREADY FILED ANSWER ADMITTING THAT RESPONDENT GREGORIO CERBANA MADE DEPOSITS AS INITIAL PAYMENT OF REDEMPTION PRICE AND THAT GREGORIO PAID A TOTAL OF P101K, therefore acknowledging that it was Gregorio who was making payments on the loan obligation, even referred to Gregorio as the REDEMPTIONER of the foreclosed property. -ON RELEVANCE OF THE FACT THAT SPOUSES WERE NOT PARTIES TO THE MORTGAGE CONTRACT: SPOUSES' COA MAY BE DIFFERENT FROM THAT OF CARMEN. While the death of Carmen Cerbo certainly extinguished whatever cause of action she had against petitioner, private respondents cause of action, based on the allegations in the complaint, was not thereby similarly extinguished. Indeed, assuming the allegations of the complaint to be true, private respondents, having paid the redemption price, have the right to demand an accounting, to be refunded for whatever excess payments they made, and even to redeem the property. Correlatively, petitioner, having accepted payment from private respondents, has the obligation to account for such payment, to return the excess, if any, and to allow redemption.

This case is more of a civpro case!

BUKIDNON DOCTOR'S HOSPITAL VS. METROBANK

Facts: Bukidnon Doctor's Hospital obtained a P25M loan from MBTC for the construction of its hospital. It also constituted a REM over the lands over which the hospital would be built as a security. As the Bukidnon Doctor's defaulted, MBTC foreclosed the REM and then was able to buy it. No redemption made by Bukidnon Doctors so MBTC consolidated ownership over the properties. ---however, it was apparent that before the end of the redemption period, Bukidnon Doctor's and MBTC had a lease agreement so that the operation of the hospital erected on the lands mortgaged would not be disrupted. but after the consolidation of the ownership over the properties, MBTC asked Bukidnon Doctors to vacate the property. Bukidnon Doctors refused, invoking the lease agreement -MBTC filed EX PARTE MOTION FOR WRIT OF POSSESSION w/ RTC RTC: granted WON MBTC ENTITLED TO WRIT OF POSSESSION AS A MATTER OF RIGHT DESPITE THE LEASE AGREEMENT BETWEEN ITSELF AND THE FORMER MORTGAGOR-SELLER? NO where a lease agreement, whether express or implied, is subsequently entered into by the mortgagor and the mortgagee after the expiration of the redemption period and the consolidation of title in the name of the latter, a case for ejectment or unlawful detainer, not a motion for a writ of possession, is the proper remedy in order to evict from the questioned premises a mortgagor -turned-lessee. The rationale for this rule is that a new relationship between the parties has been created. What applies is no longer the law on extrajudicial foreclosure, but the law on lease. And when an issue arises, as in the case at bar, regarding the right of the lessee to continue occupying the leased premises, the rights of the parties must be heard and resolved in a case for ejectment or unlawful detainer under Rule 70 of the Rules of Court.

Bukidnon Doctors v. MetroBank: In extrajudicial foreclosure, a writ of possession shall be issued as a matter of course upon proper motion after expiration of redemption period without the mortgagor exercising his right of redemption.
III.

Other Tax Matters

(AS THIS WAS NOT ASSIGNED AND SIR WANTED TO DISCUSS IT, NO PRIOR NOTES. PLEASE BARE WITH ME) Other Tax Matters A. Applicable Taxes 1. Income Tax 2. DST (.5% for loan, .2% for mortgage) 3. Gross Receipt Tax Omnibus Agreement: a contract similar to a syndicated loan which includes volumes of agreements Omnibus Agreement is a tax avoidance scheme since only the higher rate of DST is paid (ie, that of loan). Since guarantee is not subject to DST, it makes no sense to include the same to the agreement since it only raises the base for computation of DST. Problem: Pari Passu Representation violation in view of notarization of mortgage. Solution: There must be waiver of preference re notarization of mortgage agreement. Also, include a provision that the notarization does not apply to the loan. FCDU Tax

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FCDU Tax Transaction with

Resident Non-residents, OBU & local commercial banks including foreign bank branches

Tax Status
10% Final Tax Exempt

If the bank lends money, the interest is subject to gross receipts tax (normally 5%) but the same amount is includable as part of the gross income of the bank, the net taxable portion of which is taxed by income tax (30% beginning 2009). DST also imposed on certain bank transactions: -loan agreements and PNs: .5% of the amount in the transaction -pledges, mortgages, trust receipts: .2% of the amount involved in the transaction -but if combine loan+security (omnibus agreement): .5% (higher between the two) -if assignment: P15.00 (tax certificate) FCDUs are taxed differently. The income of FCDUs from foreign currency transactions: 10% final witholding tax (should be with residence: include local KB, local branches of Foreign banks, other fcdus, obus) It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now the law is not very clear because the "In lieu" of provision was deleted in the NLRC. Intent before was to encourage foreign banks to invest in the Philippines (thus mas konting tax imposed on them). If FCDU derive income from non-foreign currency transaction: regular corporate income tax rate (10%) -if the counterparty is a nonresident: income derived by that nonresident is not taxable here; similarly, the income by FCDU is not taxed. SO favorite customer of a FCDU is a nonresident, as there is no tax!
Originating bank structure, the basicis tax minimizing structure Tax minimizing structure: tax avoidance scheme (not tax evasion)

Omnibus Agreement: combine loan with security agreement Mondragon Leisure and Resorts Corporation vs. CA Parties entered into a Originating bank structure =fronting bank structure -idea is the borrower would look for a bank that is exempt from Philippine income tax Either under *tax treaty *NIRC - SEC 32: Financial institutions getting from their government
(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.

Originating Bank Structure This is otherwise known as fronting bank structure. It takes advantage of tax exemption status of foreign lenders. It is a form of tax avoidance. In this structure, a foreign bank acts as creditor on record while domestic bank participates silently.

Derivative Transactions This is a contract for differences. The income is derived from the difference between agreed settlement price and actual market price on the agreed settlement date. Derivative: financial asset the price of which is derived from value of other financial assets ISDA: International Swaps and Derivatives Association Types: 1. Option Contract a. Call Option: right, not obligation, of buyer to exercise option to buy PN within a specified period b. Put Option: right, not obligation, of seller to exercise option to sell PN within a specified period 2. Forward Transaction Illustration: Co. A will buy US$1M 6mths from now at PhP40=US$1 ForEx Rate in 6mths Situation
PhP50=US$1
PhP30=US$1 PhP40=US$1

In the money
Out of the money; but in the market At the money; exercise forward given assured amount

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PhP40=US$1

At the money; exercise forward given assured amount

3. Currency Swap It is the simultaneous buying and selling of currencies involving spot (near leg) and forward (far leg) rates.
A bank cannot engage in derivative transactions without necessary BSP license.

Onapal v. CA: In ISDA, there is netting off of agreements which may give rise to gambling issues. In case there is but pretended delivery of goods involved in the transactions, the Civil Code provision prohibiting gambling is violated. FPIC v. CA: Cherry picking is not allowed in Philippine jurisdiction. The powers granted to the conservator, enormous and extensive as they are, cannot extend to the post facto repudiation of perfected transactions. Otherwise, they would infringe upon non-impairment of contracts clause in Constitution. Securitization: See Securitization Act of 2004. This involves the transfer of credit risks in a true sale transaction to transform the receivables into asset backed securities. Due Diligence: Two Types: 1. Prospectus: undertaken by underwriter in offer of securities 2. Securities: undertaken by buyer in insuring that property to be acquired is worth -buying Defense of due diligence in insuring omission or non-disclosure of material facts is but a mitigating circumstance. The SRC only recognizes knowledge defense. Certain Other Matters 1. AMLA (RA 9160) 2.Securities Regulation Code The Code is for consumer protection. The SEC no longer issues license to sell, rather it declares securities as defective to protect buyers.
Redherring: review of preliminary prospecturs

GR: Every security must be registered. Exception: 1. exempt securities 2. exempt transactions 3. offshore offering of securities

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Mondragon Leisure and Resorts Corp. v. CA

Saturday, August 29, 2009 2:39 PM

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 154188 June 15, 2005 MONDRAGON LEISURE AND RESORTS CORPORATION, Petitioner, vs. COURT OF APPEALS, ASIAN BANK CORPORATION, FAR EAST BANK AND TRUST COMPANY, and UNITED COCONUT PLANTERS BANK, Respondents. DE C I S I O N QUISUMBING, J.: In its DECISION1 dated March 12, 2002, the Court of Appeals in CA-G.R. SP No. 61047 dismissed the petition for certiorari filed by Mondragon Leisure and Resorts Corporation against the Order2 dated March 9, 2000, of the Regional Trial Court of Angeles City, Branch 61, in Civil Case No. 9527. Likewise, in its Resolution dated July 3, 2002, the CA denied the motion for reconsideration. The facts of the case are undisputed. On February 28, 1994, Mondragon International Philippines, Inc. (MIPI), Mondragon Securities Corporation (MSC) and herein petitioner entered into a lease agreement with the Clark Development Corporation (CDC) for the development of what is now known as the Mimosa Leisure Estate.
To help finance the project, petitioner, on June 30, 1997, entered into an Omnibus Loan and Security Agreement3 (hereafter Omnibus Agreement) with respondent banks for a syndicated term loan in the aggregate principal amount of US$20M. Under the agreement, as amended on January 19, 1999,4 the proceeds of the loan were to be released through advances evidenced by promissory notes to be executed by petitioner in favor of each lender-bank, and to be paid within a six-year period from the date of initial advance inclusive of a one year and two quarters grace period. To secure the repayment of the loan, petitioner pledged in favor of respondents US$20M worth of MIPI shares of stocks; assigned, transferred and delivered all rights, title to and interest in the pledged shares; and assigned by way of security its leasehold rights over the project and all the rights, title, interests and benefits in, to and under any and all agreements in connection with the project.

On July 3, 1997, petitioner fully availed of and received the full amount of the syndicated loan agreement. Petitioner, which had regularly paid the monthly interests due on the promissory notes until October 1998, thereafter failed to make payments. Consequently, on January 6 and February 5, 1999, written notices of default, acceleration of payment and demand letters were sent by the lenders to the petitioner. Then on August 27, 1999, respondents filed a complaint, docketed as Civil Case No. 9527, for the foreclosure of leasehold rights against petitioner.
Petitioner moved for the dismissal of the complaint on the following grounds: (1) a condition precedent for the filing of the complaint has not been complied with and/or the instant complaint failed to state a cause of action, or otherwise the filing was premature; (2) the certification of non-forum shopping appended to the complaint was fatally defective since one of the plaintiffs, UCPB, deliberately failed to mention that it had previously filed another complaint; and (3) plaintiffs had engaged in forum shopping in filing the instant complaint.

F: Mondragon International Philippines, Inc. (MIPI), Mondragon Securities Corporation (MSC) and Mondragon Leisure and Resorts Corporation (MLRC) entered a lease agreement with CLARK DEVELOPMENT CORPORATION (CDC) for the development of Mimosa Leisure Estate. -Omnibus agreement in this case composed of: *loan agreement for US$20M *Pledge of US$20M worth of MIPI shares of stocks *assignment, transfer and delivery of all rights, titles and interest in the pledged shares *assignment of leasehold rights over the project and all the rights, title, interests and benefits to and under any and all agreements in connection with the project

The trial court denied the motion and ruled as follows: .. . After a careful study of the arguments of the parties, this court finds that the motion to dismiss is without merit. As correctly pointed out by the plaintiffs under par. 6.01, the borrower defaults when interests due at stated maturity are not paid and the lenders are authorized to accelerate any amount payable under the loan agreements. One of the consequences of such default is the foreclosure of collaterals. This is the action taken by the herein plaintiffs-lenders. This court also finds the alleged force majeure baseless. The same are not those provided for under Sec. 1, Article 41 of the loan agreement.
As to the allegation of forum shopping, the herein parties Asian Bank Corporation and Far East Bank and Trust Company are not parties to this case in 9510 (sic). The subject matter of Civil Case No. 9527 is not the same with the subject matter in Civil Case No. 9510. Wherefore, premises considered, the motion to dismiss is denied. The defendant is given 15 days from receipt hereof within which to file its answer and/or responsive pleading. SO ORDERED.5

Petitioner moved for the reconsideration of the order and argued that the complaint is premature, since it had not been validly declared in default.6 The trial court denied the motion for reconsideration. Seasonably, petitioner filed a special civil action for certiorari with the Court of Appeals. Before the appellate court, petitioner reiterated its arguments in its motion to dismiss before the trial court, including the failure of the respondents to attach the board resolutions authorizing them to file the complaint.7 The Court of Appeals dismissed the petition and denied the subsequent motion for reconsideration. Hence, this appeal by certiorari8 imputing the following errors: I THE RESPONDENT-APPELLEE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE COMPLAINT IN CIVIL CASE NO. 9527 COMPLIED WITH THE MANDATORY REQUIREMENTS OF CERTIFICATION OF NON-FORUM SHOPPING. II THE RESPONDENT-APPELLEE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN NOT RULING THAT A CONDITION PRECEDENT FOR THE FILING OF THE COMPLAINT IN CIVIL CASE NO. 9527 HAS NOT BEEN COMPLIED WITH, OR THAT IT IS OTHERWISE PREMATURE, AND/OR THAT IT FAILS TO STATE A CAUSE OF ACTION AGAINST PETITIONER-APPELLANT.

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IT FAILS TO STATE A CAUSE OF ACTION AGAINST PETITIONER-APPELLANT. III THE RESPONDENT-APPELLEE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN NOT RULING THAT RESPONDENT-APPELLEE BANKS, IN FILING THE COMPLAINT IN CIVIL CASE NO. 9527, DELIBERATELY ENGAGED IN FORUM SHOPPING. 9

ISSUES: In brief, three issues are presented for resolution, namely, (1) Was the certificate of non-forum shopping defective? (2) Did respondents engage in forum shopping? and (3) Do respondents have a cause of action against the petitioner?
On the first issue, petitioner asserts that the verification and certificate of forum shopping were defective because there was no proof as to the authority of the signatories to file the complaint. Petitioner avers that UCPB Resolution 48-87, which was only presented in the Court of Appeals, merely authorized the signatory to "appear, act for, or otherwise represent the bank in all judicial, quasi-judicial or administrative hearings or incidents, including pre-trial conference, and in connection therewith, to do any and all of the following acts and deeds" and clearly pertains to a pending proceeding.

Respondents, on the other hand, contend that the lack of authority of the persons who verified and certified the complaint was neither raised in the motion to dismiss nor in the motion for reconsideration of the petitioner. They aver that the verification and certification of non-forum shopping contained a statement by the persons who signed it that they had been so authorized by the board of directors of their respective corporations. Considering the submissions of the parties, we are constrained to agree with the respondents contention. The trial court did not err in denying the motion to dismiss. The issue concerning the signatories authorization was never raised before it. Likewise, the appellate court did not err in refusing to take cognizance of the issue, since the parties did not raise it beforehand. Issues not raised in the trial court cannot be raised for the first time on appeal.10 On the second issue, petitioner claims that respondent UCPB engaged in forum shopping since it earlier instituted an action for foreclosure of mortgage and/or collection, docketed as Civil Case No. 9510.11 This claim, in our view, is untenable. A comparison of the two complaints would show its utter lack of merit. Civil Case No. 9510 pertains to an Omnibus Credit and Security Agreement executed by and between the petitioner and respondent UCPB on November 23, 1995. This is separate and distinct from the Omnibus Agreement involved in Civil Case No. 9527. Moreover, respondents Asian Bank and Far East Bank are not among the parties to Civil Case No. 9510. As pointed out by the Court of Appeals, forum shopping exists when both actions involve the same transactions, with the same essential facts and circumstances; and where identical causes of actions, subject matter and issues are raised. The test to determine the existence of forum shopping is whether the elements of litis pendentia are present, or whether a final judgment in one case will amount to res judicata in another.12 The requisites in order that an action may be dismissed on the ground of litis pendentia are (a) the identity of parties, or at least such as representing the same interest in both actions; (b) the identity of rights asserted and relief prayed for, the relief being founded on the same facts; and (c) the identity of the two cases such that judgment in one, regardless of which party is successful, would amount to res judicata in the other.13 Such requisites are not present in this controversy. Apropos the third issue, petitioner contends the subject obligation of the instant case is not yet due and demandable because the Omnibus Agreement allows a full six-year term of payment. Even if it failed to pay some installments, petitioner insists it is not in default because respondents merely sent collection and demand letters, but failed to give the written notice of default required under their agreement. Moreover, petitioner avers that the provisions on default in the Omnibus Agreement have been rendered inapplicable and unenforceable by fortuitous events, namely the Asian economic crisis and the closure of the Mimosa Regency Casino, which was petitioners primary source of revenues.1avvphi1.zw+ Respondents counter that the Omnibus Agreement defines, as an event of default, the failure of petitioner to pay when due at stated maturity, by acceleration or otherwise, any amount payable under the loan documents. Since petitioner is also required to pay interest, respondents posit that nonpayment thereof constituted a clear and unmistakable case of default. Respondents add that they had properly advised the petitioner that it had been declared in default, referring to the January 6 and February 5, 1999 letters as their compliance with the notice requirement. On this issue, we are unable to agree with the petitioner. Section 2.06 (a) of Part B of the Omnibus Agreement provides that the borrower shall pay interest on the advances outstanding from time to time on each interest payment date, while Section 6 of Part A reads 6.01 Events of Default Each of the following events shall constitute an Event of Default under this Omnibus Agreement: (a) Payment Default The BORROWER defaults in the payment when due at stated maturity, by acceleration or otherwise, of any amount payable under the Loan Documents.14 .. . Clearly, under the foregoing provisions of the Agreement, petitioner may be validly declared in default for failure to pay the interest. As a consequence of default, the unpaid amount shall earn default interest,15 and the respondent-banks have four alternative remedies without prejudice to the application of the provisions on collaterals and any other steps or action which may be adopted by the majority lender.16 The four remedies are alternative, with the right of choice given to the lenders, in this case the respondents. Under Article 1201 of the Civil Code, the choice shall produce no effect except from the time it has been communicated. This is the reason why a written notice is required under Section 6.02 of the Omnibus Agreement. In the present case, we find that written notices were sent to the petitioner by the respondents. The notices clearly indicate respondents choice of remedy: to accelerate all payments payable under the loan agreement. On January 6, 1999, respondents notified petitioner that it was in default, and demanded payment of the stated amount within five days from receipt of the letter, otherwise all outstanding availments of the US$20M term loan together with interests and other sum payable shall be declared due and demandable.17 The letter clearly indicated the choice of remedy by the respondents, pursuant to the Omnibus Agreement. Even though subsequent demand is waived by the petitioner in Section 6.02 of Part B of the Omnibus Agreement, on February 5, 1999, the respondents nevertheless actually made their demand in writing for the payment of the principal plus interest and penalty charges due on or before February 28, 1999, with express notice that they would take all legal remedies available to protect the interests of their clients.18 Clearly, respondents have more than complied with the requirement concerning notice to the

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clients.18 Clearly, respondents have more than complied with the requirement concerning notice to the petitioner. It should be noted that the agreement also provides that the choice of remedy is without prejudice to the action on the collaterals. Thus, respondents could properly file an action for foreclosure of the leasehold rights to obtain payment for the amount demanded. Petitioners claim, that the respondents could not be held in default because of a fortuitous event, is untenable. Said event, the Asian financial crisis of 1997, is not among the fortuitous events contemplated under Article 117419 of the Civil Code. To exempt the obligor from liability for a breach of an obligation by reason of a fortuitous event, the following requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor.20 As pointed out by the respondents, the loan agreement was entered into on June 30, 1997, or when the Asian economic crisis had already started. Petitioner, as a long established corporation, should have been well aware of the economic environment at that time, yet it still took the risk to expand operations. Likewise, the closure of the Mimosa Regency Casino was not an unforeseeable or unavoidable event, in the context of the contract of lease between petitioner and CDC. Every business venture involves risks. Risks are not unforeseeable; they are inherent in business. Worthy of note, risk is an exception to the general rule on fortuitous events. Under the law, these exceptions are: (1) when the law expressly so specifies; (2) when it is otherwise declared by the parties; and (3) when the nature of the obligation requires the assumption of risks.21 We find that in the Omnibus Agreement, the parties expressly agreed that any enactment, official action, act of war, act of nature or other force majeure or other similar circumstances shall in no way affect the obligation of the borrowers to make payments.22 In sum, the appellate court did not err in dismissing petitioners action for certiorari and in denying the motion for reconsideration. It committed no reversible error, much less any grave abuse of discretion amounting to lack or excess of jurisdiction, contrary to petitioners contentions. WHEREFORE, the appeal is DENIED for lack of merit. The Decision dated March 12, 2002 and the Resolution dated July 3, 2002 of the Court of Appeals in CA-G.R. SP No. 61047 are hereby AFFIRMED. Costs against petitioner. SO ORDERED. LEONARDO A. QUISUMBING Associate Justice WE CONCUR: HILARIO G. DAVIDE, JR. Chief Justice Chairman

CONSUELO YNARES-SANTIAGO ANTONIO T. CARPIO Associate Justice Associate Justice ADOLFO S. AZCUNA Associate Justice CE RT I F I C A T I O N Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. HILARIO G. DAVIDE, JR. Chief Justice Footnotes 1 Rollo, pp. 59-64. Penned by Associate Justice Juan Q. Enriquez, Jr., with Associate Justices Delilah Vidallon-Magtolis, and Candido V. Rivera concurring. 2 Id. at 275-278. 3 Id. at 104-205, 500-601. 4 Id. at 206-213. 5 Id. at 277-278. 6 Id. at 288-290. 7 Id. at 291-328. 8 Id. at 11-58. 9 Id. at 32-33. 10 Lim v. Queensland Tokyo Commodities, Inc., G.R. No. 136031, 4 January 2002, 373 SCRA 31, 41. 11 Rollo, pp. 241-250. 12 Tirona v. Alejo, G.R. No. 129313, 10 October 2001, 367 SCRA 17, 33. 13 Republic v. Carmel Development, Inc., G.R. No. 142572, 20 February 2002, 377 SCRA 459, 470-471. 14 Rollo, p. 525. 15 Id. at 550. (Part B) 6.03 Default Interest Notwithstanding anything in this Omnibus Agreement to the contrary, if the BORROWER fails to make payment when due of any sum hereunder (whether at stated maturity, by acceleration or otherwise), the BORROWER shall, in addition to the interest then applicable as determined pursuant to Section 2.06(b) of Part B, pay to the LENDERS default interest on such past due and unpaid amount from due date until date of full payment (both before as well as after judgment) to be computed at the rate of two percent (2%) per month. 16 Ibid. (Part B) 6.02 Consequences of Default If an event of Default shall have occurred then at any time thereafter, if any such event shall then be continuing, the Majority Lenders, upon written notice to the Borrower, may [i] declare all Commitments to be terminated whereupon the obligation of the LENDERS to make or maintain the Advances hereunder shall forthwith terminate, [ii] accelerate payment and declare the Loan, all interest accrued and unpaid thereon and all other amounts payable hereunder, and default interest hereunder, to be forthwith due and payable, whereupon the same shall become immediately due and payable, without demand, protest or further notice of any kind, all of which are hereby expressly waived by the BORROWER, [iii] foreclose on the Collaterals or take such other necessary steps conformably with the Collaterals, or [iv] immediately, without notice to the BORROWER, apply and compensate or set-off toward the partial or full liquidation of such amount or amounts, any funds, securities, or other property of the BORROWER held by the LENDERS in deposit or under any other concept without prejudice to the adoption by the Majority Lenders of any other steps or action, which, in the Majority Lenders sole discretion, is needed to protect the LENDERS rights and interests, and without prejudice to the application of the provisions of the Collaterals, as provided in Section 3 of Part A. For purposes of this provision, the BORROWER hereby appoints each LENDER as its attorney-in-fact with full power and

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authority to do any and all acts required to give full force and effect to this provision. [Emphasis supplied] 17 Id. at 614-615. 18 Id. at 616-617. 19 Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. 20 Huibonhoa v. Court of Appeals, G.R. Nos. 95897 and 102604, 14 December 1999, 320 SCRA 625, 651-652. 21 Art. 1174, Civil Code, supra, note 19. 22 Rollo, p. 533. (Part A) 7.13 Force Majeure The LENDERS shall not be responsible for any damage resulting from any enactment, official action, act of war, strike, lockout, boycott, blockade, act of nature or other force majeure or other similar occurrence beyond the control of the LENDERS. Any such circumstances shall in no way affect the obligations of the BORROWER to make payments which are or may become due under this Omnibus Agreement.
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Notes on securities from net

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(ii) is the system of ownership and rights in relation to property other than land sufficiently developed to encourage lending on the security of such property?
In the philippine, there are two ways of securing a loan with personal property. This may be done either by a chattel mortgage or through a pledge. Chattel Mortgage Article 2140 of the Civil Code provides: "Art. 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." There are two principles applicable to chattel mortgages which often create problems for creditors: (1) a chattel mortgage cannot be executed over future property or property not yet in existence at the time the chattel mortgage is executed; and (2) a chattel mortgage may not be executed to secure future obligations. In the case of a real estate mortgage, any improvements introduced on the land after the execution of the mortgage are automatically included in the mortgage, unless they had been expressly excluded. However, Section 7 of Act. No. 1508, otherwise known as the Chattel Mortgage Law, prohibits a chattel mortgage over future property: "A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding." Decisions of the Supreme Court, however, have carved out exceptions to this rule. The Court reasoned that the intention behind the enactment of the Chattel Mortgage Law was to promote business and trade in the philippine, and that it could not have been the intention to apply that prohibition to retail stores open to the public, such as drug, grocery and dry goods stores whose stocks-in-trade are constantly sold and substituted with new stock. The Supreme Court held in one case: "A stipulation in the mortgage, extending its scope and effect to after acquired property, is valid and binding... where 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 etc. 11 C.J., p.436) Present practice in the Philippine financial community has extended the exception to the rule against a mortgage of future chattels to inventories of raw materials, goods in process and finished goods. Many lawyers believe that inventories are continually being consumed and subsequently replaced and are of the same nature as stock-in-trade; thus they claim that inventories qualify for this exception. To extend the exception much further, however, would be to tread on uncharted and possibly dangerous ground. For future obligations, a real estate mortgage may secure not only a specific credit accommodation but also all other present and future obligations of a debtor in favor of a creditor. Thus, the Philippine Supreme Court has upheld the validity of a stipulation in a real estate mortgage that the mortgage would secure a specific loan as well as "such other loans or other advances already obtained or still to be obtained by the mortgagors as makers." However, this does not apply to chattel mortgages. The Supreme Court has adhered (although not uniformly) to the rule that a chattel mortgage may not secure future obligations. The reason cited for this rule is the fact that Section 5 of the Chattel Mortgage Law requires the parties involved to execute a so-called affidavit of good faith, in which both parties state: "We severally swear that the foregoing is made for the purpose of securing the

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obligation specified in the conditions thereof and for no other purpose, and that the same is a just and valid obligation and not one entered into for the purpose of fraud." In Belgian Catholic Missionaries v. Magallanes Press, the Philippine Supreme Court struck down a chattel mortgage that secured an obligation that had not yet been contracted by the mortgagor at the time of the mortgage's execution; the Court explained: "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted." In a subsequent case, however, the Supreme Court held that this ruling would not apply had there been an express stipulation in the mortgage that it would secure future obligations as well. These conflicting decisions appeared to have been resolved, at least temporarily when the Supreme Court in a later case categorically stated: "This deed of chattel mortgage is void because it provides that the security stated herein is for the payment of any and all obligations herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the Mortgagee." However, the Philippine Supreme Court appeared to weaken its position in this ruling by citing as its support part of the Belgian Catholic Missionaries decision, namely that "a mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage." In an even later case the Supreme Court held that a chattel mortgage could not secure future advances but only those obligations that were expressly specified in the mortgage, namely "[P=40,000] including the interest thereon, the cost of collection and other obligations owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the mortgagee. In Philippine National Bank v. Court of Appeals, although the Court could have simply reasoned that future advances could not have been secured by the mortgage because they were future obligations, the Court chose not to. Instead, the Court implied that certain future obligations, such as costs of collection and certain other obligations, could be secured by the chattel mortgage provided they were embraced within the scope of the mortgage. The Court stated: "Applying the principle of ejusdem generis, the term 'other obligations' must be limited to such as are the same nature as interest and costs of collection. The term cannot be enlarged to include future additional advances to debtor-mortgagor. . ." The extent to which future obligations may be secured by a chattel mortgage is thus not yet well settled. Previous decisions of the Philippine Supreme Court suggest that provided that the chattel mortgage expressly includes within its coverage certain well-defined future obligations, then the mortgage would be upheld. Pledge As for creation of pledge, personal or movable property may also be given as security by way of pledge. A pledge is a contract whereby the debtor delivers to the creditor or to a third person by common agreement a movable(or a document that evidences an incorporeal right) for the purpose of securing the fulfillment of a principal obligation. In addition to the delivery of the thing pledged to the creditor to a third person, it is necessary that a description of the thing pledged and the date of the pledge should appear in a public instrument. On the basis of this rule, a deed of pledge, in order to be valid against a third person, should be acknowledged before a notary public. There is no requirement, however, for the pledge to be registered or recorded in any registry. Incorporeal rights, which are evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents, may also be pledged. In these cases, the instrument proving the right pledged must be delivered to the creditor and, if negotiable, must be endorsed. The difficulties confronting the lender in case shares of stock are pledged to secure a loan is that of ascertaining the value of the shares especially after a default has occurred, unless the shares are listed in the exchange, in which case the market value thereof may easily be determined. C2. Secured financing (a) What mechanisms for taking of security over assets of a corporate borrower are available to

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financiers in this economy (for example mortgages over land; fixed and/or floating charges over personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)? In the main, there are six main classes of security arrangements available to secure the payment and performance of loans and other credit accommodations. They are the following: i. guarantee - where a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so; ii. suretyships - where a person binds himself solidarily with the principal debtor; iii. real estate mortgage - 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 in case the principal obligation is not complied with at the time stipulated. The documents in which the mortgage appears must be recorded in the appropriate Registry of Property, and if the instrument is not recorded, the mortgage is nevertheless binding between the parties. iv) chattel mortgages - a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation; and v) pledges - a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled the thing delivered shall be returned with all its fruits and accessions.

(b) In practice, which of these types of security are most commonly employed by financiers?
In practice, what is most commonly employed type of security by financiers are real estate mortgages, chattel mortgages, and suretyships. (c) Is there a system of registration in this economy for any of these types of security taken by financiers? For guarantees, suretyships, and pledges, in order for the security agreement to be valid against third parties, it should be acknowledged before a notary public. There's no requirement for the guarantee or pledge agreement to be registered or recorded in any registry. As for Real Estate Mortgages, in order to create a valid mortgage over land, it is necessary to record the mortgage document in the Registry of Property located where the land is situated. However, if the mortgage is not recorded, it is nevertheless binding between the parties to the mortgage. For Chattel Mortgages, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. (d) To what extent are priorities between competing securities regulated? The provisions on Concurrence and Preference of Credits in the Civil Code shall regulate this. C3. Enforcement of securities: (a) When a corporate borrower is in financial difficulties and a secured debt has become due, would it be usual or customary for a secured lender and/or the corporate borrower to attempt to negotiate a suitable arrangement for repayment and/or refinancing before the secured lender invokes legal enforcement methods? Yes. Usually the corporate borrower shall exert efforts to extend the credit facilitates given to them by their creditors in order that their loans will not be considered as past due. Creditors are amenable to this and are also open to the possibility of entering into a workout for as long as they feel that the corporate borrower will not file for insolvency, suspension of payments, or will dispose of their assets in fraud of their creditors. Once they feel that their security is threatened, then they will not hesitate to seek legal remedy in enforcing such securities.

(b) What mechanisms are available to security holders to enforce their securities under the legal system of this economy (For example, power to take possession of the property, power to appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, power to wind up the corporate borrower)?

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For Real Estate Mortgages, upon default in the principal obligation that it secures, it may be foreclosed either judicially or extrajudicially. In foreclosure proceedings, the property given by way of security is sold at public auctions; the proceeds of the sale are then used to pay or settle the obligations secured by the mortgage. If the proceeds of sale are not sufficient to cover the secured obligations, the creditor has a right of action against the debtor for the deficiency and may file a complaint is court against the debtor for the shortfall. The creditor may not, however, appropriate for himself the mortgaged property given by way of security without going through foreclosure proceedings. The reason is because of Art. 2088 of the Civil Code which states that "the [creditor] cannot appropriate to himself the things given by way of pledge or mortgage, or otherwise dispose of them." A stipulation such as this is known as a pactum commisorium The rationale behind this prohibition is that forfeiture of property given as security has traditionally not been allowed because it was considered to be contrary to morals and public policy. Although a debtor, instead of paying for its obligation in cash, can transfer to his creditor property to satisfy the obligation, a debtor may not grant previous authorization to the creditor to appropriate the property mortgaged or pledged as the latter's own payment of the debt. Thus, a stipulation in a mortgage that, in case of default of payment, the mortgaged property would be considered full payment "without further action in court" is held to be null and void as a pactum commisorium. A Real Estate Mortgage may be foreclosed judicially or extrajudicially. It is foreclosed judicially if the mortgagee files a complaint in court for foreclosure of the mortgage pursuant to the Rules of Court. A real estate mortgage may be foreclosed extrajudicially if the real estate mortgage grants a power of attorney to the creditor allowing it to do so. Because of the expense, inconvenience and length of time that a judicial proceeding for the foreclosure of a mortgage would ental, almost all mortgages contain a clause authorizing extrajudicial foreclosure of the mortgage. Practically all defaulted mortgages are now foreclosed extrajudicially. As with a real estate mortgage, a chattel mortgage may also be foreclosed judicially or extrajudicially. However, as with a real estate mortgage, practically all chattel mortgages are foreclosed extrajudicially because of the time and expense that a judicial proceeding would require. Similar to a real estate mortgage, any provision in the contract granting the creditor the right to appropriate the thing mortgaged upon debtor default is null and void as a pactum commisorium. As for pledges, if the debtor defaults in its obligation, the creditor may foreclose the pledge by having the thing sold at a public auction by a notary public. The debtor and the owner of the thing pledged must be given prior notice of the sale. If at the first sale the thing is not sold, a second one with the same formalities must be held; and, if at the second auction there is no sale, the creditor may appropriate the thing pledged. In this case the creditor must give an acquittance for its entire claim. At the public auction, both the pledgor and owner may bid, and they will have first claim if they offer the same terms as the highest bidder. The creditor may also bid, but its offer will not be valid if it is the only bidder. All bids at the public auction must be for cash, and, if the creditor accepts any other bid, it will be deemed to have received cash. After the auction, the pledge must promptly advise the pledgor of the results. Any provision in a deed of pledge granting the creditor the right to appropriate as its own the thing pledged increase of default is null and void as a pactum commisorium. Upon foreclosure of either a real estate or chattel mortgage, the creditor may bring an action in court against the debtor for any deficiency in case the proceeds of the foreclosure sale are not sufficient to cover the secured obligations. In the case of a pledge, however, the sale of the thing pledged at a foreclosure sale extinguishes the principal obligation that it secures, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than the amount, the debtor is not entitled to the excess, unless it is otherwise agreed. Likewise, if the price of the sale is less, the creditor is not entitled to recover the deficiency, unless there is a stipulation to the contrary. The creditor, however, is not obliged to foreclose a pledge. It may choose instead to sue in court on the principal obligation rather than foreclosure. If the creditor prevails in the court action, it may then have the pledged property sold at an execution sale. If the proceeds of the execution sale are not sufficient to cover the secured obligations, the creditor may then recover the deficiency by levying upon other assets of the debtor. The fact that the creditor is granted possession of the thing pledged may provide a creditor with a

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greater degree of security than a chattel mortgage. However, many creditors dislike pledges because it is practically impossible to recover any pledge deficiency. An attempt can be made to combine both a chattel mortgage and a pledge by having a chattel mortgage registered in the chattel mortgage register while also delivering possession of the mortgaged chattel to the creditor. Although this would appear to grant the creditor the best features of both a chattel mortgage and a pledge, most lawyers in the philippine would be unwilling to express the opinion that such an arrangement would not be construed as a pledge. A creditor may still be unable to recover any deficiency in case of foreclosure. For an antichresis, a contract of antichresis is self -executing and need not await the occurrence of an event of default under the principal obligation. Thus, there is no requirement of foreclosure since the creditor in possession of the debtor's property merely harvests the fruits and applies them in payment of the debtor's obligation. (c) Do these methods include that a secured creditor may 'self-enforce' the security (ie, without the need for an order of a court or the consent of a regulatory authority)?

See answer in C3(b). (d) In practice, which method(s) of enforcement are most commonly employed by security holders?
See answer in C3(b). (e) Briefly describe the process involved in these method(s). See answer in C3(b).
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Onapal vs. CA
Saturday, August 29, 2009 3:01 PM

PHILIPPINE JURISPRUDENCE - FULL TEXT The Law phil Proj ect - Arellano Law Foundation G.R. No. 90707 February 1, 1993 ONAPAL PHIL. COMMODITIES, INC. v s. COURT OF APPEALS, ET AL.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 90707 February 1, 1993 ONAPAL PHILIPPINES COMMODITIES, INC., petitioner, vs. THE HONORABLE COURT OF APPEALS and SUSAN CHUA, respondents. Zosa & Quijano Law Offices for private respondents.

CAMPOS, JR., J.: This is an appeal by way of a Petition for Certiorari under Rule 45 of the Rules of Court to annul and set aside the following actions of the Court of Appeals: a) Decision * in Case CA-G.R. CV No. 08924; and b) Resolution ** denying a Motion for Reconsideration on the ground of grave abuse of discretion amounting to lack or excess of jurisdiction and further ground that the decision is contrary to law and evidence. The questioned decision upheld the trial court's findings that the Trading Contract 1 on "futures" is a specie of gambling and therefore null and void. Accordingly, the petitioner (as defendant in lower court) was ordered to refund to the private respondent (as plaintiff) the losses incurred in the trading transactions. In support of the petition, the grounds alleged are: 1) Article 2018 of the New Civil Code is inapplicable to the factual milieu of the instant case considering that in a commodity futures transaction the broker is not the direct participant and cannot be considered as winner or loser and the contract itself, from its very nature, cannot be considered as gambling. 2) A commodity futures contract, being a specie of securities, is valid and enforceable as its terms are governed by special laws, notably the Revised Securities Act and the Revised Rules and Regulations on Commodity Futures Trading issued by the Securities and Exchange Commission (SEC) and approved by the Monetary Board of the Central Bank; hence, the Civil Code is not the controlling piece of legislation. From the records, We gather the following antecedent facts and proceedings. The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), a duly organized and existing corporation, was licensed as commission merchant/broker by the SEC, to engage in commodity futures trading in Cebu City under Certificate of Registration No. CEB-182. On April 27, 1983, petitioner and private respondent concluded a "Trading Contract". Like all customers of the petitioner, private respondent was furnished regularly with "Commodities Daily Quotations" showing daily movements of prices of commodity futures traded and of market reports indicating the volume of trade in different future exchanges in Hongkong, Tokyo and other centers. Every time a customer enters into a trading transaction with petitioner as broker, the trading order is communicated by telex to its principal, Frankwell Enterprises of Hongkong. If the transaction, either buying or selling commodity futures, is consummated by the principal, the petitioner issues a document known as "Confirmation of Contract and Balance Sheet" to the customer. An order of a customer of the petitioner is supposed to be transmitted from Cebu to petitioner's office in Manila. From Manila, it should be forwarded to Hongkong and from there, transmitted to the Commodity Futures Exchange in Japan. There were only two parties involved as far as the transactions covered by the Trading Contract are concerned the petitioner and the private respondents. We quote hereunder the respondent Court's detailed findings of the transactions between the parties:
It appears from plaintiff's testimony that sometime in April of 1983, she was invited by defendant's Account Executive Elizabeth Diaz to invest in the commodity futures trading by depositing the amount of P500,000.00 (Exh. "A"); She was further told that the business is "profitable" and that she could withdraw

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P500,000.00 (Exh. "A"); She was further told that the business is "profitable" and that she could withdraw her money anytime; she was furthermore instructed to go to the Onapal Office where she met the Manager, Mr. Ciam, and the Account Executive Elizabeth Diaz who told her that they would take care of how to trade business and her account. She was then made to sign the Trading Contract and other documents without making her aware/understand the risks involved; that at the time they let her sign "those papers" they were telling her that those papers were for "formality sake"; that when she was told later on that she made a profit of P20,480.00 in a span of three days in the first transaction, they told her that the business is "very profitable" (tsn, Francisco, March 14, 1985, p. 11). On June 2, 1983, plaintiff was informed by Miss Diaz that she had to deposit an additional amount of P300,000.00 "to pay the difference" in prices, otherwise she will lose her original deposit of P500,000.00; Fearing the loss of her original deposit, plaintiff was constrained to deposit an additional amount of P300,000.00 (Exh. "B"); Since she was made to understand that she could withdraw her deposit/investment anytime, she not knowing how the business is operated/managed as she was not made to understand what the business was all about, she wanted to withdraw her investment; but Elizabeth Diaz, defendant's Account Executive, told her she could not get out because there are some accounts hanging on the transactions. Plaintiff further testified that she understood the transaction of buying and selling as speculating in prices, and her paying the difference between gains and losses without actual delivery of the goods to be gambling, and she would like to withdraw from this kind of business, the risk of which she was not made aware of. Plaintiff further testified that she stopped trading in commodity futures in September, 1983 when she realized she was engaged in gambling. She was able to get only P470,000.00 out of her total deposit of P800,000.00. In order to recover the loss of P330,000.00, she filed this case and engaged the services of counsel for P40,000.00 and expects to incur expenses of litigation in the sum of P20,000.00." 2

A commodity futures contract is a specie of securities included in the broad definition of what constitutes securities under Section 2 of the Revised Securities Act. 3
Sec. 2 . . .: (a) Securities shall include bonds, . . ., commodity futures contracts, . . . .

The Revised Rules and Regulations on Commodity Futures Trading issued by the SEC and approved by the Monetary Board of the Central bank defines such contracts as follows:
"Commodity Futures Contract" shall refer to an agreement to buy or sell a specified quantity and grade of a commodity at a future date at a price established at the floor of the exchange.

The petitioner is a duly licensed commodity futures broker as defined under the Revised Rules and Regulations on Commodity Futures Trading as follows:
"Futures Commission Merchant/Broker" shall refer to a corporation or partnership, which must be registered and licensed as a Futures Commission Merchant/Broker and is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of the contract market and that, in connection with such solicitation or acceptance of orders, accepts any money, securities or property (or extends credit in lieu thereof) to margin, guarantee or secure any trade or contract that results or may result therefrom.

At the time private respondent entered into the transaction with the petitioner, she signed a document denominated as "Trading Contract" in printed form as prepared by the petitioner represented by its Branch Manager, Albert Chiam, incorporating the Rules for Commodity Trading. A copy of said contract was furnished to the private respondent but the contents thereof were not explained to the former, beyond what was told her by the petitioner's Account Executive Elizabeth Diaz. Private respondent was also told that the petitioner's principal was Frankwell Enterprises with offices in Hongkong but the private respondent's money which was supposed to have been transmitted to Hongkong, was kept by petitioner in a separate account in a local bank. Petitioner now contends that commodity futures trading is a legitimate business practiced in the United States, recognized by the SEC and permitted under the Civil Code, specifically Article 1462 thereof, quoted as follows:
The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised or acquired by the seller after the perfection of the contract of sale, in this Title called "future goods". There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen.

Petitioner further argues that the SEC, in the exercise of its powers, authorized the operation of commodity exchanges to supervise and regulate commodity futures trading. 4 The contract between the parties falls under the kind commonly called "futures". In the late 1880's, trading in futures became rampant in the purchase and sale of cotton and grain in the United States, giving rise to unregulated trading exchanges known as "bucket shops". These were common in Chicago and New York City where cotton from the South and grain from the Mid-west were constantly traded in. The name of the party to whom the seller was to make delivery when the future contract of sale was closed or from whom he was to receive delivery in case of purchase is not given the memorandum (contract). The business dealings between the parties were terminated by the closing of the transaction of purchase and sale of commodities without directions of the buyer because his margins were exhausted. 5 Under the rules of the trading exchanges, weekly settlements were required if there was any difference in the prices of the cotton between those obtaining at the time of the contract and at the date of delivery so that

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the cotton between those obtaining at the time of the contract and at the date of delivery so that under the contract made by the purchaser, if the price of cotton had advanced, he would have received in cash from the seller each week the advance (increase) in price and if cotton prices declined, the purchaser had to make like payments to the seller. In the terminology of the exchange, these payments are called "margins". 6 Either the seller or the buyer may elect to make or demand delivery of the cotton agreed to be sold and bought, but in general, it seems practically a uniform custom that settlements are made by payments and receipts of difference in prices at the time of delivery from that prevailing at the time of payment of the past weekly "margins". These settlements are made by "closing out" the contracts. 7 Where the broker represented the buyer in buying and selling cotton for future delivery with himself extending credit margins, and some of the transactions were closed at a profit while the others at a loss, payments being made of the difference in prices arising out of their rise or fall above or below the contract price, and the facts showed that no actual delivery of cotton was contemplated, such contracts are of the kind commonly called "futures". 8 Making contracts for the purchase and sale of commodities for future delivery, the parties not intending an actual delivery, or contracts of the kind commonly called futures, are unenforceable. 9 The term "futures" has grown out of those purely speculative transactions in which there are nominal contracts to sell for future delivery, but where in fact no delivery is intended or executed. The nominal seller does not have or expect to have a stock of merchandise he purports to sell nor does the nominal buyer expect to receive it or to pay for the price. Instead of that, a percentage or margin is paid, which is increased or diminished as the market rates go up and down, and accounted for to the buyer. This is simple speculation, gambling or wagering on prices within a given time; it is not buying and selling and is illegal as against public policy. 10 The facts as disclosed by the evidence on record show that private respondent made arrangements with Elizabeth Diaz, Account Executive of petitioner for her to see Mr. Albert Chiam, petitioner's Branch Manager. The contract signed by private respondent purports to be for the delivery of goods with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner. We quote with approval the following findings of the trial court as cited in the Court of Appeals decision:
The evidence of the plaintiff tend to show that in her transactions with the defendant, the parties never intended to make or accept delivery of any particular commodity but the parties merely made a speculation on the rise or fall in the market of the contract price of the commodity, subject of the transaction, on the pretended date of delivery so that if the forecast was correct, one party would make a profit, but if the forecast was wrong, one party would lose money. Under this scheme, plaintiff was only able to recover P470,000.00 out of her original and "additional" deposit of P800,000.00 with the defendant. The defendant admits that in all the transactions that it had with the plaintiff, there was (sic ) no actual deliveries and that it has made no arrangement with the Central Bank for the remittance of its customer's money abroad but defendant contends in its defense that the mere fact that there were no actual deliveries made in the transactions which plaintiff had with the defendant, did not mean that no such actual deliveries were intended by the parties since paragraph 10 of the rules for commodity trading, attached to the trading contract which plaintiff signed before she traded with the defendant, amply provides for actual delivery of the commodity subject of the transaction. The court has, therefore, to find out from all the facts and circumstances of this case, whether the parties really intended to make or accept deliveries of the commodities traded or whether the defendant merely placed a provision for delivery in its rules for commodity futures trading so as to escape from being called a bucket shop, . . . xxx xxx xxx . . . the court is convinced that the parties never really intended to make or accept delivery of any commodity being trade as, in fact, the unrebutted testimony of Mr. Go is to the effect that all the defendant's customers were mere speculators who merely forecast the rise or fall in the market of the commodity, subject of the transaction, below or above the contract price on the pretended date of delivery and, in fact, the defendant even discourages its customers from taking or accepting delivery of any commodity by making it hard, if not impossible, for them to make or accept delivery of any commodity. Proof of this is paragraph 10(d) of defendant's rules for commodity trading which provides that the customer shall apply for the necessary licenses and documents with the proper government agency for the importation and exportation of any particular commodity. 11

The trading contract signed by private respondent and Albert Chiam, representing petitioner, is a contract for the sale of products for future delivery, in which either seller or buyer may elect to make or demand delivery of goods agreed to be bought and sold, but where no such delivery is actually made. By delivery is meant the act by which the res or subject is placed in the actual or constructive possession or control of another. It may be actual as when physical possession is given to the vendee or his representative; or constructive which takes place without actual transfer of goods, but includes symbolic delivery or substituted delivery as when the evidence of title to the goods, the key to the warehouse or bill of lading/warehouse receipt is delivered. 12 As a contract in printed form, prepared by petitioner and served on private respondent, for the latter's signature, the trading contract bears all the indicia of a valid trading contract because it complies with the Rules and Regulations on Commodity Futures Trading as prescribed by the
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complies with the Rules and Regulations on Commodity Futures Trading as prescribed by the SEC. But when the transaction which was carried out to implement the written contract deviates from the true import of the agreement as when no such delivery, actual or constructive, of the commodity or goods is made, and final settlement is made by payment and receipt of only the difference in prices at the time of delivery from that prevailing at the time the sale is made, the dealings in futures become mere speculative contracts in which the parties merely gamble on the rise or fall in prices. A contract for the sale or purchase of goods/commodity to be delivered at future time, if entered into without the intention of having any goods/commodity pass from one party to another, but with an understanding that at the appointed time, the purchaser is merely to receive or pay the difference between the contract and the market prices, is a transaction which the law will not sanction, for being illegal. 13 The written trading contract in question is not illegal but the transaction between the petitioner and the private respondent purportedly to implement the contract is in the nature of a gambling agreement and falls within the ambit of Article 2018 of the New Civil Code, which is quoted hereunder:
If a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid.

The facts clearly establish that the petitioner is a direct participant in the transaction, acting through its authorized agents. It received the customer's orders and private respondent's money. As per terms of the trading contract, customer's orders shall be directly transmitted by the petitioner as broker to its principal, Frankwell Enterprises Ltd. of Hongkong, being a registered member of the International Commodity Clearing House, which in turn must place the customer's orders with the Tokyo Exchange. There is no evidence that the orders and money were transmitted to its principal Frankwell Enterprises Ltd. in Hongkong nor were the orders forwarded to the Tokyo Exchange. We draw the conclusion that no actual delivery of goods and commodity was intended and ever made by the parties. In the realities of the transaction, the parties merely speculated on the rise and fall in the price of the goods/commodity subject matter of the transaction. If private respondent's speculation was correct, she would be the winner and the petitioner, the loser, so petitioner would have to pay private respondent the "margin". But if private respondent was wrong in her speculation then she would emerge as the loser and the petitioner, the winner. The petitioner would keep the money or collect the difference from the private respondent. This is clearly a form of gambling provided for with unmistakeable certainty under Article 2018 abovestated. It would thus be governed by the New Civil Code and not by the Revised Securities Act nor the Rules and Regulations on Commodity Futures Trading laid down by the SEC. Article 1462 of the New Civil Code does not govern this case because the said provision contemplates a contract of sale of specific goods where one of the contracting parties binds himself to transfer the ownership of and deliver a determinate thing and the other to pay therefore a price certain in money or its equivalent. 14 The said article requires that there be delivery of goods, actual or constructive, to be applicable. In the transaction in question, there was no such delivery; neither was there any intention to deliver a determinate thing. The transaction is not what the parties call it but what the law defines it to be. 15 After considering all the evidence in this case, it appears that petitioner and private respondent did not intend, in the deals of purchasing and selling for future delivery, the actual or constructive delivery of the goods/commodity, despite the payment of the full price therefor. The contract between them falls under the definition of what is called "futures". The payments made under said contract were payments of difference in prices arising out of the rise or fall in the market price above or below the contract price thus making it purely gambling and declared null and void by law. 16 In England and America where contracts commonly called futures originated, such contracts were at first held valid and could be enforced by resort to courts. Later these contracts were held invalid for being speculative, and in some states in America, it was unlawful to make contracts commonly called "futures". Such contracts were found to be mere gambling or wagering agreements covered and protected by the rules and regulations of exchange in which they were transacted under devices which rendered it impossible for the courts to discover their true character. 17 The evil sought to be suppressed by legislation is the speculative dealings by means of such trading contracts, which degenerated into mere gambling in the future price of goods/commodities ostensibly but not actually, bought or sold. 18 Under Article 2018, the private respondent is entitled to refund from the petitioner what she paid. There is no evidence that the orders of private respondent were actually transmitted to the petitioner's principal in Hongkong and Tokyo. There was no arrangement made by petitioner with the Central Bank for the purpose of remitting the money of its customers abroad. The money which was supposed to be remitted to Frankwell Enterprises of Hongkong was kept by petitioner in a separate account in a local bank. Having received the money and orders of

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petitioner in a separate account in a local bank. Having received the money and orders of private respondent under the trading contract, petitioner has the burden of proving that said orders and money of private respondent had been transmitted. But petitioner failed to prove this point. For reasons indicated and construed in the light of the applicable rules and under the plain language of the statute, We find no reversible error committed by the respondent Court that would justify the setting aside of the questioned decision and resolution. For lack of merit, the petition is DISMISSED and the judgment sought to be reversed is hereby AFFIRMED. With costs against petitioner. SO ORDERED. Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.
#

Footnotes

* Promulgated on June 30, 1989; Associate Justice Oscar M. Herrera, ponente. Associate Justices Lorna S. Lombos-de la Fuente and Fernando A. Santiago, concurring. ** Promulgated on October 24, 1989. 1 Annex A of Petition; Rollo, pp. 25-29. 2 Rollo, pp. 45-46. 3 Batas Pambansa Blg. 178. 4 See P.D. No. 902-A. 5 Lemonius, et al. vs. Mayer, et al., 14 So. 33 (1893). 6 Ibid., p. 34. 7 Ibid., p. 34. 8 S.M. Weld & Co. vs. Austin, 107 Miss. 279, 65 So. 247 (1914). 9 Ibid. 10 King vs. Quidwicks, 14 R. Is. 131, 138; Anderson vs. State, 58 S.E. 401 (1907); Henry Hentz & Co. vs. Booz, 70 S.E. 108 (1911). 11 Rollo, pp. 49-50; 51-52; Records, pp. 180-181, 182. 12 Black's Law Dictionary 515-516 (4th ed.). 13 Plank vs. Jackson, 26 N.E. 568 (1891); Lemonius, et al. vs. Mayer, et al., supra, note 5. 14 CIVIL CODE, Art. 1458. 15 Schmid & Oberly, Inc. vs. R.J.L. Martinez Fishing Corporation, 166 SCRA 493 (1988). 16 Supra, note 7. 17 Supra, note 5. 18 Ibid., p. 35.
The Lawphil Project - Arellano Law Foundation

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First Philippine International Bank vs. CA

Saturday, August 29, 2009 3:03 PM

GR 115849, 24 January 1996 Third Division Panganiban (J) Charilyn Dee Facts: In the course of its banking operations, the defendant Producer Bank of the Philippines acquired six parcels of land with a total area of 101 hectares located at Don Jose, Sta. Rosa, Laguna. It was formerly owned by BYME Investment and Development Corporation which had them mortgaged with the bank as a collateral for a loan. Plaintiffs Demetrio Demetria and Jose O. Janolo wanted to purchase the property and thus initiated negotiations for that purpose. Upon the advice of Jose Fajardo, BYME Investments legal counsel, they met with defendant Mercurio Rivera, Manager of the Property Mangement Department of the defendant bank. After the meeting, plaintiff Janolo, following the advice f defendant Rivera, made a formal offer to the bank through a letter dated August 30, 1987 wherein he offered to buy the property for the amount of P3,500,000.00 pesos. Defendant Rivera made a counter offer, in behalf of the bank, on a letter dated September 1, 1987 of P5,500,000.00 pesos. Plaintiff, in response, offered the amount of P4.250 million in cash. There was no reply,what took place was a meeting between plaintiffs and Luis Co, the Senior Vice-president of defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the meeting. Two days later, plaintiff Janolo sent to the bank, through Rivera, a letter agreeing to the last proposed amount made by Rivera. On October 12, 1987, the consevator of the bank was replaced by an Acting Conservator in the person of defendant Leonida T. Encarnacion. On November 4, 1987, defendant Rivera wrote plaintiff Demetria a letter informing him that his proposal is under study of the newly created committee for submission to the newly designated Acting Conservator of the bank. Plaintiff served a series of demand for compliance with what plaintiff considered as a perfected contract of sale, which demands were in one form or another refused by the bank. Plaintiffs filed a suit for specific performance with damages against the bank, its manager Rivera and acting Conservator Encarnacion. On March 14, 1991, Henry L. Co (Brother of Luis Co) filed a motion to intervene in the trial court, alleging that as owner of 80% of the Banks outstanding shares of stocks, he had substantial interest in resisting the complaint. His motion was denied in the ground that it was filed after trial had already been concluded. The motion for reconsideration was also denied. From the trial courts decision, the Bank, petitioner Rivera and conservator Encarnacion appealed to the Court of Appeals which subsequently affirmed with modification the said judgment. Henry Co did not appeal the denial of his motion for intervention. In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in place of Demetria and Janolo, in view of the assignment of the latters rights in the matter in litigation to said private respondent. On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and several other stockholders of the Bank, filed an action (hereafter, the Second Case) purportedly a derivative suit with the Regional Trial Court of Makati, against Encarnacion, Demetria and Janolo to declare any perfected sale of the property as unenforceable and to stop Ejercito from enforcing or implementing the sale. In his answer, Janolo argued that the Second Case was barred by litis pendentia by virtue of the case then pending in the Court of Appeals. During the pre-trial conference in the Second Case, plaintiffs filed a Motion for Leave of Court to Dismiss the Case Without Prejudice. Private respondent opposed this motion on the ground, among others, that plaintiffs act of forum shopping justifies the dismissal of both cases, with prejudice. Private respondent, in his memorandum, averred that this motion is still pending in the Makati RTC. Issue: Whether or not there is forum shopping. Held: We rule for private respondent. To begin with, forum-shopping originated as a concept in private international law, where non-resident litigants are given the option to choose the forum or place wherein to bring their suit for various reasons or excuses, including to secure procedural advantages, to annoy and harass the defendant, to avoid

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overcrowded dockets, or to select a more friendly venue. To combat these less than honorable excuses, the principle of forum non conveniens was developed whereby a court, in conflicts of law cases, may refuse impositions on its jurisdiction where it is not the most convenient or available forum and the parties are not precluded from seeking remedies elsewhere. In this light, Blacks Law Dictionary 13 says that forum shopping occurs when a party attempts to have his action tried in a particular court or jurisdiction where he feels he will receive the most favorable judgment or verdict. Hence, according to Words and Phrases, a litigant is open to the charge of forum shopping whenever he chooses a forum with slight connection to factual circumstances surrounding his suit, and litigants should be encouraged to attempt to settle their differences without imposing undue expense and vexatious situations on the courts. In the Philippines, forum shopping has acquired a connotation encompassing not only a choice of venues, as it was originally understood in conflicts of laws, but also to a choice of remedies. As to the first (choice of venues), the Rules of Court, for example, allow a plaintiff to commence personal actions where the defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff (Rule 4, Sec. 2 *b+). As to remedies, aggrieved parties, for example, are given a choice of pursuing civil liabilities independently of the criminal, arising from the same set of facts. A passenger of a public utility vehicle involved in a vehicular accident may sue on culpa contractual, culpa aquiliana or culpa criminal each remedy being available independently of the others although he cannot recover more than once. In either of these situations (choice of venue or choice of remedy), the litigant actually shops for a forum of his action. This was the original concept of the term forum shopping. Eventually, however, instead of actually making a choice of the forum of their actions, litigants, through the encouragement of their lawyers, file their actions in all available courts, or invoke all relevant remedies simultaneously. This practice had not only resulted to (sic) conflicting, adjudications among different courts and consequent confusion enimical (sic) to an orderly administration of justice. It had created extreme inconvenience to some of the parties to the action. Thus, forum shopping had acquired a different concept - which is unethical professional legal practice. And this necessitated or had given rise to the formulation of rules and canons discouraging or altogether prohibiting the practice. What therefore originally started both in conflicts of laws and in our domestic law as a legitimate device for solving problems has been abused and mis-used to assure scheming litigants of dubious reliefs. To avoid or minimize this unethical practice of subverting justice, the Supreme Court, as already mentioned, promulgated Circular 28-91. And even before that, the Court had proscribed it in the Interim Rules and Guidelines issued on January 11, 1983 and had struck down in several cases the inveterate use of this insidious malpractice. Forum shopping as the filing of repetitious suits in different courts has been condemned by Justice Andres R. Narvasa (now Chief Justice) in Minister of Natural Resources, et al., vs. Heirs of Orval Hughes, et al., as a reprehensible manipulation of court processes and proceedings . . . When does forum shopping take place? There is forum shopping whenever, as a result of an adverse opinion in one forum, a party seeks a favorable opinion (other than by appeal or certiorari) in another. The principle applies not only with respect to suits filed in the courts but also in connection with litigations commenced in the courts while an administrative proceeding is pending, as in this case, in order to defeat administrative processes and in anticipation of an unfavorable administrative ruling and a favorable court ruling. This is specially so, as in this case, where the court in which the second suit was brought, has no jurisdiction. The test for determining whether a party violated the rule against forum shopping has been laid down in the 1986 case of Buan vs. Lopez, also by Chief Justice Narvasa, and that is, forum shopping exists where the elements of litis pendentia are present or where a final judgment in one case will amount to res judicata in the other, as follows: There thus exists between the action before this Court and in the RTC identity of parties, or at least such parties as represent the same interests in both actions, as well as identity of rights asserted and relief prayed for, the relief being founded on the same facts, and the identity on the two preceding particulars is such that any judgment rendered in the other action, will, regardless of which party is successful, amount to res adjudicata in the action under consideration: all the requisites, in fine, of auter action pendant. xxx xxx xxx As already observed, there is between the action at bar and RTC case, an identity as regards parties, or interests represented, rights asserted and relief sought, as well as basis thereof, to a degree sufficient to give rise to the ground for dismissal known as auter action pendant or lis pendens. That same identity puts into operation the sanction of twin dismissals just mentioned.

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The application of this sanction will prevent any further delay in the settlement of the controversy which might ensue from attempts to seek reconsideration of or to appeal from the Order of the Regional Trial Court in Civil Case No. 86-36563 promulgated on July 15, 1986, which dismissed the petition upon grounds which appear persuasive. Consequently, where a litigant (or one representing the same interest or person) sues the same party against whom another action or actions for the alleged violation of the same right and the enforcement of the same relief is/are still pending, the defense of litis pendencia in one case is a bar to the others; and, a final judgment in one would constitute res judicata and thus would cause the dismissal of the rest. In either case, forum shopping could be cited by the other party as a ground to ask for summary dismissal of the two 20 (or more) complaints or petitions, and for the imposition of the other sanctions, which are direct contempt of court, criminal prosecution, and disciplinary action against the erring lawyer. Applying the foregoing principles in the case before us and comparing it with the Second Case, it is obvious that there exist identity of parties or interests represented, identity of rights or causes and identity of reliefs sought. Very simply stated, the original complaint in the court a quo which gave rise to the instant petition was filed by the buyer (herein private respondent and his predecessors-in-interest) against the seller (herein petitioners) to enforce the alleged perfected sale of real estate. On the other hand, the complaint in the Second Case seeks to declare such purported sale involving the same real property as unenforceable as against the Bank, which is the petitioner herein. In other words, in the Second Case, the majority stockholders, in representation of the Bank, are seeking to accomplish what the Bank itself failed to do in the original case in the trial court. In brief, the objective or the relief being sought, though worded differently, is the same, namely, to enable the petitioner Bank to escape from the obligation to sell the property to respondent. In Danville Maritime, Inc. vs. Commission on Audit, this Court ruled that the filing by a party of two apparently different actions, but with the same objective, constituted forum shopping: In the attempt to make the two actions appear to be different, petitioner impleaded different respondents therein PNOC in the case before the lower court and the COA in the case before this Court and sought what seems to be different reliefs. Petitioner asks this Court to set aside the questioned letter-directive of the COA dated October 10, 1988 and to direct said body to approve the Memorandum of Agreement entered into by and between the PNOC and petitioner, while in the complaint before the lower court petitioner seeks to enjoin the PNOC from conducting a rebidding and from selling to other parties the vessel T/T Andres Bonifacio, and for an extension of time for it to comply with the paragraph 1 of the memorandum of agreement and damages. One can see that although the relief prayed for in the two (2) actions are ostensibly different, the ultimate objective in both actions is the same, that is, the approval of the sale of vessel in favor of Petitioner, and to overturn the letter-directive of the COA of October 10, 1988 disapproving the sale. In an earlier case, but with the same logic and vigor, we held: In other words, the filing by the petitioners of the instant special civil action for certiorari and prohibition in this Court despite the pendency of their action in the Makati Regional Trial Court, is a species of forum-shopping. Both actions unquestionably involve the same transactions, the same essential facts and circumstances. The petitioners claim of absence of identity simply because the PCGG had not been impleaded in the RTC suit, and the suit did not involve certain acts which transpired after its commencement, is specious. In the RTC action, as in the action before this Court, the validity of the contract to purchase and sell of September 1, 1986, i.e., whether or not it had been efficaciously rescinded, and the propriety of implementing the same (by paying the pledgee banks the amount of their loans, obtaining the release of the pledged shares, etc.) were the basic issues. So, too, the relief was the same: the prevention of such implementation and/or the restoration of the status quo ante. When the acts sought to be restrained took place anyway despite the issuance by the Trial Court of a temporary restraining order, the RTC suit did not become functus oficio. It remained an effective vehicle for obtention of relief; and petitioners remedy in the premises was plain and patent: the filing of an amended and supplemental pleading in the RTC suit, so as to include the PCGG as defendant and seek nullification of the acts sought to be enjoined but nonetheless done. The remedy was certainly not the institution of another action in another forum based on essentially the same facts. The adoption of this latter recourse renders the petitioners amenable to disciplinary action and both their actions, in this Court as well as in the Court a quo, dismissible.
Pasted from <http://74.125.113.132/search?q=cache:sblh9Y7lB0EJ:arellanolaw.net/notesbankblog/%3Fp%3D254 +First+Philippine+International+Bank+vs.+Court+of+appeals&cd=2&hl=tl&ct=clnk&gl=ph&client=firefox-a>

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+First+Philippine+International+Bank+vs.+Court+of+appeals&cd=2&hl=tl&ct=clnk&gl=ph&client=firefox-a>

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III. Other Tax Matters (if ever sir would discuss this again)
Saturday, September 19, 2009 9:24 AM

III. A. 1. 2.

Other Tax Matters Applicable Taxes Income Tax DST BIR RR 9-94, Section 8: If the loan agreement and security device are evidenced by 1 agreement (omnibus agreement), pay only the higher DST e.g. 1 borrower entered into the ff transactions (I'm not sure if this is accurateshould find the applicable DST rates):
Transaction *200M Loan agreement DST to be paid 300T

*100M Loan agreement

*50M Loan Agreement

150T
75T

*REM securing the 200M and 100M loan 600,010

*CM securing the 200M & 100M loan

*guarantee securing the 50M loan

600,010
0

*but if there's an omnibus agreement, pay P700,010 or P675,010

From Sir's lecture the other meeting: If the bank lends money, the interest is subject to gross receipts tax (normally 5%) but the same amount is includable as part of the gross income of the bank, the net taxable portion of which is taxed by income tax (30% beginning 2009). DST also imposed on certain bank transactions: -loan agreements and PNs: .5% of the amount in the transaction -pledges, mortgages, trust receipts: .2% of the amount involved in the transaction -but if combine loan+security (omnibus agreement): .5% (higher between the two) -if assignment: P15.00 (tax certificate)
3. Gross Receipts Tax

B. Taxation of FCDUs and OBUs RA 9294 GR: All income derived from transactions with NONRESIDENTS are EXEMPT from all taxes X: interest income from foreign currency loans with RESIDENTS: subject to 10% final tax rate From Sir's lecture the other meeting: FCDUs are taxed differently. The income of FCDUs from foreign currency transactions: 10% final witholding tax (should be with residence: include local KB, local branches of Foreign banks, other fcdus, obus) It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now the law is not very clear because the "In lieu" of provision was deleted in the NLRC. Intent before was to encourage foreign banks to invest in the Philippines (thus mas konting tax imposed on them). If FCDU derive income from non-foreign currency transaction: regular corporate income tax rate (10%) -if the counterparty is a nonresident: income derived by that nonresident is not taxable here; similarly, the income by FCDU is not taxed. SO favorite customer of a FCDU is a nonresident, as there is no tax! C. Tax Minimizing Structures 1. Omnibus Agreement *An omnibus loan agreement is a loan agreement with the mortgage agreement already included as one of the provisions *should also include a waiver (if mortgage is REM) of the credit preferences in NCC as a loan agreement with pari passu provision requires that the loan agreement should not be notarized. However, REM is required to be notarized. To comply with the latter requirement, the creditor in the loan agreement should waive the preference of credit provision in the NCC and specify that the notarization is only for the purpose of the loan agreement *An omnibus agreement is a tax minimizing structure because for executing transactions, DST is required to be paid for each transaction. However, as the omnibus agreement combines two transactions, only 1 DST is required to be paid (BIR RR 9-94, Section 8 requires the higher rate be paid) Mondragon Leisure and Resorts Corp. v. CA F: Mondragon International Philippines, Inc. (MIPI), Mondragon Securities Corporation (MSC) and Mondragon Leisure and Resorts Corporation (MLRC) entered a lease agreement with CLARK DEVELOPMENT CORPORATION (CDC) for the development of Mimosa Leisure Estate. -Omnibus agreement in this case composed of: *loan agreement for US$20M *Pledge of US$20M worth of MIPI shares of stocks

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*assignment, transfer and delivery of all rights, titles and interest in the pledged shares *assignment of leasehold rights over the project and all the rights, title, interests and benefits to and under any and all agreements in connection with the project ***the case does not really show how an omnibus agreement is a tax minimizing scheme but gives an example of an omnibus agreement 2. "Originating bank" structure (a.k.a. "Fronting Strcuture") (from Sharry's Notes) This is otherwise known as fronting bank structure. It takes advantage of tax exemption status of foreign lenders. It is a form of tax avoidance. In this structure, a foreign bank acts as creditor on record while domestic bank participates silently.

From Reviewer: In this structure, a fronting entity/bank which enjoys TAX-EXEMPTION or a LOWER TAX RATE under prevailing tax laws "FRONTS" for what would otherwise be direct lenders to a borrower. The fronting bank (F) lends dollars/money to borrower (B), a local company, w/o need of witholding taxes on interest paymentsbecause of the tax-exemption or tax treaty overrides (lower taxes).
F is actually a "FRONT", and thereby turns around and executes a participation agreement w/local banks FCDUs, in effect making these local bank FCDUs "silent participants".

Another variation involves the booking of the "front" (like IFC) of an "A" loan in its books, and another "B" loan, participated in by local banks for which the "front" acts as such. From Sir's lecture last time: Originating bank structure =fronting bank structure -idea is the borrower would look for a bank that is exempt from Philippine income tax Either under *tax treaty *NIRC - SEC 32: Financial institutions getting from their government
(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.

*Feeling ni Cha ganito un Bank doesn't want to pay tax when it lends money (interest income tax and other income taxes from its transactions). (Check TAX 1 FOR WHO ARE EXEMPT FROM PAYING INCOME TAXES!). So they would search for other banks who are EXEMPT from paying taxes. IV. Project Financing Reviewer on Project Financing: Project Financing is the financing of an economic asset capable of generating enough revenues to cover operation costs and debt servicing for a duration of time longer than the life of such asset. It is most often undertaken in projects involving electricity andpower generation, transportation infrastructures and the like. What usually happens is that a sponsor undertakes to cover the initial financing of the project, lenders are resorted to cover the deficiency, a SPECIAL PROJECT VEHICLE (SPV) is established (which is usually a joint venture or limited partnership) to undertake the building of the infrastructure, the SPV enters into a loan agreement with the lenders backed by securities: mortgage over the assets of the SPV and pledge of equity of sponsors. (hay, basta on page 10)
SIR in lecture Relates to infrastructure projects you see around e.g. MRT, power plants, skyway

You have a project, its economic life more or less is more than 25 years (must exceed the term of the loan). It is anticipated by the lenders that the project would earn revenues because the lenders would look at the revenues -it is a without recourse transaction so the lenders usually need an offtaker If the project does not earn revenues, the lenders would not get paid. So it is essential for the project to have an offtaker(entity that's going to buy the public project?) e.g. in powerplant project OFFTAKER: NPC (WON NPC uses the electricity generated by the power plant, NPC has to pay) In MRT Offtaker: DOTC (even if nobody rides the train, DOTC would still pay the periodic lease payments) Sponsors of the project -it would establish a special purpose company SPONSORS >>>establish>>> SPECIAL PURPOSE COMPANY (SPV) >>> Sponsors would provide an EQUITY which would fund the project (but it's not sufficient) so there would be lenders that would put money in the company LENDERS: mainly banks and multilateral development banks such as ADB, US EXIM Bank or Japan EXIM Bank >>>The project company would mortgage to the lenders (trustee designated by the lenders) the property/equipment/facilities >>>there would be REM, CM, pledge of shares (pledged by the sponsors in favor of the lenders not because the shares are very valuable on the standpoint of the lendersbut for the lenders to be able to take over the project company just in case the sponsors would not be able

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the standpoint of the lendersbut for the lenders to be able to take over the project company just in case the sponsors would not be able to pay the loan >>>to make sure that the revenues are all delivered and remitted to the lenders, there's the TRUST RETENTION ACCOUNT/AGREEMENT wherein all revenues from the project would be remitted e.g. all payments from NPC are remitted to the trust account managed by the trustees of the lenders. If for instance there's a need to pay the employees of the project company, a request would be made to the trustee of the account to release (disburse) money fromthe account (the diagram drawn by sir "looks like a waterfall" so it is called cash waterfall account) >>>the issue is WON the company could be owned by foreigners (as usually, foreigners provide the funds) -SC ruling said that (implicitly) yes, because the actual operation is nationalized, not the facilities - para ngang may ganito na pinabasa on MRT Operation Maintenance Agreement -usually lenders require technicians to run the facility to make sure that it would earn revenues Inter-Creditor Agreement -lenders agree among themselves how to synchronize their activities in case there's a default OMNIBUS AGREEMENT -contain all these agreements!!!

A. Mechanism -without recourse financing -There must be a guaranteed taker/purchaser of the output of the project -e.g. MRT >>riding public Power plant >> NPC -lenders look to revenues of the project as the main soure of the payment (hence, it is important that the project is earningmoney)

B. BOT and similar arrangements -there are several Field List transfer: the arrangement in MRT Rehabilititate-Operate-Transfer: rehabilitate Rehabilitate-Own:
*Unsolicited Proposal e.g. Megaworld Proposal -develop hectares of land in Global City e.g. Terminal 3 BOT Law

V. Derivative Transactions A. Concept Financial asset derived from another financial asset i.e. option on treasury bill CALL OPTION: option to buy PUT OPTION: option to sell -the option is called a derivative *buyer: one who wants the option seller/writer: one giving the option *American Option: exercise option before the strike date (any time during the option period) -more flexible but higher premium *European Option: exercise option on the strike date (end of the option) -stricter but lower premium *Bermudan Option: Exercise option on any date DERIVATIVE CONTRACT -contract for the differences -concerned with the differences between the price on strike date and price on trade date i.e. forward foreign exchange contract TRADE DATE: P57 = $1 After 3 months (strike date): P60 = $1 -the buyer is said to be "in the money" because ha has a gain of P3/$1
BUT IF DURING THE STRIKE DATE P56 = $1 -buyer is "out of money" because he loses P1/$1. Hence, he shall forego the option and will buy the dollars elsewhee. *CURRENCY SWAP -simultaneous purchase and sale of currency involving the same counter party

From reviewer: DERIVATIVE -a financial instrument, the value of which is dependent upon the price of one or more other assets, such as commodities, foreign

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-a financial instrument, the value of which is dependent upon the price of one or more other assets, such as commodities, foreign currencies, etc. -rephrase: they are financial assets which derive their value from other financial assets such as: (1) equity, securities (2) fixed-income securities (3) foreign currency and (4) commodities -aka Contracts for differences: difference between agreed future price and actual price

DERIVATIVE TRANSACTION -one that involves derivatives -purpose: manage risks of exposure/investment to the underlying financial assets it represents -it can either be OPTIONS OR FORWARDS a. OPTIONS *CALL OPTION: the buyer is given the right (not obligation) to purchase an asset at a specified price on or before a specified date *PUT OPTION: the seller/rider is given the right (not the obligation) to sell an asset for a specified price on or before a specified date b. FORWARD -involves the OBLIGATION to either buy or sell an asset at a specified price on or before a specified date Illustration: Co. A will buy US$1M 6mths from now at PhP40=US$1 ForEx Rate in 6mths Situation
PhP50=US$1 In the money

PhP30=US$1
PhP40=US$1

Out of the money; but in the market

At the money; exercise forward given assured amount

common examples of Derivative Transactions: *currency swap *forward contract *call option *put option From Sharry: This is a contract for differences. The income is derived from the difference between agreed settlement price and actual market price on the agreed settlement date.
On CURRENCY SWAP: -It is the simultaneous buying and selling of currencies involving spot (near leg) and forward (far leg) rates.

***A bank cannot engage in derivative transactions without necessary BSP license.
Example ni sir from lecture FORWARD: buy currency from the future e.g. you're a borrower, you earn an interest rate every 6 months at $1. You want to lock the interest rate. Let's assume thatthe Exchange rate is $1=P50 -you enter into a forward contract, you buy $1 which is equivalent to P50. 6 months from now: Supposing exchange rate is $1.00=P60 You made the right decision! In the money: you would exercise your option! (you anticipate a gain)

$1.00= P50 Out of the money: the market price 6 months from now is lower than the agreed price under the forward agreement - you would not exercise your option to buy (you would just lose the premium you paid). You would buy somewhere else not under forward contract $1.00=P55 At the money

2 Derivatives In the Philippines 1. Equity related securities 2. Exchange for Debt Securities All other transactions outside the exchange are called OTC (over the counter):
IN US 1. New York Future Exchange 2. New York Cotton Exchange 3. CSCE (Coffee Sugar and Cocoa Exchange) -commodities Exchange In Exchange: you have remedy: clearing agency makes sure that the buyer is able to pay and the seller is able to deliver

Exchange Traded Derivatives -governed by agreements in prescribed forms -OTC derivatives: there's an organization that took initiative to provide uniform documentation (International Swaps and Dealers Association -ISDA) - see below CROSS-CURRENCY SWAP

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CROSS-CURRENCY SWAP (refer to diagram on page 48 of the reviewer)

A. BSP Licensing Requirements Section X602 (BSP Circular) -the license will enable the licensee to engage in currency forwards and currency swap 2 Types of License: a. Regular Derivative license: any bank, NBQB, affiliate b. Expanded Derivative License: only Commercial and universal banks can apply
BSP Circ. No. 102-95 Section 2. General Authority -any *BANK *NBQB *And or its subsidiaries/affiliates may engage in financial derivatives activities upon prior approval of the BSP -a bank may engage in derivative activities BOTH in its RBU and FCDU/expanded FCDU BSP Circ. No 297-01 a. for expanded derivatives authority SCOPE: ONLY UBs and KBs -what may be done after acquiring license: may *trade *Sell *deal *take positions in currency swap *forward of any tenor as well as all other derivatives for their own account or on behalf of customers b. For regular derivatives authority SCOPE: other Financial institutions (Fis) supervised by the BSP pede -what may be done after acquiring license: may *sell derivative products to its customers PROVIDED >FI shall hedge such derivatives >the risk being hedged is already existing with the FI itself c. No license derivatives SCOPE: UB and KB w/ no license -what may be done: *trade *sell *deal *take positions for their own account or in behalf of customers in currency swaps and *forwards w/ tenor of one year or less *sell other derivative products of licensed entities to its customers PROVIDED >customer currently has a risk w/ the bank it wishes to hedge d. For engaging in derivative transactions as end-users SCOPE: Banks, NBQB, Other BSP supervised FI -no license needed as they are purely end-users BSP Circ 594 -latest Circular on derivative transactions

*if banks does hedging, no need for license but other than that, needs special license *corporates (corporations): not governed by BSP, it would depend on the articles of incorporations on WON they could enter into derivative transactions (or else, transaction is ultra vires) ---in other jurisdictions, corporates does not do ultra vires transactions: they could do anything! But sir thinks it's better to regulate the activities of the corporatesbecause it sounds goodultra vires:) )

B. ISDA Master Agreements 1992 ISDA MASTER AGREEMENT (international swap dealer's association) -standardize documentation -cannot modify terms of agreement -have to use schedule to change the agreement -one of the most carefully drafted agreement -has 7 pages long of lists of Derivative Agreements Cross-out netting -you have a master agreement which you want to amend: you can't just cross it out. The master agreement stays as is, you have to make a schedule to the master agreement whch reflect the amendment

SCHEDULE -contains the terms agreed upon by the parties

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SCHEDULE -contains the terms agreed upon by the parties -actual transactions evidenced by confirmation -contains a serial agreement clause (any and all transactions are considered as one agreement) >>>gross out netting provision satisfies the delivery requirement to render a future contract valid
If there's a default on the part of 1 party, all of these transactions are netted such that only 1 number emerges. Single agreement: all the agreements treated as a single transaction (then sir discusses cherry picking) - See below

Onapal Philippines Commodities, Inc. v. CA F: Onapal is a registered and licensed commodity futures broker. Susan Chua was invited by Diaz, Account Exec. Of Onapal, to invest in the commodity futures trading by depositing P500k Chua signed a Tradig Contract and other documents w/o being aware of the risks involved Chua was asked to deposit again P300k. She wanted to withdraw her money but DIAZ wouldn't allow her Chua instituted the present action to recover her money
I: WON the TRADING CONTRACT is VALID HELD: VALID IN ITSELF BUT TRANSATION CARRIED OUT TO IMPLEMETN IT VOID

Commodity Fixtures Contract -specie of securities -agreement to buy or sell a specified quantity and grade of a commodity at a future sale at a price established at the floor of exchange Terms of Contract signed by Chua -Onapal will act as broker and will directly transmit the order of customers (includes Chua) to its principal Frankwell Enterprises in HK. The later will then place the order to Tokyo Exchange. -however, in this case, there was no evidence that the orders and the money were transmitted to Frankwell. *the trading contract IS VALID IN ITSELF because it complies with the RULE AND REGULATIONS ON COMMODITY FUTURES TRADING *BUT the transaction which was carried out to implement the contract DEVIATED from the true import of the agreement >no actual delivery to Frankwell >final settlement is made by payment of the differences of prices -the dealings became mere speculative contracts in which parties merely GAMBLE in the rise and fall of prices WHICH IS ILLEGAL As such, the trading contract became in the nature of a GAMBLING CONTRACT WHICH IS NULL AND VOID.
Onapal v. CA: In ISDA, there is netting off of agreements which may give rise to gambling issues. In case there is but pretended delivery of goods involved in the transactions, the Civil Code provision prohibiting gambling is violated.

SIR: There's a section that pending the issuance of SEC of rules of trading of securities of futures, trading is suspended. However, in the document called HISTORY OF BACKGROUND of SEC, what is suspended is public trading of commodity future transactions Onapal happened when commodities trading was still allowed. The problem in this case is that even if the contract was valid, its implementation was such that there was no delivery of the commodity, in violation of ART 2018, NCC The issue now is WON cross-currency swapping after this, or contracts about currencies, is comprehended in ART 2018. In other words, is ForEx securities? Share of stocks? NO, NOBut is it goods? Look at A1636: Goods defined. It excludes money and legal tender in the Philippines. It is implied to include foreign exchange. If that is the case, then is Forex supposed to be contemplated under Art 2018? SIR says no, because introductory paragraph of A1636 states that the definition of goods undr that article is for the title of sales, not under the title of aleatory contracts. SO A2018 does not contemplate forex.
First Philippine International Bank v. CA F: First Philippine International Bank went insolvent H: Cherry picking (liquidator picks out the contracts not favorable to the insolvent bank) is not allowed. The conservator isnot allowed to disregard contracts unfavorable to the insolvent bank. -power of conservator is not unilateral...

SECTION 70, insolvency law -prohibits the sale, transfer, etc. of the assets of the insolvent 1 month prior to filing for insolvency -does not apply to banks and insurance companies because they have their own set of insolvency rules FPIC v. CA: Cherry picking is not allowed in Philippine jurisdiction. The powers granted to the conservator, enormous and extensive as they are, cannot extend to the post facto repudiation of perfected transactions. Otherwise, they would infringe upon non-impairment of contracts clause in Constitution.
SIR: -because of the single transactions clause, there's no cherry picking because there would only be one cherry to pick +page 177 of sir's book

VI. Securitization A. Concept -means by which the seller/originator discounts receivables to the buyer on a true sale basis -absolute transfer: creditors of the seller cannot reach the assets -without recourse transaction

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-absolute transfer: creditors of the seller cannot reach the assets -without recourse transaction -buyer must be a Special Purpose Entity (special purpose corporation or special purpose trust) >>the SPE repackages the receivables in the asset pool and issues a security known as ABS (Asset Bracket Security) ( See part B) -receivables transformed into securities
DIFFERENTIATED FROM AN SPV: SPV: involves bad debts Securitization: performing receivables (credit card receivables, PLDT) B. Asset-backed securities >>ABS is sold to investors who look to revenues collected from the asset pool >>there is overcollateralization in this situation

BSP Circ. 185 -Originating bank cannot use its own trust department to issue ABS, has to do it through another bank

C. Securitization Act of 2004 (RA 9267)

SECTION 3. Definition of Terms. - For purpose of this Act, the term: (a) "Securitization" means the process by which assets are sold on a without recourse basis by the Seller to a Special Purpose Entity (SPE) and the issuance of asset-backed securities (ABS) by the SPE which depend, for their payment, on the cash flow from the assets so sold and in accordance with the Plan. (b) Asset-backed securities (ABS)" refer to the certificates issued by an SPE, the repayment of which shall be derived from the cash flow of the assets in accordance with the Plan. (c) "Assets", whether used alone or in the term "Asset-backed securities," refer to loans or receivables or other similar financial assets with an expected cash payment stream. The term "Assets" shall include, but shall not be limited to, receivables, mortgage loans and other debt instruments: Provided, That receivables that are to arise in the future and other receivables of similar nature shall be subject to approval by the Securities and Exchange Commission (SEC) or the Bangko Sentral ng Pilipinas (BSP), as the case may be: Provided, further, That the term "Assets" shall exclude receivables from future expectation of revenues by government, national or local, arising from royalties, fees or imposts. (d) "Asset Pool" means the group of identified, homogeneous assets underlying the ABS. (e) "Commission" refers to the Securities and Exchange Commission (SEC). (f) "Credit Enhancement" means any legally enforceable scheme intended to improve the marketability of the ABS and increase the probability that the holders of the ABS receive payment of amounts due them under the ABS in accordance with the Plan. (g) "Originator" means the person or entity which was the original obligee of the Assets, such as financial institution thatgrants a loan or a corporation in the books of which the Assets were created in accordance with the Plan. (h) "Plan" means the plan for securitizations as approved by the Commission (i) "Secondary Mortgage Institution (SMI)" means an entity created for the purpose of enhancing a secondary market for residential mortgages and housing-related ABS. (j) "Seller" means the person or entity which conveys to the SPE the Assets forming the Asset Pool in accordance with the Plan. In most instances, the Seller may itself be the Originator. (k) "Servicer" refers to the entity designated by the SPE to collect and record payments received on the assets, to remit such collections to the SPE, and perform such other services as may be specifically required by the SPE, excluding asset management or administration. (l) "Special Purpose Entity (SPE)" means either a Special Purpose Corporation (SPC) or a Special Purpose Trust (SPT). (m) "Special Purpose Corporation (SPC)" refers to a juridical person created in accordance with the Corporation Code of the Philippine solely for the purpose of securitization and to which the Seller makes a true and absolute sale of assets. (n) "Special Purpose Trust (SPT)" means a trust administered by an entity duly licensed to perform trust functions under the General Banking Law, and created solely for the purpose of securities and to which the Seller makes a true and absolute sale of assets

SIR: even if securitization act passed 2004, not much securitization transaction under the act -quite recently, because of the subPrime prices, securitization acquired bad reputation -SP Entity (SPE), which can be an SPC or SP trust, will be the one to issue the asset-backed securities (ABS) ABS: receivables that were acquired by the SPE --it's source or repayment would come from the obligors of the receivables --the holders of ABS are looking to the payments from the obligors, in a sense, it's a limited recourse HOW DONE: Collateralization e.g. Issue is P1M, the pool of receivables supporting it is 1%, SELLER of the receivables = originator = Globe, Smart, PLDT Servicer = can also be the originator SPT: trust department can act as one. A mere account w/n trust department (there can be several SPTs in one trust department) SPC: corporation that is formed and established for the purpose of that single securitization transaction --more cumbersome: should have board of directors, meet reporting requirements of SECetc. ----HOWEVER, if you use an SPT, it would be easier than SPC! -but why is it that there's not much securitization transactions: a bank that want to enter a securitization transaction CANNOT USE ITS OWN TRUST DEPARTMENT! The SPT must be independent from the ORIGINATOR! -sir says this should be reversed as the trust department of a bank is separate and distinct from the bank's operations! -what entity in the Philippines expect lots of receivables? BANKS!!! WON a bank can purchase ABS? BSP issued Circ 468 that states that bank can acquire ABS (to that effect, there's underlying securities mentioned but sir said that it's the same as ABS) e.g. share of LGUs on the tobacco taxes were securitized (but there's a provision in the new act which prohibits securitization of tax revenues. Sir says the example is not covered by the prohibition because it is not revenue flow, it is not liquid yet)

VII. Due Diligence Due diligence team in a lawfirm: examines an entity

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Due diligence team in a lawfirm: examines an entity

2 types: 1. Prospectus Due Diligence -derived from securities act where there's astatement to the effect that securities to be sold to the public must be registered with SEC and there must be a prospectus accompanying statement and the facts mentioned therein must be accurate in all material respect, no omissions which would make any statement in it misleading. In that act, it was a defense on the part of the issuer that it has exercised DUE DILIGENCE in making the RS in the prospectus. That defense is supported by the issuer's employing a DUE DILIGENCE TEAM. ~so balik sa DUE DILIGENCE TEAM: inspects the documents of the company, transactions, etc. to make sure that all material information about the company is correct Under SRC, due diligence is no longer a defense. The KNOWLEDGE DEFENSE is the only defense left: the issuer or underwriter might escape liability if proves that purchaser had knowledge of the fact incorrectly stated. DUE DILIGENCE may be mitigating circumstancein admin case before SEC but not defense. 2. Acquisition Due Diligence e.g. Philamlife is being sold by AIG, there are several lawyers and underwritersNyek, moot because transaction was aborted

I. Certain Financial Products/Exoteric Structures (not EXOTIC!!!) A. Trade Account/Brokering e.g. SMC has several dealersSMC delivers products to SMC, Dealers would not pay all at once SMC could mandate a bank to look for investors that would buy the receivables -bank acting for several investors, investors would enter agreement with the bank to look for investments When SMC sells receivables to a bank representing several investors, the bank merely gives PARTICIPATION PARTICIPATES/CONFIRMATION SALE to the investors, this way the bank receives commission (Manila Type of Trade Brokering) B. Credit-Linked Notes/Deposits E.g. Foreign bank buys RP bonds? For $1M -but foreign bank worries about credit-worthiness of RP (no-election news) so it wants to get rid of the transaction with RP. SO bank issues CLN to a local bank, local bank gives $1M to foreign bank in exchange of CLN. The agreement is that the CLN would carry a higher interest than the credit rate then I'm lost Cash settlement: foreign bank would sell its holdings of RP bonds to market (and probably for a lesser price). The proceeds of the sale would then be paid to the local bank Physical settlement: the RP bond is delivered to the local bank; this is better because the RP bond is the most prime (nonrisk item) in the Philippines. If worse comes to worst, the local bank would still be paid in Pesos. IX. Certain Other Matters A. Anti-Money Laundering Act Financial Action Task Force (FATF): a task force organized by developed countries which identified noncooperative countries (Philippines was formerly included in it, together with Nauru and Russia) -if the Philippines did not comply with it w/n the deadline, there's a sanction! (money - remittances to the Philippines would be cross checked, meaning delay in the receipt of remittances in the Philippines) -however, 1st AMLA was not compliant in certain aspects. AMLC: authorized to freeze assets but this power taken out from it, should petition CA for freezing of assets (but this is problematic because a mole in the SC could easily inform the money-launderer of the attempt to freeze the latter's assets, and thus the account would be w/drawn) - The 2nd AMLA was inferior from the 1st one but it became compliant because the one who checked it wined and dined with Congressmen! On cases when there's no need for freezing order from CA: *Hi-jacking *Drug trafficking (as if the first thing that the violators would do is to deposit the proceeds of their illegal acts in the banks!) -there's also suggestion that lawyers be whistle-blowers: BUT THIS WOULD NOT DO BECAUSE OF THE CONFIDENTIALITY AGREEMENT BETWEEN LAWYERS AND CLIENTS -there are many recommendations of the FATF: but only few are taken -among the recommendation is to amend the bank secrecy law -threshhold amount loweredif you transact with covered institutions and the amount of the transaction is above the threshold, the bank is obligated to file a CTRbut even if lower than the threshold and the bank would be suspicious, the bank could still file a"suspicious transaction report" (CHA: I don't know why it's CTR when it stands for suspicious transactions report) B. Securities Regulation Code -statute in Securities law, among which are: *Truth in lending act *GBL provs: truth in borrowing act *SRC: truth in securities act -persons who want to sell securities need to comply with the requirements of registration by SEC Exceptions: 1. Exempt securities: when sold to the public, no need to register it (example, gov't securities issued to the public) 2. Securities sold in transactions classified as exempt in SEC: e.g. Private placement ---just file with SEC a notice/form of exception w/n 10d from date of sale 3. Offshore offering: not covered by SEC because SEC would not have jurisdiction over sale of securities outside the Philippines *SEC could come up with a list of exempt securities and transactions *some of the list are discussed in Sir's bookwhich is unfortunately out of stock hehe.

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*SEC could come up with a list of exempt securities and transactions *some of the list are discussed in Sir's bookwhich is unfortunately out of stock hehe. -Any public offering of securities is prohibited unless the securities are registered w/ SEC and SEC has declared effective the Registration Statement PRIVATE PLACEMENT: sale to not more than 19 nonqualified buyers (qualified buyers are the banks, financial institutions) PUBLIC OFFERING: random or indiscriminate offering to the public (any member of qualified buyers) Qualified buyers: they can fend for themselves ***To avoid regulation by the SEC: OFFSHORE OFFERING: a contract is signed abroad and payments are made through FCDU
INSIDER TRADING: when you are in possession of information not known to the public, you're not supposed to trade with that shares until the public was made aware of the information (only after disclosure can an insider trade) -insider trading rules meant to remedy the asymmetry in information to make the insider and non-insider pari passu in terms of information -INSIDER: given, you have access to non-public information from an insider (insider becomes the Tipper, you become a Tippee) -insiders mandated to disgorge "short-swing profit" (if you were able to detect transactions in which the insider has made money, then the net gain must be disgorged by the insider) - turnover the profit to the company

Tender-offer -if you intend to acquire at least 35% of the outstanding capital stock of a public company, e.g. listed company, whether alone or in concert with other persons, you need to make a tender-offer to the remaining shareholders who might be left out (because 67% is control). In a case, the SC has ruled that the 35% can be direct or indirect shareholding Continuing disclosure requirements -for corporations FINALS: Oct 17 -from security devices til end (focus on the principles, not on ready-made answers!)

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RA 9294
Saturday, September 19, 2009 10:06 AM

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\ [2004 RA 9294] AN ACT RESTORING THE TAX EXEMPTION OF OFFSHORE BANKING UNITS (OBUs) AND FOREIGN CURRENCY DEPOSIT UNITS (FCDUs), AMENDING FOR THE PURPOSE SECTION 27 (D) AND SECTION 28, PARAGRAPHS (A) (4) AND (A) (7) (b) OF THE NATIONAL INTERNAL REVENUE CODE AS AMENDED2004 Apr 283rd Regular Session12th CongressRepublic of the Philippines Congress of the Philippines Metro Manila
Twelfth Congress Third Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand three. Republic Act No. 9294 April 28, 2004

AN ACT RESTORING THE TAX EXEMPTION OF OFFSHORE BANKING UNITS (OBUs) AND FOREIGN CURRENCY DEPOSIT UNITS (FCDUs), AMENDING FOR THE PURPOSE SECTION 27 (D) AND SECTION 28, PARAGRAPHS (A) (4) AND (A) (7) (b) OF THE NATIONAL INTERNAL REVENUE CODE AS AMENDED
Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled: Section 1. Section 27, paragraph (D) (3) of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

"Sec. 27. Rates of Income Tax on Domestic Corporations. "(D) Rates of Tax on Certain Passive Incomes. "(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with *nonresidents, *offshore banking units in the Philippines, *local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system shall be exempt from all taxes, except *net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%). "Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax."
Section 2. Section 28, paragraph (A)(4) and (A)(7)(b) of the same Code are hereby amended to read as follows:

"Sec. 28. Rates of Income Tax on Foreign Corporations. "(A) Tax on Resident Foreign Corporations. "(1) In General.-Except as otherwise provided in this Code, a corporation organized, authorized, or

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existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided. That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "In the case of corporations adopting the fiscal-year accounting period the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.
"The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. "Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27(A).

"(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. "(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on this 'Gross Philippine Billings' as defined hereunder: "(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
"(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. "(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units shall be exempt from all taxes *except net income from such transactions as may be specified by the Secretary of Finance, upon recommendations of the Monetary Board which shall be subject to the regular income tax payable by banks: Provided, however, That any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of ten percent (10%).

"Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.
"(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or carmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Section 57 and 58 of this Code: Provided, That interests, dividends, rents,

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royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

"(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. "(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. "(b) Regional operating headquarters as defined in Section 22 (EE) shall pay a tax of ten percent (10%) of their taxable income.

"(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. "(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposits Substitutes, Trust Funds and Similar Arrangements and Royaties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under he expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (71/2%) of such interest income. "(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular tax payable by banks: Provided, however. That interest income from foreign currency loans granted by such depositors banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%).
"Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

"(c) Capital Gains from Sales of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000 5% Or any amount in excess of P100,000 10%

"(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title.
"(B) Tax on Nonresident Foreign Corporation. "(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual periodic or casual gains, profits and income, and capital gains, except

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capital gains subject to tax under subparagraphs 5 (c) and (d); Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

"(2) Nonresident Cinematographic Film Owner Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. "(3) Nonresident Owner or Lessor of Vessels Charactered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (41/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.
"(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charter and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (71/2%) of gross rentals or fees. "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. "(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1996;

"(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation which shall be collected and paid as provided in Section 57(A) Of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; "(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed sold, or disposed of through the stock exchange;
Not over P 100,000 5%

On any amount in excess of P10,000 10%"

Section 3. Separability Clause. - If any part or provision of this Act shall be held unconstitutional or invalid, other provisions hereof which are not affected thereby shall continue to be in full force and effect. Section 4. Repealing Clause. - All laws, decrees, orders, rules and regulations and other issuances or parts thereof inconsistent with this Act are hereby repealed or modified accordingly.
Section 5. Effectivity. - This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in two (2) newspapers of general circulation.

Approved, FRANKLIN DRILON

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FRANKLIN DRILON President of the Senate JOSE DE VENECIA JR. Speaker of the House of Representatives

This Act which is a consolidation of Senate Bill No. 2747 and House Bill No. 5246 was finally passed by the Senate and House of Representatives February 6, 2004 and February 7, 2004, respectively.
OSCAR G. YABES Secretary of Senate ROBERTO P. NAZARENO Secretary General House of Represenatives

Approved: April 28, 2004

GLORIA MACAPAGAL-ARROYO President of the Philippines \---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/ ([2004 RA 9294] AN ACT RESTORING THE TAX EXEMPTION OF OFFSHORE BANKING UNITS (OBUs) AND FOREIGN CURRENCY DEPOSIT UNITS (FCDUs), AMENDING FOR THE PURPOSE SECTION 27 (D) AND SECTION 28, PARAGRAPHS (A) (4) AND (A) (7) (b) OF THE NATIONAL INTERNAL REVENUE CODE AS AMENDED, 12th Congress, 2004 Apr 28, 3rd Regular Session)

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Securitization Act of 2004 (RA 9267)

Saturday, September 19, 2009 11:35 AM

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\ [2004 RA 9267] AN ACT PROVIDING THE REGULATORY FRAMEWORK FOR SECURITIZATION AND GRANTING FOR THE PURPOSE EXEMPTIONS FROM THE OPERATION OF CERTAIN LAWS2004 Mar 193rd Regular Session12th CongressRepublic of the Philippines Congress of the Philippines Metro Manila Twelfth Congress Third Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand three.

Republic Act No. 9267

March 19, 2004

AN ACT PROVIDING THE REGULATORY FRAMEWORK FOR SECURITIZATION AND GRANTING FOR THE PURPOSE EXEMPTIONS FROM THE OPERATION OF CERTAIN LAWS Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
ARTICLE 1 GENERAL PROVISIONS

SECTION 1. Short Title. - This Act shall be known as "The Securitization Act of 2004". SECTION 2. Declaration of Policy. - It is the policy of the State to promote the development of the capital market by supporting securitizaiton, by providing a legal and regulatory framework for securitization and by creating a favorable market environment for a range of asset-backed securities. For this purpose, the State shall rationalize the rules, regulations, and laws that impact upon the securitization process, particularly on matters of taxation and sale of real estate on installment. Furthermore, the State shall pursue the development of a secondary market, particularly for residential mortgage-backed securities and other housing-related financial instruments, as essential to its goal of generating investment and accelerating the growth of the housing finance sector, especially for socialized and low-income housing. The State shall likewise pursue the development of a secondary market for other types of asset-backed securities (ABS). SECTION 3. Definition of Terms. - For purpose of this Act, the term: (a) "Securitization" means the process by which assets are sold on a without recourse basis by the Seller to a Special Purpose Entity (SPE) and the issuance of asset-backed securities (ABS) by the SPE which depend, for their payment, on the cash flow from the assets so sold and in accordance with the Plan. (b) Asset-backed securities (ABS)" refer to the certificates issued by an SPE, the repayment of which shall be derived from the cash flow of the assets in accordance with the Plan.
(c) "Assets", whether used alone or in the term "Asset-backed securities," refer to loans or receivables or other similar financial assets with an expected cash payment stream. The term "Assets" shall include, but shall not be limited to, receivables, mortgage loans and other debt instruments: Provided, That receivables that are to arise in the future and other receivables of similar nature shall be subject to approval by the Securities and Exchange Commission (SEC) or the Bangko Sentral ng Pilipinas (BSP), as the case may be: Provided, further, That the term "Assets" shall exclude receivables from future expectation of revenues by government, national or local, arising from royalties, fees or imposts.
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expectation of revenues by government, national or local, arising from royalties, fees or imposts. (d) "Asset Pool" means the group of identified, homogeneous assets underlying the ABS. (e) "Commission" refers to the Securities and Exchange Commission (SEC). (f) "Credit Enhancement" means any legally enforceable scheme intended to improve the marketability of the ABS and increase the probability that the holders of the ABS receive payment of amounts due them under the ABS in accordance with the Plan.
(g) "Originator" means the person or entity which was the original obligee of the Assets, such as financial institution that grants a loan or a corporation in the books of which the Assets were created in accordance with the Plan. (h) "Plan" means the plan for securitizations as approved by the Commission (i) "Secondary Mortgage Institution (SMI)" means an entity created for the purpose of enhancing a secondary market for residential mortgages and housing-related ABS.

(j) "Seller" means the person or entity which conveys to the SPE the Assets forming the Asset Pool in accordance with the Plan. In most instances, the Seller may itself be the Originator. (k) "Servicer" refers to the entity designated by the SPE to collect and record payments received on the assets, to remit such collections to the SPE, and perform such other services as may be specifically required by the SPE, excluding asset management or administration. (l) "Special Purpose Entity (SPE)" means either a Special Purpose Corporation (SPC) or a Special Purpose Trust (SPT).
(m) "Special Purpose Corporation (SPC)" refers to a juridical person created in accordance with the Corporation Code of the Philippine solely for the purpose of securitization and to which the Seller makes a true and absolute sale of assets. (n) "Special Purpose Trust (SPT)" means a trust administered by an entity duly licensed to perform trust functions under the General Banking Law, and created solely for the purpose of securities and to which the Seller makes a true and absolute sale of assets SECTION 4. Declaration of Principles. - The Commissions shall exercise the powers provided for in this Act in consonance with the principle of full disclosure, transparency and accountability. The Commission shall include in its annual report the list of SPEs with the corresponding types and amounts of assets scrutinized.

ARTICLE II SPECIAL PURPOSE ENTITY SECTION 5. Special Purpose Entity (SPE). - The SPE in the form of an SPC shall be a stock corporation established in accordance with the Corporation Code of the Philippines and the rules promulgated by the Commission solely for the purpose of securitization and registered as such with the Commission. An SPE constituted as an SPT shall be a trust administered by an entity duly licensed to perform trust functions under the General Banking Law and need not be registered as such with the Commission. In any event, the SPE, whether in the form of an SPT or SPC, shall be solely organized and operated for purposes of securitization in accordance with this Act. The Commission and the BSP shall, from time to time, determine the required capitalization for the SPCs and SPTs, respectively.
SECTION 6. Approval of the Plan. - After the establishment of an SPE pursuant to Section 5 hereof, the proposed Plan shall be submitted to the Commission for approval, which shall include the following:

(a) The nature and mechanics of the sale of assets from the Seller to the SPE, including the terms, conditions and circumstances specified in the Plan wherein the assets may be reverted to the Seller:
(b) The credit enhancements or liquidity supports for the ABS which may be provided in the following manner:
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manner:

(i) standby letter of credit issued by a commercial bank or universal bank other than the trustee bank or the Originator or Seller or its subsidiary/affiliate, its parent company or the parent company's subsidiary/affiliate; (ii) surety bond issued by any insurance company other than the Originator or Seller or its subsidiary or affiliate, its parent company or the parent company's subsidiary or affiliate, or the parent or subsidiary of the trustee bank;
(iii) guarantee issued by any entity other than the Originator or Seller or its subsidiary/affiliate, its parent company or the parent company's subsidiary/affiliate, or the trustee bank or its parent or subsidiary;

(iv) over-collateralization provided by the Seller wherein the assets conveyed to the SPC or SPT exceed the amount of ABS to be issued;
(v) subordinated securities issued by an SPE to any entity including those issued to the Seller that are lower ranking, or junior to other obligation, and are paid after claims to holders of senior are satisfied; and (vi) other credit enhancements as may be approved by the Commission.

(c) The identities and qualifications of the Originator, Seller, Servicer, underwriter an dealer of the ABS, and description of any compensation the issuer, seller or any underwriter has received or will receive in the future in connection with the ABS; (d) The identity, qualifications and compensation of the trustee that will administer the assets conveyed to the SPE for the benefit of the ABS holders of the ABS holders which trustee shall not be related directly or indirectly to the Originator or Sellers; (e) The aggregate principal amount of the value of ABS to be issued, the principal amount of each class within the ABS, and the denominations which shall not be lower than Five thousand pesos (P5,000.00) in which the ABS will be issued; (f) The structure of the ABS to be registered, including the structure and payment priorities of each class of certificates within the ABS, anticipated payments and yields for each class, and the circumstances under which the ABS may be redeemed or retired; (g) A full description of the assets contained, or to be contained, in the asset pool supporting the ABS; (h) The rating agency/agencies for the ABS, the criteria used or to be used to rate the ABS, and any limitation, qualifications or material risks not addressed by the rating agency/agencies; (i) A full description of how the issuer will collect and maintain remittances from the assets pending distribution to holders of the ABS, including the issuer's investment policies and the identity of the issuer's investment advisor, if any; (j) The plan for the management and administration of the assets, asset pool and the ABS, including the disposition of the foreclosed properties, if any; and
(k) The manner of disposal of any residual value or asset with the SPE after all obligations to holders of ABS shall have been settled.

SECTION 7. Registration of Asset-Backed Securities (ABS). - All ABS shall be registered with the Commission in accordance with Sections 8 and 12 of the Securities Regulation Code and its implementing rules and regulations: Provided, however, That issuers of ABS falling under Sections 9 and 10 thereof shall be required to file with the Commission, a notice, with a disclosure statement.
SECTION 8. Approval. - The commission shall issue to an SPC or SPT the corresponding order and permit to sell ABS only after compliance with all the registration requirements and the approval of the Plan by the Commission.

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SECTION 9. Originator is a Bank; Special Purpose Trust. - In case the originator of the assets is a bank or any other financial intermediary which under special laws is subject to the supervision of the BSP, or an entity directly related to said bank or other financial intermediary, or in the event the SPE is constituted in the form of an SPT, an endorsement by the BSP of the Plan shall be required before it s approval by the Commission. SECTION 10. Powers of the SPE. - Each SPE shall have the power to: (a) Accept the sale or transfer of assets; (b) Issue and offer the ABS for sale to investors; (c) Undertake on its own or through contracts with any person, such activities as contained in the approved Plan;
(d) Create any indebtedness or encumbrances to defray administrative or other necessary expenses as specified in the Plan; and

(e) Pay out or invest its funds in accordance with the Plan or as approved by the Commission. SECTION 11. Restriction. - the SPE shall not undertake any activity other than that contained in the approved Plan except upon a written approval of the Commission and the written consent of the holders of the ABS representing at least two-thirds (2/3) of the outstanding amount of the ABS: Provided, That in case the originator of the assets is a bank or nay other financial intermediary which under special laws is subject to the supervision of the BSP, or an entity directly or indirectly related to said bank or other financial intermediary, or in the event the SPE is constituted in the form of an SPT, prior endorsement by the BSP is necessary.
SECTION 12. Transfer of Assets and Security. - The transfer of the assets from the Originator or Seller to the SPE shall be deemed to be a "true sale" when it results in the following:

(a) The transferred Assets are legally isolated and put beyond the reach of the Originator or Seller and its Creditors;
(b) The transferee SPE has the right to pledge, mortgage or exchange those transferred Assets; (c) The transferor relinquishes effective control over the transferred assets; (d) The transfer shall be effected by either a sale, assignment or exchange, in any event on a without recourse basis to the Originator or Seller;

(e) The transferee shall have the right to profits and disposition with respect to the assets; (f) The transferor shall have the right to recover the assets and the transferee shall not have the right to reimbursement of the price or other consideration paid for the assets; and (g) The transferee shall undertake the risks associated with the assets. This shall not, however, prevent the transferor from giving normal representations or warranties of the assets sold.

SECTION 13. Withdrawal of Registration. - If the Commission finds that the Originator or Seller has undertaken the securitization so as to seek the benefits of this Act without a true intention to carry it out, the Commission shall withdraw or cancel the registration of the ABS and the registration of the SPE as issuer, and cause the dissolution of the SPC or termination of the SPT. The Originator or Seller and as the case may be, the trustees, shall pay as fine an amount equal to the taxes from which the SPE has been exempted plus a surcharge of twenty-five percent (25%) of the face value of the ABS issued, without prejudice to the penalties under this law and the National Internal Revenue Code of 1997. SECTION 14. Inheritance and Donor's Tax Evasion. - It shall be unlawful for any person, whether or not it contemplation of death, to cause directly, the issuance, for the benefit of another or others, of ABS and avail of the tax incentives granted by this Act for the purpose of evading the payment of donor's or
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avail of the tax incentives granted by this Act for the purpose of evading the payment of donor's or estate taxes. SECTION 15. Dissolution of the Special Purpose Entity (SPE). - The SPE shall be dissolved in the following cases: (a) It fail to accept the transfer of assets or issue ABS to investors within six (6) months from the date of approval of the Plan unless extended by the Commission; (b) Holders of at least two third (2/3) of the total amount of its ABS still outstanding have resolved to dissolve the SPE and the approval of the Commission has been obtained; in case the Originator of the assets is a bank or any other financial intermediary which under special laws, is subject to supervision of the BSP, or an entity directly or indirectly related to said bank or other financial intermediary, or in the event the SPE is constituted in the form of an SPT, an endorsement by the BSP shall be required prior to approval of the Commission;
(c) Conditions for dissolution that are specified in the Plan occur; or (d) The Commission orders dissolution in accordance with Section 13 and 19. SECTION 16. Effects of Dissolution of SPE. - The SPE and the registration of the ABS shall be terminated, cancelled withdrawn in any of the cases provided for under the last preceding section.

SECTION 17. Appointment of an Interim Representative. - If the Commission finds that an SPE has no authorized representative to act on its behalf or such persons cannot act for any reason resulting in the interruption of its activities pursuant to the approved Plan, the Commission shall have the power to appoint any person or persons to act as interim representative for the SPE. The interim representative shall have the full and exclusive authority to implement the approved Plan.
In the event of an appointment of replacement of an interim representative, the Commission shall post the notice at the Commission's office and other its publication in at least two (2) newspapers of national circulation. SECTION 18. Delivery of Property and Records it Interim Representative. - Where an interim representative has been appointed in accordance with Section 17.

(a) The directors, officers, or any employees of the SPE shall take all appropriate steps to safeguard the property and the benefits of the holders of the ABS of the SPE and shall deliver the property accounts, documents, and seals of the SPE to the interim representative; and (b) Any person who possesses property or documents of the SPE shall notify the representative of such possession. SECTION 19. Failure to Continue Business. - The Commission shall order the dissolution of an SPE upon finding that the SPE cannot continue to undertake its business, and shall proceed to liquidate the SPE in accordance with the Corporation Code. SECTION 20. Power of Inspection. - The Commission shall have the power to inspect or order the Production of the records of the SPE.
ARTICLE III THE SERVICER

SECTION 21. Duties. - The Service shall perform its duties pursuant to the terms and conditions of the servicing agreement and such other written instructions as the SPE, the trustees or its interim representative may issue or in case-to-case basis. Collections made by the Servicer shall be remitted promptly to the SPE or as may be agreed upon the parties in the servicing agreement, but in no case shall be remittance period be longer than one (1) month. SECTION 22. Reports. - The Servicer shall prepare periodic reports as may be required by the SPE, the trustee or its interim representative within thirty (30) days, including reports of any borrower or obligator which fails to pay its debt or obligation at maturity date or any adverse development that may
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obligator which fails to pay its debt or obligation at maturity date or any adverse development that may be affect the collectibility of any loan account or receivable comprising the asset pool. SECTION 23. Extent of Authority. - The Servicer shall have such authority as is expressly stated in the servicing agreement and unless otherwise specifically provided therein, such authority shall encompass the general powers of administration. The Servicer shall have no authority to waive penalties and charges except with the written authority from the Board of SPE, the trustee or the interim representative, should one be appointed SECTION 24. Qualifications. - The Servicer shall be a corporation duly incorporated under Philippine law, with a minimum authorized capitalization of Ten million pesos (P10,000,00.00) or such higher amounts as the Commission may prescribe. It shall be independent of the SPC or the trustee and shall not share common ownership, officers, or directors with the SPC or the trustees. The Originator or Seller may act as the Servicer as may be approved by the Commission or the BSP, as the case may be. SECTION 25. Standard of Conduct. - The Servicer shall act with utmost good faith and shall perform its obligations under the servicing agreement with the due diligence of a good father of a family.
SECTION 26. Penalties. - Breach by the Servicer of its obligations arising from the failure to abide by the standard of conduct set forth in the preceding section shall subject the Servicer to the penalty of revocation of its corporate registration and a fine of not less than One Million pesos (P1,000,000.00) and shall subject its officers and employees responsible for such noncompliance with the standard of conduct referred to above, to a penalty of imprisonment for not more than five (5) years and a fine of not less than One Hundred Thousand pesos (100,000.00). Breach arising from bad faith or gross negligence shall subject the Servicer to revocation of its corporate registration and a fine of not less than Five million pesos (P5,000,000.00) and shall subject the officers and employees responsible for such breach to a penalty of imprisonment for not more than six (6) years and one (1) day up to a maximum of twenty (20) years and a fine of not less than Five hundred thousand pesos (P500,000.00). ARTICLE IV TAX AND OTHER RELATED ISSUES

SECTION 27. income Taxation of Special Purpose Entity. - The SPE in the form of an SPC shall be subject to income tax under Section 27(a), Chapter IV of the National Internal Revenue Code of 1997. An SPE constituted as an SPT shall be subject to income tax in accordance with the provisions of Section 61, Chapter X of the same Code.
SECTION 28. Transfer of Assets. - The sale or transfer of assets to the SPE, which includes sale or transfer of any and all security interest thereto, it made in accordance with the Plan shall be exempted from value-added tax (VAT) and documentary stamp tax (DST), or any other taxes imposed in lieu thereof. Except for registration fees with the Commission, all applicable registration and annotation fees to be paid, related or incidental to the transfer of assets, or the security interest thereto, shall be fifty percent (50%) of the applicable registration and annotation fees.

The transfer of assets by dation in payment (dacion en pago) by the obligor in favor of an SPE shall not be subject to capital gains tax as provided under Section 27 (d)(5) of the National Internal Revenue Code of 1997. SECTION 29. Issuance and Transfer of Securities. - The original issuance of ABS and other securities related solely to such securitization transaction, such as, but not limited to, seller's equity, subordinated debt instruments purchased by the originator, and other related forms of credit enhancement shall be exempt from VAT, or any other taxes imposed in lieu thereof, but subject to DST. All secondary trades and subsequent transfers of ABS, including all forms of credit enhancement in such instruments, shall be exempt from DST and VAT, or any other taxes imposed in lieu thereof. SECTION 30. Non-Classification of SPE as a Bank, Quasi-Bank or Financial Intermediary. - The SPE, created pursuant to a Plan, shall not be classified as a ban, quasi-bank or financial intermediary under the provisions of the New Central Bank Act, the General Banking Law and the National Internet Revenue Code of 1997, and shall not be subject to the gross receipts tax (GRT) or any other tax imposed in lieu thereof. SECTION 31. Securities not to be Categorized as Deposit Substitutes. - The ABS issued by an SPE pursuant
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SECTION 31. Securities not to be Categorized as Deposit Substitutes. - The ABS issued by an SPE pursuant to the Plan approved by the Commission shall not be considered as deposit substitutes under the laws mentioned in Section 30 hereof: Provided, however, That for purposes of taxation, the yield for the ABS shall be subject to a twenty percent (20%) final withholding tax, except those held by tax-exempt investors. SECTION 32. Re-transfer of Assets. - Where the implementation of the Plan or the provision of this Act requires or provides a transfer of the assets and collateral back to the Originator or Seller, then the provisions of Section 28 shall apply to such transfer.
SECTION 33. Incentives for Securitization. - In order to promote the securitization of the mortgage and housing related receivables of the government housing agencies as may be determined by the Housing and Urban Development Coordinating Council (HUDCC) and the Department of Finance (DOF), the yield or income of the investor from any low-cost or socialized housing-related ABS shall be exempt from income tax. SECTION 34. Waiver of Rights. - For purposes of securitization pursuant to this Act, the buyer of real estate on installment payments may agree to waive his rights under Republic Act No. 6552, the provision of Section 7 of the said notwithstanding. ARTICLE V SECONDARY MORTGAGE INSTITUTION

SECTION 35. Registration of Secondary Mortgage Institution (SMI). - An SMI, which shall be primarily responsible in providing liquidity mechanism to primary mortgage lenders/holders as well as in developing a secondary market for mortgage and housing-related ABS, shall also be registered with the Commission. SECTION 36. Registration of Business and Operational Plan. - The SMI shall also register its business and operational plan with the Commission and shall, as a minimum, be subject to the same disclosure requirements as SPCs. SECTION 37. Promulgation of Rules. - The Commission, in consultation with the BSP and the Insurance Commission (IC), shall promulgate rule regarding the ownership, organization, capitalization and opertion of the SMI. In promulgating such rules, the Commission shall consider the size of the asset pools to be held by the SMI, the amount of debt to be issued by it, the extent of its operation and the powers of the SMI specified under this Act. SECTION 38. Powers of the SMI. - For purposes of securitization under this Act and pursuant to the Plan submitted to the Commission, the SMI may perform any or all of the following:
(a) Wholesale purchase of residential mortgages and housing-related contract receivables; (b) Buy and sell residential mortgage and housing-related ABS; (c) Provide loans to primary lending institutions against residential mortgages;

(d) Issue housing-related ABS through an SPE, and issue bonds and other debt instruments; (e) Perform ancillary functions including, but not limited to, title insurance, through a subsidiary, wholly or partially owned by an SMI, and loan servicing; and (f) Perform such other functions as the Commission may determine necessary to mobilize and channel funds from the capital markets to the mortgage and housing finance sector. SECTION 39. SMI Capitalization and Organizational Requirements. - Any SMI established for the housing sector shall be a stock corporation and shall have a minimum initial paid-up capital of Two billion pesos (P2,000,000,000.00): Provided, That the total obligation of the SMI, including both actual and contingent obligations, shall not exceed fifteen (15) times its paid-up capital: Provided, further, That the actual

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obligations of the SMI shall not exceed ten (10) times its paid-up capital: Provided, furthermore, That the ratios indicated herein may be adjusted by the Commission with approval of the DOF and BSP upon a showing that the conditions of the secondary and primary markets and the financial viability of the SMI warrant such adjustment: Provided, Finally, That the investment of financial entities in the SMI shall be subjected to and be made to comply with rules and regulations of the appropriate regulatory agency. Government financial institutions and government-owned or-controlled corporations, may collectively hold and own up to a maximum of thirty percent (30%) of the SMI's capital: Provided, That such investment does not conflict with their existing charters
A government financial institution may invest up to a maximum of ten percent (10%) of its total investible funds in housing-related assets or five percent (5%) in non-housing related assets: Provided, That such investment does not exceed five percent (5%) of the total amount of each ABS issue. Within ten (10) years of its incorporation, the SMI shall offer and list at least twenty percent (20%) of its common shares in the stock exchange, which period shall be extendible only upon approval of the Commission in instances where the lace of financial viability of the SMI warrants such extension. SECTION 40. Prohibited Activities of the SMI. - The SMI shall be prohibited from: (a) Originating or financing individual mortgage loans; (b) Providing loans to other parties engaged in a business other than that approved in the Plan submitted to the Commission: and

(c) Providing capital equity to other companies. SECTION 41. Extension of Benefits to the SMI. - The benefits provided to the transactions entered into by the SPCs under Sections 28 to 33 of this Act shall also be granted to the same transactions entered into by the SMIs for purposes of securitzation in accordance with the provisions of this Act. SECTION 42. Dissolution of the SMI. - The Commission shall order the dissolution and liquidation of the SMI upon a finding that it; (a) Cannot continue to undertake its business; or (b) Is not operation actively; or (c) Is engaging in activities that conflict with its objectives as an SMI; or (d) Has fulfilled a condition for dissolution specified in its Articles of Incorporation. ARTICLE VI RATING SYSTEM
SECTION 43. Rating ABS. - No ABS shall be issued unless such ABS has been rated by a duly accredited credit rating agency.

SECTION 44. Credit Rating Agency. - Every credit rating agency which now exists or which may hereafter be formed shall be subject to the provisions of this Act. SECTION 45. Accreditation of Credit Rating Agency. - No credit rating agency shall commence ratemaking operations pursuant to this Act until it shall have obtained an accreditation from the Commission under such rules and regulations as the Commission may deem appropriate. SECTION 46. Examination of Credit Rating Agencies. - Credit rating agencies shall be subject to examination by the Commission as the latter may deem warranted: Provided, That the Commission shall conduct an examination of the credit rating agencies at least once every three (3) years. SECTION 47. Noncompliance of Accredited Rating Agencies. - The Commission may suspend or revoke the accreditation given to any credit rating agency which fails to comply with the Commission's lawful order within the time limited by such order, or any extension thereof which the Commission may grant.
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order within the time limited by such order, or any extension thereof which the Commission may grant. ARTICLE VII PENAL PROVISIONS SECTION 48. Penalties. - Any person who violates any of the provisions of this Act, or the rules and regulations promulgated by the Commission under authority hereof, or any person who, in a registration statement, notice, or Plan filed under this Act, makes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, shall, upon conviction, suffer a fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five million pesos (P5,000.00) or imprisonment of not less than six (6) years and one (1) day nor more than twenty-one (21) years, or both in the discretion of the court. If the offender is corporation, partnership or association or other juridical entity, the penalty may in the discretion of the court be imposed upon such juridical entity upon the officer or officers of the corporation, partnership, association or entity responsible fro the violation, and if such officer is an alien, he shall in addition to the penalties prescription prescribed, be deported without further proceedings after service of sentence.
ARTICLE VIII MISCELLANEOUS PROVISIONS

SECTION 49. Implementing Rules and Regulations (IRR). - The Commission, in coordination with the BSP, DOF and the IC, shall promulgate the implementing rules and regulations which shall be submitted to the Congressional Oversight Committee which shall review, revise and approve the same: Provided, That the Commission BSP, DOF and the IC may continue to issue separate regulations that will apply exclusively to the institutions under their respective jurisdiction, consistent with the IRR as approved by the Congressional Oversight Committee. SECTION 50. Congressional Oversight Committee. - There is hereby created a Congressional Oversight Committee composed of seven (7) members from the Senate and seven (7) members from the House of the Representatives. The members from the Senate shall be appointed by the Senate President with at least two (2) Senators representing the Minority. The members from the House of Representatives shall also appointed by the Speaker with at least two (2) members representing the Minority. After the Oversight Committee has approved the IRR, it shall thereafter become functus officio, and therefore cease to exist. SECTION 51. Repeating Clause. - All laws, executive orders, rules and regulations, and parts thereof which are inconsistent with this Act are hereby repealed or amended accordingly.
SECTION 52. Separability Clause. - If for any reason any article or provision of this Act or any portion therefore or application of such article, provision, or portion thereof to any person, group, or circumstance is declared invalid or unconstitutional, the remainder of this Act shall not be affected by such decision.

SECTION 53. Effectivity Clause. - This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) newspapers of general circulation, whichever comes earlier.

Approved, FRANKLIN DRILON President of the Senate JOSE DE VENECIA JR. Speaker of the House of Representatives

This Act which is a consolidation of House Bill No. 4453 and Senate Bill No. 2095 was finally passed by the House of Representatives and the Senate on January 28, 2004 and January 29, 2004, respectively.

OSCAR G. YABES
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OSCAR G. YABES Secretary of Senate ROBERTO P. NAZARENO Secretary General House of Represenatives

Approved: March 19, 2004 GLORIA MACAPAGAL-ARROYO President of the Philippines \---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/ ([2004 RA 9267] AN ACT PROVIDING THE REGULATORY FRAMEWORK FOR SECURITIZATION AND GRANTING FOR THE PURPOSE EXEMPTIONS FROM THE OPERATION OF CERTAIN LAWS, 12th Congress, 2004 Mar 19, 3rd Regular Session)

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Exam Review
Saturday, September 19, 2009 1:58 PM

1. What do you call the liability of Bank ABC -not a deposit, not insurable with PDIC 2. 3. 4. 5. 6. 7. 8. 9. 10. Bank can invoke Bank Secrecy Law Wait for default Independence principle Section X Pari Passu RA 8183: Dapat sabihin na with this, the court can validly render judgment in other currencies Allied or non allied Systemic risk DST paid in execution, BUT IN TRANSFER: NO DST IF THERE's NO CHANGE IN THE TENOR

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BOT Law
Saturday, September 19, 2009 2:26 PM

The Philippine BOT Law ________________________________________________________________________ Page 1 The Philippine BOT Law REPUBLIC OF THE PHILIPPINES Congress of the Philippines Metro Manila Second Regular Session Begun and held in Metro Manila, on Monday, the twenty-sixth day of July, nineteen hundred and ninety-three [ REPUBLIC ACT NO. 7718 ] AN ACT AMENDING CERTAIN SECTIONS OF REPUBLIC ACT NO. 6957, ENTITLED "AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND FOR OTHER PURPOSES" Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled: SEC. 1. Section 1 of Republic Act no. 6957 is hereby amended to read as follows: "SEC. 1. Declaration of Policy. - It is the declared policy of the State to recognize the indispensable role of the private sector as the main engine for national growth and development and provide the most appropriate incentives to mobilize private resources for the purpose of financing the construction, operation and maintenance of infrastructure and development projects normally financed and undertaken by the Government. Such incentives, aside from financial incentives as provided by law, shall include providing a climate of minimum government regulations and procedures and specific government undertakings in support of the private sector." SEC. 2. Section 2 of the same Act is hereby amended to read as follows: "SEC. 2. Definition of Terms. - The following terms used in this Act shall have the meanings stated below: "(a) Private sector infrastructure or development projects - The general description of infrastructure or development projects normally financed and operated by the public sector but which will now be wholly or partly implemented by the private sector, including but not limited to, power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroads and railways, transport systems, land reclamation projects, industrial estates or townships, housing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may be authorized by the appropriate agency/LGU pursuant to this Act. Such projects shall be undertaken through contractual arrangements as defined hereunder and such other variations as may be approved by the President of the Philippines. "For the construction stage of these infrastructure projects, the project proponent may obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino contractor: Provided, That, in case an infrastructure or a development facility's operation requires a public utility franchise, the facility operator must be a

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Filipino or if a corporation, it must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos: Provided, further, That in the case of foreign contractors, Filipino labor shall be employed or hired in the different phases of construction where Filipino skills are available: Provided, finally, That projects which would have difficulty in sourcing funds may be financed partly from direct government appropriations and/or from Official Development Assistance (ODA) of foreign governments or institutions not exceeding fifty percent (50%) of the project cost, and the balance to be provided by the project proponent. "(b) Build-operate-and-transfer - A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years: Provided, That in case of an infrastructure or development facility whose operation requires a public utility franchise, the proponent must be Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos. The Philippine BOT Law ________________________________________________________________________ Page 2 "The build-operate-and-transfer shall include a supply-and-operate situation which is a contractual arrangement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals. "(c) Build-and-transfer - A contractual arrangement whereby the project proponent undertakes the financing and construction of a given infrastructure or development facility and after its completion turns it over to the government agency or local government unit concerned, which shall pay the proponent on an agreed schedule its total investments expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure or development project, including critical facilities which, for security or strategic reasons, must be operated directly by the Government. "(d) Build-own-and-operate - A contractual arrangement whereby a project proponent is authorized to finance, construct, own, operate and maintain an infrastructure or development facility from which the proponent is allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users: Provided, That all such projects, upon recommendation of the Investment Coordination Committee (ICC) of the National Economic and Development Authority (NEDA), shall be approved by the President of the Philippines. Under this project, the proponent which owns the assets of the facility may assign its operation and maintenance to a facility operator. "(e) Build-lease-and-transfer - A contractual arrangement whereby a project proponent is authorized to
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"(e) Build-lease-and-transfer - A contractual arrangement whereby a project proponent is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government agency or local government unit concerned. "(f) Build-transfer-and-operate - A contractual arrangement whereby the public sector contracts out the building of an infrastructure facility to a private entity such that the contractor builds the facility on a turn-key basis, assuming cost overrun, delay and specified performance risks. "Once the facility is commissioned satisfactorily, title is transferred to the implementing agency/LGU. The private entity, however, operates the facility on behalf of the implementing agency/LGU under an agreement. "(g) Contract-add-and-operate - A contractual arrangement whereby the project proponent adds to an existing infrastructure facility which it is renting from the government. It operates the expanded project over an agreed franchise period. There may, or may not be, a transfer arrangement in regard to the facility. "(h) Develop-operate-and-transfer - A contractual arrangement whereby favorable conditions external to a new infrastructure project which is to be built by a private project proponent are integrated into the arrangement by giving that entity the right to develop adjoining property, and thus, enjoy some of the benefits the investment creates such as higher property or rent values. "(i) Rehabilitate-operate-and-transfer - A contractual arrangement whereby an existing facility is turned over to the private sector to refurbish, operate and maintain for a franchise period, at the expiry of which the legal title to the facility is turned over to the government. The term is also used to describe the purchase of an existing facility from abroad, importing, refurbishing, erecting and consuming it within the host country. "(j) Rehabilitate-own-and-operate - A contractual arrangement whereby an existing facility is turned over to the private sector to refurbish and operate with no time limitation imposed on ownership. As long as the operator is not in violation of its franchise, it can continue to operate the facility in perpetuity. "(k) Project proponent - The private sector entity which shall have contractual responsibility for the project and which shall have an adequate financial base to implement said project consisting of equity and firm commitments from reputable financial institutions to provide, upon award, sufficient credit lines to cover the total estimated cost of the project. "(l) Contractor - Any entity accredited under the Philippine laws which may or may not be the project proponent and which shall undertake the actual construction and/or supply of equipment for the project. "(m) Facility operator - A company registered with the Securities and Exchange Commission, which may or may not be the project proponent, and which is responsible for all aspects of operation and maintenance of the infrastructure or development facility, including but not limited to the collection of tolls, fees, rentals or charges from facility users: Provided, That in case the facility requires a public utility franchise, the facility operator shall be Filipino or at least sixty per centum (60%) owned by Filipino. The Philippine BOT Law ________________________________________________________________________ Page 3 "(n) Direct government guarantee - An agreement whereby the government or any of its agencies or local government units
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local government units assume responsibility for the repayment of debt directly incurred by the project proponent in implementing the project in case of a loan default. "(o) Reasonable rate of return on investments and operating and maintenance cost - The rate of return that reflects the prevailing cost of capital in the domestic and international markets: Provided, That in case of negotiated contracts, such rate of return shall be determined by ICC of NEDA prior to the negotiation and/or call for proposals: Provided, further, That for negotiated contracts for public utility projects which are monopolies, the rate of return on rate base shall be determined by existing laws, which in no case shall exceed twelve per centum (12%). "(p) Construction - Refers to new construction, rehabilitation, improvement, expansion, alteration and related works and activities including the necessary supply of equipment, materials, labor and services and related items." SEC. 3. Section 3 of the same Act is hereby amended to read as follows: "SEC. 3. Private Initiative in Infrastructure. - All government infrastructure agencies, including government-owned andcontrolled corporations (GOCC) and local government units (LGUs) are hereby authorized to enter into contract with any duly pre-qualified project proponent for the financing, construction, operation and maintenance of any financially viable infrastructure or development facility through any of the projects authorized in this Act. Said agencies, when entering into such contracts, are enjoined to solicit the expertise of individuals, groups, or corporations in the private sector who have extensive experience in undertaking infrastructure or development projects." SEC. 4. Section 4 of the same act is hereby amended to read as follows: "SEC. 4. Priority Projects. - All concerned government agencies, including government-owned andcontrolled corporations and local government units, shall include in their development programs those priority projects that may be financed, constructed, operated and maintained by the private sector under the provisions of this Act. It shall be the duty of all concerned government agencies to give wide publicity to all projects eligible for financing under this Act, including publication in national and, where applicable, international newspapers of general circulation once every six (6) months and official notification of project proponents registered with them. "The list of all such national projects must be part of the development programs of the agencies concerned. The list of projects costing up to Three hundred million pesos (P300,000,000) shall be submitted to ICC of NEDA for its approval and to the NEDA Board for projects costing more than Three hundred million pesos (P300,000,000). The list of projects submitted to ICC of the NEDA Board shall be acted upon within thirty (30) working days. "The list of local projects to be implemented by the local government units concerned shall be submitted, for confirmation, to the municipal development council for projects costing up to Twenty million pesos; those costing above Twenty up to Fifty million pesos, to the provincial development council; those costing up to Fifty million, to the city development council; above Fifty million up to Two hundred million pesos, to the regional development councils; and those above Two hundred million pesos, to ICC of NEDA. SEC. 5. A new section is hereby added after Section 4 of the same Act and numbered as Section 4-A, to read as follows: "SEC. 4-A. Unsolicited Proposals. - Unsolicited proposals for projects may be accepted by any government agency or local government unit on a negotiated basis: Provided, That, all the following conditions are met: (1) such projects involve a new
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projects involve a new concept or technology and/or are not part of the list of priority projects, (2) no direct government guarantee, subsidy or equity is required, and (3) the government agency or local government unit has invited by publication, for three (3) consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals and no other proposal is received for a period of sixty (60) working days: Provided, further, That in the event another proponent submits a lower price proposal, the original proponent shall have the right to match that price within thirty (30) working days." SEC. 6. Section 5 of the same Act is hereby amended to read as follows: "SEC. 5. Public Bidding of Projects. - Upon approval of the projects mentioned in Section 4 of this Act, the head of the infrastructure agency or local government unit concerned shall forthwith cause to be published, once every week for three (3) consecutive weeks, in at least two (2) newspapers of general circulation and in at least one (1) local newspaper which is circulated in the region, province, city or municipality in which the project is to be constructed, a notice inviting all prospective infrastructure or development project proponents to participate in a competitive public bidding for the projects so approved. "In the case of a build-operate-and-transfer arrangement, the contract shall be awarded to the bidder who, having satisfied The Philippine BOT Law ________________________________________________________________________ Page 4 the minimum financial, technical, organizational and legal standards required by this Act, has submitted the lowest bid and most favorable terms for the project, based on the present value of its proposed tolls, fees, rentals and charges over a fixed term for the facility to be constructed, rehabilitated, operated and maintained according to the prescribed minimum design and performance standards, plans and specifications. For this purpose, the winning project proponent shall be automatically granted by the appropriate agency the franchise to operate and maintain the facility, including the collection of tolls, fees, rentals, and charges in accordance with Section 5 hereof. "In the case of build-and-transfer or build-lease-and-transfer arrangement, the contract shall be awarded to the lowest complying bidder based on the present value of its proposed schedule of amortization payments for the facility to be constructed according to the prescribed minimum design and performance standards, plans, and specifications: Provided, however, That a Filipino contractor who submits an equally advantageous bid with exactly the same price and technical specifications as those of a foreign contractor shall be given preference. "In all cases, a consortium that participates in a bid must present proof that the members of the consortium have bound themselves jointly and severally to assume responsibility for any project. The withdrawal of any member of the consortium prior to the implementation of the project could be a ground for the cancellation of the contract. "The public bidding must be conducted under a two-envelope/two-stage system: the first envelope to contain the technical proposal and the second envelope to contain the financial proposal. The procedures for this system shall be outlined in the implementing rules and regulations of this Act. "A copy of each contract involving a project entered into under this Act shall forthwith be submitted to Congress for its information." SEC. 7. A new section is hereby added after Section 5 of the same Act and numbered as section 5-A, to read as follows: "SEC. 5-A. Direct Negotiation of Contracts. - Direct negotiation shall be resorted to when there is only
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"SEC. 5-A. Direct Negotiation of Contracts. - Direct negotiation shall be resorted to when there is only one complying bidder left as defined hereunder: "(a) If, after advertisement, only one contractor applies for pre-qualification and it meets the prequalification requirements, after which it is required to submit a bid/proposal which is subsequently found by the agency/local government unit (LGU) to be complying. "(b) If, after advertisement, more than one contractor applied for pre-qualification but only one meets the pre-qualification requirements, after which it submits bid/proposal which is found by the agency/LGU to be complying. "(c) If, after pre-qualification of more than one contractor, only one submits a bid which is found by the agency/LGU to be complying. "(d) If, after pre-qualification, more than one contractor submit bids but only one is found by the agency/LGU to be complying: Provided, That any of the disqualified prospective bidder may appeal the decision of the implementing agencys/LGUs Pre-qualification Bids and Awards Committee within fifteen (15) working days to the head of the agency, in case of national projects; to the Department of the Interior and Local Government (DILG), in case of local projects from the date the disqualification was made known to the disqualified bidder: Provided, furthermore, That the implementing agency concerned or DILG should act on the appeal within forty-five (45) working days from receipt thereof. SEC. 8. Section 6 of the same Act is hereby amended to read as follows: "SEC. 6. Repayment Scheme. - For the financing, construction, operation and maintenance of any infrastructure project undertaken through the Build-Operate-and-Transfer arrangement or any of its variations pursuant to the provisions of this Act, the project proponent shall be repaid by authorizing it to charge and collect reasonable tolls, fees, and rentals for the use of the project facility not exceeding those incorporated in the contract and, where applicable, the proponent may likewise be repaid in the form of a share in the revenue of the project or other non-monetary payments, such as, but not limited to, the grant of a portion or percentage of the reclaimed land, subject to the constitutional requirements with respect to the ownership of land: Provided, That for negotiated contracts, and for projects which have been granted a natural monopoly or where the public has no access to alternative facilities, the appropriate government regulatory bodies, shall approve the tolls, fees, rentals, and charges based on a reasonable rate of return: Provided, further, That the imposition and collection of tolls, fees, rentals, and charges shall be for a fixed term as proposed in the bid and incorporated in the contract but in no case shall this term exceed fifty (50) years: Provided, furthermore, That the tolls, fees, rentals, and charges may be subject to adjustment during the life of the contract, based on a predetermined formula using official price indices and included in the instructions to bidders and in the contract: Provided, also, That all tolls, fees, rentals, and charges and adjustments thereof shall take into account the reasonableness of said rates to the end-users of private sector-built infrastructure: Provided, The Philippine BOT Law ________________________________________________________________________ Page 5 finally, That during the lifetime of the franchise, the project proponent shall undertake the necessary maintenance and repair of the facility in accordance with standards prescribed in the bidding documents and in the contract. In the case of a BuildandTransfer arrangement, the repayment scheme is to be effected through amortization payments by the
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the case of a BuildandTransfer arrangement, the repayment scheme is to be effected through amortization payments by the government agency or local government unit concerned to the project proponent according to the scheme proposed in the bid and incorporated in the contract." SEC. 9. Section 7 of the same Act is hereby amended to read as follows: "SEC. 7. Contract Termination. - In the event that a project is revoked, cancelled or terminated by the Government through no fault of the project proponent or by mutual agreement, the Government shall compensate the said project proponent for its actual expenses incurred in the project plus a reasonable rate of return thereon not exceeding that stated in the contract as of the date of such revocation, cancellation or termination: Provided, That the interest of the Government in these instances shall be duly insured with the Government Service Insurance System (GSIS) or any other insurance entity duly accredited by the Office of the Insurance Commissioner: Provided, finally, That the cost of the insurance coverage shall be included in the terms and conditions of the bidding referred to above. "In the event that the government defaults on certain major obligations in the contract and such failure is not remediable or if remediable shall remain unremedied for an unreasonable length of time, the project proponent/contractor may, by prior notice to the concerned national government agency or local government unit specifying the turn-over date, terminate the contract. The project proponent/contractor shall be reasonably compensated by the Government of equivalent or proportionate contract cost as defined in the contract." SEC. 10. Section 8 of the same Act is hereby amended to read as follows: "SEC. 8. Regulatory Boards. - The Toll Regulatory Board which was created by Presidential Decree No. 1112 is hereby attached to the Department of Public Works and Highways with the Secretary of Public Works and Highways as Chairman." SEC. 11. Section 9 of the same Act is hereby amended to read as follows: "SEC. 9. Project Supervision. - Every infrastructure project undertaken under the provisions of this Act shall be in accordance with the plans, specifications, standards, and costs approved by the concerned government agency and shall be under the supervision of the said agency or local government unit in the case of local projects." SEC. 12. A new section to be numbered as Section 10 is hereby added to read as follows: "SEC. 10. Investment Incentives. - Among other incentives, projects in excess of One billion pesos (P1,000,000,000) shall be entitled to incentives as provided by the Omnibus Investment Code, upon registration with the Board of Investments." SEC. 13. Section 10 of the same Act is hereby renumbered as Section 11 to read as follows: "SEC. 11. Implementing Rules and Regulations. - A committee composed of one (1) representative from the Department of Public Works and Highways (DPWH), the Department of Transportation and Communications (DOTC), the Department of Energy (DOE), the Department of Environment and National Resources (DENR), the Department of Agriculture (DA), the Department of Trade and Industry (DTI), the Department of Finance (DOF), the Department of Interior and Local Government (DILG), the National Economic and Development Authority (NEDA), the Coordinating Council of the Philippine Assistance Program (CCPAP), and other concerned government agencies shall, within sixty (60) days from the effectivity of this Act, formulate and prescribe, after public hearing and publication as required by law, the implementing rules and regulations including, among others, the criteria and guidelines for evaluation of bid proposals, list of financial incentives and arrangements that the Government may provide for the project, in order to carry out the provisions of
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arrangements that the Government may provide for the project, in order to carry out the provisions of this Act in the most expeditious manner. "The Chairman of this committee shall be appointed by the President of the Philippines from its members. "From time to time the Committee may conduct, formulate and prescribe after due public hearing and publication, amendments to the implementing rules and regulations, consistent with the provisions of this Act. SEC. 14. A new section to be numbered as Section 12 is hereby added to read as follows: "SEC. 12. Coordination and Monitoring of Projects. - The Coordinating Council of the Philippine Assistance Program (CCPAP) shall be responsible for the coordination and monitoring of projects implemented under this Act. The Philippine BOT Law ________________________________________________________________________ Page 6 "Regional development councils and local government units shall periodically submit to CCPAP information on the status of said projects. "At the end of every calendar year, the CCPAP shall report to the President and to Congress on the progress of all projects implemented under this Act." SEC. 15. Sections 11, 12 and 13 of the same Act are hereby renumbered as Sections 13, 14 and 15respectively. SEC. 16. Repealing Clause. - All laws or parts of any law inconsistent with the provisions of this Act are hereby repealed or modified accordingly. SEC. 17. Separability Clause. - If any provision of this Act is held invalid, the other provisions not affected thereby shall continue in operation. SEC. 18. Effectivity Clause. - This Act shall take effect fifteen (15) days after its publication in at least two (2) newspapers of general circulation. Approved, EDGARDO J. ANGARA JOSE DE VENECIA JR. President of the Senate Speaker of the House of Representative This Act which is a consolidation of House Bill No. 10943 and Senate Bill No. 1586 was finally passed by the House of Representatives and the Senate on April 12, 1994 and April 27, 1994, respectively. EDGARDO E. TUMANGAN ROBERTO P. NAZARENO Secretary of the Senate Acting Secretary General House of Representative FIDEL V. RAMOS President of the Philippines Approved: 5 MAY 1994

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Anti-Money Laundering Act

Saturday, September 19, 2009 2:32 PM

RA 9160 Republic of the Philippines Congress of the Philippines Metro Manila Twelfth Congress First Regular Session Begun and held in Metro Manila, on Monday, the twenty-third day of July, two thousand one.

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
SECTION 1. Short Title. This Act shall be known as the Anti-Money Laundering Act of 2001. SEC. 2. Declaration of Policy. It is hereby declared the policy of the State to protect and preserve the integrity and confidentiality of bank accounts and to ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity. Consistent with its foreign policy, the State shall extend cooperation in transnational investigations and prosecutions of persons involved in money laundering activities wherever committed. SEC. 3. Definitions. For purposes of this Act, the following terms are hereby defined as follows: (a) Covered institution refers to: (1) banks, non-banks, quasi-banks, trust entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP); (2) insurance companies and all other institutions supervised or regulated by the Insurance Commission; and (3) (i) securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant, (ii) mutual funds, close-end investment companies, common trust funds, pre-need companies and other similar entities, (iii) foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities, and (iv) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by Securities and Exchange Commission. (b) Covered transaction is a single, series, or combination of transactions involving a total amount in excess of Four million Philippine pesos (Php4,000,000.00) or an equivalent amount in foreign currency based on the prevailing exchange rate within five (5) consecutive banking days except those between a covered institution and a person who, at the time of the transaction was a properly identified client and the amount is commensurate with the business or financial capacity of the client; or those with an underlying legal or trade obligation, purpose, origin or economic justification. It likewise refers to a single, series or combination or pattern of unusually large and complex transactions in excess of Four million Philippine pesos (Php4,000,000.00) especially cash deposits and investments having no credible purpose or origin, underlying trade obligation or contract. (c) Monetary instrument refers to: (1) coins or currency of legal tender of the Philippines, or of any other country; (2) drafts, checks and notes; (3) securities or negotiable instruments, bonds, commercial papers, deposit certificates, trust certificates, custodial receipts or deposit substitute instruments, trading orders, transaction tickets and confirmations of sale or investments and money market instruments; and (4) other similar instruments where title thereto passes to another by endorsement, assignment or delivery. (d) Offender refers to any person who commits a money laundering offense.
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(d) Offender refers to any person who commits a money laundering offense. (e) Person refers to any natural or juridical person. (f) Proceeds refers to an amount derived or realized from an unlawful activity. (g) Supervising Authority refers to the appropriate supervisory or regulatory agency, department or office supervising or regulating the covered institutions enumerated in Section 3(a). (h) Transaction refers to any act establishing any right or obligation or giving rise to any contractual or legal relationship between the parties thereto. It also includes any movement of funds by any means with a covered institution. (i) Unlawful activity refers to any act or omission or series or combination thereof involving or having relation to the following: (1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended; (2) Sections 3, 4, 5, 7, 8 and 9 of Article Two of Republic Act No. 6425, as amended, otherwise known as the Dangerous Drugs Act of 1972; (3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended; otherwise known as the Anti-Graft and Corrupt Practices Act; (4) Plunder under Republic Act No. 7080, as amended; (5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; (6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602; (7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532; (8) Qualified theft under Article 310 of the Revised Penal Code, as amended; (9) Swindling under Article 315 of the Revised Penal Code, as amended; (10) Smuggling under Republic Act Nos. 455 and 1937; (11) Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000; (12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets; (13) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; (14) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. SEC. 4. Money Laundering Offense. Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following: (a) Any person knowing that any 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 of money laundering referred to in paragraph (a) above. (c) Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so. SEC. 5. Jurisdiction of Money Laundering Cases. The regional trial courts shall have jurisdiction to try all cases on money laundering. Those committed by public officers and private persons who are in conspiracy with such public officers shall be under the jurisdiction of the Sandiganbayan. SEC. 6. Prosecution of Money Laundering. (a) Any person may be charged with and convicted of both the offense of money laundering and the unlawful activity as herein defined. (b) Any proceeding relating to the unlawful activity shall be given precedence over the prosecution of any offense or violation under this Act without prejudice to the freezing and other remedies provided. SEC. 7. Creation of Anti-Money Laundering Council (AMLC). The Anti-Money Laundering Council is hereby created and shall be composed of the Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner of the Insurance Commission and the Chairman of the Securities and Exchange Commission as members. The AMLC shall act unanimously in the discharge of its functions as defined hereunder: (1) to require and receive covered transaction reports from covered institutions; (2) to issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered
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determine the true identity of the owner of any monetary instrument or property subject of a covered transaction report or request for assistance from a foreign State, or believed by the Council, on the basis of substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity; (3) to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General; (4) to cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses; (5) to initiate investigations of covered transactions, money laundering activities and other violations of this Act; (6) to freeze any monetary instrument or property alleged to be proceeds of any unlawful activity; (7) to implement such measures as may be necessary and justified under this Act to counteract money laundering; (8) to receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations provided in this Act; (9) to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; and (10) to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including government-owned and -controlled corporations, in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering offenses and prosecution of offenders. SEC. 8. Creation of a Secretariat. The AMLC is hereby authorized to establish a secretariat to be headed by an Executive Director who shall be appointed by the Council for a term of five (5) years. He must be a member of the Philippine Bar, at least thirty-five (35) years of age and of good moral character, unquestionable integrity and known probity. All members of the Secretariat must have served for at least five (5) years either in the Insurance Commission, the Securities and Exchange Commission or the Bangko Sentral ng Pilipinas (BSP) and shall hold full-time permanent positions within the BSP. SEC. 9. Prevention of Money Laundering; Customer Identification Requirements and Record Keeping. (a) Customer Identification. - Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf. The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts. (b) Record Keeping. - All records of all transactions of covered institutions shall be maintained and safely stored for five (5) years from the dates of transactions. With respect to closed accounts, the records on customer identification, account files and business correspondence, shall be preserved and safely stored for at least five (5) years from the dates when they were closed. (c) Reporting of Covered Transactions. - Covered institutions shall report to the AMLC all covered transactions within five (5) working days from occurrence thereof, unless the Supervising Authority concerned prescribes a longer period not exceeding ten (10) working days. When reporting covered transactions to the AMLC, covered institutions and their officers, employees, representatives, agents, advisors, consultants or associates shall not be deemed to have violated Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791 and other similar laws, but are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person the fact that a covered transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned officer, employee, representative, agent, advisor, consultant or associate of the covered institution, shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any person for having made a covered transaction report in the regular performance of his duties and in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other Philippine law. When reporting covered transactions to the AMLC, covered institutions and their officers, employees, representatives, agents, advisors, consultants or associates are prohibited from communicating,
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representatives, agents, advisors, consultants or associates are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person, entity, the media, the fact that a covered transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of violation thereof, the concerned officer, employee, representative, agent, advisor, consultant or associate of the covered institution, or media shall be held criminally liable. SEC. 10. Authority to Freeze. Upon determination that probable cause exists that any deposit or similar account is in any way related to an unlawful activity, the AMLC may issue a freeze order, which shall be effective immediately, on the account for a period not exceeding fifteen (15) days. Notice to the depositor that his account has been frozen shall be issued simultaneously with the issuance of the freeze order. The depositor shall have seventy-two (72) hours upon receipt of the notice to explain why the freeze order should be lifted. The AMLC has seventy-two (72) hours to dispose of the depositors explanation. If it fails to act within seventy-two (72) hours from receipt of the depositors explanation, the freeze order shall automatically be dissolved. The fifteen (15)-day freeze order of the AMLC may be extended upon order of the court, provided that the fifteen (15)-day period shall be tolled pending the courts decision to extend the period. No court shall issue a temporary restraining order or writ of injunction against any freeze order issued by the AMLC except the Court of Appeals or the Supreme Court. SEC. 11. Authority to Inquire into Bank Deposits. Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of this Act when it has been established that there is probable cause that the deposits or investments involved are in any way related to a money laundering offense: Provided, That this provision shall not apply to deposits and investments made prior to the effectivity of this Act. SEC. 12 Forfeiture Provisions. (a) Civil Forfeiture. - When there is a covered transaction report made, and the court has, in a petition filed for the purpose ordered seizure of any monetary instrument or property, in whole or in part, directly or indirectly, related to said report, the Revised Rules of Court on civil forfeiture shall apply. (b) Claim on Forfeited Assets. - Where the court has issued an order of forfeiture of the monetary instrument or property in a criminal prosecution for any money laundering offense defined under Section 4 of this Act, the offender or any other person claiming an interest therein may apply, by verified petition, for a declaration that the same legitimately belongs to him and for segregation or exclusion of the monetary instrument or property corresponding thereto. The verified petition shall be filed with the court which rendered the judgment of conviction and order of forfeiture, within fifteen (15) days from the date of the order of forfeiture, in default of which the said order shall become final and executory. This provision shall apply in both civil and criminal forfeiture. (c) Payment in Lieu of Forfeiture. - Where the court has issued an order of forfeiture of the monetary instrument or property subject of a money laundering offense defined under Section 4, and said order cannot be enforced because any particular monetary instrument or property cannot, with due diligence, be located, or it has been substantially altered, destroyed, diminished in value or otherwise rendered worthless by any act or omission, directly or indirectly, attributable to the offender, or it has been concealed, removed, converted or otherwise transferred to prevent the same from being found or to avoid forfeiture thereof, or it is located outside the Philippines or has been placed or brought outside the jurisdiction of the court, or it has been commingled with other monetary instruments or property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be segregated for purposes of forfeiture, the court may, instead of enforcing the order of forfeiture of the monetary instrument or property or part thereof or interest therein, accordingly order the convicted offender to pay an amount equal to the value of said monetary instrument or property. This provision shall apply in both civil and criminal forfeiture. SEC. 13. Mutual Assistance among States. (a) Request for Assistance from a Foreign State. - Where a foreign State makes a request for assistance in the investigation or prosecution of a money laundering offense, the AMLC may execute the request or refuse to execute the same and inform the foreign State of any valid reason for not executing the request or for delaying the execution thereof. The principles of mutuality and reciprocity shall, for this purpose, be at all times recognized. (b) Powers of the AMLC to Act on a Request for Assistance from a Foreign State. - The AMLC may execute a request for assistance from a foreign State by: (1) tracking down, freezing, restraining and seizing assets alleged to be proceeds of any unlawful activity under the procedures laid down in this
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seizing assets alleged to be proceeds of any unlawful activity under the procedures laid down in this Act; (2) giving information needed by the foreign State within the procedures laid down in this Act; and(3) applying for an order of forfeiture of any monetary instrument or property in the court: Provided, That the court shall not issue such an order unless the application is accompanied by an authenticated copy of the order of a court in the requesting State ordering the forfeiture of said monetary instrument or property of a person who has been convicted of a money laundering offense in the requesting State, and a certification or an affidavit of a competent officer of the requesting State stating that the conviction and the order of forfeiture are final and that no further appeal lies in respect of either. (c) Obtaining Assistance from Foreign States. - The AMLC may make a request to any foreign State for assistance in (1) tracking down, freezing, restraining and seizing assets alleged to be proceeds of any unlawful activity; (2) obtaining information that it needs relating to anycovered transaction, money laundering offense or any other matter directly or indirectly related thereto; (3) to the extent allowed by the law of the foreign State, applying with the proper court therein for an order to enter any premises belonging to or in the possession or control of, any or all of the persons named in said request, and/or search any or all such persons named therein and/or remove any document, material or object named in said request: Provided, That the documents accompanying the request in support of the application have been duly authenticated in accordance with the applicable law or regulation of the foreign State; and (4) applying for an order of forfeiture of any monetary instrument or property in the proper court in the foreign State: Provided, That the request is accompanied by an authenticated copy of the order of the regional trial court ordering the forfeiture of said monetary instrument or property of a convicted offender and an affidavit of the clerk of court stating that the conviction and the order of forfeiture are final and that no further appeal lies in respect of either. (d) Limitations on Requests for Mutual Assistance. - The AMLC may refuse to comply with any request for assistance where the action sought by the request contravenes any provision of the Constitution or the execution of a request is likely to prejudice the national interest of the Philippines unless there is a treaty between the Philippines and the requesting State relating to the provision of assistance in relation to money laundering offenses. (e) Requ States. - A request for mutual assistance from a foreignirements for Requests for Mutual Assistance from Foreign State must (1) confirm that an investigation or prosecution is being conducted in respect of a money launderer named therein or that he has been convicted of any money laundering offense; (2) state the grounds on which any person is being investigated or prosecuted for money laundering or the details of his conviction; (3) give sufficient particulars as to the identity of said person; (4) give particulars sufficient to identify any covered institution believed to have any information, document, material or object which may be of assistance to the investigation or prosecution; (5) ask from the covered institution concerned any information, document, material or object which may be of assistance to the investigation or prosecution; (6) specify the manner in which and to whom said information, document, material or object obtained pursuant to said request, is to be produced; (7) give all the particulars necessary for the issuance by the court in the requested State of the writs, orders or processes needed by the requesting State; and (8) contain such other information as may assist in the execution of the request. (f) Authentication of Documents. - For purposes of this Section, a document is authenticated if the same is signed or certified by a judge, magistrate or equivalent officer in or of, the requesting State, and authenticated by the oath or affirmation of a witness or sealed with an official or public seal of a minister, secretary of State, or officer in or of, the government of the requesting State, or of the person administering the government or a department of the requesting territory, protectorate or colony. The certificate of authentication may also be made by a secretary of the embassy or legation, consul general, consul, vice consul, consular agent or any officer in the foreign service of the Philippines stationed in the foreign State in which the record is kept, and authenticated by the seal of his office. (g) Extradition. - The Philippines shall negotiate for the inclusion of money laundering offenses as herein defined among extraditable offenses in all future treaties. SEC. 14. Penal Provisions. (a) Penalties for the Crime of Money Laundering. The penalty of imprisonment ranging from seven (7) to fourteen (14) years and a fine of not less than Three million Philippine pesos (Php 3,000,000.00) but not more than twice the value of the monetary instrument or property involved in the offense, shall be imposed upon a person convicted under Section 4(a) of this Act. The penalty of imprisonment from four (4) to seven (7) years and a fine of not less than One million five hundred thousand Philippine pesos (Php1,500,000.00) but not more than Three million Philippine pesos (Php3,000,000.00), shall be imposed upon a person convicted under Section 4(b) of this Act. The penalty of imprisonment from six (6) months to four (4) years or a fine of not less than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand
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hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos (Php500,000.00), or both, shall be imposed on a person convicted under Section 4(c) of this Act. (b) Penalties for Failure to Keep Records. The penalty of imprisonment from six (6) months to one (1) year or a fine of not less than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos (Php500,000.00), or both, shall be imposed on a person convicted under Section 9(b) of this Act. (c) Malicious Reporting. Any person who, with malice, or in bad faith, reports or files a completely unwarranted or false information relative to money laundering transaction against any person shall be subject to a penalty of six (6) months to four (4) years imprisonment and a fine of not less than One hundred thousand Philippine pesos (Php100, 000.00) but not more than Five hundred thousand Philippine pesos (Php500, 000.00), at the discretion of the court: Provided, That the offender is not entitled to avail the benefits of the Probation Law. If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the responsible officers, as the case may be, who participated in the commission of the crime or who shall have knowingly permitted or failed to prevent its commission. If the offender is a juridical person, the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the offender is a public official or employee, he shall, in addition to the penalties prescribed herein, suffer perpetual or temporary absolute disqualification from office, as the case may be. Any public official or employee who is called upon to testify and refuses to do the same or purposely fails to testify shall suffer the same penalties prescribed herein. (d) Breach of Confidentiality. The punishment of imprisonment ranging from three (3) to eight (8) years and a fine of not less than Five hundred thousand Philippine pesos (Php500,000.00) but not more than One million Philippine pesos (Php1,000,000.00), shall be imposed on a person convicted for a violation under Section 9(c). SEC. 15. System of Incentives and Rewards. A system of special incentives and rewards is hereby established to be given to the appropriate government agency and its personnel that led and initiated an investigation, prosecution and conviction of persons involved in the offense penalized in Section 4 of this Act. SEC. 16. Prohibitions Against Political Harassment. This Act shall not be used for political persecution or harassment or as an instrument to hamper competition in trade and commerce. No case for money laundering may be filed against and no assets shall be frozen, attached or forfeited to the prejudice of a candidate for an electoral office during an election period. SEC. 17. Restitution. Restitution for any aggrieved party shall be governed by the provisions of the New Civil Code. SEC. 18. Implementing Rules and Regulations. Within thirty (30) days from the effectivity of this Act, the Bangko Sentral ng Pilipinas, the Insurance Commission and the Securities and Exchange Commission shall promulgate the rules and regulations to implement effectively the provisions of this Act. Said rules and regulations shall be submitted to the Congressional Oversight Committee for approval. Covered institutions shall formulate their respective money laundering prevention programs in accordance with this Act including, but not limited to, information dissemination on money laundering activities and its prevention, detection and reporting, and the training of responsible officers and personnel of covered institutions. SEC. 19. Congressional Oversight Committee. There is hereby created a Congressional Oversight Committee composed of seven (7) members from the Senate and seven (7) members from the House of Representatives. The members from the Senate shall be appointed by the Senate President based on the proportional representation of the parties or coalitions therein with at least two (2) Senators representing the minority. The members from the House of Representatives shall be appointed by the Speaker also based on proportional representation of the parties or coalitions therein with at least two (2) members representing the minority. The Oversight Committee shall have the power to promulgate its own rules, to oversee the implementation of this Act, and to review or revise the implementing rules issued by the Anti-Money Laundering Council within thirty (30) days from the promulgation of the said rules. SEC. 20. Appropriations Clause. The AMLC shall be provided with an initial appropriation of Twentyfive million Philippine pesos (Php25,000,000.00) to be drawn from the national government. Appropriations for the succeeding years shall be included in the General Appropriations Act. SEC. 21. Separability Clause. If any provision or section of this Act or the application thereof to any person or circumstance is held to be invalid, the other provisions or sections of this Act, and the application of such provision or section to other persons or circumstances, shall not be affected thereby.
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thereby. SEC. 22. Repealing Clause. All laws, decrees, executive orders, rules and regulations or parts thereof, including the relevant provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791, as amended and other similar laws, as are inconsistent with this Act, are hereby repealed, amended or modified accordingly. SEC. 23. Effectivity. This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation. The provisions of this Act shall not apply to deposits and investments made prior to its effectivity. Approved, FRANKLIN M. DRILON JOSE DE VENECIA JR. President of the Senate Speaker of the House of Representatives This Act which is a consolidation of House Bill No. 3083 and Senate Bill No. 1745 was finally passed by the House of Representatives and the Senate on September 29, 2001. OSCAR G. YABES ROBERTO P. NAZARENO Secretary of the Senate Secretary General House of Representatives Approved: GLORIA MACAPAGAL-ARROYO President of the Philippines
Pasted from <http://www.amlc.gov.ph/archive/RA9160.html>

RA 9194

Republic of the Philippines Congress of the Philippines Metro Manila Twelfth Congress First Regular Session
Begun and held in Metro Manila, on Monday, the twenty-second day of July, two thousand two.

[ REPUBLIC ACT NO. 9194 ] AN ACT AMENDING REPUBLIC ACT NO. 9160, OTHERWISE KNOWN AS THE "ANTI-MONEY LAUNDERING ACT OF 2001"

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
SECTION 1. Section 3, paragraph (b), of Republic Act No. 9160 is hereby amended as follows: "(b) 'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of Five hundred thousand pesos (P500,000.00) within one (1) banking day." SEC. 2. Section 3 of the same Act is further amended by inserting between paragraphs (b) and (c) a new paragraph designated as (b-1) to read as follows: "(b-1) 'Suspicious transaction' are transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist: "1. there is no underlying legal or trade obligation, purpose or economic justification; "2. the client is not properly identified; "3. the amount involved is not commensurate with the business or financial capacity of the client; "4. taking into account all known circumstances, it may be perceived that the clients transaction is structured in order to avoid being the subject of reporting requirements under the Act; "5. any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the clients past transactions with the covered institution; "6. the transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or "7. any transaction that is similar or analogous to any of the foregoing." SEC. 3. Section 3(i) of the same Act is further amended to read as follows: "(i) 'Unlawful activity' refers to any act or omission or series or combination thereof involving or having direct relation to the following: "(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal
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"(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended; "(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002; "(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act; "(4) Plunder under Republic Act No. 7080, as amended; "(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; "(6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602; "(7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532; "(8) Qualified theft under Article 310 of the Revised Penal Code, as amended; "(9) Swindling under Article 315 of the Revised Penal Code, as amended; "(10) Smuggling under Republic Act Nos. 455 and 1937; "(11) Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000; "(12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets; "(13) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; "(14) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries." SEC. 4. Section 4 of the same Act is hereby amended to read as follows: "SEC. 4. Money Laundering Offense. Money laundering is a crime whereby the proceeds of an unlawful activity as herein defined are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following: "(a) Any person knowing that any 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 of money laundering referred to in paragraph (a) above. "(c) Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so." SEC. 5. Section 7 of the same Act is hereby amended as follows: "SEC. 7. Creation of Anti-Money Laundering Council (AMLC). The Anti-Money Laundering Council is hereby created and shall be composed of the Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner of the Insurance Commission and the Chairman of the Securities and Exchange Commission as members. The AMLC shall act unanimously in the discharge of its functions as defined hereunder: "(1) to require and receive covered or suspicious transaction reports from covered institutions; "(2) to issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report or request for assistance from a foreign State, or believed by the Council, on the basis of substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity. "(3) to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General; "(4) to cause the filing of complaints with the Department of Justice 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, money laundering activities, and other violations of this Act; "(6) to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity as defined in Section 3(i) hereof; "(7) to implement such measures as may be necessary and justified under this Act to counteract money laundering; "(8) to receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations provided in this Act; "(9) to develop educational programs on the pernicious effects of money laundering, the methods
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own anti-money laundering operations provided in this Act; "(9) to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; "(10) to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including government-owned and -controlled corporations, in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering offenses and prosecution of offenders; and "(11) to impose administrative sanctions for the violation of laws, rules, regulations and orders and resolutions issued pursuant thereto." SEC. 6. Section 9(c) of the same Act is hereby amended to read as follows: "(c) Reporting of Covered and Suspicious Transactions. Covered institutions shall report to the AMLC all covered transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the Supervising Authority prescribes a longer period not exceeding ten (10) working days. "Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be required to report the same as a suspicious transaction. "When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees shall not be deemed to have violated Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791 and other similar laws, but are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned officer and employee of the covered institution shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his duties in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other law. "When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees are prohibited from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered institution and media shall be held criminally liable." SEC. 7. Section 10 of the same Act is hereby amended to read as follows: "SEC. 10. Freezing of Monetary Instrument or Property. The Court of Appeals, upon application ex parte by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order shall be for a period of twenty (20) days unless extended by the court." SEC. 8. Section 11 of the same Act is hereby amended to read as follows: "SEC. 11. Authority to Inquire into Bank Deposits. Notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of this Act, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense under Section 4 hereof; except that no court order shall be required in cases involving unlawful activities defined in Sections 3(i)(1), (2) and (12). "To ensure compliance with this Act, the Bangko Sentral ng Pilipinas (BSP) may inquire into or examine any deposit or investment with any banking institution or non -bank financial institution when the examination is made in the course of a periodic or special examination, in accordance with the rules of examination of the BSP." SEC. 9. Section 14, paragraphs (c) and (d) of the same Act is hereby amended to read as follows: "(c) Malicious Reporting. Any person who, with malice, or in bad faith, reports or files a completely unwarranted or false information relative to money laundering transaction against any person shall be subject to a penalty of six (6) months to four (4) years imprisonment and a fine of not less than One hundred thousand Philippine pesos (Php 100,000.00) but not more than Five hundred thousand Philippine pesos (Php 500,000.00), at the discretion of the court: Provided, That the offender is not entitled to avail the benefits of the Probation Law. "If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the responsible officers, as the case may be, who participated in, or allowed by their
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imposed upon the responsible officers, as the case may be, who participated in, or allowed by their gross negligence, the commission of the crime. If the offender is a juridical person, the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the offender is a public official or employee, he shall, in addition to the penalties prescribed herein, suffer perpetual or temporary absolute disqualification from office, as the case may be. "Any public official or employee who is called upon to testify and refuses to do the same or purposely fails to testify shall suffer the same penalties prescribed herein. "(d) Breach of Confidentiality. The punishment of imprisonment ranging from three (3) to eight (8) years and a fine of not less than Five hundred thousand Philippine pesos (Php 500,000.00) but not more than One million Philippine pesos (Php 1,000,000.00) shall be imposed on a person convicted for a violation under Section 9(c). In the case of a breach of confidentiality that is published or reported by media, the responsible reporter, writer, president, publisher, manager and editor-inchief shall be liable under this Act." SEC. 10. Section 15 of Republic Act No. 9160 is hereby deleted. SEC. 11. Section 23 of the same Act is hereby amended to read as follows: "SEC. 23. Effectivity. This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation." SEC. 12. Transitory Provision. Existing freeze orders issued by the AMLC shall remain in force for a period of thirty (30) days after the effectivity of this Act, unless extended by the Court of Appeals. SEC. 13. Effectivity. This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation. Approved,
(Sgd.) (Sgd.) FRANKLIN M. DRILON JOSE DE VENECIA JR. President of the Senate Speaker of the House of Representatives This Act which is a consolidation of House Bill No. 5655 and Senate Bill No. 2419 was finally passed by the House of Representatives and the Senate on March 5, 2003. (Sgd.) (Sgd.) OSCAR G. YABES ROBERTO P. NAZARENO Secretary of the Senate Secretary General House of Representatives Approved: March 7, 2003

(Sgd.) GLORIA MACAPAGAL-ARROYO President of the Philippines

Copyright 2004 AMLC Secretariat. All Rights Reserved.
Pasted from <http://www.amlc.gov.ph/archive/RA9194.html>

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Derivatives, Hedging and stuff from net

Saturday, September 19, 2009 3:10 PM

I. Hedging and Hedging Instruments: Some key concepts 1. What is a derivative? A derivative can be defined as a financial instrument that primarily derives its value from the performance of an underlying variable such as interest rates, FX rates, or financial instrument prices. A user of a derivatives instrument may enter into a derivatives transaction for several economic purposes such as hedging, managing capital or funding costs, and yield enhancement, among others. For a growing number of banking organizations, derivatives positiontaking and risk arbitrage. 2. What is hedging? Hedging is similar to an insurance coverage that people acquire to protect themselves from incurring possible losses due to unfavorable event taking place in the future.3 Hedging strategies are designed to reduce the volatility of earnings or to stabilize the value of a particular asset and liability. As business operations and activities are generally exposed to a wide array of risks (e.g., adverse movements in financial asset prices such as foreign exchange rates, interest rates, commodity prices and equity prices), the practice of hedging has grown across various financial markets. In the case of FX transactions, an FX hedge takes the form of a transaction entered into to reduce the risk of sharp movements in the prices of foreign currencies. For example, an exporter who is vulnerable to an appreciation of the peso can partially create a natural hedge if it can pay off its expenses in dollars. Alternately, an exporter can borrow dollars, convert it to pesos at the current spot rate to meet current peso funding requirements and pay off future dollar obligations using its dollar export proceeds. In these scenarios, the exporter is able to minimize its FX risks such that future movements in foreign exchange rates will not have a significant impact on its cash flows. 3. What are the advantages of hedging? From a risk management perspective, hedging allows financial institutions, corporations and other entities to identify, isolate, and manage separately or on a portfolio basis, the risks in their balance sheets arising from financial instruments and commodities.4 When designed appropriately, hedging can offer economic agents efficient and effective methods for reducing certain risks as well as financing costs. In particular, a hedging strategy can be designed to minimize ones exposure to unwanted risks, while allowing the business to gain or profit from its core operations. An exporter may not have the expertise, time and resources to manage unacceptable exposures to foreign exchange rate movements. Hedging strategies reduce these unwanted exposures so that an exporter can concentrate on its core business operations rather than on the volatility in the foreign exchange market. For instance, exporters can enter into derivatives transactions that allow them to sell dollars at a fixed price at a future date. In this case, hedging reduces cash flow uncertainties, improves financial decisionmaking, and facilitates cash conservation and planning for capital needs. 4. What are the disadvantages of hedging? Designing hedging strategies requires careful planning and good understanding of the transactions involved. A poorly executed hedging strategy may result in incurring additional unacceptable risks. While hedging transactions are intended to reduce specific risks, e.g. FX risk, these transactions do not eliminate all risks. In addition, hedging transactions may involve costs. Specifically for derivatives, costs may take the form of fees or reduced opportunity to gain from favorable movements. The fees may include premiums paid from transferring the risk of loss due to adverse movements in asset prices to a counterparty that is willing to carry the risk. Costs can also be incurred from the reduced opportunity to gain from favorable movements. In the case of a forward transaction, an exporter that fixes the price of its dollar against a peso appreciation, say at P41/US$1, foregoes the opportunity to gain if the peso depreciates to P42/US$1 and would have been better off had he not entered into a hedging transaction. However, the loss of being on the disadvantaged side of the contract can be mitigated if an exporter buys insurance or an FX option to exercise the contract. The cost would only be limited to the premiums paid for the FX option. 5. What are the basic hedging instruments? Basic hedging instruments include forwards/futures, swaps, and options. Forwards and options are widely used for hedging.5 6. What is a forward agreement? A forward agreement is a contract that commits one party to buy (pay) and the other to sell (receive) a given quantity of an asset for a fixed price on a specified future date. When forwards are traded in an exchange, these forward agreements are called futures. In the Philippines, the most common forward contracts include: FX Forward Contract. This refers to an agreement for delayed delivery of a foreign currency in which the buyer agrees to purchase and the seller agrees to deliver a particular amount at a specified future date and at a pre -arranged exchange rate. It has the effect of locking -in the price of the dollar as of deal date to protect the investor against an appreciating peso. However, if the peso depreciates or the price of a dollar goes higher than the fixed price, the exporter will not be able to benefit from hedging the transaction. For example, an exporter sells US$100,000 to a local bank one year forward or one year from now. The forward rate is P41.00/US$1 or the rate at which the dollar can be exchanged into pesos. One year after, the exporter shall deliver the US$100,000 to the local bank and the local bank shall pay the exporter P4.1 million. Non-deliverable Forward (NDF). It has the characteristics of a regular FX forward but the transaction is net-settled; i.e. there is no principal exchange of dollar versus the peso. The settlement will be just the net peso difference between the fixed forward rate and the spot rate at maturity date, multiplied by the agreed principal amount. Such transaction provides cash flow flexibility. Using the previous example, if the peso-dollar exchange rate appreciates to P39.00/US$1 one year after, the bank shall pay the exporter P200,000 or the difference between the forward rate of P41.00/US$1 against the spot rate of P39.00/US$1, multiplied by the US$100,000 that the exporter agreed to sell one year forward. There is no actual delivery of the US dollars from the exporter and of the pesos from the banks. On the other hand, if the peso depreciates to P42.00/US$1 at maturity date, the exporter shall give the bank P100,000 which is equivalent to the difference between the forward rate of P41.00/US$1 against the spot rate of P42.00/US$1, multiplied by the US$100,000 that the exporter agreed to sell one year forward. Meanwhile, the exporter can convert his dollar earnings at the depreciated rate of P42.00/US$1 and offset the net difference in the NDF transaction that he paid to his bank. 7. What are FX swaps? FX swaps refer to an agreement involving an initial exchange of two currencies, usually at the prevailing spot rate, and a simultaneous commitment to reverse the exchange of the same two currencies at a date further in the future at a rate (different from the rate applied to the initial exchange) agreed on deal date. For example, a company needs to acquire dollars and another company needs to acquire pesos for a certain period of time. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. 8. What is an FX option?

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An FX option is a financial derivatives contract that provides the holder the right, but not the obligation, to buy or sell foreign currency, for a fee or premium, at a specified exchange rate at a specified future date. There are two types of options: 1) the call option or the right, not the obligation, to buy a currency; and 2) put option or the right, not the obligation, to sell a currency. There are also two parties in an option transaction: 1) option buyer (also called the holder of the option) who enjoys the right to exercise and the right not to exercise the option (i.e., let the option lapse); and 2) option writer, has the obligation to deal at the strike price if the buyer elects to exercise the option (also known as option seller). The strike price is the rate at which the purchaser may exercise or settle an option contract. In the case of an exporter, an FX option gives him the right but not the obligation to sell or buy a currency at a future date at a specified price. This has the potential for limited losses and unlimited gains since the cost to exporters for protecting themselves from adverse movements in the FX market is only the option premium while giving the exporter the option not to exercise the transaction if market movement goes against it. To illustrate, an exporter who wants to hedge against a possible strengthening of the peso can buy a Put Option with the following terms: 1) strike price of P41.00/US$1; 2) spot rate at the start of transaction is P42.00/US$1; 3) expiry of 1 month; and 4) premium of P0.50 per dollar hedged. If upon maturity (a month from now), the peso appreciates to P41.50/US$1 (the break -even rate which covers the premium paid by the option buyer), the exporter shall exercise his option to sell the dollars at the strike price. If the peso depreciates to P42.50/US$1, the option expires and his loss is limited to the amount of the premium only. II. Developments in the Philippine Derivatives Market 9. How do the recent Philippine derivatives market movements compare with past developments? In the past, derivatives were not widely used in the Philippines, except for foreign exchange swaps and forwards. However, during the 1997 Asian crisis, expanded commercial banks increased their derivatives transactions to hedge against foreign exchange risks in response to a more volatile financial environment. Foreign capital inflows to the Philippines have generally increased in recent years. This reflects the global integration of the Philippine economy as well as the improved economic fundamentals and reforms undertaken in the country to strengthen, develop and liberalize the financial system. The growth in capital flows are also driven, in part, by the deepening of local markets as well as the introduction of new instruments in the equity and derivatives markets. In turn, as foreign capital flows increased, the FX derivatives market in the Philippines has also grown significantly. These developments in the capital and financial markets translated to a marked increase in the outstanding FX forwards, options and swaps, which stood at around US$57.3 billion as of December 2007 compared to US$15.3 billion in 2000 (Figure 1). The bulk of the outstanding derivatives in 2007 are comprised of FX forwards at 83.6 percent (Figures 2.a and 2.b). Furthermore, the share of interest swaps almost doubled to 14.0 percent in 2007 from 7.6 percent 10. What are the BSP regulations covering derivatives activities of banks? The BSP supports the development of the Philippine financial market by providing banks and their clients with greater opportunities for financial risk management and investment diversification through the prudent use of derivatives. Consistent with this policy, the BSP has been continuously improving the regulatory framework for derivatives activities. More recently, the BSP has adopted a comprehensive reform agenda for the liberalization of FX regulatory framework and regulations for derivatives activities undertaken by banks. Specifically, the BSP issued Circular No. 594 on 8 January 2008, which revised the regulations on derivatives activities undertaken by banks. 6 This issuance superseded previous issuances on derivatives (e.g. Circular Nos. 102 and 297). The revised guidelines seek to: Promote the growth of the domestic capital markets by expanding the range of available derivatives products for banks and their clients and by providing a framework for organized derivatives market; Strengthen the supervisory framework for derivatives activities undertaken by banks; Protect the investing public by providing sales and marketing guidelines, including client suitability procedures and risk disclosure requirements for banks offering derivatives products to clients. 11. What are the BSP regulations that support the development of hedging products? To promote the growth of the domestic capital markets, current regulations on derivatives expanded the range of available derivatives products, including hedging products. In particular, universal banks and commercial banks are allowed, among others, to offer FX forwards, FX swaps and currency swaps with tenor of three years or less without need for prior BSP approval. Previous to the revised guidelines, only FX forwards and FX swaps with tenor of one year or less were allowed without prior BSP approval. For other hedging products such as options, banks need additional derivatives authority. 12. What are the responsibilities of banks offering hedging facilities towards the endusers? The sales and marketing guidelines under BSP Circular No. 594 require banks to ensure that: (1) their clients understand the nature of the transaction; (2) the transaction meets the clients objectives and risk tolerance and (3) there is sufficient, accurate and comprehensible information disclosure regarding the products offered. Furthermore, banks offering hedging facilities should ensure that the derivatives are appropriate for their clients hedging needs through a client suitability process. The banks are required to obtain client information about financial situation, experience, and objectives relevant to their desired hedging products. 13. What are the initiatives to develop the hedging market in the Philippines? The Development Bank of the Philippines (DBP), the Department of Trade and Industry (DTI) and the Department of Finance (DOF) conceptualized a hedging program for exporters on 28 June 2007. The hedging program aims to shield exporters from further exchange rate losses through the provision of foreign exchange insurance and forward foreign exchange rate protection products. Total availment under the said program has increased from US$113,000 as of end-September 2007 to US$12.4 million as of 24 March 2008. In support of the governments objective to help exporters cope with the more challenging global economic developments, the BSP hosted a conference on hedging facilities for exporters on 3 October 2007 to familiarize merchandise and service exporters with various hedging products available in the market as well as with the BSPs regulations on hedging transactions and relevant foreign exchange policies. The BSP has rolled out this hedging conference to the regions in the first semester of 2008 to provide information on hedging and other foreign exchange measures.

6 Circular No. 594 is consistent with Circular No. 561 dated 8 March 2007 and Circular No. 591 dated 27 December 2007 as part of the two-phase reform agenda for the FX regulatory framework. The first phase saw the increase in FX position limits and relaxation of allowable non-trade FX purchases without supporting documents. These measures were aimed at giving banks more flexibility to expand their FX holdings and thus, enhance their capability to service the increasing FX requirements of both the corporate and consumer sectors. The second phase focused largely on two objectives: first, to promote greater integration with international capital markets and risk diversification supportive of an expanding economy with global linkages; and second, to streamline the documentation and reporting requirements on the sale of foreign exchange by banks. In addition, the second phase also expanded the use of FX swaps involving the Philippine peso.

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