EXAM POINTERS

I. CREDIT TRANSACTIONS BASIC PRINCIPLES

Art. 1933 By the contract of loan, one of the parties delivers to

another, either something not consumable so that the latter
may use the same for a certain time and return it, in which
case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay

interest.

In commodatum the bailor retains the ownership of the thing

loaned, while in simple loan, ownership passes to the
borrower. (1740a)

Basis Commodatum Mutuum (Simple loan)

1. Subject matter -involves something not -money or other consumable
consumable thing
2. Transfer of -ownership of the thing loaned is -ownership is transferred to the
ownership retained by the lender borrower
3. Consideration -essentially gratuitous -may be gratuitous or onerous,
that is, with stipulation to pay
interest
4. Return of the -the borrower must return the -the borrower need only pay the
thing same thing loaned same amount of the same kind
and quality
5. Nature of the -may involve real or personal -refers only to personal property
thing property
transferred
6. Purpose -a loan for use or temporary -a loan for consumption
possession
7. Demand of the -bailor may demand the return of -the lender may not demand its
thing loaned the thing loaned before the return before the lapse of the
expiration of the term in case of term agreed upon
urgent need
8. Loss of the -suffered by the bailor -borrower suffers the loss even
thing if caused exclusively by a
fortuitous event and he is not,
therefore, discharged from his
duty to pay
9. Nature of -purely personal -not personal
contract

Essentiality of delivery

Art. 1934 An accepted promise to deliver something by way of

commodatum or simple loan is binding upon parties, but the
commodatum or simple loan itself shall not be perfected until
the delivery of the object of the contract.

Catholic Vicar vs. CA

Facts:
- 1962: Catholic Vicar Apostolic of the Mountain Province (Vicar),
petitioner, filed with the court an application for the registration of title
over lots 1, 2, 3 and 4 situated in Poblacion Central, Benguet, said lots
being used as sites of the Catholic Church, building, convents, high
school building, school gymnasium, dormitories, social hall and
stonewalls.

- 1963: Heirs of Juan Valdez and Heirs of Egmidio Octaviano claimed

that they have ownership over lots 1, 2 and 3. (2 separate civil cases)

- 1965: The land registration court confirmed the registrable title of

Vicar to lots 1 , 2, 3 and 4. Upon appeal by the private respondents
(heirs), the decision of the lower court was reversed. Title for lots 2 and
3 were cancelled.

- VICAR filed with the Supreme Court a petition for review on certiorari
of the decision of the Court of Appeals dismissing his application for
registration of Lots 2 and 3.

- During trial, the Heirs of Octaviano presented one (1) witness, who
testified on the alleged ownership of the land in question (Lot 3) by
their predecessor-in-interest, Egmidio Octaviano; his written demand to
Vicar for the return of the land to them; and the reasonable rentals for
the use of the land at P10,000 per month. On the other hand, Vicar
presented the Register of Deeds for the Province of Benguet, Atty. Sison,
who testified that the land in question is not covered by any title in the
name of Egmidio Octaviano or any of the heirs. Vicar dispensed with the
testimony of Mons. Brasseur when the heirs admitted that the witness if
called to the witness stand, would testify that Vicar has been in
possession of Lot 3, for 75 years continuously and peacefully and has
constructed permanent structures thereon.

Issue: WON Vicar had been in possession of lots 2 and 3 merely as bailee
borrower in commodatum, a gratuitous loan for use.

Held: YES.

Private respondents were able to prove that their predecessors' house

was borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the
petitioner the bailee.

The bailees' failure to return the subject matter of commodatum to

the bailor did not mean adverse possession on the part of the
borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when
it declared the lots for taxation purposes. The action of petitioner Vicar
by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.

The Court of Appeals found that petitioner Vicar did not meet the
requirement of 30 years possession for acquisitive prescription over
Lots 2 and 3. Neither did it satisfy the requirement of 10 years
possession for ordinary acquisitive prescription because of the absence
of just title. The appellate court did not believe the findings of the trial
court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3
was acquired also by purchase from Egmidio Octaviano by petitioner
Vicar because there was absolutely no documentary evidence to
support the same and the alleged purchases were never mentioned in
the application for registration.
 Producers vs. CA

FACTS: Vives was asked by his friend Sanchez to help her friend
Doronilla, in incorporating his business, the Sterela Marketing and
Services (Sterela), by depositing in a bank a certain amount of money
in the bank account of Sterela.

Angeles assured Vives that he could withdraw his money from said
account within a months time. Vives issued a check in the amount of
P200,000.00 in favor of Sterela. Upon learning that Sterela was no
longer holding office in the address previously given to him, Vives went
to the Bank to verify if their money was still intact. He learned that the
money in the account had been withdrawn by Doronilla, and that only
P90,000.00 remained therein.

Vives instituted an action for recovery of sum of money.

ISSUE: Whether or not the transaction between Doronilla and Vives

was one of simple loan

RULING: The transaction between Vives and Doronilla was a

commodatum and not a mutuum.

Article 1933 of the Civil Code seems to imply that if the subject of the
contract is a consumable thing, such as money, the contract would be a
mutuum. However, there are some instances where a commodatum
may have for its object a consumable thing.

Article 1936 of the Civil Code provides: Consumable goods

may be the subject of commodatum if the purpose of the contract is
not the consumption of the object, as when it is merely for
exhibition.

The rule is that the intention of the parties thereto shall be

accorded primordial consideration in determining the actual character
of a contract. In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.
 In this case, the evidence shows that Vives agreed to deposit his
money in the savings account of Sterela specifically for the purpose of
making it appear that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be returned
within thirty (30) days. Vives merely accommodated Doronilla by
lending his money without consideration, as a favor to his good friend
Sanchez. It was however clear to the parties to the transaction that the
money would not be removed from Sterelas savings account and would
be returned to private respondent after 30 days.

II. HISTORY OF INTEREST/USURY LAW

General Rule: Under Article 1956 of the Civil Code, no interest shall be due
unless it has been expressly stipulated in writing. Jurisprudence on the
matter also holds that for interest to be due and payable, two conditions
must concur: a) express stipulation for the payment of interest; and b)
the agreement to pay interest is reduced in writing.

Exceptions
Indemnity for damages debtor in delay must pay legal interest even if
there is no stipulation

Interest accruing from unpaid interest interest due shall earn interest
from the time it is judicially demanded although the obligation may be
silent on this point (2212)

LAW EFFECTIVITY INTEREST RATE

ACT. No. 2655 May 1, 1916 In the absence of a
written stipulation,
the interest rate to be
imposed in judgments
involving a
forbearance of credit
shall be 12% per
annum
CB 416 July 29, 1974 12%
CB 905 Jan. 1, 1983 12 % and 6 %
6% per annum
transactions other than
loans/forbearance of money

Examples: contract of sale,

monetary award for piece of work

If there is no demand but only

delay, apply the 6% per annum
interest. There is forbearance when
there is demand and delay.

12% per annum delay in

paying loans, forbearance
of money, judgments
involving loans or
forbearance in absence of
stipulation computed from
date of default (CB Circular
416)

CB 799 June 21, 2013 The rate of interest for

the loan or
forbearance of any
money, goods or
credits and the rate
allowed in judgments,
in the absence of an
express contract as to
such rate of interest,
shall be six percent
(6%) per annum.

Note: At present, usury has been legally non-existent in view of the

suspension of the Usury Law by Central Bank Circular No. 905. Even so,
not all interest rates levied upon loans are permitted by the courts as
they have the power to equitably reduce unreasonable interest rates.

In Trade & Investment Development Corporation of the Philippines v.

Roblett Industrial Construction Corporation, it was held:

While the Court recognizes the right of the parties to enter into
contracts and who are expected to comply with their terms and
obligations, this rule is not absolute. Stipulated interest rates are
 illegal if they are unconscionable and the Court is allowed to
temper interest rates when necessary.

III. BANK MISSION/VISSION Vis--vis FINANCE

CHARGES/TRUTH IN LENDING ACT

Sample bank Vision Statement

We shall be at the forefront of the leasing and financing industry in the

Philippines and in the Asia Pacific Region. We shall have the most
extensive market reach and shall be composed of highly trained,
technically competent and upright professionals working as a team and
contributing to the growth of the nation and the communities we serve.
Recognizing that the customer is the focus of our activities, we shall lead
the industry by providing modern and relevant financial services which
exceed their expectations.

Mission Statement

We are in business for our customers, shareholders and employees. We

shall deliver creatively innovative products and cross-sell the BDO
Unibank Groups services supported by procedures, systems and
processes which will ensure utmost customer satisfaction. We shall
recognize and reward excellence in our employees and shall provide an
environment conducive to maximizing their potentials as we work
cohesively as a team. We shall generate consistently high returns for our
shareholders.

IV. SURETIES/ACCOMMODATION PARTY

Guaranty vs Suretyship

Guaranty Suretyship
They are alike in that each promises to answer for the debt, default or
miscarriage of another
-liability depends upon an -assumes the liability as a regular
independent agreement to pay the party to the undertaking
obligation if the principal debtor fails
to do so
 -collateral undertaking -charged as an original promisor
-secondarily liable -primarily liable
-insurer of the solvency of the debtor -insurer of the debt

ACCOMODATION PARTY: One who has signed the instrument as

(MADI) maker, drawer, indorser, acceptor, without receiving any value
therefore and for the purpose of lending his name to some other person

Requisites:
1. He must be a party to the instrument, signing as maker, acceptor,
indorser, or drawer
2. He must not receive any value therefore
3. He must sign for the purpose of lending his name or credit.

RIGHTS AND LEGAL POSITION OF AN ACCOMODATION PARTY

The accomodation party is generally regarded as a surety for the

party accommodated.

When the accomodation parties make payment to the holder of the

notes, they have the right to sue the accomodated party for
reimbursement since the relation between them is in effect that
of a principal and sureties, the accomodation parties being the
sureties

LIABILITY OF THE ACCOMODATION PARTY

The accomodation party is liable on the instrument to a holder

in value, notwithstanding such holder at any time of the taking of
the instrument knew him to be only an accomodation party

The accomodation party doesn't receive any valuable consideration

for the instrument he signs but he is liable to a holder for value as if
the contract wasn't for accomodation

NOTE:

CORPORATIONS ARE NOT LIABLE AS ACCOMODATION PARTIES EVEN TO

HOLDERS FOR VALUE
OFFICERS SIGNING FOR CORPORATION AS ACCOMODATION PARTY
WITHOUT AUTHORITY TO DO SO FOR THEIR INDIVIDUAL DEBTS OR
TRANSACTIONS ARE PERSONALLY LIABLE THEREON

HOLDER MUST OTHERWISE BE A HOLDER IN DUE COURSE

ACCOMODATION PARTY MAY ACCOMODATE ONE WHO IS NOT A PARTY TO

THE INSTRUMENT

ACCOMODATION PARTY CAN INTERPOSE DEFENSE OF WANT OF

CONSIDERATION AGAINST ONE NOT HOLDER IN DUE COURSE.

V. PAWNSHOP/COMPANY LENDING ACT

-refer below

VI. TRADITIONAL SECURED LOANS

Pledge Chattel Mortgage Real Mortgage Antichresis

Subject Matter Movables Incorporeal Movables Incorporeal Immovables Fruits of real property
rights rights Alienable real rights

Added Requisite for Delivery of SM to Registration in CM Public Instrument Principal and interest
Validity pledgee Registry must be in writing

Essence Pledgee retains CM follows the property RM creates a real right Cr editor enjoys fruits
possession until and encumbrance until payment of debt
payment and interest

Default options Art. 2112 Act 1508 Act 1508 or Rules of Court Rules of Court

VII. LETTERS OF CREDIT/TRUST RECEIPT

Q: What is a Letter of Credit (L/C)?

A: It is any arrangement, however named or described, whereby a

bank (issuing bank), acting at the request and on the instructions of a
customer (applicant) or on its own behalf, binds itself to: PAN
 1. Pay to the order of, or accept and pay drafts drawn by a third
party (Beneficiary), or

2. Authorize another bank to pay or to accept and pay such drafts,

or

3. Authorizes another bank to Negotiate, against stipulated

documents,
Provided, the terms and conditions of the credit are complied with
(Art. 2, Uniform Customs & Practice for Documentary Credits.)

Q: Distinguish an irrevocable L/C from a confirmed L/C.

A: In an irrevocable L/C, the issuing bank may not, without the consent
of the beneficiary and the applicant, revoke its undertaking under the
letter, whereas, in a confirmed L/C, the correspondent bank gives an
absolute assurance to the beneficiary that it will undertake the issuing
banks obligation as its own according to the terms and condition of the
credit (Prudential Bank and Trust Company v. IAC, G.R. No. 74886, Dec.
8, 1992).

Q: Can a court order the release to the applicant the proceeds of an

irrevocable letter of credit without the consent of the beneficiary?
A: No, such order violates the irrevocable nature of the L/C. The terms
of an irrevocable letter of credit cannot be changed without the consent
of the parties, particularly the beneficiary thereof (Phil. Virginia
Tobacco Administration v. De Los Angeles, G.R. No. L-27829, Aug. 19,
1988).

Q: In case the buyer was not able to pay its obligation under the
letter of credit, can the bank take possession over the goods
covered by the said L/C?

A: No. The opening of a L/C does not vest ownership of the goods in the
bank in the absence of a trust receipt agreement. A letter of credit is a
mere financial device developed by merchants as a convenient and
relatively safe mode of dealing with the 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 (Transfield Philippines, Inc. v. Luzon Hydro
Corporation, G.R. No. 146717, Nov. 22, 2004)

Q: Is an issuing bank a guarantor?

A: No, the concept of guarantee vis-a-vis the concept of irrevocable L/C
is inconsistent with each other. L/Cs are primary obligations and not
security contracts and while they are security arrangements, they are
not converted thereby into contracts of guaranty (MWSS v. Hon. Daway,
G.R. No. 160732, June 21, 2004).

Q: Are L/Cs considered as negotiable instruments?

A: No. A L/C is not considered a negotiable instrument. However, drafts
issued in connection with L/Cs can be considered negotiable
instruments. The presumption that the drafts drawn in connection with
the L/Cs have sufficient consideration applies (Lee v. CA, G.R. No.
117913, Feb. 1, 2002).

Q: What is the Doctrine of Independence/ Independence Principle?

A: The relationship of the buyer and the bank is separate and distinct
from the relationship of the buyer and seller in the main contract; the
bank is not required to investigate if the contract underlying the
L/C has been fulfilled or not because in transactions involving L/C,
banks deal only with documents and not goods (BPI v. De Reny Fabric
Industries, Inc)

Q: What is the exception to the independence principle?

A: The Fraud Exception Principle. It provides that the
untruthfulness of a certificate accompanying a demand for payment
under a standby letter of credit may qualify as fraud sufficient to
support an injunction against payment.

This principle refers to fraud in relation with the independent purpose

or character of the L/C and not only fraud in the performance of the
obligation or contract supporting the letter of credit (Transfield v.
Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).

Q: What is the remedy for such fraudulent abuse under this

principle?
A: Injunction against payment is the remedy; provided the requisites
enumerated immediately below this item are present.

Q: What is the doctrine of strict compliance?

A: The documents tendered by the seller/beneficiary must strictly
conform to the terms of the L/C. The tender of documents must include
all documents required by the letter. Thus, a correspondent bank
which departs from what has been stipulated under the L/C 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 (Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr.
30, 1991).

TRUST RECEIPTS LAW (P.D. 115)

Q: What is a trust receipt (TR) transaction?

A: It is any transaction between the entruster and entrustee:

1. Whereby the entruster who owns or holds title or security interests

over certain specified goods, documents or instrument (GDI), releases
the same to the possession of entrustee upon the latters execution of a
TR agreement.

2. Wherein the entrustee binds himself to hold the GDI in trust for the
entruster and, in case of default,

a. to sell or otherwise dispose such GDI with the obligation to turn over
to the entruster the proceeds to the extent of the amount owing to it or
b. to turn over the GDI itself if not sold or otherwise disposed of in
accordance with the terms and conditions specified in the TR.

Q: What are the two features of a TR transaction?

A: 1. Loan feature - is brought about by the fact that the entruster
financed the importation or purchase of the goods under TR (Sps.
Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29,
1987).

2. Security feature - property interest in the GDI to secure performance

of some obligation of the entrustee or of some third persons to the
entruster (Rosario Textile Mills Corp. v. Home Bankers Savings and
Trust Company, G.R. No. 137232, June 29, 2005).

VII. FRIA/CONCURRENCE AND PREFERRENCE OF CREDITS

FRIA covers TWO remedies of a financially distressed

person/corporation:.

1. REHABILITATION
The first option is REHABILITATION , the law tells you that first option
is rehabilitation, it connotes preference in the liability. Which by intent,
it accords the debtor breathing stage by allowing it to continue
operating the business under rehabilitation. And the 2nd remedy is
more drastic which is the

2. LIQUIDATION. The FRIA now would delay or set aside or reconsider

the application of preference and concurrence credit rule to be the last
resort. The preference of credit will not apply if there is a rehabilitation.
Liquidation has been broken down to 3 stages and only on the 3rd stage
that the rules on concurrence and preference of credit will apply.

How did the FRIA restore the application of the concurrence and
preference of credit when it comes to liquidation, these are the ways.
It has given the liquidator both power and the duty. The power and the
duty here is, order must be followed

1. THE DUTY TO PRESERVE AND MAXIMIZE THE VALUE OF THE

ASSETS OF THE DEBTOR AND TO RECOVER THOSE ASSETS.
Thats the first duty. This is the term Sheperding of Assets it refers
shepherd. So the liquidator acts like a shepherd, kung sino ung nawala u
can recover and direct it to greener pasture. Thats shepherding. He has
the duty to preserve and maximize the value of the assets of the debtor
and to recover those assets. Sheperding of Assets. The first duty and
power must first be exercised Hindi pwede unahin ung no. 2.

it will not call the application of CPC (concurrence and preference of

credits) wala tayong pag-uusapan na CPC..
This is the stage where the liquidator separates the properties that are
not executor from___ properties. And the ___ properties must not only be
valued but be appraised. Movable- personal property appraisers, real
property (real property appraisers) (talked about appraisers, brokers,
gold appraiser etc. )

2. DUTY AND POWER OF THE LIQUIDATOR. To liquidate the assets,

meaning to convert it into cash. Thats the second duty of the power of
the liquidator. You cannot perform the 2nd without performing the first.
So how do you convert it? Meron kasi ung iba kagaya ng CAP Inco, they
went for rehab not because their liabilities are more than their assets.
Their liabilities are weigh below their assets. But their assets are still
buildings and land property assets and they have liabilities which is
recurring like mga bayad sa college , everyday kinahanglan mugasto. So
their income from their assets cannot anymore pay for the recurring
liability that is why they ask for rehabilitation. The duty of the liquidator
if there is liquidation, convert the properties, his hard assets and of
course take note of which money is which why? The proceeds of the
property may be bound to unsecured creditor. For all you know upon
computation nay mupalit ug apil... aside from converting it to cash , the
liquidator must see to it that the cash is duly noted for... during the
conversion into cash, the CPC do not apply.

3. DUTY AND POWER OF THE LIQUIDATOR to discharge all claim

against the debtor. Meaning you pay the debts. This is the time that the
rules on CPC will be observed. You go to first page of that material and
you have here an example of a liquidation Plan thats letter A. the
liquidation plan submitted here did not include the property that
discovered by security. Why? Because it is an option for the liquidator.
The liquidator has the power to choose whether to sell that property. Its
based on his discretion. In my opinion, liquidators are advised with
caution if the value of the property is low or if it is a Real Property and
the time (the appraisal is very low) , hands off kanalang dun. Thats an
option for the liquidator. The liquidator may also be signed to sell the
property even if it is covered with rent. Bakit pwede niyang ibenta? The
only provision there is that if he will sell it, he will make sure that he can
settle the whole amount with the mortgagee. (Concurrence and
preference of credit will be applied in this stage.)
FRIA upholds the following principles of Insolvency

1.) PRIMACY of SECURED CREDITORS RIGHTS

- Can you recall how is this applied?
- You have a parcel of land that is subject to a REM the total amount of
debt is 1 M, we have a secured debt of 400k, the unsecured is 600k. The
property value is 3M. How is this liquidated? When you say liquidation,
this property is disposed of for the amount of 3M for the property value
and satisfaction first is prioritized to the secured debtor. That is the
meaning of Primacy of Secured Creditors Rights.

Lets change the facts a little bit. The property value is 3M this is
subjected to a REM for 2M and the REM was entered into JULY 2015 and
will mature on JULY 2016. The unsecured loan was entered into
AUGUST 2014 and was decided on (nanalo sa kaso) JANUARY 2016.
Hence now, we have the writ of execution. We are levying the property
because of the writ of execution., Sino ngayon ang mag-uuna with
regards to the property? The levy may be made however it is subject the
real estate mortgage. Whoever wins on the option sale, still he will
respect the REM. Why? Because it does not follow that the loan is first
than the REM. Ulahi naman ang Levy, ung utang na unsecrured matagal
na pero ung levy, so much greater. At the time of the levy, meron ng
REM. So the ruling here is yes, the levy may be made but the same is
subject to REM. Pwede parin I foreclose yung mortgagee kahit na levy
na. so that is one display of the primacy of secured creditors rights. Take
note of that because that is a basic principle and a hot topic for the Bar.

2.) PRINCIPLE OF ABSOLUTE PRIORITY RULE (APR)

-APR Presupposes a corpo, partnership or cooperative entity. As we all
know these entity have stockholders, member, etc. Stockholders must
be paid at liquidation. The APR dictates that creditors first before
stockholder, members, etc. in rehab or liquidation scenario, who needs
to be paid in APR? CREDITORS first before stockholders, partners,
members. Thats APR.
Who is a secured creditor? It comes to my mind that secured creditors
are those pledgee, mortgagee and anticreditor. And we have a new and
expanded definition under the concept of FRIA. Eto nakakatawa. Ewan
ko sino nag lagay ng definition nato. Alam niyo sino leading senator na
gumawa nito? Si Lito Lapid and he is really famous in defining things.
And he defined it this way. A secured creditor is one who has a secured
claim. Brayt kaau no? Haha. What is a securedt claim? A secured claim is
defined as one secured by a LIEN. So it would call now to our
knowledge, what is a lien?

Lien shall refer to a statutory or contractual claim or judicial charge on

real or personal property that legality entities a creditor to resort to
said property for payment of the claim or debt secured by such lien.

a.) statutory claim , these are the claims that are written and scattered
all over the laws encountered. Mostly the NIRC and the LGC regarding
taxes. Those were statutory. Of course meron din tayong legal pledges,
meron tayong laborers lien, last illness credit lien (kahit walang formal
contract, it has a lien) or contractors lien, mechanics lien. Meron
tayong lien scattered all over the law.

b.) We have the contractual lien, the pledge, REM, CM, antichresis and
Trust Receipts.

c.) Judicial Charge- it refers to those that are on execution,

levy,garnishment. So kahit unsecured at first but by the time there is a
rehabilitation and liquidation, you already have that judgment. Uso baya
kayo na karon labi na sa small claim. It willjust take 2-3 months and may
decision na ang small claims. Paspas kayo no? so it is possible that even
before liquidation or order of liquidation, may ibang creditors nan a
may judgment kasi mabilis ang small claims. Kaya kino-consider na din
na secured claim ang judicial charge and therefore the winner of that
case who already have the award is considered as secured debtor under
the FRIA.

Another one that is a game changer when it comes to rehabilitation or

liquidation. Now the FRIA does not distinguish whether your security is
registered or unregistered. There are certain types of security that
needs registration. Like Chattel Mortgage.. FRIA does not distinguish
kahit register ka or unregistered. You are still considered a secured
creditor when it comes to insolvency proceedings but when it comes to
foreclosure, of course you have to mention. Even if the CM is
unregistered, it is still written as secured claim. Here we are a law that
would allow the rehabilitator to de-list secured claims.

If a court is presented with a Rehabilitation Plan, the court appoints a

rehabilitator or a liquidator but because of our preference, usually the
court will appoint a rehabilitator. A person called the rehabilitator
would assess the entire the distress of the institution and present a RP.
The rehabilitator must present at least 2 RP. May module 1 and 2 pwede
din 3 , etc kahit sampu pa yan and he presents it to the court. The courts
will approve the RP. Parties may protest, argue any RP. Kagaya ng 1st
module natin, sino ang nakikita niyo ang magproprotest niyan?
Employees. Sa 2nd module? Secured creditors. So the courts will weigh,
meron tayong hearing and the courts are guided by the following
principles in approving a RP. These principles are 95% would likely be
asked in the bar.

What are the principles that would guide courts in approving RP.
This is aimed for an effective insolvency and creditors rights and
system.

1. Principle of EQUITABLE DISTRIBUTION OF LIABILITY AND

ASSETS.
What is distributed here is not only the assets but also liability. Antos
bah Equitable distribution

2. The principle of NON-POSSESSORY or Non- registrable OR NON-

VISIBLE CLAIMS should not derogate upon consensual right of the
creditors
-non registration is not used against those who did not registered
- even if your claim is not registered, is equally recognizable by the court
(Chattel Mortgage mo kahit d registered, recognizable xa)

3. The PRINCIPLE OF GOVERNMENT NON-COMPETITION WITH THE

PRIVATE SECTOR when it comes to commercial interest.
- non compettion by the public government to the private sector
- this is the type of principle that dictates BIR, CUSTOMS, LGU to be part
of the Equitable distribution of liabilities and assets. Our old law is too
much burdened ___. Bakit unahin talaga yung tax? Before anything else?
It is the policy the governments claim should not compete with private
or commercial entity.

So these are the 3 principles that must be discovered by the court in the
RP. So when you compare the two, we have the first and the 2nd
module, saan RP pasok ang tatlo? The 2nd. Most likely the court will
approve the 2nd module of the RP.

LECTURE

INTEREST

Governing Rules:

1. NO INTEREST RULE
a. no agreement
b. agreement not to have interest
c. funds release from Islamic Banking Act
2. LEGAL INTEREST
a. there is agreement of interest but the amount/portion is silent
b. there is agreement but the court declared it unlawful, excessive
c. after judicial demand

Note: Interest should be computed from the time of finality of

judgment from contracts with NO INTEREST because it is the
time that we can say that is forbearance.

LAW EFFECTIVITY INTEREST RATE

ACT. No. 2655 May 1, 1916 12%
CB 416 July 29, 1974 12%
CB 905 Jan. 1, 1983 12 % and 6 % if
forbearance
CB 799 June 21, 2013 6% (regardless if
 forbearnce or not)

3. AGREED INTEREST AND PROPER INTEREST

The parties may stipulate any interest, however the court have
the power to exercise judicial determination to declare if the
interest is unlawful or excessive.

Latest jurisprudence states that 5.5% monthly interest is already

unconscionable.

DEBT TO EQUITY CONVERSION

This is done thru:

a. Novation
b. Corporate Rehabilitation
Cases: SECRETARY OF THE DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS vs. TECSON

Clearly, petitioners had been occupying the subject property for more
than fifty years without the benefit of expropriation proceedings. In
taking respondents property without the benefit of expropriation
proceedings and without payment of just compensation, petitioners
clearly acted in utter disregard of respondents proprietary rights which
cannot be countenanced by the Court. For said illegal taking,
respondents are entitled to adequate compensation in the form of actual
or compensatory damages which in this case should be the legal interest
of six percent (6%) per annum on the value of the land at the time of
taking in 1940 until full payment.43 This is based on the principle that
interest runs as a matter of law and follows from the right of the
landowner to be placed in as good position as money can accomplish, as
of the date of taking

S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT

CORPORATION, vs. PARADA

Article 2209 of the Civil Code provides that "if the obligation consists in
the payment of a sum of money, and the debtor incurs in 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
stipulation, the legal interest, which is six percent per annum." Pursuant
to the said provision, then, since there is no finding of a stipulation by
the parties as to the imposition of interest, only the amount of 12% per
annum47 may be awarded by the court by way of damages in its
discretion, not two percent(2%) per month, following the guidelines
laid down in the landmark case of Eastern Shipping Lines v. Court of
Appeals,48 to wit:

I. 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.49 (Citations omitted)
As further clarified in the case of Sunga-Chan v. CA,50 a loan or
forbearance of money, goods or credit describes a contractual obligation
whereby a lender or creditor has refrained during a given period from
requiring the borrower or debtor to repay the loan or debt then due and
payable.51 Thus:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12%
per annum under Central Bank (CB) Circular No. 416 shall be adjudged
only in cases involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the concept of
damages arising from default in the performance of obligations in
general and/or for money judgment not involving a loan or forbearance
of money, goods, or credit, the governing provision is Art. 2209 of the
Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently
provides:

"Art. 2209. If the obligation consists in the payment of a sum of money,

and the debtor incurs in 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 stipulation, the legal interest, which
is six per cent per annum."

The term "forbearance," within the context of usury law, has been
described as a contractual obligation of a lender or creditor to refrain,
during a given period of time, from requiring the borrower or debtor to
repay the loan or debt then due and payable.

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of

interest, if proper, and the applicable rate, as follows: The12% per
annum rate under CB Circular No. 416 shall apply only to loans or
forbearance of money, goods, or credits, as well as to judgments
involving such loan or forbearance of money, goods, or credit, while the
6% per annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of
obligations in general," with the application of both rates reckoned
"from the time the complaint was filed until the adjudged amount is
fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to
the condition "that the courts are vested with discretion, depending on
the equities of each case, on the award of interest.

ROLANDO C. DE LA PAZ vs. L & J DEVELOPMENT COMPANY

The lack of a written stipulation to pay interest on the loaned amount

disallows a creditor from charging monetary interest.
Under Article 1956 of the Civil Code, no interest shall bedue unless it
has been expressly stipulated in writing. Jurisprudence on the matter
also holds that for interest to be due and payable, two conditions must
concur: a) express stipulation for the payment of interest; and b) the
agreement to pay interest is reduced in writing.

While the Court recognizes the right of the parties to enter into
contracts and who are expectedto comply with their terms and
obligations, this rule is not absolute. Stipulated interest rates are illegal
if they are unconscionable and the Court is allowed to temper interest
rates when necessary.

it has been ruled in a plethora of cases that stipulated interest rates of

3% per month and higher, are excessive, iniquitous, unconscionable and
exorbitant. Such stipulations are void for being contrary to morals, if not
against the law.29 The Court, however, stresses that these rates shall be
invalidated and shall be reduced only in cases where the terms of the
loans are open-ended, and where the interest rates are applied for an
indefinite period. Hence, the imposition of a specific sum of P40,000.00
a month for six months on aP1,000,000.00 loan is not considered
unconscionable.

VETERANS PHILIPPINE SCOUT SECURITY AGENCY, INC. vs. FIRST

DOMINION PRIME HOLDINGS, INC

An essential function of corporate rehabilitation is the mechanism of

suspension of all actions and claims against the distressed corporation
upon the due appointment of a management committee or
rehabilitation receiver.25Section 6(c) of PD 902-A mandates that upon
appointment of a management committee, rehabilitation receiver,
board, or body, all actions for claims against corporations, partnerships
or associations under management or receivership pending before any
court, tribunal, board, or body shall be suspended. The actions to be
suspended cover all claims against a distressed corporation whether for
damages founded on a breach of contract of carriage, labor cases,
collection suits or any other claims of pecuniary nature. Jurisprudence is
settled that the suspension of proceedings referred to in the law
uniformly applies to "all actions for claims" filed against the
corporation, partnership or association under management or
receivership, without distinction, except only those expenses incurred
in the ordinary course of business.26 The stay order is effective on all
creditors of the corporation without distinction, whether secured or
unsecured.

BASICS OF THE LENDING COMPANY REGULATION ACT OF 2007

(RA 9474)

What is a Lending Company?

It refers to a corporation engaged in granting loans from its own capital funds or
from funds sourced from not more than nineteen (19) persons. It shall not be
deemed to include banking institutions, investment houses, savings and loan
associations, financing companies, pawnshops, insurance companies, cooperatives
and other credit institutions already regulated by law. The term shall be
synonymous with lending investors.

What is the form of organization for a lending company?

A lending company shall be established ONLY as a corporation. Existing lending

investors organized as single proprietorships or partnerships shall be disallowed
from engaging in the business of granting loans to the public one year after the date
of effectivity of the law. No lending company shall conduct business unless granted
an authority to operate by the SEC.

What is the capital required for lending companies?

The minimum paid in capital of any lending company established under the law is
One Million Pesos (P1,000,000.00). Existing lending companies established and in
operation prior to the effectivity of this law shall comply with the required
minimum capitalization within such time as may be prescribed by the SEC which
time shall, in no case, be less than three years from the date of effectivity. The SEC
may also prescribe a higher minimum capitalization if warranted by circumstances.
What is the citizenship requirement?

Upon the effectivity of the law, at least a majority of the voting capital stock shall be
owned by citizens of the Philippines. The percentage of foreign-owned voting stock
in any lending company existing prior to the effectivity of the law, if such percentage
is in excess of forty-nine percent (49%) of the voting stock, shall not be increased
but may be reduced and, once reduced, shall not be increased thereafter beyond
forty-nine percent (49%) of the voting stock of the lending company. The
percentage of foreign-owned voting stocks in any lending company shall be
determined by the citizenship of the individual stockholders. In the case of
corporations owning shares in a lending company, the citizenship of the individual
owners of voting stock in such corporations shall be the basis in the computation of
the percentage. No foreign national may be allowed to own stock unless the country
of which he is a national accords reciprocal rights to Filipinos.

What are the prescribed amount and charges on loans?

A lending company may grant loans in such amounts and reasonable interest rates
and charges as may be agreed upon between the lending company and the debtor.
However, the agreement shall be in compliance with the provisions of Republic Act
No. 3765, otherwise known as the Truth in Lending Act and Republic Act 7394,
otherwise known as the Consumer Act of the Philippines. The Monetary Board of
the Bangko Sentral ng Pilipinas, in consultation with the SEC and the industry, may
prescribe such interest rate as may be warranted by prevailing economic and social
conditions.

Note:

This Act applies to activity of lending as a business. It is the Primary

mandate of this act to make sure that the act of lending out to the public can only be
done by a corporation.

The minimum paid-up capital must be 1M

Subscribed Capital must be 250K
Minimum Authorized capital 1M (provided it is all paid up)
The minimum incorporators must be 5 but must be less than 19
Paid up must be equal to or greater than the loan granted

Subject to fit and proper rule

- Fit and Proper Rule refers to the standard for determining whether a
member of the Board of Directors/ Trustees or CEO is fit and proper to hold a
position in a corporation which shall include, but not be limited to, standards
on integrity, experience, education, training and competence.
 Subject to DOSRI Rule (Note Notice of disclosure of DOSRI as a requirement
for obtaining load)

DOSRI RULE- promulgated by the BSP, upon authority of Section 5 of the

General Banking Law of 2000, which regulate the amount of credit
accommodations that a bank may extend to its directors, officers,
stockholders and their related interests (thus, DOSRI). Generally, a banks
credit accommodations to its DOSRI must be in the regular course of
business and on terms not less favorable to the bank than those offered to
non-DOSRI borrowers.

TWO-TIER LICENCE:

a. Articles of Incorporation
b. Authority to Operate

Actual regulation is done by Central Bank of the Phil although

Regulatory permits are filed in the SEC.

Requirement: 51% Filipino- CONTROLLED

Filipino controlled- means that the voting stocks must be controlled

by Filipinos

Filipino- owned- means that the authorized capital stock is 51% is

owned by Filipinos

In Filipino owned corporation, majority of its stock without any

qualification must be owned by Filipinos.

THE TRUTH IN LENDING ACT (RA 3765)

What is the Truth in Lending Act?

It is Republic Act No. 3765, which is an act requiring the disclosure of finance
charges in connection with the extension of credit.

What is the policy behind the Truth in Lending Act?

The declared policy behind the law is to protect the people from lack of awareness
of the true cost of credit by assuring full disclosure of such cost, with a view of
preventing the uninformed use of credit to the detriment of the national economy.

Who are covered under the Truth in Lending Act?

The law covers any creditor, which is defined as any person engaged in the business
of extending credit (including any person who as a regular business practice make
loans or sells or rents property or services on a time, credit, or installment basis,
either as principal or as agent) who requires as an incident to the extension of
credit, the payment of a finance charge.

In that definition, what is meant by credit?

It means any loan, mortgage, deed of trust, advance, or discount; any conditional
sales contract; any contract to sell, or sale or contract of 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.

In the same definition, what is meant by a finance charge?

A finance charge includes interest, fees, service charges, discounts, and such other
charges incident to the extension of credit as may be prescribed by the Monetary
Board of the Bangko Sentral ng Pilipinas through regulations.

What are the information required to be furnished to the debtor or borrower?

(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or 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.

When and how should these information be furnished to the debtor or

borrower?

The information enumerated above must be disclosed to the debtor or borrower

prior to the consummation of the transaction. The information must be clearly
stated in writing.
What is the effect on the obligation in case of violations to the Truth in
Lending Act?

The contract or transaction remains valid or enforceable, subject to the penalties

discussed below.

What are the penalties in case of violation?

1. Any creditor who violates the law is liable in the amount of P100 or in an amount
equal to twice the finance charged required by such creditor in connection with
such transaction, whichever is the greater, except that such liability shall not exceed
P2,000 on any credit transaction. The action must be brought within one year from
the date of the occurrence of the violation.

2. The creditor is also liable for reasonable attorneys fees and court costs as
determined by the court.

3. Any person who willfully violates any provision of this law or any regulation
issued thereunder shall be fined by not less than P1,00 or more than P5,000 or
imprisonment of not less than 6 months, nor more than one year or both.

However, no punishment or penalty under this law shall apply to the Philippine
Government or any agency or any political subdivision thereof.

Note:

Because of this Act people availing credit facilities are made aware of what to
pay or the true cost of the credit.
(For the finance charges, memorize the Mision/Vision of Banks)

The disclosure of finance charges must be made SIMULTANEOUS OR PRIOR

TO the making/ signing of loan agreement.

The loan contract is not perfected upon signing of agreement but upon the
receipt of money by the debtor.

Violation of this Act will arise if notice of the charges is received by the
debtor AFTER the signing of the contact.

(Reveiew the effects of violation of the truth in lending act to the contract)

REPRICING PERIOD- this is the period agreed by the parties that in a certain term,
a certain interest will apply. After the agreed period, the interest will reprice
depending on the market situations/prevailing market rates/ suggested monetary
rate.
 Rate of interest must be not unilateral and must be made known to the
debtor prior to or simultaneous to the singning by the debtor.

Cases: NEW SAMPAGUITA BUILDERS G.R. No. 148753 CONSTRUCTION, INc. Vs. PNB

Courts have the authority to strike down or to modify provisions in promissory

notes that grant the lenders unrestrained power to increase interest rates, penalties
and other charges at the latters sole discretion and without giving prior notice to
and securing the consent of the borrowers.

While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular
No. 905,[33] nothing in the said Circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets

The effect, therefore, when the borrower is not clearly informed of the Disclosure
Statements -- prior to the consummation of the availment or drawdown -- is that the
lender will have no right to collect upon such charge[99] or increases thereof, even
if stipulated in the Notes.

CREDIT INFORMATION SYSTEM ACT (RA 9510)

What is the policy behind the Credit Information System Act?

This law, Republic Act No. 9510, is consistent with the need to establish a
comprehensive and centralized credit information system for the collection and
dissemination of fair and accurate information relevant to, or arising from, credit
and credit-related activities of all entities participating in the financial system. A
credit information system will directly address the need for reliable credit
information concerning the credit standing and track record of borrowers. An
efficient credit information system will also enable financial institutions to reduce
their over-all credit risk, contributing to a healthier and more stable financial
system.

What entity is charged to consolidate the basic credit data, among other
functions? The law created the Credit Information Corporation, the primary
purpose of which is to receive and consolidate basic credit data, to act as a central
registry or central repository of credit information, and to provide access to reliable,
standardized information on credit history and financial condition of borrowers.
The SEC Chairman shall be the Chairman of the Board of Directors of the
Corporation.

What is a Basic Credit Data?

It refers to positive and negative information provided by a borrower to a
submitting entity in connection with the application for and availment of a credit
facility and any information on the borrowers creditworthiness in the possession of
the submitting entity and other factual and objective information related or relevant
thereto in the submitting entitys data files or that of other sources of information.

What is a Credit facility?

It refers to any loan, credit line, guarantee or any other form of financial
accommodation from a submitting entity. For purposes of this Act, deposits in banks
shall not be considered a credit facility extended by the depositor in favor of the
bank.

What is a Submitting Entity? It refers to any entity that provides credit facilities
such as, but not limited to, banks, quasi-banks, trust entities, investment houses,
financing companies, cooperatives, nongovernmental, micro-financing
organizations, credit card companies, insurance companies and government lending
institutions.

What is Positive Credit Information? It refers to information/data concerning

the credit performance of a borrower such as, but not limited to, information on
timely repayments or non-delinquency.

What is Negative Credit Information? It refers to information/data concerning

the poor credit performance of borrowers such as, but not limited to, defaults on
loans, adverse court judgments relating to debts and reports on bankruptcy,
insolvency, petitions or orders on suspension of payments and corporate
rehabilitation.

What happens to negative information? The negative information on the

borrower as contained in the credit history files of borrowers should stay in the
database of the Corporation unless sooner corrected, for not more than 3 years from
and after the date when the negative credit information was rectified through
payment or liquidation of the debt, or through settlement of debts through
compromise agreements or court decisions that exculpate the borrower from
liability. Negative information shall be corrected and updated within 15 days from
the time of payment, liquidation or settlement of debts.

How about bank deposits/client funds? In the absence of a written waiver duly
accomplished by the borrower, basic credit data shall exclude confidential
information on bank deposits and/or clients funds under the following laws:

Republic Act No. 1405 (Law on Secrecy of Bank Deposits)

Republic Act No. 6426 (The Foreign Currency Deposit Act)
Republic Act No. 8791 (The General Banking Law of 2000)
Republic Act No. 9160 (Anti-Money Laundering Law)
RA 9510 does not impair the secrecy of bank deposits and/or client funds and
investments in government securities or funds, as provided under the laws
enumerated above.

Who are allowed to access the Basic Credit Data? The Corporation shall be
authorized to release and disclose consolidated basic credit data only to certain
entities. Basic Credit Data released to Accessing Entities shall be limited to those
pertaining to existing Borrowers or Borrowers with pending credit applications.
Credit information shall not be released to entities other than those enumerated
below, except upon order of the court. The entities authorized to access the credit
information are the following:

1. Accessing Entities. An accessing entity refers to any submitting entity or any

other entity authorized by the Corporation to access basic credit data from the
Corporation. Accessing Entities shall hold strictly confidential any credit
information they receive from the Corporation.

2. Special Accessing Entities. A Special Accessing Entities is a duly accredited

private corporation engaged primarily in the business of providing credit reports,
ratings and other similar credit information products and services. They are subject
to the following requirements, among others:

Special Accessing Entities shall be accredited by the Corporation in accordance with

such standards and rules as the SEC in coordination with the relevant government
agencies, may prescribe.

They shall be entitled access to the Corporations pool of consolidated basic credit
data, subject to the restrictions provided by the law and related implementing rules
and regulations.

They are prohibited from releasing basic credit data received from the Corporation
or credit reports and credit ratings derived from the basic credit data received from
the Corporation, to non-accessing entities unless the written consent or
authorization has been obtained from the Borrower. However, in case the borrower
is a local government unit (LGU) or its subsidiary or affiliate, the special accessing
entity may release credit information on the LGU, its subsidiary or affiliate upon
written request and payment of reasonable fees by a constituent of the concerned
LGU.

3. Outsource Entities. An outsource entity refers to any accredited third party

provider to whom the Corporation may outsource the processing and consolidation
of basic credit data pertaining to a borrower or issuer of debt or convertible
securities under such qualifications, criteria and strict confidentiality guidelines that
the Corporation shall prescribe and duly publish. Outsource Entities, which may
process and consolidate basic credit data, are absolutely prohibited from releasing
such data received from the Corporation other than to the Corporation itself.
4. Borrowers. A borrower is a natural or juridical person, including any local
government unit (LGU), its subsidiaries and affiliates, that applies for and/or avails
of a credit facility.

What about a Non-Accessing Entity? A Non-Accessing Entity refers to an entity

other than a Submitting Entity, Special Accessing Entity or Borrower that is
authorized by the Corporation to access credit information from a Special Accessing
Entity. While a Non-Accessing Entity is not among the enumerated entities
authorized to access consolidated Basic Credit Data under the third paragraph of
Section 6, its definition (Section 3) and its obligation to observe the confidentiality
of information (first paragraph of Section 6) indicate that it is allowed to access
relevant information.

What are the basic rights of the Borrower?

1. The borrower has the right to know the causes of refusal of the application for
credit facilities or services from a financial institution that uses basic credit data as
basis or ground for such a refusal.

2. The borrower, for a reasonable fee, shall have, as a matter of right, ready and
immediate access to the credit information pertinent to the borrower. In case of
erroneous, incomplete or misleading credit information, the subject borrower shall
have the right to dispute the erroneous, incomplete, outdated or misleading credit
information before the Corporation.

3. Confidentiality of credit information. The Corporation and other parties shall hold
the credit information under strict confidentiality and shall use the same only for
the declared purpose of establishing the creditworthiness of the borrower. The
accreditation of an accessing entity, a special entity and/or an outsource entity
which violates the confidentiality of, or which misuses, the credit information
accessed from the Corporation, may be suspended or revoked, in addition to the
possible criminal liability of violators.

What is Credit Rating? It is an opinion regarding the creditworthiness of a

borrower or of an issuer of debt security, using an established and defined ranking
system.

What is Credit Report? It refers to a summary of consolidated and evaluated

information on creditworthiness, credit standing, credit capacity, character and
general reputation of a borrower.

How shall the Corporation collect information through the newly-created

Credit Information System?
1. Banks, quasi-banks, their subsidiaries and affiliates, life insurance companies,
credit card companies and other entities that provide credit facilities are required to
submit basic credit data and updates thereon on a regular basis to the Corporation.

2. The Corporation may include other credit providers to be subject to compulsory

participation. All other entities qualified to be submitting entities may participate
subject to their acceptance by the Corporation.

3. Participating submitting entities are required to submit to the Corporation any

negative and positive credit information that tends to update and/or correct the
credit status of borrowers.

4. The Corporation should regularly collect basic credit data of borrowers at least on
a quarterly basis to correct/update the basic credit data of said borrowers.

5. The Corporation may also access credit and other relevant information from
government offices, judicial and administrative tribunals, prosecutorial agencies
and other related offices, as well as pension plans administered by the government.

What notice is required from the Submitting Entity? Each submitting entity shall
notify its borrowers of the formers obligation to submit basic credit data to the
Corporation and the disclosure thereof to the Corporation, subject to the provisions
of this law and the implementing rules and regulations.

Note:

This Act is not violative of the Secrecy of Bank Deposit Act because it aims
only to provide basic credit data like the name, address of the person or credit card
information controlled by Central Bank of Phil.

THREE BASIC STATUTORY RIGHTS OF BORROWERS

1. Right to confidentiality of credit information

2. Right to know the refusal of its loan by the entity using the basic credit data
or the reason of non-approval.
3. Right to ready and immediate access to credit information/ credit report

PRESIDENTIAL DECREE No. 114

PAWNSHOP REGULATION ACT

It is hereby declared the policy of the State to regulate the establishment of

pawnshops and to place their operation on a sound and stable basis to derive the
optimum advantages from them as an additional source of credit; to prevent and
mitigate, as far as practicable, practices prejudicial to public interest; and to lay
down the minimum requirements and standards under which they may be
established and do business.

Section 3. Definitions. As used in this Decree, unless the context otherwise requires,
the following terms shall have the following meanings:
"Pawnshop" shall refer to a person or entity engaged in the business of lending
money on personal property delivered as security for loans and shall be
synonymous, and may be used interchangeably, with pawnbroker or
pawnbrokerage.
"Pawner" shall refer to the borrower from a pawnshop. "Pawnee" shall refer to the
pawnshop or pawnbroker.
"Pawn" is the personal property delivered by the pawner to the pawnee as security
for a loan.
"Pawn ticket" is the pawnbrokers' receipt for a pawn. It is neither a security nor a
printed evidence of indebtedness.
"Property" shall include only such personal property as may actually be delivered to
the control and possession of the pawnshop: Provided, however, That certain
specified chattels such as guns, knives and similar weapons whose reception in
pawn is expressly prohibited by other laws or regulations shall not be included.

Section 4. Form of organization. A pawnshop may be established as a single

proprietorship, partnership or corporation.

Section 5. Registration and licensing. Any person or entity desiring to engage in the
pawnshop business shall (a) register with the Bureau of Commerce in the case of
single proprietorship or the Securities and Exchange Commission in the case of a
corporation or any other association and (b) secure a license from the appropriate
city or municipality having territorial jurisdiction over the place of establishment
and operation.
Section 6. Requirement of registration with the Central Bank. Any individual,
corporation or association duly registered and licensed to engage in the pawnshop
business shall file an information sheet, under oath, with the Central Bank before
commencement of actual operations: Provided, however, That pawnshops duly
licensed and operating before the approval of this Decree shall, within six months
from the date of effectivity of the same, register with the Central Bank. For this
purpose, the Central Bank shall furnish pawnshops, upon request, with necessary
copies of the prescribed information sheet.

Section 7. Capital. The minimum paid-in capital of any pawnshop which may be
established after the effectivity of this Decree shall be one hundred thousand pesos
(P100,000.00): Provided, however, That pawnshops established and in operation
prior thereto shall comply with the minimum capitalization required under the
provisions of this section within such time as may be prescribed by the Monetary
Board, which time shall, in no case, be less than three years from the date of
effectivity of this Decree.
Section 8. Citizenship requirement. Upon the effectivity of this Decree, only Filipino
citizens may establish and own a pawnshop organized in the form of a single
proprietorship: Provided, however, That in the case of a partnership, at least
seventy per cent (70%) of its capital shall be owned by Filipino citizens: Provided,
further, That in the case of a corporation, at least seventy per cent (70%) of the
voting capital stock shall be owned by citizens of the Philippines, or if there be no
capital stock, at least seventy per cent (70%) of the members entitled to vote, shall
be citizens of the Philippines.
The percentage of foreign-owned voting stock or non-citizens entitled to vote in any
domestic pawnshop existing prior to the effectivity of this Decree, if such percentage
is in excess of thirty per cent (30%) of the voting stock or members entitled to vote
of the pawnshop shall not be increased but may be reduced, and once reduced, shall
not be increased thereafter beyond thirty per cent (30%) of the voting stock, or
number of members entitled to vote, of the pawnshop.
The percentage of foreign-owned voting stocks in any pawnshop shall be
determined by the citizenship of the individual stockholders in that pawnshop. In
the case of corporations owning shares in a pawnshop, the citizenship of the
individual owners of voting stock in such corporations shall be the basis of
computing the percentage.

Section 9. Amount of loan. Pawnshops may grant such amount of loans as may be
agreed upon between the parties: Provided, That the amount of loan shall, in no
case, be less than thirty per cent (30%) of the appraised value of the security offered
for the loan unless the pawner manifests in writing the desire to borrow a lesser
amount.

Section 10. Rates of interest. No pawnshop shall directly or indirectly stipulate,

charge, demand, take or receive any higher rate or greater sum or value for any loan
or forbearance than the rate allowed by the Usury Law for such transactions. It shall
be unlawful for a pawnshop to divide the pawn offered by a pawner in order to
collect greater interest and/or to require the pawner to pay an additional charge as
insurance premium for the safekeeping and conservation of the article pawned.
In addition to interest charges, pawnshops may impose a maximum service charge
of five pesos (P5.00), but in no case to exceed one per cent (1%) of the principal
loan.

Section 11. Maintenance of records. Every pawnbroker shall keep a memorandum

book in which shall be entered, in ink, at the time of each loan or pledge, an accurate
account and description, in Pilipino or English with corresponding translation in the
local dialect of every pawn, the amount of money loaned thereon, the date of
pawning or pledging the same, the rate of interest to be paid on the loan, and the
name and residence of each pawner, together with a particular description of such
pawner, including his or her nationality, sex, and general appearance, and no
pawnbroker or other person shall alter or erase any entry made in such book. Every
person pawning or pledging any article or thing with a pawnbroker shall sign his
name and give his address to said pawnbroker and such name and address shall be
made part of the record heretofore described in this section: Provided, That a
person who is unable to write shall imprint his thumbmark, and his name shall be
written by a competent person, who shall sign his own name as witness to said
thumbmark.

Section 12. Pawn ticket. Every pawnbroker shall, at the time of every such loan or
pledge, deliver to each person pawning or pledging any article or thing a
memorandum or ticket signed by such pawnbroker and containing the substance of
the record required to be kept in such pawnbroker's memorandum book in section
eleven hereof, excluding the description of the person so pawning or pledging such
article or thing, and no compensation of any kind whatsoever shall be received by
any pawnbroker for any such memorandum or ticket.

Section 13. Redemption. The pawner who fails to pay his obligation on the date it
falls due may, within ninety days from the date of maturity of the obligation, redeem
the pawn by payment of the principal of the debt with interest: Provided, however,
That for the purpose of computing interest due after maturity of the obligation, the
basis shall be the sum of the principal of the obligation and interest earned at the
time the obligation matured.

Section 14. Disposition of pawn on default of pawner. In the event the pawner fails
to redeem the pawn within ninety days from the date of maturity of the obligation in
accordance with the preceding section, the pawnbroker may sell or otherwise
dispose of any article taken or received by him in pawn: Provided, however, That
the pawner shall be duly notified of such sale on or before the termination of the
ninety- day period, the notice particularly stating the date, hour, and place of sale.

Section 15. Public auction of pawned articles. No pawnbroker shall sell or otherwise
dispose of any article or thing taken or received in pawn or pledge except at public
auction in his place of business as such pawnbroker or in any other public place
within the territorial limits of the municipality or city where the pawnshop has its
place of business, under the control and direction of an auctioneer with license duly
issued by the corresponding authorities, nor shall any such article or thing be sold
or disposed of unless said pawnbroker has published a notice once in at least two
daily newspapers printed in the city or municipality during the week preceding the
date of such sale. In remote areas where the newspapers are neither published nor
circulated notice by newspaper publication shall be substituted by posting notices in
conspicuous public places within the territorial limits of the city or municipality
where the pawnshop has its place of business. Said notice, whether published or
posted, shall be in English, and either in Filipino or in the local dialect, and shall
contain the name of the pawnshop, its owner, address of the establishment, hour,
and date of the auction sale.

Section 16. Closing and removal of business period. No pawnbroker shall close or
transfer his place of business within three months after the expiration of the period
for which any article or thing shall have been taken or received by him at his place
of business in pawn or pledge, or before any such article or thing shall have been
sold or otherwise disposed of in accordance with the provisions of this Decree:
Provided, however, That removal or transfer of a pawnbroker's place of business
from one place to another within the territorial limits of the same city or
municipality may be authorized on condition that the pawnbroker shall publish a
notice of such removal in two local daily papers, one in English, another in Pilipino
or in the local dialect, for a period of not less than three days, the last day of which
shall take place five days before the removal, stating in the notice the date of
removal, the address of the premises to be vacated and of the premises to which the
pawnshop will transfer; and that he shall likewise post in a conspicuous place in
both premises one copy of the notice in English and another in either Pilipino or the
local dialect during the period of its publication in the said local papers.

Section 17. Grant of authority to the Central Bank. The Central Bank is hereby
authorized
(a) to issue rules and regulations to implement the provisions contained herein:
(b) to require from pawnshops reports of condition and such other reports
necessary to determine compliance with the provisions of this Decree:
(c) to exercise visitatorial powers whenever deemed necessary; and
(d) to impose such administrative sanctions including the imposition of fines for
violations of this Decree and regulations issued by the Central Bank in pursuance
thereto.

Section 18. Penalties. A fine of not less than one hundred pesos (P100.00) and not
more than one thousand pesos (P1,000.00) or imprisonment for not less than thirty
days and not more than one year, or both, at the discretion of the court, shall be
imposed for violations of the provisions of this Decree and its implementing rules
and regulations: Provided, That if the violation is committed by a corporation,
partnership or an association, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or persons therein responsible for
the offense, without prejudice to civil liabilities arising from the criminal offense.

Section 19. Matters not covered by this Decree. The provisions of existing law,
insofar as they are not in conflict with any provision of this Decree, shall apply in
matters not otherwise specifically provided for in this Decree.

Note:

A pawnshop may be sole proprietorship or corporation, if the latter, must be

70% Filipino OWNED.

The least value pawned must be 30% of the value of the property

Subject to Fit and Proper Rule regulated by the monetary board

Subject to Bank Circular
 The capital must be equal or greater than the loan granted

CB956 (June 2009)- removes requirement of presentation of title of

ownership by the owner, it is enough that there be an execution of affidavit of
ownership.

DRAGNET CLAUSE- Is one which is specifically phrased to subsume all debts

of past and 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.

CREDIT CARDS AND ACCESS DEVICES REGULATION ACT

What is the Access Devices Regulation Act of 1998?

It is Republic Act No. 8484, which is an act regulating the issuance and use of access
devices and prohibiting the fraudulent acts committed relative thereto, among
others. By enacting this legislation, the State recognizes the recent advances in
technology and the widespread use of access devices in commercial transactions.

What is an Access Device?

It is any card, plate, code, account number, electronic serial number, personal
identification number, or other telecommunications service, equipment, or
instrumental identifier, or other means of account access that can be used to obtain
money, good, services, or any other thing of value or to initiate a transfer of funds
(other than a transfer originated solely by paper instrument). It includes a credit
card.

What is a credit card?

It is any card, plate, coupon book, or other credit device existing for the purpose of
obtaining money, goods, property, labor or services or any thing of value on credit.

What are the information required to be declared in credit card application

and solicitation?

Any application to open a credit card account for any person under an open-end
credit plan or a solicitation to open such an account, either by mail, telephone or
other means, shall disclose in writing or orally, as the case may be, the following
information:
(a) Annual Percentage Rate

Each annual percentage rate of interest on the amount of credit obtained by the
credit card holder under such credit plan. Where an extension of credit is subject to
a variable rate, the fact that the rate is variable, and the annual percentage rate in
effect at the time of the mailing.
Where more than one rate applies, the range of balances to which each rate applies.

(b) Annual and other Fees

Any annual fee, other periodic fee, or membership fee imposed for the issuance or
availability of a credit card, including any account maintenance fee or any other
charge imposed based on activity or inactivity for the account during the billing
cycle.

Any minimum finance charge imposed for each period during which any extension
of credit which is subject to a finance charge is outstanding (a finance charge
represents the amount to be paid by the debtor incident to the extension of credit
such as interest or discounts, collection fees, credit investigation fees, and other
service charges).

Any transaction charge imposed in connection with use of the card to purchase
goods or services.

Any fee, penalty or surcharge imposed for the delay in payment of an account. (a
penalty charge means such amount, in addition to interest, imposed on the credit
card holder for non-payment of an account within a prescribed period).

(c) Balance Calculation Method the name or a detailed explanation of the balance
calculation method used in determining the balance upon which the finance charge
is computed.

(d) Cash Advance Fee any fee imposed for an extension of credit in the form of
cash.

(e) Over-the-Limit-Fee any fee imposed in connection with an extension of credit

in excess of the amount of credit authorized to be extended with respect to such
amount. In case the application or solicitation to open a credit card account for any
person under an open-end consumer credit plan be made through catalogs,
magazines, or other publications, the following additional information shall be
disclosed:

1) A statement, in a conspicuous and prominent location on the application or

solicitation, that, the information is accurate as of the date the application or
solicitation was printed; such date; the applicant should contact the creditor for
information on any change in the information contained in the application or
solicitation since it was printed;

(2) The date the application or solicitation was printed; and

(3) In a conspicuous and prominent location on the application or solicitation, a toll

free telephone number or mailing address which the applicant may contact to
obtain any change in the information provided in the application or solicitation
since it was printed.

Is there any exceptions to this disclosure requirement?

Yes. The disclosures may be omitted in any telephone solicitation or

application if the credit card issuer does not impose any fee in connection
with paragraph (b)(1) above; does not impose any fee in connection with
telephone solicitation unless the consumer signifies acceptance by using the card;
discloses clearly the information in writing within thirty (30) days after the
consumer requests the card, but in no event later than the date of delivery of the
card; and discloses clearly that the consumer is not obligated to accept the card or
account and the consumer will not be obligated to pay any fees or charges disclosed
unless the consumer elects to accept the card or account by using the card.

If a credit card issuer already disclosed the information required above, is it

still required to disclose certain information prior to renewal?

Yes. Except in telephone solicitations, a card issuer that imposes any fee described
above shall transmit to a consumers credit card account a clear and conspicuous
disclosure of: the date by which, the month by which, or the billing period at the
close of which, the account will expire if not renewed; the information described
above shall be transmitted to a consumer at least thirty (30) days prior to the
scheduled renewal date of the consumers credit card account;
the information described in 4 (a) (1) above, which shall be transmitted to a
consumers credit card account; and the method by which the consumer may
terminate the continued credit availability under the account.

These disclosures must be made prior to posting a fee described in 4 (b) (1) above,
or with the periodic billing statement first disclosing that the fee has been posted to
the account subject to the condition that the consumer is given thirty (30) day
period to avoid payment of the fee or to have the fee recredited to the account in any
case where the consumer does not wish to continue the availability of the credit.

What is the duty of a credit card isssuer in terms of computation?

A credit card issuer must, to the extent practicable, provide a detailed explanation
and a clear illustration of the manner by which all charges and fees are computed.
Is there any exceptions to this disclosure requirement?

Yes. The disclosures may be omitted in any telephone solicitation or application if

the credit card issuer: does not impose any fee in connection with paragraph (b)(1)
above; does not impose any fee in connection with telephone solicitation unless the
consumer signifies acceptance by using the card; discloses clearly the information in
writing within thirty (30) days after the consumer requests the card, but in no event
later than the date of delivery of the card; and discloses clearly that the consumer is
not obligated to accept the card or account and the consumer will not be obligated
to pay any fees or charges disclosed unless the consumer elects to accept the card or
account by using the card.

If a credit card issuer already disclosed the information required above, is it

still required to disclose certain information prior to renewal?

Yes. Except in telephone solicitations, a card issuer that imposes any fee described
above shall transmit to a consumers credit card account a clear and conspicuous
disclosure of:

the date by which, the month by which, or the billing period at the close of which,
the account will expire if not renewed;
the information described above shall be transmitted to a consumer at least thirty
(30) days prior to the scheduled renewal date of the consumers credit card account;
the information described in 4 (a) (1) above, which shall be transmitted to a
consumers credit card account; and
the method by which the consumer may terminate the continued credit availability
under the account.

These disclosures must be made prior to posting a fee described in 4 (b) (1) above,
or with the periodic billing statement first disclosing that the fee has been posted to
the account subject to the condition that the consumer is given thirty (30) day
period to avoid payment of the fee or to have the fee recredited to the account in any
case where the consumer does not wish to continue the availability of the credit.

What is the duty of a credit card isssuer in terms of computation?

A credit card issuer must, to the extent practicable, provide a detailed explanation
and a clear illustration of the manner by which all charges and fees are computed.

What shall you do if you lose your credit card or other access devices?

In case of loss of an access device, the holder must notify the issuer of the access
device of the details and circumstances of such loss upon knowledge of the loss. Full
compliance with such procedure would absolve the access device holder of any
financial liability from fraudulent use of the access device from the time the loss or
theft is reported to the issuer.
 REAL ESTATE MORTGAGE
CONCEPT
A contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, specially subjecting to such security immovable property or
real rights over immovable property which obligation shall be satisfied with the
proceeds of the sale of said property or rights in case said obligation is not complied
with at the time stipulated.

SUBJECT MATTER

Immovables
Alienable real rights in accordance with the laws imposed upon immovables
Includes natural accessions, improvements, growing fruits, rents or income
not yet received when the obligation becomes due
Includes insurance proceeds or proceeds of expropriation for public use
WHETHER THE SM IS IN THE HANDS OF THE OWNER OR A 3RD PERSON
May include AFTER-ACQUIRED PROPERTIES this is allowed when the real
property are perishable or subject to inevitable wear and tear. The purpose here is
to maintain the original value of the securities given (Mendoza v. CA, June 25, 2001)

Coverage: Dragnet Clause

A clause which subsumes all debts of past or future origin.

The mortgage may secure future loans or advancements. e.g. for the payment
of loan of P20,000 and such other loans or advances already obtained or still to be
obtained (Quintanilla v. CA, 279 SCRA 397 [1997])

Essential Requisites, 2085

Constituted to secure the fulfillment of a principal obligation

The mortgagor is the absolute owner of the thing mortgaged

That the persons constituting the mortgage have the free disposal of the
property or are legally authorized to do so

Mortgage must be in a public document. No valid mortgage is constituted

where the deed of mortgage is in a mere private document (Hechanova v. Adil, 144
SCRA 450)

Requisites for Real Estate Mortgage:

Article 2085 + must be in a public document

Minimum Requirement for Validity: Public Document

 If mortgage is in a public document but is not recorded - mortgage is
nonetheless binding on the parties (2125)
If the mortgage is in a private document, the mortgage is void and the
mortgagee may demand reduction of mortgage in a public instrument (notarized)

Effect of Non-Registration

Registration only operates as a notice of the mortgage to others but does

NOT add to the validity of the mortgage or convert an invalid mortgage into a valid
one (Samanilla v. Cajucom, 107 Phil 432) In this case, the mortgagor was not the
owner but he nevertheless had the mortgage recorded. The duty of the Register of
Deeds as to the recording of the mortgage is merely ministerial. So, in this case, the
registration did not make the mortgage valid.

Even if the Real Estate Mortgage is not registered, it is still a valid Real Estate
Mortgage

EXTRAJUDICIAL FORECLOSURE
File application with executive judge who has
jurisdiction over the property, through Clerk of Court

Post notice of sale or publish notice of sale once a week for at least 3 consec weeks in a newspaper of gen
circ

Clerk of Court issues receipt and certificate of payment

Application is raffled among sheriffs

Sale must have at least 2 bidders, if not, sale is postponed. If still no 2 bidders, proceed.

Certificate of sale is approved by Exec Judge or Vice Exec Judge in formers absence. Cert is issued to
winning bidder
3 months 1-Yr Right of Redemption

If redemption period expires, Clerk archives records

Redemption in Extrajudicial Foreclosure

If mortgagor is NOT a juridical entity - Right of Redemption Within 1 year from date of
registration of certificate of sale

If mortgagor is a juridical entity - Equity of Redemption until but not after the registration of
certificate of foreclosure sale which shall not be more than 3 months after foreclosure,
WHICHEVER IS EARLIER (RA 8791)

Judicial Foreclosure
 File an action with RTC which has jurisdiction over
location of SM

Court shall order payment of debt within 90-120 days from entry of judgment (debtors receipt of
judgment, Herrera v. Arellano, 97 Phil 776)

Equity of Redemption Equity of Redemption

If no payment, the court orders sale of SM to the Highest bidder in a public auction

The court calls parties for confirmation of sale

Equity of Redemption Equity of Redemption

Execution of judgment

Application of proceeds

Execution of sheriffs certificate

Registration of certified true copy of the final order of

the court confirming the sale

If mortgagee is PNB or For ordinary mortgagees,

a banking institution, 1-yr title shall now be
right of redemption starts consolidated in winning
bidders name

CASES: RAMON HERRERA, ET AL. Petitioners, vs. HON. FRANCISCO ARELLANO,

ET AL.,

It must be noted that the 90-day period granted the mortgage debtor within which
to pay the amount of the mortgage is in Section 2 of Rule 70 of the Rules of Court,
and it is to be counted "from the date of the service of the order," not from the date
thereof. The order referred to in the rule is the order requiring the debtor to pay the
judgment within 90 days. This 90-day period given in the rule is not a procedural
requirement merely; it is a substantive right granted to the mortgage property from
final disposition at the foreclosure sale.

LETTERS OF CREDIT

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.
CASES: TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO
CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION, respondents.

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.[29]

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.

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.[31]

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.[32]

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court
ruled that the observance of the UCP is justified by Article 2 of the Code of
Commerce which provides that in the absence of any particular provision in the
Code of Commerce, commercial transactions shall be governed by usages and
customs generally observed.
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.

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.

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION),

petitioner, vs. THE COURT OF APPEALS, and BERNARDO E. VILLALUZ,

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
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.

Financial Rehabilitation and Insolvency Act (FRIA) of 2010".

Proceedings under this Act shall be in rem. The proceedings shall be conducted in a
summary and non-adversarial manner.
Rehabilitation Plan shall refer to a plan by which the financial well-being and
viability of an insolvent debtor can be restored using various means including, but
not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-
reorganization, dacion en pago, debt-equity conversion and sale of the business (or
parts of it) as a going concern, or setting-up of new business entity as prescribed in
Section 62 hereof, or other similar arrangements as may be approved by the court
or creditors.

Section 11. Authorization to Exchange Debt for Equity. - Notwithstanding

applicable banking legislation to the contrary, any bank, whether universal or not,
may acquire and hold an equity interest or investment in a debtor or its subsidiaries
when conveyed to such bank in satisfaction of debts pursuant to a Rehabilitation or
Liquidation Plan approved by the court: Provided, That such ownership shall be
subject to the ownership limits applicable to universal banks for equity investments
and: Provided, further, That any equity investment or interest acquired or held
pursuant to this section shall be disposed by the bank within a period of five (5)
years or as may be prescribed by the Monetary Board.

WAREHOUSE RECEIPTS (WHR) LAW (ACT 2137 AS AMENDED)

Q: What is a warehouse receipt (WHR)?
A: A written acknowledgment by the warehouseman that he has received and holds
certain goods therein described in his warehouse for the person to whom the
document is issued. The warehouse receipt has two-fold functions, that is, it is a
contract and a receipt (Telengtan Bros. & Sons v. CA, G.R. No. L- 110581, Sept 21,
1994.)

Q: What is the form of a WHR and what are its essential terms?
A: It need not be in particular form but must embody within its written or printed
terms: LCD-DSWD-LF
1. LocationoftheWH
2. Consecutivenumberofthereceipt
3. Dateoftheissue
4. A statement whether the goods received will be Delivered to bearer, to a specified
person or to a specified person or his order
5. SignatureoftheWHM
6. If the receipt is issued for goods of which the Warehouseman is the owner, either
solely or jointly or in common with others, the fact of such ownership; and
7. Description of the goods
8. A statement of the amount of advances made and of liabilities incurred for which
the warehouseman claims a Lien.
9. Fees (Sec. 2, WH Law.)

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

A: CIV-N
1. Conversion of the contract to ordinary deposit.
2. Injured person can hold WHM liable for all damages caused by the omission
3. Validity of receipt not affected
4. Negotiability of receipts not affected (Gonzales v. Go Fiong & Luzon Surety Co.,
G.R. No. 91776, Aug. 30, 1958)

Q: What is the rule where a warehouse receipt is transferred to secure payment of a

loan by way of pledge or mortgage?

A: The pledgee or mortgagee does not automatically become the owner of the goods
but merely retains the right to keep, and with the consent of the owner to sell them
so as to satisfy the obligation from the proceeds for the simple reason that the
transaction is not a sale but only a mortgage or pledge. Likewise, if the property is
lost without the fault or negligence of the mortgagee or pledgee, then said goods are
to be regarded as lost on account of the real owner, mortgagor or pledgor (PNB v.
Sayo, Jr., G.R. No. 129198, July 9, 1998).