LETTERS OF CREDIT

1. DEFINITION

Letters of credit are those issued by one merchant to another or for the purpose of attending to
a commercial transaction. (Art. 567 Code of Commerce).

A letter of credit is a financial device developed by merchants as a convenient and relatively

safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interest of seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before
paying. (Bank of America, NT and SA v Court of Appeals et. al., GR No. 105395, Dec. 10, 1993)

A letter of credit is defined as an engagement by a bank or other person made at the request of
a customer that the issuer will honor drafts or other demands for payment upon compliance with the
conditions specified in the credit. (Prudential Bank v. Intermediate Appellate Court et. al., GR. No. 74886,
Dec. 8, 1992)

A letter of credit is a written instrument whereby the writer requests or authorizes the addressee
to pay money or deliver goods to a third person and assumes responsibility for payment for debt therefore
to the addressee. (Transfield Philippines v. Luzon Hydro Corp.)

2. GOVERNING LAWS
Letters of Credits have long been and are still governed by the provisions of the Uniform
Customs and Practice for Documentary Credits of the International Chamber of Commerce. (MWSS v.
Daway, GR. No. 160732, June 21, 2004)

In Bank of P.I. vs De Nery (35 SCRA 256, 1970), the Supreme Court pronounced that the
observance of the U.C.P. is justified by Article 2 of the Code of Commerce. Article 2 of the Code of
Commerce enunciates that in the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by the usages and customs generally observed.

3. NATURE OF LETTER OF CREDIT

1. A letter of credit is nothing more than a commitment by the issuer that the party in whose favor
it is issued and who can collect upon it, will have his credit against the applicant of the letter duly paid in the
amount specified therein. a letter of credit which states that the bill shale be duly honored on presentation is
not a contract between the applicant and the issuing bank or between the applicant and the Central Bank.
The contract in which the applicant is a party and on which he can claim a violation of vested rights is his
application for the issuance of the letter of Credit (Climaco vs. Central Bank of the Phils. Vol. *, Court of
Appeals Reports 414, No. 34, 691-R, Sept. 16, 1965)
2. Letters of credit under the Code of Commerce, are not negotiable instruments being issued in
favor of a specified person and not to order. Article 568 (1) of the Code of Commerce provides that the
essential conditions of letters of credit shall be:
1. To be issued in favor of a definite person and not to bearer.
2. The bearer of the letter of credit is not considered bound to receive the money; he may use the
letter as he pleases, and the contracts an obligation only by receiving the money. (Bouvier’s Law
Dictionary)

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 Art. 572 of the Code of Commerce provides that “ If the bearer of a letter of credit does not
make use thereof within the period agreed upon with the drawer, or, in default the period fixed, within six
months, counted from its date, in any point in the Philippines, and within twelve months outside thereof, it
shall be void in fact and in law.
3. Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents and is thus a commitment by the issuer that the party in whose
favor it is issued an who can collect upon it will have his credit against the applicant of the letter, duly paid
in the amount specified in the letter. They are effect absolute undertakings to pay the money advanced or
the amount for which credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted thereby into
contracts of guaranty. What distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and other required shipping documents are
presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are
presented. (MWSS v. Daway, GR. No. 160732, June 21, 2004)

4. PARTIES TO A LETTER OF CREDIT

As enumerated by the Supreme Court in Lee vs. Court of Appeals, GR. No. 117913, Feb. 1, 2002, the
following are the parties to the letter of credit:
1. The buyer or importer;
2. The seller, also referred to as the beneficiary;
3. The opening bank which is usually the buyer’s bank which actually issues the letter of credit;
4. The notifying bank which is the correspondent of the opening bank through which it advises the
beneficiary of the letter of credit;
5. The negotiating bank which is usually any bank in the city of the beneficiary. the services of the
notifying bank must always be utilized if the letter of credit is to be advised to the beneficiary through
cable;
6. The paying bank which buys or discounts the drafts contemplated by the letter of credit if such draft is
to be drawn on the opening bank or another designated bank not in the city of the beneficiary. As a
rule, whenever the facilities of the opening bank are used, the beneficiary is supposed to present his
drafts to the notifying bank for negotiation; and
7. The confirming bank which , upon the request of the beneficiary, confirms the letter of credit issued by
the opening bank.

8. RIGHTS and OBLIGATIONS of PARTIES

1. The buyer procures the letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title;
2. The seller, who in compliance with the contract of sale ships the goods to the buyer and
delivers the document of title and draft to the issuing bank to recover payment;
3. The bank issuing the letter of credit undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer upon reimbursement.
4. The notifying (advising) bank conveys to the seller the existence of the letter of credit;
5. The paying bank undertakes to encash the drafts drawn by the exporter. (Bank of America, NT
and SA vs. Court of Appeals, GR. No. 105395, Dec. 10, 1993).
In case of a notifying bank, the correspondent bank assumes no liability except to notify and or
transmit to the beneficiary the existence of the other letter of credit. A negotiating bank, on the
other hand, is a correspondent bank which buys or discounts a drafts under a letter of credit. Its
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 liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual relationship will then prevail between the
negotiating bank and the seller. In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a primary one as if the correspondent
bank itself had issued the letter of credit. (FEATI Bank vs. CA)

6. BASIC PRINCIPLES OF LETTER OF CREDIT

1. Doctrine of Independence

The so-called “independence principle” assures the seller or the beneficiary of prompt payment independent of
any breach of the main contract and precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the
goods represented by any documents, or for the good faith or acts and/ or omissions, solvency, performance or
standing or the consigner, the carriers, or the insurers of the goods, or any other person whomsoever.
(Transfield Philippines Inc. vs. Luzon Hydro Corporation, 443 SCRA 307, GR. No. 146717, Nov. 22, 2004)

2. Fraud exception principle

Fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a
certificate accompanying a demand for the payment under a standby credit may qualify as fraud sufficient to
support an injunction against payment. However, injunction should not be granted unless: (a) there is a clear
proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and
not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted, of
the recovery of damages would be seriously damaged. (Transfield Philippines Inc. vs. Luzon Hydro
Corporation, 443 SCRA 307 GR. No. 14717, Nov. 22, 2004)

3. Doctrine of strict compliance

It is a settled rule in commercial transactions involving letter of credit that the

documents tendered must strictly conform to the terms of the letter of credit. The tender of
documents by the beneficiary (seller) must include all documents required by the letter. A
correspondent bank which departs from what has been stipulated under the letter of credit, as
when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover
from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary.
Thus, the rule strict compliance. (FEATI Bank and Trust Company vs. Court of Appeals, 196
SCRA 576 (1991)

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 JURISPRUDENCE

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

December 10, 1993

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

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

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

2. Letters of credit distinguished from other accessory contracts. – What characterizes letters of credit, as
distinguished from other accessory contracts , is the engagement of the issuing bank to pay the seller
once the draft and the issuing bank to pay the seller once the draft and the required documents are
presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any
breach of the main contract. By the so called independence principle, the bank determines compliance
with the letter of credit only by the examining the shipping documents presented; it is precluded from
determining whether the main contract is accomplished or not.

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 FEATI BANK and TRUST COMPANY vs. COURT of APPEALS
196 SCRA 576, 1991

FACTS:
Private respondent Villaluz agreed to sell 2, 000 cubic meter of lauan logs to Christiansen. The latter
issued purchase order No. 76171.
On the instructions of the consignee, Hanmi Trade Developmet Ltd., de Santa Ana California, the
Security issued Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54,000, the total
purchase price of the lauan logs.
The letter of credit was mailed to the FEATI Bank and Trust Company with the instruction to the latter
that it forward the enclosed letter of credit to the beneficaiary.
Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit despite
several request made by the private respondent.
Because of the absence of certification by Christiansen, FBTC resused to advance the payment on the
letter of credit.
Since the demands by the private respondent for Christiansen to execute the certification proved futile,
Villaluz instituted an action for mandamus and specific performance against Christiansen and FBTC before the
CFI.
However, while the case was still pending trial, Christiansen left the Philippines without informing the
court and his counsel. Hence, Villauz filed an amended complaint to the make FBTC solidarily liable with
Christiansen.
After trial, the CFI found FBTC solidarily liable. The trial court ruled that petitioner, in accepting the
obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of
the private respondent, has confirmed the letter. Thus, FBTC is a confirming bank, CA, in affirming the trial
court’s decision, added that petitioner acted as a guarantor of the issuing bank and in effect also of the latter’s
principal or client.

ISSUES:
1. Whether or not a correspondent bank is to be held liable under the letter of credit despite non-
compliance by the beneficiary with the terms thereof?
2. Whether of not petitioner is a notifying bank or a confirming bank
3. Whether or not petitioner acted as a guarantor of the issuing bank and in effect also of the latter’s
principal or client.
HELD:
1. Under the provisions of the UCP, the bank may only negotiate, accept or pay, if the documents
tendered to it are on their face in accordance with the terms and conditions of the documentary credit.
And since a correspondent bank, like the petitioner principally deals only with document, the absence of
any document required in the documentary credit justifies the refusal by the correspondent bank to
negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It
merely has to rely on the completeness of the documents tendered by the beneficiary.
2. The letter merely provided that the petitioner “forward the enclosed original credit to the beneficiary.”
Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National
Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming banks a ruled by
the courts below.
If the petitioner was a confirming bank, then a categorical declaration should have been stated in the
letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was
simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary.
3. The concept of guarantee vis-svis the concept of an irrevocable credit are inconsistent with each other.
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 The guarantee theory destroys the independence of the bank’s responsibility from the contract upon
which it was opened. The nature of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person
primarily liable. On the other hand, in an irrevocable credit, the bank undertakes a primary obligation.

LAND BANK OF THE PHILIPPINES vs. MONETS EXPORT AND MANUFACTURING CORPORATION et. al.
GR. No. 161865, March 10, 2005

FACTS:
Petitioner Land Bank of the Philippines (Land Bank), and Monets Export and Manufacturing
Corporation (Monet) executed an Export Packing Credit Line agreement under which Monet was given a credit
line in the amount of P250,000.00, secured by the proceeds of its export letters of credit, the continuing
guaranty of the spouses Vicente V. Tagle Sr. and Ma. Consuelo C. Tagle, and the third party mortgage
executed by Pepita C. Mendigoria.
The credit line agreement was renewed and amended several times until it was increased to
P5,000,000.00. Owing to the continued failure and refusal of Monet, notwithstanding repeated demands, to pay
its indebtedness to Land Bank, which have ballooned to P11,464,246.19, a complaint for collection of sum of
money with prayer for preliminary attachment was filed by Land Bank with the RTC.
In their joint Answer with Compulsory Conterclaim, Monet and the Tagle spouses alleged that Land
Bank failed and refused to collect the receivables on their export letter of credit against Wishbone Trading
Company of Hongkong in the sum of US$ 33,434.00, while it made unauthorized payments on their import letter
of credit to Beautilike (H.K.) LTd. in the amount of US $38,768.40, which seriously damaged the business
interest of Monet.
Meanwhile, Land Bank contended of Monet, the issuing bank in the Beautilike transaction involving an
import letter of credit, it only deals in documents and it is not involved in the contract of the parties.

ISSUE: Whether or not Land Bank is correct.

HELD:
The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual,
because both privity and meeting of the minds are lacking. Thus, upon receipt by Land Bank of the documents
of the title which conform with what the letter of credit requires, it is duty bound to pay the seller.
Thus, no fault or acts of mismanagement can be attributed to Land Bank relative to Monets import letter
of credit.
Once the credit is established, the seller ships the goods to the buyer and in the process secures the
required shipping documents or documents of title. To get paid, the seller executes a draft and presents it
together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to
the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires.
The bank then obtains possession of the documents upon paying the seller. The transaction is completed when
the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer
acquires the said documents and control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and the required shipping documents are
presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of
the main sales contract. By the so-called independence principle, the bank determines compliance with the
letter of credits only by examining the shipping documents presented; it is precluded from determining whether
the main contract is actually accomplished or not.

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 The Uniform Customs and Practice (USCP) for Documentary Credits provides that credits, by their
nature, are separate transactions from the sales or other contract(s) on which they may be based and banks
are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such
contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiable and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant
resulting from his relationship with the issuing bank or the beneficiary.

QUESTIONS AND ANSWERS

1. Are letters of credit negotiable instruments?

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

2. What is the exception to the independence principle?

The “Fraud exception rule.” It provides that the untruthfulness of a certificate accompanying a demand for payment under a
standby letter of credit may qualify as fraud sufficient to support an injunction against payment. (Transfield v. Luzon Hydro,
G.R. No. 146717, Nov. 22, 2004)

3. Can Irrevocable Letters of Credit be amended?

Irrevocable Letters of Credit cannot be amended or cancelled without the agreement of the credit parties.
Unconfirmed irrevocable letters of credit cannot be modified without the written consent of both the issuing bank
and the beneficiary. Confirmed irrevocable letters of credit need also confirming bank's written consent in order
any modification or cancellation to be effective.

4. I generally open letters of credit through my bank. How are your letters of credit different?

The letters of credit that we open are opened using our bank accounts at prime banking institutions. When you
open the letter of credit through your bank, you use your credit line. When you open through us, you use our
credit lines.

5. Why do I need to pay your fee before you open the letter of credit? Can't you take your fee out of the
profits of our transaction?

We do not participate in the transactions of our clients as a party to the transaction other than a provider of
certain financing. Therefore, we do not participate in the profits of our client's transactions. Our fees are the
same regardless of the profit margin in the transaction.

6. Can I cancel my letter of credit after it has been opened?

All of the instruments that we issue are irrevocable and cannot be canceled except by the beneficiary.

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

In most cases we do not require a specific collateral deposit to open a letter of credit. We offer transactional
based finance. When a client wishes to open a letter of credit, he presents us with the details of his transaction
so that we can make a decision about the transaction on its merit. The final decision by our company to enter
into a transaction is made according to a set of criteria.

8. What is the charge for opening a letter of credit?

The letter of credit charge depends on a number of factors. Our agents can provide you with an up to date Tariff
schedule.

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9. What is the maximum size letter of credit that you open?

We are able to open letters of credit of almost any size. We consider the complexity of the transaction; the
goods that are being trades; and, other factors having to do with the parties to the transactions and where they
take place.

10. For what type of goods do you open letter of credit?

We can open letters of credit for any type of goods provided they fall into our ethical and legal criteria. That
said, we will not get involved in transactions involving weaponry or ammunition under any circumstances.

11. I opened a letter of credit to my supplier, but he did not ship the goods. Will you refund my fee?

Once the letter of credit is opened your fee cannot be refunded. We recommend to all of our clients that they
need to assure themselves of their suppliers' ability to perform before opening any banking instruments to them.

WAREHOUSE RECEIPT LAW (Act No. 3135)

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1. Warehouse Receipt

A warehouse receipt is a written acknowledgment by the warehouseman that he has received the
goods described therein and holds the same for the person to whom it is issued or as the latter may
order.
It is a contract between the owner of the goods or the person authorized by the owner to transfer
ownership or possession over the goods, on one hand, and the warehouseman, on the other hand, for
the latter to store the goods and the former to pay the compensation for that service.
2. Warehouseman– a person lawfully engaged in the business of storing goods for profit and issues
warehouse receipt. Only a warehouseman may issue a warehouse receipt.
3. Warehouse - a building or place where the goods are deposited and stored for profit.
4. Non-negotiable Receipt – receipt in which it stated that the goods received will be delivered to the
depositor or to any other specified person.
5. Negotiable Receipt – receipt in which it is stated that the goods received shall be delivered to the
bearer or to the order of any person named in such receipt.
Purpose of the Law
1. To regulate the status, rights, and liabilities of the parties in a warehousing contract;
2. To protect those who in good faith and for value, acquire negotiable warehouse receipts by negotiation;
3. To render the title to, and the right of possession of, property stored in warehouses more easily
convertible;
4. To facilitate the use of warehouse receipts as documents of title; and
5. In order to accomplish these, to place much greater responsibility on the warehouseman.
Form and Contents of the Warehouse Receipt:
1. Location of warehouse. This requirement is for the benefit of the holders of warehouse receipts to
enable them to determine where the goods are deposited especially when the warehouseman has
more than one warehouse located in different places.
2. Date of issue of receipt. Although a warehouse receipt is not essential to create a contract of storage,
the date of issue appearing therein, indicates prima facie the date when the contract of deposit is
perfected and when the storage charges shall begin to run against the depositor.
3. Consecutive number of receipt. The purpose of this requirement is to identify each receipt with the
goods which it was issued. There is no express requirement as to when the consecutive numbering
shall begin.
4. Person to whom goods are deliverable. This requirement determines the person or person who shall
prima facie be entitled lawfully to the possession of the goods deposited.
5. Rate of storage charges. This states the consideration for the contract from the view of the
warehouseman.
6. Description of goods or packages. The general object of giving a description of the goods in the
receipt is for identification so that the identical property delivered to the warehouseman may be
delivered back by him upon the return of the warehouse receipt. The mere fact that the goods
deposited are incorrectly described does not make the receipt when the identity of the goods is fully
established by the evidence.
7. Signature of warehouseman. The warehouseman’s signature furnishes the best evidence of the fact
that the warehouseman has received the goods described in the receipt and has bound himself to
assume all obligations in connection therewith.
8. Warehouseman’s ownership of or interest in the goods. This is to prevent abuses which in the past
had arisen from the past had arisen from warehousemen issuing receipts on their goods.

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9. Statement of advances made and liabilities incurred. This is to preserve the lien of the
warehouseman over the goods stored or the proceeds thereof in his hands.
Effect of Omission of Any of the Essential Terms
1. The validity of the warehouse receipt is not affected.
2. The warehouseman shall be held liable for damages to those injured by omission.
3. The negotiability of the warehouse receipt is not affected.
4. The issuance of warehouse receipt in the form provided by law is merely permissive and directory and
not mandatory in the sense that if the requirements are not observed, then the goods delivered for the
storage become ordinarily deposits.
Terms Which May not be Inserted in a Warehouse Receipt
Under Section 3, the warehouseman is given the power to insert additional terms or conditions in receipts
issued by him subject to two (2) limitations under subsection (a) and (b) . In addition to those limitations, the
stipulations in the receipt must not be contrary to law, morals, good customs, public order or public policy.
1. Exemption from liability for misdelivery. Under subsection (a), a warehouseman is not authorized to
insert any term exempting him from liability for misdelivery of goods because such would be against
Section 10 of the Act or for not giving statutory notice in case of sale of goods because such would be
contrary to Sections 33 and 34.
2. Exemption from liability for negligence. Under subsection (b), a warehouseman cannot insert any
term which would relieve him from liability for his own negligence such as ‘’For account and at the risk
of the depositor’’. The warehouseman is required by law to exercise that degree of care in the
safekeeping of the goods entrusted to him which reasonable careful man would exercise in regard to
similar goods of his own.
Nature and Function of a Warehouse Receipts
1. It is a written acknowledgement by a warehouseman that he has received and holds a certain goods
therein described in store of the person to whom it is issued.
2. It is a simple written contract between the owners of the goods and the warehouseman to pay the
compensation for that service.
3. It is a bilateral contract. It imports that goods are in the hands of a warehouseman and is a symbolical
representation of the property itself.
4. A warehouse receipt is not a negotiable instrument within the meaning of the Negotiable Instrument
Law in the technical sense that a bill of exchange or promissory note is negotiable even though the
Warehouse Receipts Act declares it negotiable.
Persons to Whom Goods Must be Delivered
1. Person lawfully entitled to possession of goods or his agent. The warehouseman is justified to deliver
the goods to the person to whom a competent court has ordered the delivery of goods or to an
attaching creditor or to the purchaser in case of sale of the goods by the warehouseman to enforce his
lien where the goods are perishable or hazardous.
2. Person entitled to delivery under a non-negotiable receipt or with written authority.
3. Person in possession of negotiable receipt.

Negotiable Instrument v. Negotiable Warehouse Receipt

Negotiable Instrument
When altered deliberately, it becomes null and
void.
If originally payable to bearer, it will always
remain payable regardless of the way it is
Negotiable Warehouse Receipt
When altered, it is valid but it may be enforced
only in accordance with its original tenor.
If payable to bearer and is endorsed specially, it
will be converted into a receipt deliverable to

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endorsed.
A holder in due course may be able to obtain a
title better than that which the party who
negotiated the instrument to him had.
order and can only be negotiated further by
indorsement and delivery.
An indorsee even if a holder in due course
obtains only such title as the person negotiating
over the goods.

Rights of a Person to Whom a Non-negotiable Warehouse Receipt Has Been Transferred

1. Right to the title of the goods as against the transferor;
2. Right to notify the warehouseman of the transfer thereof; and
3. The right thereafter to acquire the obligation of the warehouseman to hold the goods for him.

Rights of a Person to Whom a Negotiable Warehouse Receipt Has Been Transferred

1. The right of the goods as against the transferor and
2. The right to compel the transferor to indorse the receipt. But if the intention of the transferor is that the
receipt should merely be transferred, the transferee has no right to require the transferor to indorse the
receipt.

Principal Obligations of the Warehouseman

A warehouseman is essentially a depositary with respect to the goods received and stored by him
in his warehouse. The following are the principal obligations of the warehouseman:
1. To take care of the goods entrusted to his safekeeping.
General rule: A warehouseman is required to exercise such degree of care which a reasonable careful
owner would exercise over similar goods of his own. He shall be liable for any loss or injury to the goods
caused by his failure to exercise such care.
Exception: He shall not be liable for any loss or injury which could not have avoided by the exercise of
such care.
Exception to the exception: He may limit his liability to an agreed value of the property received in case of
loss. He cannot stipulate that he will not be responsible for any loss caused by his negligence.
2. To deliver the goods to the holder of the receipt or the depositor upon demand, provided
demand is accompanied with:
3. An offer to satisfy the warehouseman’s lien;
A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the
goods to him until the lien is satisfied.
The offer to satisfy the warehouseman’s lien is, therefore, required before the warehouseman is bound to
deliver or return the goods.
4. An offer to surrender the negotiable receipt properly endorsed;
The offer to surrender the receipt is required for the protection of the warehouseman since the receipt
represents the goods described therein.
If the receipt is negotiable, the demand for the delivery of the goods must be accompanied by an offer to
surrender the receipt properly indorsed. If the receipt issued is not negotiable, any person lawfully entitled to
the possession of the goods may be entitled to delivery without surrender of the receipt.
5. A readiness and willingness to sign an acknowledgement that the goods have been delivered if
such is requested by the warehouseman.
Lawful Excuses Non-delivery Goods

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

2. And though he delivered the goods as authorized he shall be so liable if prior to such delivery he had
either:
1. Been requested, by or on behalf of the person lawfully entitled to a right of property or

possession in the goods, not to make such delivery or

2. Had information that the delivery about to be made was to one not lawfully entitled to the
possession of the goods.

Effects of Alteration on Liability of Warehouseman

The liability of a warehouseman under a warehouse receipt which has been altered depends on the nature
of the alteration as follows:
1. Alteration immaterial. If the alteration is immaterial, the tenor of the receipt is not changed, whether
fraudulent or not, authorized or not, the warehouseman is liable on the altered receipt according to its
original tenor;
2. Alteration material. If the alteration is material, the tenor of the receipt is changed, but authorized, the
warehouseman is liable according to the terms of the receipt as altered;
3. Material innocently made. If the alteration is material but innocently made though unauthorized, the
warehouseman is liable on the altered receipt according to its original tenor; and
4. Material alteration fraudulently made. If the alteration is material and fraudulently made, the
warehouseman is liable according to the original tenor of the receipt to a purchaser of the receipt for
value without notice, and even to the alterer and subsequent purchasers with notice except that as

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 regards to the last two, the warehouseman’s liability is limited only to delivery as he is excused from
any liability.
Liability of a Warehouseman
1. Liability of a warehouseman in case of lost or destroyed receipt. Where a negotiable receipt has
been lost or destroyed, the court may order delivery to a person upon satisfactory proof of such loss or
destruction and upon proper posting of a bond to protect the warehouseman from any liability or
expense which he may incur by reason of the original receipt remaining outstanding.
2. Liability of warehouseman as to duplicate. When more than one negotiable receipt is issued for the
same goods, the word ‘’duplicate” must be plainly placed by the warehouseman upon the face of every
such receipt, except on the first issued. In such case, the warehouseman warrants (a) that the duplicate
is an accurate copy of the original receipt; and (b) such original receipt is uncancelled at the date of the
issue of the duplicate.
Extent of Warehouseman’s Lien

A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands for:

1. All lawful charges for storage and preservation of the goods

2. All lawful claims for money advances, interest, insurance, transportation, labor, weighing, cooperating,
and other charges and expenses in relation to such goods
3. All reasonable charges and expenses for notice and advertisements of sale and for the sale of the
goods where default has been made in satisfying the warehouse lien.
How is a lien enforced?
1. By refusing to deliver the goods until the lien is satisfied;
2. By causing the extrajudicial sale of the property and applying the proceeds to the value of the lien;
3. By filing a civil action for unpaid charges or by way of counterclaim in an action to recover the property
from him.

How is a lien lost?

1. By surrendering possession of the goods. A warehouseman loses his lien upon goods by voluntarily
surrendering the possession thereof without requiring payment of his lien. It will be presumed that the
lien has been waived or abandoned where the warehouseman permits a depositor to remove the goods
but not where the property is taken without the warehouseman’s consent or by force or under a legal
process, as by replevin suit.
2. By wrongfully refusing to deliver goods. The warehouseman also losses his lien by refusing to
deliver the goods where the holder of the receipt offers to comply with the requirements of section 8.
The loss of the warehouseman’s lien, does not necessarily mean the extinguishment of the depositor’s
obligation to pay the warehousing fees and charges which continues to be personal liability.
Negotiation and Transfer of Receipts
How to negotiate a receipt deliverable to order.
1. By indorsing it in blank thereby making it deliverable to bearer or
2. By special indorsement, which would require further indorsements for further negotiations.
In both cases, the indorsements must be coupled with delivery.
How to negotiate a receipt deliverable to bearer.

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There is no need to indorse for negotiation. Physical delivery of the instrument will suffice. But if the
instrument is indorsed specially, the bearer character of the receipt is destroyed and for further negotiation,
there will be a need for indorsement.
Criminal Offenses
1. Warehouseman, or any officer, agent or servant of the warehouseman, issues or aids in issuing a receipt
knowing that the goods have not actually been received or are not under his actual control at the time of issuing
of such receipt.

LIABILITY: Imprisonment not exceeding 5 yrs or by a fine not exceeding P10, 000.00, or by both.

2. Warehouseman, or any officer, agent or servant of warehouseman, fraudulently issues or aids in fraudulently
issuing a receipt for goods knowing that it contains any false statements.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding P2,000.00, or by both.
3. Warehouseman, or any officer, agent or servant of warehouseman, issues or aids in issuing a duplicate or
additional negotiable receipt for goods knowing that a former negotiable receipt for the same goods is
outstanding and uncancelled, without plainly placing “duplicate” (except in case of loss or destroyed receipts)
LIABILITY: Imprisonment not exceeding 5 yrs, or by a fine not exceeding P10,000.00, or by both.
4. If there are goods deposited or held by the warehouseman as an owner, either solely or jointly with others,
and that warehouseman, or any officer, agent or his servant, knowing such ownership, issues or aids in issuing
a negotiable receipt not stating such ownership.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding P2,000.00, or by both.
5. Warehouseman, or any officer, agent or servant of warehouseman, delivers goods out of the possession of
such warehouseman, knowing that a negotiable receipt is outstanding and uncancelled, without obtaining the
possession of such receipt at or before the time of delivery
LIABILITY: Imprisonment not exceeding 1 yr, or a fine not exceeding P2,000.00, or by both.
6. Any person who deposits goods to which he has no title, or upon which there is a lien or mortgage, and who
takes, for such goods a negotiable receipt which he afterwards negotiates for value without disclosing his want
of title or existence of the lien or mortgage.
LIABILITY: Imprisonment not exceeding 1 yr, or by a fine not exceeding P2,000.00, or by both.

JURISPRUDENCE

Roman v. Asia Banking Corporation, G.R. No. L-17825, June 26, 1922
Legal principle: As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as
“non-negotiable”, a holder of the receipt who purchase if for value supposing it to be negotiable may, at his
option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had
the receipt been negotiable.
Facts: U. de Poli, for value received, issued a quedanconvering the 576 bultos of tobacco to the Asia Banking
Corporation. It was executed as a security for a loan. The aforesaid 576 butlos are part and parcel of the 2, 766
bultos purchased by U. de Poli from Felisa Roman.
The quedan which is a warehouse receipt issued by the warehouse of U. de Poli for 576 bultos of tobacco. In
the left margin of the face of the receipt, U. de Poli certifies that he is the sole owner of the merchandise therein
described. The receipt is endorsed in blank; it is not marked”non-negotiable” or “not negotiable”.
Since a sale was consummated between Roman and U. de Poli, Roman’s claim is a vendor’s lien. The lower
court ruled in favor of Roman on the theory that since the transfer to Asia Banking Corp. (ASIA) was neither a
pledge nor a mortgage, but a security for a loan, the vendor’s lien of Roman should be accorded preference
over it. However, if the warehouse receipt issued was non-negotiable, the vendor’s lien of Roman cannot
prevail against the rights of ASIA as indorsee of the receipt.
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Issue: Whether the quedan issued by U. de Poli in favor of ASIA negotiable, despite failure to mark it as not
negotiable?
Held: YES. The warehouse receipt in question is negotiable. It recited that certain merchandise deposited in
the ware house “pororden” of the depositor instead of “a la orden”, there was no other direct statement showing
whether the goods received are to be delivered to the bearer, to a specified person, or to a specified order or
his order. However, the use of “pororden” was merely a clerical or grammatical error and that the receipt was
negotiable.
As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as “non-negotiable”, a
holder of the receipt who purchase if for value supposing it to be negotiable may, at his option, treat such
receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been
negotiable. This appears to have given any warehouse receipt not marked “non-negotiable” practically the
same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt
acquired it for value supposing it to be negotiable, circumstances which admittedly exist in the present case.
Hence, the rights of the indorsee, ASIA, are superior to the vendor’s lien.

CIR V. Hawaiian-Philippine Company, G.R. No. L-16315 , May 30, 1964

Legal Principle: A warehouseman has been defined as one who receives and stores goods of another for
compensation. For one to be considered engaged in the warehousing business, therefore, it is sufficient that he
receives goods owned by another for storage, and collects fees in connection with the same.
Facts: The petitioner, a corporation duly organized in accordance with law, is operating a sugar central in the
City of Silay, Occidental Negros. It produces centrifugal sugar from sugarcane supplied by planters. The
processed sugar is divided between the planters and the petitioner in the proportion stipulated in the milling
contracts, and thereafter is deposited in the warehouses of the latter. For the sugar deposited by the planters,
the petitioner issues the corresponding warehouse receipts of "quedans". It does not collect storage charges on
the sugar deposited in its warehouse during the first 90 days period counted from the time it is extracted from
the sugarcane. Upon the lapse of the first ninety days and up to the beginning of the next milling season, it
collects a fee of P0.30 per picul a month. Henceforth, if the sugar is not yet withdrawn, a penalty of P0.25 per
picul or fraction thereof a month is imposed.
The storage of sugar is carried in the books of the company denominated "Manufacturing Cost Ledger Control";
the storage fees under Account No. 521620; the expense accounts of the factory under Account No. 5200; and
the so-called "Sugar Bodega Operations" under Account No. 5216, under which is a Sub-Account No. 20,
captioned, "Credits". The collections from storage after the lapse of the first 90 days period are entered in the
company's books as debit to CASH, and credit to Expense Account No. 2516-20
The credit for storage charges decreased the deductible expense resulting in the corresponding increase of the
taxable income of the petitioner. This is reflected by the entries enclosed in parenthesis in Exhibit "G", under the
heading "Storage Charges". The alleged reason for this accounting operation is that, inasmuch as the "Sugar
Bodega Operations" is considered as an expense account, entries under it are "debits". Similarly, since
"Storage Charges" constitute "credit", the corresponding figures are enclosed in parenthesis as they decrease
the expenses of maintaining the sugar warehouses.
Upon investigation conducted by the Bureau, it was found that during the years 1949 to 1957, the petitioner
realized from collected storage fees a total gross receipts of P212,853.00, on the basis of which the respondent
determined the petitioner's liability for fixed and percentage taxes, 25% surcharge, and administrative penalty in
the aggregate amount of P8,411.99.
Issue: Whether petitioner is a warehouseman liable for the payment of the fixed and percentage taxes
prescribed in Sections 182 and 191 of the National Internal Revenue Code
Held: YES. Respondent disclaims liability under the provisions quoted above, alleging that it is not engaged the
business of storing its planters' sugar for profit; that the maintenance of its warehouses is merely incidental to
its business of manufacturing sugar and in compliance with its obligation to its planters. We find this to be
without merit.
It is clear from the facts of the case that, after manufacturing the sugar of its planters, respondent stores it in its
warehouses and issues the corresponding "quedans" to the planters who own the sugar; that while the sugar is
stored free during the first ninety days from the date the it "quedans" are issued, the undisputed fact is that,
upon the expiration of said period, respondent charger, and collects storage fees; that for the period beginning
1949 to 1957, respondent's total gross receipts from this particular enterprise amounted to P212,853.00.
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A warehouseman has been defined as one who receives and stores goods of another for compensation. For
one to be considered engaged in the warehousing business, therefore, it is sufficient that he receives goods
owned by another for storage, and collects fees in connection with the same. In fact, Section 2 of the General
Bonded Warehouse Act, as amended, defines a warehouseman as "a person engaged in the business of
receiving commodity for storage."
That respondent stores its planters' sugar free of charge for the first ninety days does not exempt it from liability
under the legal provisions under consideration. Were such fact sufficient for that purpose, the law imposing the
tax would be rendered ineffectual.

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

Legal Principle: Where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure
the payment of a loan or debt, the transferee or endorsee does not automatically become the owner of the
goods covered by the warehouse receipt or quedan but he merely retains the right to keep and with the consent
of the owner to sell them so as to satisfy the obligation from the proceeds of the sale.
Facts: LaureanoAtendido obtained from PNB a loan of P3k and pledged 2000 cavans of palay to guarantee
payment which were then deposited in the warehouse of Cheng Siong Lam & Co and to that effect the borrower
endorsed in favour of the bank the corresponding warehouse receipt.
Before the maturity of the loan, the 2000 cavans of palay disappeared for unknown reasons in the warehouse.
When the loan matured, the borrower failed to pay obligation
Defendant claimed that the warehouse receipt covering the palay which was given as security having been
endorsed in blank in favor of the bank and the palay having been lost or disappeared, he thereby became
relieved of liability.
Issue: Whether or not the surrender of the warehouse receipt covering 2000 cavans of palay given as security,
endorsed in blank, to PNB, has the effect of transferring their title or ownership OR it should be considered
merely as a guarantee to secure the payment of the obligation of Defendant?
Held: Where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure the payment
of a loan or debt, the transferee or endorsee does not automatically become the owner of the goods covered by
the warehouse receipt or quedan but he merely retains the right to keep and with the consent of the owner to
sell them so as to satisfy the obligation from the proceeds of the sale. This is for the simple reason that the
transaction involved is not a sale but only a mortgage or pledge, and that if the property covered by the
quedans or warehouse receipts is lost without fault or negligence of the mortgagee or pledge or the transferee
or endorsee of the warehouse receipt or quedan, then said goods are to be regarded as lost on account of the
real owner, mortgagor or pledgor.
Nature of contract is Pledge supported by the stipulations embodied in the contract signed by Defendant when
he secured the loan from PNB. The 2000 cavans of palay covered by the warehouse receipt were given to PNB
only as a guarantee to secure the fulfilment by Defendant in his obligation. This clearly appears in the contract
wherein it is expressly stated that said 2000 cavanes of palay were given as collateral security.
It follows that by the very nature of the transaction its ownership remains with the pledgor subject only to
foreclosure in case of non-fulfillment of the obligation. By this we mean that if the obligation is not paid upon
maturity the most that the pledge can do is to sell the property and apply the proceeds to the payment of the
obligation and to return the balance, if any, to the pledgor. This is the essence of the contract, for, according to
law, a pledge cannot become the owner of, nor appropriate to himself the thing given in pledge.
If by the contract of pledge, the pledgor continues to be the owner of the thing pledged during the pendency of
the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor.
The fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not
alter the situation, the purpose of such endorsement being merely to transfer the juridical possession of the
property to the pledge and to forestall any possible disposition thereof on the part of the pledgor.

QUESTIONS AND ANSWERS

1.What should be done to put the receipt within the purview of Warehouse Receipts?
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 The warehouse receipt should be issued by the warehouseman because he is the authorized person
to issue such receipts.
2.What is the effect of the omission of the essential contents of the warehouse receipts?
A warehouseman shall be liable to any person injured thereby all damages caused by the omission
from a negotiable receipt of any of the terms herein required. The validity of the receipt not affected and
negotiability of the receipt is also not affected.
3. What should accompany the demand for the return of the goods?
An offer to satisfy the warehouseman’s lien and an offer to surrender the receipt, if negotiable with such
indorsements as would be necessary for the negotiation of the receipts.
4. What is the liability of the warehouseman for the non-existence or misdescription of goods?
As a general rule, the warehouseman is under obligation to deliver the identical property stored with him and if
he fails to do so, he is liable directly to the owner .As against a bona fide holder of a warehouse receipt, the
warehouseman is estopped whether the receipt is negotiable or not, to deny that he has received the
goods described in it.
5. Does the warehouseman can refuse delivery because he acquired title or right over the goods?
The warehouseman cannot refuse to deliver the goods on the ground that he has acquired title or right to
the possession of the same unless such title or right is derived—
1. Directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or
subsequent thereto
2. From the warehouseman’s lien

6. How do you attach or impose a lien over the goods covered by a warehouse receipt?
If it is not negotiable, the court would issue a writ of attachment. If it is negotiable, the court should require the
surrender of the receipt and restrict further negotiations.
7. Against what property may the lien may be enforced?
a. Against all goods, whenever deposited, belonging to the person who is liable to the debtor for the claims
in regard to which the lien is asserted.
b. Against all goods belonging to others which have been deposited at any time by the person who is
liable as debtor for claims in regard to which the lien is asserted if such person had been entrusted
with the possession of the goods that a pledge of the same by him at the time of the deposit to one who took
the goods in good faith for value would have been valid.
8. How a warehouseman loses his lien?
a. By surrendering possession thereof
b. By refusing to deliver the goods when a demand is made with which he is bound to comply under the
provisions of the law

9. What are the warehouseman’s liabilities for misdelivery?

Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of
them, the warehouseman shall be liable for conversion/estafa to all having a right of property or possession
in the goods if he delivered the goods otherwise than as authorized . And though he delivered the goods as
authorized he shall be so liable if prior to such delivery he had either—
1. Been requested by or on behalf of the person lawfully entitled to a right of property or
possession in the goods, not to make such delivery.
2. Had information that the delivery about to be made was to one not lawfully
entitled to the possession of the goods.
10. What is the legal remedy of the warehouseman in case of conflicting claim?

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

TRUST RECEIPTS LAW

(P.D. No. 115)

PURPOSE OF THE LAW

(a) to encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade;
(b) to provide for the regulation of trust receipts transactions in order to assure the protection of the rights and enforcement
of obligations of the parties involved therein; and
(c) to declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or
instruments released under trust receipts as a criminal offense punishable under Article Three hundred and fifteen (Article
315) of the Revised Penal Code.

TRUST RECEIPT DEFINITION

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

TRUST RECEIPT TRANSACTION DEFINITION

It refers to any transaction by and between an entruster and the entrustee, whereby the entruster (who
owns or holds absolute title or security interests over certain specified goods, documents or instruments)
releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of
a signed document called a “trust receipt”. (PD 115, Sec. 4)
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PARTIES TO A TRUST RECEIPT

a. "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a
trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in
the trust receipt agreement.

b. "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust
receipt transaction, and any successor in interest of such person.

***"Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary, partnership,
corporation, business trust or other association, and two more persons having a joint or common interest.

IMPORTANCE OF TRUST RECEIPTS

(a) to encourage and promote the use of trust receipts as an additional and convenient aid to commerce and
trade;

(b) to provide for the regulation of trust receipts transactions in order to assure the protection of the rights and
enforcement of obligations of the parties involved therein; and

(c) to declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods,
documents or instruments released under trust receipts as a criminal offense punishable under Article Three
hundred and fifteen of the Revised Penal Code.

DIFFERENCE BETWEEN TRUST RECEIPTS AND LETTERS OF CREDIT

Letters of Credit and Trust Receipts are commonly used to improve cash flow for any type of business
that imports/exports goods for sale or supplies commodities which are used in the production of finished goods.
Whether starting your own business or expanding an existing business L/Cs and TRs are important financial
instruments designed to reduce risk and trim the high cost of potential import/export trade operation failures.
Successful import/export cash flow scenarios rely on these types of financial strategies to create operational
efficiencies important to thwarting risks associated with a buyer’s receipt of contracted goods and a seller’s
receipt of payment for such goods.

1. Identification

A Letter of Credit or L/C is a document issued by a bank that guarantees payment to a seller for a
specified amount, at a certain period of time. The buyer gains protection through absolute compliance to the
L/C terms before the payment to the seller is released.

A Trust Receipt or TR is a document of release of goods to a customer by a bank. After an L/C is

drafted and the import shipment has arrived, this type of additional financing may be offered in place of a
buyer’s immediate payment. The customer may use or sell the goods but the bank retains title to them.

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b. Function

A typical scenario where an L/C is used is when an importer makes application to a bank for credit to
pay an exporter. When the buyer receives the goods from the seller and is deemed compliant with the L/C in
terms of timely presentation of documents and goods that conform to the conditions set out by the L/C, the
funds are released from the bank to pay the seller.

Commonly, if the importer is in good standing with the bank, an offer of TR financing will be extend.
When the terms of the TR are agreed to (usually for payment in 60 to 90 days at a specified rate), the bank will
release the goods to the buyer for the purpose of manufacture or sale whilst retaining the title to the goods. The
buyer is required to keep the goods separate from its other business and hold the goods or proceeds from the
sale of goods subject to remittance or repossession of the bank.

2. Advantages

Major advantages of using a L/C for import/export transactions include the buyer's ability to access
certain suppliers who will not trade without a letter of credit, payment of receivables is accelerated and supplier
collection time is reduced. In these cases, the buyer is assured payment as long as the L/C is compliant to its
terms.

When you use a TR the buyer need note make payment immediately when documents are presented.
Among other advantages, the importer may take possession of the goods for resale before paying the bank. As
well, the buyer's working capital or cash flow is not tied up and can be used for other business purposes.

d. Considerations

L/C financing may help with cash flow but the fees associated with documentation and loan rates can
be cost prohibitive. As with any contract agreement, reviewing the details of the L/C before signing is of utmost
importance. Buyers may gain major advantages if the supplier does not participate in forming the terms of the
L/C. The seller should always review the contract in its early stages to resolve discrepancies and vet errors
before any bank is involved. If an error needs to be corrected or terms adjusted, banks will charge additional
fees. Sellers can request that buyers pay for all bank fees associated with the L/C.

TR's may have unattractive associated rates and fees that can outweigh the advantages of
convenience and freed-up working capital. Considering the use of other instruments like Import Documentary
Collections may better help to reduce costs.

1. CONCEPT OF A TRUST RECEIPT TRANSACTION

A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee,
whereby the entruster, who owns or holds absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust receipt".

1. LOAN /SECURITY FEATURE

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1. In a letter of credit-trust receipt arrangement, a bank extends a loan covered by the letter of credit, and
the trust receipts act as the security for the loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in the covering trust receipt. [ Vintola
v. Insular Bank of Asia and America ]

2. The security feature is what provides the much needed financial assistance to our traders in the
importation or purchase of goods or merchandise through the use of those goods or merchandise as
collateral for the advancements made by a bank. The title of the bank to the security is the one sought
to be protected and not the loan which is a separate and distinct agreement. [People v. Nitafan (1992)]

1. OWNERSHIP OF THE GOODS, DOCUMENTS AND INSTRUMENTS UNDER A TRUST RECEIPT

2. To secure the banker (entrustee) shall be repaid at the critical point – that is, when the imported goods
finally reach the hands of the intended vendee – the banker takes the full title to the goods at the very
beginning, and he continues to hold that title as his indispensable security until the goods are sold.

3. The importer (entruster) becomes absolute owner of the imported merchandise as soon as he has paid
its price. The ownership of the merchandise continues to be vested in the owner thereof or in the
person who has advance payment (entrustee), until he has been paid full, or if the merchandise has
already been sold, the proceeds of the sale should be turned over to him by the importer or by his
representative or successor in interest. {Prudential Bank v. National Labor Relations Commission
(1995)]

B. RIGHTS OF THE ENTRUSTER

(1) In case of sale: Right to the proceeds from the sale of the goods, documents or instruments released under
a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust
receipt.

(2) In case of non-sale: Right to the return of the goods, documents or instruments.

(3) Right to the enforcement of all other rights conferred on him in the trust receipt (which are not contrary to
the provisions of PD 115)

(4) Right to cancel the trust and take possession of the goods, documents or instruments subject of the trust
or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of
the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee

(5) Right to sell the goods, documents or instruments at public or private sale, not less than five days after
serving or sending of notice to the entrustee of the intention to sell

(6) Right to purchase at a public sale the goods, documents, or instruments

(7) Right to recover deficiency from the entrustee should the proceeds be insufficient [PD 115, Sec. 7]

The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee
liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt
transaction be responsible as principal or as vendor under any sale or contract to sell made by the
entrustee. [PD 115, Sec. 8]

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B.1. VALIDITY OF THE SECURITY INTEREST AGAINST THE CREDITORS OF THE
ENTRUSTEE/INNOCENT PURCHASERS FOR VALUE

4. The entruster’s security interest in goods, documents, or instruments pursuant to the terms of a trust
receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt
agreement. [PD 115, Sec. 12]

5. A purchaser of goods from an entrustee with right to sell, or of documents or instruments through
their customary form of transfer, who buys the goods, documents, or instruments for value and in good
faith from the entrustee, acquires said goods, documents or instruments free from the entruster’s
security Interest. [PD 115, Sec. 11]

C. OBLIGATIONS AND LIABILITIES OF THE ENTRUSTEE

1. hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt;

2. receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the
amount owing to the entruster or as appears on the trust receipt;

3. insure the goods for their total value against loss from fire, theft, pilferage or other casualties;

4. keep said goods or proceeds thereof whether in money or whatever form, separate and capable of
identification as property of the entruster; and

5. return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and

6. observe terms and conditions of the trust receipt not contrary to PD 115. [PD 115, Sec.9]

C.1. PAYMENT/DELIVERY OF PROCEEDS OF SALE OR DISPOSITION OF GOODS, DOCUMENTS OR

INSTRUMENTS

The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the
trust receipt shall constitute the crime of estafa, punishable under RPC 315, par.1 (b) [ PD 115,Sec.13]

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

The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the
subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. [PD 115,
Sec.10]

C.3. PENAL SANCTION IF OFFENDER IS A CORPORATION

If the violation or offense is committed by a corporation, partnership, association or other juridical

entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. [P.D
115, Sec. 13]

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D. REMEDIES AVAILABLE

D.1. UPON DEFAULT OR FAILURE OF THE ENTRUSTEE TO COMPLY WITH THE TERMS AND
CONDITIONS

a.) The entruster may cancel the trust and take possession of the goods, documents or instruments subject of
the trust or of the proceeds realized therefrom.

b.) The entruster may sell the goods, documents or instruments not less than five days after serving or sending
of the requisite notice, and the entruster may become a purchaser at a public sale.

c.) The proceeds shall be applied

(a) to the payment of the expenses thereof;

(b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments;

(c) to the satisfaction of the entrustee’s indebtedness to the entruster. [PD 115, Sec. 7]

D.2. IN CASE OF FAILURE TO TURN OVER THE PROCEEDS OF THE SALE, OR FAILURE TO RETURN IN
CASE OF NON-SALE

File a criminal case for estafa under RPC 315, par. 1(b). [PD 115, Sec.13]

JURISPRUDENCE

PILIPINAS BANK, petitioner, vs. ALFREDO T. ONG and LEONCIA LIM, respondents. [G.R. No. 133176.
August 8, 2002]

FACTS:

On April 1991, Baliwag Mahogany Corporation (BMC), through its president, respondent Alfredo T. Ong,
applied for a domestic commercial letter of credit with petitioner Pilipinas Bank (hereinafter referred to as the
bank) to finance the purchase of about 100,000 board feet of “Air Dried, Dark Red Lauan” sawn lumber.

The bank approved the application and issued Letter of Credit No. 91/725-HO in the amount of P 3,500,000.00.
To secure payment of the amount, BMC, through respondent Ong, executed two (2) trust receipts providing
inter alia that it shall turn over the proceeds of the goods to the bank, if sold, or return the goods, if unsold, upon
maturity on July 28, 1991 and August 4, 1991.

On due dates, BNC failed to comply with the trust receipt agreement. On November 22, 1991, it filed with the
Securities and Exchange Commission (SEC) a Petition for Rehabilitation and for a Declaration in a State of

24 | P a g e
Suspension of Payments under Section 6 (c) of P.D. No. 902-A, as amended, docketed as SEC Case No.
4109. On November 27, 1992, the SEC rendered a Decision approving the Rehabilitation Plan of BMC as
contained in the MOA and declaring it in a state of suspension of payments.

However, BMC and respondent Ong defaulted in the payment of their obligations under the rescheduled
payment scheme provided in the MOA.

ISSUE: Did the respondents, Ong and Leoncia Lim, as the president and treasurer of BMC, respectively violate
the Trust Receipt Law (PD No. 115)?

RULING: NO. The execution of the MOA constitutes a novation which “places petitioner Bank in estoppel to
insist on the original trust relation and constitutes a bar to the filing of any criminal information for violation of the
trust receipts law.”

It has the effect of a compromise agreement, novated BMC’s existing obligations under the trust receipt
agreement. The novation converted the parties’ relationship into one of an ordinary creditor and debtor.
Moreover, the execution of the MOA precludes any criminal liability on their part which may arise in case they
violate any provision thereof.

The execution of the MOA extinguished respondents’ obligation under the trust receipt. Respondents’ liability, if
any, would only be civil in nature since the trust receipts were transformed into mere loan documents after the
execution of the MOA. This is reinforced by the fact that the mortgage contracts executed by the BMC survived
despite its non-compliance with the conditions set forth in the MOA.

ALFREDO CHING, petitioner, versus THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR
ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch
52; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE PHILIPPINES, respondents.

(G. R. No. 164317 February 6, 2006)

FACTS:

Ching was the Senior Vice President of Philippine Blooming Mills, Inc (PBMI). PBMI, through Ching applied with
the Rizal Commercial Banking Corporation (RCBC) for the issuance of Commercial Letters of Credit to finance
its importation of assorted goods. RCBC approved the application, and irrevocable Letters of Credit were issued
in favor of Ching (PBMI). The goods were purchased and delivered in trust to PBMI. Ching signed 13 trust
receipts as SURETY, acknowledging delivery of goods to RCBC or to return their value despite repeated
demands. Thus, RCBC filed a criminal complaint for estafa against Ching. The City Prosecutor found probable
cause for estafa, thus 13 informations were filed.

Ching appealed to the Minister of Justice which ordered the withdrawal of the informations. RCBC refiled the
criminal complaint for estafa before the office of the City Prosecutor. The City Prosecutor ruled that there was
no probable cause to charge Ching as his liability was only civil and not criminal having signed the trust receipts
as surety. RCBC appealed to the Secretary of Justice which reversed the resolution of the City prosecutor,
holding that Ching as senior Vice-President of PBMI, executed the 13 trust receipts and as such, was one
responsible for the offense. The execution of said receipts is enough to indict Ching as the official responsible
for the violation of PD 115 (Trust Receipts Law).

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The Court of Appeals (CA) affirmed the decision of the Secretary of Justice. Hence, this appeal.

ISSUE: Can Ching be held criminally liable for violating the Trust Receipts Law when he signed the trust
receipts merely as a surety and not as the entrustee?

RULING: Yes.An officer of a corporation who signed a trust receipt cannot hide behind the cloak of the
separate corporate personality of the corporation and cannot avoid criminal persecution even though he had no
physical possession of the goods nor is benefitted by the delictual acts. Though the entrustee is a corporation,
nevertheless, the law specifically makes the officers, employees and other officers or persons responsible for
the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The rationale is that such officers or employees are
vested with authority and responsibility to devise means necessary to ensure compliance with the law and, if
they fail to do so, are held criminally accountable.

A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment. However, a corporation may be charged and prosecuted for a crime of the imposable penalty is
FINE.

Rosario Textile Mills versus Home Bankers Savings and Trust Company (G.R. No. 137232 June 29,
2005)

FACTS:

Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings and Trust
Co. for an Omnibus Credit Line for P10 million. The bank approved RTMC’s credit line but for only P8 million.
The bank notified RTMC of the grant of the said loan thru a letter dated March 2, 1989 which contained terms
and conditions conformed by RTMC thru Edilberto V. Yujuico.

On March 3, 1989, Yujuico signed a Surety Agreement in favor of the bank, in which he bound himself jointly
and severally with RTMC for the payment of all RTMC’s indebtedness to the bank from 1989 to 1990. RTMC
availed of the credit line by making numerous drawdowns, each drawdown being covered by a separate
promissory note and trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of
eleven (11) promissory notes.

Yujuico contend that he should be absolved from liability. He alleged that the bank gave assurance that the
suretyship agreement was merely a formality under which Yujuico will not be personally liable. He theorized that
when RTMC imported the raw materials needed for its manufacturer, using the credit line, he was merely acting
on behalf of the bank, the true owner of the goods by virtue of the trust receipts.

ISSUE: IsYujuico absolved from liability by the grant of the credit line and the execution of the suretyship
agreement?

RULING: No. Yujuico’s agreement conveniently ignores the true nature of its transaction with the bank. A trust
receipt is a security agreement pursuant to which a bank acquires a ‘security interest’ in the goods. It secures
an indebtedness and there can be no such thing as security interest that secures no obligation.

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In Samo vs. People, the Supreme Court described a trust receipt as “a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or resources to finance the importation
or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral,
of the merchandise imported or purchased. In this case, Yujuico signed to secure the obligation of the bank to
pay. Hence, he is liable under the trust receipts law.

QUESTIONS AND ANSWERS

1. What is the loan and security feature of the trust receipt transaction?

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

2. Who is the owner of the articles subject of the TR?

The entrustee. A trust receipt has two features, the loan and security features. The loan is brought
about by the fact that the entruster financed the importation or purchase of the goods under TR. Until and
unless this loan is paid, the obligation to pay subsists. If the entrustee is made to appear as the owner, it was
but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in
any manner that it wants, which it cannot do. To consider the entrustee as the true owner from the inception of
the transaction would be to disregard the loan feature thereof (Rosario Textile Mills Corp. v. Home Bankers
Savings and Trust Company, G.R. No. 137232. June 29, 2005).

3. What is the penal sanction if offender is a corporation?

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or other persons
responsible for the offense liable to suffer the penalty of imprisonment. The reason is obvious, corporations,
partnerships, associations and other juridical entities cannot be put to jail. Hence, the criminal liability falls on
the human agent responsible for the violation of the Trust Receipts Law (Ong vs. CA, G.R. No. 119858, April
29, 2003).

4. In the event of default by the entrustee on his obligation under the trust receipt agreement, is it
absolutely necessary for the entruster to cancel the trust and take possession of the goods to be able
to enforce his right thereunder?

The law uses the word "may" in granting to the entruster the right to cancel the trust and take
possession of the goods. Consequently, the entrustee has the discretion to avail of such right or seek any
alternative action, such as a third party claim or a separate civil action which it deems best to protect its right, at
any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust
agreement (South City Homes, Inc. v. BA Finance Corporation, G.R. No. 135462, Dec. 7, 2001).

5. What is the effect of novation of a trust agreement?

Where the entruster and entrustee entered into an agreement which provides for conditions
incompatible with the trust receipt agreement, the obligation under the trust receipt is extinguished. Hence, the

27 | P a g e
breach in the subsequent agreement does not give rise to a criminal liability under P.D. 115 but only civil liability
(Philippine Bank versus Ong, G.R. No. 133176, Aug. 8, 2002).

6. Can deposits in a savings account opened by the buyer subsequent to the TR transaction be applied
to outstanding obligations under the TR account?

No, the receipt of the bank of a sum of money without reference to the trust receipt obligation does not
obligate the bank to apply the money received against the trust receipt obligation. Neither does compensation
arise because compensation is not proper when one of the debts consists in civil liability arising from criminal
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).

7. What acts or omissions are penalized under the Trust Receipts Law?

It declares the failure to turn over goods or proceeds realized from sale thereof, as a criminal offense
under Article 315 (1) (b) of the Revised Penal Code. The law is violated whenever the entrustee or person to
whom trust receipts were issued to: (a) return the goods covered by the trust receipts; or (b) return the
proceeds of the sale of said goods (Metropolitan Bank versus Tonda, G.R. No. 134436, August 16, 2000).

8. Is lack of intent to defraud a bar to the prosecution of these acts or omissions?

No. The TR Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of the
goods, or (2) return the goods covered by the trust receipts if the goods are not sold. The mere failure to
account or return gives rise to the crime which is malumprohibitum. There is no requirement to prove intent to
defraud (Ching versus Secretary of Justice, G.R. No. 164317, February 6, 2006; Colinares versus Court of
Appeals, G.R. No. 90828, September 5, 2000; Ong versus Court of Appeals, G.R. No. 119858, April 29, 2003).

9. Mr. Noble, as the President of ABC Trading Inc executed a trust receipt in favor of BPI Bank to secure
the importation by this company of certain good. After release and sale of the imported goods, the
proceeds from the sale were not turned over the BPI. Would BPI be justified in filing a case for estafa
against Noble?

SUGGESTED ANSWER:

Yes, BPI would be justified in filing a case for estafa under PD 115 against Noble. The fact that the trust receipt
was issued in favor of a bank, instead of a seller, to secure the importation of the goods did not preclude the
application of the Trust Receipt Law. Under the law, any officer or employee of a corporation responsible for the
violotation of a trust receipt is subject to the liability thereunder (Sia versus People 166 SCRA 655).

10. X buys goods from a foreign supplier using his credit line with a bank to pay for the goods. Upon
arrival of the goods at the pier, the bank requires X to sign a trust receipt that contains the usual
language. X disposes of the goods and receives payment but does not pay the bank. The bank files a
criminal action against X for violation of the Trust Receipt Law. X asserts that the trust receipt is only to
secure his debt and that a criminal action cannot lie against him because that would be violative of his
constitutional right against “imprisonment for non-payment of a debt.” Is he correct?

SUGGESTED ANSWER:

No. Violation of a trust receipt is criminal as it is punished as estafa under Art 315 of the RPC. There is a public
policy involved which is to assure the entruster the reimbursement of the amount advanced or the balance
28 | P a g e
thereof for the goods subject of the trust receipt. The execution of the trust receipt or the use thereof promotes
the smooth flow of commerce as it helps the importer or buyer of the goods covered thereby.

11. PB & Co., Inc., a manufacturer of steel and steel products, imported certain raw materials for use by
it in the manufacture of its products. The importation was effected through a trust receipt arrangement
with AB Banking Corporation. When it applied for issuance by AB Banking Corporation of a letter of
credit, PB & Co., Inc., did not make any representation to the bank that it would be selling what it had
imported. It failed to pay the bank. When demand was made upon it to account for the importation, to
return the articles, or turn-over the proceeds of the sale thereof to the bank, PB & Co., Inc., also failed.
The bank sued PB & Co.’s President who was the signatory of the trust receipt for estafa. The President
put up the defense that he could not be made liable because there was no deceit resulting in the
violation of the trust receipt because the raw materials were not sold but used by the corporation in the
manufacture of its products. Would those defenses be sustainable? Why?

SUGGESTED ANSWER:

No, the defenses are not sustainable. The lack of deceit should not be sustained because of the mere failure to
account for the importation, or return the articles constitute abuse of confidence under the crime, estafa. The
facts that the goods were not sold but were used in the manufacture of its products is immaterial because a
violation of the trust receipts law happened when it failed to account for the goods or return them to the Bank
upon demand.

CHATTEL MORTGAGE (Act. No. 1501)

Article 1484. In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.
Article 1485. The preceding article shall be applied to contracts purporting to be leases of personal
property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of
the thing.
Article 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation. If the movable, instead of being recorded, is delivered to
the creditor or a third person, the contract is a pledge and not a chattel mortgage.

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Article 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel
Mortgage Law shall be applicable to chattel mortgages.
DEFINITION OF CHATTEL MORTGAGE:
1. CHATTEL MORTGAGE is a contract by virtue of which a personal property is recorded in the Chattel
Mortgage Register as security for the performance of an obligation.
2. Section 3, Act 1508 (Chattel Mortgage Law )
1. It is a “conditional sale” of personal property as security for the payment of a debt, or the
performance of some other obligation specified therein, the condition being that the sale shall be void
upon the seller paying to the purchaser a sum of money or doing some other act named. If the
condition is performed according to its terms, the mortgage and sale immediately become void, and the
mortgagee is thereby divested of his title.

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

CHATTEL MORTGAGE DISTINGUISHED FROM PLEDGE:

Chattel Mortgage Pledge

1. Delivery of Personal Property

Not required Delivery is required for
validity

2. Registration in the Chattel Mortgage

Register
Necessary for validity of Not necessary; Public
the CM against third document is enough to
persons bind third persons

3. Right to Excess of Proceeds of Sale

The excess goes to the The excess goes to the
debtor/ mortgagor pledgee/creditor, unless
otherwise stipulated

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 4. Right to Recover Deficiency
Creditor/ mortgagee can Creditor/ mortgagee is not
recover from the debtor/ entitled to recover any
mortgagor, except if deficiency after the
covered by Recto Law property is sold,
notwithstanding contrary
stipulation

A. ESSENTIAL REQUISITES:

1. It is constituted to secure the fulfillment of a principal obligation.

2. The mortgagor must be the absolute owner of the thing mortgaged.
3. The persons constituting the mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
4. It cannot exist without a valid obligation.
5. It must be registered.
Registration of Chattel Mortgage:

(1)Period-before the mortgagor has complied with his principal obligation and no right of innocent third persons
is prejudiced.
(2)Venue-
1. If the mortgagor resides in the Philippines – in the office of the register of deeds of the province in
which the mortgagor resides at the time of the making of the chattel mortgage.
2. If the mortgagor does not reside in the Philippines – in the province in which the property is
situated.
3. If the property is located in a different province – registration in both provinces is required.
(3)Effect-
1. It creates real rights which follow the chattel.
2. It is an effective and binding notice to other creditors.
3. It gives the mortgagee symbolical possession.

Effect of failure to register in the Chattel Mortgage Registry:

The mortgage is binding between the parties. However, the right of the person in whose favor the law
establishes a mortgage is to demand the execution and the recording of the instrument.
B. FORMAL REQUISITES:

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

(2) It should be signed by the person/s executing the same in the presence of two witnesses who shall sign the
mortgage as witnesses to the execution thereof; and
(3) Each mortgagor and mortgagee or, in the absence of the mortgagee, his agent or attorney, shall make and
subscribe an affidavit in the form prescribed by law, which affidavit, signed by the parties to the mortgage and
the two witnesses and the certificate of the oath signed by the person authorized to administer an oath shall be
appended to such mortgage and recorded therewith. [Sec. 5, Act 1508]

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1. Affidavit of good faith is required, and it states that the chattel mortgage is—
1. Made solely for the purpose of securing the obligation specified in the chattel mortgage, and
2. The principal obligation is a just and valid obligation, and one not entered into for the purpose of fraud.

C. AFTER-ACQUIRED PROPERTY

GENERAL RULE: A chattel mortgage shall cover only the property described therein and not like or substituted
property thereafter acquired by the mortgagor. (Sec 7, Act 1508)

EXCEPTION: The after-acquired property is either:

1. in renewal of, or in substitution for, goods on hand when the mortgage was executed; or
2. purchased with the proceeds of the sale of such goods (Torres v Limjap. 56 Phil 141, 1931)

D. AFTER-INCURRED OBLIGATIONS

GENERAL RULE: Chattel mortgage shall be made for the purpose of securing the obligation SPECIFIED IN
THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE. (Sec 3, Act 1508); A chattel mortgage can
only cover obligations existing at the time the mortgage is constituted (Acme Shoe, et al v CA, GR No. 103576,
August 22, 1996).

EXCEPTION: When:
1. The old contract is amended or a new chattel mortgage is made which stipulates an agreement
covering the newly contracted debt; AND
2. Such contract must observe the formalities prescribed by the Chattel Mortgage Law as mentioned in
Section 5.

E. RIGHT OF JUNIOR MORTGAGEE

The only right passes to junior mortgagee or the second mortgagee is the right of redemption within the period
of redemption allowed by law, for as long as the mortgagor has not yet exercised his right of redemption.

GENERAL RULE: The rights of the first mortgagee over mortgaged properties are superior to those of a
subsequent attaching creditor and other junior mortgagees. In Chattel Mortgage the right is only an EQUITY
REDEMPTION.

Period within which equity of redemption may be exercised:

Right of redemption is exercised from the date the condition of chattel mortgage is broken but BEFORE the
foreclosure sale of collateral. The 30-day period to foreclose a chattel mortgage is the minimum period after
violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the
mortgaged chattel and is the period of grace for the mortgagor to discharge the mortgage obligation.

Amount to be paid:
1. The amount due on such mortgagee; and
2. The costs and expenses incurred by such breach of condition before sale.

Persons entitled to redeem:

1. Mortgagor;
2. A person holding subsequent mortgagee;
3. A subsequent attaching creditor.

EFFECT OF TAKING POSSESSION OF MORTGAGED PROPERTY AS AGAINST A JUNIOR

MORTGAGEE:

In order to make a mortgaged property in a chattel mortgage to create a lien as against possible rights of
creditors, subsequent purchasers and encumbrancers in good faith, it is necessary that the possession of the
mortgaged chattels be transferred, or within reasonable time the instrument be filed or recorded. Hence, a first

32 | P a g e
chattel mortgage unregistered is absolutely void against a second or junior mortgagee taken in good faith; and
such junior mortgagee need not be recorded at all to give priority over such first mortgagee.

F. FORECLOSURE PROCEDURE
(Section 14, Chattel Mortgage Law)

1. Thirty (30) days after the condition of a chattel mortgage is broken, the mortgagee may cause the
mortgaged property or any part thereof to be sold at public auction by a public officer at a public place
in the municipality where the mortgagor resides or where the property is situated;
2. The application for the foreclosure of the mortgagee should be filed with the Executive Judge through
the Clerk of Court;
3. After receipt of the application, the Clerk of Court shall, among other duties:
1. Raffle the application among the Sheriffs; and
2. Cause the posting of the notice of sale.

3. Notice of the time, place and purpose of such sale must be posted, at least ten (10) days before the
date of sale, at 2 or more public places in the property is situated;
4. The mortgagee shall notify the mortgagor and the persons holding subsequent mortgages of the time
and place of sale, at least 10 days before the sale, either by notice in writing directed to him or left at
his abode, if within the municipality, or sent by mail if he does not reside in such community;
5. The officer making the sale shall, within 30 days thereafter, make in writing a return of his doings and
file the same in the office of the registry of deeds where the mortgage is recorded, and the registry of
deeds shall record the same. The return shall particularly describe the articles sold and state the
amount received for each article.

DEFAULT AND FORECLOSURE:

The default of the mortgagor have no effect of vesting ownership of the mortgaged property on the mortgagee.
He is only permitted to recover his credit from proceeds of the sale of the property at public auction through
public officer in the manner prescribed in Sec. 14, Act No. 1508. PactumCommissorium is prohibited.

G. REDEMPTION

Definition:

It is a transaction by which the mortgagor reacquires the property which may have passed under the mortgage
or divests the property of the lien which the mortgage may have created.

Kinds:

(a) Equity of redemption: A mortgagor’s total ownership value or rights in a mortgaged investment, property or
asset.

In judicial foreclosure of real estate mortgage under the ROC, it is the right of the mortgagor to redeem the
mortgaged property by paying the secured debt within the 120 day period from entry of judgment or after the
foreclosure sale, but before the sale of the mortgaged property or confirmation of sale

(b) Right of redemption: The right to disencumber property or to free it from a claim or lien, specifically
the right to free from encumbrance of a foreclosure or other judicial sale, or to recover the title passing
thereby by paying what is due with interests and costs.

In extrajudicial foreclosure of real estate mortgage, the right of the mortgagor to redeem the property within a
certain period after it was sold for the satisfaction of the debt.

(i) For natural persons – one year from the registration of the TCT
(ii) For juridical persons – three months from the foreclosure

Note: Formal offer to redeem must be with tender of redemption price to preserve right of redemption

When is equity of redemption may be exercised?

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Equity of redemption may be exercised by the mortgagor after his default in the performance of his obligation
but before the sale of the mortgaged property or confirmation of sale.

The following may redeem if the condition of the mortgage is broken:

1. Mortgagor

2. A person holding subsequent mortgage

3. A subsequent attaching creditor (Sec. 13, Act 1508)

H. CLAIM FOR DEFICIENCY

General Rule: The mortgagee is entitled to recover deficiency.

Exception:

1. Recto Law;

2. In accommodation mortgages, the accommodation mortgagor is liable only to the extent of the value of the
mortgaged property;

3. Due to death of mortgagor. (Vda. De Jacob v. CA, G.R. No. 88602, Apr. 6, 1990)

Application of Recto Law:

1. Sale of personal property, the price of which is payable in two or more installments
2. Contracts purporting to be leases of personal property with option to buy (Art. 1485, NCC)
(Articles 1484 & 1485 of the Civil Code)

Requisites for the Sale to be covered under the Recto Law:

1. Sale of personal property
2. Payable in installments
3. CM constituted over the same property

Remedies of the Unpaid Seller under the Recto Law:

1. Exact fulfillment of the obligation, should the vendee fail to pay (action for specific performance)
2. Cancel the sale, should the vendee’s failure to pay cover two or more installments (rescission); or
3. Foreclose the chattel mortgage on the thing sold, should the vendee’s failure to pay cover 2 or more
installments.

JURISPRUDENCE

ACME SHOE vs. COURT OF APPEALS

G.R. No. 103576 August 22, 1996

PRINCIPLE/S:
1) Contracts of Security; Contracts of security are either personal or real. ). In contracts of real security, such as
a mortgage, that fulfillment is secured by an encumbrance of property -- in chattel mortgage by the execution of
the corresponding and substantially in the form prescribed by law-- upon the essential condition that if the
obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the
payment of the obligation, but that should the obligation be duly paid, then the contract is automatically

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extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void.
2) The rule on after-incurred obligations; a chattel mortgage can only cover obligations existing at the time the
mortgage is constituted.

FACTS: Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic Corporation, executed a
chattel mortgage in favor of Producers Bank of the Philippines, as a security for a corporate loan in the amount
of P3M. The chattel mortgage contained a clause that provided for the mortgage to stand as security for all
other obligations contracted before, during and after the constitution of the mortgage. The P3M was paid.
Subsequently, the corporation obtained additional financial accommodations totalling P2.7M. This was also paid
on the due date. Again, the bank extended another loan to the corporation in the amount of P1M, covered by
four promissory notes. However, the corporation was unable to pay this at maturity. Thereupon, the bank
applied for an extra-judicial foreclosure of mortgage.

ISSUE/S:
1) Whether or not extra-judicial foreclosure of the chattel mortgage is proper.

2)Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred?

RULING:
1)No. The chattel mortgage was terminated when payment for the P3M loan was made so there was no chattel
mortgage to even foreclose at the time the bank instituted the extra-judicial foreclosure.
Contracts of security are either personal or real. In contracts of real security, such a mortgage, that fulfillment is
secured by an encumbrance of property -- in chattel mortgage by the execution-- upon the essential condition
that if the obligation becomes due and the debtor defaults, then the property encumbered can be alienated for
the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically
extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void.
1. No. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, can
only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in
a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can
be compelled upon, the security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is executed either by concluding a
fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the
Chattel Mortgage Law.

ALEJANDRO TORES, et al v FRANCISCO LIMJAP, special administrator of the deceased Henson

GR No. 34385; September 21, 1931

PRINCIPLE/S:
1)The provision in Section 7 of Act 1508 does not apply to drug stores, bazaars and all other stores in the
nature of a revolving and floating business, i.e. one that deals with the sale of either perishable goods, "rolling"
goods, or goods subject to wear and tear.

2)A stipulation in the chattel mortgage, extending its scope and effect to after-acquired property, is valid and
binding where the after-acquired property is in renewal of, or in substitution for, goods on hand when the
mortgage was executed, or is purchased with the proceeds of the sale of such goods.

FACTS: Chattel mortgages were executed by defendant (Henson) on his drug store in favor of the plaintiff as
security for his loan he acquired from the latter. Included in the contract is a stipulation authorizing Henson to
sell the goods covered by the mortgage and replace them with the other goods thereafter acquired. Since
defendant failed to comply with his obligation to pay the interest on the loans, plaintiffs wanted to take
possession of the chattels and moved to foreclose their mortgages thereon. The defendant however asserted
that the chattels (referring to the goods) which the plaintiffs sought to recover were not the same property
described in the mortgage and are therefore not to be attached. According to him, even if the contract contained
a stipulation extending its scope and effect to after-acquired property, it is not valid because it contravenes the
provision of Section 7 of Act 1508: “Chattel mortgage should cover only property described therein and not like
or substituted property thereafter acquired.”

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ISSUE/S:

1) WON a stipulation in a mortgage extending its scope and effects to after-acquired goods valid?
2) Are the goods in question covered by the chattel mortgage despite the express provision of Section 7 of Act
1508?

RULING:

1) Yes, a stipulation is valid and binding if the after-acquired property is in renewal of, or in substitution for,
goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods.
In the case, the goods on hand when the mortgage was executed were substituted by these after-acquired
properties.

2) Yes. The provision in the last paragraph of Section 7 of the Chattel Mortgage law is not applicable to drug
stores, bazaars and all other stores in the nature of a revolving and floating business. The intention of the Law
is to promote business and trade in these Islands and to give impetus to the economic development of the
country. If said provision were intended to apply to this class of business, it would be practically impossible to
constitute a mortgage on such stores without closing them, contrary to the very spirit about a handicap to trade
and business, would restrain the circulation of capital, and would defeat the purpose for which the law was
enacted, to wit, the promotion of business and the economic development of the country.

INDUSTRIAL FINANCE CORPORATION, petitioner,vs.

CASTOR TOBIAS, respondent.
G.R. No. L‐41555; July 27 1977

PRINCIPLE:
Should the vendee or purchaser of a personal property be in default in the payment of two or more of the
agreed installments, the vendor or seller has the option to either exact fulfillment by the purchaser of -the
obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was
constituted. The remedies provided for in Art. 1484 are considered alternative, not cumulative

FACTS: On June 16, 1968, Tobias bought on installment 1 Dodge truck from Leelin Motors, Inc. executing a
promissory note in favor of the latter, for the sum of P29.070.28 payable in thirty-six (36) equal installments with
interest at the rate of 12% per annum. To secure payment of the promissory note, respondent Tobias executed
in favor of Leelin Motors, Inc. a chattel mortgage on the Dodge truck.
On June 19, 1969, Leelin Motors, Inc. indorsed the promissory note and assigned the chattel mortgage to
petitioner Industrial Finance Corporation. Tobias paid 6 installments on the promissory note directly to the
petitioner Industrial Finance Corporation but defaulted on more than two installments, IFC through a letter gave
Tobias a choice of either paying the balance of the purchase price or surrender the truck. Tobias responded to
the letter voluntarily and willingly surrendering the truck which was still in the custody of Leelin Motors ever
since the truck met an accident. Upon learning that the truck met an accident, IFC decided not to get the truck
anymore from Leelin Motors. Instead, IFC filed an action against Tobias to recover the unpaid balance of the
promissory note.
The lower court dismissed the complaint and on appeal, the CA affirmed the decision of the CFI.

ISSUE: Whether or not IFC is estopped to insist on its claim the balance of the promissory note when it
demanded the return or surrender of the track in its letter of May 14, 1970.

RULING: No. The claim of respondent cannot be sustained. Art. 1484 is clear that "should the vendee or
purchaser of a personal property be in default in the payment of two or more of the agreed installments, the
vendor or seller has the option to either exact fulfillment by the purchaser of -the obligation, or to cancel the
sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. Since the case
involves the sale of personal property on installments Art. 1484 of the Civil Code should apply.
Since the petitioner has not availed itself of the remedy of cancelling the sale of the truck in question or of
foreclosing the chattel mortgage on said truck, petitioner is still free to avail of the remedy of exacting fulfillment.

MAGNA FINANCIAL SERVICES GROUP, INC. vs. ELIAS COLARINA

G.R. No. 158635, December 9, 2005

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FACTS: Elias Colarina bought on installment one (1) unit Suzuki Multicab from Magna Financial Services
Group, Inc. After making down payment, Colarina executed promissory note for the balance and executed a
deed of chattel mortgage over the motor vehicle. Colarina failed to pay monthly amortization beginning January
1999 and despite repeated demands, he failed to settle the balance. Financial Services Group filed for
foreclosure of Chattel Mortgage with replevin. Colarina voluntarily surrendered physical possession of the
vehicle. The trial court rendered judgment in favour of Magna Financial Services. Colarina appealed to the RTC
but it affirmed the decision of the trial court.

ISSUE: Whether or not there is actual sale of the mortgaged vehicle that would bar the creditor from recovering
unpaid balance.

RULING: No. There was no actual foreclosure of the subject vehicle. Where the mortgagee (Magna Financial
Services Group, Inc.) elects a remedy of foreclosure, the law requires the actual foreclosure of the mortgaged
chattel in accordance with Sec. 14 of Act No. 1508.
The law requires actual sale of the mortgaged chattel when the mortgagee elects a remedy of foreclosure in
order to recover the unpaid balance from mortgagor.
Under the law, the delivery of possession of the mortgaged property to the mortgagee can only operate to
extinguish liability of the mortgagor if the mortgagee had actually caused the foreclosure sale of the mortgaged
property when it recovered possession thereof. In this case, there has been no actual sale of the property at
public auction; hence Magna Financial Services cannot recover the unpaid balance from Colarina.

QUESTIONS AND ANSWERS

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

Answer: The following are the distinctions between a contract of chattel mortgage and a contract of pledge:

1. A chattel mortgage is a formal contract while a pledge is a real contract;

2. In a contract of Chattel Mortgage, possession belongs to the creditor, while in a contract of
pledge possession belongs to the debtor;
3. A contract of chattel mortgage must be recorded in a public instrument to bind third persons while a
contract of pledge must be in a public instrument containing description of the thing pledged and the
date thereof to bind third persons.

2) Juan constructed a building on a parcel of land he leased from Mario. He executed a chattel
mortgage over said building in favor of Pedro for a loan obtained from the latter. When he could not pay
Pedro, Pedro initiated foreclosure proceedings. Juan claimed that the building he had constructed on
the leased land cannot be validly foreclosed because the building was, by law, an immovable. Is Juan
correct?
Answer: No, Juan is not correct. The Chattel Mortgage is void and cannot be foreclosed because the building
is an immovable and cannot be an object of a chattel mortgage.
However, If the building was intended and is built of light materials, the chattel mortgage may be considered as
valid as between the parties and it may be considered in respect to them as movable property, since it can be
removed from one place to another.

3)What kind of property can be the subject of a chattel mortgage?

Answer:
General rule: Personal property only
Exception: Real property covered by chattel mortgage:
a. Growing crops (Sec 7 of Act 1508 or Chattel Mortgage Law)
b. House built on another person’s land (Tumalad v Vicencio, 41 SCRA 143, 1971)

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c. Machinery permanently affixed to a building, under the doctrine of estoppel (Makati Leasing v Wearever
Textile, 122 SCRA 296, 1983)

4) Can like or substituted property be deemed covered by a chattel mortgage?

Answer: Generally, NO because Sec 7 of Act 1508 expressly provides that only property described therein and
not like or substituted property thereafter acquired by a mortgagor may be covered by a chattel mortgage.
However, this provision does not apply to drug stores, bazaars and all other stores in the nature of a revolving
and floating business, ie. One that deals with the sale of either perishable goods, “rolling” goods, or goods
subject to wear and tear. (Torres v Limjap, 56 Phil 141, 1931)

5) Is a promise expressing the inclusion of future debts in a chattel mortgage initially contracted valid
and enforceable?
Answer: It is valid but the security itself can’t be enforced or cannot exist/arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either by concluding a fresh contract or by amending
the old one and provided that it conforms to the formalities prescribed by the Chattel Mortgage Law.

6) What is the effect of a mortgagee, who does not have possession of the property but registered the
mortgage, to subsequent mortgagee?
Answer: The mortgagee has the right superior to the right of the subsequent mortgagee. The mortgage has the
force and effect of mortgage when registered. The mortgagee can enforce his right on the day on which it is
filed for record, or on which the property is delivered.
The mortgage then is given life and force as against all persons, second mortgagee or subsequent mortgage.

7) Can a chattel mortgagee sue for deficiency following foreclosure?

Answer: Yes. A chattel mortgagee can sue for a deficiency judgment following foreclosure.
Exception: The property sold in installments, the mortgagee can no longer take any action against the
purchaser to recover any unpaid balance of the price (Art 1484, Civil Code).
Where the mortgagee elects a remedy of foreclosure, the law requires the actual foreclosure of the mortgaged
chattel

8) Where the proceeds from the sale of mortgage property (chattel mortgage) do not fully satisfy the
secured debt, is the mortgagee entitled to recover the deficiency from the mortgagor? State the rule
and exception if any.
Answer: Generally, yes, the mortaggee is entitled to recover the deficiency from the mortgagor.(Ablazavs
Ignacio, L-11460, May 23,1958)
An exception to the aforementioned rule may be found in Article 1484 which speaks of a chattel mortgage as
security for the purchase of personal property payable in installments. Here, no deficiency judgment can be
asked. Any agreement to the contrary shall be void.

9) Can the unpaid seller avail of all remedies?

Answer: No, the remedies are alternative.

10) Is the mortgagee’s letter informing the mortgagor of his intent to foreclose is already considered a
foreclosure of the chattel?

Answer: No. A mere offer by the mortgagor to surrender the chattel, not accepted by the mortgagee, does not
preclude the mortgagee from bringing suit to recover the balance of the purchase price. (Industrial Finance
Corp v. Castor Tobias, G.R. No. L‐41555, July 27 1977)

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 REAL ESTATE MORTGAGE LAW
(Act No. 3135, as amended by R.A 4118)
Articles 2124 – 2131 Civil Code

Art. 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage. (1874a)

1. DEFINITION OF REAL ESTATE MORTGAGE

Mortgage (otherwise known as “real estate mortgage or “real mortgage”) is a contract whereby the debtor secures to the
creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over
immovable property which obligation shall be satisfied with the proceeds of the sale of said property or rights in case the
said obligation is not complied with at the time stipulated. (De Leon)

It is a contract in which the debtor guarantees to the creditor the fulfillment of a principal obligation, subjecting for the faithful
compliance therewith a real property in case of non-fulfillment of said obligation at the time stipulated. (12 Manresa, p. 460).

2. ESSENTIAL REQUISITES

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own
property. (1857)
Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which
the pledge or mortgage consists may be alienated for the payment to the creditor. (1858)
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the
recording of the document in which the mortgage is formalized. (1875a)

The Essential Requisites of Mortgage are:

1. That it is constituted to secure the fulfillment of a principal obligation;

2. That the mortgagor be the absolute owner of the thing pledged or mortgaged;
3. That the persons constituting the mortgage have the free disposal of their property, and in the absence thereof, that
they be legally authorized for the purpose;
4. That the things in which the pledge or mortgage consists may be alienated for the payment to the creditor when the
principal obligation becomes due;
5. That the document in which it appears be recorded in the Registry of Property
A duly executed mortgage is presumed to be valid until the contrary is shown. To the party attacking, rests the
burden of proving its invalidity due to fraud, duress or illegality. The right to attack the validity of a mortgage may be
lost by a waiver of defects and objections, or by unreasonable delay to act amounting to ratification.

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6. REGISTRATION REQUIREMENTS

A registration, whether registered or not is binding between the parties, registration being necessary only to make the
same valid against third persons. Thus, registration only operates as a notice of the mortgage to others, but neither
adds to its validity nor convert an invalid mortgage into a valid one between the parties. If the purpose of registration is
merely to give notice, the question regarding the effect or invalidity of instrument, are expected to be decided after not
before registration. It must follow as a necessary consequence that registration must first be allowed and the validity or
the effect litigated afterwards.

7. WHY IS THERE A REQUIREMENT FOR THE REGISTRATION OF MORTGAGE?

1. Mortgagee is entitled to registration of mortgage as a matter of right.

The mortgagor is understood to have given his consent to its registration, and he cannot be permitted to revoke it
unilaterally.

2. Proceedings for registration do not determine validity of mortgage or its effect.

It is merely a declaration that the record of the title appears to be burdened with the mortgage described. It must
follow as a necessary consequence that registration must first be allowed and its validity or effect litigated
afterwards.

3. Registration without prejudice to better right of third parties.

A registered mortgage is superior to a contract to sell, subject to any liabilities the owner (vendor / mortgagor) may
have incurred in favor of the buyer. In a contract to sell, title is retained by the vendor until full payment of the price.

4. Registrability of encumbrance acquired subsequent to the mortgage.

Where the mortgage deed has been duly registered, said deed forms part of the records for the registration of the
property mortgaged. Thus in a proceeding for the annotation of an encumbrance over the property subsequently
acquired, which is being opposed by the mortgagee, the latter has no need for the introduction of the mortgage dee
to prove its existence.

5. Registrability of mortgage by surviving spouse of his/her undivided share of conjugal property.

The mortgage by the wife, after the death of her husband in an undivided one-half share of the conjugal partnership
is valid, the registration being an essential requirement in order that the mortgage may be validly constituted.
Registration will not affect the rights of the deceased husband’s creditors or of his heirs for their interest is limited to
the husband’s half of the estate covered by the mortgage.

6. Subsequent registration of an adverse claim.

A prior registration of a lien creates a preference; hence, the subsequent annotation of an adverse claim cannot
defeat the rights of the mortgagee or the purchaser at the auction sale whose rights were derived from prior
mortgage validly registered.

1. COVERAGE
Governs sales made under a special power inserted in or attached to any real-estate mortgage, which is made as
security for the payment of money or the fulfillment of any other obligation. The Act will govern the manner in which the
sale and redemption shall be effected, whether or not provision for the same is made in the power. (Sec 1, Act 3135)

The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale and redemption of the
property if and when the mortgagee is given a special power or express authority to do so in the deed itself or in a
document annexed thereto.

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or
income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it
passes into the hands of a third person. (1877)

2. THE FOLLOWING ARE DEEMED TO BE INCLUDED IN A MORTGAGE OF REAL PROPERTY:

1. New plantings;
2. Fruits, except those collected before the obligation falls due, and those removed and stored when it falls due;
3. Accrued and unpaid rents as well as those which should have to be paid while the credit remains wholly unsatisfied;
4. Buildings, machinery and accessories belonging to the mortgage debtor installed on a mortgaged sugar central;

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 5. All objects permanently attached to a mortgaged land or building, although they may have been placed there after
the execution of the mortgage are also included;
6. A more costly building erected in place of the mortgaged building which was torn down by the debtor.

Note: if the mortgaged estate passes into the hands of a third person, the mortgage does not extend to any machinery,
object, chattel or construction which he may have brought or placed there and which such third person may remove
whenever it is convenient for him to do so.

7. REMEDIES AVAILABLE TO MORTGAGE UPON DEFAULT OF THE MORTGAGOR

When a mortgagor (borrower) defaults on mortgage payments, the mortgagee (lender) has several remedies at its
disposal. The most frequently used remedies are a power of sale, an action for judicial sale, and an action for
foreclosure.

1. Power of sale
Following a default, a mortgagee may sell the mortgaged property pursuant to a private power of sale. This remedy
allows a mortgagee to force a sale of the mortgaged property for the purpose of recovering the outstanding balance
remaining on the mortgage.

When a mortgagee exercises its power of sale, it is able to convey the mortgaged property to a third party
purchaser despite the owner’s wishes or objection. The benefit of this remedy is that the process is quite simple.
Upon default, a mortgagee must provide notice to a mortgagor that it intends to exercise its power of sale remedy.
The mortgagee then only has to wait 35 days before it can properly convey the mortgaged property. Within this
period, the mortgagor may stop the process only by providing for the entire balance remaining on the mortgage.

The goal of the mortgagee using a power of sale is not to profit, but simply to recover the balance outstanding on
the mortgage. Provided that the proceeds extinguish the mortgage, the defaulting mortgagor is actually entitled to
the surplus proceeds. As a result, the mortgagee can be held liable to the mortgagor if the property is not sold at its
fair market value. The common law is clear that when a mortgagee exercises its power of sale, it has a duty to the
mortgagor to receive the highest value possible. As a result, some mortgagees are dissuaded from pursing a power
of sale, instead choosing a remedy where liability can be avoided.

2. Judicial sale
Similarly to a power of sale, a judicial sale allows the mortgagee to convey the mortgaged property to a third party
purchaser despite the owner’s wishes or objections. However, in a judicial sale, the court oversees the entire
process. Consequently, the mortgagee cannot be held liable if the proceeds are only sufficient to pay off the
outstanding balance on the mortgage. As a result, several mortgagees select this mechanism as it insulates them
from future liability.

Countering the benefits though is the fact that a judicial sale is a lengthy process. It requires greater notice to the
mortgagor, and several appearances before the court. As a result of the additional time and cost required, many
mortgagees bypass the judicial sale remedy.

3. Foreclosure
Another remedy available to mortgagees is an action for foreclosure. Unlike the other two remedies, when a
mortgagee successfully forecloses a property, it receives a court order awarding it full possessory and legal title of
the mortgaged property. As a result, the mortgagee is entitled to all the proceeds following a sale, meaning it has no
duty to provide the surplus to the mortgagor. While the full extinguishment of the mortgagor’s interest is
advantageous, it can also operate against the mortgagee. Where a property cannot be sold for an amount suffici ent
enough to satisfy the outstanding mortgage, a mortgagee has no standing to bring a claim against the mortgagor for
the difference. Conversely, in both a power of sale and judicial sale, a mortgagee may claim against a mortgagor for
the deficiency following a sale. This additional risk requires mortgagees to carefully consider the market value of the
property before deciding upon the foreclosure remedy.

4. NEED FOR SPECIAL POWER OF ATTORNEY

A Special Power of Attorney is a legal document wherein a person designates another person to do a particular act in
his behalf. This document states the authority of a person and the limits of his authority in doing a particular act. The
person executing this document is called the principal and the person designated by the principal to do a particular act
is the agent. This document, in order to be valid must be signed by the principal and notarized by a Notary Public. The
usual authorities given under a Special Power of Attorney are the following:
1. Authority to Sell a Real Property

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 2. Authority to Sell Shares of Stocks or other personal properties
3. Authority to manage the business of the principal
4. Authority to withdraw retirement benefits
5. Authority to obtain a loan
6. Authority to Mortgage Real Property
7. Other Acts which cannot be consummated without the proper authorization from the concerned person.

1. AUTHORITY TO FORECLOSE EXTRAJUDICIALLY

Foreclosure – It is a remedy available to the mortgagee by which he subjects the mortgaged property to the
satisfaction of the obligation to secure which the mortgage was given.

Validity and effect of foreclosure–Foreclosure is but a necessary consequence of non-payment of mortgage

indebtedness. As a general rule, the mortgage can be foreclosed only when the debt remains unpaid at the time it is
due. The right of foreclosure cannot be exercised by any other person other than the creditor-mortgagee or his assigns.

A mortgage contract may contain an acceleration clause—on occasion of the mortgagor’s default, the whole sum
remaining unpaid automatically becomes due and payable.

2. FORECLOSURE
The remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation
to secure which the mortgage was given where the mortgagor is in default in the payment of said obligation.
Foreclosure may be effected judicially or extra-judicially.

3. JUDICIAL FORECLOSURE UNDER THE RULES OF COURT

This is governed by Rule 68 of the Rules of Court.

1. Judicial action for the purpose. — A mortgage may be foreclosed judicially by bringing an action for that purpose,
in the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof, is
situated. (see Sec.1, Rule 4, Rules of Court.)

2. Order to mortgagor to pay mortgage debt. — If the court finds the complaint to be well-founded, it shall order the
mortgagor to pay the amount due upon the mortgage debt or obligation with interest and other charges within a
period of not less than 90 days nor more than 120 days from the entry of judgment. (Sec.2, Rule 68, Ibid.)

3. Sale to highest bidder at public auction. — If the mortgagor fails to pay at the time directed in the order, the
court, upon motion, shall order the property to be sold to the highest bidder at public auction. (Sec. 3, Ibid.)

4. Confirmation of sale. — The sale when confirmed by an order of the court, also upon motion, shall operate to
divest the rights of all parties to the action and to vest their rights in the purchaser subject to such right of
redemption as may be allowed by law. (Ibid.)

5. Execution of judgment. — No judgment rendered in an action for foreclosure or mortgage can be executed
otherwise than in the manner prescribed by the law on mortgages, because parties to an action are not authorized
to change the procedure which it prescribed. (Piano vs. Cayanong, 7 SCRA 397 [1963].)

6. Application of proceeds of sale. — The proceeds of the sale shall be applied to the payment of the:
a. Costs of the sale;
b. The amount due the mortgagee;
c. Claims of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and
d. The balance if any, shall be paid to the mortgagor or his duly authorized agent, or to the person entitled to it.
(Sec.4, Rule 68, Rules of Court.)

7. Execution of sheriff’s certificate. — In judicial foreclosures, the “foreclosure” is not complete until the sheriff’s
certificate is executed, acknowledged and recorded. In the absence of a Certificate of Sale, no title passes by the
foreclosure proceedings to the vendee. It is only when the foreclosure proceedings are completed and the
mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the property.

4. EXTRAJUDICIAL FORCLOSURE Under act No. 3135 as amended; and A.M. No. 99-10-05-0 which prescribes the
rules in cases of extrajudicial foreclosure of mortgages.

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 -A mortgage may be foreclosed extra judicially where there is inserted in the contract a clause giving the mortgagee the
power, upon default of the debtor, to foreclose the mortgage by an extrajudicial sale of the mortgage property.(Sec.1, Act
No. 3135)

1. Where to file
All applications for extrajudicial foreclosure of mortgage whether under the direction of the sheriff or a notary public,
pursuant to Act 3135, as amended by Act 4118, shall be filed with the executive judge, through the Clerk of
court.

2. Where to sell
Under Sec. 2 of Act No. 3138 as amended by Act No. 4118, Sale cannot be made legally outside of the province in
which the property sold is situated; and in case the place within said province in which the sale is to be made is the
subject of stipulation, Such sale shall be made in said place in the municipal building of the municipality in which the
property or part thereof is situated.

3. Posting requirement
Sec.3, of Act No. 3135 merely requires that the notice of sale be posted in at least three(3) places in the city or
municipality where the property is situated, to wit: the Sheriff’s Office, the Assessor’s office, and the Register of deeds
which are certainly the public places contemplated by law.(Fortune motor vs. Metropolitan Bank & trust Co., 265
SCRA 72)

4. Publication Requirement
a. Sufficiency of Newspaper Publication – Section 3
“Notice shall be given by posting notices of the sale for not less than twenty (20) days in at least three (3) public
places of the municipality or city where the property is situated, and if such property is worth more than four hundred
pesos (P400.00), such notice shall also be published once a week for at least three (3) consecutive weeks in a
newspaper of general circulation in the municipality or city.”

b. Need for Republication in Case of Postponement

“Republication is necessary for the validity of a postponed extrajudicial foreclosure sale. Another publication is
required in case the auction sale is rescheduled, and the absence of such republication invalidates the foreclosure
sale. The last paragraph of the prescribed notice of sale (under SC Circular 7-2002) allows the holding of a
rescheduled auction sale without reposting or republication of the notice. In the event the public auction should not
take place on the said date, it shall be held on __________, ______ without further notice. However, the rescheduled
auction sale will only be valid if the rescheduled date of auction is clearly specified in the prior notice of sale. The
absence of this information in the prior notice of sale will render the rescheduled auction sale void for lack of reposting
or republication.”

5. Personal notice to the mortgagor when and when not needed.

General rule: Personal notice to the mortgagor is not generally required.

Exception: Unless required in the mortgage contract, the lack of personal notice to the mortgagor is not a
ground to set aside foreclosure sale.

Unless otherwise stipulated by the parties to the mortgage contract, the debtor-mortgagor need not be
personally serve a copy of the notice of extrajudicial foreclosure. (SC Circular 7-2002)

1. Personal Notice to the Mortgagor When and when not needed

General Rule: Personal notice to the mortgagor is not generally required. Exception: Unless required in the mortgage
contract, the lack of personal notice to the mortgagor is not a ground to set aside a foreclosure sale.

Unless otherwise stipulated by the parties to the mortgage contract, the debtor-mortgagor need not be personally
served a copy of the notice of the extra- judicial foreclosure. SC Circular 7-2002.

6. POSSESSION BY PURCHASER OF FORCLOSED PROPERTY

Once title to the property has been consolidated in the buyer’s name upon failure of the mortgagee to redeem the
property within the one year redemption period, the writ of possession becomes a matter of right belonging to the buyer.

Consequently, the buyers can demand possession of the property anytime. Its right to possession has then ripened into
the right of a confirmed absolute owner and the issuance of the writ becomes a ministerial function that does not admit

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 of the exercise of the courts discretion. The court acting on an application for its issuance, should issue the writ as a
matter of course and without delay. (GR no. 172504 Donna C. Nagtalon vs. United Coconut Planter’s Bank, July 31,
2013)

7. REMEDY OF DEBTOR IF FORECLOSURE IS NOT PROPER

Under Sec. 8 of Act no. 3135, the debtor may, in the proceedings in which possession was requested, within 30 days
after the purchaser is given possession was requested, within 30 days after the purchaser is given possession of the
property, pettion that the sale be set aside and the writ of possession be cancelled because the mortgage was violated
or the sale was not made in accordance with the provisions thereof.

8. REDEMPTION

DEFINITION:

Transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage
or divests the property of the lien which the mortgage may have created. It allows the owner to repurchase or buy back
within a certain period and for a certain amount, a property that has been sold due to the debt or encumbrance.

KINDS:

1. EQUITY OF REDEMPTION

Right of the mortgagor in case of judicial foreclosure to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage but before the confirmation of the sale of the mortgaged property.

2. RIGHT OF REDEMPTION

Right of the mortgagor in case of extrajudicial foreclosure to redeem the mortgaged property within a certain period
from and after it was sold for the satisfaction of the mortgage debt.

EQUITY OF REDEMPTION RIGHT OF REDEMPTION

9. the equitable right of the mortgagor to 13. the statutory right of the mortgagor to
redeem redeem

10. available before auction sale 1. available after auction sale

11. available only judicial foreclosure 2. available only in extra-judicial foreclosure,

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

REQUISITES OF VALID REDEMPTION

Pursuant to Section 28, Rule 39 of the Rules of Court and subject to the provisions of special laws, the requisites for
valid redemption are:
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 1. The redemption must be made within one (1) year from the date of the registration of the certificate of sale, not from
the date of the foreclosure sale. The existence of the right of redemption operates to depress the market value of the
property until the period expires, and to render the period indefinite would render nugatory the period fixed by statute.

The period of redemption is not a prescriptive period but a condition precedent provided by law to restrict the right of the
person exercising redemption.

2. Payment of the purchase price of the property plus 1% interest per month together with the taxes thereon, if
any, paid by the purchaser and the amount of his prior lien, if any, with the same rate of interest computed from
the date of registration of the sale, up to the time of redemption; and

3. Written notice of the redemption must be served on the officer who made the sale and a duplicate fi led with
the proper Register of Deeds. (Rosales vs. Yboa, 120 SCRA 869 [1983].)

4. In judicial foreclosure, the general rule is that the mortgagor of real estate can no longer exercise his right of
redemption after the sale is confirmed by the court. Allowing a redemption after the lapse of the statutory period,
when the buyer at the foreclosure sale does not object but even consents to the redemption, will uphold the
policy of the law which is to aid rather than defeat the right of redemption. There is nothing in the law which
prevents a waiver of the statutory period for redemption. (Ramirez vs. Court of Appeals, 219 SCRA 598 [1993].)

5. The mortgagor or his assignee is required to tender payment within the prescribed period to make said
redemption valid, or to preserve the right of redemption for future enforcement beyond such period of
redemption.

WHO MAY REDEEM?

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

PERIOD OF REDEMPTION

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

2. Judicial – before confirmation of the sale by the court

Note: Allowing redemption after the lapse of the statutory period when the buyer at the statutory period when the
buyer at the foreclosure sale does not object but even consents to the redemption, will uphold the policy of the law
which is to aid rather than defeat the right of redemption.

AMOUNT OF REDEMPTION PRICE

1. Mortgagee is not a bank (Act No. 3135 in relation to Section 28, Rule 39 of the Revised Rules of Court)
a. Purchase price of the property
b. 1% interest per month on the purchase price
c. Taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest computed
from the date of registration of sale, up to the time of redemption.

2. Mortgagee is a bank. (General Banking Law of 2000)

a. Amount due under the mortgage deed
b. Interest
c. Cost and expenses

2. EFFECTS OF PENDENCY OF ACTION FOR ANNULMENT OF SALE

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 The filing of Court action to enforce redemption has the effect of preserving the redemptioner’s rights and freezing the
expiration of one year period to redeem. (Banco Filipino v. CA)

3. WRIT OF POSSESSION

DEFINITION:

A writ of possession is generally understood to be an order by a court whereby the sheriff is commanded to place in
possession of real or personal property the person entitled thereto such as when a property is extrajudicially foreclosed.
In a foreclosure of real estate mortgage, this right of the writ is granted to the purchaser.

WHEN MAY BE ISSUED?

A writ of possession may be issued under the following instances:

1. Land registration proceeding;

2. In a Judicial Foreclosure of a real estate mortgage, provided that:
a. The debtor is in the possession of the mortgaged realty;
b. No third person, not a party to the foreclosure suit, had intervened.
1. In Extrajudicial foreclosure of real estate mortgage.
2. In Ordinary execution sales (Section 33, rule 39, rules of court)

DUTY OF THE COURT TO ISSUE SAID WRIT:

1. On extrajudicial foreclosure
The issuance of the writ of possession is merely a ministerial function of the court.(A.G development corporation vs
CA, 1997; mamerto marquez foundation Inc. vs Pizarro, 2005)

“In any sale made under the provisions of this act, the purchaser may petition the court of first instance (now
Regional Trial Court) of the province or place where the propert or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the
property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without
violating the mortgage or without complying with the requirements of this act” ( Section 7, Act 3135 as amended)

2. On Judicial Foreclosure

Also Ministerial.

“Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by
law, The purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the
property , unless a third party is actually holding the same adversely to the judgment obligor”.

“The said purchaser or last redemptioner may secure a writ of possession , upon motion, from the court which
ordered the foreclosure” (section 3, second paragraph, rule 68, rules of court)

Note: The right of the applicant or a subsequent purchaser to request for the issuance of a writ of possession never
prescribes. ( Rodil vs. Benedicto, 1980; Paderes vs Court of appeals, 2005)

ENFORCEMENT AGAINST THIRD PERSON:

GENERAL RULE:

The writ of possession issues as a matter of right 1) during redemption period, by filing a petition ex parte and approval
of the furnished bond, and 2) after the redemption period.

EXCEPTION:

No possession of the mortgage property may be awarded to the purchaser if a third party is actually holding or in
possession of the property adversely to the judgment debtor.

REASON FOR THE EXCEPTION:

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 One who claims to be the owner of the property possessed by another must bring the appropriate judicial action for its
physical recovery (Article 433, civil code of the Philippines)

An “ex parte” petition for issuance of a writ of possession is not, strictly speaking, a judicial process contemplated in
article 433.

REASON FOR THE REASON:

The writ of possession does not issue in case of doubt. The court may not grant the writ through a mere motion where
title is in doubt, the proceedings, being, for the issuance of the writ is a mere incident in the transfer of title. ( PNB vs CA
374 scra 22; DBP vs prime Neighborhood, 587 scra 582)

To do so would tantamount to the third Person’s summary ejectment, in violation of the basic tenets of due process
under the constitution which states that no person shall be deprived of life, Liberty or Property without due process of
law?

3. PENDENCY OF ACTION FOR ANNULMENT OF SALE:

The law and jurisprudence are clear that both during and after the period of redemption, the purchaser at the
foreclosure sale is entitled as of right to a writ of possession , REGARDLESS of whether or not there is a pending
suit for annulment of the mortgage or the foreclosure sale itself, without prejudice to the eventual outcome of said
case. (De leon, credit transaction, 2011)

Any objection on the validity of the sale and the writ issued pursuant thereto should be threshed out in a subsequent
proceedings under section 8 of Act 3135.

“The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the
purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the
damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the
provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure
provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the
complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who
obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of
Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of
the appeal.”

Such question cannot be raised to opposed the issuance of the writ of possession, since the proceeding is ex parte.
(PNB vs Sanao Marketing Corp, 465 scra 287; Sulit vs CA, 268 scra 441)

4. ANNULMENT OF SALE

DEFINITION:

It is a real action and a remedy available to the Mortgagor to make inoperative the foreclosure sale of the real property
mortgage if a ground exist.

An action to annul a real estate mortgage foreclosure sale is no different from an action to annul a private sale of real
property ( Muoz vs Llamas, 1950)

GROUNDS:

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

JURISPRUDENCE

1. San Juan vs. Court of Appeals, 363 SCRA 387

FACTS:

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

ISSUE: Whether or not the petitioner had been lawfully divested of her title to the subject property.

RULING: Petition denied.

9. To defend her title over the property, petitioner should have filed the necessary court action from the moment
she discovered the mortgage. Yet, it took almost three (3) years -- well beyond the lapse of the redemption
period -- and the issuance of the final Certificate of Sale, before she protested and attacked the validity of the
real estate mortgage.
10. The right to attack the validity of a mortgage may be lost by a waiver of defects and objections, such as alleged
fraud or misrepresentation. Mortgagors desiring to attack the validity of a mortgage should act with promptness.
Otherwise, unreasonable delay may amount to ratification.
11. A duly executed mortgage is presumed to be valid until the contrary is shown. To the party attacking rests the
burden of proving its invalidity due to fraud, duress or illegality. It should be stressed that, as a general rule,
courts will adopt such construction as will sustain rather than defeat the mortgage.
12. Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a matter of right.
By executing the mortgage, the mortgagor is understood to have given his consent to its registration, and he
cannot be permitted to revoke it unilaterally. The validity and fulfillment of contracts can not be left to the will of
one of the contracting parties.
13. The annotation of private respondents final Certificate of Sale in the Original Certificate of Title, even without
the presentation of petitioners duplicate, was valid. To rule otherwise would result in a situation in which a
purchaser in a foreclosure sale can never consolidate his or her title to the property even after the lapse of the
redemption period, because of the sheer refusal or failure of the former owner to submit the latters duplicate
certificate of title.

2. METROPOLITAN BANK AND TRUST COMPANY, INC vs. EUGENIO

PEAFIEL

ISSUE: WON the notice of sale was published in a newspaper of general circulation

HELD:NO.
“For the purpose of extrajudicial foreclosure of mortgage, the party alleging non-compliance with the requisite
publication has the burden of proving the same.

Nonetheless, the publisher’s testimony that they "do not just offer to anybody" implies that the newspaper is not
available to the public in general. This statement, taken in conjunction with the fact that there are no subscribers in
Mandaluyong City, convinces the Court that Maharlika Pilipinas is, in fact, not a newspaper of general circulation in
MandaluyongCity The object of a notice of sale is to inform the public of the nature and condition of the property to be
sold, and of the time,place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a
sacrifice of the property. The goal of the notice srequirement is to achieve a "reasonably wide publicity" of the auction
sale. This is why publication in a newspaper of general circulation is required. The Court has previously taken judicial
notice of the "far-reaching effects" of publishing the notice of sale in a newspaper of general circulation.”

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 3. DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS and EMERALD RESORT HOTEL
CORPORATION

ISSUE: WON the extrajudicial foreclosure of real estate chattel mortgage is valid.

HELD:Void.

“There is no question that DBP published the notice of auction sale scheduled on 12August 1986. However, no auction
sale took place on 12 August 1986 because DBP,at the instance of ERHC, agreed to postpone the same to 11
September 1986.

Publication, therefore, is required to give the foreclosure sale a reasonablywide publicity such that those interested
might attend the public sale. To allow theparties to waive this jurisdictional requirement would result in converting into
aprivate sale what ought to be a public auction.”

1. ACT NO. 3135 - AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR
ANNEXED TO REAL-ESTATE MORTGAGES

Section 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made
as security for the payment of money or the fulfillment of any other obligation, the provisions of the following election shall
govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is
made in the power.

Sec. 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in case the
place within said province in which the sale is to be made is subject to stipulation, such sale shall be made in said place
or in the municipal building of the municipality in which the property or part thereof is situated.

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of
the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such
notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in
the municipality or city.

Sec. 4. The sale shall be made at public auction, between the hours or nine in the morning and four in the afternoon; and
shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality in
which such sale has to be made, or a notary public of said municipality, who shall be entitled to collect a fee of five pesos
each day of actual work performed, in addition to his expenses.

Sec. 5. At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may participate in the bidding
and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the
mortgage or trust deed under which the sale is made.

Sec. 6. In all cases in which an extrajudicial sale is made under the special power herein before referred to, the debtor,
his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the
property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time
within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions
of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as
these are not inconsistent with the provisions of this Act.

Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the
province or place where the property or any part thereof is situated, to give him possession thereof during the redemption
period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without violating the mortgage or without complying with the
requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration
or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under
the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property
encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law,
and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven
of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered
Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue,
addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

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 Sec. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the
purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the
damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the
provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided
for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the
debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession.
Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four
hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal.

Sec. 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be entitled to
deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part
thereof was rented; if the purchaser occupied the property as his own dwelling, it being town property, or used it gainfully,
it being rural property, the redeemer may deduct from the price the interest of one per centum per month provided for in
section four hundred and sixty-five of the Code of Civil Procedure.

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

Approved: March 6, 1924

2. ACT NO. 4118 - AN ACT TO AMEND ACT NUMBERED THIRTY-ONE HUNDRED AND THIRTY-FIVE, ENTITLED "AN
ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL-
ESTATE MORTGAGES.

Section 1. Section six of Act Numbered Thirty-one hundred and thirty-five, entitled "An Act to regulate the sale of property
under special powers inserted in or annexed to real-estate mortgages," is hereby amended to read as follows:

"Section 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor,
his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the
property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time
within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions
of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as
these are not inconsistent with the provisions of this Act."

Sec. 2. The following three sections are hereby inserted after section six of said Act Numbered Thirty-one hundred and
thirty-five:

Section 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the
province or place where the property or any part thereof is situated, to give him possession thereof during the redemption
period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without violating the mortgage or without complying with the
requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration
or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under
the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property
encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law,
and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven
of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered
Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue,
addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

"Section 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the
purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the
damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the
provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided
for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the
debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession.
Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four
hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal.

"Section 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be entitled
to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part
thereof was rented; if the purchaser occupied the property as his own dwelling, it being town property, or used it gainfully,

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 it being rural property, the redeemer may deduct from the price the interest of one per centum per month provided for in
section four hundred and sixty-five of the Code of Civil Procedure."

Sec. 3. The number of the present section seven of said Act Numbered Thirty-one hundred and thirty-five is hereby
changed, making it section ten.

Sec. 4. This Act shall take effect on its approval.

Approved: December 7, 1933

QUESTIONS AND ANSWERS

1. A real estate mortgage may be foreclosed judicially or extrajudicially. In what instance may a
mortgagee extrajudicially foreclose a real estate mortgage? (5%)

SUGGESTED ANSWER:
When a sale is made under a special power inserted or attached to any real-estate mortgage, thereafter
given as security for the payment of money or the fulfillment of any other obligation, then the mortgagee
may extrajudicially foreclose the real estate mortgage (Sec. 1, Act No. 3135, as amended)

2. What are the three public places being contemplated by the law where posting of notices shall be
made?
1. Sheriff’s office;
2. Assessor’s office; and
3. Register of deeds

RATIO: These are the places where people interested in purchasing real estate congregate usually
proceed.(De leon)

4. What is the effect if the posting and publication requirement is waived?

To allow the parties to waive the posting and publication requirements, would result in converting into a
private sale what ought to be a public auction.(PNB V. Nepomuceno 394 scra 405)

5. What I the proper remedy to seek reversal of judgment in an action for foreclosure of a real estate
mortgage?

It has been held that the proper remedy to seek reversal of a judgment in an action for forclosure of real
estate mortgage is not a petition for annulment of judgment but an appeal from the judgment itself or from
the order confirming the sale of a real estate mortgage. (Agbada v. Inter-urban developers, Inc., 389 SCRA
430)

6. What are the three most frequently used remedies available to mortgage upon default of the mortgagor?

Power of sale, an action for judicial sale, and an action for foreclosure.

7. A mortgage contract may contain an acceleration clause. What does this mean?

On occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes due and
payable.

8. What is the remedy of the debtor if the foreclosure is not proper?

Under Sec. 8 of Act no. 3135, the debtor may, in the proceedings in which possession was requested, within 30
days after the purchaser is given possession was requested, within 30 days after the purchaser is given possession
of the property, pettion that the sale be set aside and the writ of possession be cancelled because the mortgage
was violated or the sale was not made in accordance with the provisions thereof.

9. What is the effect of pendency of action for annulment of sale?

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 The filing of Court action to enforce redemption has the effect of preserving the redemptioner’s rights and freezing
the expiration of one year period to redeem. (Banco Filipino v. CA)

10. What is the difference between equity of redemption and right of redemption?
Right of the mortgagor in case of judicial foreclosure is the right of the owner to redeem the mortgaged property
after his default in the performance of the conditions of the mortgage but before the confirmation of the sale of the
mortgaged property. On the other hand, Right of the mortgagor in case of extrajudicial foreclosure is the right of the
owner to redeem the mortgaged property within a certain period from and after it was sold for the satisfaction of the
mortgage debt.

11. Who are the persons entitled to redeem the property that was foreclosed?

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

THE GENERAL BANKING LAW OF 2000 (R.A.8791)

BANKING INSTITUTION- an entity duly authorized by the Monetary Board of the Central Bank to engage
regularly in the lending of funds obtained from the public through the receipt of deposits of any kind and
regularly conducting such operation (Sec. 2, R.A. 337).

DISTINCTIONS BETWEEN AN ORDINARY AND A BANKING CORPORATION

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

CLASSIFICATIONS OF BANKS OR BANKING INSTITUTIONS

SALIENT FEATURES GOVERNING LAW

Universal Bank -authorized to engage in normal bank operations, R.A. 8791
financing, warehousing and non-allied enterprises

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 -exercises the powers of an investment house
-has the highest capitalization requirement (see table
below)
Commercial Bank -accepts or creates demand deposits withdrawable by R.A. 8791
checks
-cannot exercise the powers of an investment house and
invest in non-allied enterprises
Offshore Banking -foreign banking institution authorized by the BSP to do R.A. 8791
Units business in the Philippines
-conducts business transactions in foreign currencies
involving the receipt of funds from external sources and
the utilization of such resources in transactions with non-
residents or other offshore banking units
Savings and -accumulates funds of depositors for investment or for R.A. 8791
Mortgage Bank loans for personal or home financing
Stock Savings and -accumulates savings deposits of members, R.A. 3779, R.A. 7906
Mortgage stockholders or other persons for loans or investments
Association
Private R.A. 4093, R.A. 7906
Development Banks
Rural Bank -provides credit for rural community purposes R.A. 7353, R.A. 7906
Cooperative Banks -organized primarily to make financial and credit R.A. 6983
services available to cooperatives
Islamic Banks -dealings and activities are subject to basic principles R.A. 6848
and rulings of Islamic Shariah
Specialized and -examples: DBP and LBP
Unique Government
Banks -governed by their respective charters but still subject to
the supervision and regulation by the BSP
Branches of Foreign R.A. 8791
Banks in the
Philippines

Amended Minimum Capital Requirements for Banks

Existing Minimum Revised Minimum

Bank Category/Network Size
Capitalization Capitalization

Universal Banks P 4.95 billion2/

1. Head Office only P3.00billion
2. Up to 10 branches 1/ 6.00billion
3. 11 to 100 branches1/ 15.00billion
4. More than 100 branches1/ 20.00 billion
Commercial Banks 2.40 billion2/
1. Head Office only 2.00billion
2. Up to 10 branches1/ 4.00billion
3. 11 to 100 branches1/ 10.00billion
4. More than 100 branches1/ 15.00 billion
Thrift Banks
Head Office in:
1. Metro Manila 1.00 billion2/
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2. Cebu and Davao cities 500 million2/
3. Other Areas 250 million2/
Head Office in the National Capital
Region (NCR)
1. Head Office only 500million
2. Up to 10 branches1/ 750million
3. 11 to 50 branches1/ 1.00billion
4. More than 50 branches1/ 2.00 billion
Head Office in All Other Areas
Outside NCR 200million
1. Head Office only 300million
2. Up to 10 branches1/ 400million
3. 11 to 50 branches1/ 800 million
4. More than 50 branches1/
Rural and Cooperative Banks
Head Office in:
1. Metro Manila 100million2/
2. Cebu and Davao cities 50million2/
3. Other cities 25million2/
4. 1st to 4th class municipalities 10million2/
5. 5th to 6th class municipalities 5 million2/
Head Office in NCR
1. Head Office only 50million
2. Up to 10 branches1/ 75million
3. 11 to 50 branches1/ 100million
4. More than 50 branches1/ 200 million
Head Office in All Other Areas Outside NCR (All
Cities up to 3rd Class Municipalities)
1. Head Office only 20million
2. Up to 10 branches1/ 30million
3. 11 to 50 branches1/ 40million
4. More than 50 branches1/ 80 million
Head Office in All Other Areas Outside NCR (4th
to 6th Class Municipalities)
1. Head Office only 10million
2. Up to 10 branches1/ 15million
3. 11 to 50 branches1/ 20million
4. More than 50 branches1/ 40 million

QUASI-BANKING INSTITUTIONS- entities regularly lending funds but receiving deposits only occasionally and
not from the general public, such as trust companies and non-stock savings and loan associations.
-also refers to those entities engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of
receivables and other obligations.
TRUST CORPORATIONS- quasi-banking corporations formed or organized for the purpose of acting as trustee
or administering any trust or holding property in trust or on deposit for the use, benefit or behoove of others.
BANK POWERS AND LIABILITIES

BANKPOWERS

1. Banking powers - these are the main powers; without any of these powers, the entity is not a bank (Sec. 3,
RA 8791).

a. The power to accept deposits

b. The power to lend funds obtained in the form of deposits.

2. Powers of a commercial bank (Sec. 29, RA 8791)

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a. General powers incident to corporations
b. All such powers as may be necessary to carry on the business of commercial banking such as:
- accepting drafts and issuing letters of credit
- discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt
-accepting or creating demand deposits
- receiving other types of deposits and deposit substitutes
-buying and selling foreign exchange and gold or silver bullion
-acquiring marketable bonds and other debt securities
-extending credit
c. To invest in equities of allied enterprises

3. Powers of a universal bank (Sec. 23, RA 8791)

a. Has the powers authorized for a commercial bank

b. Has the powers of an investment house
c. Has the power to invest the equities of allied (both financial or non-financial) or non-allied enterprises

** allied enterprises- those entities which enhance or complement banking.

** financial allied enterprises- in thrift banks, rural banks, or other allied enterprise.
** non-financial allied enterprises- activities such as warehousing, lease of safety deposit boxes.

4. Corporate powers

According to sec. 8, R.A. 8791, a bank or a quasi-bank is a stock corporation. It has the general powers
incident to corporations.

Note:
R.A. 8791, section 14 states that the "Securities and Exchange Commission shall not register the articles of
incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued
by the Monetary Board, under its seal..." as a bank is under the supervision, policy direction, authority, and
examination of the BangkoSentral (Sections 4-7, RA 8791).

A stock corporation is one which has a capital stock divided into shares and is authorized to distribute to the
holders of such shares dividends or allotments of the surplus profits. (BP 68/Corporation Code, Sec. 3)

As a stock corporation, a bank is to issue par value stocks only, which are shares with a value fixed in the
articles of incorporation. (Sec. 9, RA 8791).

Furthermore, "to maintain the quality of bank management and afford better protection to depositors and the
public in general, the Monetary Board shall prescribe, pass upon and review the qualifications and
disqualifications of individuals elected or appointed bank directors or officers and disqualify those unfit." - FIT
AND PROPER RULE (Sec. 16, RA 8791).

The corporate powers of a bank are:

a. It is a legal or juridical person, with a personality separate and apart from its individual stockholders, with
the power to sue and be sued in its corporate name.

b. It has the power of succession by its corporate name for the period stated in the articles of incorporation. It
has the capacity to have continuity of existence despite the changes on the persons who compose it. The
personality continues despite the change of stockholders or officers.

c. To adopt by-laws not contrary to law, morals, or public policy and to amend or repeal the same in accordance
with the Corporation Code.

d. To exercise such other powers as may be essential or necessary to carry out its purposes as stated in the
articles of incorporation.

LIABILITIES

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1. Liability for tort

A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of
their employment. (PCI Bank vs. CA 350 SCRA 446, 2001).

2. Liability for fraud

A bank is liable to innocent third persons where the representation is made in the course of its business by a
bank agent acting within the general scope of his authority even though the agent is secretly a using his
authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate
benefit (Phil Banking Corp. vs. CA 419 SCRA 487, 2004).

3. Liability for acts and contracts

As a corporation, obligations incurred by the bank acting thru its authorized agents are its sole liabilities.

Illustration:
The bank is bound by the agreement entered into by its branch manager with a client's deposit at an interest of
17% p.a. The bank impugned the interest rate; however, it is bound by the contract made. (BPI Family Bank vs.
First Metro Investment Corp, 429 SCRA 30, 2004).

4. Liabilities for crimes

As a corporation, it cannot be held liable for a crime committed by its officers since it does not have the
essential element of malice. The responsible officers would be criminally liable, without prejudice to the civil
liabilities of such banking corporation.

DILIGENCE REQUIRED OF BANKS

*The banking system has become an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized society- it is important that banks should guard against injury attributable to
negligence or bad faith on its part. THE HIGHEST DEGREE OF DILIGENCE is expected, and high standards
of integrity and performance are required of banks. (Security Bank vs. RCBC, 577 SCRA 407, 2009).

*The degree of diligence required of banks is more than that of a reasonable man or a good father of a family.
In view of the fiduciary nature of their relationship with their depositors, banks are duty-bound to treat the
accounts of their clients with the highest degree of care. (BPI vs. Lifetime Marketing Corp., 555 SCRA 373,
2008).

*The law imposes on banks a high degree of obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of banking. (PNB vs. Pike, 470 SCRA 328, 2005).

*The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. This fiduciary relationship means that the bank’s obligation to observe high standards of
integrity and performance is deemed written into every deposit agreement between a bank and its depositor.
(Phil Banking Corp. vs. CA, G.R. No. 127469. January 15, 2014).

*The fiduciary nature of the relationship between a bank and its depositors means that the bank is under
obligation to treat the accounts of his depositors with meticulous care whether such account consists only of a
few hundred pesos or of millions of pesos. (Simex International, Manila vs. CA, 183 SCRA 408, 1992).

Illustrations:

1. The bank was grossly negligent when it allowed the sum of PhP220,000.00 to be withdrawn thru falsified
withdrawal slips without the depositor's authority and knowledge. The evidence showed that Bank did not
exercise the degree of diligence it ought to have exercised in dealing with its clients - diligence higher than that
of a good father of a family. If only respondent bank exercised such diligence, no anomaly or irregularity would
have happened. (Cagungun vs. Planters Dev. Bank, 473 SCRA 259, 2005).

2. The external auditor of the company forged the signature of its officers on several checks and deposited the

56 | P a g e
same to his account using a fictitious name. The court ruled that a bank is required to take meticulous care of
the deposits of its clients, who have the right to expect high standards of integrity and performance from it.
Among its obligations in further care thereof is knowing the signatures of its clients. (PBI vs. Casa Montessori
Internationale, 430 SCRA 261, 2004).

NATURE OF BANK FUNDS AND BANK DEPOSITS

Deposits
Deposits consists of money placed into banking institutions for safekeeping. The account holder has
the right to withdraw deposited funds, as set forth in the terms and conditions governing the account
agreement.
These funds are liabilities of the bank, because these have to be returned to the owners on demand.
These likewise become assets of the bank.

Kinds of Deposits

1. Currents Deposits
The depositors of such deposits can withdraw and deposit money whenever they desire. Since banks
have to keep the deposited amount of such accounts in cash always they carry either no interest or very low
rate of interest.
Current Deposits are also called Demand Deposits because these can be demanded or withdrawn by
the depositors at any time they want. Thus, these are highly useful for traders and big business firms because
they have to make payments and accept payments many times in a day.
Demand deposit accounts may have joint owners. Both owners must sign when opening the account,
but only one owner must sign when closing the account. Either owner may deposit or withdraw funds and sign
checks without permission from the other owner.
Financial institutions typically create minimum balances for demand deposit accounts. Accounts falling
below the minimum value typically are assessed a fee each time the balance drops below the required value.

2. Fixed Deposits

Fixed Deposits are also called Time Deposits , Certificate of Deposit or Savings Bonds since
these are the deposits which are deposited for a definite period of time, thus, it cannot be withdrawn before the
expiry of the stipulated time.
These deposits generally carry a higher rate of interest because banks can use these for a definite time
without having the fear of being withdrawn.
Generally speaking, the longer the term, the better the yield of the money.

3. Savings Deposits
Money up to a certain limit can be deposited and withdrawn once or twice in a week, thus, the rate of
interest is very less.
These accounts are not as convenient to use as checking accounts, however, these accounts let
customers keep liquid assets while still earning a monetary return.

Types of Deposits Accounts

1. Individual or Single Account are individually-owned accounts or accounts held under one name: either as
natural person or juridical entity
2. Joint Account
a) "And" account. This is a co-ownership account wherein the signatures of both co-depositors are
required for withdrawals.
b) "And / Or" account. Eighter one of the co-depositors may deposit and withdraw from the account
without the knowledge, consent and signature of the other.
Upon the death of one, the survivor may withdraw the entire balance on deposit.
Joint Accounts may be deemed a survivorship agreement depending on the intention of the parties.
Survivorship agreement is one whereby the co-depositors agree to permit either of them to withdraw
the whole deposit during their lifetime and transferring the balance to the survivor upon the death of one of
them. It is not prohibited unless its operation or effect may be violative of the law.

Deposit Substitutes (Quasi-banking functions)

An alternative form of obtaining funds from the public, other than deposits, through the issuance,
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endorsement or acceptance of debt instruments for the borrowers own-account, for the purpose of re-lending or
purchasing of receivables and other obligations (Sec. 95, RA 7653)

Special Rules on Depositors

1. Minors. They can open bank accounts in their own right provided that:
a) they are at least 7 years of age;
b) they are able to read and write and have sufficient discretion;
c) they are not otherwise disqualified by any other incapacity; and
d) it should only be savings or time deposits (Sec. 1, P.D. 734)
1. Parents may deposit for their minor children and guardians for their wards (Sec. 1, P.D. 734)
2. With respect to thrift banks, if any guardian shall give notice in writing to any thrift bank not to make
payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such
payment shall be made only to the guardian (Sec. 22, Thrift Banks Act of 1995)
2. Married Women are allowed to open bank accounts without the assistance of their husbands (R.A. 7192)
2. Corporations. Judicial persons are capacitated to open bank accounts with respect to corporations, the
opening of an account in its behalf is in fact a requirement even before its life commences.

STIPULATION OF INTEREST

Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe the maximum
rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued
Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby
amended to read as follows:

Sec. 1303. Interest and Other Charges.

— The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance
of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject
to any ceiling prescribed under or pursuant to the Usury Law, as amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or
credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However,
contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to
unilaterally raise the interest rate without the other’s consent.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of
mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more
efficacy than if it had been done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.

GRANT OF LOANS AND SECURITY REQUIREMENTS

SECTION 39. Grant and Purpose of Loans and Other Credit Accommodations. - A bank shall grant loans
and other credit accommodations only in amounts and for the periods of time essential for the effective
completion of the operations to be financed. Such grant of loans and other credit accommodations shall be
consistent with safe and sound banking practices. (75a)

The purpose of all loans and other credit accommodations shall be stated in the application and in the contract
between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit
accommodation have been employed, without its approval, for purposes other than those agreed upon with the
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bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate
repayment of the obligation. (77)

SECTION 40. Requirement for Grant Of Loans or 0ther Credit Accommodations. - Before granting a loan
or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to
the bank.

Toward this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of
their income and expenditures and such information as may be prescribed by law or by rules and regulations of
the Monetary Board to enable the bank to properly evaluate the credit application which includes the
corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should
such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other
credit accommodation granted on the basis of said statements and shall have the right to demand immediate
repayment or liquidation of the obligation.

In formulating rules and regulations under this Section, the Monetary Board shall recognize the peculiar
characteristics of micro financing, such as cash flow-based lending to the basic sectors that are not covered by
traditional collateral. (76a).

PENALTIES FOR VIOLATIONS

a. Monetary Penalties - Fines of one-tenth of one percent (1/10 of 1%) of the excess over the ceiling but not
to exceed Thirty Thousand Pesos (P30,000.00) a day for each SBL violation shall be assessed on the bank to
be reckoned from the date the excess started up to the date when such excess was eliminated: Provided, That
a maximum fine of Five Hundred Pesos (P500.00) a day for each violation shall be imposed against banks with
total resources of less than P50 million at the time of granting of loan/credit accommodation.

b. Other Sanctions
First Offense – Reprimand for the directors/officers who approved the credit availment which resulted in the
excess with a warning that subsequent violations will be subject to more severe sanctions.

Subsequent Offenses –
1. Fine of One Thousand Pesos (P1,000.00) for directors/officers who approved the credit availment which
resulted in the excess.
2. Suspension of the bank’s branching privileges and access to BangkoSentral rediscounting facilities until the
excess is eliminated.
3. Other penalties as the Monetary Board may impose depending on the gravity of the offense.

JURISPRUDENCE
Republic vs Security Credit and Acceptance Corp. (19 SCRA 58)
Facts: Defendant corporation managed to induce the public to open 59 643 savings deposits accounts with an
aggregate amount of P1 689 136.74 deposited which it lent out to borrowers. However, it was not authorized by
the Central Bank to operate a banking institution.
Issue: May Security Credit and Acceptance Corp. be considered as a banking institution?
Ruling: Yes. The determining factors in deciding whether a person or an entity is a banking institutions are
engagement in the lending of funds obtained from the public and regularity in conducting such operation. The
Corporation’s actions fall squarely on such requisites.

ASSOCIATED BANK (Now WESTMONT BANK) vs. TAN

G.R. No. 156940. December 14, 2004

FACTS:

Tan is a businessman and a regular depositor-creditor of Associated Bank. He deposited a postdated check
with the said bank in the amount of Php101,000.00. The check was duly entered in his bank record making his
balance in the amount of PhP297,000.00. Tan was advised that the check had been cleared and so on the

59 | P a g e
same date, Tan withdrew PhP240,000.00 leaving a balance of PhP57,793.45. A day after, he deposited
PhP50,000.00 making his existing balance in the amount of PhP107,793.45.
Tan issued checks to his business partners and suppliers. However, his partners went back to him alleging that
the check he issued bounced for insufficiency of funds. In his Complaint, Tan alleged that he had sufficient
funds to pay the checks he issued.
The bank averred that Tan had no cause of action and it argued that it had all the right to debit the account of
Tan by reason of the dishonor of the check deposited by him which was withdrawn by him prior to its clearing.
The bank did not inform Tan that a debit had been made on his account.

ISSUE:
Did the bank treat the account of its depositor with the highest degree of care?

RULING:
No.The manager of the bank categorically admitted that she and the employees of the bank allowed Tan to
withdraw the amount of check deposited without clearance from the drawee bank. This act clearly disregarded
banking system. The Court confirmed the ruling of the trial court that the bank manager was negligent in
handling the checking account of respondent Tan.

PCIB vs. Court of Appeals

G.R. No. 121413 January 29, 2001

FACTS: This case is composed of three consolidated petitions involving several checks, payable to the Bureau
of Internal Revenue, but was embezzled allegedly by an organized syndicate.

I. G. R. Nos. 121413 and 121479

On October 19, 1977, plaintiff Ford issued a Citibank check amounting to P4,746,114.41 in favor of the
Commissioner of Internal Revenue for the payment of manufacturer’s taxes. The check was deposited with
defendant IBAA (now PCIB), subsequently cleared the the Central Bank, and paid by Citibank to IBAA. The
proceeds never reached BIR, so plaintiff was compelled to make a second payment. Defendant refused to
reimburse plaintiff, and so the latter filed a complaint. An investigation revealed that the check was recalled by
Godofredo Rivera, the general ledger accountant of Ford, and was replaced by a manager’s check. Alleged
members of a syndicate deposited the two manager’s checks with Pacific Banking Corporation. Ford filed a
third party complaint against Rivera and PBC. The case against PBC was dismissed. The case against Rivera
was likewise dismissed because summons could not be served. The trial court held Citibank and PCIB jointly
and severally liable to Ford, but the Court of Appeals only held PCIB liable.

II. G. R. No. 128604

Ford drew two checks in favor of the Commissioner of Internal Revenue, amounting to P5,851,706.37
and P6,311,591.73. Both are crossed checks payable to payee’s account only. The checks never reached BIR,
so plaintiff was compelled to make second payments. Plaintiff instituted an action for recovery against PCIB and
Citibank.

On investigation of NBI, the modus operandi was discovered. Gorofredo Rivera made the checks but
instead of delivering them to BIR, passed it to Castro, who was the manager of PCIB San Andres. Castro
opened a checking account in the name of a fictitious person “Reynaldo Reyes”. Castro deposited a worthless
Bank of America check with the same amount as that issued by Ford. While being routed to the Central Bank
for clearing, the worthless check was replaced by the genuine one from Ford.

The trial court absolved PCIB and held Citibank liable, which decision was affirmed in toto by the Court
of Appeals.

ISSUES:

(1) Whether there is contributory negligence on the part of Ford

(2) Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank)
the value of the checks intended as payment to the Commissioner of Internal Revenue?

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HELD:

(1) The general rule is that if the master is injured by the negligence of a third person and by the concurring
contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and will
defeat the superior's action against the third person, assuming, of course that the contributory negligence was
the proximate cause of the injury of which complaint is made. As defined, proximate cause is that which, in the
natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury and without
the result would not have occurred. It appears that although the employees of Ford initiated the transactions
attributable to an organized syndicate, in our view, their actions were not the proximate cause of encashing the
checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as the
proximate cause of the injury to the parties. The mere fact that the forgery was committed by a drawer-payor's
confidential employee or agent, who by virtue of his position had unusual facilities for perpertrating the fraud
and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the drawer. This rule likewise applies to the checks
fraudulently negotiated or diverted by the confidential employees who hold them in their possession.

(2) We have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its ultimate
agenda of stealing the proceeds of these checks.

a. G. R. Nos. 121413 and 121479.

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of
PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN-
04867 was duly authorized, showed lack of care and prudence required in the circumstances. Furthermore, it
was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent
of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor
or its agent. It is a well-settled rule that the relationship between the payee or holder of commercial paper and
the bank to which it is sent for collection is, in the absence of an argreement to the contrary, that of principal
and agent. A bank which receives such paper for collection is the agent of the payee or holder.

Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check
should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to
ascertain that the check be deposited in payee's account only. Therefore, it is the collecting bank (PCIBank)
which is bound to scrutinize the check and to know its depositors before it could make the clearing indorsement
"all prior indorsements and/or lack of indorsement guaranteed".

Lastly, banking business requires that the one who first cashes and negotiates the check must take
some precautions to learn whether or not it is genuine. And if the one cashing the check through indifference or
other circumstance assists the forger in committing the fraud, he should not be permitted to retain the proceeds
of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of
the person negotiating the instrument before paying the check. For this reason, a bank which cashes a check
drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of
the negotiation of the checks. Thus, one who encashed a check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.

b. G. R. No. 128604

In this case, there was no evidence presented confirming the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their employment. A bank will be held liable
for the negligence of its officers or agents when acting within the course and scope of their employment. It may
be liable for the tortuous acts of its officers even as regards that species of tort of which malice is an essential
element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme

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hatched by a syndicate in which its own management employees had participated. But in this case,
responsibility for negligence does not lie on PCIBank's shoulders alone.

QUESTIONS AND ANSWERS

BAR QUESTION (1978)

1. ABC Investment Corporation is engaged in the purchase of accounts receivables, or specifically
installment papers of purchasers of cars and trucks. As a source of its funding, the corporation sells its
bonds from time to time to the public. The proceeds of which are utilized in financing operations. On
the basis of these facts, the Legal Counsel of the Central Bank rendered an opinion to the effect that
ABC Investment Corp. is a banking institution within the purview of the General Banking Act.
Is this correct? Give reasons for your answer.
No, the opinion of the Legal Counsel is not correct because said corporation does not fall within the definition of
a bank. A bank as defined by law is one which is engaged in the receipt of deposits of any kind. Moreover,
being a financing corporation, it has not been considered expressly by our law as a banking institution.

2. What are the main powers of a bank?

The banking powers of accepting deposits and lending funds from deposits.

1. What is meant by “fiduciary relationship” between a bank and its depositor?

The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. This fiduciary relationship means that the bank’s obligation to observe high standards of
integrity and performance is deemed written into every deposit agreement between a bank and its
depositor. (Phil Banking Corp. vs. CA, G.R. No. 127469. January 15, 2014). The bank is under obligation to
treat the accounts of his depositors with meticulous care whether such account consists only of a few
hundred pesos or of millions of pesos. (Simex International, Manila vs. CA, 183 SCRA 408, 1992).

4. Mr. U, a bank employee, allowed withdrawal from an account of Mr. Z by a certain person who
claimed to be Mr. Z without verifying his signature. Consequently, the withdrawal turned out to be an
unauthorized one. Mr. Z filed a complaint against the bank for damages. However, the bank averred that
Mr. Z has no cause of action against it as the one liable should be Mr. U. Is the bank’s contention
correct?

No.A bank will be held liable for the negligence of its officers or agents when acting within the course and
scope of their employment. (PCI Bank vs. CA 350 SCRA 446, 2001).

5. What is the relationship between the depositor and the bank with respect to the money deposited by
the former with the latter?

There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and
the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on
demand. The savings deposit agreement between the bank and the depositor is the contract that determines
the rights and obligations of the parties.

6. When a co-depositor inquires into the deposits, does he need the written consent of the other
depositor?

No. A co-payee in a check deposited in a bank is likewise a co-depositor. No written consent therefore
of the other co-payee is needed in an inquiry of the deposits by the said co-depositor.

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 BANGKO SENTRAL NG PILIPINAS LAW
RA 7653 (1993)

A. STATE POLICIES
1. the State shall maintain a central monetary authority
2. that shall function and operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit
3. in line with this policy, and considering its unique functions and responsibilities, the central monetary
authority established under this Act, while being a government-owned corporation, shall enjoy fiscal and
administrative autonomy (sec. 1)
B. CREATION OF THE BSP
SECTION 2. Creation of the Bangko Sentral. — There is hereby established an independent central monetary
authority, which shall be a body corporate known as the Bangko Sentral ng Pilipinas, hereafter referred to as
the Bangko Sentral.
C. BSP RESPONSIBILITIES
1. provide policy directions in the areas of money, banking, and credit

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 2. have supervision over the operations of banks
3. excercise such regulatory powers as provided in this Act and other pertinent laws over the operations of
FINANCE COMPANIES and non-bank financial institutions performing quasi-banking functions, hereafter
referred to as QUASI-BANKS, and institutions performing similar functions (sec. 3)
BSP Primary Objective
1. maintain price stability conducive to a balanced and sustainable growth of the economy
2. it shall also promote and maintain monetary stability and the convertibility of the peso

D. THE MONETARY BOARD

The powers and function of Bangko Sentral are exercised by its Monetary Board, which has seven members
appointed by the President of The Philippines. Under the New Central Bank Act, one of the government sector
members of the Monetary Board must also be a member of the Cabinet designated by the President.

The New Central Bank Act establishes certain qualifications for the members of the Monetary Board and also
prohibits members from holding certain positions with other governmental agencies and private institutions that
may give rise to conflicts of interest. With the exception of the members of the Cabinet, the Governor and the
other members of the Monetary Board serve terms of six years and may only be removed for cause.

The Monetary Board meets at least once a week. The Board may be called to a meeting by the Governor of
the Bangko Sentral or by two (2) other members of the Board. Usually, the Board meets every Thursday but
on some occasions, it convenes to discuss urgent issues.

Powers and Functions of the Monetary Board

In the exercise of its authority, the Monetary Board shall:

1. Issue rules and regulations it considers necessary for the effective discharge of the responsibilities
and exercise of the powers vested upon the Monetary Board and the Bangko Sentral;
2. Direct the management, operations, and administration of the Bangko Sentral, reorganize its personnel,
and issue such rules and regulations as it may deem necessary or convenient for this purpose. The
legal units of the Bangko Sentral shall be under the exclusive supervision and control of the Monetary
Board;
3. Establish a human resource management system which shall govern the selection, hiring, appointment,
transfer, promotion, or dismissal of all personnel. Such system shall aim to establish professionalism
and excellence at all levels of the Bangko Sentral in accordance with sound principles of management.
A compensation structure, based on job evaluation studies and wage surveys subject to the Board's
approval, shall be instituted as an integral component of the Bangko Sentral's human resource
development program.
On the recommendation of the Governor, appoint, fix the remunerations and other emoluments, and
remove personnel of the Bangko Sentral, subject to pertinent civil service laws: Provided, That the
Monetary Board shall have exclusive and final authority to promote, transfer, assign, or reassign
personnel of the Bangko Sentral and these personnel actions are deemed made in the interest of the
service and not disciplinary: Provided, further, That the Monetary Board may delegate such authority to
the Governor under such guidelines as it may determine;
4. Adopt an annual budget for and authorize such expenditures by the Bangko Sentral in the interest of
the effective administration and operations of the Bangko Sentral in accordance with applicable laws
and regulations; and
5. Indemnify its members and other officials of the Bangko Sentral, including personnel of the
departments performing supervision and examination functions against all costs and expenses
reasonably incurred by such persons in connection with any civil or criminal action, suit or proceedings
to which he may be, or is, made a party by reason of the performance of his functions or duties, unless
he is finally adjudged in such action or proceeding to be liable for negligence or misconduct.

E. HOW THE BSP HANDLES BANKS IN DISTRESS?

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Examination and Supervision of the BSP (sec. 25)
the BSP shall have
a) supervision over
b) and conduct periodic or special examinations of
1. banking institutions
2. quasi-banks
3. including their subsidiaries and affiliates engaged in allied activities
- a subsidiary means a corporation more than 50% of the voting stock of which is owned by a bank or quasi-
bank
- an affiliate means a corporation the voting stock of which, to the extent of 50% or less, is owned by a bank or
quasi-bank or which is related or linked to such institution or intermediary through common stockholders or
such other factors as may be determined by the Monetary Board
The department heads and the examiners of the supervising and/or examining departments are hereby
authorized
1. to administer oaths to any director, officer, or employee of any institution under their respective supervision or
subject to their examination
2. and to compel the presentation of all books, documents, papers or RECORDS necessary in their judgment to
ascertain the facts relative to the true condition of any institution as well as the books and records of persons
and entities relative to or in connection with the operations, activities or transactions of the institution under
examination, subject to the provision of existing laws protecting or safeguarding the secrecy or confidentiality of
bank deposits as well as investments of private persons, natural or juridical, in debt instruments issued by the
Government
No injunction against BSP (SEC. 25)
no restraining order or injunction shall be issued by the court enjoining the BSP from examining any
institution subject to supervision or examination by the BSPB
unless there is
a) convincing proof that the action of the BSP is plainly arbitrary and made in bad faith
b) and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond
executed in favor of the BSP in an amount to be fixed by the court
- the provisions of Rule 58 of the New Rules of Court insofar as they are applicable and not inconsistent with
the provisions of this section shall govern the issuance and dissolution of the restraining order or injunction
contemplated in this section
Conservatorship (SEC. 29)
Whenever
1. on the basis of a report submitted by the appropriate supervising or examining department
1. the MB finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain
a condition of liquidity deemed adequate to protect the interest of depositors and creditors

The MB may appoint a conservator w/ such powers as the MB shall deem necessary
a) to take charge of the assets, liabilities, and the management thereof
b) reorganize the management
c) collect all monies and debts due said institution
d) and exercise all powers necessary to restore its viability
e) the conservator shall report and be responsible to the MB
f) and shall have the power to overrule or revoke the actions of the previous management and board of
directors of the bank or quasi-bank
- (qualifications) the conservator should be competent and knowledgeable in bank operations and management
- (period) the conservatorship shall not exceed 1 year
Remuneration:

1. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed
2/3 of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly
payments

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2. If at any time within one-year period, the conservatorship is terminated

Bank Closure (sec. 30)

whenever, upon report of the head of the supervising or examining department, the MB finds that a
bank or quasi-bank:

1. is unable to pay its liabilities

1. as they become due in the ordinary course of business
2. provided that this shall not include inability to pay caused by extraordinary demands induced by
financial panic in the banking community
2. has insufficient realizable assets, as determined by the BangkoSentral, to meet its liabilities or
3. cannot continue in business w/o involving probable losses to its depositors or creditors or
4. has willfully violated a cease and desist order under sec. 37 that has become final involving acts or
transactions which amount to fraud or a dissipation of the assets of the institution
1. notifies the BSP or publicly announces a bank holiday or in any manner suspends the payment of its
deposit liabilities continuously for more than 30 days (added ground under Sec 53 of RA8791)
2. Conducting business in an UNSAFE or UNSOUND manner (added ground under Sec 56 of RA8791)
The MB may summarily and w/o need for prior hearing:
- forbid the institution from doing business in the Philippines
- and designate the PDIC as receiver of the banking institution (for a bank)
- or any person of recognized competence in banking or finance may be designated as receiver (for a quasi-
bank)
Receivership (Sec 30)
A. DUTIES OF THE RECEIVER UPON HIS DESIGNATION:
1. the receiver shall immediately gather and take charge of all the assets and liabilities of the institution
2. administer the same for the benefit of its creditors
3. exercise the general powers of a receiver under the Revised Rules of Court
1. SHALL NOT PAY OR COMMIT ANY ACT THAT WILL INVOLVE THE transfer OR DISPOSITION OF
any asset OF THE INSTITUTION W/ THE exception OF administrative expenditures
B) THE RECEIVER MAY deposit OR PLACE THE FUNDS OF THE INSTITUTION IN non-speculative
investments
2. not later than 90 days from take over -- the receiver shall determine as soon as possible, whether the
institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to
resume business with safety to its depositors and creditors and the general public:
Any determination for the resumption of business of the institution shall be subject to prior approval of
the MB
3. if the receiver determines that the institution cannot be rehabilitated or permitted to resume business in
accordance with the next preceding paragraph
a) the MB shall notify in writing the board of directors of its findings
b) and direct the receiver to proceed w/ the liquidation of the institution
Liquidation
A. DUTIES OF RECEIVER DURING LIQUIDATION (SEC 30):
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1. file ex parte with the proper RTC, and w/o requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution
a) pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks
b) in case of quasi-banks, the liquidation plan shall be adopted by the MB
c) upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice
- adjudicate disputed claims against the institution
- assist the enforcement of individual liabilities of the stockholders, directors and officers
- and decide on other issues as may be material to implement the liquidation plan adopted
d) the receiver shall pay the cost of the proceedings from the assets of the institution
2. convert the assets of the institutions to money
a) dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in
accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines
b) in the name of the institution, and w/ the assistance of counsel, institute such actions as may be necessary to
collect and recover accounts and assets of, or defend any action against, the institution
- the assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of
the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be
exempt from any order of garnishment, levy, attachment, or execution
- the actions of the MB taken under this section or under sec. 29 of this Act shall be final and executory, and
may not be restrained or set aside by the court except on petition for certiorari on the ground that the action
taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction
- the petition for certiorari may only be filed by the stockholders of record representing the majority of the capital
stock w/in 10 days from receipt by the board of directors of the institution of the order directing receivership,
liquidation or conservatorship
- the designation of a conservator under Section 29 of this Act or the appointment of a receiver under this
section shall be vested exclusively w/ the MB
– the designation of a conservator is not a precondition to the designation of a receiver
DISTRIBUTION OF ASSETS (SEC. 31)
In case of liquidation of a bank or quasi-bank, after payment of the cost of proceedings, including
reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay the debts of
such institution, under order of the court, in accordance with the rules on concurrence and preference of credit
as provided in the Civil Code.
DISPOSITION OF REVENUES AND EARNINGS (SEC 32)
All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of
any bank or quasi-bank within the purview of this Act shall be used to pay the costs, fees and expenses
mentioned in the preceding section, salaries of such personnel whose employment is rendered necessary in the
discharge of the liquidation together with other additional expenses caused thereby. The balance of revenues
and earnings, after the payment of all said expenses, shall form part of the assets available for payment to
creditors.
DISPOSITION OF BANKING FRANCHISE (SEC. 33)
The Bangko Sentral may, if public interest so requires, award to an institution, upon such terms and conditions
as the Monetary Board may approve, the banking franchise of a bank under liquidation to operate in the area
where said bank or its branches were previously operating: Provided, That whatever proceeds may be realized
from such award shall be subject to the appropriate exclusive disposition of the Monetary Board.
F. HOW THE BSP HANDLES EXCHANGE CRISIS?
Exchange Crisis Authority (sec. 72)

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in order
a) to achieve the primary objective of the BangkoSentral
b) or protect the international reserves of the BangkoSentral in the imminence of, or during an exchange crisis,
or in time of national emergency
c) and to give the Monetary Board and the Government time in which to take constructive measures to forestall,
combat, or overcome such a crisis or emergency
the MB w/ the concurrence of at least 5 of its members and w/ the approval of the
President of the Philippines may
a) temporarily suspend or restrict sales of exchange by the BSP
b) and may subject all transactions in gold and foreign exchange to license by the BangkoSentral,
c) and may require that any foreign exchange thereafter obtained by any person residing or entity operating in
the Philippines be delivered to the BSP or to any bank or agent designated by the BangkoSentral for the
purpose, at the effective exchange rate or rates
1. AS CUSTODIAN OF COUNTRY’S INTERNATIONAL RESERVES
International Monetary Stabilization. (Sec. 64)
The BangkoSentral shall exercise its powers under this Act to preserve the international value of the
peso and to maintain its convertibility into other freely convertible currencies primarily for, although not
necessarily limited to, current payments for foreign trade and invisibles.
International Reserves. (Sec. 65)
In order to maintain the international stability and convertibility of the Philippine peso, the
BangkoSentral shall maintain international reserves adequate to meet any foreseeable net demands on the
BangkoSentral for foreign currencies.
Composition of the International Reserves. (Sec. 66)
The international reserves of the BangkoSentral may include but shall not be limited to the following
assets:
1. gold; and
2. assets in foreign currencies in the form of: documents and instruments customarily employed for the
international transfer of funds; demand and time deposits in central banks, treasuries and commercial
banks abroad; foreign government securities; and foreign notes and coins.
The Monetary Board shall endeavor to hold the foreign exchange resources of the BangkoSentral in
freely convertible currencies; moreover, the Board shall give particular consideration to the prospects of
continued strength and convertibility of the currencies in which the reserve is maintained, as well as to the
anticipated demands for such currencies. The Monetary Board shall issue regulations determining the other
qualifications which foreign exchange assets must meet in order to be included in the international reserves of
the BangkoSentral.
The BangkoSentral shall be free to convert any of the assets in its international reserves into other
assets as described in subsections (a) and (b) of this section.
3. AS CONTROLLER OF CREDIT
Guiding Principle. (Sec. 61)
The Monetary Board shall endeavor to control any expansion or contraction in monetary aggregates
which is prejudicial to the attainment or maintenance of price stability.
Power to Define Terms. (Sec. 62)
For purposes of this article and of this Act, the Monetary Board shall formulate definitions of monetary
aggregates, credit and prices and shall make public such definitions and any changes thereof.
Action When Abnormal Movements Occur in the Monetary Aggregates, Credit, or Price Level. (Sec. 63)
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1. Whenever abnormal movements in the monetary aggregates, in credit, or in prices endanger the
stability of the Philippine economy or important sectors thereof, the Monetary Board shall:
1. take such remedial measures as are appropriate and within the powers granted to the Monetary Board
and the BangkoSentral under the provisions of this Act; and
2. submit to the President of the Philippines and the Congress, and make public, a detailed report which
shall include, as a minimum, a description and analysis of:
1. the causes of the rise or fall of the monetary aggregates, of credit or of prices;
2. the extent to which the changes in the monetary aggregates, in credit, or in prices have been reflected
in changes in the level of domestic output, employment, wages and economic activity in general, and
the nature and significance of any such changes; and
3. the measures which the Monetary Board has taken and the other monetary, fiscal or administrative
measures which it recommends to be adopted.
1. Whenever the monetary aggregates, or the level of credit, increases or decreases by more than fifteen
percent (15%), or the cost of living index increases by more than ten percent (10%), in relation to the
level existing at the end of the corresponding month of the preceding year, or even though any of these
quantitative guidelines have not been reached when in its judgment the circumstances so warrant, the
Monetary Board shall submit the reports mentioned in this section, and shall state therein whether, in
the opinion of the Board, said changes in the monetary aggregates, credit or cost of living represent a
threat to the stability of the Philippine economy or of important sectors thereof.
2. The Monetary Board shall continue to submit periodic reports to the President of the Philippines and to
Congress until it considers that the monetary, credit or price disturbances have disappeared or have
been adequately controlled.
Guiding Principles. (Sec. 81)
1. The rediscounts, discounts, loans and advances which the BangkoSentral is authorized to extend to
banking institutions under the provisions of the present article of this Act shall be used to influence the
volume of credit consistent with the objective of price stability.
EXCHANGE CRISIS PROVISION (sec. 72) (supra)
Acquisition of Inconvertible Currencies (Sec. 73)
The BangkoSentral shall avoid the acquisition and holding of currencies which are not freely convertible, and
may acquire such currencies in an amount exceeding the minimum balance necessary to cover current
demands for said currencies only when, and to the extent that, such acquisition is considered by the Monetary
Board to be in the national interest.
Exchange Rates. (Sec. 74)
1. The Monetary Board shall determine the exchange rate policy of the country.
2. The Monetary Board shall determine the rates at which the BangkoSentral shall buy and sell spot
exchange, and shall establish deviation limits from the effective exchange rate or rates as it may deem
proper.
3. The BangkoSentral shall not collect any additional commissions or charges of any sort, other than
actual telegraphic or cable costs incurred by it.
4. The Monetary Board shall similarly determine the rates for other types of foreign exchange transactions
by the BangkoSentral, including purchases and sales of foreign notes and coins, but the margins
between the effective exchange rates and the rates thus established may not exceed the corresponding
margins for spot exchange transactions by more than the additional costs or expenses involved in each
type of transactions.

Operations with Foreign Entities. (Sec. 75)

1. The Monetary Board may authorize the BangkoSentral to grant loans to and receive loans from foreign
banks and other foreign or international entities, both public and private, and may engage in such other

69 | P a g e
 operations with these entities as are in the national interest and are appropriate to its character as a
central bank.
2. The BangkoSentral may also act as agent or correspondent for such entities.
3. Upon authority of the Monetary Board, the BangkoSentral may pledge any gold or other assets which it
possesses as security against loans which it receives from foreign or international entities.
Foreign Exchange Holdings of the Banks (Sec. 76)
1. In order that the BangkoSentral may at all times have foreign exchange resources sufficient to enable it
to maintain the international stability and convertibility of the peso, or in order to promote the domestic
investment of bank resources, the Monetary Board may require the banks to sell to the BangkoSentral
or to other banks all or part of their surplus holdings of foreign exchange.
2. The Monetary Board may, whenever warranted, determine the net assets and net liabilities of banks
and shall, in making such a determination, take into account the bank's networth, outstanding liabilities,
actual and contingent, or such other financial or performance ratios as may be appropriate under the
circumstances.
Requirement of Balanced Currency Position (Sec. 77)
1. The Monetary Board may require the banks to maintain a balanced position between their assets and
liabilities in Philippine pesos or in any other currency or currencies in which they operate.
2. The banks shall be granted a reasonable period of time in which to adjust their currency positions to
any such requirement.
3. The powers granted under this section shall be exercised only when special circumstances make such
action necessary.
Regulation of Non-spot Exchange Transactions. (Sec. 78)
In order to restrain the banks from taking speculative positions with respect to future fluctuations in foreign
exchange rates, the Monetary Board may issue such regulations governing bank purchases and sales of non-
spot exchange as it may consider necessary for said purpose.
Other Exchange Profits and Losses. (Sec. 79)
The banks shall bear the risks of non-compliance with the terms of the foreign exchange documents and
instruments which they buy and sell, and shall also bear any other typically commercial or banking risks,
including exchange risks not assumed by the BangkoSentral under the provisions of the preceding section.
CREDIT OPERATIONS
Guiding Principles (Sec. 81)
The rediscounts, discounts, loans and advances which the BangkoSentral is authorized to extend to banking
institutions under the provisions of the present article of this Act shall be used to influence the volume of credit
consistent with the objective of price stability.

JURISPRUDENCE

ABACUS REAL ESTATE DEVELOPMENT v. MANILA BANKING CORP

[G.R. No. 162270. April 06, 2005]

The appointment of a receiver operates to suspend the authority of the bank and of its directors and officers
over its property and effects, such authority being reposed in the receiver, and in this respect, the receivership
is equivalent to an injunction to restrain the bank officers from intermeddling with the property of the bank in any
way.

Facts:

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Manila Banking Corporation (Manila Bank, for brevity), owns a 1,435-square meter parcel of land located along
Gil Puyat Avenue Extension, Makati City and covered by Transfer Certificate of Title (TCT) No. 132935 of the
Registry of Deeds of Makati. Prior to 1984, the bank began constructing on said land a 14-storey building. Not
long after, however, the bank encountered financial difficulties that rendered it unable to finish construction of
the building. Central Bank of the Philippines, now Bangko Sentralng Pilipinas, ordered the closure of Manila
Bank and placed it under receivership, with Feliciano Miranda, Jr. being initially appointed as Receiver. The
legality of the closure was contested by the bank before the proper court. Manila Bank’s then acting president,
the late Vicente G. Puyat, in a bid to save the bank’s investment, started scouting for possible investors who
could finance the completion of the building earlier mentioned.
A group of investors, represented by Calixto Y. Laureano (hereafter referred to as Laureano group), wrote
Vicente G. Puyat offering to lease the building for ten (10) years and to advance the cost to complete the same,
with the advanced cost to be amortized and offset against rental payments during the term of the lease.
Likewise, the letter-offer stated that in consideration of advancing the construction cost, the group wanted to be
given the “exclusive option to purchase” the building and the lot on which it was constructed. Vicente G. Puyat
accepted the Laureano group’s offer and granted it an “exclusive option to purchase” the lot and building for
One Hundred Fifty Million Pesos (P150,000,000.00). Later, or on October 31, 1989, the building was leased to
MEQCO for a period of ten (10) years pursuant to a contract of lease bearing that date. MEQCO subleased the
property to petitioner Abacus Real Estate Development Center, Inc. (Abacus, for short), a corporation formed
by the Laureano group for the purpose, under identical provisions as that of the October 31, 1989 lease
contract between Manila Bank and MEQCO.

Issue:
Whether or not Vicente Puyat, acting as president of Manila Bank, has the power to sell the disputed properties.

Held:
There can be no quibbling that respondent Manila Bank was under receivership, pursuant to Central Bank’s MB
Resolution No. 505 dated May 22, 1987, at the time the late Vicente G. Puyat granted the “exclusive option to
purchase” to the Laureano group of investors. Owing to this defining reality, the appellate court was correct in
declaring that Vicente G. Puyat was without authority to grant the exclusive option to purchase the lot and
building in question. The invocation by the appellate court of the following pronouncement inVillanueva vs.
Court of Appeals was apropos, to say the least the assets of the bank pass beyond its control into the
possession and control of the receiver whose duty it is to administer the assets for the benefit of the creditors of
the bank. Thus, the appointment of a receiver operates to suspend the authority of the bank and of its directors
and officers over its property and effects, such authority being reposed in the receiver, and in this respect, the
receivership is equivalent to an injunction to restrain the bank officers from intermeddling with the property of
the bank in any way. With respondent bank having been already placed under receivership, its officers,
inclusive of its acting president, Vicente G. Puyat, were no longer authorized to transact business in connection
with the bank’s assets and property. Clearly then, the “exclusive option to purchase” granted by Vicente G.
Puyat was and still is unenforceable against Manila Bank.
Concededly, a contract unenforceable for lack of authority by one of the parties may be ratified by the person in
whose name the contract was executed. However, even assuming, in gratia argument, that Atty. Renan
Santos, Manila Bank’s receiver, approved the “exclusive option to purchase” granted by Vicente G. Puyat, the
same would still be of no force and effect.

MIRANDA v. COURT OF APPEALS

[G.R. No. 169334, September 8, 2006]

Solidary liability cannot attach to the BSP, in its capacity as government regulator of banks, and the PDIC as
statutory receiver under R.A. No. 7653, because they are the principal government agencies mandated by law
to determine the financial viability of banks and quasi-banks, and facilitate receivership and liquidation of closed
financial institutions, upon a factual determination of the latter’s insolvency.

Facts:
Leticia G. Miranda (Miranda) was a depositor of Prime Savings Bank. She withdrew substantial amounts from
her account, but instead of cash she opted to be issued a crossed cashier’s check in the sum of P2,500,000
and cashier’s check in the amount of P3,002,000. Petitioner deposited the two checks into her account in
another bank on the same day, however, Bangko Sentralng Pilipinas (BSP) suspended the clearing privileges
of Prime Savings Bank effective 2:00 p.m. of June 3, 1999. The two checks of petitioner were returned to her
unpaid. Subsequently, Prime Savings Bank declared a bank holiday. The BSP placed Prime Savings Bank
under the receivership of the Philippine Deposit Insurance Corporation (PDIC).
Petitioner filed a civil action for sum of money in the Regional Trial Court to recover the funds from her unpaid
checks against Prime Savings Bank, PDIC and the BSP. The court rendered judgment against defendants and

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ordered them to pay the plaintiff. On appeal, the Court of Appeals reversed the trial court and ruled in favor of
the PDIC and BSP, dismissing the case against them, without prejudice to the right of petitioner to file her claim
before the court designated to adjudicate on claims against Prime Savings Bank. Petitioner’s motion for
reconsideration was denied. Hence, this petition.
Issue:
Whether or not the PDIC are solidarily liable to pay the petitioner.
Held:
Only Prime Savings Bank that is liable to pay for the amount of the two cashier’s checks. Solidary liability
cannot attach to the BSP, in its capacity as government regulator of banks, and the PDIC as statutory receiver
under R.A. No. 7653, because they are the principal government agencies mandated by law to determine the
financial viability of banks and quasi-banks, and facilitate receivership and liquidation of closed financial
institutions, upon a factual determination of the latter’s insolvency. However, in a situation involving the element
of fraud, where a cashier’s check is purchased from a bank at a time when it is insolvent, as its officers know or
are bound to know by the exercise of reasonable diligence, it has been held that the purchase is entitled to a
preference in the assets of the bank on its liquidation before the check is paid. Hence, the CA decision is
affirmed with modification that the claim of petitioner Miranda is entitled to preference in the assets of PSB in its
liquidation.

SUAN V. GONZALES
[A.C. No. 6377 March 12, 2007]

The filing of the intra-corporate case before the RTC to compel the bank to disclose its stockholdings, to allow
them the inspection of corporate books and records, and the payment of damages does not amount to forum-
shopping notwithstanding the BSP’s investigation on the bank’s unsafe and unsound business practices

Facts:
Gonzales filed a case for Mandamus, Computation of Interests, Enforcement of Inspection, Dividend and
Appraisal Rights, Damages and Attorney’s Fees against the Rural Green Bank of Caraga, Inc. and the
members of its Board of Directors before the Regional Trial Court (RTC) of Butuan City. The petition prayed
for, inter alia, that a temporary restraining order be issued enjoining the conduct of the annual stockholders’
meeting and the holding of the election of the Board of Directors. The trial court issued a temporary restraining
order (TRO) conditioned upon respondent’s posting of a bond.
Thereafter, Gonzales submitted a certification by Stronghold Insurance Company, Incorporated (SICI) together
with a Certification issued by then Court Administrator, now Associate Justice, Presbitero J. Velasco, Jr. that,
according to the Clerk of Court of the Municipal Trial Court in Cities (MTCC) of Butuan City, SICI has no
pending obligation and/or liability to the government insofar as confiscated bonds in civil and criminal cases are
concerned.
Suan also claimed that in the complaint filed by respondent, together with Eduardo, Purisima, Ruben, and
Manuel, all surnamed Tan, before the BangkoSentralngPilipinas (BSP) against Ismael E. Andaya and the
members of the Board of Directors of the Rural Green Bank of Caraga, Inc. for alleged gross violation of the
principles of good corporate governance, they represented themselves as the bank’s minority stockholders with
a total holdings amounting to more or less P5 million while the controlling stockholders own
approximately 80% of the authorized capital stock. He also claimed that there was forum shopping as the RTC
has jurisdiction over the case.

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

Held:
The filing of the intra-corporate case before the RTC does not amount to forum-shopping. It is a formal demand
of respondent’s legal rights in a court of justice in the manner prescribed by the court or by the law with respect
to the controversy involved. The relief sought in the case is primarily to compel the bank to disclose its
stockholdings, to allow them the inspection of corporate books and records, and the payment of damages. It
was also prayed that a TRO be issued to enjoin the holding of the annual stockholder’s meeting and the
election of the members of the Board, which, only courts of justice can issue.
On the other hand, the complaint filed with the BangkoSentralngPilipinas was an invocation of the BSP’s
supervisory powers over banking operations which does not amount to a judicial proceeding. It brought to the

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attention of the BSP the alleged questionable actions of the bank’s Board of Directors in violation of the
principles of good corporate governance. It prayed for the conduct of an investigation over the alleged unsafe
and unsound business practices of the bank and to make necessary corrective measures to prevent the
collapse of the bank.

QUESTIONS AND ANSWERS

Q1. What are the primary objectives of BSP?
A1:
1.1. To maintain price stability conducive to a balanced and sustainable growth of the economy;
1.2. To promote and maintain monetary stability and the convertibility of the peso.

Q2. Can the bank still grant new loans and accept new deposits, while under receivership?
A2. No. During the receivership, the assets and properties of the corporation are being gathered for conversion
into cash in preparation for distribution to creditors. Granting new loans and accepting new deposits would
constitutes doing business for the bank in the ordinary course of business which is contrary to the purpose and
nature of receivership proceeding.

Q3. Where will the claims against the insolvent bank are filed?
A3. Where liquidation is undertaken with judicial intervention, all claims against the insolvent bank should be
filed in the liquidation proceeding. It is not necessary that a claim be initially disputed in a court or agency
before it is filed with the liquidation court (Ong v. CA, GR. NO. 112830, Feb. 1, 1996).

Q4. Can the bank file its claim against another person/ entity before the liquidation court?
A4. No. The exclusive jurisdiction of the liquidation court pertains only to the adjudication of claims against the
bank. It does not cover the reverse situation where it is which files a claim against another person or legal entity
(Manalo v. Ca, GR. NO. 141297, Oct. 8, 2001).

Q5. Can the president or officers of the bank, placed under receivership authorize to transact business in
connection with the bank’s assets and property?
A5. No. The appointment of a receiver operates to suspend the authority of the bank and its officers over the
bank assets and properties, such authority being reposed in the receiver (Abacus Real Estate Center, Inc. v.
Manila Banking Corp., GR. NO. 162270, APRIL 6, 2005).

Q6. Is the bank still obligated to pay the time deposits upon maturity despite the fact that its operation was
suspended by the Central Bank?
A6. The suspension of the operations of a bank cannot excuse non-compliance with the obligation to remit the
time deposits of depositors which matured before the bank’s closure (Overseas Bank of Manila v. CA, GR. NO.
45886, APRIL 19, 1989).

Q7. What action will you institute to question the Monetary Board’s order?
A7. The order of the monetary board may be questioned on a petition for certiorari on the ground that the action
taken was in excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction.
The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital
stock within ten (10) days from receipt by the board of directors of the institution of the order directing;
receivership, liquidation or conservatorship (Section 30, R.A. NO. 7653).

LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405)

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 1. PURPOSES

RA 1405 has 2 allied purposes:

1. To discourage private hoarding; and
2. To encourage people to deposit their money in banking institutions so that it may be utilized by way of
authorized loans and thereby assist in economic development.
Owing to this piece of litigation, the confidentiality of bank deposits remains to be a basic state policy in the
Philippines. Section 2 of the law institutionalized this policy by characterizing as absolutely confidential in
general all deposits of whatever nature with banks and other financial institution in the country.

1. COVERAGE

RA 1405 covers all deposits of whatever nature with banks or banking institutions in the Philippines and
investments in government bonds are absolutely confidential in nature and may not be examined, inquired or
looked into by any person, government official, bureau or office. (Section 2, RA 1405)

What is Deposit?
1. Deposit refers to money or funds placed with a bank that can be withdrawn on the depositor’s order or
demand, such as deposit accounts in the form of savings, current and time deposits.
2. Deposits are characterized as being in the nature of a simple loan. The placing of deposits in a bank
creates a creditor-debtor relationship between the depositor and the bank. As such, the bank, being the
debtor, has the obligation to pay a certain sum of money to the depositor, being the creditor.

What are investments in Government Bond?

3. Refer to investments in bonds issued by Government of the Philippines, its political subdivisions and its
instrumentalities.
4. Government bonds are debt securities which are unconditional obligations of the state and backed by
its full taxing power.
5. Examples are treasury bills notes, retail treasury bonds and other free bonds

6. PROHIBITED ACTS AND PERSONS LIABLE

(i) Any person or government official who, or any government bureau or office that, examines, inquires or looks
into a bank deposit or government bond investment in any of the instances not allowed in Section 2;
(ii) Any official or employee of a banking institution who makes a disclosure concerning bank deposits to
another in any instance not allowed by law (Sec. 3); and
(iii) Any person who commits a violation of any of the provisions of the law. (Sec.5).

Under the General Banking Law, Bank directors, officers, employees or agents are prohibited from disclosing to
any unauthorized person, without order of a competent court, any information relative to funds or properties
belonging to private individuals, corporations, or any other entity in the custody of the bank. (Sec. 55(b) RA
8791)

Thrift Banks Act and the Rural Bank Act likewise prohibit any bank officer, employee or agent from disclosing
any information on such funds or properties. (Sec 21 (a)(2), RA 7906 and Sec 26 (a)(2), RA 7353)

EXCEPTIONS:
As a rule, all deposits of whatever nature in banks or banking institutions in the Philippines and
investments in government bonds are absolutely confidential in nature. (Sec. 2, RA 1405)

1. Under the Law on Secrecy of Bank Deposits:

Section 2 of RA 1405, provides that bank deposits and government bond investments may be
examined inquired and looked into in the following instances:
1. Upon written permission or consent in writing by the depositor;
For consent to be valid, it should be made knowingly, voluntarily and with sufficient awareness of
the relevant circumstances and likely consequences/
2. In cases of impeachment of the President, Vice President, Members of the Supreme Court, Members of
the Constitutional Commissions and Ombudsman for the culpable violation of the Constitution, treason,
bribery, graft and corruption, other high crimes of betrayal of public trust. (Art. XI, Sec. 2, Philippines
Constitution)

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3. Upon order of a competent court in cases of bribery or dereliction of duty of public officials.
4. In cases where the money deposited or invested is the subject matter of litigation.
The money deposited should be the very thing in dispute. (BSB Group, INC. vs Go)

II. OTHER LAWS PROMOTING SECRECY OF BANK DEPOSITS POLICY

A. Under the Foreign Currency Deposit Act (Rep. Act 6426)

1. Except upon written permission by the depositor.
Foreign Currency Deposit Act are considered are hereby declared as and considered of an
absolutely confidential nature, and in no instance shall foreign currency deposits be examined,
inquired or looked into by any person, government officials, bureau or office, whether judicial or
administrative, or any other entity whether public or private. (Sec. 8, RA 6426, amended by PD
1034, 1035 and 1246);

2. Foreign Currency Deposit Act accounts are exempt from attachment, garnishment, or any other order
or process of any court, legislative body, government agency or any administrative body whatsoever.
(Intengan vs CA, 377 SCRA 63)

B. ANTI-GRAFT AND CORRUPT PRACTICES ACT

1) Bank deposits of a public officials, his spouse and unmarried children may be taken into consideration in the
enforcement of Sec. 8 of the Anti-Graft and Corrupt Practices Act.
1. Sec. 8. Dismissal due to unexplained wealth.
… properties in the name of the spouse and unmarried children of such public official may be taken
into consideration, when their acquisition through legitimate means cannot be satisfactorily shown..
(PNB vs Gancayco, 15 SCRA 91)
2) On unexplained wealth, before an in-camera inspection may be allowed of bank deposits, there must be a
pending case before a court of competent jurisdiction, the account must be clearly identified, the bank
personnel and the account holder must be notified to be present during the inspection, and such inspection may
cover only the account in the pending case. (Marquez vs Desierto)

C. EXCEPTIONS UNDER OTHER LAWS

Bank deposits and investments may be examined, inquired or looked into as provided for under other
laws in the following instances:
1. The ombudsman has the power to issue subpoena and subpoena ducestecum, take testimony in any
investigation or inquiry as well as examine and access bank accounts and records,
2. The Philippine Deposit Insurance Commission and The BangkoSentral may inquire into bank deposits
where there is a finding of unsafe or unsound banking practices;
3. Directors, Officers, Stockholders, and related interests who contract a loan or any form of financial
accommodation with their bank or related bank are required to execute a written waiver of Secrecy of
Deposits pursuant to the New Central Bank Act.

GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS

The Secrecy of Bank Deposit Account does not prohibit attachment or garnishment of bank accounts.
1. What is garnishment?
1. A court order directing that money or property of third party (usually wages paid by an employer) be
seized to satisfy a debt owned by a debtor to a creditor.
2. A legal procedure by which a creditor can collect what a debtor owes by reaching the debtor’s property
when it is in the hands of someone other than the debtor.
Garnishment without prior notice and a prior hearing violates the fundamental principles of due
process.
3. Garnishment vs Attachment
Garnishment is the process of seizing of property of the debtor that is in the possession of a third party while
attachment is the process of seizing property of the debtor that is in the possession of the debtor.
4. Cases of garnishment of deposits, including foreign deposits.

PENALTIES FOR VIOLATION

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 SECTION 5. Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five
years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

JURISPRUDENCE

Ejercito vs. Sandiganbayan

Facts:
Joseph Victor G. Ejercito is the owner of Trust Account No. 858 which was originally opened at Urban Bank but
which is now maintained at Export and Industry Bank, which is the purchaser and owner now of the former
Urban Bank and Urbancorp Investment, Inc. He is also the owner of Savings Account No. 0116-17345-9 which
was originally opened at Urban Bank
Estrada was subsequently charged with Plunder. The Sandiganbayan filed a Request for Issuance of
Subpoena DucesTecum for the issuance of a subpoena directing the President of Export and Industry Bank
(EIB, formerly Urban Bank) or his/her authorized representative to produce various document related to the
investigation.

Issue:
Whether or not a Trust Account is covered by the term “deposit” as used in R.A. 1405

Held:
YES.The Trust Account no. 858 is covered by the term “deposit”. The Trust Agreement between petitioner and
Urban Bank provides that the trust account covers "deposit, placement or investment of funds" by Urban Bank
for and in behalf of petitioner.
The money deposited under Trust Account No. 858, was, therefore, intended not merely to remain with the
bank but to be invested by it elsewhere.
To hold that this type of account is not protected by R.A. 1405 would encourage private hoarding of funds that
could otherwise be invested by banks in other ventures, contrary to the policy behind the law. Section 2 of the
same law in fact even more clearly shows that the term "deposits" as what the phrase “of whatever nature”
proscribes pertain not only to money which is deposited but also to those which are invested. Clearly, therefore,
RA 1405 is broad enough to cover Trust Account no. 858.

Intengan v. CA 377 SCRA 63, 2002

Facts:
Citibank filed a complaint for violation of the Corporation Code against 2 of its officers. The complaint was
attached with the affidavit of Vic Lim, VP of Citibank, who was then instructed by the higher management of the
bank to investigate the anomalous/highly irregular activities of the said officers. As evidence, Lim annexed bank
records purporting to establish the deception practiced by the officers. Some of the documents pertained to the
dollar deposits of petitioners. As an incident to the foregoing, petitioners filed respective motions for the
exclusion and physical withdrawal of their bank records that were attached to Lim’s affidavit. The filing of
Information against private respondents was recommended for alleged violation of Republic Act No. 1405.
Private respondents appealed before the DOJ which ruled in their favor. Resort to the Court, referred the matter
to the CA which then held that the disclosure was proper and falls under the exception under R.A. No. 1405.

Issue:
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Whether or not the disclosure falls under the exception under R.A. No. 1405.

Ruling: NO.
The accounts in question are U.S. dollar deposits; consequently, the applicable law is not Republic Act No.
1405 but Republic Act (RA) No. 6426, known as the “Foreign Currency Deposit Act of the Philippines.” Thus,
under R.A. No. 6426 there is only a single exception to the secrecy of foreign currency deposits, that is,
disclosure is allowed only upon the written permission of the depositor. The violation of the secrecy of foreign
deposit is punishable as an act malumprohibitum. Violation of Foreign Currency Deposit Act prescribes in eight
(8) years, and the filling of the complaint or information of the alleged violation of the violation of the Secretary
of Bank Deposit Act does not toll the running of the prescriptive period.

SALVACION VS. CENTRAL BANK

G.R. No. 94723 August 21, 1997

FACTS:

Greg Bartelli, an American tourist, was arrested for committing four counts of rape and serious illegal detention against
Karen Salvacion. Police recovered from him several dollar checks and a dollar account in the China Banking Corp. He was,
however, able to escape from prison. In a civil case filed against him, the trial court awarded Salvacion moral, exemplary
and attorney’s fees amounting to almost P1,000,000.00.
Salvacion tried to execute the judgment on the dollar deposit of Bartelli with the China Banking Corp. but the latter refused
arguing that Section 11 of Central Bank Circular No. 960 exempts foreign currency deposits from attachment, garnishment,
or any other order or process of any court, legislative body, government agency or any administrative body whatsoever.
Salvacion therefore filed this action for declaratory relief in the Supreme Court.

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

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

PHILIPPINE NATIONAL BANK vs. EMILIO A. GANCAYCO

G.R. No. L-18343, 30 September 1965
FACTS:
PNB was required to produce the records of the bank deposits of Jimenez who was then under investigation for unexplained
wealth. In declining to reveal its records, the plaintiff bank invoked Republic Act No. 1405 or the Law on Secrecy of Bank D
eposits with the following exceptions:

1. Upon written permission of the depositor;

2. In cases of impeachment;
3. Upon order of a competent court in cases of bribery or dereliction of duty of public officials;
4. In cases where the money deposited is the subject matter of the litigation.
ISSUE:
Whether or not a bank can be compelled to disclose the records of accounts of a depositor who is under investigation for un
explained wealth.

RULING:
Yes. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two
classes of cases cannot be excepted from the rule making bank deposits confidential. The policy as to one cannot be differe
nt from the policy as to the other. This policy express the motion that a public office is a public trust and any person who ent
ers upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny.

QUESTIONS AND ANSWERS

1. A bought some goods from a department store and paid with his personal check. The check was dishonored.
On the assumption that the department store did not know who A was, the store manager inquired from the

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 check’s drawee bank the name of the dishonored check. The drawee bank refused to disclose the name of
the drawer invoking the Secrecy of Bank Deposits Law. Is the bank correct?

ANSWER: In this case, the bank is not justified in not divulging the name of the drawer to the store
manager. The store manager is merely inquiring as to the name of the drawer of the check. To divulge the
same would not in any way amount to disclosure of any. Also, the inquiry is not an investigation of any balance
in favor of the drawer.

2. M, a newspaper columnist, while making a deposit in a bank, overheard a bank teller informing a co-
employee that G, a well-known public official, has just a few hundred pesos in G’s bank account and that her
check will probably bounce. M wrote about this information in his newspaper column. G filed a complaint
against M for unlawfully disclosing information about her bank account. Will it prosper?

ANSWER: The suit will not prosper. The Law on Secrecy of Bank Deposits does not penalize the mere receipt
of information about a bank account. M, having merely overheard the information on G’s account and not
having examined, inquired or looked into the said account cannot be penalized under Sec. 2 of the Bank
Secrecy Law. Neither could he be penalized under Sec. 3 of the Bank Secrecy Law since Sec. 3 refers to
disclosures made by officials or employees of banking institutions.

3. Shirlene bought P500,00 worth of Pabahay bonds issued by the Home Development Mutual Fund, a
government agency, through ABC bank. Afterwards, she placed the bonds in a safety deposit box she rented
from ABC bank. Ella one of the bank’s safety deposit attendants, saw what shirlene placed inside her box,
noting that they were in her name. During lunch, she told her co-attendants what she saw and wondered
aloud how government employee like shirlene could have money to buy the bonds. Could Shirlene file a
complaint against Ella for violation of RA 1405?

ANSWER: Yes. Shirlene could. The disclosure by Ella to her co-attendants of the existence, and the deposit in
the safety box, of the bonds is a prohibited act under RA 1405. A deposit in a safety deposit act is also
protected by the said law.

4. What does the law prohibits?

ANSWER:
1. The examination and inquiry or looking into all deposits of whatever nature with the banks or banking institutions in
the Philippines including the investments in bonds issued by the Government or its political subdivisions and
instrumentalities by any person, government official, bureau; and
2. The disclosure by any official or employee of nay banking institution to any unauthorized person of any information
concerning said deposits.
3. What disclosures or inquiries into deposits are not prohibited?
ANSWER:
1. Upon written permission of the depositor;
2. In cases of impeachment;
3. Upon order of a competent court in cases or bribery or dereliction of duty of public officials;
4. In cases where the money deposited or invested is the subject matter or litigation;
5. Upon the order of the court or subpoena issued by the Ombudsman in cases of unexplained wealth. This is subject
to the following requisites:
1. Only an in-camera inspection is allowed;
2. There must be a pending case before a court of competent jurisdiction;
3. Account is clearly identified;
4. Examination is limited to account subject of the court case; and
5. Bank personnel and the account holder must be notified to be present during the inspection.
6. Upon the order of the Commissioner of Internal Revenue in respect of the bank deposits of a decedent for the
purpose of determining such decedent’s gross estate;
7. Upon the order of the Commissioner of Internal Revenue when a taxpayer files an application to compromise his
tax liability by reason of financial incapacity;
8. Upon examination made in the course of a special or general audit of a bank as authorized by the Monetary Board
after being satisfied that there is reasonable ground to believe that a bank fraud or irregularity is being committed
and it has become necessary to look into the deposit to establish the same;
9. Upon examination of a bank’s independent auditor, the result of which are for the exclusive use of the bank;
10. In case of suspicious transaction under the Anti-Money Laundering Law;
11. Under the Anti-Money Laundering Law where banks are required to report to Anti-Money Laundering Council any
transaction in cash or other equivalent monetary instrument in excess of P500,000.00 in any one day;
12. Also under Anti-Money Laundering Law, the Anti-Money Laundering Council may inquire into a deposit or
investment maintained with any financial institution upon order of a competent court, in cases of violation of the

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 Act, when there is a probable cause that the deposit or investment is in any way related to an unlawful activity as
defined in the Act or a money laundering offense under the Act;
13. When a director, officer, stockholder and related interest (DOSRI) obtains a loan from his bank or its subsidiaries,
or with related controlling interests of more than 5% of the capital, or surplus of the bank, it shall constitute a waiver
of secrecy nature in all banks in the Philippines; and
14. Under the Unclaimed Balances Law;
15. The examination of a bank account under Section 10, Rule 57 in relation to the examination of a party whose
property is attached and persons indebted to a defendant or controlling his property.

16. Who are the primarily liable for violations of the law?
ANSWER:The persons primarily liable for a violation of the law would be a bank employee or officer and the person,
government officer, agency or office looking into the deposit when not authorized by any of the exceptions to the law.

Note: Investigations by the Monetary Board and the Bureau of Internal Revenue are confidential in nature. Thus, any
disclosure in violation of the confidentiality will create liability.

17. Will the garnishment of a bank deposit violate the law?

ANSWER:No, the garnishment of a bank deposit will not violate the law. If the existence of the deposit is disclosed, the
same is considered as purely incidental to the execution process.
What is to be disclosed only is the existence of the deposit, particularly whether or not it is sufficient to satisfy the
garnishment. Hence, a disclosure of the balance may constitute a violation of the law.
18. In a case where the money deposited or invested is the subject matter of the litigation, could an inquiry into the
whereabouts of the amount extend to the deposits held in the name of persons other than the one responsible?
ANSWER: Even in cases not involving prosecution under the Anti-Graft and Practices Act, an inquiry into the whereabouts
of the amount converted necessarily extends to whatever in concealed, held or recorded in the name of persons other than
the responsible inasmuch as the case is aimed at recovering the amount converted.
19. Are foreign currency deposits covered by the law?
ANSWERS: While the law does not cover foreign currency deposits, they however are absolutely confidential and cannot be
disclosed pursuant to RA 6426, otherwise known as the Foreign Currency Deposit Act, the only exception to disclosure
being upon the written consent of the depositor.
An additional exemption has been provided by the Anti-Money Laundering Law when it has been established that there is
probable cause that the deposits involved are in any way related to the offense of money laundering.
20. Will an unlawful examination of a bank account render the information obtained inadmissible?
ANSWER: There is nothing in the law that provides that an unlawful examination shall render the evidence obtained
therefrom to be inadmissible.
21. What is the penalty for a violation of the law?
ANSWER: Upon conviction, a violator may be sentenced to imprisonment of not more than 5 years or a fine of not more
than 200,000.00, or both at the discretion of the court.

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 PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)
RA No. 3591, as amended

Objective:
To provide permanent and continuing deposit insurance coverage for the depositing public to help promote
public confidence and stability in the economy. It ensures prompt payment of insured deposit, exercises
complementary supervision of banks, adopts responsive resolution.
Basic Policy (Section 2)
1. Insures the deposits of all banks which are entitled to the benefits of insurance;
2. Promote and safeguard the interest of the depositing public by providing insurance coverage on all
insured deposits and helping maintain a sound and stable banking system;
3. Strengthen the mandatory deposit insurance coverage system to generate, preserve, maintain faith and
confidence in the country’s banking system;
4. Protect it from illegal schemes and machinations.
Concept of Insured deposit (Section 5)
>it covers only the amount due to any depositor for deposits in an insured bank, net of any obligation to the
insured bank as of date of closure, this does not exceed Five Hundred Thousand Pesos(500,000.00).
>in determining the amount due to any depositor, it shall be added together all deposits in the bank maintained
in the same right and capacity for his or her benefit.
>a joint account regardless of the conjunction “and”, “or”, “and/or”, it shall be insured separately from any
individually owned deposit account

Provided:

1. If the account is held jointly by two or more natural persons or by two or more juridical persons, the maximum
insured deposit shall be divided equally among them, unless there is another written sharing scheme;
2. If the account is held by a juridical person jointly with one or more natural persons, the maximum insured
deposit shall be presumed to belong entirely to such juridical person;
3. The aggregate of interest of each co-owner over several joint accounts, whether owned by the same or
different combinations of individuals be subject to the maximum insured deposit of Five Hundred Thousand
Pesos (500,000.00);

Functions of PDIC:

1. Deposit Insurer
2. Co-regulator of banks

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3. Receiver and liquidation of closed banks methods, and applies efficient , management of receivership and
liquidation functions
Types of deposit insured by PDIC:
1. deposits of all commercial banks
2. savings and mortgage banks
3. Rural banks
4. Private development banks
5. Cooperative banks
6. Savings and loan associations
7. Branches and agencies in the Philippines of foreign banks
8. All other corporations authorized to perform banking functions in the Philippines
9. Foreign currency deposits (RA No. 6426)
PDIC Insurance coverage:
1. Deposit insurance coverage is not determined on a per-account basis
2. The type of account, whether checking, savings, time or other form of deposit, has no bearing on the
amount of insurance coverage.
3. Deposits in different banking institutions are insured separately. But if a bank has one or more
branches, the main office and all branch officers are considered as one bank.
Risk covered by PDIC:
1. Only the risk of a bank closure ordered by the Monetary Board
2. Not due to theft, fire, closure by reason of strike or existence of public disorder, revolution or civil war
3. The insurance premium is paid by the banks, not by the depositors. The bank is assessed one-fifth
(1/5) of one percent (1%) per annum of the assessment base of the bank.
The list of priorities after payment of the maximum amount of insured deposit:
1. government taxes
2. Labor claims
3. Secured credits
4. Trust funds
1. Funds held by insured bank in a fiduciary capacity and includes without being limited to, funds
held as trustee, executor, administrator, guardian or agent (Section 5).
EXTENT OF LIABILITY
1. The extent of the PDIC’s liability to a bank depositor is the amount due to any depositor for deposits to
the insured bank net of any obligation of the depositor to the insured bank as of the date of closure
but not to exceed Five Hundred Thousand Pesos (500,000.00) per depositor.

DETERMINATIONS OF INSURED DEPOSITS

2. PDIC shall commence the determination of insured deposits due the depositors of a closed bank upon
its actual takeover of the closed bank. PDIC shall give notice to the depositors of the closed bank of the
insured deposits due them of whatever means deemed appropriate by the Board of Directors. PDIC
shall publish the notice once a week for atleast three (3) consecutive weeks in a newspaper of general

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 circulation as when appropriate, in a newspaper circulated in the community or communities where the
closed bank or its branches are located (Sec. 16 R.A. No. 3591, as amended).
CALCULATION OF LIABILITY
3. A. Per depositor, per capacity rule-capacity of the bank types of deposits
1. Demand-current accounts
2. Savings- saving accounts
3. Time deposits- time to mature

If the depositor has all three types of accounts with the same bank, he can only recover up to the
amount of Five Hundred Thousand Pesos. He is considered as one depositor.

4. B. joint accounts
A joint account regardless of whether the conjunction “and”, “or”, “and/or” is used shall be
insured separately from any individually-owned deposit account. Provided that:
1. If the account is held jointly by two or more natural juridical persons or entities, the
maximum insured deposit shall be divided into as many equal shares as there are individuals,
juridical persons or entities, unless a different sharing is stipulated in the document of deposit;
2. If the account is held by a juridical person or entity with one or more natural persons,
the maximum insured shall be presumed to belong entirely to such juridical person or entity.

5. C. Mode of payment

1. by cash; or
2. by making available to each depositor a transferred deposit in another insured bank in an
amount equal to insured deposit of such depositor (Sec. 14 R.A. 3591, as amended).
PDIC, in its discretion, may require proof of claims to be filed before paying the insured deposits and
that in any case where PDIC is not satisfied as to the viability of a claim for an insured deposit, it may require
final determination of a court of competent jurisdiction before paying such claim (Sec. 14 R. A. 3591, as
amended).
6. D. Effect of payment of insured deposit
1. PDIC is discharged from any further liability to the depositor;
2. PDIC is subrogated to all the rights of the depositor against the closed bank to the extent of such
payment.

7. E. Payments of insured deposits as preferred credit under article 2244 of the Civil Code:
All payments by PDIC of insured deposits in closed banks partake of the nature of public funds,
and as such, must be considered a preferred credit similar to taxes due to the National
Government in the order of preference, under Article 2244 of the Civil Code (Sec. 15 R. A. No.
3591 as amended).

8. F. Failure to settle claim of insured depositor

1. PDIC has six (6) months from the date of filing of claim for insured deposit.

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 2. Failure to settle the claim within six months from the date of claim for insured deposit, where
such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall
upon conviction, subject the directors, officers or employees of PDIC are responsible for the
delay, to imprisonment from six months to one year.
The period shall not apply if the validity of the claim requires the resolution of issues of
facts and/or law by another office, body or agency (Sec. 14; R.A. 3591 as amended).

9. G. Failure of depositor to claim insured deposits effect:

It constitute a waiver of his (depositor) right to claim if he fails to claim his insured deposits with
the PDIC within 2 years from the actual takeover of the closed bank bt the receiver, unless
otherwise waived by PDIC (Sec. 16; R. A. 3591, as amended).
The period by which a depositor of insured deposits may file his claim is within 2 years from the
closure of the bank by the central bank.

Unsafe and/or Unsound Banking Practices

The PDIC hereby adopts the general principles and guidelines in Bangko Sentral ng Pilipinas (BSP)
Circular No. 341 (series of 2002), as amended by BSP Circular No. 640 (series of 2009), relating to the
determination of activities that may be considered unsafe and/or unsound banking practices.

1. Principles in the Determination of Unsafe and/or Unsound Deposit-Related Practices

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

1. Unreasonable delay in the processing or determination of the validity of deposit claims in the
event of bank closure; or
2. Material loss or damage or abnormal risk to the bank’s depositors, creditors, shareholders, or to
the PDIC; or
3. Material loss or damage or abnormal risk or danger to the safety, stability, liquidity, or solvency
of the bank.

2. Unsafe and/or Unsound Deposit-Related Practices

The following may be considered unsafe and/or unsound deposit-related practices:
1. Performance of any deposit-related practice, activity, or transaction without the requisite
approvals or without adequate controls, as mandated by existing laws, rules, and regulations,
which may result to unaccounted, undocumented and/or unrecorded deposits.
2. Failure to keep bank records (printed and/or electronic) within the bank premises especially
deposit documents such as, but not limited to, signature cards, depositor information files, and
deposit ledgers.

For purposes of this section, “premises” shall refer to places where a bank has a legal right to
stay or occupy to conduct its operations and/or keep its records. It includes, but is not limited to,
lands and buildings, warehouses, storerooms, online storage, and offsite or backup sites
owned or leased by a bank. For those not owned by the bank, it must be covered by a contract
showing the bank’s legal right to stay or occupy therein.

3. Granting high interest rates when the bank has: (i) negative unimpaired capital and (ii) either a
liquid assets-to-deposits ratio of less than 10% or an operating loss.

A bank is deemed offering high interest rates on deposits if the interest rate is over 50% of the
prevailing comparable market median rate for similar bank categories.

Liquid assets refer to the sum of Cash, Due from BSP/Banks and Financial Assets, net of
allowance for credit losses.
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 4. Non-compliance with PDIC Regulatory Issuances.
5. Other deposit-related practices, activities, and transactions which the PDIC may identify
through appropriate issuances.

Attached for guidance is a list of specific activities which the PDIC may consider to be unsafe and/or
unsound banking practices (Annex A). The PDIC may hereafter consider other acts or omissions as
unsafe and/or unsound pursuant to the general principles and guidelines in this Regulatory Issuance.

3. Consequences of Unsafe and/or Unsound Practices

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

1. Deposit accounts and all information related thereto may be inquired into or examined by PDIC
upon the finding of unsafe and/or unsound banking practices, notwithstanding any provisions of
law to the contrary. (Section 8, 8th par., PDIC Charter)
2. The PDIC Board of Directors may issue a cease and desist order, and require the bank or its
directors or agents concerned to desist and/or correct the practices or violations. (Section 7,
PDIC Charter)
3. Deposit insurance on deposit accounts or transactions constituting, and/or emanating from,
unsafe and/or unsound banking practice/s as determined by the PDIC Board shall not be paid,
after due notice and hearing, and publication of a directive to cease and desist from engaging
in the cited unsafe and/or unsound practice/s. (Section 4 (f), PDIC Charter)

The foregoing shall be without prejudice to the criminal, civil, and administrative actions that may be
instituted against, or fines imposed upon, the bank and its responsible directors, officers, employees, or
agents, pursuant to the provisions of the PDIC Charter, PDIC Regulatory Issuances, and other
pertinent laws.

How is insurance coverage determined?

In determining the insured amount, the outstanding balance of each account is adjusted, such that interests are
updated, withholding taxes are deducted, accounts maintained by a depositor in the same right and capacity
are added together; and whenever applicable, unpaid loans and other obligations of the depositor are deducted;
and in no case shall insured deposit exceed P500,000.

R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for the following accounts or transactions:

1. Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking practices;

Deposits that are determined to be proceeds of an unlawful activity as defined under the Anti-Money
Laundering Law.

JURISPRUDENCE

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

FACTS:

On 2005 the Board of Directors of the PDIC Board adopting resolution No. 2005-03-032 (3) approving
the conduct of an investigation in accordance with Sec. 9 of R. A. No. 3591, as amended, in the basis of the
reports of examination of the Bangko Sentral ng Pilipinas on ten (10) banks, four (4) of which are repondents in
this petition for review. The said resolution also created as Specail Investigation Team to conduct the said
investigation with the authority to administer oath, to examine, take and preserve testimony of any person
relating to the subject of the investigation and to examine pertinent banks.
In accordance with the PDIC Board Resolution the head of the PDIC issued Notice of Investigation to
the President as the highest Ranking Officer of PCRBI. In the course of investigation, PCRBI was found to have
granted loans to certain, which were settled by way of dacion of properties. The properties had already heen
previously foreclosed and consolidated under the names of PCRBI, BEAI, and RBCI.
Similarly, a notice of investigation was served and PCRBI, BEAI and a separate notice of investigation
served to RBCI. Subsequently, PCRBI, BEAI, and RBCI refused entry to their bank premises and access to
their records and documents by PDIC Investigation Team. PCRBI latter refuses to the continuance of the PDIC
upon the advices of its legal counsel on the grounds that there is no prior approval from the Monetary Board
allowing the conduct of PDIC to investigate.

ISSUE:
Whether or not the approval of the Monetary Board of the Bsngko Sentral ng Pilipinas is necessary
before the PDIC may conduct an investigation of respondent banks.

HELD:
PDIC is of the position that in order for it to exercise its power of investigation, the law requires that:
a. the investigation is based on a complaint of a depositor or any government agency or the report of
examination of the BSP and PDIC
b. the complaint alleges, on the BSP and/or PDIC report of examination contains adverse findings of
fraud inequalities or anomalies committed by the bank and/or its directors, officers, employees or agents; and
c. the investigation is upon the authority of the PDIC Board of Directors.
It argues that when it commenced its investigation on banks, all of the aforementioned requirements
were met. PDIC stresses that its power of examination is different from its power of investigation, in such that
the former requires prior approval of the Monetary Board while the require merely the PDIC Board. It further
claim that power of examination cannot be exercised within twelve months from the last examinations
conducted, whereas the power of investigation merely to look into the condition of the bank. Whereas the power
of investigation aims to address fraud, inequalities and anomalies based on complaint from depositors and
other government agencies upon reports of examination conducted by the PDIC or by the BSP.

Philippine Deposit Insurance Corporation vs. Court of Appeals

G.R. No. 118917 - December 22, 1997

FACTS: On September 22, 1983, plaintiffs-appellees invested in money market placements with the Premiere
Financing Corporation (PFC) in the sum of P10,000.00 each for which they were issued by the PFC
corresponding promissory notes and checks. On the same date (September 22, 1983), John Francis Cotaoco,
for and in behalf of plaintiffs-appellees, went to the PFC to encash the promissory notes and checks, but the
PFC referred him to the Regent Saving Bank (RSB). Instead of paying the promissory notes and checks, the
RSB, upon agreement of Cotaoco, issued the subject 13 certificates of time deposit with Nos. 09648 to 09660,
inclusive, each stating, among others, that the same certifies that the bearer thereof has deposited with the
RSB the sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the certificate is insured
up toP15,000.00 with the PDIC; and that the maturity date thereof is on November 3, 1983 (Exhs. “B”, “B-1” to
“B-12”).

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 On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to encash the said
certificates. Thereat, RSB Executive Vice President Jose M. Damian requested Cotaoco for a deferment or an
extension of a few days to enable the RSB to raise the amount to pay for the same (Exh. “D”). Cotaoco
agreed. Despite said extension, the RSB still failed to pay the value of the certificates. Instead, RSB advised
Cotaoco to file a claim with the PDIC.

Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued Resolution No. 788 (Exh.
‘2’, Records, p. 159) suspending the operations of the RSB. Eventually, the records of RSB were secured and
its deposit liabilities were eventually determined. On December 7, 1984, the Monetary Board issued Resolution
No. 1496 (Exh. ‘1’) liquidating the RSB. Subsequently, a masterlist or inventory of the RSB assets and liabilities
was prepared. However, the certificates of time deposit of plaintiffs-appellees were not included in the list on
the ground that the certificates were not funded by the PFC or duly recorded as liabilities of RSB.

On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective claims for the amount of
the certificates (Exhs. “C”, “C-1”, to “C-12”). Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion,
who have similar claims on their certificates of time deposit with the RSB, likewise filed their claims with the
PDIC. To their dismay, PDIC refused the aforesaid claims on the ground that the Traders Royal Bank Check
No. 299255 dated September 22, 1983 for the amount of P125,846.07 (Exh. “B”) issued by PFC for the
aforementioned certificates was returned by the drawee bank for having been drawn against insufficient funds;
and said check was not replaced by the PFC, resulting in the cancellation of the certificates as indebtedness or
liabilities of RSB.

Consequently, on March 31, 1987, private respondents filed an action for collection against PDIC, RSB
and the Central Bank.

On September 14, 1987, the trial court, declared the Central Bank in default for failing to file an answer.

On May 29, 1989, the trial court rendered its decision ordering the defendants therein to pay plaintiffs,
jointly and severally, the amount corresponding to the latter’s certificates of time deposit.

Both PDIC and RSB appealed.

ISSUE: Whether or not PDIC can be held liable for value of the certificates of time deposit held by the
petitioners.

HELD: NO. Whenever an insured bank shall have been closed on account of insolvency,

payment of the insured deposits in such bank shall be made by the Corporation as soon as possible. The term
“deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of
business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift
account or which is evidence by passbook, check and/or certificate of deposit printed or issued in accordance
with Central Bank rules and regulations and other applicable laws, together with such other obligations of a
bank which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe
by regulations to be deposit liabilities of the Bank. These pieces of evidence convincingly show that the subject
CTDs were indeed issued without RSB receiving any money therefor. No deposit, as defined in Section 3 (f) of
R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC cannot be held liable for value of
the certificates of time deposit held by private respondents.

Philippine Deposit Insurance Corporation vs. Court of Appeals

G.R. No. 126911 April 30, 2003

FACTS: Prior to May 22, 1997, respondents had 71 certificates of time deposits denominated as "Golden Time
Deposits" (GTD) with an aggregate face value of P1,115,889.96. May 22, 1987, a Friday, the Monetary Board
(MB) of the Central Bank of the Philippines, now Bangko Sentral ng Pilipinas, issued Resolution 5052
prohibiting Manila Banking Corporation to do business in the Philippines, and placing its assets and affairs
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under receivership. The Resolution, however, was not served on MBC until Tuesday the following week, or on
May 26, 1987, when the designated Receiver took over. On May 25, 1987 - the next banking day following the
issuance of the MB Resolution, respondent Jose Abad was at the MBC at 9:00 a.m. for the purpose of pre-
terminating the71 aforementioned GTDs and re-depositing the fund represented thereby into 28 new GTDs in
denominations of P40,000.00 or less under the names of herein respondents individually or jointly with each
others Of the 28 new GTDs, Jose Abad pre-terminated 8 and withdrew the value thereof in the total amount of
P320,000.00. Respondents thereafter filed their claims with the PDIC for the payment of the remaining 20
insured GTDs. February 11, 1988, PDIC paid respondents the value of 3 claims in the total amount
of P120,000.00. PDIC, however, withheld payment of the 17 remaining claims after Washington Solidum,
Deputy Receiver of MBC-Iloilo, submitted a report to the PDIC that there was massive conversion and
substitution of trust and deposit accounts on May 25, 1987 at MBC-Iloilo. Because of the report, PDIC
entertained serious reservation in recognizing respondents' GTDs as deposit liabilities of MBC-Iloilo. Thus,
PDIC filed a petition for declaratory relief against respondents with the RTC of Iloilo City, for a judicial
declaration determination of the insurability of respondents' GTD sat MBC-Iloilo. In their Answer respondents
set up a counterclaim against PDIC whereby they asked for payment of their insured deposits. The Trial
Court ordered petitioners to pay the balance of the deposit insurance to respondents. The Court of Appeals
affirmed the decision of the lower court. Petitioner posits that the trial court erred in ordering it to pay the
balance of the deposit insurance to respondents, maintaining that the instant petition stemmed from a petition
for declaratory relief which does not essentially entail an executory process, and the only relief that should have
been granted by the trial court is a declaration of the parties' rights and duties. As such, petitioner continues, no
order of payment may arise from the case as this is beyond the office of declaratory relief proceedings.

ISSUE: Whether or not the trial court order the payment of the balance even if the petition stemmed from a
petition for declaratory relief which does not essentially entail an executor process.

HELD: YES. Without doubt, a petition for declaratory relief does not essentially entail an executory process.
There is nothing in its nature, however, that prohibits a counter claim from being set-up in the same action.
There is nothing in the nature of a special civil action for declaratory relief that prescribes the filing of a
counterclaim based on the same transaction, deed or contract subject of the complaint. A special civil action is
after all not essentially different from an ordinary civil action, which is generally governed by Rules 1 to 56 of the
Rules of Court, except that the former deals with a special subject matter which makes necessary some special
regulation. But the identity between their fundamental nature is such that the same rules governing ordinary civil
suits may and do apply to special civil actions if not inconsistent with or if they may serve to supplement the
provisions of the peculiar rules governing special laws.

QUESTIONS AND ANSWERS

1. What is PDIC’s overall mandate?

PDIC exists to provide permanent and continuing deposit insurance coverage for the depositing public to help
promote public confidence and stability in the economy. It ensures prompt payment of insured deposits,
exercises complementary supervision of banks, adopts responsive resolution methods, and applies efficient
management of receivership and liquidation functions.
2. What is PDIC’s maximum deposit insurance coverage?

Effective June 1, 2009, the maximum deposit insurance coverage is P500,000 per depositor. All deposit
accounts by a depositor in a closed bank maintained in the same right and capacity shall be added together.

Under R.A. No. 9576, the PDIC may propose to adjust the MDIC, subject to the approval of the President of the
Philippines, in case of a condition that threatens the monetary and financial stability of the banking system that
may have systemic consequences.
3. What is an insured deposit?

The term ‘insured deposit’ means the amount due to any bona fide depositor for legitimate deposits in an
insured bank net of any obligation of the depositor to the insured bank as of date of closure, but not to exceed
P500,000.00. A joint account shall be insured separately from any individually-owned deposit account.

R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for the following accounts or transactions:
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1. Investment products such as bonds, securities and trust accounts;
2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking practices;
4. Deposits that are determined to be proceeds of an unlawful activity as defined under the Anti-Money
Laundering Law.

4. Are all banks members of PDIC?

Membership of banks to PDIC is mandatory; hence, all operating banks are members of PDIC.
5. What types of deposits are insured by PDIC?

Except for the exclusions stipulated in RA 9576, deposits of all commercial banks, savings and mortgage
banks, rural banks, private development banks, cooperative banks, savings and loan associations, as well as
branches and agencies in the Philippines of foreign banks and all other corporations authorized to perform
banking functions in the Philippines, are insured with PDIC. As for Philippine banks with branches outside the
country, RA 9576 stipulates that subject to the approval of the Board of Directors, any insured bank with branch
outside the Philippines may elect to include for insurance its deposit obligations payable at such branch.

Foreign currency deposits are also insured by PDIC pursuant to RA 6426 (“An act instituting a foreign currency
deposit system in the Philippines, and for other purposes”) and Central Bank (CB) Circular No. 1389.
Depositors may receive payment in the same currency in which the insured deposit is denominated.

Exclusions from deposit insurance coverage as stipulated in R.A. No. 9576:

1. Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking practices;

Deposits that are determined to be proceeds of an unlawful activity as defined under the Anti-Money
Laundering Law.

1. Are deposits maintained in Philippine banks with branches outside the Philippines
insured by the PDIC?

The PDIC Charter provides that a Philippine bank may elect to insure with the PDIC its deposits in branches
outside the Philippines. As of 31 December 2012, no Philippine bank has elected to insure deposits in their
foreign branches with PDIC.

To verify if your deposits in a branch of a Philippine bank outside the Philippines are covered by deposit
insurance in the host foreign country, please inquire with the account officer of your branch.

2. Can PDIC insurance coverage be increased by having several accounts in the same
name in an insured bank?
No. Deposit insurance coverage is not determined on a per-account basis. The type of account (whether
checking, savings, time or other form of deposit) has no bearing on the amount of insurance coverage.
3. If I have deposits in several different insured banks, will my deposits be added together
for insurance purposes?
No. Deposits in different banking institutions are insured separately. However, if a bank has one or more
branches, the main office and all branch offices are considered as one bank. Thus, if you have deposits at the
main office and at one or more branch offices of the same bank, the deposits are added together when
determining deposit insurance coverage, the total of which shall not exceed P500,000.
4. How long does it take PDIC to settle a claim for insured deposit?

PDIC aims to pay valid claims as soon as possible. Prior to payout, claims are examined thoroughly. This is to
protect the Deposit Insurance Fund (DIF) which is the source of insurance payments. Sometimes, depositors
mistakenly assume that the payouts are sourced from their deposits. This is not the case. The payouts are from
PDIC’s own funds.
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The claim for insured deposit should be settled within six (6) months from the date of filing provided all
requirements are met but the claim must be filed within twenty-four (24) months after bank takeover. The six-
month period shall not apply if the documents of the claimant are incomplete or if the validity of the claim
requires the resolution of issues of facts and law by another office, body or agency, independently or in
coordination with PDIC.
10. What happens when the depositor of a closed bank fails to file his claim within the 24-month
period?
All rights of the depositor with respect to the insured deposit shall no longer be honored. But he may still make
a claim against the assets of the closed bank.
11. If the deposit account in a closed bank is more than P500,000.00, what happens to the excess of the
maximum amount of insured deposit?

If the closed bank is not rehabilitated or taken over by another bank, amount in excess of the P500,000
coverage can still be claimed upon the final liquidation of the remaining assets of the closed bank.

The claim may be filed with the Liquidator of the closed bank but payment of the said claim will depend on the
bank's available assets to settle its preferred claims (Government taxes, labor claims, secured credits and trust
funds) and approval of the Liquidation Court. The schedule of payment beyond the P500,000.00 maximum
insurance shall be based on priorities set by law.
12. What specific risks to a bank does PDIC cover?

PDIC covers only the risk of a bank closure ordered by the Monetary Board. Thus, bank losses due to theft fire,
closure by reason of strike or existence of public disorder, revolution or civil war, are not covered by PDIC.

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 ANTI-MONEY LAUNDERING ACT
(R.A. 9160)

A. POLICY of the LAW

1. The integrity and confidentiality of bank accounts shall be protected and preserved;
2. To ensure that the Philippines shall not be used as a money laundering site for the proceeds of any
unlawful activity.
3. Philippines shall not extend cooperation in transnational and prosecutions of persons involved in money
laundering activities wherever committed

B. COVERED INSTITUTION

1. Banks
2. Non‐banks
3. Quasi‐banks
4. Trust entities
5. All other institutions, their subsidiaries and affiliates supervised or regulated by BSP
6. Insurance companies and all other institutions supervised and regulated by the Insurance Commission
7. Securities dealers, brokers, salesmen, investment houses and other similar entities managing
securities or rendering services as investment agent, advisor, or consultant
8. Mutual funds, closed‐end investment companies, common trust funds, pre‐need companies and other
similar entities.
9. Foreign exchange, corporations, money changers, money payments, remittance, and transfer
companies and other similar entities; and
10. Other entities administering or otherwise dealing in currency, commodities or financial derivatives

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 based thereon, valuable objects, cash substitutes, and other similar monetary instruments or property
supervised or regulated by SEC. (Sec. 3 R.A. 9160, as amended)

C. OBLIGATIONS of COVERED INSTITUTIONS

1. They are mandated by the AMLA to submit covered and suspicious transaction reports to the AMLC.

D. COVERED TRANSACTIONS
2. These are transactions in cash or other equivalent monetary instrument involving a total amount in
excess of 500,000.00 within 1 banking day.

E. SUSPICIOUS TRANSACTIONS
Regardless of amount, if any of the following is present:
1. No underlying economic, trade or legal justification
2. Client not properly identified; numbered accounts are allowed provided client is identified.
3. Transaction is not commensurate with financial capability of the client
4. Transaction is so structured that it cannot be reported to the AMLC
5. Transaction which deviates from usual profile of the client
6. Relates to unlawful activity as defined by law
7. Analogous transactions

F. WHEN is MONEY LAUNDERING COMMITTED

8. The meaning of Money Laundering

- A crime whereby the proceeds of unlawful activity are transacted, making them appear to
have come from lawful transaction. (Sec. 4 R.A. 9160, as amended)

9. Money laundering act is committed by the following persons:

1. Any person knowing that the monetary instrument or property represents, involves, or relates to, the proceeds of
any unlawful activity, transacts or attempts to transact said monetary instrument or property;

2. Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity
performs or fails to perform any act as a result of which he facilitates the offense referred to in No. 1 above

3. Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed
with the Anti‐Money Laundering Council (AMLC), fails to do so. (Sec 4 R.A. 9160, as amended)

G. UNLAWFUL ACTIVITIES or PREDICATE CRIMES

4. These refer to any act or omission or series or combination thereof involving or having direct relation to
the following:
1. Kidnapping for ransom
2. Drug trafficking and related offenses
3. Graft and corrupt practices
4. Plunder
5. Robbery and Extortion
6. Jueteng and Masiao
7. Piracy

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

H. ANTI-MONEY LAUNDERING COUNCIL

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

4. The purpose of the law on creating the Anti-Money Laundering Council

1. To protect and preserve the integrity and confidentiality of bank accounts;

2. To ensure that the Philippines shall not be used as a money laundering site for proceeds of any unlawful activity;
and

3. To extend cooperation in transnational investigation and prosecution of person involved in money laundering
activities wherever committed.

4. The AMLC is a collegial body where Chairman & members of AMLC are entitled to one vote each
General Rule:
1. AMLC acts unanimously in discharge of functions
Exception:
2. In case of incapacity, absence or disability, any member to discharge his functions, the officer
designated shall act in his stead.
3. SECRETARIAT
1. Headed by Exec. Director, appointed by AMLC for a term of percentage years
qualifications:
1. member of Phil. Bar;
2. at least 35 years of age;
3. of good moral character;
4. with unquestionable integrity & known probity; and
5. Must have served for at least 5 years in Insurance Commission, SEC or BSP & shall hold full-time
permanent position within the BSP.
General Rule:

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 Members of AMLC, Executive Director, all members of Secretariat,
on detail, on secondment shall not reveal in any manner any information by reason of their
office
Exception:
Under any orders of the court, Congress, or any government offices
authorized by law
6. MEETING:
AMLC shall meet every first Monday of the month or as often as may be
necessary at the call of Chairman
7. Through modern technologies such as, but not limited to TELECONFERENCING &
VIDEOCONFERENCING
8. BUDGET: (appropriated by Congress)
9. Used to defray operational expenses, including indemnification for LEGAL COST & EXPENSES.

I. FUNCTIONS

The following are the functions of the anti-money laundering act:

1. To require and receive reports of suspicious transactions from covered institutions
Note: Covered institutions include, (banks and all other institutions and their subsidiaries and affiliates
supervised or regulated by BSP; insurance companies and all other institutions supervised or regulated by
the IC; and securities dealers and other entities supervised or regulated by the SEC)
2. To issue orders addressed to the Supervising Authority or the covered institution
3. To institute civil forfeiture proceedings and all other remedial proceedings through the OSG
4. To cause the filing of complaints with the DOJ or the Ombudsman for the prosecution of money
laundering offenses
5. To investigate suspicious transactions and covered transactions deemed suspicious after an
investigation by AMLC
6. To apply before the CA, ex parte, for the freezing of any monetary instrument/property alleged to be
proceeds of any unlawful activity as defined in the AMLA
7. To implement such measures as may be necessary and justified to counteract money laundering
8. To receive and take action in respect of any request for assistance from foreign states in their own anti-
money laundering operations
9. To develop educational programs on the pernicious effects of money laundering.
10. To enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the
government, including GOCCs in undertaking any and all anti-money laundering operations
11. To impose administrative sanctions for the violation of laws, rules, regulations and orders and
resolutions issued pursuant thereto. (Sec. 7 R.A. 9160, as amended)
12. To examine or inquire into bank deposits/investments upon order of any competent court in cases of
violation of the AMLA, when it has been established that there is probable cause that the
deposits/investments are related to an unlawful activity. (Sec. 11 R.A. 9160, as amended)
Note: No court order, however, is necessary in cases involving kidnapping for ransom; narcotics offenses;
and hijacking, destructive arson and murder, including those perpetrated by terrorists against non-
combatant persons and similar targets.

J. FREEZING of MONETARY INSTRUMENT or PROPERTY

13. The following has the jurisdiction for violations of Anti-Money Laundering Act:

1. RTC – all cases on money laundering.

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

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

It also has the exclusive jurisdiction to extend existing freeze orders previously issued by the AMLC vis-à-vis
accounts and deposits related to money-laundering activities. (Republic v. Cabrini Green & Ramos, G.R. No.
154522, May 5, 2006)

K. AUTHORITY to INQUIRE INTO BANK DEPOSITS

4. The Anti-Money Laundering Council (AMLC) can inquire into bank deposits when

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

JURISPRUDENCE

REPUBLIC versus GLASGOW CREDIT and COLLECTION SERVICES INC.

FACTS:
Glasgow is a corporation existing under the laws of the Philippines and has funds in the amount of P21, 301,
430.00 deposited with City state Savings Bank, Inc. (CSBI).
However, the aforestated bank account is related to the unlawful activities of Estafa and violation of Securities
Regulation Code.
Thus, the Republic filed a complaint in the Regional Trial Court of Manila for civil forfeiture of assets with plea
for issuance of temporary retraining order and writ of preliminary injunction and was granted.
Glasgow filed a motion to dismiss alleging that the complaint was premature and stated no case of action as
there was still no conviction of Estafa or other criminal violations, Hence, the petition.

ISSUE:
Is criminal conviction for unlawful activity is considered a pre requisites for the institution of a civil forfeiture?

HELD:
NO, The complaint was sufficient in form and substance, the question submitted to the court for determination is
the sufficiency of the allegations made in the complaint to constitute a cause of action and not whether those
allegations of facts are true. A finding of guilt for an unlawful activity is not an essential element for forfeiture.

REPUBLIC versus CABRINI GREEN and ROSS INC.

FACTS:

The Anti- Money Laundering Council (AMLC) issued freeze orders against various accounts of respondents.
The bank accounts were previously found prima facie to be related to the unlawful activities.

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Before the lapse of fifteen (15) days, AMLC filed with the Court of Appeals (CA) petitions for extension of
effectivity of its freeze orders.
However, Court of Appeals disregard the petitions. It ruled that it was not vested by R.A 9160 with the power to
extend a freeze order.

ISSUE:
Which court has jurisdiction to extend the effectivity of a freeze orders?

HELD:
The law stands, it is solely the Court of Appeals which has the authority to issue a freeze order as well as to
extend its effectivity, It has the exclusive jurisdiction to extend existing freeze orders previously issued by the
Anti Money Laundering Council accounts and deposits related to money-laundering activities.

REPUBLIC versus EUGENIO

FACTS:
Anti- Money Laundering Council filed an application to inquire or examine the deposited or investments of
Alvarez et. al, before the Regional Trial Court of Makati. The latter granting the Anti- Money Laundering Council
the authority to inquire and examine the subject bank accounts.
The trial court being satisfied that there existed probable cause to believe that the deposits in various
accounts are related to the offense of violation of Anti-Graft and corrupt practices Act now the subject of
criminal prosecution.

ISSUE:
Whether or not the bank accounts of respondents can be examined.

HELD:
All bank deposits are absolutely confidential. However, the Anti Money Laundering Act also provides exceptions
to the Bank Secrecy Act. It may inquire into a bank account upon orders of any competent court in case of
violation of the Anti Money Laundering Act.

QUESTIONS AND ANSWERS

1. Alvin is jobless but is reputed to be a jueteng operator. He has never been charged or convicted of any crime. He
maintains several bank accounts amounting to P100 Million. AMLC charged Alvin with violation of the
Anti‐Money Laundering Law. (Bar exam question 2002)

A. Can Alvin move to dismiss the case on the ground that he has no criminal record?

ANSWER:

No. The contention of Alvin is not tenable because under AMLA, "money laundering crime" committed when
the proceeds of an "unlawful activity," like jueteng operations, are made to appear as having originated from
legitimate sources. The money laundering crime is separate from the unlawful activity of being a jueteng operator, and
requires no previous conviction for the unlawful activity. (Sec. 3, AMLA)

B. In disclosing Alvin's bank accounts to the AMLC, did the bank violate any law?

ANSWER:
No, the bank did not violate any law. The bank being specified as a "covered institution" under the Anti‐Money
Laundering Law, is obliged to report to the AMLC covered and suspicious transactions, without thereby violating
any law. This is one of the exceptions to the Secrecy of Bank Deposit
2. Rudy is jobless but is reputed to be a jueteng operator. He has never been charged or
convicted of any crime. He maintains several bank accounts and has purchased 5 houses and lots
for his children from the Luansing Realty, Inc. Since he does not have any visible job, the

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company reported his purchases to the Anti-Money Laundering Council (AMLC). Thereafter,
AMLC charged him with violation of the Anti-Money Laundering Law. Upon request of the AMLC, the
bank disclosed to it Rudy's bank deposits amounting to P100 Million. Subsequently, he was
charged in court for violation of the Anti-Money Laundering Law. (Bar exam question 2002)
A: Can Rudy move to dismiss the case on the ground that he has no criminal record? (2.5%)
ANSWER:
No. Under the Anti-Money Laundering Law, Rudy would be guilty of a "money laundering crime"
committed when the proceeds of an "unlawful activity," like jueteng operations, are made to appear as
having originated from legitimate sources. The money laundering crime is separate from the
unlawful activity of being a jueteng operator, and requires no previous conviction for the unlawful activity
(See also Sec. 3, Anti- Money Laundering Act of 2001).
B: To raise funds for his defense, Rudy sold the houses and lots to a friend. Can Luansing
Realty, Inc. be compelled to transfer to the buyer ownership of the houses and lots? (2.5%)
ANSWER:
Luansing Realty, Inc. is a real estate company, hence it is not a covered institution under Section 3 of the
Anti- Money Laundering Act. Only banking institutions, insurance companies, securities dealers and
brokers, pre- need companies and other entities administering or otherwise dealing in currency,
commodities or financial derivatives are covered institutions. Hence, Luansing Realty, Inc. may not
use the Anti-Money Laundering Act to refuse to transfer to the buyer ownership of the houses and
lots.
C: In disclosing Rudy's bank accounts to the AMLC, did the bank violate any law? (2.5%)
ANSWER:
No, the bank did not violate any law. The bank being specified as a "covered
institution" under the Anti-Money Laundering Law, is obliged to report to the AMLC covered and
suspicious transactions, without thereby violating any law. This is one of the
exceptions to the Secrecy of Bank Deposit Act.
D: Supposing the titles of the houses and lots are in possession of the Luansing Realty, Inc., is it
under obligation to deliver the titles to Rudy? (2.5%)
ANSWER
Yes, it has an obligation to deliver titles to Rudy. As Luansing Realty, Inc. is not a covered
institution under Section 3 of the Anti-Money Laundering Act, it may not invoke this law to refuse
delivery of the titles to Rudy.
3. Who shall be liable if the offender is a juridical entity?
Answer:
If the offender is a corporation, association, partnership or any judicial person, the penalty shall be imposed
upon the responsible officers, as the case may be, who participated or failed to prevent its
commission. If the offender is a juridical person, the court may suspend or revoke its license. (Rule 3,
Sec. 2 (par.6), IRR)

4. Who has the authority to freeze accounts?

Answer:
The AMLC is authorized under Sections 6 (6) and 10 of the AMLA to freeze any account or any
monetary instrument or property subject thereof upon determination that probable cause exists that the same is
in any way related to any unlawful activity and/or money laundering offense. The AMLC may freeze
any account or any monetary instrument or property subject thereof prior to the institution or in the course
of, the criminal proceedings involving the unlawful activity and/or money laundering offense to which said
account, monetary instrument or property is any way related. The freeze order on such account shall be

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effective immediately for a period not exceeding fifteen (15) days.
5. May a court issue TRO or writ of injunction to extend a freeze order?
Answer:
Only the CA and SC. No court shall issue a temporary restraining order or writ of injunction against any
freeze order issued by the AMLC or any court order extending period of effectivity of the freeze order
except the Court of Appeals or the Supreme Court.(Rule 3, Sec. 3 (par.h), IRR)
6. Are institutions required to verify the identity of their clients through face-to-face contracts?
Answer:
To the extent and through such means allowed under existing laws and applicable rules and regulations
of the BSP, the SEC and the IC, covered institutions may create new accounts without face-to-face
contract. (Rule 5, Sec. 1, par. D, IRR)
7. How should the AMLA be construed or implemented?
Answer:
It shall not be construed or implemented in a manner that will discriminate against certain customer types,
such as politically- exposed persons, as well as their relatives, or against a certain religion, race or ethnic
origin, or such other attributes or profiles when used as the only basis to deny these persons access to the
services provided by the covered persons. Whenever a bank, or quasi-bank, financial institution or
whenever any person or entity commits said discriminatory act, the person or persons responsible for such
violation shall be subject to sanctions as may be deemed appropriate by their respective
regulators.”
8. Is personal knowledge necessary that the monetary instrument is the proceed of unlawful activity to
be qualified as an offender?
Answer:
Yes, Money laundering is committed by any person who, knowing that any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful activity. Sec. 4, RA 10365.
9. What are the exemptions on the authority of the AMLC to inquire into bank deposits of the offender?
Answer:
There is no need of acquiring a court order in cases of kidnapping, Hijacking, Drugs, Arson and Murder.
Because they are acts or omissions that involves direct relation to the offended party.
10. What are the compositions of the Anti-money laundering council?
Answer:
The following are the compositions of the AMLC:
A: Governor of BangkoSentralngPilipinas as Chairman;
B: Insurance Commissioner;
C: Chairman of Security and Exchange Commissioner.
TRUTH IN LENDING ACT (R.A. 3765)

CIRCULAR NO. 158

Series of 1998

Pursuant to Monetary Board Resolution No. 369 dated 12 March 1998, amending the composition of the
reserve requirement on all types of peso deposit and deposit substitute liabilities of expanded commercial
banks, commercial banks and non-banks with quasi-banking (NBQBs) functions and certain types of deposit
and deposit substitute liabilities of thrift banks and rural banks, and Monetary Board Resolution No. 403 dated
18 March 1998, advancing the effectivity date of the abovementioned changes, Books I, II, III and IV of the
Manual of Regulations are hereby amended as follows:

Book I

Expanded Commercial Banks and Commercial Banks

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SECTION 1. Sections 1203, 1214, 1225, 1232, 1236 and 1253 of Book 1 of the Manual of Regulations are
hereby amended by reducing the required reserves against demand and savings deposits, NOW accounts, time
deposits and negotiable certificate of time deposits regardless of maturity of banks with expanded commercial
banking authority, commercial banks, the Land Bank of the Philippines, the Development Bank of the
Philippines and the Al-Amanah Islamic Investment Bank of the Philippines from thirteen percent (13%) to ten
percent (10%).

SECTION 2. Section 1283 of Book I of the Manual of Regulations is hereby amended by reducing the required
reserves against deposit substitute liabilities regardless of maturity from thirteen percent (13%) to ten percent
(10%).

Book II

Thrift Banks

SECTION 3. Section 2203, Section 2225 and Section 2253 of Book II of the Manual of Regulations are hereby
amended by reducing the required reserves against demand deposits and NOW accounts from thirteen percent
(13%) to ten percent (10%).

SECTION 4. Section 2283 of Book II of the Manual of Regulations is hereby amended by reducing the required
reserves against deposit substitute liabilities regardless of maturity from thirteen percent (13%) to ten percent
(10%).

SECTION 5. Sections 2232, 2236, and 2253 of Book II of the Manual of Regulations are hereby amended by
reducing the required reserves against time deposits and negotiable certificates of time deposits regardless of
maturity from eleven percent (11%) to eight percent (8%).

SECTION 6. Sections 2214 and 2253 of Book II of the Manual of Regulations are hereby amended by reducing
the required reserves against savings deposits from eleven percent (11%) to eight percent (8%).

Book III

Rural Banks

SECTION 7. Sections 3203 and 3253 of Book III of the Manual of Regulations are hereby amended by reducing
the required reserves against demand deposits from thirteen percent (13%) to ten percent (10%).
SECTION 8. Sections 3225, 3236, and 3253 of Book III of the Manual of Regulations are hereby amended by
reducing the required reserves against NOW accounts from thirteen percent (13%) to ten percent (10%).
SECTION 9. Under Sections 3214 and 3232 of Book III of the Manual of Regulations, the required reserves
against savings and time deposits regardless of maturity shall remain at five percent (5%).

Book IV

Non-Bank Financial Intermediaries

SECTION 10. The first paragraph of Section 4283Q of Book IV of the Manual of Regulations is hereby
amended by reducing the required reserves against deposit substitute liabilities, regardless of maturity, from
thirteen percent (13%) to ten percent (10%).

Books I, II, III and IV

Liquidity Reserves for all Financial Intermediaries

SECTION 11. On top of the regular reserve requirements, liquidity reserve ratios against peso demand,
savings, time deposit and deposit substitute liabilities shall be raised, as follows:

1. For expanded commercial banks, commercial banks, and non-bank financial intermediaries with quasi-
banking functions (NBQBs), from four percent (4%) to seven percent (7%);

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2. For thrift banks, from three percent (3%) to six percent (6%); and
3. For rural banks, from zero to three percent (3%) against their demand deposit liabilities.

The required liquidity reserve may be maintained in the form of short-term market-yielding government
securities purchased directly from the BSP-Treasury Department, pursuant to Circular No. 10 dated 29
December 1993.

Form and Composition of Regular Reserves for all Financial Intermediaries

SECTION 12. Regular reserves shall be maintained in the same form and composition as provided in Sections
1254, 2254, 3254, 1283, 2283.1, 3283, and 4283Q of Books I, II, III, and IV, respectively, of the Manual of
Regulations for Banks and Other Financial Intermediaries.

“ TRUTH IN LENDING ACT”

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

II. Obligation of Creditors to Person to whom CREDIT IS EXTENDED

Any creditor, PRIOR TO THE CONSUMPTION OF THE TRANSACTION shall FURNISH a clear
statement in writing setting forth, to the extent applicable and in accordance with the rules and
regulations prescribed by the Board, the following INFORMATION; ( as provided in Section 4 )

a. the cash price or delivered price of the property or service to be acquired;

b. the amounts, if any, to be credited as down payment and/or trade-in;

c. the difference between the amounts set forth under clauses (1) and (2);

d. the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;

e. the total amount to be financed;

f. the finance charge expressed in terms of pesos and centavos; and

g. the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

III. COVERED AND EXCLUDED TRANSACTIONS

1. THOSE COVERED ARE:

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

2. THOSE EXCLUDED ARE:

The following transactions are exempt;

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1. Credit extended primarily for a business, commercial, or agricultural purpose;

2. Credit extended to other than a natural person (including credit to government agencies or
instrumentalities);

3. Credit in excess of $25 thousand not secured by real or personal property used as the principal
dwelling of the consumer;

4. Public utility credit;

5. Credit extended by a broker-dealer registered with the Securities and Exchange Commission (SEC) or
the Commodity Futures Trading Commission (CFTC), involving securities or commodities accounts;
6. Home fuel budget plans; and
7. Certain student loan programs.

NOTE: When determining whether credit is for consumer purposes, the creditor must evaluate all of the
following:

• Any statement obtained from the consumer describing the purpose of the proceeds.

- For example, a statement that the proceeds will be used for a vacation trip would indicate a consumer
purpose.

- If the loan has a mixed-purpose (e.g., proceeds will be used to buy a car that will be
used for personal and business purposes), the lender must look to the primary
purpose of the loan to decide whether disclosures are necessary. A statement of
purpose from the consumer will help the lender make that decision.

- A checked box indicating that the loan is for a business purpose, absent any
documentation showing the intended use of the proceeds, could be insufficient
evidence that the loan did not have a consumer purpose.

• The consumer's primary occupation and how it relates to the use of the proceeds. The higher the correlation
between the consumer's occupation and the property purchased from the loan proceeds, the greater the
likelihood that the loan has a business purpose.

For example, proceeds used to purchase dental supplies for a dentist would indicate a business purpose.

• Personal management of the assets purchased from proceeds. The lower the degree of the borrower's
personal involvement in the management of the investment or enterprise purchased by the loan proceeds, the
less likely the loan will have a business purpose.

For example, money borrowed to purchase stock in an automobile company by an individual who does not work
for that company would indicate a personal investment and a consumer purpose.

• The size of the transaction. The larger the size of the transaction, the more likely the loan will have a business
purpose. For example, if the loan is for a $5,000,000 real estate transaction, that might indicate a business
purpose.

• The amount of income derived from the property acquired by the loan proceeds relative to the borrower's total
income. The lesser the income derived from the acquired property, the more likely the loan will have a
consumer purpose.

For example, if the borrower has an annual salary of $100,000 and receives about $500 in annual dividends
from the acquired property, that would indicate a consumer purpose.

8. CONSEQUENCES OF NON-COMPLIANCE WITH OBLIGATION

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

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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 attorney’s fees and court costs as determined by the court.

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

However, no punishment or penalty under this law shall apply to the Philippine Government or any agency or
any political subdivision thereof. (section 6 )

JURISPRUDENCE

UCPB v. Sps. Beluso August 17, 2007 No. 159912

Facts:
UCPB granted spouses Beluso a Promissory Notes Line under a Credit Agreement whereby the latter could
avail from the former credit up to the maximum amount of P1.2 M, which was amended to increase P2.35 M.
Spouses Beluso have executed a total of 5 promissory notes, the last two of which they claim to have never
been released to them. In any case, UCPB applied interest rates on the different promissory notes ranging from
18% to 34%, and thereafter continued to charge interests and penalties. When the respondents failed to make
payments, UCPB foreclosed their mortgaged properties. Respondents filed a petition for annulment thereof.
RTC ruled in favor of respondents and the CA affirmed thereof. It was ruled that the provision on interest rates
agreed upon by the parties is void as the rates and bases therefor were determined solely by the petitioner.
UCPB argues that there is no violation of the principle of mutuality of contracts, and assuming there is, it was
already cured by estoppel on the part of respondents.
Issue:
Is the contention of the petitioner UCPB meritorious?

Ruling:
No. Article 1308 provides that a contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them. In order that obligations arising from contracts may have the force of law between
the parties, there must be mutuality between the parties based on their essential equality. A contract containing
a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting
parties is void. The provision stating that the interest shall be at theœrate indicative of DBD retail rate or as
determined by the Branch Head is indeed dependent solely on the will of petitioner UCPB. Under such
provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a rate indicative of the DBD
retail rate; or (2) a rate as determined by the Branch Head. As UCPB is given this choice, the rate should be
categorically determinable in both choices. If either of these two choices presents an opportunity for UCPB to fix
the rate at will, the bank can easily choose such an option, thus making the entire interest rate provision
violative of the principle of mutuality of contracts. Not just one, but rather both, of these choices are dependent
solely on the will of UCPB. Spouses Beluso had acknowledged before the RTC their obligation to pay a 12%
legal interest on their loans. There is sufficient basis to impose a 12% legal interest in favor of petitioner in the
case at bar, as what we have voided is merely the stipulated rate of interest and not the stipulation that the loan
shall earn interest. We uphold the contract stipulation providing the compounding of interest. The provisions in
the Credit Agreement and in the promissory notes providing for the compounding of interest were neither
nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso. Note:€ Furthermore, opening
a credit line does not create a credit transaction of loan or mutuum, since the former is merely a preparatory
contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the
considerations specified therefor, to lend to the other party amounts not exceeding the limit provided. The credit
transaction thus occurred not when the credit line was opened, but rather when the credit line was availed of. In
the case at bar, the violation of the Truth in Lending Act allegedly occurred not when the parties executed the
Credit Agreement, where no interest rate was mentioned, but when the parties executed the promissory notes,
where the allegedly offending interest rate was stipulated.

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 Consolidated Bank v. CA

Facts:
George King Tim Pua obtained several loans from Consolidated Bank for which he executed several
promissory notes. In order to secure Pua’s payment of the promissory notes, he assigned the proceeds of his
fire insurance policy. The proceeds of the fire insurance policy was then applied to Pua’s obligations with
Consolidated Bank. Pua sued the bank for recovery of the unpaid balances on the promissory notes.
Issue:
Whether or not Pua is obliged to pay handling charges .
Ruling:
Banks and non-bank financial intermediaries authorized to engage in quest-banking functions are required to
strictly adhere to the provisions of the Truth in Lending Act. Where the promissory note signed by the borrowers
do not contain any stipulation on the payment of handling charges, the bank cannot collect the same even though a CB
circular authorized banks to collect handling charges on loans over P500,00

DBP v. Arcilla Jr.

Facts:
Atty. Felipe Arcilla Jr. was employed by the DBP. After he was assigned to the legal department, he decided to avail of a loan
under the Individual Housing Project (IHP) of the bank for the payment of the parcel of land purchased by him and for its
construction. When Arcilla resigned from DBP, the bank notified him that his loan has been converted to a regular
housing loan. Arcilla agreed to the reservation by the DBP of its right to increase the rate of interest on the loan,
as well as all other fees and charges on loans and advances pursuant to such policy as it may adopt from time to time during the
period of the loan.

Issue:
Whether or not DBP violated RA 3765 otherwise known as The Truth in Lending Act.
Ruling:

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank, as creditor,
is obliged to furnish a client with a clear statement, in writing, setting forth, to the extent applicable and in
accordance with the rules and regulations prescribed by the Monetary Board of the Central Bank of the
Philippines, the following information:
1. the cash price or delivered price of the property or service to be acquired;
2. the amounts, if any, to be credited as down payment and/or trade-in;
3. the difference between the amounts set forth under clauses(1) and (2);
4. the charges, individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit;
5. the total amount to be financed;
6. the finance charges expressed in terms of pesos and centavos; and
7. the percentage that the finance charge bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

If the borrower is not duly informed of the data required by the law prior to the consummation of the availment
or drawdown, the lender will have no right to collect such charge or increases thereof, even if stipulated in the
promissory note. However, such failure shall not affect the validity or enforceability of any contract or transaction.

QUESTIONS AND ANSWERS

1. What is the policy behind the Truth in Lending Act?

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

2. In that definition, what is meant by “credit”?

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

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contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other
claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon
the security of, any obligation of claim arising out of any of the foregoing; and any transaction or series of
transactions having a similar purpose or effect.

3. In the same definition, what is meant by a “finance charge”?

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

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

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

5. When and how should this information be furnished to the debtor or borrower?

The information enumerated above must be disclosed to the debtor or borrower prior to the consummation of
the transaction. The information must be clearly stated in writing.

6. What is the effect on the obligation in case of violations to the Truth in Lending Act?

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

FOREIGN INVESTMENT ACT (R.A. 7042, as amended)

I. POLICY OF THE LAW

a. On extent of foreign ownership of export enterprises, THERE ARE NO RESTRICTIONS
- the state shall attract, promote and welcome productive investments from FOREIGN individuals,
partnerships, corporations and governments ( including political subdivisions) which significantly contribute to
national industrialization and socio-economic development.

b. Foreigners can INVEST as much as 100% equity EXCEPT in areas included in the NEGATIVE LISTS.
- Foreign investments that significantly expand livelihood and employment for Filipinos.
- An investment which enhances the economic value of farm products.
- Serves mainly the domestic market.

II. DEFINITION OF TERMS

a. Foreign Investment
-an equity investment made by a non-Philippine national in the form of foreign exchange and/or other
assets actually transferred to the Philippines and duly registered with the Central Bank which shall asses and
appraise the value of such assets other than foreign exchange.

b. Doing Business in the Philippines

- Solicitation of orders, service contracts, opening officers, and any other ACTS that IMPLY a
CONTINUITY of commercial dealings or arrangements.

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Note: Doing business does not merely include mere investment as a shareholder by a foreign entity in
domestic corporations.

c. Export Enterprise
- an enterprise where a manufacturer, processor or service enterprise EXPORTS SIXTY percent (60%)
or more of its ourput.
- a trader purchases products domestically and EXPORTS SIXTY percent (60%) or more of such
purchases.

d. Domestic Market Enterprise

- an enterprise which PRODUCES GOODS FOR SALE
- RENDERS SERVICES to the domestic market ENTIRELY
- FAILURE to continuously export at least SIXTY percent (60%)

III. REGISTRATION OF INVESTMENT OF NON-PHILIPPINE NATIONALS

a. WITHOUT NEED OF PRIOR APPROVAL, a non-Philippine national who is not disqualified by law may, upon
registration with the Securities and Exchange commission (SEC) or with the Bureau of Trade Regulation and
Consumer Protection (BPTRC) of the Department of Trade and Industry in the CASE OF SINGLE
PROPRIETORSHIPS, do BUSINESS or

b. INVEST in a DOMESTIC enterprise up to ONE HUNDRED percent (100%) of its capital, unless said
participation is prohibited or limited by law.

c. The SEC or BRTRCP shall not impose any limitations on the extent of foreign ownership in an enterprise as
the case may be.

1. Note: Any enterprise seeking to avail of incentives under the Omnibus Investment code of 1987 must
apply for registration with the Board of Investments (BOI).

2. A non-Philippine national in line of a business as an existing joint venture being a substantial partner
must DISCLOSE the facts of the partners in the joint venture.

3. During the TRANSITORY period, SEC shall disallow registration of the applying non-Philippine national
if the existing joint venture enterprise, particularly the Filipino partners, can REASONABLY PROVE that
they are CAPABLE to make the investment needed for the domestic market activities.

4. SEC shall effect registration within fifteen (15) days upon submission of completed requirements.

IV. FOREIGN INVESTMENT in DOMESTIC MARKET Enterprise

-Non-Philippine nationals may own up to one hundred percent (100%) of domestic market enterprise unless
foreign ownership therein is prohibited or limited by the Constitution or the Foreign Investment Negative Lists.

V. FOREIGN INVESTMENT NEGATIVE LISTS

In Negative List A, It enumerates the areas of activities reserved to Philippine nationals by mandate of
the Constitution and specific laws.

No Foreign Equity

1. Mass Media except recording

2. Practice of professions
3. Retail trade enterprises with paid-up capital of not less than US$2,500,000.00
4. Cooperatives
5. Private Security Agencies
6. Small-scale Mining
7. Utilization of Marine Resources in archipelagic waters, territorial sea, and
exclusive economic zone
8. Ownership, operation and management of cockpits
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical

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and radiological weapons and anti-personal mines
11. Manufacture of firecrackers and other pyrotechnic devices

Up to Twenty Percent (20%) Foreign Equity

12. Private radio communication network

Up to Twenty-Five Percent (25%) Foreign Equity
13. Private recruitment, whether for local or overseas employment
14. Contracts for the construction and repair of locally-funded public works,
except:
a. infrastructure/development projects covered in RA 7718; andˇ
b. projects which are foreign funded or assisted and required to undergo international competitive bidding (Sec.
2(a) of RA 7718)

15. Contracts for construction of defense-related structure

Up to Thirty Percent (30%) Foreign Equity

16. Advertising
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of natural resources
18. Ownership of Private Lands
19. Operation and management of public utilities
20. Ownership/establishment and administration of educational institutions
21. Culture, production, milling, processing, trading excepting retailing, of rice
and corn and acquiring, by barter, purchase or otherwise, rice and corn and the
byproducts thereof
1. Contracts for the supply of materials, goods and commodities to
2. Government owned or controlled corporation, company, agency or Municipal
3. Corporation
23. Project Proponent and facility Operator of a BOT project requiring a public
utilities franchise
24. Operation of deep-sea commercial fishing vessels
25. Adjustment Companies
26. Ownership of condominium units where the common areas in the
condominium projects are co-owned by the owners of the separate units or
owned by a corporation

Up to Sixty Percent (60%) Foreign Equity

27. Financing companies regulated by the Securities and Exchange Commission

28. Investment houses regulated by the SEC

What is the coverage of Negative List B?

In Negative List B, foreign ownership in certain business is limited for reason of

security, defense, risk to health and morals and protection of small-and-
medium scale enterprises. These are:

Up to Forty Percent (40 %) Foreign Equity

1. Manufacture, repair, storage and/or distribution of products and/or ingredients requiring Philippine National
Police (PNP) clearance:

1. Firearms (handguns to shotguns), parts of firearms and ammunition therefore,

instruments or implements used or intended to be used in the manufacture of
firearms
b. Gunpowder
c. Dynamite
d. Blasting supplies
e. Ingredients used in making explosives

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f. Telescopic sight, sniper scope and other similar devices
1. Manufacture, repair, storage and/or distribution of products requiring Department of National
Defense (DND) clearance;

a. Guns and ammunition for warfare

b. Military ordnance and parts thereof (e.g., torpedoes, depth charges, bombs,
grenades, missiles)
c. Gunnery, bombing and fire control systems and components
d. Guided missiles/missile systems and components
e. Tactical aircraft (fixed and rotary -winged), parts and components thereof
f. Space vehicles and component systems
g. Combat vessels (air. land and naval) and auxiliaries
h. Weapons repair and maintenance equipment
i. Military communications equipment
j. Night vision equipment
k. Stimulated coherent radiation devices, components and accessories
l. Armament training devices
m. Others as may be determined by the Secretary of the DND
3. Manufacture and distribution of dangerous drugs
4. Sauna and steam bathhouses, massage clinics and other like activities
regulated by law because of risks posed to public health and morals
5. All forms of gambling, e.g. race track operation
6. Domestic market enterprises with paid-in equity capital of less than the
equivalent of US$200,000
1. Domestic market enterprises, which involve advanced technology or employ at
least fifty (50) direct employees with paid-in-equity capital of less than the
equivalent of US$100,000

JURISPRUDENCE

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

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

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

RULING: NO.
The appointment of a distributor in the Philippines is not sufficient to constitute doing business unless it is under the full
control of the foreign corporation. On the other hand, if the distributor is an independent entity which buys and distributes
products, other than those of the foreign corporation, for its own name and its own account, the latter cannot be considered
to be doing business in the Philippines. Here, DISI was an independent contractor which sold Steelcase products in its own
name and for its own account. As a result, Steelcase cannot be considered to be doing business in the Philippines by its act
of appointing a distributor as it falls under one of the exceptions under R.A. No. 7042.

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 MR HOLDINGS, LTD vs. SHERIFF CARLOS P. BAJAR, SHERIFF FERDINAND M. JANDUSAY,
SOLIDBANK CORPORATION, AND MARCOPPER MINING CORPORATION
G.R. No. 138104 April 11, 2002

FACTS:
Marcopper Mining Corporation was unable to pay its loans from the Asian Development Bank (ADB). Later,
ADB transferred all its rights to collect from Marcopper to MR Holdings, Ltd. In order to pay MR Holdings,
Marcopper assigned all its assets to MR Holdings and executed therefor a Deed of Assignment in MR Holdings
favor.
Meanwhile, another creditor of Marcopper, Solidbank Corporation, won a case against Marcopper. The court
then issued a writ of execution directing Sheriff Carlos Bajar to levy Marcopper’s assets.
MR Holdings then filed an opposition asserting that it is now the owner of Marcopper’s assets hence, Bajar
cannot levy them. The lower court denied MR Holdings on the ground that the Deed of Assignment was made
in bad faith and that MR Holdings was a foreign corporation doing business without a license in the Philippines
(by virtue of the Deed of Assignment) and as such cannot sue in the Philippines.

ISSUE: Whether or not MR Holdings may sue on this particular transaction.

HELD: Yes. The Supreme Court emphasized the following rules when it comes to foreign corporations doing
business here in the Philippines:

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

Being a mere assignee does not constitute “doing business” in the Philippines. MR Holdings, a foreign
corporation, cannot be said to be doing business simply because it became an assignee of Marcopper. MR
Holdings was not doing anything else other than being a mere assignee. The only time that MR Holdings is
considered to be doing business here is that if it continues the business of Marcopper – which it did not.
Therefore, since it is not doing business here, pursuant to the rules above, it can sue without any license before
Philippine courts on an isolated transaction or on a cause of action entirely independent of any business
transaction.
Anent the issue of bad faith, the same was not proven. It appears that the deed of assignment was an earlier
agreement incidental to the loan agreement between ADB and Marcopper which precedes the action brought
by Solidbank against Marcopper.

HAHN v. CA
G.R. No. 113074; January 22, 1997

FACTS:
Petitioner Alfred Hahn is a Filipino citizen doing business under the name and style "Hahn-Manila". On the
other hand, private respondent (BMW) is a nonresident foreign corporation existing under the laws of the former
Federal Republic of Germany, with principal office at Munich, Germany.
On March 7, 1967, petitioner executed in favor of private respondent a "Deed of Assignment with Special Power
of Attorney. Per the agreement, the parties "continue[d] business relations as has been usual in the past without
a formal contract."
But on February 16, 1993, in a meeting with a BMW representative and the president of Columbia Motors
Corporation (CMC), Jose Alvarez, petitioner was informed that BMW was arranging to grant the exclusive
dealership of BMW cars and products to CMC, which had expressed interest in acquiring the same.
On February 24, 1993, petitioner received confirmation of the information from BMW which, in a letter,
expressed dissatisfaction with various aspects of petitioner's business, mentioning among other things, decline
in sales, deteriorating services, and inadequate showroom and warehouse facilities, and petitioner's alleged
failure to comply with the standards for an exclusive BMW dealer.
Nonetheless, BMW expressed willingness to continue business relations with the petitioner on the basis of a
"standard BMW importer" contract, otherwise, it said, if this was not acceptable to petitioner, BMW would have
no alternative but to terminate petitioner's exclusive dealership effective June 30, 1993.

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 Because of Hahn's insistence on the former business relations, BMW withdrew on March 26, 1993 its offer of
a "standard importer contract" and terminated the exclusive dealer relationship effective June 30, 1993.
On April 29, 1993, BMW proposed that Hahn and CMC jointly import and distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for specific performance and
damages against BMW to compel it to continue the exclusive dealership.

ISSUE:
Whether petitioner Alfred Hahn is the agent or distributor in the Philippines of private respondent BMW

HELD:
Alfred Hahn is an agent of BMW.
The Supreme Court held that agency is shown when Hahn claimed he took orders for BMW cars and transmits
them to BMW. Then BMW fixes the down payment and pricing charges and will notify Hahn of the scheduled
production month for the orders, and reconfirm the orders by signing and returning to Hahn the acceptance
sheets.

The payment is made by the buyer directly to BMW. Title to cars purchased passed directly to the buyer and
Hahn never paid for the purchase price of BMW cars sold in the Philippines. Hahn was credited with a
commission equal to 14% of the purchase price upon the invoicing of a vehicle order by BMW. Upon
confirmation in writing that the vehicles had been registered in the Philippines and serviced by him, Hahn
received an additional 3% of the full purchase price. Hahn performed after-sale services, including, warranty
services. for which he received reimbursement from BMW. All orders were on invoices and forms of BMW.

Moreover, the Court distinguished an agent from a broker. The court ruled that an agent receives a commission
upon the successful conclusion of a sale. On the other hand, a broker earns his pay merely by bringing the
buyer and the seller together, even if no sale is eventually made.

QUESTIONS AND ANSWERS

1. What is the general policy of the government for foreign investments?

The Philippine government is encouraging foreign investors to invest in the country with businesses that will
provide opportunities in employment, develop the productivity of resources, heighten the volume as well as the
value of exports and provide the future development of the economy’s foundation.
2. What requirements must be complied with before a foreign corporationcan do business in the
Philippines?

If the foreign corporation itself intends to do business in the Philippines under its foreign charter, the foreign
corporation must first secure a “License to do Business in the Philippines” from the Philippine Securities &
Exchange Commission (SEC). If the foreign corporation intends to do business in the Philippines by
incorporating a Philippine company, the foreign corporation must first secure the approval of the SEC by filing
its incorporation papers, together with authenticated copies of its foreigncharter and by-laws.

3. What is the effect of being issued a “License to Do Business in thePhilippines”?

When a foreign corporation is issued the license to do business in the Philippines, it may commence to transact
its business in the Philippines and continue to do so for as long as it retain its authority to act as a corporation
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under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked,
suspended, or annulled.
4. How does the Philippines define foreign corporations?

Foreign corporations has been defined as one, which owes its existence to the laws of another state, and
generally, has no legal existence within another state. Section 123 of the Corporation Code defines a foreign
corporation as one formed, organized, and existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in the Philippines.

5. Can a foreign company invest in the Philippines?

Yes. The Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179, 1996) liberalized the entry of
foreign investment into the Philippines. Under the FIA, foreign investors are generally treated like their domestic
counterparts and must register with the Securities and Exchange Commission (SEC) (in the case of a
corporation or partnership) or with the Department of Trade and Industry’s Bureau of Trade Regulation and
Consumer Protection (in the case of a sole proprietorship).

1. What is the percentage of foreign equity allowed under the FIA?

With the liberalization of the foreign investment law, 100% foreign equity may be allowed in all areas of
investment except those reserved for Filipinos under the Philippine Constitution and existing laws.

2. Is there a need for the foreign corporation to appoint its local agent in the Philippines?

Yes, if the foreign corporation intends to do business in the Philippines under its foreign charter. Among the
things to be stated in the verified application are the name and address of the foreign corporation’s resident
agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a
local office, all notices affecting the corporation.

3. What is the effect of failure to appoint or maintain a local agent?

The failure to appoint or maintain a resident agent in the Philippines, or after change of its resident agent or his
address, failure to submit to the SEC a statement of such change, are grounds for revocation of a license
granted to a foreign corporation to do business in the Philippines.

9. Is there any Reciprocity Compliance?

Yes. Attached to the application shall also be a duly executed certificate under oath by the authorized official or
officials of the jurisdiction of incorporation of the foreign corporation, attesting to the fact that the laws of the
country or state of the applicant allow Filipino citizens and corporation to do business therein.

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