Professor: Dean Nilo T.

Divina

Transcribers:
Marc Roby de Chavez (MARX)

Mon Cristhoper Pasia (MON)

 Special Commercial Laws Notes by MARX and MON
What is a letter of credit?
Any arrangement however named of described,
whereby a bank acting upon the request of its client
or in its own behalf, agrees to pay another, against a
stipulated documents provided that the terms of the
credit are complied with.
The definition of letter of credit based on the
National Chamber of Commerce
Can there ever be a letter of credit were there is no sale
setting?
Yes, Let say a debtor wants to obtain a loan from
creditor, the creditor is willing to lend money to the
debtor under the condition that there is a security
arrangement issued by a bank. So the creditor is
comfortable with any collateral coming from the
debtor; the creditor is not comfortable with any
guaranty agreement that would be executed by an
ordinary person; he wants a security coming from a
bank. So in that case, there is a letter of credit issued
in favor of the creditor. It is a non-sale setting. It is a
contract of loan, then the bank issues a letter of
credit. So it is not correct to say then that the letter
of credit always presupposes for a sale setting.
Commercial letter of credit conforms to sale setting. The
transaction underlying the letter of credit is sale.
Standby letter of credit conforms to non-sale setting. The
transaction underlying the letter of credit is non-sale.
Example of Commercial Letter of credit
Buyer is a company based in the Philippines, it wants to
purchase equipment from a company based in Japan. Only
this company based in Japan has the capability or technical
knowhow to manufacture this equipment that the Buyer
needs for his business. The only problem is they reside in
different jurisdiction the Buyer is on the Philippines the seller
is in abroad. If the buyer advance payment there is a
possibility that he will not get the equipment, on the other
hand if the seller causes the shipment of the equipment there
is a possibility that the buyer may not pay. In that case there
is a risk on the part of either the buyer or the seller. Through
a letter of credit we can solve the deadlock. So the buyer will
apply with the Issuing Bank to issue a letter of credit in favor
of the seller, now the beneficiary of the letter of credit, so the
buyer, now called the applicant of the letter of credit will
apply to the issuing bank a letter of credit. We he makes an
application he pays a certain deposit, before the bank can be
induced or encourage to issue an undertaking to pay in favor
of a beneficiary, the buyer-applicant pays a certain amount
representing a certain percentage of the total obligation to
be incurred under the letter of credit, it is called a marginal
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deposit. Buyer-applicant pays 30% of the total obligation and
pay fees and commission to the issuing bank. Of course, the
bank will not issue a letter of credit without an income, there
is a gain and the gain or income comes in the form of
payment of commission and interest charges on the
obligation to be paid in favor of the seller-beneficiary later
on. As the buyer applicant pays the marginal deposit and
agrees on the terms and conditions that the issuing bank may
impose, the issuing bank will now undertake to pay the seller-
beneficiary for issuing a letter of credit. The undertaking to
pay by the issuing bank is conditioned on submission of
certain stipulated documents, that why earlier in our
definition “Any arrangement however named of described,
whereby a bank acting upon the request of its client or in its
own behalf, agrees to pay another, against a stipulated
documents” which means the obligation of the issuing bank
to pay, the commitment of the issuing bank to pay the
beneficiary is on the condition or against the stipulated
document meaning on the condition that the seller-
beneficiary will submit certain stipulated documents. This
documents stipulated by the parties usually are the shipping
documents, the same documents to show that the seller-
beneficiary has complied with his obligation under the
contract of sale with the buyer and the same documents that
the buyer-applicant will need later on to obtain delivery of
the equipment. The shipping documents are the Bill of lading
(issued by a common carrier acknowledging receipt of the
goods with the obligation to deliver the same to the
consignee), sale invoices (contains the description of the
equipment, the purchase price) and a draft to be drawn by
the issuing bank etc. once the document have been defined
or verified, these documents are submitted to the issuing
bank, upon receipt of the issuing bank of those documents,
the issuing bank will pay the seller-beneficiary. The issuing
bank will release the documents of title to the buyer-
applicant, so the buyer-applicant will be able to obtain
delivery of equipment from the common carrier or the
customs as the case may be. But the issuing bank will not just
release the documents, it has to be reimburse by the buyer-
applicant of the total amount paid under the letter of credit.
So the issuing bank pays $10,000.00 and the buyer-applicant
paid only 30%. The issuing bank has to be reimburse the
remaining balance and other charges. Once the charges and
reimbursement are effected, then the issuing bank will now
release the documents in favor of the buyer. By the receipt of
such documents the buyer will go to the common carrier or
the customs as the case may be, present such documents and
made delivery of the equipments. The buyer got the
equipment, the seller got paid, and the issuing bank got the
business.
Example of stand-by letter of credit
Debtor would like to obtain a loan from a creditor on the
amount of Php 5M. the creditor will issue the money to the
 Special Commercial Laws Notes by MARX and MON
debtor on the condition that the debtor will have to procure a
security arrangement to be issued by a bank. So the creditor
is not comfortable in granting a loan to the debtor with any
security, at the same time the creditor is not comfortable
granting loan to the debtor simply on the strength of its
mortgage on his properties or the creditor is not comfortable
granting loan to the debtor with a guaranty agreement to be
signed by a third party. So the creditor will only be comforted
in granting a loan to the debtor in a security arrangement
comes from a bank, the bank is presumably with resources or
with the ability to pay the debtor’s obligation. So the debtor
now procures a standby letter of credit in favor of the
creditor, he pays the marginal deposit and agrees with the
commission. The issuing bank will now open the letter of
credit in favor of the creditor. Undertaking to pay the creditor
upon submission of the stipulated documents. In standby
letter of credits the documents to be submitted are
documents showing that the obligor did not perform his
obligation under the contract supporting the letter of credit.
In a commercial letter of credit, the documents submitted by
the seller-beneficiary are documents showing that he has
taken the required steps to comply with his obligations under
the contract of sale. So by shipping that equipment he
obtained the bill of lading, so he has taken the positive steps
to comply with his obligation.
In a standby letter of credit the documents submitted by the
creditor that the debtor did not perform his obligation under
the contract that supports the letter of credit. So, it is either a
certificate of non-payment or certificate of default or
certificate of non-performance. So once the documents has
been submitted and identified and documents have been
submitted by the creditor, such creditor can now draw on the
standby letter of credit. The payment is made by the issuing
bank to the creditor, then the bank must be reimburse from
the debtor. So, whatever is the amount paid to the creditor
plus the charges and the commission.
A letter of credit by itself does not come into operation
without a contract supporting it. It is not a contract that can
stand on its own, it needs a supporting contract. In a
commercial letter of credit it is a sale in standby letter of
credit, it is a non-sale transaction.
If we remove the issuing bank, what we’ll have is a promise to
pay made by the buyer in favor of the seller to pay the
purchase price without the issuing bank. By introducing the
issuing bank, the promise to pay by the buyer is substituted
by the promise to pay made by the bank. The bank is
presumably with resources, the seller finds comfort in dealing
with the bank not just with the buyer.
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Without the issuing bank in the equation, what we have is a
promise to pay by debtor to the creditor, in a standby letter
of credit, by introducing an issuing bank in the equation, the
promise to pay by the debtor is substituted by a better
promise to pay made by the issuing bank.
In both cases, whether commercial or standby letter of credit,
they conform or fits the definition of letter of credit.
Who are the parties to the letter of credit?
• Applicant
• Beneficiary
• Issuing bank
When we say in the definition “against stipulated documents”
what does it mean? What is the condition that these
stipulated are submitted?
Provided that the terms of the credit are complied
with
Who are the parties to the letter of credit? (Basic Parties)
• Applicant/Account party – he may be a buyer,
importer or obligor. The person who procures the
opening of letter of credit and who agrees to
reimburse the issuing bank any and all amount
should be paid under the letter of credit once the
issuing bank is compelled to pay because the
beneficiary is able to submit the document
stipulated.
• Issuing Bank – the one that undertakes to pay the
beneficiary upon submission of the beneficiary of
these stipulated documents and compliance with the
terms of the credit
• Beneficiary – the one titled to payment from the
issuing bank upon his submission of the document
stipulated and compliance with the terms of the
credit.
Other Party
Correspondent Bank of the issuing bank
Why do we need a Correspondent Bank? If the account party
is in the Philippines, the beneficiary is in abroad. How will the
beneficiary know that there is a letter of credit, if the bank is
Philippine based? In payment time, how will the beneficiary
be paid?
Thru a Correspondent Bank of the issuing bank
Kinds of Correspondent Bank
• Advising/Notifying Bank – is not liable to pay the
beneficiary; it does not have any contractual
relations with the beneficiary. Its only obligation is to
determine the apparent authenticity of the letter of
credit; to check if at first glance that the same is
genuine or valid. If at first glance the letter of credit
 Special Commercial Laws Notes by MARX and MON
if genuine, the advising/notifying bank notifies the
beneficiary of the letter of credit; transmit the letter
of credit in favor of the beneficiary so that the
beneficiary can cause shipment of the equipment.
• Paying Bank – is an agent of the issuing bank for the
purpose of making payment to the beneficiary.
Usually an issuing bank has a bank account in Tokyo,
let’s say BDO has an account in the Bank of Tokyo.
Bank of Tokyo may be a paying bank. BDO will
instruct Bank of Tokyo to pay the beneficiary, debit
the account of BDO then credit the account to the
beneficiary. The Paying Bank collects fees from the
issuing bank.
Is it possible for an advising bank and the paying
bank to be the same bank?
Yes
• Confirming Bank –
Why is it called confirming bank?
Because it lends credence to a letter of
credit issued by a lesser known bank as if it
is the one who issued the letter of credit.
Let’s say BDO in the Philippines is the largest bank in
Philippines but BDO in Japan is small. So BDO in
Japan is a lesser-known bank in Japan. So why will
the beneficiary agree on a letter of credit to be
issued by a lesser-known bank? A confirming bank
may come into the equation. That confirming bank
lends credence to the letter of credit issued by a
lesser-known bank as of it is the one that issued the
letter of credit. Which means the beneficiary,
instead of going directly to the issuing bank, may just
present the documents to the confirming bank, and
the confirming bank will be the one to pay the
beneficiary. Once the confirming bank pays the
beneficiary it will claim reimbursement from the
issuing bank and collect also its own fees. If there is a
confirming bank, the letter of credit becomes more
expensive because there are more fees to be paid.
• Negotiating Bank – the moment that the mode of
payment of the letter of credit is a draft/bill of
exchange, draft drawn by the beneficiary against
either the issuing bank or confirming bank, pay to
the order of myself at sight the amount of $10,000.
Once a draft is accepted by the issuing bank, it
becomes liable. If the drawee does not accept, there
is no liability. In a letter of credit the issuing bank or
confirming bank is the drawee bank, the one
ordered to pay by the beneficiary.
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Who will give the order to pay to the issuing bank or
confirming bank as the drawee of the draft?
The one liable to pay. So the drawer and
the payee can be both the seller-beneficiary
What will the payee do on the draft?
On maturity, the payee may present the
draft to the drawee. The drawee accepts
and pays.
What if the draft is payable 60 days after sight?
Upon acceptance by the drawee, it is not
yet due for payment. That the payee will
have to wait for 60 more days upon
acceptance by the drawee
If it is a user’s draft, the payee may not want to wait
for 60 days, what will the payee-beneficiary do?
He may have the option to negotiate the
draft into somebody else. So if the payee-
beneficiary negotiates that draft to a bank
(XYZ bank). This bank is known as the
negotiating bank. The bank that buys the
drafts drawn against the issuing bank or
confirming bank is the negotiating bank
In negotiable instruments law, if you have a draft, the drawer
address the drawee to pay the payee. The payee has 2
options: present the instrument for acceptance or negotiate.
If he payee negotiate, the holder, the one who pays the
instrument, becomes the owner and the owner now has 2
options: present the instrument for acceptance or negotiate
Why will a bank by the draft?
Because it will buy it with a discount. So if the draft
is valued of $10,000.00, the bank will only buy it for
$9500.00. So the payee gets the $9500.00 without
waiting for 60 days. The entire $10,000.00 will be
collected by XYZ bank on maturity from the issuing
or confirming bank.
So as far the as the payee is concerned, he need not
to wait for maturity. The waiting will be done by the
negotiating bank, but the same earns the difference
between the face value of the instrument and the
actual value it paid to the payee-beneficiary.
What are the 3 distinct relationship arising from a letter of
credit?
• Issuing Bank and the applicant – relationship is
governed by the terms of the application and
 Special Commercial Laws Notes by MARX and MON
agreement for the issuance of the letter-credit by
the bank
• Issuing Bank and beneficiary – relationship is
governed by the terms of the letter of credit issued
by the bank
• Applicant and the beneficiary – relationship is
governed by the law on sales. They agree on the
terms and conditions of the sale
Is the contract between the applicant and beneficiary
independent from the contract between the issuing bank and
the applicant?
Yes, they are inter-connected or related but they are
independent and separate from one another
Let’s say that the buyer-applicant and the seller-beneficiary
agreed to enter into a contract of sale and the object of the
sale refers to a dye stuff. A letter of credit has been opened
procured by the buyer in favor of the seller. The seller
presented the document to the issuing bank and the issuing
bank pays the seller. Then the documents were returned to
the buyer-applicant, the buyer-applicant presented the
document to the common carrier and obtained the shipment.
When the buyer opened the goods, what was delivered were
not dye stuff. Can the buyer refuse to reimburse the issuing
bank?
No, in this case, the object did not conform on what
was agreed upon by the buyer and the seller, there
is a breach of contract. The buyer cannot refuse to
reimburse the issuing bank despite the breach of
contract by the seller. This is the DOCTRINE OF
INDEPENDENCE
Doctrine of Independence
Under this doctrine, the obligation of the issuing
bank to pay the beneficiary does not depend on the
fulfillment or non-fulfillment of the contract
supporting the letter of credit. If it is a commercial
letter of credit, the obligation if the issuing bank to
pay the beneficiary is not affected by any breach of
contract by the seller to the buyer because the
contract between the issuing bank and beneficiary is
separate and distinct from the contract between the
seller and the buyer.
The SC held that banks deals with documents, they
don’t deal with goods. The issuing bank has no
obligation to check the object, the quantity or
quality of the goods. The bank needs not to verify or
go beyond the four corners of the document. The
issuing bank will determine the documents to be
submitted, where the stipulated documents
tendered faithfully. If the documents were
submitted, the issuing pays the seller.
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The right of the issuing bank to reimbursement the
buy from the buyer applicant does not depend on
the fulfillment or non-fulfillment of the contract. It
depends on whether or not the issuing bank was
compelled to pay beneficiary because the latter
submitted the documents stipulated.
It is not part and it will never be a part of the
contract between the issuing bank and the buyer
that the bank will investigate whether the goods
conformed to the goods ordered.
What are remedies of the buyer in case the goods did not
conformed to the goods ordered?
File an action for breach of contract against the
seller. The remedy of the buyer is based on the law
on contracts and not based on the principles of
letter of credit
Let’s say the buyer and seller in a commercial letter of credit
entered into a contract of sale for a delivery of certain object.
They stipulated that the buyer will procure the opening of a
letter of credit in favor of the seller. The buyer, however, was
not able to obtain a letter of credit with a bank. In the
stipulation that the buyer will procure a letter of credit but
failed to do so prevent the consummation of the contract of
sale? Is the non-opening of the letter of credit is at least a
resolutory condition that extinguished the contract of sale?
In Reliance Commodities, Inc vs Daewoo Industrial,
the contract of sale between the seller and the
buyer is separate, distinct and independent from the
opening of the letter of credit because it is a matter
between the buyer and the issuing bank. A contract
of sale is perfected by mere consent and such nature
of a contract of sale is not affected by the non-
opening of a letter of credit
Letter of Credit in a non-sale setting or a STAND-BY LETTER
OF CREDIT
Let’s say the debtor obtained a loan from a creditor for 5
million pesos secured by a stand-by letter of credit issued by
ABC bank. Let’s say the debtor made a partial payment of 2.5
million out of 5 million obligation. The issuing bank is
committed to pay the creditor the amount of 5 million upon
the submission of the stipulated documents. The debtor
failed to pay. The creditor tendered the documents stipulated
(promissory note, certificated of non-payment). Can the
issuing bank deduct the partial payment made by the debtor
in determining the amount of his liability to the creditor?
The contract of loan is independent from the
contract between the debtor and the bank and the
bank with the creditor-beneficiary. The amount of
liability by the bank to the beneficiary is 5M under
 Special Commercial Laws Notes by MARX and MON
the letter of credit. The only amount that the issuing
bank may recover from the debtor is 5M under their
own relationship. But to prevent unjust enrichment
at the expense of another, the SC said that the
excess payment may be recovered by the debtor
from the creditor.
What are the kinds of letter of credit?
• Irrevocable letter of credit – A letter of credit
wherein the terms and the undertakings of the
issuing bank cannot be amended or altered or
revoked without the consent of the beneficiary
• Revocable letter of credit – can be amended,
altered or revoked even without the consent of the
beneficiary
• Standby letter of credit – non-sale setting
• Commercial letter of credit – the principal
transaction is a sale or importation setting
• Confirmed letter of credit - the liability of the
confirming bank is primary
• Non-confirmed letter of credit -
SPCL2
Can we say that the obligation of the issuing bank in a letter
of credit is similar to a guarantor particularly to stand-by
letter of credit?
No, the obligation in a letter of credit is primary and
solidary while in a case of a guarantor, it is
subsidiary.
In a contract of guarantee, the guarantor’s obligation
is merely collateral and it arises only upon the default of the
person primarily liable; a letter of credit is an engagement by
a bank or other person made at the request
How about a surety?
The issuing bank has to pay even there is no default
payment
Let’s say between the debtor and the creditor, there are issues
of overpayment, capacity, minority or defenses which are
personal to the debtor. While these defenses are being
determined, can the creditor made the surety liable?
No
How about in letter of credit transaction, if the issues are
personal to the debtor, can the issuing bank be held liable?
No, for as long as the stipulated documents are
submitted.
Is there an exception to the Doctrine of Independence?
Fraud exemption rule
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Does the fraud refers to the performance of the contract?
What kind of fraud that is contemplated with the fraud
exemption principle to prevent the beneficiary from collecting
on the letter of credit?
Fraud in relation with the independent purpose or
character of the letter of credit, not fraud in the
performance of the obligation or contract supporting
the letter of credit.
Because if it is fraud in the performance of the
contract, under the doctrine of independence, it is
not a bar for the beneficiary to collect from the
issuing bank.
Example: the Letter of credit requires submission of the Bill
of Lading but the submitted document was a spurious bill of
lading.
Doctrine of Strict Compliance
It requires that the document to be submitted or
tendered by the beneficiary conforms strictly,
faithfully and absolutely with the document
stipulated such that if there is a discrepancy
between the document stipulated and the document
tendered, the beneficiary is not entitled to payment.
Supposing that the document required is submitted by the
beneficiary is a document that is within the power of the
applicant to issue, but the applicant refuses to issue despite
having received the shipment, will the document of strict
complaince still bars the beneficiary in collecting the letter of
credit?
It matters not that the submission of the documents
are unfair, unjust or inequitable, the point is, it
requires that the document stipulated must be the
document to be submitted, otherwise, the issuing
bank is not liable or the beneficiary is not entitled to
payment
The SC said in various cases that in Sec 2 of the code of
Commerce that in the absence of any particular law in the
Code of Commerce, commercial transactions shall be
governed by the usages and customs generally observed
What are the requisites in order to have a basis to enjoin the
beneficiary from drawing or collecting under the letter of
credit? (fraud exemption rule)
There must be fraud in relation with the
independent purpose or character of the letter of
credit
Long definition of Letter of Credit: (international chamber of
commerce sec 2)
 Special Commercial Laws Notes by MARX and MON
Any arrangement, however named or described, whereby a
bank, acting upon the request of his client or on his own
behalf agrees to:
• Pay a third party to the order of the beneficiary
• Accept draft drawn by the beneficiary
• Authorize another bank to pay the beneficiary
• Authorize another bank to accept a draft drawn by
the beneficiary
• To negotiate against stipulated documents provided
that the terms of the letter of credit are complied
with
TRUST RECEIPTS LAW (PD 115)
Trust Receipt Transaction – any transaction between the
entruster and the entrustee, whereby the entruster who
owns or holds absolute title or security interest over specified
goods, documents or instruments releases the same to the
possession of the entrustee, who in turn, binds himself to the
designated goods, documents or instruments with the
obligation to turn over the proceeds to the entrustor to the
extent of the entrustee’s obligation to him, or if unsold, to
return the said goods, documents, or instruments to the
entrustor
Who are the parties in a trust receipt transaction?
• Entruster
• entrustee
Describe the rights of the entruster over the goods,
documents or instrument
He has absolute title or security interest over the
goods
Think of a trust receipt similar to a chattel mortgage. In trust
receipts transaction, the goods are held in trust for the
benefit of the entruster. By express provision of law, the
entrustee has the obligation to hold the goods, documents,
or instruments in trust for the entruster and if he sells the
goods, he must account for and deliver the same proceeds in
favor of the entruster. Or, if he did not sell the goods, he
must return the same to the entruster, otherwise, he is liable
for the crime of estafa under section 13 of PD 115 in relation
to section 315 of the RPC.
In a letter of credit transaction, the issuing bank pays the
beneficiary. The issuing bank release the shipping document
to the buyer only after the buyer reimburse the issuing bank
of the amount paid under the letter of credit. In a trust
receipt transaction, the Bank may release the goods, despite
non-payment yet to the Bank. But subject to the execution by
the buyer, now the entrustee of a trust receipt agreement,
whereby he hold the goods, documents or instruments in
trust. If he sells, he must deliver the proceeds. If he did not
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sell, he must return the goods, documents or instruments,
otherwise there is a crime committed.
From an issuing bank, it becomes the entruster and the buyer
becomes the entrustee, he is able to receive the goods even
though he does not pay in full, in time the obligation is
converted from mere civil to criminal.
In Bank of Commerce vs Serrano, the SC distinguished
between trust receipt and letter of credit. The liability of the
buyer-importer to reimburse the issuing bank is civil in
nature, even he does not pay, there is no crime committed. In
a trust receipt transaction, it is true that the bank may release
the goods even though it is not pay in full, but there are
concomitant obligation to be performed by the entrustee
such that he did not performed such obligation, there is a
crime committed. The issuing bank finds comfort in issuing
the goods or documents to the buyer-importer even though
he did not pay in full yet of the amount advanced by the bank
for the importation on shipment of the goods.
The basic obligation of the buyer-importer, now the
entrustee, is to pay. The bank advanced the money, the bank
lent the funds to enable the buyer to acquire the goods.
Basically, it is the money of the bank because the bank paid
the beneficiary, even though it has not been paid in full by
the buyer.
What is the basic obligation of the buyer?
To pay the amount advanced by the bank. If the
entrustee does not pay and he sold the goods but he
did not deliver the proceeds, a crime is committed.
Or, he did not pay the obligation, not able to sell the
goods but he did not return the goods, then a crime
of estafa is committed.
If he is able to pay the obligation to the bank, then
both civil and criminal obligation are extinguished.
Are there any other obligation imposed upon the entrustee?
• The obligation to insure the goods
• The obligation to keep the goods separate and
distinct from other properties
• The obligation to observe the terms and conditions
of the agreement
But only the obligations to deliver the proceeds or return
the goods if not sold will give rise to criminal liability.
A and B are engaged in the business of exporting sea crafts.
They need shells to be able to create sea crafts. They
purchased shells to the supplier secured by a letter of credit
issued by ABC bank. A and B could not pay their obligation to
the Bank, they decided to return the shells but the bank is not
 Special Commercial Laws Notes by MARX and MON
interested in the shells, did not accept the return. So bank did
not receive the return of the goods. A and B consigned the
goods in court but the consequence is, a complaint for estafa
was filed against A and B, but it was dismissed because the
goods are consigned in court. Can the Bank file a separate
civil action to enforce the civil liability of A and B?
In the case of Vintola vs IBAA, the action will prosper
because a trust receipt transaction has 2 features:
• Loan feature
• Security Feature
Loan feature is brought about by the fact that the
bank financed the cost of acquisition or importation.
The bank lent the money to enable the buyer to
obtain the goods that he wants to purchase.
Security feature lies on the goods itself, the goods
are held under a trust for the benefit of the
entruster. If they are sold, the proceeds must be
accounted for and delivered to the entruster. If they
are not sold, the goods must be returned to the
entruster, otherwise the crime of estafa is
committed.
Basically, for as long as the loan is not paid, the civil
liability remains. The return of the goods will only
have a bearing on the criminal liability of the
entrustee not on the civil liability. For as long as the
load advanced by the bank is not paid, the civil
obligation remains.
The return of the goods will only extinguished the
criminal liability but not the civil liability, the loan is
yet to be paid.
When is the civil liability be extinguished?
Only when the goods are sold and the
proceeds will be applied for the payment of
the obligation
Who is the owner under the trust receipt transaction?
Entrustee, the entrustor is merely a holder of a
security title
Can he mortgage the goods?
In ___ vs Prudential bank, the SC said that the
entrustee cannot mortgage the goods under trust
receipt transaction because one of the requisites of
the mortgage under Art 2085 the civil code is that
the mortgagor be the absolute owner of the thing
mortgage or has freedom of disposal
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Does the entrustee have absolute ownership on the property?
No, because the property is held in trust for the
benefit of the entruster. He does not have freedom
of disposal, therefore, he cannot mortgage the
goods.
The inclusion of goods under trust receipt transaction in a
mortgage is void and the ensuing foreclosure sale is likewise
null and void
The entrustee cannot mortgage but he can sell. If the
entrustee is the owner and the object is lost, suppose to be
there is no more liability. But under the trust receipt law, the
loss of the goods will not extinguish the civil liability of the
entrustee. (Section 10)
In one case, the SC said that the owner of the goods is the
entruster (in vintola case, it is the entrustee). The SC clarified
that it is an artificial concept or notion meant to protect its
interest over the goods.
A entered into a contract with ABC to renovate the cemetery
in Cebu. After entering into the contract, A purchased supplies
from a construction supplier. The following day, he went to a
bank, got a loan to pay off his construction supplier. The bank
asked him to sign a trust receipt agreement. A was not able
to pay his obligation to the bank. The bank filed a criminal
case for estafa against A. is he liable? Is that a trust receipt
transaction just because the parties signed a trust receipt
agreement? Can we say that the bank financed the goods?
It is not a trust receipt agreement but an ordinary
loan because when A signed the trust receipt
agreement, he is already the owner of the goods.
The bank did not financed the goods. It is the nature
of the transaction that determined whether the
transaction is a trust receipt transaction, not the
nomenclature or name of the agreement.
If the supposed entrustee was already the owner of
the goods before he signs the trust receipt
agreement even though he is not in possession of
the goods, it is not a trust receipt transaction as
contemplated by law even though the parties have
signed a trust receipt agreement.
If the offense is committed by a corporation, can you held the
officers liable criminally?
Yes, but only those responsible for the violation.
Only those who signed the resolution
Under section 13 of PD 115, if the offense is
committed x x x x If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers,
 Special Commercial Laws Notes by MARX and MON
employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.
What about an agent of the corporation, it was violated by
the corporation thru an agent. Who is liable civilly? The agent
who signed in behalf of the corporation or the corporation?
Corporation is liable civilly
Who is criminally liable?
In the case of Ong vs CA, it was the agent who is
criminally liable because he is a person responsible
for the offense
Can we file a criminal case against the corporation?
It depends, if the penalty is imprisonment, we
cannot file a criminal case, but if the penalty is a fine
or forfeiture or revocation of the corporation’s
franchise, then we can
What are the defenses that can be invoked to negate criminal
liability?
• The entrustee has fulfilled his obligation, that is, he
had surrendered the proceeds or returned the goods
to the entruster (delivery of the proceeds up to the
extent owing to the entruster will extinguish the civil
liability; partial delivery will not extinguish civil
liability), (return of the goods do not extinguish civil
liability, it has to be sold and apply the proceeds)
• The transaction is only a loan and not a trust receipt
transaction as contemplated by law (it does not
extinguish civil liability)
• The goods or documents subject of the trust receipt
was not delivered or received by the entrustee (it
does not extinguished civil liability)
• When the entruster cancels the agreement and
takes possession of the goods and eventually sells
the said goods. Mere repossession of goods will
extinguish criminal liability (it does not extinguish
the civil liability)
• Loss of goods due to fortuitous event or force
majeure; (it does not extinguish civil liability)
• If there is compromise agreement before the filing of
the criminal case in court, there is novation changing
the relationship from trust to creditor-debtor
relationship (it extinguish civil liability if it covers the
extinguishment of civil liability)
SPCL4
What is a TRUST RECEIPTS TRANSACTION?
It is a transaction between two parties (the entruster
and the entrustee).
The entruster, who has absolute title or security interest over
the goods, documents or instruments, releases the same to
8|P a g e
the entrustee, but subject to the execution by the entrustee
of an agreement whereby he undertakes to hold the goods,
documents or instruments in trust for the entruster.
In case he sells the goods, documents or instruments to
deliver the proceeds to the entruster up to the extent of the
amount owing to the entruster, or return the goods if not
sold. Otherwise, he commits the crime of estafa.
Think of trust receipt transaction as basically a loan secured
by chattel mortgage. Same concept except that the goods are
held in trust for the benefit of the entruster and if the goods
are sold there is a corresponding obligation to deliver the sale
proceeds or if unsold to return the goods otherwise there is a
crime of estafa under Sec 13 of PD 115 in relation to Art 315
of the RPC.
The basic obligation of the entrustee is to pay the obligation.
So the bank financed, lend money, advanced to funds to
finance the acquisition or purchase of goods under trust
receipts. So there is money out insofar as the bank is
concerned. The security of the bank lies with the goods
themselves, such that if the goods are sold the sale proceeds
must be delivered to the entruster, or if not the same must
be returned to the entruster.
If the obligation is paid, if the loan advanced by the bank is
paid then the obligation is extinguished or there is no
obligation to talk about.
If it is only when the entrustee does not pay the obligation
that what he does with goods becomes critical insofar as his
liability is concerned.
If he does not pay and sells the goods, he must deliver the
proceeds up to the full amount owing to the entruster.
If he does not pay and did not sell the goods, he must return
the goods to the entruster. This is clear in the case of Allied
Bank vs DOLE.
If the only obligation of the entrustee is to sell and deliver the
proceeds or return the goods if not sold it would seem, based
on the literal interpretation, PD 115 will only apply if the
goods are for sale or intended for resale because there is too
much emphasis on selling. This is not true according to the SC
in the case of Allied Bank vs DOLE.
Allied Bank vs DOLE
The object of the TR Transaction refers to a dolomite
nozzle, which obviously is not for sale. It is a part of
an equipment that manufactures the product. So
when you purchase a dolomite nozzle you do not
 Special Commercial Laws Notes by MARX and MON
intend to sell it. You intend to use it. So the criminal
sanction under PD 115 applies even if that object is
not for sale or resale.
So how can the entrustee comply with the obligation to
deliver the sale proceeds or return the goods if not sold if it is
not for sale anyway?
The SC the criminal sanction under PD 115
encompasses the basic obligation to pay. So if that
obligation is not fulfilled then criminal liability is also
present.
That is why we clarify that it is only when the entrustee is
able to pay that the obligation is extinguished. And it is only
when the entrustee failed to pay that what he does to the
goods as a security becomes important to determine the
nature and extent of his liablity.
What are the other obligations imposed by law upon the
entrustee?
1. to insure the goods against theft, pilferage, fire and
other natural calamities
2. keep the goods separate and distinct from his other
properties
3. to Observe the other terms and conditions of the
agreement, like if the agreement prohibits that the
goods be transferred to other location then such
must be respected.
But, only the obligation to deliver the sale proceeds or return
the goods if not sold will give rise to criminal liability in case
the loan is not paid. The rest of the obligations will not give
rise of to criminal liability.
The gravamen of the offense or the core of the offense is the
failure to pay matched with the failure to deliver the sale
proceeds or return the goods if not sold.
In cases of Vintola vs IBAA and Rosario Textile Mills vs ___
the SC explained the nature of TR Transaction. It has a loan
feature and a security feature.
The loan feature brought about by the fact of the bank lend
the money to finance the acquistion.
And security feature because the goods are held in trust for
the benefit of the entruster.
Vintola vs IBAA
This involves purchase of pucca shells secured by a
LC and trust receipts.
The loan advanced by the bank to purchase the
pucca shells were not paid prompting the filing of a
criminal complaint by the bank against the Vintolas.
9|P a g e
The Vintolas tendered the return the of the goods in
court but obviously rejected by the IBBA. The
Vintolas were forced to consign to goods in court.
The consignation will result in acquittal, but not in
the extinguishment of the civil liability, because for
as long as the loan is not paid the civil obligation
remains.
So the return of the goods will only address the
criminal liability, but unless the goods are sold and
proceeds are applied to the obligation, the civil
liability remains.
So in the case of Vintola vs IBAA that the acquittal of the
entrustee in the criminal case which impliedly includes the
civil case does not preclude or is not a bar to the filing of a
separate civil action in court of the civil liability of the
entrustee.
In Vintola vs IBBA acquittal first then separate civil action. In
Sarmiento vs CA, it is simultaneous filing.
May a criminal action proceed indecently of a civil action?
Can they go hand in hand - criminal action for estafa, civil
action to recover the obligation or enforce civil liability?
The SC said yes, because the criminal action is based
on ex delicto, violation of PD 115 as a law and the
civil action is based on ex contractu, violation of the
terms and conditions of the agreement itself.
Rosario Textile Mills vs Homebankers Trust
In this case the goods were not accepted by the
entrustee because they did not conform with the
specifications. The goods were stored in a bodega.
While in the bodega they were destroyed by fire. So
without the receipt of the goods by the entrustee.
Does that extinguish the civil obligation of the
entrustee? The goods were lost without actual
receipt by the entrustee
The SC said, citing the two features – loan
and security features, the loss of the goods
regardless of the cause of the loss, whether
due to force majeure or not, and the period
of the loss will not extinguish the civil
obligation of the entrustee up to the extent
owing to the entruster. For as long as the
loan is not paid the civil obligation remains.
Who is the real owner of the goods under TR? If it is the
entrustee how come he cannot mortgage?
As we saw in the case of DBP vs Prudential Bank (475
SCRA) touching on the issue of whether or not the
entrustee can mortgage the goods under TR.
 Special Commercial Laws Notes by MARX and MON
The SC said,''No, because one of the elements of a
valid mortgage under Art 2085 of the Civil Code is
that the mortgagor must be the absolute owner of
the property mortgaged, or must have freedom of
disposal which is not present in this case of a TR
transaction, where the goods are simply held in
trust.''
But anytime he can sell, this is one case where not being the
owner he could sell but with the corresponding obligation to
deliver the sale proceeds to the the entruster.
If the entruster is the owner, however, how come the
principle of res perit domino will not apply against him?
If he is the owner the loss of the goods would have
its effect against the entruster. If he is the owner
then he will bear the risk of loss. But that is not so.
The loss does not in any way impair the obligation of
the entrustee to pay the entruster.
In Rosario Textile Mills, the owner is the entruster but only in
an artificial concept or notion meant to preserve, protect,
and enhance the security interest over the goods.
If the facts are similar to DBP, apply DBP. If the issue is
whether or not you can mortgage, apply DBP.
If the issue is whether or not the loss of the goods
extinguishes the civil liability apply the case of Rosario Textile
Mills.
If the issue is whether or not the acquittal of the entrustee
will be a bar to the filing of a separate civil action in enforcing
the civil liability, apply the case of Vintola vs IBAA or
Sarmiento vs CA.
Defenses which the entrustee may invoke or raise against
the entruster if ever he is charged with violation PD 115
1. It is not a real transaction as contemplated by law.
2. Fulfilment of the terms and conditions of the
agreement.
3. Novation or compromise agreement entered into
before the filing of the Information in court.
4. Non-delivery of goods.
5. Cancellation of the trust and repossession of the
goods.
6. loss of the goods.
It is not a real transaction as contemplated by law
This is so in the case of Colinares vs CA and Trust
Company vs CA. It is not the name the matters, it is
not what the parties call it or designate it, but nature
10 | P a g e
of the transaction that determines the rights and
obligations of the parties to the transaction. That is
what exactly happened in the case of Colinares vs
CA.
Colinares vs CA
A entered into a contract for _ the purchase of two
sacks of rice and the following day he obtained loan
from a bank to pay-off the two sacks of rice_. The
bank made him sign a TR agreement. He did not pay
the obligation to the bank. He was charged with the
crime estafa.
Is there a crime committed?
The sequence is: He got a contract today. The
following day purchased the supplies and became
the owner thereof although on loan. After buying
the supplies, went to the bank got a loan to pay-off
the supplier.
The question is: when he signed the agreement was he in
possession and the owner of the goods?
Yes. Then if he is in possession of the goods and the
owner then that is not a TR transaction, because in a
TR transaction the bank should have financed the
acquisition of the goods.
In this case it is the reverse. It cannot be said that
the bank finances because he was an owner at the
time that the funds came in. So the funds have been
delivered before or simultaneously with the delivery.
So it cannot be said that the bank financed the
acquisition of the goods which is in keeping with the
nature and concept of a TR transaction.
Fulfilment of the terms and conditions of the agreement
Fulfilment may come in the form of payment or
delivery of the sale proceeds or return of the goods.
If the obligation is paid on its entirety then criminal
and civil liability are extinguished.
If it is delivery of the sale proceeds, it depends on
how much were the amount delivered. If it
corresponds to the full obligation then liability is also
extinguished.
If it is return of the goods it is also fulfilment. It will
only extinguish the criminal but not the civil liability.
Novation or compromise agreement entered into before the
filing of the Information in court. As you saw in People vs Ong
and Pilipinas Bank vs Ong.
 Special Commercial Laws Notes by MARX and MON
People vs Ong
The compromise agreement, unfortunately, was
entered into after the filing of the Information in
court. When the prosecution continued the
entrustee questioned the continuance of the case
because he already entered into a compromise
agreement with the entruster.
The SC said the compromise agreement after the
filing is not a ground to extinguish criminal liability.
Conversely, if the compromise agreement was
entered into after the filing of the Information there
is novation, it prevents the rising of criminal liability.
It is not a ground to extinguish criminal liability but it
prevents the rising of criminal liability.
It stops the giving birth of the criminal liability
because the basis of criminal liability was converted
into a creditor-debtor relationship.
A trust if breached will give rise to a criminal liability,
but if a trust is converted to a creditor-debtor
relationship then the trust element is gone. What
you have is simply an obligation to pay under the
compromise agreement, if breached would only give
rise to a civil liability.
Pilipinas Bank vs Ong
The entrustee here is the __ corporation. The
entrustor is the bank. The entrustee file a petition
for suspension of payment with the SEC (At that time
the SEC has jurisdiction over petition for suspension
of payment. Now it is the RTC acting as a special
commercial court). The SEC appointed a
management committee that oversaw the operation
of the entrustee corporation and forbade the
entrustee corporation from making any
payment_crisis and difficulties including the
obligation under TR.
The question is, if you have and order coming from a
management committee constituted by the SEC, will
there be criminal liability in case you do not pay your
obligation under TR or is that prohibition all
encompassing to even include payment of the
obligation under TR?
The SC said that there was no intent to
commit the act and therefore there is no
criminal liability. The SC had to clarify,
despite the malum prohibitum nature of
the TR transaction. There is no intent to
commit the act therefore there is no
criminal liability.
11 | P a g e
In criminal law, if it is a violation of special law intent
is not necessary. It is the violation of the law that
makes it an offense. But in this case the SC said that
there is no intent to commit the act. So it is not a
question of whether there is intent to violate the
law, but there is not intent to commit the act
because the reason for the non-payment was
brought about by the order coming from the
management committee appointed by the SEC.
Actually, that hair-splitting distinction would not
have been necessary because all the SC would have
to say is that there was a novation before the filing
of the information.
In this case the parties converted the TR agreement
into a 7 year term loan. They changed the term of
the contract. They increased the interest rate. The
bank requires a collateral. It is no longer a trust
relationship agreement. It is now a creditor-debtor
relationship under the loan agreement.
Non-delivery of goods
___ vs CA. The execution of a TR agreement with
matching invoice attached to it, does not prove
delivery. Just because the prosecution was able to
present the TR agreement, the invoices does not
prove delivery. The invoices merely contain the
description of the goods, quantity and quality does
not prove delivery.
The prosecution should have presented a document
independently of the TR agreement to prove
delivery.
If there is denial on the part of the entrustee of the
receipt of the goods, it behooves upon the
prosecution to substantiate delivery by producing or
presenting additional documents on top of the TR
agreement.
Cancellation of the trust and repossession of the goods
The entruster, in case of default of the entrustee,
may cancel the trust and take possession of the
goods.
If the entruster cancels the trust, take back possession of the
goods, can he still foreclose the mortgage on a property
owned or belonging to the entrustee? PNB vs Pineda
PNB repossessed the goods under TR and then
foreclosed the mortgage constituted to secure the
obligation of the TR.
 Special Commercial Laws Notes by MARX and MON
Does the repossession per se bar the PNB from
foreclosing the mortgage?
If the repossession is enough to extinguish
the obligation, then PNB would have no
basis to foreclose the mortgage.
But repossession per se does not extinguish
the civil obligation. For as long as the loan is
not paid, the civil obligation remains.
So it is only when the goods are
repossessed, sold, and the proceeds applied
to the obligation that the civil liability is
extinguished and by that time there is no
need to foreclose the mortgage.
In the case of South City Homes, we learned that the
remedies are there, but it is up to the entruster to determine
which remedy to pursue. He may file a criminal case for
estafa. He may cancel the trust and take repossession. The
option does not belong to anyone but to the entruster.
In that case the South City Homes, the surety contended that
entruster should have cancelled the trust and take
possession.
The SC said the law says “may” cancel the trust. It is
permissive, not mandatory and the option belongs to the
entruster.
What happens if the entruster retake possession, sells the
goods, apply to proceeds but then there is a deficiency, in the
sense that the proceeds of the sale are not enough to cover
the obligation secured by the TR?
Metrobank vs _ that the deficiency shall be for the
account of the entrustee.
Keep in mind that the goods are only security, they
are not mode of payment. So if the goods are sold,
the proceeds generated applied to the loan
obligation but that is not enough, then the entrustee
should pay for the deficiency.
The same way if there is an excess. If any, the excess
goes to the entrustee.
Loss of the goods
The law is clear on the effects of the goods on the
civil liability of the entrustee. As pointed in the case
of Rosario Textile Mills and the provision of the law
itself. But the law is not clear on the effects of the
loss on the criminal liability of the entrustee.
12 | P a g e
If the goods are lost without the fault of the
entrustee, it is not fair to impute criminal liability
against the entrustee. The goods must have been
lost due to fraud, deliberately, so that there is a basis
to file criminal action.
Who has the better right over the goods under TR – is it the
entruster or the creditors of the entrustee? Prudential Bank
vs NLRC
A group of laborers filed a labor complaint against
their employer and the employer corporation was
also an entrustee to a TR agreement with prudential
bank. The laborers obtained judgment against their
employer. It became final...levied on the properties
of the employer including the goods held under TR.
Prudential Bank asserted its right and ownership
over the goods.
Who has the better right over the goods held under
TR – it is the unpaid laborer or is it the entruster
itself?
The SC, citing the law, said that the security
interest of the entruster is valid and
enforceable against the creditors of the
entrustee for the duration of the trust
receipt agreement. The security interest
attaching to the goods, valid and
enforceable against the creditors of the
entrustee all throughout the duration of the
TR agreement. In simple words, the right of
the creditor is inferior to the right of the
entruster with respect to the goods held
under TR
The SC pointed out that there is only one person
who can defeat right of the entruster- an innocent
purchaser for value.
The issue of the constitutionality of PD 115 was likewise
tackled in the case of People vs ___. The SC said that it is a
valid exercise of police power. It is not just a crime against
private property. It is a crime against public order. What is
penalized is not the non-payment of debt, it not a violation of
the constitutional prohibition against imprisonment for non-
payment of debt.
What is penalized is the not the non-payment of debt, but the
abuse of confidence and the misuse of goods under TR which
would destroy and impair the trade and commerce.
The case of Metrobank vs ___ tells us that a civil liability
arising from a crime cannot be the subject of set-off or
compensation under Art 1279 of the civil code.
 Special Commercial Laws Notes by MARX and MON
here _ entered into a TR agreement with Metrobank.
He failed to pay his obligation to Metrobank.
Metrobank commenced criminal proceedings. The
defense was that the parties explore a transaction
agreement to convert the TR into a loan agreement
and in good faith _ deposited about 2.8 M with
Metrobank. But, unfortunately, not enough. The
agreement was not implemented, did not
materialize. Metrobank continued with the
prosecution of the case. _ said that no, there was
compensation because he deposited 2.8 M _.
The SC said that there can be no compensation if the
debt consisting of a civil liability arises from a crime.
Could there conventional or contractual set-off or set-off by
agreement?
Yes, but it must be stipulated.
Metrobank and _ should have agreed expressly that
this 2.8 M should be applied to the loan obligation
under TR. But it is not.
Who is liable in case the offense is committed by a
corporation?
PD 115 Sec 13 expressly provides now that if the
offense is committed by a corporation the criminal
liability may be imposed against the director, officer,
any person responsible for the violation.
Not all the directors or officers of the corporation
are to be held liable because the corporation has a
personality separate and distinct from the officers.
Only those who are responsible for the violation are
liable. In market terms, it simply means who signed
the agreement. The director or officer who signed
the agreement will be the one liable criminally, even
though he did not benefit from the transaction, even
though the goods were not received by him, even
though ____ and all the benefits accrued to the
corporation. This is what the SC said in the case of
Ching vs Secretary of Justice.
It is not a defense that the corporate officer did not
receive the goods, did not benefit from the
transaction, that everything went to the corporation
because the law makes you liable if the offense is
committed by your corporation and you are acting in
behalf of your corporation.
Ong vs CA
If mere agent signs the TR in behalf of the
corporation, that is enough to make him liable
criminally, because the operative word is “any
13 | P a g e
person responsible for the violation”. You need not
be a director. You need not be an officer. You can be
any person for as long as you acted in behalf of the
corporation, _ responsible _ for the violation stand
to be held criminally liable.
This is one instance where the one liable criminally is
not the one liable civilly. The one liable civilly is the
corporation, unless the officer or agent assumes
personal liability but criminal liability devolves upon
the responsible director, officer or person.
The same cases Ching vs Sec of Justice and Ong vs CA, it was
pointed out that you cannot file a criminal case against the
corporation if the penalty is imprisonment. Someone has to
pay the price. You cannot put behind prison bars the
corporation, it being an artificial person and that person is
the one responsible for the violation.
But if the penalty is fine, revocation of franchise, then the
corporation may be held criminally.
SPCL5
Chattel Mortgage
What is a Chattel Mortgage?
An accessory contract whereby a personal property
is recorded in the Chattel Mortgage Register to
secure the performance of a principal obligation.
The concept of a chattel mortgage as a conditional sale under
the old chattel mortgage law has been supplanted by the
definition of chattel mortgage under Art 2140 of the Civil
Code. It is now an accessory contract, no longer a conditional
sale.
Debtor obtained a loan from a creditor secured by a chattel
mortgage on personal property, let's say a car. The car was
gutted by fire, completely perished and destroyed. Is the
chattel mortgage extinguished?
Yes, because there is no more chattel.
Is the loan obligation extinguished?
No, because of the change of concept from a
conditional sale to an accessory contract, chattel
mortgage now governed by the principle that the
extinguishment of the accessory obligation does not
extinguish the principal obligation. But the
extinguishment of the principal obligation
extinguishes the accessory obligation.
 Special Commercial Laws Notes by MARX and MON
Will the lack of registration of the chattel mortgage affect its
validity? Will the lack of registration destroy the very
definition of a chattel mortgage?
All that the SC said in the case of Pilipinas Marble vs
IAC (142 SCRA) that lack of registration does not
invalidate the chattel mortgage because registration
is only necessary to bind 3rd persons.
Unrecorded chattel mortgage is still valid between
the contracting parties because registration is only
rd
for the purpose of binding 3 persons.
When you read the case of Pilipinas Marble vs IAC you will
realize that the provision cited by the SC in laying that
conclusion is a provision applicable to Real Estate Mortgage.
In credit transaction, there is an express provision on Real
Estate Mortgage that lack of registration does not invalidate
the contract. It is still valid between the contracting parties
rd
because registration is only for the purpose of binding 3
parties. It is in real estate mortgage. But, there is no
counterpart provision in chattel mortgage. In Act 1508, Art
2140 Chapter on Chattel mortgage, none.
But, just the same the SC court applied the provision on real
estate mortgage and held, and there being no different
decision, Pilipinas Marble vs IAC will stand that,
jurisprudentially, unrecorded chattel mortgage binds the
contracting parties, because registration is only for the
rd
purpose of binding 3 persons.
What may be the object of chattel mortgage?
Personal property
shares of stocks, cars, public or private vehicles,
tugboats, vessels, aircrafts, growing crops, stocks in
trade, stocks in inventory in a sari-sari store or
department stores, large or small cattle (animals
may be subject of chattel mortgage).
How about satellites?
They are personal property. They cannot be personal
property because they are up there in the sky.
Therefore for academic discussion they can be the
object of chattel mortgage.
We had a transaction when I was still with the bank, the
collateral was the Mabuhay satellite owned by PLDT. PLDT
want to obtain a loan from |Equitable and other banks]. We
were debating, arguing, contemplating, and discussing what
type of security arrangement will best capture the
transaction in a manner that will best protect the interest of
all the creditors. Pledge has been ruled out obviously because
rd
in pledge the object has to be delivered to the pledgee or 3
14 | P a g e
party by agreement of the parties. Real estate was ruled out
mortgage was ruled out because it is not a real property but a
personal property. So the board suggested chattel mortgage.
It is a personal property because theoretically you can have a
valid chattel mortgage on a satellite. A question pops out on
how do you foreclose if it is a chattel mortgage?
In chattel mortgage you cannot foreclose
extrajudicially unless you are in possession of the
chattel.
You can file an action for replevin to seize possession
preparatory to the foreclosure. But, even if you have
a replevin how do you bring it up to foreclose it. So
chattel mortgage is out of the question.
We thought of a deed of trust. A deed of trust in
your law on agency, partnership and trust, in trust a
dichotomy is created between the legal title and
beneficial (equitable) title. Legal title is held by the
trustee but for the benefit of the beneficiary. And
when the legal title and beneficial title are merged in
favor of one person, you have full ownership.
So that’s what happened, PLDT conveyed legal title
over the satellite in favor of the banks. The banks
hold the satellite for the benefit of PLDT itself. So the
trustor-beneficiary is PLDT and the legal title is with
the bank. So the collection, income of the satellite
redound to PLDT, but we have legal title. There was
a stipulation that in case of default the legal title and
beneficial title shall be merged in favor of the bank.
So we do not have to foreclose because
automatically we become the owner.
Will that violate the principle of pactum
commissorium?
In credit transaction in the case of Uytong vs CA
there are 2 requisites for factum commissorium
to a apply:
• there must be a pledge, antichresis,
mortgage, and
• A stipulation that in case of default the
creditors become the absolute owner.
A trust is not a pledge, not mortgage, not an
antichresis, therefore it is not subject to the rule on
pactum commisorium. So that is how we
documented the transaction.
Validity is different from being able to foreclose. In terms of
validity you can have valid chattel mortgage on a satellite
because it is a personal property. Do not equate validity with
the ability to foreclose easily. While you cannot foreclose
 Special Commercial Laws Notes by MARX and MON
extrajudicially, you could foreclose judicially. But still valid
object of chattel mortgage.
Chattel mortgage on stocks in trade of a sari-sari store. Let’s
say at any given time all the contents Juan de la Cruz sari-sari
store. Juan de la Cruz the proprietor of a sari-sari store,
obtains a loan secured by a chattel mortgage on the stocks in
trade found in the sari-sari store. These stocks in trade are
consumed, replenished. Consumed, being bought and
replenished by new products or merchandise. Will the new
merchandise or new stock forthcoming form part of the
chattel mortgage even though at the time of the execution of
the chattel mortgage they were not there?
Yes, that is what you call stocks in trade. If so
stipulated even though at the time of the execution
they were not there.
This is to be distinguished from machineries.
Machineries cannot be treated the same way as stocks in
trade.
Let’s say you have a chattel mortgage on machinery and then
new machineries are acquired. Will the new machineries form
part of the chattel mortgage?
No, unless otherwise stipulated. That means when
these new properties come and acquired by the
mortgagor, you have to sign a new chattel mortgage
agreement to cover them, unlike in stocks in trade
you don't have to sign any document. You just have
to stipulate that replenishment will form part of the
chattel mortgage.
What about chattel mortgage on machineries, is that valid?
Qualify. Machineries which can be transported from
one place to another and therefore movable
property, in its true sense of the word, by very
nature may be a subject of a chattel mortgage.
Machineries which are bolted, attached, embedded,
fixed to the ground is a real property by
immobilization or destination.
Can that be the object of chattel mortgage?
(machineries which are bolted)
By agreement
Is that arrangement valid as to third parsons?
No. It is valid only between the contracting
parties.
Why?
rd
It cannot bind 3 persons even if you
register. Otherwise, it would be easy too
15 | P a g e
rd
easy to bind 3 persons even if the object is
real property.
The point is if it is a real property, it cannot be the
object of a chattel mortgage.
However, the SC said in the case of Makati Leasing
vs Wearever Textile Mills, there can be a valid
chattel mortgage on machinery bolted or attached
to the ground, even if it is a real property by
destination or immobilization. You can have a valid
chattel mortgage on a house, even if it is real
property by nature. But, that arrangement is only
between the parties. It does not bind or prejudice
rd
innocent 3 persons.
In not so kind words, the SC said that if you two
want to make a fool of yourselves but don't involve
third persons. Don't let that arrangement bind or
rd
affect 3 persons.
Let’s say a judgment creditor of a debtor. The debtor obtained
a loan from creditor C secured by a chattel mortgage on a
machinery attached to the ground. That chattel mortgage is
valid as between the parties. Can the creditor foreclose?
Yes, in case of non-payment, he can foreclose and
become the owner of the machinery even though by
its very nature it is a real property.
But let’s say judgment creditor of D comes with a writ of
execution served on D, who has the better right now, the
judgment creditor of D or the mortgagee of D?
The judgment creditor. That arrangement of a
chattel mortgage on a real property does not bind
rd
innocent 3 persons.
No amount of registration can change the fact that a real
property cannot be the object of chattel mortgage and
rd
therefore cannot bind 3 persons.
Debtor obtained a loan secured by a chattel mortgage over a
house standing on a parcel of land. If the debtor cannot pay,
can the creditor foreclose the chattel mortgage over the
house?
Yes, because a chattel mortgage on a house is valid
between the parties. Even though it is a real
property it can be a valid object of chattel mortgage
between the contracting parties.
What if X, a judgment creditor of D. C foreclosed. Is the
foreclosure valid and binding against X, the judgment creditor
of D?
No. X is not bound
 Special Commercial Laws Notes by MARX and MON
Can he levy on the house?
Yes. A chattel mortgage over the house does not
rd
bind 3 persons.
C after foreclosure sold the house to Y in good faith for value
(innocent purchaser for value). Between Y and X who has the
better right over the house?
The SC said in the case of __ vs David that X has the
better right for the simple reason that Y, even
though he may be an innocent purchaser for value,
simply steps into the shoes of C and therefore
acquires the same title, rights and interests that C
has over the house subject to the same limitations
that C had over the house.
The right of C is enforceable only against D, then the
right of Y who simply steps into the shoes of C is only
valid and enforceable against D.
Registration of a Chattel mortgage
Where do you register chattel mortgage?
You have to register twice.
Chattel mortgage registered:
• in the place where the property is situated
and
• in the place where the mortgagee situated
Unless the place where the property is located is the same
place where the mortgagee resides under Sec 14 of PD 1529
13, 113 and 114 if the amount of the loan exceeds 500K then
one registration is sufficient in the place where the property
is situated.
What about a chattel mortgage over a private motor vehicle?
Land Transportation Office (LTO)
What about public motor vehicle?
Land Transportation Franchise Regulatory Board
(LTFRB)
What about chattel mortgage over a vessel, tugboats?
MARINA
What about Aircraft, helicopters, airplane?
Air Transportation Office
What is the effect of lack of registration over a chattel
mortgage over a private motor vehicle with the LTO?
Even if it recorded with the chattel mortgage
register, under the Land Transportation Code it has
to be registered also with the LTO otherwise it does
rd
not bind 3 persons.
16 | P a g e
May a chattel mortgage secure future obligations?
No.
Can it include future debts or obligations?
No,
What makes it so different from other security arrangements
like pledge, antichresis, real estate mortgage, can these
secure future debts if so stipulated?
Yes
Is there any requirement peculiar to chattel mortgage that is
not applicable to other types of security arrangements?
There should be Affidavit of good faith executed
jointly by the mortgagor and the mortgagee under
oath. They state that the chattel mortgage secures a
valid, just and existing debt and not for the purpose
of fraud. That phrase “valid, just and existing debt”
refers to debt existing at the time of its execution.
Not to debts that may be incurred or obtained in the
future.
Let’s say Debtor obtained a loan from the creditor in 2004
secured by a chattel mortgage over a personal property for
P5M. In 2005, he paid the obligation. In 2006, he obtained
another P5M from the creditor. He paid in 2007. In 2008, he
another P5M, but this time the loan was not paid. In 2004,
the debtor executed a chattel mortgage over personal
property that provides “that covers past, present and future
obligation, any and all of obligations owing by the mortgagor
to the mortgagee whether incurred before during or after the
execution of chattel mortgage agreement.” That is the only
document signed by the parties. Can the chattel mortgage be
foreclosed for the 5M debt incurred in 2008 on the strength of
the stipulation in the chattel mortgage agreement that it
covers past, present and future obligations, any and all
obligations owing by the mortgagor to the mortgagee
whether incurred before during or after the execution of
chattel mortgage agreement. Is the dragnet clause stipulation
(covers everything) void? How do you subject the 2008 loan to
the chattel mortgage?
Can the mortgagor be compelled by the mortgagee to execute
a fresh chattel mortgage contract or amend the existing
mortgage contract in 2008 at the time that the loan was
actually obtained?
On what basis can the mortgagor be compelled by the
mortgagee to draw the appropriate document whether a new
one or an amendment to the existing one so that future debts
once actually obtained can be secured by the chattel
mortgage?
The basis is that stipulation – the dragnet clause.
 Special Commercial Laws Notes by MARX and MON
That is why the SC said it is not void.
It is valid. It amounts to a promise on the part of the
mortgagor to execute a fresh chattel mortgage
contract or to amend the existing contract at the
time the loan is obtained. In either case there must
conformably to the provision of the Chattel
Mortgage Law. There must be an affidavit of good
faith.
But the chattel mortgage does not become effective,
the only amounts to a promise to sign a new one or
the existing one but the security, the chattel
mortgage by itself, does not come into play unless
you have a formal amendment or a fresh mortgage
contract.
So there have to be an amendment in 2008 or a
fresh mortgage contract, in both cases with affidavit
of good faith so that the chattel mortgage can be
foreclosed.
Let’s change the situation.
A loan was incurred in 2004 by B from C for P1M. … in 2005
another P1 M. … in 2008 P3 M and all that the mortgagor
signed is a chattel mortgage in 2004 containing a dragnet
clause.
How much loan is secured by the chattel mortgage? Is it P1 M
only the loan exist under the agreement?
P1 M only, unless you have an amendment in 2005
and 2008 or a fresh mortgage contract in 2005 or
2008, in both cases with affidavit of good faith,
because a chattel mortgage cannot secure future
debts. It can only secure debts existing at the time of
its execution, unless there is an amendment or a
fresh mortgage contract when the loans are actually
obtained. This the SC ruling in the case of ACME
Shoe rubber vs_ (260 SCRA).
If you compare this with a pledge agreement, assuming that
the pledge agreement which likewise contains the all
encompassing clause/dragnet clause. Can the pledge be
foreclosed for the loan in 2008 without a corresponding
amendment or a fresh pledge agreement?
Yes
In this case how much is the loan secured by the pledge
agreement, is it 1M or 5M if you have no document signed in
2005 and 2008 just a pledge agreement with a dragnet clause
in 2004?
P5M.
17 | P a g e
The SC said in China Bank vs CA that pledge,
antichresis and real estate mortgage can secure
future debts if so stipulated.
Take note of that qualification, “if so stipulated”
because unless otherwise stipulated then the pledge
can only secure debts existing at the time it of its
execution.
But, there is nothing wrong with including future debts in the
pledge if so stipulated and there is no need to amend or sign
a new one.
In a recent case, 2007 decision, in credit transaction the
extinguishment of the principal obligation extinguishes the
accessory obligation. Let’s say you have a loan secured by a
real estate mortgage and you paid the loan the mortgage is
likewise extinguished. The exception is dragnet clause.
So the extinguishment of the principle obligation does not
extinguish the accessory obligation if you have a dragnet
clause. Which means future debts can be secured, will be
secured, are secured by the real estate mortgage.
In real estate mortgage, you have various decisions Artadi vs
PNB (12 SCRA), Mojica vs CA (201 SCRA), Chinabank vs CA
(249 SCRA) , PDCOM vs CA (1995).
In real estate mortgage, there are many decisions. What the
SC did not realize is that these decisions affect the revenue
raising capability of the government.
Let’s say that the debtor want to obtain a loan for P1B
secured by a real estate mortgage. All that the debtor has to
do is to borrow P 10 M only after two months borrow the rest
of the remaining amount. What is the significance?
Every time you obtain a loan ___ you pay
documentary stamp tax. It is about 1.5% of the
amount of the loan. And then when you register a
real estate mortgage you pay 1.5% of registration
fee. So all in all the government collects more or less
3%.
So for a 1 B loan, taxing fees that should be earned
by the government amounts to 3%. 3% of 1 B is 30
M.
st
So if you want to save on taxes, 1 borrow 10. You
pay doc stamp for the 10. You register mortgage for
the 10 after 2 months you borrow 999,999,990 M.
 Special Commercial Laws Notes by MARX and MON
Do you have to sign a new one? Do you have the amend the
existing one?
No more, because the SC said a dragnet clause in
real estate mortgage is valid. So theoretically. You
need not sign a new one. You need not amend the
existing one. The subsequent ones are deemed
secured by the real estate mortgage.
So you don't have to pay documentary stamp tax and
registration fees on the 999,999,990 M.
It is not tax evasion it is tax avoidance. You are just taking
advantage of what the SC has laid down in various cases.
In the case of Mojica vs CA.
The debtor obtained a loan secured by a real estate
mortgage. He paid it. Because it has been paid the
accessory obligation should be extinguished,
because the extinguishment of the principal
extinguishes the accessory obligation. After 8 years
the debtor obtained another loan from the
mortgagee
Is that loan secured by the real estate mortgage
without any new mortgage agreement signed after 8
years, just because mortgage agreement signed 8
years agree contained a dragnet clause?
The SC said, “yes”. That’s 8 years down the
road. So any obligation down the road, any
future debt now derived are secured by the
real estate mortgage if the mortgage
agreement contains the so called dragnet or
all encompassing clause.
In that case the SC said that any party who
deals with these properties must inquire
from the mortgagee how much is exactly is
the amount of loan secured by the
mortgage.
So if what is annotated at the back of the
title is P 1M under real estate mortgage
rd
agreement between so and so. So any 3
party, any creditor of the debtor other than
the mortgagee should as the mortgagee,
“Magkano ba talaga ang utang ng
mortgagor?” Do not just rely on what is
annotated on the title in the title if the
mortgage contains the so called dragnet or
all encompassing clause.
Are you better off with pledge or are better off with chattel
mortgage?
In both cases they involve personal properties.
18 | P a g e
If it is a pledge there is no right to recover
deficiencies.
In chattel mortgage there is a right to recover
deficiencies, except in certain cases.
In pledge, while there is no right to recover
deficiencies in the sense that proceeds of the
foreclosure should be enough to extinguish the debt
or anything beyond that cannot be collected from
the pledgor.
The other side of the coin tells you that a pledge can
secure future debts, while a chattel mortgage
cannot secure future obligations.
So where are you better off now? Is it with pledge which could
secure future obligations, but has no right to recover
deficiency or is it chattel mortgage where there is a right to
recover deficiency but cannot secure future debts?
The best thing to do is to say that these agreements
may be interpreted or construed as pledge or chattel
mortgage at the option of the creditor.
Let’s say both elements are present, all the elements of
pledge are present, delivered and at the same time all the
elements of chattel mortgage are present, you registered with
the chattel mortgage register. What do you have now, is it
pledge or chattel mortgage?
That is why when I was with the bank what I did is to
stipulate that this agreement may be construed as a
pledge or chattel mortgage at the option of the
creditor, at the option of the bank.
So at the time of the foreclosure I'm better off
considering it as pledge, where I can secure future
debts then I will be under pledge.
But let’s say the future debts have not been covered
by an amendment or fresh mortgage contract, I
don't want chattel mortgage.
Is that stipulation contrary to public policy?
No. There is no question yet. So far it has not been
questioned or assailed by the creditor.
 Special Commercial Laws Notes by MARX and MON
In a chattel mortgage, if the proceeds of the foreclosure are
not enough to satisfy the mortgage debt, the mortgagor is
liable to pay the deficiency. And by deficiency we mean
anything not covered by the proceeds of the sale. Are there
exceptions?
What are the cases where the mortgagee has no right to
recover the deficiency?
1. In case of chattel mortgage on personal property
sold on instalment, if the mortgagor defaults in the
payment of the instalment. That is Art 1484 or
otherwise known as the Recto Law.
2. Stipulation
3. Accommodation mortgage or 3rd party mortgage as
held in __ vs CA
4. In case of extrajudicial foreclosure of chattel
mortgage due to the debt of the mortgagor as held
in __ vs Roxas and PNB vs CA.
What do you mean by accommodation mortgage?
A 3rd party mortgaging his property to secure the
debt of another.
The basis is Art 2085 of the Civil Code.
rd
What is the limitation on the liability of the 3 party
mortgagor?
Up to the extent of the value of the mortgaged
property. Not beyond that.
In Special proceedings, when the mortgagor dies the
mortgagee has two remedies.
• Money claim against the estate
• Foreclosure of mortgage which can be judicial or
extrajudicial
When the mortgage files a money claim against the
estate, he is deemed to have given up his right over the
mortgaged property. He stands in equal footing with the
other creditors of the mortgagor. And his rights depend
on how preferred he is compared to other creditors
based on rules on concurrency and preference of credit.
You can always foreclose the chattel mortgage. But in
case of extrajudicial foreclosure of the chattel mortgage
the SC said there is no right to recover deficiency.
In case of personal property sold in instalment, Debtor
obtained a loan from the creditor in the amount of P10M
payable in 12 equal monthly instalments secured by a chattel
mortgage over a personal property. The debtor defaulted in
the payment of 3 instalments. As a consequence the
mortgagee foreclosed the chattel mortgage. After the
19 | P a g e
foreclosure there is a deficiency. Is the mortgagor liable to
pay the deficiency?
Yes. The transaction is not covered by the Recto Law.
What is lacking in that example to make it within the
coverage of Recto Law?
There is no sale of personal property on instalment.
What you have is a simple loan secured by a chattel
mortgage where the mortgagor is liable to pay
deficiency, except in those cases enumerated.
Do not be misled by the instalment payment angle of
the transaction. There ought to be a chattel
mortgage on the same personal property sold on
instalment.
What are the requisites of Recto Law so that the mortgagee
cannot recover the deficiency?
• there is a sale of personal property on instalment
• A chattel mortgage was constituted over the same
property sold in instalment
• default in the payment of at least two instalments
• among the remedies available to the unpaid vendor.
he opted to foreclose the chattel mortgage
A and B signed a promissory note as solidary co-makers in
favor of ABC Bank. The loan is secured by a chattel mortgage
belonging to A. The loan was not paid. The bank foreclosed
the mortgage extrajudicially. After foreclosure there was a
deficiency.Can the bank enforce the deficiency against A?
Yes
Against B?
Yes. That is ruling of the SC in _ vs Ginhawa. A
chattel is only a security and not a mode of payment.
If the security is not enough, the mortgagor should
be liable such deficiency. And the deficiency can be
enforced not only against the mortgagor himself but
also against his solidary co-debtors if any.
If the mortgagor does not pay his obligation (simple loan
secured by a chattel mortgage) what are the remedies
available to the mortgagee?
• Action for collection or specific performance
• Foreclosure
Are the remedies alternative or cumulative?
Alternative, one bars or excludes the other.
Let’s say you have a loan secured by a chattel mortgage. Loan
was not paid. The mortgagee instead of foreclosing the
chattel mortgage, files an action for collection to enforce
payment on the loan agreement. Unfortunately, the lawyer
that he engaged is not from UST and the case was dismissed
 Special Commercial Laws Notes by MARX and MON
for failure to prosecute, he forgot his SPA during the pre-trial
conference. SPA from his client, the mortgagee, authorizing
him to appear in the pre-trial conference, to stipulate on
issues, admit certain facts and so on. So case dismissed with
prejudice. Can he foreclose it the case was dismissed on
technicality?
The mere filing of the collection case bars the
remedy of foreclosure.
So if you choose to file an action choose an action
for collection and unfortunately you did not make it
or you lose failed to obtain a favorable judgment
then you cannot foreclose the chattel mortgage.
Or let’s say you changed your mind and instead you
want to drop or abandon the collection case, you
cannot anymore foreclose the mortgage, because
one remedy bars or necessarily precludes the
exercise of the others.
Let’s say the property is situated in the Philippines but the
action for collection was filed abroad. Does that have the
same effect that the mortgagee having filed an action for
collection is precluded from foreclosing a property situated in
the Philippines?
Yes. That is what the SC in one case. The filing of an
action for collection regardless of venue, wherever
filed in other words, bars the remedy of foreclosure.
Let’s say you have loan secured by a real estate mortgage and
a chattel mortgage agreement. So you have 2 mortgages –
real and chattel. The loan was not paid. So the mortgagee
foreclosed the real estate mortgage. After foreclosure of the
real estate mortgage there is a deficiency. Can he file an
action to recover the deficiency without first foreclosing the
chattel mortgage?
No. the remedies are alternative not cumulative. So
once you chose the remedy of foreclosure, you have
to exhaust the remedy of foreclosure. So foreclose
both the REM and chattel. And only after foreclosure
that you can file an action to recover the deficiency,
if any. So you cannot foreclose and sue for the
deficiency, without first foreclosing the other (Caltex
vs CA).
SPCL 6
Is there a right of redemption in chattel mortgage?
None, in the sense that there is no right to buy back
as a matter of right after the foreclosure.
The SC said that there are only 3 cases where there is a right
of redemption. And they do not involve personal property.
They only pertain to real property.
20 | P a g e
These are:
• in case extrajudicial foreclosure of a real estate
mortgage of a real property under Act 3135
• in case of execution sale of a real property
under Rule 39 Rules of Court
• in case of judicial foreclosure of real estate
mortgage if the mortgagee is a bank or a credit
institution
There is no right of redemption in chattel mortgage. So there
is no right of redemption whatsoever when it comes to
personal property.
What right does the law afford the mortgagor in a chattel
mortgage before there can be a foreclosure sale? Is there are
right available to the mortgagor by which he can stop the
foreclosure sale despite the fact that he is already in default?
Let’s say he did not pay his obligation. Can the mortgagee
foreclose the mortgage the following day or week?
Equity of redemption. It is the right of the
mortgagor to prevent the sale by paying the debt
within 30 days from default. So it is a grace period
that the law affords in favor of the mortgagor.
Just because the mortgagor defaults either because
of non-payment or violation of the agreement does
not justify foreclosure right away. It cannot be done
in 1 week or couple of weeks. The law says 30 days
grace period.
Within the 30 days grace period there must be a
notice of sale given to the mortgagor.
Twin periods you may say –
• 30 grace period and
• 10 days notice before the sale.
If both requirements are complied with and it remains as
unpaid obligation, then the mortgagee can now foreclose the
mortgage.
Let’s compare the remedies available to the mortgagee in a
transaction of a loan secured by a chattel mortgage and the
rights or remedies available to the unpaid vendor in case of
a chattel mortgage on a property sold on installment basis.
• foreclosure of the chattel mortgage
• rescission of the sale
• collection of a sum of money
Is rescission available as a remedy in case of loan secured by a
chattel mortgage without restitution, (which means to restore
the parties to where they are; give me back my money and I'll
give you back your property)?
No
 Special Commercial Laws Notes by MARX and MON
What is the remedy available to a mortgagee in case of a
simple loan secured by a chattel mortgage?
• Action for specific performance or collection
• Foreclosure of mortgage
What are the modes of foreclosure?
• Judicial
• extrajudicial
Can the mortgagee foreclose the mortgage extrajudicially if
he is not in possession of the chattel?
No
What are the remedies available to the mortgagee in case the
mortgagor does not give up possession of the chattel?
• Apply for a writ of replevin to seize possession of the
chattel preparatory to the foreclosure.
• Judicial foreclosure
How do you compare it then with the remedies available to
the unpaid vendor in case of chattel mortgage on a property
sold on installment where the mortgagor defaulted in the
payment of at least 2 installments? What are the remedies
available in that case?
• Action for specific performance or collection
• Cancellation (rescission)
• foreclosure
Illustration:
Let’s say that D wants to buy a Toyota Lexus. D was to shell
out P4M. He wants to pay 1M first and the balance over a
period of 16 months payable in 16 equal monthly
installments. He purchased the car from Toyota Cars. He paid
1M down payment and the balance of 3M covered by a
promissory note payable in 16 monthly installments. To
secure the payment of the balance of the purchase price, D
constituted a chattel mortgage on the same Toyota Lexus. D
was paying the monthly amortization for 5 months or 6
months or so. Then he started losing his clients. The law office
floundered. He defaulted in the payment of at least 3
installments. And at the time that he is in default, let’s say
that the unpaid obligation is 2M principal and 100K interest
and 50K attorney’s fees. Under the Recto Law what are the
remedies available to the unpaid vendor?
• Action to enforce payment of the loan or action for
collection
• Cancellation or Rescission
• Foreclosure
21 | P a g e
If he files an action for collection and he loses the case
because of the incompetent handling of the case by his lawyer
can he foreclose the mortgage?
No. He is precluded because the remedies are
alternative and not cumulative.
So just like in a simple loan secured by a chattel
mortgage, the mere filing of the collection case
precludes the remedy of foreclosure.
So when there is a loans secured by a chattel
mortgage on a transaction falling under the Recto
Law, the mere filing of a collection case precludes
the remedy of foreclosure. Amounting to
abandonment or waiver of the right to foreclose the
mortgage. Equivalent to giving up the lien over the
mortgaged property.
nd
2 remedy is cancellation. Cancellation means?
Rescission of the contract. This means the return of
the vehicle and the return of the payment.
Can the mortgagee or unpaid vendor forfeit the previous
payment?
Yes.
So when you talk about cancellation, basically it
refers to the right of the unpaid vendor to seize
back, get back, obtain possession, recover, reposses
the personal property sold on installment and return
the purchase price, unless forfeiture is authorized.
And 99.9% forfeiture is the norm. I haven't seen a
case where the unpaid vendor returns the money.
He always forfeits the partial payments and the of
course is a valid stipulation because the mortgagor-
client is using of the vehicle anyways. That is why
forfeiture may be authorized, if so stipulated. So get
back the vehicle, return the payment unless
forfeiture is allowed.
rd
3 remedy is Foreclosure
If the mortgagee opts to foreclose or the unpaid
vendor opts to foreclose that is it for him. He cannot
recover any unpaid claim. During the auction sale, he
can only take the price equivalent to let us say 1.5 he
cannot recover the balance. Or if the car sells only
2M he cannot recover the unpaid claims.
The term “unpaid claim” includes interests and
attorneys fees related to the promissory note.
So what cannot be recovered is not just the
principal, not just the interest but also the attorney’s
fees related to the promissory note that was not
 Special Commercial Laws Notes by MARX and MON
paid. That is if the unpaid vendor opts to foreclose
the chattel mortgage.
If among the remedies available to him he opted to foreclose
then that is the consequence. He is limited to the particular
property sold on installment. He cannot recover beyond such
property. He cannot enforce any other security put up by the
mortgagor.
So insofar that law is concerned, the foreclosure of the
chattel mortgage on the very thing sold on installment wipes
out or extinguishes the obligation of the mortgagor
notwithstanding any stipulation to the contrary. Any
stipulation to the contrary in fact is null and void.
That is the concept or the essence of the Recto Law. That is
why before you apply the principle that the unpaid vendor or
mortgagee cannot recover any unpaid claim you have to
make sure that all the elements are present:
• there must be a sale of personal property on
installment
• chattel mortgage was constituted on the same
property sold on installment
• default in the payment of at least 2 installment
• Among the remedies available to the unpaid vendor
he opted to foreclose
If all these elements are present there is no right to recover
the deficiency.
Illustration:
Let’s say on top of the Toyota Lexus, the debtor D also
furnished the creditor car company additional collateral in the
form a chattel mortgage over a Ford Expedition owned by D.
Now, there are two collateral the Lexus sold on installment
and the ford expedition. The Lexus sold on installment and the
Ford Expedition not sold on installment but subject of a
chattel mortgage. D defaulted in 2 installment. Toyota Lexus
opted to foreclose the chattel mortgage on the Lexus and
there is a deficiency or unpaid claim because what was
recovered during the sale was less than 2.150 M. Can he
foreclose the Expedition?
No. The foreclosure of the chattel mortgage on the
thing sold on installment completely wipes out or
extinguishes the obligation of the buyer. So if it is
tantamount to the extinguishment of the obligation
what is the basis the mortgagee to foreclose the
other mortgage?
There is none.
This case of __ vs Pilipinas Investment. That is if the
mortgagee opts to foreclose, that is it for him. He
cannot recover beyond that. He is limited to that
22 | P a g e
particular property. So he cannot enforce any
additional security for that by the buyer.
If there is additional mortgage, like in this case the
Ford Expedition, that Ford Expedition is free,
released from the mortgage brought about by the
foreclosure of the chattel mortgage on the thing sold
on installment.
Let’s reverse the process, let’s say the company creditor is
aware, his counsel is a pride of UST and the lawyer advised
that if you foreclosed mortgage on the Lexus, you cannot
foreclose any other security. So let’s try to outsmart the
system. You foreclose first mortgage on the expedition, the
one not on installment. After foreclosure there was a
deficiency. Can the unpaid vendor mortgagee foreclose the
Lexus?
nd
No. The foreclosure of the 2 vehicle amounts to an
action for specific performance. Therefore, he
cannot foreclose the mortgage because the filing of
an action for specific performance is tantamount to
a waiver of the right to foreclose.
nd
Let’s say the foreclosure of the 2 vehicle is an action that is
akin to a specific performance and let’s say that there is
deficiency. And he filed an action to recover the deficiency.
Can he file an action to recover the deficiency?
Yes.
Let’s say that he obtained a favorable judgment. After
obtaining a favorable judgment, it became final and
executory. Can he levy of the Lexus?
Yes
Can he levy on the other properties of the buyer until the debt
is paid and satisfied?
Yes
This is what the SC said in case of Burdujan vs _ that
nd
the foreclosure of the 2 mortgage is tantamount to
an action for specific performance, and being
tantamount to an action for specific performance
precludes the remedy of foreclosure because an
action for collection is tantamount to a waiver of the
right to foreclose.
However, being an action for specific performance, if
proceeds of the foreclosure are not enough then the
unpaid vendor may file an action to recover the
deficiency. If he actually obtains judgment, he can
levy on the Lexus or any other properties until the
debt is paid or satisfied.
 Special Commercial Laws Notes by MARX and MON
So only when he forecloses the chattel mortgage
that he cannot recover any unpaid claim. That he
cannot recover the deficiency.
But if files an action for specific performance and
obtains a favorable judgment, he can levy any and all
properties not just the car sold on installment but
also any of the properties of the buyer until the debt
is paid and satisfied.
So that is what we have to consider.
Simple Loan
In a simple loan secured by a chattel mortgage don't
even think about it. Foreclose, because after
foreclosure you can support deficiency. And if it a big
loan as long as it not unconscionable or shocking to
the conscience, so that you can recover whatever is
not covered by the security.
Let say that you have chattel mortgage over a
vehicle. Sell it for 100 k or 150 k. Really low as long
as not ridiculously low as to be shocking to the
conscience. Because if it is grossly inadequate, as
you know in your law on sale, the sale will be
invalidated, Art 1474.
So when you foreclose it should be low and then you
sue for deficiency. As we have seen the mortgagee is
entitled to recover deficiency.
Transaction falling under the Recto Law
If it is a transaction falling under the Recto Law, a
chattel mortgage on a property sold on installment.
You have to weigh your options. You cannot just
foreclose, because you foreclose you cannot
recovery any unpaid claim. You are limited to the car
or property sold on installment.
Now if you file an action for collection or specific
performance, you are deemed to have abandoned
the mortgage. But, there is no limit on what you can
levy. You can even levy any and all properties until
the debt is paid and satisfied.
So you have to weigh your options. Are you better of filing
specific performance where there is no limit on what you can
levy? Or are you better of foreclosing the mortgage where
you are sure of that particular property but you cannot
recover deficiency.
It depends on your credit investigation. If he has many
creditors you are better of foreclosing, because at least with
that you are sure on the vehicle.
23 | P a g e
If there is no creditor you are better filing an action for
specific performance. And when you obtain judgment you
can levy on the car on installment and any and all properties
until the debt is paid and satisfied.
Illustration:
Let’s say the mortgagor in a transaction falling under the
Recto Law surrenders the vehicle to the mortgagee. On his
own volition, he surrendered the vehicle. Is the mortgagee
bound to proceed with the foreclosure?
No. The voluntary surrender of the object of the
mortgage does not amount to foreclosure.
What about a mere demand to surrender the property sold on
installment? Does that preclude the mortgagee from choosing
which remedy he wants to pursue, whether specific collection
or foreclosure? Let’s say he made a demand. D surrendered
the vehicle. Does that estop him from choosing the remedy of
collection?
No.
So what will stop him from choosing the collection?
If possession was acquired by writ, by force of law, can you
still file an action for collection? Even if it is not actual
foreclosure but just an action for replevin is he already
precluded from filing an action for collection or should it be
actual foreclosure that should preclude from filing an action
for collection?
Let’s clarify the concept, a possession was given up
voluntarily by the mortgagor so the SC said that at that point
the mortgagee-unpaid vendor is still free to choose which
remedy he wants to pursue. Either an action for specific
performance or foreclosure.
The mere demand, likewise, by the mortgagee on the
mortgagor to return or surrender the property does not
preclude him from choosing an action for collection or
foreclosure. At that point he is still free from choosing any
other remedy.
But, if the possession was acquired by virtue of a writ, by
virtue of a court process, like a replevin, the Court said you
cannot file an action for collection anymore. So, in some
cases, the SC said that it is tantamount to foreclosure in the
sense that it precludes him from filing an action for specific
performance.
So the expectation is when you file an action for replevin to
seize possession, it is preparatory to foreclosure. That is why
you cannot file an action for collection.
 Special Commercial Laws Notes by MARX and MON
Let’s say the mortgagor refuses to give up possession, as a
consequence the mortgagee was forced to file an action for
replevin. Can the mortgagee recover the cost of repossession
and the attorneys fees brought about by the unjust refusal of
the mortgagor to surrender possession chattel?
Is it not part of the term “unpaid claims” which cannot be
recovered anymore because of the foreclosure?
Let’s make a distinction between the attorney's fees related
to the promissory note that was not paid and attorney's fees
because of the refusal of the mortgagor to give up
possession.
Attorney's fees related to the promissory note which is
stipulated in the promissory note which was not paid forms
part of the term “unpaid claims” therefore cannot be cannot
be recovered anymore by the foreclosure of the chattel
mortgage.
But if it is attorney's fees incurred by the mortgagee because
the mortgagor did not give up possession and he was forced
to file an action for replevin, that attorney's fees are not part
of the term the “unpaid claim”, therefore can be recovered.
How do you apply the proceeds of the foreclosure?
• cost, expenses
• interest
• principal given to the 1st mortgagee
• creditors, if any, (other mortgagees or second
encumbrancers)
• excess, if any, given to the mortgagor
Costs and expenses are the first priority. The one who drafted
the case must have been lawyers. They make sure that they
are paid first.
Within what period can there be an action to recover
deficiency?
The SC said that the mortgagee has 10 years to
enforce payment of the deficiency.
The period is counted or reckoned from the date the
cause of action accrued.
But the SC stopped there. We do not know when the
cause of action accrued. Is it the date of the signing
of the promissory note or the date of the
foreclosure?
I think it is the date of the foreclosure, because it is
the only time you would know if you have a cause of
action to recover deficiency.
24 | P a g e
You wouldn't know at the time of the signing of the
promissory note because he may be paying his
obligation.
SUMMARY
A chattel mortgage is an accessory contract whereby
personal property is recorded in the Chattel Mortgage
Register to secure the performance of a principal obligation.
The concept of a chattel mortgage as a conditional sale has
been supplanted by the definition of chattel mortgage under
the Civil Code. Because the law now treats chattel mortgage
as an accessory contract, now it is governed by the rules
concerning the principal vis a vis the accessory obligation that
the extinguishment of the principal obligation extinguishes
the accessory obligation, but not the other way around.
Example:
A loan secured by a chattel mortgage on a vehicle. The
vehicle was destroyed by fire. Because the chattel is an
accessory contract, the destruction or loss of chattel
extinguishes the mortgage but not the principal obligation.
Unrecorded chattel mortgage is valid between the parties
rd
because registration is necessary only to bind 3 persons.
Such that without registration there can be no chattel
mortgage, that is not how the SC construed it. Even if
registration is part of the definition, you can dispense of
registration based on the SC decision and still the chattel
mortgage is valid between the contracting parties. Obviously,
not against third person unless it is duly registered. So the SC
applied the principle of realty to chattel.
This is not the only time that the SC applied the principle of
realty to chattel. There is one case Cebu International
Finance Corporation vs CA penned by CJ Kapunan.
S and B entered into a contract for a sale of a vessel.
So they signed a deed of sale. 2 copies are prepared.
One of the copies contains a marginal note that
ownership shall not be transferred to the buyer until
there is full payment of the purchase price. That is
an understanding between S and B that ownership
shall not be transferred to the buyer until there is
full payment of the purchase price. B issued post
dated checks in favor of the seller to cover the
purchase price. What B did, the copy without the
marginalization he presented with the MARINA. The
Marina cancelled the registration and issued a new
one to B. Thereafter, B changed the name of the
vessel. After changing the name of the vessel in his
own name. B obtained a loan from Cebu
International Finance Corporation secured by a
chattel mortgage over the vessel. In the meantime,
 Special Commercial Laws Notes by MARX and MON
the check that B issued to S bounced. So the seller
was not paid. The loan the B obtained from Cebu,
also was in default. He did not pay the obligation.
He has now to unpaid creditors. The unpaid creditor
and the unpaid mortgagee. So the seller initiated
replevin to arrest (seize) the vessel, and the chattel
mortgagee also instituted foreclosure proceedings to
foreclose the mortgage. Who has the better right
now over the vessel, the unpaid seller of the
mortgagee, Cebu International Finance?
A chattel mortgage to secure a loan for the
purpose of acquiring, constructing,
operating, or maintaining a vessel is a
preferred mortgage. And the SC said that
the mortgagee has the right to rely on what
appears on the 4 corners of the certificate
of registration.
The certificate of registration shows that
the owner is B and there is nothing in the
certificate that arouses suspicion then Cebu
International Finance need not go beyond
what appears on the four corners of the
certificate of registration.
Here is the catch, while the principle
applicable to realty by analogy, you can
apply the same to chattel mortgage,
because ownership is evidenced by
certificate of registration.
So the point is that it is not only Filipinas Marble vs CA that
the SC applied the principle of realty to chattel mortgage.
There is another case, the Cebu International Finance, where
the SC applied the principle of realty to chattel mortgage. And
rd
the principle that a 3 party may rely on the face of the title
is a principle on Torrens Title in your Land Registration. That
is a principle applicable to realty, not to chattel. But, the SC
applied the principle of the realty to chattel just the same.
Registration
The place where the mortgaged property is situated
and the place where the mortgagor resides, unless
they are the same place where registration once is
sufficient.
Special Registrations
In case of a:
• vessel with MARINA
• Private motor vehicle with the LTO
• public motor vehicle with the LTFRB
• Aircraft, helicopter with the Air Transportation Office
25 | P a g e
A chattel mortgage over a vehicle registered with the chattel
mortgage register but not registered with LTO is not binding
rd
on 3 persons.
Imagine you already registered with the chattel mortgage
registered. You have paid the fees already and you have to
register again with the LTO. God knows how much you will be
or be assessed in registering the mortgage with the LTO.
So chattel mortgage is very expensive.
Unlike a pledge you don't have to register. You only have to
notarize and it depends on how much they will collect. But a
pledge is in a public instrument which binds the whole world.
No need to register. So you save on fees.
Chattel mortgage you have to notarize because you cannot
register a non-notarized document. So you have to pay the
same notarial fees. And then you have to register. You have
to pay ¾ of 1%. And you have to register twice. And when you
register with the LTO you pay again. It is so expensive.
The problem with pledge, as you know in your credit
transaction, in case of foreclosure there is no right to recover
deficiency.
So in chattel mortgage you have the right to recover
deficiency except in four cases, but so expensive.
Pledge is inexpensive but there is no right to recover
deficiency.
So you have to again weigh you options.
You can combine the pledge and chattel mortgage in one
document and interpret as either depending on what is
convenient for you at the time of default as long as all the
elements are present.
You have chattel mortgage that is registered and at the same
time it is delivered to the mortgagee therefore satisfying the
elements of pledge.
Limitations of a Chattel Mortgage
The inherent Limitation of the chattel mortgage that
it cannot secure future obligations. You cannot
secure debts existing after its execution. Only Debts
existing at the time of its execution are covered by
the mortgage.
Example:
ACME Shoe Robber vs NLRC
You have a loan secured by a chattel mortgage in
2004. And that loan was paid in the following year.
 Special Commercial Laws Notes by MARX and MON
2005 another loan was obtained. Paid the following
year. Another loan was obtained for the same
amount. This time the loan was not paid. The
mortgagee is banking on a stipulation in the chattel
mortgage agreement that it covers past, present and
future obligations. So there was only one chattel
mortgage agreement signed. The one in 2004 but it
contains the dragnet clause, the one that
encompasses any and all obligations by the
mortgagor to the mortgagee whether incurred
before, during or after the execution of the chattel
mortgage. The mortgagee contends that the loan in
2008 is secured by the chattel mortgage despite the
lack of any additional or new document.
The SC said, No, the chattel mortgage only secures
an existing debt. The reason is that only a chattel
mortgage requires an affidavit of good faith.
That affidavit of good faith is a statement under oath by the
mortgagor and the mortgagee where they attest that the
chattel mortgage secures a valid, just and existing debt and
not for the purpose of fraud.
The phrase “just and existing debt” can only refer to debts
existing at the time of the execution of the chattel mortgage.
While that stipulation in chattel mortgage agreement
regarding the dragnet clause does not bind the security. It
amounts to a promise on the part of the mortgagor to amend
the existing mortgage agreement or to execute a fresh
mortgage contract. But the security is not put in place until
you have a formal amendment or a fresh mortgage contract.
So basically when future loans are incurred, you have to
supplement or back them up with an amendment with the
existing chattel mortgage contract or to execute fresh
mortgage contract. In either case conformably to the
provisions of the chattel mortgage, which means there must
affidavit of good faith.
Real property cannot be the object of the chattel mortgage
as a general rule, except by estoppel between the parties.
Examples:
Makati Leasing vs Wearever Textile Mills
The issue is whether or not a chattel mortgage over
a machinery attached to the ground and therefore
immobilized by destination and considered real
property by the Civil Code may be the object of
chattel mortgage.
The SC said, yes, but only as between the parties. It
rd
does not bind innocent 3 persons. So that
26 | P a g e
arrangement of chattel mortgage over a machinery
which by destination is real property cannot bind
third persons.
___ vs David
A chattel mortgage over a house is valid between
the contracting parties even though it is a real
property. Since it is a valid mortgage, the mortgagee
can foreclose in case of default.
But, even if he has foreclosed the chattel mortgage,
it does not bind the judgment creditor of D because
rd
it does not affect innocent 3 parties.
That conclusion will not change even if the mortgagee sold
rd
the house to a 3 party, an innocent purchaser for value.
That innocent purchaser for value has a right inferior
compared to the rights of the judgment creditors of D for the
simple reason that the innocent purchaser for value simply
steps into the shoes of the original mortgagee and acquires
only whatever rights, title, or interest that the mortgagee
originally had over the house and subject to the same
limitations.
If the right of the right of the original mortgagee is
enforceable only against the mortgagor, the right of the
innocent purchaser for value, the assignee of the original
mortgagee is also valid and enforceable only against the
rd
mortgagor. But, that does not prejudice or affect innocent 3
parties, like judgment creditors of the mortgagor.
Remedies available to the mortgagor
We compared the remedies if it is a loan secured by a chattel
mortgage or a chattel mortgage over a property sold
installment when there is default in the payment of at least 2
installments.
In a simple loan secured by a chattel mortgage the remedies
are:
• action for specific performance; and
• foreclosure
When the mortgagee files an action for collection, the mere
filing of collection case precludes the filing of foreclosure.
And it is not even the rendition of the judgment that will
prevent foreclosure but the mere filing of an action for
collection.
There is one case, Caltex vs IAC, as an exception.
What happened was the action for collection was
filed and then before the judgment could be
rendered, he withdrew the action for collection and
then foreclosed the mortgage.
 Special Commercial Laws Notes by MARX and MON
The SC said that this is one of a kind. In that case the
SC still affirmed that the correct rule that the mere
filing of an action for collection bars the remedy of
foreclosure.
If the mortgagee forecloses, however, he is subject to certain
considerations:
If he wants to foreclose extrajudicially he has to be
in possession of the chattel. He cannot foreclose,
under that mode, extrajudicially, unless he is in
possession.
If he is not in possession because the mortgagor
refuses to give it up, then the mortgagee can file an
action for replevin to seize possession of the chattel
preparatory to the foreclosure or extrajudicial
foreclosure of mortgage.
If there are two mortgages securing the loan and the
mortgagee opts to foreclose he has to exhaust the remedy of
foreclosure.
_ vs Ca,
you have loan secured by REM and chattel
mortgage. The loan was not paid. So the mortgagee
foreclosed the REM. After foreclosure there was
deficiency.
The SC held that the mortgagee cannot file an action
to recover the deficiency yet. He has to foreclose the
remaining chattel mortgage. And only after he
foreclosed the both mortgages that he can file an
action to recover deficiency if any.
Is it possible for the mortgagee to be held liable for damages
eventhough he has chosen the right remedy?
There is one case, Filinvest vs CA, the SC outlined
the remedies available to mortgagee:
• collection
• foreclosure
If it is foreclosure extrajudicially and the mortgagor
does not want to give up possession, replevin for the
seizure of possesion is there.
What is peculiar in this case, the mortgagee/unpaid
vendor, filed an action for replevin, seized
possession.
The problem arose when unpaid vendor-creditor
used or employed his own people masquerading as
sheriffs. And then after they saw, found the
equipment, they cannibalized it beyond recognition.
They broke it down to parts beyond recognition.
27 | P a g e
The SC said the remedy might be right but the
manner by which the right was exercised was in bad
faith.
And for this reason the unpaid vendor may be held
liable for damages.
On what basis?
Under the all encompassing principle on
Human Relations, Art 19 of the Civil Code,
everyone in the exercise of his rights and in
the performance of his duties must act with
justice, give to everyone his due, observe
honesty and good faith._ of human
relations. The one provision that you can
quote or cite if you want to sue someone. If
you have been aggrieved, you have been
prejudice but you do not know your cause
of action – Art 19 the abuse of rights
principle.
If it is chattel mortgage on a personal property sold on
installments, the remedies are:
• action for specific performance;
• cancellation; and
• foreclosure
In either case, whether loan secured by a chattel mortgage or
chattel mortgage on a property sold on installment, the mere
filing of action for collection precludes the remedy of
foreclosure.
The difference is on the effect of the foreclosure.
If it is simple loan secured by a chattel, after
foreclosure there is deficiency, you can sue for
deficiency. As held in _ vs Ginhawa.
And the right to recover deficiency may be enforced
against any one of the solidary co-debtors, if any,
and is not limited to the mortgagor for the reason
that the chattel mortgage is just a security, not a
mode of payment. If the security is not enough, the
mortgagor may still be made to account for
whatever may have to realize by such security.
Moreover, there is nothing in the Chattel Mortgage
Law, unlike pledge and Recto Law that precludes the
mortgagee to recover the deficiency.
If it is a chattel mortgage on a property sold on
installment and the mortgagee opts to foreclose
then he is bound by the consequences. He cannot
 Special Commercial Laws Notes by MARX and MON
recover any unpaid claims despite stipulations to the
contrary.
If it is a transaction falling under the Recto Law, its only when
the mortgagee actually forecloses or elects the remedy of
foreclosure that he is subject to the rule that he cannot
recover any unpaid claims.
So if he files an action for collection and obtained judgment
then he can levy any and all properties of the mortgagor until
the debt is paid or satisfied.
Mere demand by the mortgagee to surrender the mortgaged
vehicle does not amount to foreclosure. And the voluntary
possession given up by the mortgagor likewise does not
amount to foreclosure.
So voluntary possession, even if accepted by the mortgagee,
does not amount, unless the delivery or possession is
tantamount to dacion en pago.
If it is dacion en pago where there is transfer of ownership as
mode of payment then obviously the delivery and transfer of
ownership will extinguish the obligation.
But delivery per se, transfer of possession per se without the
transfer of ownership does not stop or preclude the
mortgagee from choosing, either the filing of an action for
collection or to foreclose the mortgage.
If he forecloses then that’s it, there no right to recover the
deficiency.
If it a loan or transaction falling under the Recto Law, the
foreclosure of the chattel mortgage on thing that is still sold
on installment completely wipes out the obligation of the
buyer-mortgagor despite stipulation to the contrary.
If there is an additional collateral, like a second mortgage, the
foreclosure of the chattel mortgage on the thing sold on
nd
installment precludes the remedy of 2 foreclosure.
What if in addition to the chattel mortgage on the property
sold installment, the buyer also put up a guaranty in favor of
the unpaid vendor in the person of Y, and after two
installment payments the mortgagee opted to foreclose and
there is an unpaid claim, can he file an action to recover the
unpaid claim against the guarantor on the argument that the
rd
prohibition is limited, directed to the buyer and not to a 3
party? That is the case of Pascual vs _ Motors.
Consistent to what is said, that the foreclosure of the
chattel mortgage on thing sold on installment
completely wipes out the obligation of the buyer
mortgagor.
28 | P a g e
Consistent with that principle the SC said, there is no
right to enforce any other security put up by the
nd
buyer. Whether 2 mortgage, or guaranty
agreement or a surety agreement, forget about all
those things. Once you foreclose that’s it. He is
looking at the particular property as the only source
of payment, no more no less.
And besides when we allowed, the SC said, the
unpaid vendor-mortgagee to recover the deficiency
against the guarantor, the guarantor after payment
will just get reimbursement the payment from the
debtor, the buyer. And in effect it is the buyer
assuming the deficiency and thereby circumventing
Art 1484 of the Civil Code.
The term “unpaid claim” includes the:
• principal
• interest
• attorney's fees related to the promissory note, or
stipulated in the promissory note
But, it does not include the attorney's fees or cost of
repossession brought about by the unjustified refusal of
the mortgagor to give up possession as held in Agustin vs
CA.
Period available to the mortgagor before foreclosure - 30
days grace period.
So the right of the mortgagor to pay the debt within 30 days
from default before there can be foreclosure. This is a
reprieve given by law to the mortgagor.
So the mortgagee cannot foreclose right away after default.
He has to give the mortgagor 30 days grace period. That is
what you call “equity of redemption”. The right of the
mortgagor to prevent the sale by paying the debt within 30
days from default. It is only when he failed the debt that
there can be actual foreclosure of chattel mortgage.
After foreclosure there is no right of redemption as the SC
pointed out there is not right of redemption in personal
property.
The SC said that there are only 3 cases where there is a right
of redemption. And they do not involve personal property.
They only pertain to real property. There are only 3:
• Extrajudicial foreclosure of Real Estate Mortgage
under Act 3135
• Execution sale of a real property under the Rule 39
Rules of Court
 Special Commercial Laws Notes by MARX and MON

• Judicial foreclosure of a real estate mortgage, if the

mortgagee is a bank or a credit institution

After foreclosure and there is a deficiency, the SC says that

the mortgagee has 10 years to recover the deficiency. The 10
year period is counted from the date that the cause of action
accrued, but not clear when exactly is the date. Is the date of
the promissory note or the date of foreclosure?

We advanced the theory or the opinion that is should be

reckoned from the date actual foreclosure because it is the
only time that you'll know if there is a deficiency.

29 | P a g e
 Special Commercial Laws Notes by MARX and MON

Banking Any corporation who does these functions and activities

without a corresponding license or approval from the SEC can
SPCL7 be ousted by way of quo warranto proceedings.

As in the case of Republic vs Security Credit & Acceptance

What is a BANK?
Corp. said corporation was authorized by its article of
An entity engaged in the lending of funds obtained
incorporation to lend money or extend credit. But it opened
from the public in the form of deposits.
various branches over the country soliciting and accepting
deposit accounts from the public. About 69K accounts
What are the 3 ELEMENTS to constitute banking?
opened all in all. So you have all elements of banking
1) entity is engaged in the lending of funds
(lending, obtained from the public, through deposits). But it
2) Funds obtained from the public (means at least 20
has no license from the BSP, so the government instituted a
depositors).
quo warranto proceedings to oust the corporation.
3) Such funds are in the form of deposits
What are the KINDS OF BANKS?
How about the concept of paluwagan? Paluwagan is wherein
1) Universal
19-20 people each one contributing certain amount every
2) Commercial
week. Entire collection for that week depends on the lasts.
3) Thrift
Every week the somebody gets the entire collection from
4) Rural Bank
every body. If there are more than 20 members, is this a
5) Islamic
bank?
6) Cooperative, and
No, because the funds are not obtained in the form
7) Other banks that may be classified by the BSP
of deposits. It is for savings among the members.
* Rural, Islamic and Cooperative Banks are not part of the Bar
ABC Co. buys promissory notes of buyers of cash on
Exams so forget about that. But for classification purposes, if
installment basis and every now and the ABC Co. issues bonds
it was asked you have to know these classifications and their
and the bonds’ proceeds are used to finance the purchase of
definitions.
the promissory notes or receivables. Is ABC a bank?
No. While bonds may be issued to the public, the
* In this course, other than the academic side, you have to
funds are not in form of deposits.
choose your bank very carefully otherwise your funds might
go to waste especially if your bank collapse.
So there is no banking unless there is deposit taking activity.
Top 5 Banks in the country (as of 2009)
What is DEPOSIT taking activity? How is deposit defined?
1. BDO
The funds given to the bank gives rise to a creditor-
2. Metro Bank
debtor relationship.
3. BPI
Money is given by the depositor to the bank.
4. PNB merged with Equitable
Ownership is transferred to the bank and the bank is
5. RCBP
free to use the funds as it pleases. The depositors
have the right to demand payment, any time, of the
What does the “Thrift Bank” include?
money deposited.
1) Savings and Mortgage Banks (like Montedepiedad
[now Keppel])
Under the old law there is another element – habitually
2) Saving and Loans Associations
performing banking operations (habituality). This was
3) Private Development Bank (i.e. Planters Bank) -
deleted.
caters to small and medium business enterprises
If there 3 elements are present it is a bank or engaged in
What are the DISTINCTIONS between Universal, Commercial
banking therefore it has to obtain a license from the Bangko
and Thrift Banks?
Sentral ng Pilipinas (BSP) and Securities and Exchange
As to minimum CAPITAL requirement
Commission (SEC). So any corporation that lends funds and
1) Universal - 4.950 Billion (It was supposed to
funds come from the public through deposits it is engaged in
be 2 tiered increases. After 1 year is was
banking. But not all corporations can engage in banking, only
supposed to be 5.4 Billion, but it got stuck
those authorized by BSP.
because many banks complained that they
could not increase)

30 | P a g e
 Special Commercial Laws Notes by MARX and MON

2) Commercial – 2.4 Billion What about a FOREIGNER? Is there a limit on the number of
3) Thrift - 325 Million if the head office is in share a foreigner can own in bank?
Metro Manila; 52.5 Million if the head Only up to 40%. Foreigners can only own 40% of the
office is outside Metro Manila. bank. This is because a bank is a “nationalized
activity.”
SPCL8
What does NATIONALIZED ACTIVITY mean?
If a client wants to set up a bank, how do you answer? It is an activity either wholly or partly reserved for
Discuss the STRUCTURE OF A BANK Filipinos.
A bank can only organize as a stock
corporation. They cannot be organize as a A bank is partly reserved for Filipinos, because Foreigners are
non- stock corporation, because a non- allowed to be stock-holders of a bank but not to exceed 40%
stock is not organized for profit. A bank is of the Bank’s capital stocks.
the obviously organized for profit. A bank is
a non-stock non-profit corporation. What about DOMESTIC CORPORATION?
40%
What does this mean?
It has capital stocks divided into shares among the What about FOREIGN BANK/corporation owned by
stock holders and authorized to distribute dividends foreigners?
to its members/stock-holders. 40%

A bank is supposed to make money because it is organized for How do you distinguish the 40% share ownership limit of a
profit. natural person who is a Filipino and 40% share limit of a
foreigner?
It is a stock corporation so it has share-holders. 40% share ownership limit for a:
1) FILIPINO natural person is INDIVIDUAL.
What are the KINDS OF SHARE-HOLDERS/stock-holders? 2) FOREIGNER is AGGREGATE which means
1) Natural persons that shares held by “FOREIGNERS” and
a. Filipino corporations owned by foreigners shall not
b. Foreigner exceed 40% of the bank’s capital stocks.
2) Juridical persons
a. corporation or So foreign held stocks whether owned by natural persons or
i. may be owned by a Filipino corporation cannot exceed 40% of the bank.
(domestic corporations)
ii. or by Foreigners (as in foreign What about domestic corporations?
banks) GENERAL RULE: A corporation may only own 40% of
b. partnership the bank

Is there limit on the number of shares that a person may own EXCEPTIONS
in a bank? How much percentage of the capital stock may be 1) In case of wholly owned thrift bank
owned by 1 person? subsidiary of a universal bank – This is
Under the Old law: because a universal bank can own up to
1) Natural person - only up to 20%. 100% of a thrift bank
2) Group of persons – up to 30%
Examples:
NEW LAW allows any natural person to own up to • BPI has a subsidiary thrift bank
40% of the capital stocks of a bank subsidiary in BPI Family Savings
Bank;
Can one group of persons or an entire family, under the new • Metrobank has a thrift bank in PS
law, own the entire bank? Bank;
Yes, for as long as not one of them own more than • BDO – Equitable Savings Bank.
40% (maximum) of the capital shares/stock of the
bank (not just 40 shares).

31 | P a g e
 Special Commercial Laws Notes by MARX and MON
If it’s really a bank why is there a need to for
a thrift bank?
To segregate the business.
Thrift bank is for retail – car loan, housing
loan, consumer loan.
Universal bank is for wholesale business.
2) If the shares of a corporation are listed
in the stock exchange - it can own up to
60% of the bank. This privilege can be
exercised only once. In other words a
corporation whose shares are listed can
own 60% of 1 bank only. As to the
other banks the maximum is still 40%.
3) If the corporation is in existence for 10
years it can own up to 60% of the bank.
This privilege can only exercised once
What about a FOREIGN BANK?
Examples are Bank of America, Standard Charter
Bank, Hong Kong Shanghai Bank, City Bank. These
are wholly owned by foreigners.
Why is this so?
Because up to June 30, 2007, there were 10 foreign
banks allowed by Foreign Bank Liberalization Law to
own a bank in the Philippines up to 100%
May a foreigner be elected in the board of a bank?
Yes, foreigners can be a director of a bank, BUT only
up to the extent of the ACTUAL FOREIGN EQUITY.
Note: The law does not state allowable foreign equity but
actual foreign equity. What is the difference?
The allowable foreign equity is 40%. But if the
foreigners only own 20% of a bank then they can be
represented to the board only up to 20%.
So if you have 15 directors and 20% of the bank is
owned by foreigners so 20% of 15 can be
reserved/allocated for foreigner (3 board of
directors). If they own 40% they can be represented
up to 6 board of directors (40% of 15).
How many directors are allowed for a bank?
Not less than 5 not more than 15 (min of 5, max of
15) and 2 of whom must be independent directors.
Who are INDEPENDENT DIRECTORS?
Directors not part of management
32 | P a g e
Is there an EXCEPTION? (allowable directors)
In case of MERGER or CONSOLIDATION law allows 21
directors.
Although the law does not state at the point of merger or
consolidation, objectively speaking, you have to determine
how many directors you want the merged bank to have at the
time you approve the merger. This is because under
corporation law you have to adopt the articles of
incorporation of the merged bank/ surviving bank or come up
with a new one. So you have to specify in the articles of
incorporation of the surviving bank how many directors you
want. If you want 21 then you have to indicate in the articles
of incorporation.
Can you have foreigners as officer of a Bank? Can you appoint
foreign officers in your Bank?
No. Under the Anti-Dummy Law, foreigners cannot
be appointed to any executive possession of any
corporation engaged in nationalized activity. Since a
bank is nationalized you cannot have foreigner
occupying executive positions in a bank.
You can only appoint them as consultants, advisers but they
cannot occupy executive positions.
What does a bank do for you? What are the POWERS AND
FUNCTIONS of a bank?
• extend credit
• receive your deposit
• foreign exchange
• issue letter of credit
• purchase promissory notes, bill of exchange or any
other evidence of indebtedness
Can you buy dollars from SM (shoe mart)?
You cannot. You can only exchange your dollar to
Peso, BUT you cannot exchanger you Peso for dollar.
Because SM is not allowed to engage in foreign
exchange. Banks do.
You can buy foreign exchange from a bank
Remember definition of LC? Any arrangement however
named or described whereby a “bank”…
A bank can issue Letters of Credit.
 Special Commercial Laws Notes by MARX and MON
You have a check drawn from a bank in the PDIC for $1K. If
you deposit such foreign check it is still subject to 30 days
clearing. You cannot make use of the check unless such check
is cleared by the bank where it is drawn against. If you are in
dire need of cash and you want the cash right away, can you
have the check discounted by a bank?
Yes. You can go to the bank and have the bank
purchase your check. You don’t have to wait for 30
days. The bank will pay you the value of the check by
discount and wait for the proceeds to be cleared.
Keep in mind that a bank is also a corporation and as such it
can exercise the same powers of a corporation. Whatever a
corporation can do a bank can also do. But on top of the
ordinary powers of the bank are the powers that a bank can
exercise (as mentioned above).
In addition to the powers and functions there are SERVICES
that A BANK MAY RENDER. What are these?
• A bank can make collection and payment for the
accounts of its customers
• A bank is authorized buy and sell shares and
securities in behalf of customer
• a bank can act as your investment manager
• deposits money for safe keeping purposes
• A bank may receive in custody or for safekeeping
funds and other valuable objects and can likewise
rent out safety deposit boxes
• A bank can render other services for as long as they
are not incompatible with banking business.
Can u make payment of your PhilHealth, PLDT, Bills to a bank?
Yes, because a bank can make collection and
payment for the accounts of its customers
You want to buy shares of stocks but you don’t want to go to
a broker, can the bank do this for you?
Yes, because a bank is authorized buy and sell shares
and securities in behalf of customer
You have so much money you don’t know where to put it. If
you put that in time deposit it will only give gain 50% per
annum interest or 7- 8%. If you want to have a yield of more
than 7-8%, can you entrust your money in a bank, with it
acting as your investment/fund manager hoping that you will
get income more than the rate or savings or time deposit?
Yes, because a bank can act as your investment
manager.
Can you deposit your money in a bank for “safe keeping (not
to give loan)?”
Yes
33 | P a g e
BPI vs IAC
Somebody deposited dollars with BPI under a
contract of strict deposit. As such the object should
not be used by the depository. So this not a regular
deposit where funds are given to the bank give rise
to creditor-debtor relationship where depositor can
withdraw the money anytime. The funds where
given to BPI under a contract of strict deposit which
is strictly for safekeeping. BPI commingled the funds
with the other funds and used it. BPI was held liable
for damages because the contract was for a strict
deposit. It was not a deposit which will give rise to
creditor-debtor relationship under Art 1980.
Is the enumeration exclusive?
No. The law says that a bank can render other
services for as long as they are not incompatible with
banking business.
Can the Bank be involved in the selling of sweepstakes tickets
(proceeds of which are used for charity) to make them socially
responsible? The bank sells sweepstakes for a commission. So
they help charity at the same time they get extra income.
No. BSP said that selling sweepstakes tickets is not
compatible with banking business.
In renting out safety deposit boxes, what is the nature of the
contract for the use of safety deposit boxes?
Sia was a stamp collector. He rented safety deposit
box in Security Bank Binondo Branch were he
stocked his stamp collections. Unfortunately the
safety deposit box he rented was at the lowest level.
In 1986, a strong typhoon hit Metro Manila. Flood
inundated the premises of Security Bank. Water
seeped into the safety deposit box and destroyed his
precious stamp collections. So he sued Security Bank
for damages.
Security raised the ff defenses: force majuere and
contract for use of safety deposit box is governed by
the law on lease. (SIA vs CA)
If it is governed by the law on lease, the only
obligation of the bank is to ensure that the lessee
enjoys the possession of the object leased to the
exclusion of the others. This is the object of a lease
contract. In other words the bank has no obligation
to safe-keep, take care, exercise due diligence to
safe-keep, preserve the contents of the box. This is
because the bank is not supposed to know the
contents of the safety deposit box. The bank will
only know the contents if you don’t pay rent,
because if you don’t pay they can force it open in the
presence of a notary public. Since such is the case
how can the bank exercise due diligence. It only
 Special Commercial Laws Notes by MARX and MON
relies on the representation and warranty of the
lender that that there is nothing there inflammable,
harmful, obnoxious contrary to law, morals public
order, public policy.
Justice Edgardo Paras was of the opinion that the
contract for the use of safety deposit box is
governed by the law on lease.
SC did not agree with him nor sided with SB said that
contract for the use of safety deposit box is a
“special kind of deposit.” In other words the bank
must exercise the due diligence required of
depository in safekeeping or preserving of the object
inside the safety deposit box.
What is the basis of the SC for this?
The Old General Banking Act. This provided that in
renting out safety deposit boxes the bank shall act as
a depositary. Because the law itself provides for this
SC concluded that the contract for the use of safety
deposit box is governed by deposits.
Is this still the same interpretation under the New Law
(General Banking Law of 2000 or RA 8791)?
New Law retains the authority of the Bank to rent
out safety deposit box but silent on being a
depositary. In ordinary it is stipulated – buy and sell
of securities the bank shall act as agent; receive in
custody documents and funds the bank shall act as
depository; investment manager the bank shall act
as agent. But when it comes to renting out safety
deposit boxes the law is silent unlike in the old law.
The new law retained the authority to the bank to rent out
safety deposit boxes but deleted any reference to being a
depositary. What then is the conclusion?
The conclusion should be the contract should be
governed by the law on lease. This should be the
intention.
So there is basis in saying there is that the use of SDB is
governed by the Law on Lease but we cannot be categorically
make that pronouncement yet because there is no case yet
overturning Sia, nor interpreting the changes in the General
Banking Law, specifically the authority of the bank to rent out
SDB.
Atty. Divina: “If there is a case of the same set of facts, then I
will invoke the General Banking Law as the controlling
principle. But for Bar purposes you have to say both. You
have the cite Sia vs CA and the changes in the general
banking law and say that it is submitted the given the changes
in the General Banking Law the contract of the use of SDB is
now governed by contract of lease.”
34 | P a g e
How does the bank make money? What is the reason why
BDO is the No. 1 Bank in the country w/ a capital of P62 B?
It is the one with cash because of SM outlets. You
cannot have a space a space/ stall/ store in SM
unless you agree to the bank of BDO. Your
collections should be deposited to BDO. So it is a Tri-
partite agreement among BDO, SM, and store
owner.
This is why BDO can grant loans for low interest
rates compared to what other banks are offering.
Because the deposit stays and interest is low
compared to other banks.
The bank lends to the public. Where does the bank get the
funds to lend to the public?
From the public. This is according to our definition
that a bank is engaged in lending funds obtained
from the public in the form deposits.
When the bank receives Juan De la Cruz it pays
interest on the deposits. If the account is savings,
your ATM the interest rate is 2%, 3% on the deposit.
If it is long term, i.e, time deposit the bank pays
higher interest.
If a bank pays 3% to Juan De la Cruz the bank charge around,
use the same funds to Petra Reyes. The bank has to impute
the cost of paying Juan De la Cruz for the deposit in lending
out to Petra. So 3% (cost of funds) plus. So It has to recover
its cost of funds. It has to collect more the 3% from Petra. So
if Petra is of full credit the bank charges high interest. There is
a danger of non-payment so she will be charge 12%. So this is
how a bank makes money. Spread the difference of
borrowing and cost of lending. So the bank using your own
funds to lend an in the process to earn money or income.
If the bank makes a mistake if Petra Reyes is a bad borrower
then bank loses everything. The bank pays 3% to Juan but no
longer collects from Petra if she does not pay. There is no
cash from lending because there is a possibility that you may
not pay.
Are there LIMITATIONS on the power of a Bank?
Yes
LIMITATIONS on the power of a Bank
• Limitations of a bank to grant loan
o Cash loan - single borrower’s limit
o Loans against Real estate
o Loans against personal property
o Loans granted to DOSRI (Directors, Officers,
Stockholders, or Related Interest).
• Limitations of a bank to invest in equity
• Limitations of a bank in acquiring real properties
• Limitations of a bank to accept and receive deposits
 Special Commercial Laws Notes by MARX and MON
Limitations of a bank to grant loan
• Cash loan - single borrower’s limit
• Loans against Real estate
• Loans against personal property
• Loans granted to DOSRI (Directors, Officers,
Stockholders, or Related Interest).
What is the SINGLE BORROWER’S LIMIT (SBL)? Let us say the
bank has 10 Billion, can the bank lend the entire 10 Billion to
Henry Sy?
No, because the law provides for a single borrower’s
limit. There is a maximum amount of loan a bank
may grant to 1 borrower. That is not to exceed 25%
of the bank’s net worth (capital).
The law says 20% but the law likewise authorizes
Central Bank (BSP) to reduce or increase the ceiling.
So BSP increased it to 25%. The maximum amount of
loan or guaranty that a bank may extend to a
borrower is 25% of the bank’s net worth. Net worth
means capital
So if the bank has 10B, the bank can only loan 2.5B
to one borrower.
Additional 10% is allowed if the loan is secured by a
Letter of Credit and other documents of title.
Branches from part of the Bank. It has no separate
legal personality from the bank. They all form part of
one bank.
Loans against real estate must not exceed 75% of the
appraised value of the land and 60% of the improvement.
Example: You just got married. You find your dream
house but you don’t have money. Can the Bank
finance the entire cost of the purchase price?
NO, because you are supposed to cover the
25%. This it was is called equity. What is
your equity in your housing loan? The law
says, “loan against real estate must not
exceed 75% of the land and 60% of the
improvement.
Loans against personal property must not exceed 75% of the
appraised value of the personal property.
Example: Car Loan. You found you dream car. Can
the bank finance the entire cost of the purchase
price?
35 | P a g e
No, because the loan against personal
property must not exceed 75% of the
appraised value of the personal property.
This is why many borrowers befriend the appraiser, because
the higher the appraised value the higher the loan value. This
is because the loan value depends on the appraisal.
Loans granted to DOSRI (Directors, Officers, Stockholders, or
Related Interest).
What is the RULE?
No Director, Officer, Stockholder of the bank, or
Related Interests directly or indirectly shall;
• borrow money,
• obtain a loan,
• be an endorser,
• surety or guarantor of a loan granted by his
bank or
• otherwise incur contractual obligations (i.e.
buying bank’s property in installment, so
there is liability in his part)
UNLESS there is compliance with procedural and
substantive requirements.
PROCEDURAL REQ’Ts
a) the transaction must be APPROVED by at least the
majority of the entire board excluding the director
concerned.
Example: If it has 15 directors all of the 8
(does not include the director concerned)
must approve the transaction
b) reported to the Banko Sentral ng Pilipinas
c) entered/RECORDED in the books of the
bank/corporation – it must be transparent, not
hidden or concealed.
SUBSTANTIVE REQUIREMENT
Unless Loan is fully secured by collateral, loan must
not exceed the book value of the paid in
contribution of the director or stockholder and the
amount of unencumbered stock deposit
Explanation (nosebleed):
Under the Corporation Law there are
Subscribed Shares and Paid-Up Shares.
A subscribed 10 M shares, he only paid 25%
(2.5 M) this is allowed.
The amount of the loan must not exceed the value of
your paid-up shares (not the subscribed share) and
the amount of your deposit.
 Special Commercial Laws Notes by MARX and MON
If you have no deposits and the book value of your
shares left is insignificant, then your loans need to
be secured for the protection of the bank (This is the
bottom line).
You have to secure the loan with a collateral because
if not you could only borrow up to the book value of
your share and the amount of your deposits.
The bottom line is that Directors, Officers, Stockholders or
Related Interest can take advantage of his position to obtain
better terms and conditions from his bank.
Dealings by the bank with DOSRI must be above forbs and at
arms length, because there are many examples where DOSRI
will borrow money from their own banks without paying
resulting to the collapse of the bank.
Examples:
Orient Bank. Directors obtained loans for themselves
using fictitious names and accounts without going
through this processes. This is a crime violating the
General Banking Law.
A Director or officer is supposed to promote the
interest of the bank because you are holding on to
public funds. You are not there to raid the bank’s
cauffers, get a loan, get extraordinary terms and
later run away. This is why the law has made strict
for a DOSRI to obtain a law from his bank because of
what happened in the past.
Who are DIRECTORS?
Those elected directly by stockholders
Who are OFFICERS?
Those advertised as such by incorporation
Who are STOCKHOLDERS? If you own than 1 or 10 shares of
stocks are you covered by DOSRI Regulations?
No. To be a stock holder for DOSRI purposes you
have to own at least 1% of the bank.
If you own less than 1% you are nobody hence you
are not covered by DOSRI regulations. You may be a
stockholder but you are not the one which is
covered by DOSRI Regulations.
What are RELATED INTERESTS?
These are related interest of the Directors, Officers
and Stockholder (DOS).
What is the RULE?
st
Only the relatives within the 1 degree of
affinity or consanguinity (parents [including
36 | P a g e
in-laws], children, and spouse) are covered
by DOSRI Regulations.
What about CORPORATIONS?
If the corporation is more than 20% owned
by the DOS (directors, officers, stock
holders) it is considered a related interest.
What about PARTNERSHIPS?
If the DOS (directors, officers, stock holders)
is a partner in the partnership will borrow
money in the bank this is considered a
DOSRI account therefore subject to
regulations.
Example:
A is the president of ABC Bank.
X is the president of XYZ Bank.
If A borrows money from ABC Bank- this is DOSRI.
If X borrows money from XYZ Bank- this is DOSRI. They have
to comply with the requirements
Can A borrow money from XYZ Bank using X as agent?
Can A borrow money from XYZ Bank using X as agent?
Can X borrow money from ABC Bank using A as agent?
Are these DOSRI transactions?
Yes, because the law says “DIRECTLY OR
INDIRECTLY.”
What about housing loans, car loans granted to officers of a
bank? Are these DOSRI Transactions?
Under the law Fringe Benefit Programs approved by
BSP is no longer subject to DOSRI Regulations.
SPCL9
Structure of a Bank
A bank is a stock corporation. It can only be
organized as a stock corporation. It cannot be
organized as a non-stock organization because such
is not organized for profit. A bank is organized for
profit. It is not a charitable institution.
Being a stock corporation it is under the Securities and
Exchange Commission (SEC) supervision with respect to being
a corporation. There has to be a primary license to be a
corporation and that can only come from the SEC. Since it is
engaged in banking which is a specialized business, it needs
an approval from the Bangko Sentral ng Pilipinas (BSP).
All corporations in general has to be approved by the SEC, but
only corporations who engaged in banking would have to be
approved or obtain a license from the BSP.
 Special Commercial Laws Notes by MARX and MON
In this case we may say that there are 2 government agencies
exercising supervision over banks:
• SEC with respect to its primary franchise as a
corporation, and
• BSP with respect to all functions, powers, and
activities pertaining to its being a bank.
Except in merger and consolidation, the law allows 21
directors. Only banks are allowed to have 21 directors in such
case.
Merger means marriage of 2 corporations – ABC and XYC
being one = ABC XYC
Consolidation – ABC and XYC equals 123.
LIMITATIONS ON THE POWER OF THE BANK TO INVEST IN
EQUITY
(DISTINCTIONS between Universal, Commercial, and Thrift)
Universal Bank can invest in the equity of allied and non-
allied.
This means that it can be a stockholder of another
corporation even though that corporation is not
allied or related to the banking.
Commercial and Thrift Bank can invest only in the equity of
allied undertakings.
This means it can only be a stockholder of another
corporation if that corporation is engaged in a
business allied or related to the banking.
To “invest in equity” - means to be a stockholder of another
corporation.
Examples of allied/related undertakings:
As long as it is about money – foreign exchange,
leasing, insurance, money market, investment
company
What about cargo operations?
Not allied to the bank. Commercial and Thrift Bank
cannot be a stockholder of this corporation, but a
Universal Bank can be (Equitable PCI Bank was at
one time a stockholder of PIATCO, before the whole
controversy erupted).
What about amount: of equity investments?
Example:
ABC has a capital (net worth) of 10 B. How much can
it invest in equity in 1 corporation? If it wants to
invest in XYZ how much of its capital can be
invested?
Any bank can invest only up to 25% to
invest in 1 corporation. In this case 2.5 B
37 | P a g e
If ABC wants to invest in 123 and 345 corporations (many
corporations)?
The limit is 50%
Thus:
1 time or Single investment – up to 25% of the bank’s net
worth
Collective or Aggregate equity investment – up to 50% of the
bank’s net worth
If the investment is in a non-allied undertaking
Example: XYZ is not allied to banking – cargo
operation.
In addition to or on top of the 25% and 50% limits,
the investment by ABC (investor corp) to XYZ
(investee corp) must not exceed 35% of the capital
stock of XYZ.
In other words Universal Bank can only own up to
35% of a non-allied undertaking. It can only be a
minority owner, and not a majority owner.
The story of how Equitable Bank (EB) purchased the shares of
PCI Bank.
That time the capital of Equitable was only 16 B. It wants to
buy the shares of the Lopezes of ABS-CBN and Gokongwie of
Universal Robina Corp. They own 72% of PCI Bank. They were
selling their share to anyone because they could not get along
with each other. They were willing to sell their share for 32 B.
So how can a small bank with a capital of 16 B buy a big bank
worth 32 B?
Equitable Bank invited SSS and GSIS to join the group
to purchase the shares of Lopes and Gokongwei. The
chairman of Equitable Bank, the owner, was a very
close friend of Erap Estrada. Erap Estrada told GSIS
and SSS to join Equitable Bank. Each invested 8 B.
(8+8 = 16).
How about the limitations on equity investment?
EB has a capital of 16 B only. According to the rules
they can only invest only up to 4 B in PCI because
single is limit is only up to 25%. Collectively, because
the bank has other investments, it can only invest 8
B. But Theoretically it can only use 4 B only.
16 B + 4 B = 20 B only. Therefore it is 20 vs 32. How about the
12 B difference?
The shares which cannot be acquired because of
equity investment were acquired by EBC
Investments, a wholly owned subsidiary of the EB (its
investment house).
 Special Commercial Laws Notes by MARX and MON
Where did EBCI got the money?
EB lent it 12 B. EBCI purchased the shares of Lopez
and Gokongwei which cannot be purchased by EB
because of the rules on equity investments.
How will EBCI pay EB?
When Equitable Bank merged with PCI, w/ the
Equitable Bank as surviving bank, EBCI paid of EB
through share of PCI, dacion en pago. EBCI conveyed
the shares in PCI back to Equitable Bank. And
because the merger resulted into 1 corp only,
Equitable Bank merged PCI to become EBPCI, all the
rules on equity investment are gone because there is
only 1 corporation.
A subsidiary has a legal personality separate and distinct from
the parent company. Not just because it is wholly owned by
the parent does not mean that they’ll be just one. Unless
there is a basis to pierce the corporate veil. You can only
pierce if the corporate fiction is used for an illegal purpose or
end.
Atty. Divina argued before the BSP: How can you say that it
was organized for unlawful end when the corporation has
been in existence even before the transaction came about?
BSP cannot say that EBCI was only organized for such
purpose because it was organized way long before
the transaction with PCI came about.
BSP believed their argument which resulted to EBPCI. Such
was later on swallowed by BDO. They became part of the
merger with BDO. At that time they were thinking what will
the name be? Would it be BDO EB PCI or EB PCI BDO? They
simply decided to drop off EB PCI completely and retain BDO.
This is why we don’t see EB PCI branches anymore.
LIMITATIONS ON ACQUIRING REAL PROPERTIES
Can the bank acquire real properties for any reason?
No, Bank can only acquire real properties only in 4
cases:
o Necessary for business (BUSINESS)
o Property as may be conveyed to it for the
settlement of a debt in the ordinary course
of business (DATION).
o Property as may be mortgaged to it to
secure a debt in good faith (FORECLOSURE)
o Property ay may be acquired in execution
sale in payment/satisfaction of a debt
(EXECUTION)
Can a bank buy real property because it is so cheap and it will
sell the same after 1 or 2 years to realize uplift in value?
38 | P a g e
No, because it is not one of the cases allowed by law
by which a bank may acquire real properties.
In other words, the authority of the bank to acquire real
properties is limited/circumscribed in 4 cases.
This strict interpretation is shown in the case of CHINA BANK
vs Registry Deeds Manila
An official of China Bank was caught misappropriating bank
funds. China Bank filed a criminal complaint for qualified theft
against the erring official. To settle the civil liability arising
from the crime of qualified theft. The bank official conveyed a
real property to China Bank. China Bank sought to transfer
the ownership over the real property to it with the Registry of
st
Deeds. Registry of Property refused on the grounds that: 1
nd
China Bank was a foreign bank; 2 it is not allowed under the
law.
Can China Bank demand the ownership of the real property be
transferred to it in settlement of the civil liability arising from
the crime given the voluntary nature by which the property
was conveyed by the offender to the bank?
SC:
st
1 on the issue of foreign bank. Can a
foreign bank acquire real property in the
Philippines?
No. Only corporations at least 60%
owned by Filipinos can acquire
private land in the Philippines.
How is this statement reconciled with what is seen in
the real world wherein so many foreign banks (Hong
Kong Shanghai Bank, City Bank, Bank of America,
Standard Charter Bank) are granting housing loans
which are obviously secured by real estate
mortgages?
There is no conflict because to be a
mortgagee is one thing and to foreclose is
another.
Under RA 133 a foreigner or foreign bank
can be a mortgagee but it cannot foreclose.
This is because if it forecloses it becomes
the owner. So it is only when the bank
forecloses does it become the owner but
before the foreclosure it is not ye the
owner. So there is no violation if a foreign
bank simply grants a loan secured by a
mortgaged on the same property. The
prohibition comes in when the bank
forecloses the mortgage.
That is why foreign banks are very careful in
granting foreign loans. They only grant
housing loans to people / borrowers who
 Special Commercial Laws Notes by MARX and MON
can really pay, whose net worth is such that
there is no way on earth that they will not
pay their obligation. But then you cannot be
omniscient, you cannot predict what will
happen in the future, that even though how
careful you are there are in granting
housing loans there will be incidents of
default.
How do these foreign banks deal with the matter if
the mortgagor defaults?
They will assign their rights to the
promissory notes and the mortgage in favor
of a Filipino.
So the one who will foreclose is already
qualified.
Example: The lawyer can buy the property.
They will grant loans to their lawyer and the
lawyer will be the one who will buy the
property mortgage.
This is not prohibited because your rights
are assignable. Rights to a PN and mortgage
are assignable. They can assign their rights
to a Filipino as long as it is not simulated,
meaning there is no consideration.
nd
2 issue: May the real property be conveyed for the
settlement of a civil liability arising from a crime?
No. The term “debt” refers to loans and
similar transactions, because this are the
debts incurred in the ordinary course of
business of the bank. Civil liability arising
from the crime cannot be in the ordinary
course of the business.
How will the bank recover the money which was
taken away from it given these rules?
China Bank can lend money to this official
and follow the rules in DOSRI because he is
an officer.
The bank lends the money to the officer in
the ordinary course of business. The loans
proceeds can be used to settle the civil
liability. So civil liability is extinguished since
it was paid.
How will the loan be extinguished?
By dacion en pago OR It can be secured by a
mortgage.
Because this time the loan is granted in the
ordinary course of business it can now be
extinguished by dacion en pago or be
39 | P a g e
secured by a mortgage which can be
foreclosed in case the loan is not paid. So
what is being extinguished is the loan and
not the civil liability arising from the crime.
LIMITATIONS ON THE POWER OF THE BANK TO
ACCEPT/RECEIVE DEPOSITS
Basically refer to the laws concerning secrecy of
information of bank funds received by the bank in
the course of its business.
Funds whether deposits or other arrangements are
privileged and confidential. They cannot be
examined, inquired, or looked into in certain cases.
Any information about funds or deposits cannot be
disclosed because it will violate certain laws and it is
also a criminal offense.
3 LAWS CONCERNING SECRECY of Information concerning
Bank Funds received in the ordinary course of business.
1. RA 1405 - Covers Philippine currency bank deposits
and investment in government securities.
2. RA 6426 - Covers Foreign currency bank deposits.
These are Dollars, Euros, etc
3. RA 8791 or the General Banking Law - Covers funds
other than deposits and properties in the bank’s
possession belonging to a private entity
Common denominator to all of these laws: Any information
about deposits whether of Philippine or Foreign currency, or
funds or property in the bank’s possession is confidential.
They cannot be examined inquired and look into.
If you have deposit with the bank, the bank cannot be
rd
disclosed to a 3 party that you have bank deposit, whether
Philippine or Foreign currency.
If you have a trust fund a bank (which is not a deposit), the
bank cannot also disclose it because of this law. Otherwise it
will violate your rights and it will give rise to a criminal
offense.
But the exceptions are different. The cases by which
information about Philippine Currency Bank Deposits can be
disclosed are different from the cases by which information
about Foreign Currency Bank Deposits can be disclosed. The
same with funds and properties in bank’s possession.
 Special Commercial Laws Notes by MARX and MON
st
1 Advice:
If there is a problem about secrecy of bank deposits you have
to ask yourself, is it in Philippine Currency or Foreign
Currency?
This is because you have to cite the
correct/appropriate law.
There is only 1 instance when 6426 Foreign Currency Deposits
law applies even if the deposits are in Peso.
That is in case of Mexican Peso, which is a foreign currency.
There is also Peru Peso.
That is why it Philippine Currency is used instead of Philippine
Peso.
Intengan vs CA
A couple of City Bank Officials were caught
manipulating the account of a client. They siphoned
off the accounts to their personal accounts.
This was discovered by City Bank. So it filed a
criminal complaint against the erring bank officials.
In the course of the complaint the bank disclosed the
details of the account manipulated.
So you cannot support/substantiate your charge
against the erring bank official unless you disclose
the account manipulated in details.
City Bank did so without the consent of the account
holder.
So the account holder sued City Bank for the
violation of RA 1403 for disclosing information about
his deposit without his consent.
[Atty. Divina had a similar case. Taking into consideration the
Intengan case, they snowflaked the name of the account holder.
There was no disclosure because nobody knows who he was.]
The case went all up to the SC. The SC hey wait a
minute you guys! The account involved here is not in
Philippine Currency. It is a Foreign Currency.
Therefore the correct law is not 1405 but RA 6426.
Then the SC said that the best legal minds in the
country failed to notice a very
important/fundamental thing that the account
involved is not Philippine Currency but a Foreign
Currency therefore the correct law is not 1405 but
RA 6426. Case dismissed.
Can a complaint be filed for the violation of RA 6426?
SC said not anymore because the filing of the
complaint for the violation of RA 1405 did not
suspend the running of the prescriptive period to file
a complaint for violation of RA 6426 because these
are 2 different kinds/laws.
40 | P a g e
RA 1405 - Philippine Currency Bank Deposits
What do you mean by Bank Deposits in this context?
This means funds given to the bank giving to a
creditor-debtor relationship.
Requisites:
• Funds given to the banks
• Ownership over the funds is transferred o the bank
• The bank is free to use the funds as he pleases
• The bank has the obligation to return the money
upon demand by the depositor under Art 1980 Civil
Code.
• Bank Deposits shall be governed by the Law on
Loans (Art 1980 Civil Code).
• Not contract of strict deposit. Not funds given to the
bank for safe-keeping, because if such is the case the
applicable law is RA 5791, Funds Other Than
Deposits.
What does investment in government securities mean?
Any investment in security issued or guaranteed by
the government is covered.
Government securities are Instruments issued or
guaranteed by the government. Meaning the
payment shall be made or guaranteed by the
government.
Examples: Treasury Bills, Erap Bonds, Maharlika
Bonds (during the FVR’s time), GSIS Civil Trade
Treasury Bonds and any obligation of the
government evidenced by a debt instrument is
covered by 1405.
The bank cannot disclose your investment in government
securities.
Treasury bills are borrowings of the government, they are
auction of; there a 3 different tenors – 31 days, 91 days, 182
and 365 days.
If you invest for 31 days you will issued with a bond. You
cannot buy directly from the National Treasury. You can only
buy through banks. Your investment securities are also
covered by 1405.
Philippine currency deposits are confidential and privileged.
They cannot be examined, inquired or looked into.
 Special Commercial Laws Notes by MARX and MON
Example:
A has following accounts with a bank, savings,
current, trust funds, money market placements.
Which of this accounts are covered by RA 1405?
Savings, checking accounts (checks/funds
withdrawal by the issuant of the check),
current accounts (same with checking
accounts) - covered
How about Trust funds and money market
placements?
Prior to the case of Ejercito vs
Sandiganbayan (Oct 2006), trust funds and
money market placements were not
covered by RA 1405, because they are not
deposits they were instead covered by RA
5791 which covers funds other than
deposits.
In the case of Ejercito vs Sandiganbayan
(involving the Jose Vellarde Account) the SC
held that funds invested in the banks are
likewise covered by RA 1405. It rationalized
that the term “deposits” should be broad
enough not just to cover funds given under
a contract of loan also funds invested in the
bank.
So as long as the funds can be used by the
bank for loans and similar transactions,
either deposited or transacted, can be
covered by RA 1405.
The SC said citing RA 1405 deposits of whatever
nature and kind are confidential and privilege.
The phrase “of whatever nature and kind” is broad
enough to include not just bank deposits but also all
funds invested in the bank.
Because of this jurisprudence trust funds are now
covered by RA 1405 and likewise by RA 8791.
The thing not addressed by SC is this, what
exceptions will be applied, exceptions under RA
1405 or that of RA 8791? SC is silent.
Trust funds – legal title over the funds is transferred to the
bank. These are not covered by PDIC only bank deposits are
insured by the PDIC. That is why Trust Fund has a higher yield
because it is not a deposit and there is no insurance.
The bank will act as a trustee. As such it has legal title over
the funds, and it has fiduciary duty with respect to those
41 | P a g e
accounts. It has to remit, account on how the money was
spent or invested by the bank.
Example:
You have to bank tellers. 2 of them are chatting with
each other and one of them made a remark, “You
know the account of the public official is almost zero
balance. This was overheard by a columnist. The
columnist wrote in his column that the account of
the public official is almost zero balance.
Can he sue the columnist for violation of RA 1405?
No because RA 1405 applies only to bank
officials not non-bank officials.
He can be sued for violation of his right to
privacy under the Civil Code.
Can the public official sue the seller who made the
remark?
rd
No because it was not a discloser to a 3
party but to a co-employee in the course of
her duties as a teller. The teller represents
the bank because she is an employee of the
bank.
What are the EXCEPTIONS or cases wherein the account can
be disclosed without violating RA 1405?
• Written permission of the account holder
• Impeachment
• In cases of a court order
• The BIR under the tax Code may inquire into the
deposits for the purpose of computing the tax due of
the estate of a deceased depositor. Because foreign
currency are not exempt for estate tax
• The BIR under the Tax code may inquire into the
bank deposits of a taxpayer who has filed an
application for compromise of his tax liability on the
ground of financial incapacity
• The PCGG under its mandate may have access to
bank deposit for the purpose of recovering illegally
acquired funds
• In case a law is passed repealing or amending RA
6426, it is a mere law, it can easily be modified.
SPCL10
rd
Regarding the 3 exception that in cases of a court order,
such court order only in the following cases: a court order
justifies disclosure of bank deposits but such court order
must be in the following cases:
• The subject matter of litigation is the money
deposited
• Bribery or dereliction of duty
• Prosecution for unexplained wealth
• Prosecution for anti-graft and corrupt practices act
 Special Commercial Laws Notes by MARX and MON
• Violation of the anti-money laundering law
• Violation of the human security act
• In case of Garnishing
Illustration:
Let say the Senate Blue Ribbon Committee is conducting an
investigation on the extent of jueteng activities in Pampanga.
In aid of legislation, the Senate Blue Ribbon Committee
invited persons suspected to be involved in jueteng and
subpoenad or issued subpoena duces tecum in various bank
of Metro Manila, directing such banks to produce documents
or records of the person suspected to be involved in jeteng
activities. Supposedly, it is in aid of legislation, can the bank
comply without violating Republic Act 1405 (Law on Secrecy
of Bank Deposits)? Supposedly introducing factual
amendment to the Anti-money Laundering Law presented by
the Senate Blue Ribbon Committee.
No, because the Senate Blue Ribbon Committee is
not a court, it may be a very powerful committee but
the fact remain that it is not a court.
The Fiscal is conducting an investigation on Violation of B.P
22, to complete the investigation, the Fiscal issued a
subpoena to the bank where the check was drawn against to
produce related documents and records of the respondent in
a criminal case, can the Bank comply without violating the
law?
No, because the Fiscal is not a court, it has to be a
court order
The subject matter of litigation is the money deposited
A one transfer for $1000, and ended up being remitted to the
account paying in the Philippines for $1000,000. So the teller
must have overlooked, she misread the instrument, so the
account of that the payee was credited was $1000,000. He
consulted his lawyer and such lawyer advised to withdraw,
spend such money. The payee withdrew the funds, and he
deposited such withdrawn amounts to various banks.
Thereafter, the Bank discovered the error and filed an action
for the reimbursement or return of the money. They ask the
court to subpoena ad tefistificandum to compel the bank
managers who have certain accounts suspected to be
depository of the funds. When one of the Bank managers is
suppose to testify, he was opposed by the lawyer of the
payee arguing such testimony by invoking Republic Act 1405.
Does the testimony violate Republic Act 1405?
No, because the subject matter of litigation is the
money deposited, the subpoena ad tefistificandum is
a court order directing the person involved to testify.
Being a court order and being the subject matter of
litigation of the money deposited falls within the
42 | P a g e
exception. Therefore the bank manager can testify
without violating the law.
A issued a check for Php1000,000, it was drawn against Allied
Bank and such check was deposited with Union Bank. Union
Bank undecoded the charged slip. Union Bank only recovers
Php1000 from Allied Bank when it should have recovered
Php1000,000 for the amount for which the account of A was
debited. After 1 year, it was discovered, so Union Bank filed a
petition to examine the account of A. Allied Bank opposed
the action of the ground that it will violate the right of A
under Republic act 1405, which the Union Bank counter-
argue that it will not because the subject matter of litigation
is the account where the money is deposited. Is the money
found in the account of A is the subject matter of the
litigation?
No, because the cause of action of the Union bank is
to recover the difference between Php1000,000 and
Php1000, it paid Php1000,000 to payee depositor
but only got P1000. Union Bank is a collecting Bank,
it collects the amount covered by a check from the
drawee bank so it can credit the account of the
depositor. So the cause of action of the Union bank
is to recover the difference between Php1000,000
and Php1000, and not necessarily the funds in the
account of A, so it is any money that falls under the
difference between Php1000,000 and Php1000. The
right to privacy is a right guaranteed by the
constitution and if it examines the account of the
depositor which do not fall under the exception
violates such right to privacy.
Bribery or dereliction of duty
Prosecution for unexplained wealth
Prosecution for anti-graft and corrupt practices act
A special prosecutor was conducting an investigation for
violation of unexplained wealth law involving a public official
suspected to have an ill-gotten wealth. In the course of the
investigation, the special prosecutor issued a subpoena were
such public official maintained an account. The Bank opposed
citing the R.A 1405, this case went up in the SC.
The SC said that when it comes to investigation of
unexplained wealth under anti-graft and corrupt
practices act, the prosecutor may have access to
bank deposits. Although a special prosecutor is not a
court, but the SC allowed the examination under the
exception on the accounts, documents or records.
The SC relied on the Anti-graft and corrupt practices
act and unexplained wealth law, in both laws it
provided that Bank deposits shall be taken into
account in the enforcement of these laws. So, when
it comes to anti-graft and corrupt practices act,
bribery or dereliction of duty and the unexplained
 Special Commercial Laws Notes by MARX and MON
wealth law, even a prosecutor may have access to
bank deposits
Reiterated in the case of Banco Filipino vs Purisima. In such
case the subject matter of the case extends to the relatives of
the public officials charged with violation of unexplained
wealth, then the relatives invoked R.A 1405 saying that they
are not public officials so their accounts should not be
examined.
In case of violation of unexplained wealth law, the
right to inquiry into illegally acquired property in
such cases extends to cases where such property is
concealed by being held or recorded in the name of
other persons.
Note: in both examples, there is no court order, only an order
of subpoena coming from a special prosecutor, why do we
lump them under court order, were in these 2 examples there
is no court order just a subpoena from a special prosecutor?
Because these cases have been modified by the
decision in the case of Marquez vs Desierto.
Facts: Lourdes Marquez was the branch Manager of
Union Bank. In the course of the investigation of the
PEA money land scam, the Ombudsman issued a
subpoena to Lourdes Marquez for her to produce
banks accounts, documents, records or check stags
of the public official involve in the investigation. She
invoked republic act 1405. But the Ombudsman
asserts that they have the right to inquire to Bank
deposits if the subject matter of the investigation is
violation of anti-graft and corrupt practices act.
Union bank argues the right to privacy of its
depositors.
Held: the SC laid down the elements to enable the
Ombudsman to examine bank account deposits. The
ombudsman who includes the special prosecutor
may examine bank accounts, documents, records
only if the following elements are present: (these are
the limitations on the power of the Ombudsman to
inspect bank, documents records.
• There must be a case pending before a
competent court
• The account to be examine must be
specified
• The account holder and the bank officer
must be informed of the time and date of
the examination
• The examination must be limited to the
account specified
43 | P a g e
Violation of the anti-money laundering law
What is Money Laundering?
Dirty money made clean, it is a crime whereby the
proceeds of an unlawful activity is transacted making
it appear that it came from legitimate resources.
Example:
Kidnapping, if ransom money is taken and deposited
in the Bank, then the crime of money laundering is
committed independently of the commission of the
crime of kidnapping. Because of the anti-money
laundering law, that act of making it appear that the
funds came from legitimate resources is a crime by
itself independently of primary crime.
3 ways for the commission of Money Laundering:
• Action- if a person knows that a monetary
instrument relates to an unlawful activity and
transacts it.
• Omission- if a person knows that a monetary
instrument relates to an unlawful activity and he
fails to perform an act that facilitates the
commission of money laundering
• Failure to report in the anti-money laundering
council. If there is a transaction that is covered by
the anti-money laundering law and the bank does
not report to the anti-money laundering council, the
crime of money laundering itself is committed
regardless of good faith or bad faith on the part of
the bank.
2 kinds of transaction that is covered by the Anti-money
laundering act that must be reported to the AMLA; both
transaction must be reported to the Anti-Money laundering
council otherwise, the crime is committed
• Covered transactions- any transaction involving the
amount of more than Php500,000 in one banking
day. The Bank to whom the money is deposited must
report it to the Anti-money laundering council
otherwise it is liable for violation of the Anti-money
laundering act
• Suspicious transactions- any transaction regardless
of amount with any of the following circumstances
are present:
o There is no underlying legal justification or
economic trade
 Example: a lawyer who has a
depositor-client who have
$10,000,000 want to deposit such
amount to a bank without any
answer with questions about its
legal justification or economic
trade, if such lawyer or depositor-
 Special Commercial Laws Notes by MARX and MON
client cannot explain the supposed
to be money deposited in the
bank, the lawyer and the
depositor-client can be held liable
for violation of anti-money
laundering act, because the lawyer
perform an act that facilitates
money laundering and on the very
least the lawyer know that an act
or a monetary instrument
facilitates in the commission of the
anti-money laundering.
o The client is not properly identified
 Example: Jose Velarde account
Can we open a number account
like account #143 or 9?
Yes, for as long as the
client is properly
identified owner of such
account. Number account
is allowed but not for
checking accounts or
current account for as
long as the owner is
identified.
o The transaction is not commensurate to the
financial capacity of the client.
 Example: a professor without other
means of income earning
Php20,000 a month, suddenly
deposited Php400,000.
o The transaction is so structured as to
prevent reporting to the Anti-money
laundering council.
 Example: a person deposited today
Php499,000, the next day
Php495,000, after a week
Php490,000, so clearly such person
tries to avoid the threshold
amount.
o The transaction is deviates from its usual
transaction with the bank
 Example: the person deposits
Php50,000 every week since the
year 2000, then all of a sudden he
made a huge deposit, it becomes a
suspicious
o The transaction engaged of an unlawful
activity as defined by AMLA
 Kidnapping
 High jacking
 Arson
 Murder
44 | P a g e
o Any transaction analogous to the foregoing-
the enumeration under the law of what
constitutes suspicious transaction is not
exclusive because any transaction
analogous is likewise suspicious
 Example: a bank in Pampanga,
every Monday, Wednesday and
Friday, someone wearing maong
shorts, and SLEEVELESS SANDO
deposits Php30,000 in coins
Who can inquire into the bank deposits in case there is a
violation of the Anti-Money laundering law?
The anti-money laundering council (AMLA), the bank
or other institution will repost covered or suspicious
transactions to the AMLA, the AMLA will be the one
to inquire whether such funds relates to any
unlawful activity, if it does, it will file a petition with
the CA to forfeit the funds and request for a freeze
order in the meantime. The freeze order is good for
30 days.
Republic vs Eufemio
Issue: whether the inquiry order may be granted if
there is no pending case with any competent court
Held: there is no need for the pending case, the
AMLA may inquire or ask for a bank inquiry order.
However, the bank inquiry order cannot be granted
ex parte, it has to be with notice with the depositor.
When it comes to freeze order, the AMLA may
obtain a freeze order without notice to the account
holder because the law says so, freeze order may be
obtain ex parte. But when it comes to Bank inquiry
order, it has to be with notice to the depositor.
A court order is not necessary in any of the following cases,
the AMLA may inquire into the bank deposits even without a
court order if the duns or proceeds relate to:
• High Jacking
• Kidnapping
• Arson
• Murder
• Violation of Dangerous Drugs act
Violation of the human security act
What do we mean by Human Security act?
It covers accounts used for terrorism
In case of Garnishment
In case of Garnishment, any bank disclose any information
about bank deposits pursuant to a writ of garnishment,
placing the account, garnishing it meaning segregating it from
 Special Commercial Laws Notes by MARX and MON
the funds of the depositor to answer for a garnishment order,
such bank is not liable or there is no violation because when a
bank discloses information pursuant to a garnishment, the
disclosure is only incidental to the execution of the judgment
and it is not the intention of the legislature to place bank
deposits beyond the reach of judgment creditor
The BIR under the tax Code may inquire into the deposits for
the purpose of computing the tax due of the estate of a
deceased depositor.
Can the bank disclose to the heirs of the deceased depositors
without violating the RA 1405?
No, because the law says that the BIR can inquire to
the bank deposits not the heirs. The heirs may refer
their concern to the BIR.
The BIR under the Tax code may inquire into the bank
deposits of a taxpayer who has filed an application for
compromise of his tax liability on the ground of financial
incapacity
Under the unclaimed balances law, in case of dormant
accounts for which may be escheated in favor of the
government, the bank may disclose information about
dormant accounts. The Unclaimed Balances Law allows the
Government to forfeit deposits without claim or movement
for 10 years; it is the obligation of the bank to disclose
information about dormant accounts to the National
treasurer so that the National Treasurer can initiate escheat
proceedings. Such disclosure of the bank does not violate RA
1405. Such forfeiture is based on the Regalian Doctrine
The PCGG under its mandate may have access to bank
deposit for the purpose of recovering illegally acquired funds
In case a law is passed repealing or amending RA 1405, it is a
mere law, it can easily be modified.
COMPARISON BETWEEN 1405 TO 6426 (Foreign Currency
Deposit Act)
Under RA 6426 (Foreign Currency Deposit Act)
General Rule: Foreign Bank Deposits are privileged and
Confidential
Exceptions:
• Written permission of the depositor
• Impeachment
• The AMLA may inquire bank deposits
• The BIR under the tax Code may inquire into the
deposits for the purpose of computing the tax due of
the estate of a deceased depositor. Because foreign
currency are not exempt for estate tax
45 | P a g e
• The BIR under the Tax code may inquire into the
bank deposits of a taxpayer who has filed an
application for compromise of his tax liability on the
ground of financial incapacity
• The PCGG under its mandate may have access to
bank deposit for the purpose of recovering illegally
acquired funds
• In case a law is passed repealing or amending RA
6426, it is a mere law, it can easily be modified.
General Rule: Foreign currency deposits are exempt from
court order, garnishment, and execution
Exceptions:
• A court order In case of the Anti-Money laundering
law because Anti-Money laundering law provides
that “notwithstanding 1405, 6426 and 8791, the
AMLA may inquire into funds, investments or
deposits if there is probable cause that will relate to
any unlawful activity under the Anti-Money
Laundering Law.
• A court order for equitable considerations
Example:
A 10 year old minor was raped 10 times by
an American tourist. But since the American
tourist was not in the country anymore the
so the Parents claimed for the civil liability
arising from the criminal act. In the
Garnishment, the American tourist has a
bank deposit in China Bank, the parents
caused the garnishment of the deposit with
China Bank, but China Bank invoked that
there in a law that exempts foreign
currency deposits from garnishment,
execution or court order. The Supreme
Court held that foreign currency deposits of
a foreigner guilty of a wrong doing can be
garnished because RA 6426 was passed to a
solitary purpose, to encourage foreign
currency deposits but not to benefit a
wrong doer.
According to the Secretary of Justice, foreign currency
deposits are exempt from escheat proceedings because
escheat is akin to garnishment, since foreign currency
deposits are exempt from garnishment and escheat is a form
or specie of garnishment, therefore foreign currency deposits
are exempt from escheat proceedings. Being exempt from
escheat proceedings, the bank has no authority to disclose to
the National Treasurer any information about foreign
currency dormant accounts
 Special Commercial Laws Notes by MARX and MON
SPCL11
General Banking Law (RA 8791)
General Banking Law prohibits disclosure of any information
among funds other than deposits as well as properties in the
bank’s possession belonging in the private entity. It covers
funds other than deposits. Prior to the case of Ejercito vs
Sandiganbayan, trust funds are confidential not because of
RA 705 but because of RA 8791, but now TRUST FUNDS ARE
COVERED BY RA 1405 hence funds other than deposits for as
long as their inventory ___ and the banks may use the same
for loans or similar transactions are now governed by 2 laws
RA 8791 and RA 1405. The Supreme Court did not go beyond
explaining what exceptions will apply because under RA 8791
there are 2 exceptions (written permission and court order).
There are funds which are not covered by RA 1405, these
funds that the bank cannot be use for loans and other similar
transactions (take note of the qualification that the SC held in
Ejercito vs Sandiganbayan).
“Funds which are deposited or invested with the bank which
the bank can use for loans and similar transactions” if the
bank can use it for loans and similar transactions then it is not
covered by RA 1405 but it is governed by RA 8791. Examples
of these are funds obtained by the bank for “strict deposit”
meaning for safe keeping. Since the bank cannot use these
funds for loans, it is not covered by RA 1405 but they are
covered by RA 8791.
Whether 1405 or 8791 both laws say that it cannot be
inquired or looked in to but the problem lies on which
exception would apply.
8791 also includes properties belonging to private entity,
example of these is the safe deposit box, can the bank
disclose information about the contents of the safety deposit
box?
No, because it will violate 8791
What if the depositor did not pay rents on the safety deposit
box?
If the depositor is not paying rents, then the Bank
will force open the safety deposit box. In case of
force opening, the Bank will know the contents of
the box, so every time the bank will force open the
Box it engages with the services of the notary public
to make sure that the owner of the safety deposit
box will not put a tag on the contents of Safety
deposit box way beyond human imagination.
46 | P a g e
Can the bank disclose the whereabouts of a client, let say that
a bank has 2 clients and one is indebted to the other, can the
bank upon the request of the creditor disclose information on
the whereabouts of the debtor?
This information is not covered by 1405, 6426 or
8791 because it is not funds, but it is covered by the
Constitution the right to privacy.
Bottom line is that “whatever information we give to the
bank is confidential or privilege and can only be disclose in
those cases provided by law”
What are prohibited transactions under the General Banking
Law?
• The bank is not allowed or prohibited upon
disclosing any information about funds or properties
in the bank’s possession without a court order or
information to the depositor
• Overvaluing the collateral
o Example: loan value is dependent on the
appraised value; the higher the appraisal
the higher the loan. The play there is to
convince the appraiser to increase the
value.
• The bank is not allowed to outsource inherent
banking functions. Outsourcing means letting a third
party to do function which can be dine in-house. The
bank can outsource non-inherent banking functions
o Example: inherent functions like tellering;
non-inherent banking functions like
janitorial services, security etc
Which agency exercise supervision over banks?
The Security Exchange Commission (SEC) and the
Banko Sentral ng Plilipinas (BSP)
SEC exercise supervision over banks because a bank is also a
corporation, all corporation obtained their primary franchise,
or the authority to act as a corporation from the SEC. now
such corporation wanted to have a secondary franchise like
to engaged in a special business like banking or insurance, it
need such franchise to appropriate agency. If it is banking it is
the BSP. So any corporation engaged in specialized business
needs 2 franchises, primary franchise (to act as a corporation)
– SEC; secondary franchise (to act or engaged in a particular
business) under supervision of another agency.
Theoretically, there is no clash between SEC and BSP in
jurisdiction because all that is pertain to corporation is
cognizable by the SEC and all that is pertain to banking is
cognizable by BSP.
Banko Sentral ng Pilipinas is governed by RA 7653 (central
bank act of 1993). The old central bank was RA 265.
 Special Commercial Laws Notes by MARX and MON
All obligations of the old central bank are not assumed by the
new BSP.
What are the objectives of the Banko Sentral ng Pilipinas?
• Supervised policy directions in the areas of banking,
money and credit
• Promote peso stability
• Promote price stability
• Exercise supervision over banks and quasi-banks
Supervised policy directions in the areas of banking, money
and credit
Currency issued by BSP represents a conditional obligation on
the government. The BSP cannot print notes without assets
to back it up. The required back up is assets before gold.
Which currency is a legal tender?
In Obligations and Contract, the debtor can compel
the creditor to accept Philippine Currency in
payment of a debt when it tenders the right amount.
Are coins legal tender?
Yes, but only up to certain amount. Php100 – for
denominations of Php0.25, Php0.10 and Php0.05;
Php1000 – for denominations of Php1.00, Php5.00
and Php10.00
The central bank did not put any cut on the legal tender
power of notes
What about notes which are defaced, is it a valid legal
tender?
If the note is defaced by more than 3/5, it is not a
legal tender
What about notes and coins withdrawn from circulation
carrying the signature of the President if such president
signature is not incumbent, can it be still a legal tender?
Yes, provided within 1 year from recall, for the
period of 1 year, it can be exchanged for legal tender
notes. 1 year from recall and 1 year for exchange,
beyond that period or for 2 years such notes are only
for posterity not as a legal tender.
Is a cashier’s check a legal tender or manager’s check? A
cashier’s check is a check drawn by a bank against itself, the
drawer and the drawee itself is the bank.
There are conflicting decisions:
• A cashier’s check issued by a bank in good
standing is as good as cash
• A check whether ordinary, manager’s or
cashier’s is not a legal tender, it only proves
47 | P a g e
the affirmative capacity of the obligor to
pay his obligation.
• If there is a mistake (a bank is required to
exercise extra-ordinary diligence in the
performance of their obligations) on the
part of the depositor, it is the obligation of
the bank to call the attention of the client
and rectify such mistake because the banks
are engage in a business that affects public
interest. A manager’s check or a cashier’s
check is legal tender in the commercial
world
• A cashier’s check is not legal tender,
however if the creditor accepts without
objection, it becomes legal tender under
the principle of estoppel.
• For the purpose of bar exams- cashier’s
check is not legal tender because:
o Under section 60 of the Central
bank Act, the debtor cannot
compel the creditor to accept a
check in payment of a debt (by
express provision of law) the law
makes no distinction as to what
check it is. And if the debtor
cannot compel the creditor to
accept a check in payment of a
debt that means that a check is not
legal tender.
o Civil Code Art 1249
How does BSP exercise supervision over banks and quasi-
banks?
• Issuance of rules and regulations to govern banking
business
• Imposition of sanction in case of violations of these
banking rules and regulations
• Conducting audit of banks or examination to
determine compliance with these rules and
regulations and to inquire insolvency or illiquidity
What are the remedies available to the BSP in case a bank
violates any banking rules and regulations?
• BSP may impose a fine and other administrative
sanctions and the fine shall not exceed Php30,000 a
day for every violation and Suspension of erring
directors and bank officers
• Suspension of a quasi-banking privileged or function,
Foreign exchange operation, rediscounting facility
And Clearing Facility
o Quasi-banking- the ability to obtain funds
from the public through deposit substitutes
o Foreign exchange operation- buys and sells
foreign exchange
 Special Commercial Laws Notes by MARX and MON
o Rediscounting facility- when a borrower
issued a promissory to a bank, the bank
may negotiate it with the BSP
o Clearing Facility- the check will be cleared,
people cannot make checking account
• To appoint a conservator or receiver
• To close a bank in cases allowed by law
Appointment of a Conservator or Receiver
A conservator is appointed if the bank is illiquid. Illiquid
means its assets are not in cash.
Example: the bank has an obligation of
Php100,000,000.00, it cashed only Php5,000,000.00,
but its assets are Php1B, but the assets are real
properties. So a bank may have more assets than
liabilities but it is not liquid. If the bank is illiquid, it
cannot pay its obligation.
A receiver is appointed if the bank is insolvent. Insolvency
means the assets are less than the liabilities.
Cases where the bank may be under a receiver other than
insolvency:
• Inability to pay debts when it falls due provided that
this shall not include inability to pay caused by
extraordinary demands induced by financial panic in
the banking community
• If the bank violates a cease and desist order issued
by BSP
• If the bank cannot continue the business without
involving probable loss to its depositors or creditors
Do conservators or receivers have powers of dominion?
No, they only have acts of administration, they
cannot sell properties of banks, they cannot
approved option to purchase properties, just purely
acts of administration
Can the BSP close a bank without prior hearing?
Yes, because if prior hearing is required then bank
run will be the order of the day. The power of BSP to
close a bank is a valid exercise of police power. If
there is showing of bad faith or grave abuse of
discretion, it can be set aside and subject to judicial
scrutiny
Can BSP close a bank on the strength of a report by the
supervising and examining department without complete
notice of such bank?
Yes,
48 | P a g e
What are the assets of the banks?
• Cash
• Properties (real or personal)
• Receivables
• Collectibles
What are the liabilities?
• Deposits
• Deposit Substitutes
• Standing Letter of Credits
• Obligations Due to Credits
SPCL12
TRUTH IN LENDING LAW
HISTORICAL BACKGROUND
• The Truth in Lending Law was pass to compliment
the then USURY LAW.
• The USURY LAW is suspended (not repealed) since
1982 up to the present because Central Bank (CB)
lifted the ceiling on interest rate.
• A rate of interest is USURIOUS if it in excess of the
ceiling set forth by the Bangko Sentral ng Pilipinas
(BSP).
• In 1982 CB issued Circular 905 lifting the ceiling on
interest rate. There being no ceiling in interest rates
then there is no usurious rate of interest.
• When the Truth in Lending Law was passed the
Usury Law was still in place. Under said law the rate
of interest is usurious if the interest is more than
12% for secured loans and more than 40% for
unsecured loan (no collateral, no mortgages).
• Many persons were found to circumvent the usury
law by sticking to the ceiling but collecting other
items not on their interest but other charges. Since
they are not interest then they are not usurious but
they jacked up the cost of credit. So this is why the
Truth in Lending Law was passed – to compliment
the Usury Law.
What does the Truth in Lending Law basically provide? What
is the ESSENCE of Truth in Lending Law?
The law basically imposes upon the creditor an
obligation to inform the borrower the true cost of
credit.
Lay down everything on the table. No hidden
charges. No hidden fees. Disclose everything to the
borrower - what are fees that he has to pay, charges,
interest, damages. Everything disclosed to the
borrower so that he can decision whether or not to
borrow, obtain a loan or pursue a transaction w/ the
creditor.
 Special Commercial Laws Notes by MARX and MON

Specifically the law REQUIRES THE CREDITOR TO FURNISH the If the car has a value of 3M and down payment is
borrower prior to the consummation of the transaction 1M, how much is the amount to be financed?
WRITTEN DOCUMENT CONTAINING THE FOLLOWING 2M. It is payable in 5 years, then 2M plus
information: interest over 5 years. It has to be indicated
1. Cost price and delivery price of the property
2. Amount of down payment/Trade in 6. Finance Charges
3. Difference between 1 and 2 The interest. How much is the interest?
4. Charges not incident to the credit which must be Is it 12%?
itemized Is it compounded monthly?
5. Total amount financed Is it in arrears/discounted?
6. Finance charges Is it compounded?
7. Finance charged as it bears to the total amount Is it collectible every quarter/semi-
financed or simply the unpaid interest on the annually?
outstanding obligation
All of these must be indicted.
Application:
A wants to purchase a car on installment basis. The cost of 7. The Finance charge bears as to the total amount
the car is 3M. He made a down payment of P1M. The financed OR, simply, what is unpaid interest on the
balance (P2M) is covered by a promissory note payable over outstanding balance the obligation.
60 mos. (5 yrs to pay).
This is why when you purchase a car on installment
The truth in lending law requires the creditor (the car basis you are provided with the schedule of the
st nd
company) to disclose to the borrower (the buyer to the car) amortization - 1 mo. This much...2 mo. This
th
the ff informantion: much...so forth and so on up to 60 mo.
1. Cost Price/Delivery Price - How much is the cost or
value of the delivery of the car? P3M These are disclosed so that the borrower can decide - given
2. Amount of Down Payment – P1M; the interest of 12% compounded monthly, given the handling
OR “Trade In” (if the borrower wants to trade his old fees of so much, the handling fees of so much will I pursue
car in exchange for a new car then the trade in value the transaction?
has to be indicated in the document)
3. The Difference bet. 1 and 2 So everything disclosed. Nothing hidden. This is basic concept
4. Charges not incident to the credit which must be of the truth in lending law.
itemized.
What happens IN CASE these REQUIREMENTS ARE NOT
Are there charges not incident to the credit? COMPLIED WITH?
Yes. Interest is not incident to the credit. A purchased a car on installment basis. He paid 30%
and the balanced covered by the promissory note
Are there other charges not related to the credit? If secured by a chattel mortgage on the same vehicle.
there are they must be itemized. The Promissory note indicates the principal amount,
Example: the value of the car 3M, amount of down payment,
Is there handling fee for the interest 12% on monthly basis, compounded if it is
transaction? not paid and “charges which the car company will
Is there a service fee for the determine from time to time.”
mortgage or registration of the
mortgage? What law is violated in this case?
Is there a notarial fee? The Truth in Lending Law because the charges must
Is there a registration fee? be itemized. It can just simply be said, “from time to
time,” or “what the creditor will determine.”
So all the fees or charges not incident/related to the
credit must be disclose prior to the transaction. If you give discretion creditor then you are not being
clear on the cost of credit.
5. The Total Amount Financed.
The requirement of the law is to itemize the charges
which are not incidental to your credit.

49 | P a g e
 Special Commercial Laws Notes by MARX and MON
In this case there is non-compliance with the Truth in Lending
Law. What are the CONSEQUENCES? Does it render the
transaction unenforceable? Will it render it void? Does that
mean that the borrower need not pay anymore the value of
the amortization as they fall due? Does that mean that the
car company can get back the credit?
Answer: NO. These are not the consequences of
non-compliance with the Truth in Lending Law.
What then are the EFFECTS?
• Charges not disclosed need not be paid and
• If paid can be recovered
• w/o prejudice to penal sanction that might be
imposed against the erring person. There is a penal
sanction that attaches to it. It is a crime/offense. It is
probationable.
Unenforceability and declaration of nullity are not the
consequences of non-compliance with the Truth in
Lending Law. This is finally made clear by the SC in the
case of DBP vs ______ (this is in our supplemental
outline)
If you want to buy a DVD component. You went to SM
Appliance Center and you were able to spot the DVD
component that you’ve been looking for. You got it and you
got your credit card from your wallet, and then presented it
to the sales lady. The sales lady swiped it into the machine.
Machine said transaction approved and then you signed the
invoices. You pick up 1 for you, 1 for the establishment (SM),
another 1 for the card company. Then you got your DVD
component. After 1 month you got a billing statement from
your card company. It turns out that you have a revolving
credit with the card company. You are allowed to pay 36
months with the card company 0 interests for 36 mos. So you
are not forced to pay affront. You will pay on installment
basis for 36 mos. 0 interest. Billing statement comes; it says
“12% interest on the invoice charges and other fees or
charges that the card company may determine from time to
time.” Did SM Appliance Center Violated that Truth in Lend
Law?
No because the transaction between SM and the
card holder is on cash basis. The installment basis is
between the card holder and the card company. If
there is anyone required to comply with the Truth in
Lending Law it is the card company.
The truth in lending law does not apply when there
is no “credit component” in the transaction.
It does not apply when the transaction is payable in
cash.
50 | P a g e
Supposing 1 of you lends money to your classmate for a
gimik/date. Does your classmate need to comply with the
Truth in Lending Law by lending X amount of money so that
you can have a good date?
No. The in Lending only applies to a creditor as
defined by law.
What does this mean? (creditor)
A person who extends credit in the course of
business. It does not apply to generic creditor.
PNB vs Padilla (1996)
In this case a promissory note that stipulates the
unbridled authority of the creditor/bank in the case
to adjust or change the interest rate every quarter or
every month as the banks shall please.
SC said any provision in a promissory note or any
loan agreement giving not giving the creditor the
unbridled discretion to change the interest rate as
he pleases despite the advance consent of the
borrower violates the principle of “equality of
contracts.”
If the promissory note signed by the maker indicates
that the bank has been empowered to change the
interest rate every month, this stipulation is void
because it is sole potestative condition left solely to
the discretion of the creditor.
In other words just because there is a provision in
the promissory note, it does not mean that the
creditor can adjust or increase the interest rate
anytime that he wants. There has to be consent to
every subsequent interest increase.
st
For the 1 the SC court said that such provision does
not only violate the principle of equality of contracts
it also violates the Truth in lending Law. This is the
case of UCPB vs Spouses Velloso (2007).
UCPB vs Spouses Velloso
In this case the promissory note signed by the
borrower in favor of the bank (UCPB) indicate that
the branch manager is authorized to adjust the
interest rate every quarter and the interest rate as
posted in conspicuous place in the bank premises is
the applicable interest rate for the interest period.
SC court said that that provision giving UCPB the
power to adjust the interest rate is void for being for
being a sole potestative condition and more so it
violates Truth in Lending Law.
So the officer who increase the interest rate without
to consent of the client may be charged criminally
for the violation of the Truth in Lending Law.
 Special Commercial Laws Notes by MARX and MON
WHEN does the CAUSE of action ACCRUE?
Within 1 year from the date the interest or charges
not disclosed are supposed to be paid (I’m not sure
w/ this transcription, the law provides that the
action to recover the penalty may be brought w/in 1
year from the date of occurrence of the violation...).
PDIC LAW
RA 9302 as amended
What is the CONCEPT of the PDIC?
PDIC is the insurer of deposits. It insures deposits.
Where does PDIC get the premiums?
It collects premiums from the “banks.” Not from the
depositors/client. It is based on a certain percentage
of the total deposits, ¼ - 1%. Every year PDIC collects
premium from the bank to insure their deposits
dependent on the amount of the all the deposits.
If the bank collapses, then you can file your claim w/
PDIC. This is the concept of PDIC. It ensures your
deposit even without you paying the premium
(which is paid by the bank).
What are the CONDITIONS to make PDIC liable?
1. The bank must have receive deposits
2. The bank became insolvent or closed because of
insolvency
If the bank is operating in good condition you don’t go to
PDIC. You go to the bank to get back your money.
You only go to PDIC if the bank has closed because of
insolvency.
1st element: The bank receives “deposit.”
What does do we mean here by DEPOSIT? Does this include
trust funds, fictitious accounts, proceeds of money market?
The amendatory law provided fictitious accounts,
spurious accounts, dummy accounts, fraudulent
accounts are not insured with PDIC. The law made
st
this clear for the 1 time (this was not in the RA
9302).
Like what happened to the case of Legacy (Legacy
Insurance, Legacy Motor Vehicles etc). They
discovered that there are many deposits are
fictitious so they were not honored by the PDIC.
51 | P a g e
What about TRUST FUND?
This is NOT covered by PDIC. This was made even
clearer by the Amendatory Law to RA 9302.
Why is Trust Fund not included?
Because what is covered by the PDIC is only
deposits, funds deposited with the bank giving rise
to a creditor debtor relationship. So if there is no
creditor-debtor relationship then that is not insured
with PDIC.
If you have P100 K, you want to put your money in the bank.
The bank asked you what do you want: savings - low interest
but you can withdraw your money any time),
time deposit - 30 days, you get 4-5%; you cannot easily
withdraw your money; if you preterminate the interest rate
will be adjusted
trust funds - higher interest rate than savings and time
deposit.
Why?
This is because it is not insured with PDIC. So the
bank shall not pay premium for the trust fund.
It is not included/computed in determining the
premiums to be paid by the bank to PDIC. This is the
risk, if the bank collapses it is not insured with PDIC.
There is a disclaimer when you sign a Trust
Agreement saying, “Not Insured with PDIC”
How about FUNDS HELD FOR SAFEKEEPING?
NO. It has to be funds giving rise to creditor debtor
relationship.
The following accounts are COVERED by PDIC
• Savings
• Current/Checking Account (these are the same)
• Dollar Deposits – the new law made it clear Dollar
Deposits are covered. You have to convert the same
to Philippine Currency at the time of closure of the
Bank.
Accounts NOT Covered by PDIC
• Trust Fund
• Money Market Placement - here you buy securities
from the bank there is no creditor debtor
relationship)
PDIC vs CA
A made a money market placement with ABC Finance Co
(company). The company is supposed to return the principal
investment and the interest within 30 days but at the
maturity of the placement the company collapsed, it became
insolvent. So the company referred A to XYZ Bank (bank) and
 Special Commercial Laws Notes by MARX and MON
Affiliate Company of ABC owned and controlled by the same
group of stock holders. The bank issued a certificate of
deposit in favor of A – 30 days Time Deposit Certificate. On
maturity of the time deposit certificate the bank also
collapsed. Can A file a claim with PDIC?
1st condition: Did the bank received deposit in this case?
No. It is the Finance company which got the money,
not the bank. The bank only issued a certificate of
deposit to him after being referred to by an affiliate
company to the bank, but the bank never received
deposit. So nothing was insured with the PDIC.
The liability of PDIC is statutory, dependent on the receipt of
the bank by the deposit. So if nothing was received so
nothing was insured with the PDIC you cannot file claim with
PDIC.
What is if the CERTIFICATE OF TIME DEPOSIT is NOT
NEGOTIABLE, does it matter?
It doesn’t matter. What matter is that deposit was
received by the bank and the bank became
insolvent.
COMPUTATIONS:
What is the maximum insurance coverage under PDIC?
Now it is P500 K (2 years ago it was only 250 K. It was
increased because of what happened to Legacy
Bank). Because of this increase 98% now of all
accounts are insured with PDIC.
What does this mean?
This means that only 2% have deposits of more than
P500 K. The 98% are those whose deposits are 500 K
or less. Only 2% of the population of the country
have deposited more than 500 K.
RULES ON COMPUTATION
1. Individual account is insured separately from joint
accounts; BUT
2. In case of joint accounts the amount of the deposit
shall be divided equally between the depositors
UNLESS otherwise is stipulated.
Example: 50K; A and B, A or B, A and/or B = 250 K
each unless otherwise stipulated in the agreement
3. The maximum coverage likewise shall be divided
between the depositors.
So 500 K divide also between A and B.
52 | P a g e
Given these rules how much can a depositor recover from
PDIC?
• 500 K for his individual account
• 500 K for all his joint accounts
What if he has so many joint accounts?
A and/or B
A and/or Father
A and/or Mother
A and/or Brother
A and/or Sister
Are all these accounts insured separately from one another?
This is the significant amendment in RA 9302, which
was carried over in the new amendatory law.
“The aggregate share of the depositor in all the joint accounts
should be added, and aggregate share of all the joint
accounts is insured only up to 500 K.” So the maximum
amount you can recover from PDIC is P1M – 500K for you
individual account and 500K for you share in all your joint
accounts.
Example: A has the following accounts with ABC Bank:
1M in his own name (A)
1M A and/or B
1M A and/or C
1M A and/or B
For any amount in excess of the insured deposit you cannot
recover from PDIC.
It can be recovered from the Bank but based on concurrence
of preference of credit. So you stand in equal footing with
other creditors of the distressed bank. And usually deposit is
not a preferred credit EXCEPT the case of Miranda vs CA.
Miranda vs CA.
The depositor withdrew 5 M and converted to a manager’s
check. When it was converted to a manager’s check the bank
officials already knew that the bank was insolvent, it got the
money and issued the managers check. In transit the bank
closed because of insolvency. Under these circumstances the
SC said that the deposit is considered a preferred credit.
Generally it is not a preferred credit, generally the 500 K
cannot be recovered not from PDIC but from the bank
depending on the available assets and how many creditors
are there – are they preferred or not. Your chances of
recovering the entire amount nil, but the chances or you
recovering a portion of the 500K depend on how preferred
you are viz a viz the other creditors of the distressed bank.
 Special Commercial Laws Notes by MARX and MON
Within what period can you file with PDIC?
Within 24 mos. from closure. After that PDIC will not
be liable but you can still recover from the distressed
bank based on the rules concurrence an on
preferences of credit.
A and/or B – the amount shall be divided between them: A
owns 500K, B owns 500K (no problem)
A and/or C – A owns 500K, C owns 500K (no problem)
A and/or D - A owns 500K, C owns 500K (no problem)
Total account of A is 1.5 M
How much can be recovered?
Only 500K. Under the old law these accounts are
insured separately, that is why prior RA 9302 the law
was easy to circumvent.
The 1M cannot be recovered from PDIC but from the
distressed bank subject to the rules on concurrence
and preference of credit.
A has accounts with X branch, Y branch and Z branch of the
same bank, are they insured separately?
No because they are maintained in the same bank
but different branches. So it should be per bank not
per branch in computation.
What if A has accounts with ABC Bank and XYZ Bank, both
banks collapsed how much can he recover?
This is not something the law does not contemplate.
But it makes sense that the depositor can demand
500 K for his deposit with ABC Bank and 500 K for his
deposit with XYZ Bank.
What about account maintained with a corporation?
Example: A and/or ABC Corp. Who can recover the insurance?
It is the corporation unless otherwise stipulated.
So don’t you ever maintain an account with a
corporation because the presumption it is owned by
the corporation unless otherwise stipulated in the
contract of deposit.
What about A in trust for B; or Father in trust for son, who can
recover the insurance coverage?
The account is owned by the Father, he can
withdraw it anytime but he earmarked for the credit
of his son.
The law says that for insurance purposes it is the
beneficiary (in whose favour the account is opened),
the son, that can claim the insurance coverage not
the one opening the account,
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Does PDIC have the power to examine bank deposits?
Under RA 9302 it was not clear it was simply state
that PDIC with consent of BSP may examine the
books documents and records. It does not say
whether this cover deposits.
The amendments made it clear that PDIC has the
power to examine deposits of distressed banks.
Does BSP have the power to examined Bank Deposits?
Only for the purpose of insuring compliance with the
Anti-Money Laundering Law.
PDIC, no qualification, can examine bank deposits of a
distressed bank.
Does PDIC have the power to reduce interest on deposit?
PDIC law now empowers the PDIC to reduce the
interest rate on any deposit made within 6 mos.
prior to closure. So if you are induced by the “offer”
of the bank of its high interest rate, think twice
because all of these banks have closed in the past
and PDIC , any way, has the power to reduce the
interest rate to a reasonable level. So what is the
point of putting you money in that bank because of
the high interest rate if it closes?
*Every time a bank offers a very interest rate, it is an
indication of poor financial health.
For tax purposes if an account is held in a “and/or capacity”
can one of the depositor later on withdraw the entire amount
without paying taxes?
If it A and/or B, 50% owned by A therefore 50% may
be withdrawn without paying taxes.
What if it is “A and B”?
Same. 50% shall be without tax.
So if you want to save on taxes make it A or B. So that if B
dies you can withdraw the entire deposit.
The basis for this should be made in complete trust between
A and B because if it turns out to be someone take advantage
of the situation the prudence that prompted you to open
account in that capacity may be defeated by other important
consideration. Just like what happened to the case of City
Bank v CA.
City Bank vs CA.
Father and/or daughter. The daughter withdrew the
entire deposit and transferred everything to her
account.
 Special Commercial Laws Notes by MARX and MON
Famous moviestar before he was officially declared dead,
there was observance of 3 days before he was declared
clinical death (organs are no longer working) and
physical/legal death (no more part of your body is
functioning). During the 3 day period they changed the
account from “A and B” to “A or B,” using the thumbmark of
the movie actor. Then authenticated by the notary public
swearing before his own god that thumbmark was affixed
with his free consent or volition. Once the records have been
cleansed they declared the movie actor dead. So the wife was
able to withdraw all the deposit without being subjected to
payment of taxes.
BULK SALES LAW
What is the ESSENCE of the Bulk Sales Law?
Any sales in bulk as defined by law must comply with
certain requirements. Otherwise the sale shall be
deemed in fraud of creditor therefore null and void.
1st It must be a “bulk” sale defined by law
nd
2 it must comply with certain requirements
When is a sale considered in bulk?
As sale is in bulk in any of the following cases:
1. Sale, transfer, assignment, mortgage not in the
ordinary course of business
2. Sale, transfer, assignment, mortgage of all or
substantially all of the merchandise, goods or ware
(sale of the ASSETS)
3. Sale, transfer, assignment, mortgage of all or
substantially all of the business or trade (sale of
BUSINESS)
How come mortgage is lumped altogether with sale, transfer
and assignment when there is no conveyance of ownership in
mortgage?
Note that even mortgage of all or substantially all of
assets or trade of business is also considered a bulk
sale. So it is not in the conveyance. Even mortgage is
included if it accounts for all or substantially all of
the assets or business.
What is the gauge to determine if the sale involves
“substantially all?”
The test is after the sale can continue with his
business.
Here we can apply by analogy Sec 40 of the
Corporation Code regarding the sale of substantially
all the assets. It provides that the sale
merchandise/assets are considered substantially all
if after the sale the seller cannot continue with his
business.
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If it is a bulk sale it also has to comply with certain
REQUIREMENTS.
What are the requirements?
1. The seller must provide the buyer with a “verified”
list of creditors so that the buyer can inform the
creditors at least 10 days before the sale
The list must be verified (under oath), it must
include the names, addresses, due dates and
amounts owing to each of the creditors of the seller.
Is the consent of creditors required in a bulk sale?
No but the seller has to give the buyer a list
of creditors, under oath, so that the buyer
inform these creditors 10 days from sale to
enable them to take appropriate measures
to protect their interest.
So consent is not necessary and it is enough that
they are notified.
2. Inventory of goods, properties, merchandise or
wares to be sold must be made.
3. The inventory must also include the cost price or
acquisition price of each of the goods to be sold and
the amount for which they are to be sold.
4. List of creditors and the inventory of goods must be
filed with the Department of Trade and Industry
If these are not complied with the sale is presumed to be in
fraud of creditors therefore null and void.
If we have determined that the sale was in bulk.
The seller must provide the buyer verified list of creditors
Then inventory of goods
These must be filed with DTI
If these requirements are not complied with it is clear that
insofar a B’s Creditors are concerned the sale is void.
What about between Sell and Buyer? What are the
consequences for non-compliance with the requirements of
the Bulk Sales Law? Is the sale also void?
There is divergence of views:
One view: The sale is also void
Another view (better one): The sale is not
necessarily void between them but void
only as against the creditors because after
all the bulk sales law intends to protect the
creditors not the seller and the buyer.
 Special Commercial Laws Notes by MARX and MON
Why sale not void between the seller and the buyer?
Because the law presuppose that if these
requirements are not complied with the buyer holds
the properties in trust for the creditors with right to
demand payment or return of the purchase price
plus interest and damages.
So if the buyer has to right to obtain the return of
the purchase price plus damages and interest, and
with the obligation to hold these assets and
properties in trust for the creditors, this means the
sale is not void between them. This is because a void
contract produces no effect, establishes no right,
imposes no obligation.
A is defendant in a collection case. During the pendency of
the collection case he sought the advice of his lawyer on how
he can save on estate tax or how his heirs or relatives can
save on estate tax upon his death.
He was told by his tax lawyer, “Why don’t you set up a
corporation by which you can transfer all your properties to
that corporation in exchange for shares of stocks. If the
transfer is such that you’ll end up controlling the transferee
corporation, the transfer, sale or assignment of the
properties is not subject to tax.”
This is a tax free transaction: When you transfer your assets
to a corporation in exchange for shares of stock. If the
transferor ends up to be the controlling stock holder of the
transferee corporation that transaction is not subject to
____tax and VAT. If A dies the properties are in ABC
Corporation.
A followed the advice of his lawyer and transferred all his
assts to ABC Corp. Then he lost his case.
The judgment creditor tried to levy assets, properties of A but
could not find any because share of stocks are not registered
with the Register of Deeds.
Unlike Real properties, all you have to do is to verify with the
Register of Deeds what properties are
under the name of A.
There is no registry of certain stock so you cannot go there
you cannot ask the ____ and ask what are the corporations
under which A is a stock holder.
Creditor cannot find any of A’s properties what are the
remedies available e to him?
Can he pierce the corporate veil of ABC Corp on the ground
that ABC Corp was set up for the purpose of saving taxes?
No.
55 | P a g e
____ vs CIA 150 SCRA. Tax avoidance scheme is legitimate
and it does not justify the piercing of the corporate of fiction.
So the remedy of the creditor is not to pierce the corporate
fiction, because the corporation is legitimately and lawfully
setup, and it was a Tax avoidance scheme.
What then are the remedies available to the creditor?
The Bulk Sales Law.
Is it a bulk sale?
Yes, because all the assets are transferred in favor of
ABC.
Did A comply with the requirements of the Bulk Sales Law?
No list of creditors given to the transferee
corporation;
No Inventories of goods
No filing with the DTI.
Therefore the transferee corporation holds the
properties in trust for the benefit of the creditor.
What is the difference between Tax Avoidance and Tax
Evasion?
Classic distinction is that Tax Avoidance is legitimate,
ethical and moral
Tax Evasion is contrary to law, unethical and
immoral
But when you come to think about it the real distinction
between tax avoidance and tax evasion is a “GOOD laywer”.
If you have a “GOOD lawyer” tax evasion becomes tax
avoidance.
But if you have a “VERY LOUSY lawyer” even tax avoidance
would end up as tax evasion.
What are the CASES wherein Bulk Sales LAW will NOT APPLY?
1. Sale in the ordinary course of business
i.e. A is a vegetable grower. 1 bountiful harvest
season he was able to harvest vegetables enough to
fill up 2 trucks. He loaded his vegetables on his
trucks and went to Balintawak and unloaded all the
vegetables to the vendors in the market. All of the
vegetables were disposed off. Is he required to
comply to the Bulk Sales Law because he has sold all
his merchandise, goods and wares?
No, because it is sale in the ordinary course
of business.
2. A bulk sale accompanied by the waiver on the part of
the creditors.
The law is intended to benefit the creditors. It is a
right given to the creditors to demand compliance
 Special Commercial Laws Notes by MARX and MON
with these requirements. But it is a right that can be
waived by the creditors for as long as it is in writing
and under oath.
3. Sale by executor, administrator or legal
representative pursuant to a court order.
When the executor sales property under
administration with the courts consent and approval,
he need not comply with he need not comply with
the bulk sales law requirement; or
If a guardian sells the all the properties of his ward
by virtue of a court order, there requirements are
not necessary to be complied with.
4. Sale of Properties exempt from execution.
This is because if the properties are exempt from
execution it cannot be said the creditors are
prejudiced.
5. Sale of a manufacturer.
A manufacturer always sells in bulk because if he
sells on retail he is not a manufacturer. This is why
the manufacturer need not comply with these
requirements because it is the essence of his
business to sell in bulk.
6. Sale of a foundry shop.
A foundry shop is a “pandayan,” where they shape
metals to finished objects like swords.
When you sell a foundry shop you don’t sell it in
retail you sell the entire thing.
7. Sale of services.
Only sale of goods is covered.
Warehouse Receipts Law
What is a “warehouse receipt?”
A warehouse receipt is both an acknowledgment
receipt and a bilateral contract between a
warehouseman and a depositor.
When does Warehouse Receipts Law apply?
This law only applies if the receipt is issued by a
“warehouseman as defined by law.”
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If you have a document that looks like a warehouse receipt. It
tells you where the goods are stored,
Charges to be paid, location of the warehouse, quantity of
the goods deposited BUT not issued by a warehouseman,
what law governs?
The Law on Deposit.
Example: A deposited sacks of palay with X. If X is
not a warehouseman defined by law what law
governs the transaction?
Law on Deposit.
If X is a warehouseman as defined by law what law governs?
Warehouse Receipts Law. It is also a deposit but
because it is issued by a warehouseman as defined
by the law on deposit it is governed by a special law.
What is a “warehouseman?”
A warehouseman refers to any person, natural or
juridical, lawfully engaged in the business of storing
goods for profit.
In this case if X is warehouseman and he issued a warehouse
receipt, what does that mean?
It means that the warehouseman acknowledges the
receipt of the goods,
And it is bilateral contract in the sense that the
warehouseman has the obligation to safekeep and
preserve the goods of the goods in his possession
using due diligence of a good family, pending the
delivery to the depositor or any person entitled to
possession and he has the right to be paid storage
charges as stipulated in the document.
What about the depositor?
The depositor has the right to demand delivery of
the goods based on the terms of the warehouse
receipt or can assign, negotiate or transfer the
warehouse receipt to somebody else.
The transferee or assignee, depending on whether
he is holder for value or not, can demand delivery of
the goods from the warehouseman.
Is the warehouse receipt a “negotiable instrument”?
No, because it does not comply with the
requirements of negotiability under Sec 1 of the
Negotiable Instruments Law.
st
1 of, the obligation to pay is not there. It is the
obligation to deliver goods, not to pay money
 Special Commercial Laws Notes by MARX and MON
However, even if it is not a negotiable instrument it
can be a “negotiable or non-negotiable document of
title.”
Is a warehouse receipt a document of title?
Yes because it represents title over goods covered by
such instrument.
What is the test to determine if it is a negotiable document of
title?
Same test to determine the negotiability of
instrument, which means the words, “order or
bearer” should be present.
If the goods are deliverable to order or bearer then it
is a negotiable document of title.
If it is deliverable to a specific person it is a non-
negotiable document of title or warehouse receipt.
Don’t ever think that a warehouse receipt transaction is
limited to goods or commodities or staples, it can be any
personal properties (computer, car etc).
QUEDANS - If what are deposited to the warehouseman are
goods, commodities or staples
- It is only for goods (does not apply to, i.e.,
computers) a form of warehouse receipt but limited
only to goods, commodities or staples.
But you can issue warehouse receipts for all kinds of personal
properties deposited to the warehouse.
B deposited 1000 sacks of sugar with W and W issued a
warehouse receipt in favour of B or bearer. What does this
mean?
This means the W has the obligation to take
care/safe-keep good and then deliver the goods to
anyone lawfully entitled to possession.
Before the warehouseman may be compelled to deliver, what
are his rights?
1. He has to be paid storage charges and other fees as
may be stipulated in the warehouse receipt.
If he is not paid the storage charges, he may
withhold delivery of the goods in his possession; OR
2. When there is an offer pay the lien or the charges
but the claimant/depositor doesn’t want surrender
the receipt, then the warehouseman cannot be
compelled to deliver; OR
3. If the depositor/claimant doesn’t want to
acknowledge the receipt of goods, then the
warehouseman cannot be compelled to deliver.
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So these are basic the conditions before a warehouseman
may be compelled to deliver:
1. The lien must be paid. This is compose of storage
charges and other fees.
2. The receipt must be surrendered or returned to the
warehouseman
3. The claimant/depositor must acknowledge the
receipt of the goods.
st
1 condition: The storage charges have to be paid.
The storage charges are “lien” on the property. They
follow the property wherever it goes.
And for as long as this lien is not satisfied the
warehouseman withhold delivery.
nd
2 condition: The receipt must be surrendered.
If the receipt is no surrendered it may have been
negotiated to somebody else.
If W delivers to A not in possession of the warehouse
receipt, the one who is in possession may claim later
on that is why the law makes it a crime for a
warehouseman to deliver the goods without the
required surrender of the warehouse receipt – to
avoid circuitous or multiple claims over the goods in
his possession.
rd
3 condition: The claimant must acknowledge the receipt of
the goods.
The receipt issued by W may be negotiable or non-
negotiable warehouse receipt.
It is negotiable if it deliverable to the “order or
bearer” (order of B, B or order, B or bearer, or
bearer)
If is not negotiable if it is deliverable to specific
persons.
What if it is negotiable or non-negotiable?
There are many advantages conferred by law to a
holder of a negotiable warehouse receipt as against
a non-negotiable warehouse receipt.
What are the advantages of a negotiable warehouse receipt?
1. The goods while in the possession of the
warehouseman cannot be garnished or levied on
execution
UNLESS:
• the receipt is surrendered or
• the negotiation is enjoined, or
• the receipt is impounded by order of court
 Special Commercial Laws Notes by MARX and MON
Example: D deposited to W 1000 sacks of palay and
then D negotiated the receipt in favor of Y.
Here comes X a judgment creditor of D. Armed with
a writ of execution, he went to the warehouseman
and served the writ of execution to deliver to him all
the assets properties, goods, merchandise wares
owned by D. to whom will W deliver the goods – X,
the judgment creditor or to Y, the holder of a
negotiable warehouse receipt brought about by the
negotiation of B to Y?
Y, the holder of the negotiable warehouse
receipt. The law provides that the goods
while in the possession of the
warehouseman cannot be garnished or
levied on execution unless the receipt is
surrendered or the negotiation is enjoined,
or the receipt is impounded by order of
court.
The receipt cannot be surrendered because it is in
the possession of Y. The negotiation was not
enjoined because of the fact “made in favor of Y.”
So if W makes a delivery to the judgment creditor his
liable for misdelivery or conversion. So the judgment
debtor in this case is not the person entitled to
possession. It is the holder of the negotiable
warehouse receipt.
What if X got an order, “don’t negotiate,” and stops here?
If D could not negotiate then X has a better right.
OR what if the court impounds the warehouse
receipt and therefore cannot be negotiated to
somebody else?’
X has a better right as judgment creditor.
BUT if the receipt has been negotiated to the holder
for value, that holder for value has a better right
than the judgment creditor. If W makes a delivery to
the judgment creditor his liable for misdelivery or
conversion.
2. The holder of the negotiable warehouse receipt are
not subject to the unpaid vendor’s lien.
Example: D purchased 1000 sacks of palay from X,
paid 50% and then deposited the same to W. W
issued a warehouse receipt to B. B negotiates to Y. X
wasn’t paid in full. Who has the better right X or Y?
X, the unpaid vendor insists that there is a
lien because D hasn’t paid in full the
purchase price.
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The law provides that the holder of the
negotiable warehouse receipt not subject to
the unpaid vendor’s lien. So between the
unpaid vendor and the holder of the
negotiable warehouse receipt, Y, the latter
(Y) has the better right. Y can compel W, the
warehouseman to deliver the goods to him,
even though the buyer-depositor has not
yet paid in full the purchase price in favour
of the vendor.
3. The holder of the negotiable warehouse receipt
acquires the direct obligation of the warehouseman
to hold the goods in his favor with or without notice
of the negotiation.
Can the warehouseman say, “I have not been told of
the negotiation. I have not been informed that the
receipt has been negotiation in your favour therefore
I am not bound to honor that assignment or
negotiation”?
NO whoever is the holder of the negotiable
warehouse receipt he acquires the direct
obligation of the warehouseman to hold the
goods in his favor with or without notice of
the negotiation of transfer to the
warehouseman.
SPCL13
Advantages of a Negotiable Warehouse Receipt
Obviously there are 2 basic parties to warehouse receipt, the
number of parties may increase depending whether or not
the receipt has been negotiated or assigned. The warehouse
man the one who acknowledges the receipt of the goods and
has the obligation to safe keep the goods pending delivery to
the person lawfully entitled to possession and the depositor
or his assignee or any person who acquired the instrument
from him either a transferee or a holder for value.
Take note the law says that the warehouse man is suppose to
deliver to the person lawfully entitled to possession and not
necessarily to the depositor so it is not only the case that the
depositor is entitled to the delivery, it is to be delivered to
the person lawfully entitled to possession.
Who is entitled to possession depends on the facts of each
case.
Example: when there is a warehouse receipt duly negotiated.
D negotiates a negotiable warehouse receipt to X and here
comes Y, a judgment creditor of D and Y has a writ of
execution to serve to the warehouse man and demand the
warehouse man to deliver to him all the properties
 Special Commercial Laws Notes by MARX and MON
(merchandise, goods and etc) of the depositor (D). In this case
who is the person lawfully entitled to possession?
It’s X (the holder for value of a negotiable warehouse
receipt), not Y (judgment creditor)
Suppose that the instrument is not negotiated or no
negotiation take place, who is the person lawfully entitled to
possession? Y (judgment creditor) or D (depositor)?
It is Y (judgment creditor) because there is no person
whose right is superior to him
Suppose there is a negotiable warehouse receipt but Y
(judgment Creditor) was able to get a TRO or an injunction to
stop the negotiation of the receipt, such that it could not
transfer from the depositor to anyone else. In this case who is
the person lawfully entitled to possession?
It is Y (judgment Creditor)
In what cases may the warehouse man not be compelled to
make delivery of the goods, what are the cases that will
justify in withholding the delivery of the goods?
• Non-fulfillment with the conditions set forth in Sec.
A par. A of the warehouse receipts law
o Conditions:
 Failure to satisfy warehouse man’s
lien
 Failure to surrender the negotiable
warehouse receipt
 Non-willingness to acknowledge
the receipt of the goods
• The warehouseman by himself or third person
acquires information that the depositor is not the
owner of the goods
• In case of conflicting claims on the same goods in the
possession of the warehouse man
o If there are conflicting claims, what are the
remedies available to the warehouseman?
 To file an action for interpleader to
compel the conflicting claimants to
litigate and prove who has the
better rights in the goods in the
possession of the warehouse man,
so the warehouseman out of
prudence should not take sides, he
should deliver to the person
adjudge by the court as the one
entitled to possession. The essence
of interpleader is to let the
conflicting claimants to litigate and
prove to the court who has the
better rights over the goods in the
possession of the warehouseman.
• If the goods is lost
• If the goods are hazardous in nature
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Example: the object of the deposit is a swine
afflicted with flu, so the warehouseman is justified to
slaughter the swine and he is not liable for as long as
he gives notice to the depositor and the reason is
the hazardous nature of the object
• If the receipt is negotiated back to the
warehouseman
Failure to satisfy warehouse man’s lien (condition 1)
What is this lien all about?
It consist of storage charges (the warehouse man
incurs storage charges in performing his obligation
to safe keep the goods). Storage charges have to be
satisfied first before the warehouseman can be
compelled to deliver. So if the claimant is not able to
pay or satisfy the lien, then the warehouseman is
justified to withhold to deliver. The lien is
possessory, it follows the property wherever it goes.
The lien consist of storage charges and other fees as
may be stipulated in the warehouse receipt. What
are the other fees that may be stipulated:
 Weighing fee
 Transportation
 Labor
 Insurance
 And other fees as may be indicated
in the warehouse receipt
What about storage charges whether or not it is stipulated, it
forms part of the warehouseman bill, because that is the
essence of a warehouse receipt transaction. The
warehouseman safe keeps in consideration of payment of
storage charge, whether or not stipulated, that is a lien in
favor of the warehouseman
Failure to surrender the negotiable warehouse receipt
(condition 2)
It is even an offense for the warehouseman to
deliver the goods without requiring to surrender of the
warehouse receipt. The warehouseman must require the
surrender of the receipt as a condition to deliver.
In one case, a farmer deposited sacks of palays with
the warehouseman. The warehouseman issued a receipt
unfortunately the farmer lost the warehouse receipt. The
farmer executes an affidavit of loss to request a replacement
but the warehouseman refuse to issue a replacement
warehouse receipt. The farmer is in great need of at least 1
sack of rice for sustenance but still the warehouseman
refuses to deliver unless he surrenders the instrument. The
farmer went to court to order the warehouseman to deliver
the sack of palay to the farmer for sustenance. This case
 Special Commercial Laws Notes by MARX and MON
shows how stringent the warehouseman can be because if he
does not requires to surrender the chances are the
warehouse receipt is negotiated to somebody else, thereby
giving rise to conflicting claims on the property or goods in his
possession.
One case:
It involves PNB and Noah’s Ark Sugar refinery. D purchase
sugar from Noah’s Ark and deposited back the sugar to
Noah’s Ark for Noah’s Ark issued a negotiable warehouse
receipt in favor of D.
Noah’s Ark is both manufacturer and warehouseman
D obtained a loan from PNB secured by a pledge or
assignment of right on the warehouse receipt. The loan was
not paid, PNB foreclosed the pledge, after foreclosure PNB
was the winning bidder. PNB demanded delivery of sugar
from Noah’s ark sugar refinery. Noah’s Ark refinery in defense
said it is yet to be paid the purchase of the sugar meaning D
did not pay on full the purchase price but was able to
negotiate by way of loan or pledge in favor of PNB.
First question is “Is Noah’s Ark sugar refinery
(warehouseman) justified in withholding the delivery of
sugar?”
No, the non-payment of the purchase price is not
one of the cases that justifies withholding of
delivery. It does not matter if the purchase price
have not been paid, the warehouse man should
delivery to the holder of the warehouse receipt
without prejudice to his right to enforce payment of
the purchase price against the buyer.
Second Question: can the warehouseman collect the lien?
the lien of the warehouseman may be enforced
judicially or extra-judicially. Extra-judicially by
refusing to give back possession. Remember that the
lien is possessory in nature, it follows the property
wherever it goes, it attaches to the property. Once
possession is gone, then the lien is lost.
So the first way or mode for you to obtain the lien is
to retain the goods, withhold delivery.
The lien may be lost:
o if possession is given up voluntarily
o if the warehouseman refuses without just
cause to deliver the goods.
In this case, PNB made a bad claim against Noah’s
Ark to delivery the goods. Therefore Noah’s Ark is
not justified in withholding delivery, so it lost the lien
over the goods.
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Not just because the lien is lost does not mean that
payment of the lien or storage charges cannot be
enforce in some other ways. So retaining possession
is just one of the remedies available to the
warehouseman to be paid the lien, but if the lien is
lost there are various remedies for which the
warehouseman can enforce payment. The remedies
are:
Judicial remedies
Action for collection and other
remedies available to the creditor
against a debtor based on similar
practices and circumstances like
Action Pauliana and Action
Reinvidicatoria
PNB may claim delivery. Noah’s ark lost the lien
because the refusal was unjustified but Noah’s Ark
can enforce payment of storage charges
Third Question: who will pay the storage charges? PNB or the
depositor?
There is no law that obligates PNB (pledge) to
assume the obligation of the D (pledgor) for storage
charges. So the D (pledgor) must pay for the storage
charges incurred before foreclosure. But after
foreclosure when PNB is already the owner, then
PNB has to pay the storage charges
Negotiable warehouse receipt- if by its terms the goods are
deliverable to the order of a specified person or bearer
Non-negotiable warehouse receipt- if it is deliverable to a
specified person
How to negotiate a warehouse receipt, it depends if it is
negotiable or non-negotiable
• If it is non-negotiable by simple assignment or
transfer, the transferee acquiring the same right as
the transferor and subject with the same defenses
available when it was assigned.
• If it is negotiable, it depends on whether deliverable
to order or deliverable to bearer. In the same way
that a negotiable instrument may be negotiated.
o If it is deliverable to order, it can be
negotiated by indorsement and delivery.
o If it is deliverable to bearer by mere delivery
 Special Commercial Laws Notes by MARX and MON
D (depositor) deposited a computer with W (warehouseman).
W issues a warehouse receipt deliverable to D or bearer. W
hand it over the receipt in favor of X (messenger of D). X in
breach of faith negotiated the same in favor of Y. who has the
better right? Y or D?
Y, because it is a negotiable warehouse receipt being
deliverable to bearer and being deliverable to bearer
it can be negotiated by mere delivery. Y assuming
that he had no knowledge of any infirmities of the
instrument is entitled to the goods
Will the answer be the same is the receipt is deliverable to the
order of D? Who has the better right? Y or D?
D, because if the receipt is deliverable to the order,
how can it be negotiated by indorsement plus
delivery. Since there is no indorsement in the part of
D, no title was transferred in favor of Y.
Another scenario:
D stole hundreds sacks of palay from X. D deposits to W and
W issues a warehouse receipt in favor of D. D negotiates to Y
(holder for value). Who has the better right in this case
between Y and X?
If the owner of goods did not deposit the same in
the warehouseman, his right cannot be defeated by
anyone not even by a holder for value of a
negotiable warehouse receipt. D transfer no title.
The concept of a holder in course does not apply in
warehouse receipt.
Distinguish between the first scenario and second scenario
First scenario- D, as the lawful owner, deposited and
there was a breach in the negotiation of the
instrument, that breach in negotiation does not
impair the rights or interest of the holder of the
negotiable warehouse receipt for as long as he
acquires the same for value and in good faith.
Second Scenario- the owner did not deposit, the
object was stolen. So his rights cannot be defeated
by anyone even by the holder of the negotiable
warehouse receipt.
W issues a warehouse receipt in favor of D covering some
staples. D negotiates it to X. X negotiates it with Y. Y presents
the instrument to the warehouseman, warehouseman refuses
to deliver, can Y run after D and X?
No, because in a warehouse receipt transaction
unlike in the negotiation of a negotiable instrument,
the intermediate parties or indorsers do not warrant
61 | P a g e
fulfillment of the obligation of the warehouseman.
They do not warrant delivery by the warehouseman.
Are there cases were they can be held liable?
They can be held liable if there is a breach
of warranty. By negotiating the warehouse
receipt, they (indorsers) assume certain
warranties. The warranties are:
• They have legal title to the
instrument
Example: Stolen instrument - liable
• The instrument is genuine
Example: forged instrument -
liable
• They do not have information that
the instrument is worthless
Example: If they are aware that
the warehouse man is insolvent at
the time of negotiation - liable
• The goods are mechantable or fit
for transaction
Whether or not the holder can sue or charge the indorsers of
a warehouse receipt?
It depends on the nature of the action:
• if it is simply an action to enforce delivery or
fulfillment of the obligation of the
warehouseman, then the indorsers are not
liable because they do not warrant
fulfillment by the warehouseman of its
obligation to deliver the goods
• If the action stems from the breach of
warranty that the indorsers assumed under
the law, then they can be made liable in
case there is a breach of warranty
What are the cases for which the warehouseman may be held
liable?
• Failure to exercise due diligence in the preservation
and safe keeping of the goods in possession
Can the warehouseman exempt himself
from the obligation of exercising due
diligence to preserve the goods in his
possession?
No, such stipulation is null and
void, it is against public policy
• Failure to indicate the word non-negotiable, if it is
non-negotiable warehouse receipt
• Failure to notify the depositor in case of sale of the
goods for being hazardous in nature
• Issuance of a receipt not back up with delivery of
goods, issuing a receipt without receiving the goods
• Issuance of a receipt containing false statement
• Failure to require the surrender of the warehouse
receipt if it is negotiable
 Special Commercial Laws Notes by MARX and MON

Which of the acts or omissions give rise to criminal liability?

• Issuance of a receipt not back up with delivery of
goods, issuing a receipt without receiving the goods
• Issuance of a receipt containing false statement
• Failure to require the surrender of the warehouse
receipt if it is negotiable

The first 3 only give rise to civil liability

62 | P a g e
 Special Commercial Laws Notes by MARX
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