BANKING - IBL-Reviewer

July 29, 2017 | Author: viva_33 | Category: Pawnbroker, Securities (Finance), Banks, Loans, Cheque
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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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BANKING LAW I I. GENERAL CONCEPTS A. CONCEPT OF BANKING a. Definition: Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits (Sec. 3.1, GBL) b. Elements: i. Engaged in lending of funds ii. Obtained in the form of deposits iii. From the public, which shall mean 20 or more persons (Sec. 8.2, GBL) REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19 SCRA 58 (1967) DOCTRINE: A bank is a moneyed institute founded to facilitate the borrowing, lending and safekeeping of money and to deal in notes, bills of exchange and credits. An investment company, which lends out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank. FACTS This is a quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security and Acceptance Corporation for allegedly engaging in banking operations without the authority required therefor by the General Banking Act (Republic Act No. 337).

campaign undertaken by the corporation, the same had managed to induce the public to open 59,463 savings deposit accounts. ISSUE Whether the corporation is engaged in banking RULING YES. It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank has been defined as: ... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, 348] founded to facilitate the borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46). Moreover, it has been held that: An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.) ... any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised. (MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30.)

Security Credit and Acceptance Corporation is a duly registered corporation with the SEC. It’s articles of incorporation authorize it to o engage primarily in financing agricultural, commercial and industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation.

Accordingly, defendant-corporation has violated the law by engaging in banking without securing the administrative authority required in Republic Act No. 337.

The Superintend of Banks of the Central Bank of the Philippines thru its legal counsel rendered an opinion that Security Credit and Acceptance Corporation is a banking institution within the purview of Republic Act No. 337. Central Bank advised the corporation to comply with the requirements of the General Banking Act.

That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby.

Notwithstanding, the corporation, as well as the members of its Board of Directors and the officers of the corporation, continued performing the functions and activities which had been declared to constitute illegal banking operations; the corporation established 74 branches in principal cities and towns throughout the Philippines; that through a systematic and vigorous

CENTRAL BANK v MORFE, 20 SCRA 507 (1967) DOCTRINE: The law requiring compliance with certain requirements before anybody can engage in banking obviously seeks to protect the public against actual, as well as potential, injury.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 FACTS First Mutual Savings and Loan Organization (Organization) is a registered non-stock corporation, whose main purpose is “to encourage x x x and implement savings and thrift among its members, and to extend financial assistance in the form of loans” to them. In 1962, the Central Bank Legal Department rendered an opinion finding the Organization as a banking institution, falling within the purview of the Central Bank Act. Hence, it applied for a search warrant with the Municipal Court of Manila against the Organization, alleging that it was engaged in illegal banking activities, “by receiving deposits of money for deposit, disbursement, safekeeping or otherwise or transacts the business of a savings and mortgage bank and/or building and loan association x x x without having first complied with the provisions of RA 337. Judge Cancino issued the warrant applied for there being “good and sufficient reasons to believe” that the Organization has under its control the articles/items subject of the offense complained of. On the same day, the Organization commenced an action with the CFI of Manila against the Municipal Court, the sheriff, the Manila Police Department and the Central Bank to annul the search warrant on the ground that it was issued with GADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order in favor of the Organization. Accordingly, the Bank moved for reconsideration but was denied and commenced the present action. ISSUE Whether the Organization is a banking institution within the purview of the Central Bank Act RULING YES. The records suggested clearly that the transactions objected to by the Central Bank constitute the general pattern of the business of the Organization. Indeed, the main purpose thereof, according to its By-Laws, is “to extend financial assistance, in the form of loans, to its members, with funds deposited by them. It is true that such funds are referred to as their “savings” and that the depositors thereof are designated as “members,” but, even a cursory examination of said documents will readily show that anybody can be a depositor and thus be “participating member.” In other words, the Organization is open to the public for deposit accounts, and the funds so raised may be lent by the Organization. Moreover, the power to dispose of said funds is placed under the exclusive authority of the “founding members,” and “participating members” are

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expressly denied the right to vote or be voted for, their privileges and benefits being limited to those, which the BoT may in its discretion, determine from time to time. Thus, the membership of the “participating members” is purely nominal in nature. This situation is fraught, precisely, with the very dangers or evils, which RA 337 seeks to forestall, by exacting compliance with the requirements of said Act, before the transactions in question could be undertaken. BANAS v ASIA PACIFIC FINANCE CORPORATION, 343 SCRA 527 (2000) DOCTRINE: An investment company refers to any issuer, which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities. What is prohibited by law is for investment companies to lend funds obtained from the public through receipts of deposit, which is a function of banking institutions. FACTS Teodoro Banas issued a Promissory Note (P.N.), amounting to 390k payable in installments, in favor of C. G. Dizon Construction. Later, Dizon Construction endorsed the P.N to Asia Pacific Finance Corporation, an investment house. As security for the endorsement, Dizon Construction made a Chattel Mortgage over 3 heavy equipment units. As additional security, Cenen Dizon, president of Dizon Construction, executed a Continuing Undertaking, bounding himself to pay the obligation jointly and severally. At first, Dizon Construction complied with the installments. However, it defaulted in its payment of the remaining installments. Asia Pacific sued Banas and Dizon Construction for payment of the P.N.. Banas and Dizon Construction argue that the transaction was never intended to be legal but a subterfuge to conceal the loan of 390k with usurious interest. They both claim that Asia Pacific proposed the scheme with them involved because Asia Pacific could not engage in banking business. RTC ruled in favor of Asia Pacific. CA affirmed the decision. ISSUE Whether the transaction violated banking laws, hence null and void RULING NO, it did not violate banking laws. An investment company refers to any issuer which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities. securities include commercial papers evidencing indebtedness of any person, financial or non-financial entity,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as promissory notes. The transaction between the two was a purchase of receivables at a discount and not a loan. Such act is within the purview of the functions of an investment company. Moreover, Sec 2 of the General Banking Act provides, Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in the lending of funds obtained from the public through the receipt of deposits of any kind, and all entities regularly conducting such operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws What is prohibited by law is for investment companies to lend funds obtained from public through receipts of deposit. However, the funds obtained by Asia Pacific have not been shown to have been obtained from the public through deposits. Thus, no banking laws were violated. Upon further inspection of the 3 documents (Promissory Note / Chattel Mortgage / Continuing Undertaking) , the documents failed to prove the theory that the transaction was a loan. Petitioners are still liable for the unpaid balance of the P.N.

B. BANKING DISTINGUISHED FROM QUASI-BANKING a. Elements of Quasi-Banking: "Quasi-Banks" shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for purposes of relending or purchasing of receivables and other obligations (Sec. 4, Par. 3, GBL) i. Borrowing of funds for borrower’s own account ii. From 20 or more lenders at any one time iii. Through issuance, endorsement or assignment with recourse of acceptance of deposit substitutes (Sec. 95, NCBA) iv. For purposes of relending or purchasing of receivables and other obligations

b. Requirement of Separate License: No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

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The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasibanking functions and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or other special laws (Sec. 6, Par. 1-2, GBL) C. BANKS DISTINGUISHED INSTITUTIONS

FROM

OTHER

FINANCIAL

a. Investment Houses: Sec. 2-3, PD 129 Section 2. Scope. Any enterprise, which engages in the underwriting of securities of other corporations, shall be considered an "Investment House" and shall be subject to the provisions of this Decree and of other pertinent laws. Nothing in this Decree shall be understood to preclude other enterprises from engaging in the mere buying and selling of short-term securities of other persons or enterprises. Section 3. Definitions. For the purpose of this Decree, unless the context otherwise indicates, the following definition of terms are hereby adopted: (a) "Underwriting" is the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. (b) "Securities" are written evidences of ownership, interest, or participation, in an enterprise, or written evidences of indebtedness of a person or enterprise. It includes, but is not limited to the instruments enumerated in Section 2 of the Securities Act (Commonwealth Act No. 83, as amended). b. Financing Companies: "Financing companies," hereinafter called companies, are corporations, or partnerships, except those regulated by the Central Bank of the Philippines, the Insurance Commissioner and the Cooperatives Administration Office, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, either by discounting or factoring

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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commercial papers on accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by leasing of motor vehicles, heavy equipment and industrial machinery, business and office machine and equipment, appliances and other movable property (Sec. 3(a), RA 5980, as amended by RA 8556)

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g. Pawnshops: "Pawnshop" shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawnbrokerage (Sec. 3, PD 114) FIRST PLANTERS PAWNSHOP, INC. v CIR, 560 SCRA 606 (2008)

c.

d.

Investment Companies: "Investment Company" means any issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities(Sec. 4, RA 2629) Non-Stock Savings and Loans Associations: Non-stock savings and loan association shall mean a non-stock, non-profit corporation engaged in the business of accumulating the savings of its members and using such accumulations for loans to members to service the needs of households by providing long term financing for home building and development and for personal finance (Sec. 3, RA 8367)

e. Cooperatives: A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles (Art. 3, RA 6938) A cooperative bank is one organized by the majority shares of which is owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. The term "cooperative bank" shall include cooperative rural banks (Art. 100, RA 6983) f.

Insurance Companies: The term "doing an insurance business" or "transacting an insurance business", within the meaning of this Code, shall include (a) making or proposing to make, as insurer, any insurance contract; (b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code (Sec. 2, PD 612)

DOCTRINE: A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as “a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage.” That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. FACTS

In

a Pre-Assessment Notice, petitioner was informed by the BIR that it has an existing tax deficiency on its VAT and DST liabilities for the year 2000. The deficiency assessment was at P541,102.79 for VAT and P23,646.33 for DST. Petitioner protested the assessment for lack of legal and factual bases. Petitioner subsequently received a Formal Assessment Notice, directing payment of VAT deficiency in the amount of P541,102.79 and DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest. Petitioner filed another protest but was denied. Petitioner then filed a petition for review with the Court of Tax Appeals (CTA) but it was denied. Petitioner later sought reconsideration from the CTA En Banc but was still denied thus this case. First Planters Pawnshop, Inc. (petitioner) contests the deficiency valueadded and documentary stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the year 2000. The core of petitioner's argument is that it is not a lending investor within the purview of Section 108(A) of the National Internal Revenue Code (NIRC), as amended, and therefore not subject to value-added tax (VAT). Petitioner also contends that a pawn ticket is not subject to documentary stamp tax (DST) because it is not proof of the pledge transaction, and even assuming that it is so, still, it is not subject to tax since a documentary stamp tax is levied on the document issued and not on the transaction.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 ISSUE Whether Petitioner is liable for the assessed VAT and DST deficiency RULING The tax liability shall be based on the tax treatment of pawnshops. The Court has ruled that they shall be treated as non-bank financial intermediaries and reasons as follows: R.A. No. 337, as amended, or the General Banking Act characterizes the terms banking institution and bank as synonymous and interchangeable and specifically include commercial banks, savings bank, mortgage banks, development banks, rural banks, stock savings and loan associations, and branches and agencies in the Philippines of foreign banks. R.A. No. 8791 or the General Banking Law of 2000, meanwhile, provided that banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas in the classification of banks. Financial intermediaries, on the other hand, are defined as “persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others.” It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of their business activities partakes that of a financial intermediary in that its principal function is lending. A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as “a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage.” That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of theBangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. The Manual includes pawnshops in the list of non-bank financial intermediaries, Coming now to the issue at hand - Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from nonbank financial intermediaries being specifically deferred by law,[34] then

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petitioner is not liable for VAT during these tax years. But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be. Regarding the liability on DST, the court ruled that petitioner is liable for said tax. The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, in which it was ruled that the subject of DST is not limited to the document alone. Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident thereto, is also subject to DST. In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents, which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioner’s nebulous claim that it is not subject to DST is without merit.

D. NATURE OF BANKING BUSINESS The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy (Sec. 2, GBL) a. Vital Role in Economy SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992) DOCTRINE: As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. FACTS Simex was a food exporter that drew stock in the Philippines then sold it abroad. It deposited 100k in Traders Royal Bank , raising the balance to P190,380.74, then later issued checks that were suddenly dishonored – California Manufacturing and others issued demand letters for the dishonored check. Simex’s credit line was canceled because of the dishonored check – Traders bank said the deposit of 100k was not credited, the error was rectified but Simex filed a case against the bank and demanded reparation for gross and wanton negligence: not met – complaint

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 for 1m moral and 500k exemplary damages + 25% atty. fees and costs – CFI: moral and exemplary damages not called for, but nominal damages 20k plus 5k atty. fees – affirmed by CA ISSUE Was there Gross negligence in not crediting the deposit? RULING YES. Banking system: indispensable institution in modern world; plays vital role in economic life of every civilized nation. – Trusted and active associate – depositor expects bank to treat account with utmost fidelity, must record each transaction accurately – Fiduciary nature of relationship – Traders was remiss in duty – 20k moral damages, 50k exemplary (by way of example or correction for the public good) Subject to Reasonable Regulation by the State CENTRAL BANK OF THE PHILIPPINES v CA, 208 SCRA 652 (1992) DOCTRINE: It is the Government’s responsibility to see to it that the financial interests of those who deal with banks and banking institutions, as depositors or otherwise, are protected—this task is delegated to the Central Bank, which is authorized to administer monetary, banking and credit system in the Philippines. FACTS During the regular examination of the Producers Bank of the Philippines, Central Bank examiners stumbled upon some highly questionable loans which had been extended by the PBP management to several entities. Upon further examination, it was discovered that these loans, totalling approximately P300 million, were "fictitious" as they were extended, without collateral, to certain interests related to PBP owners themselves. Said loans were deemed to be anomalous particularly because the total paid-in capital of PBP at that time was only P 140.544 million. This means that the entire paid-in capital of the bank, together with some P160 million of depositors' money, was utilized by PBP management to fund these unsecured loans. Several blind items about a family-owned bank in Binondo which granted fictitious loans to its stockholders appeared in major newspapers. These news items triggered a bank-run in PBP which resulted in continuous overdrawings on the bank's demand deposit account with the Central Bank. The Monetary Board (MB), pursuant to its authority under Section 28-A of R.A. No. 265 and by virtue of MB Board Resolution No. 164, placed PBP under conservatorship. The Monetary Board gave PBP several opportunities to submit a viable rehabilitation plan in order to salvage the bank and lift the conservatorship. PBP failed to respond to the notices of the Monetary Board, hence the

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conservatorship was maintained. Later on, PBP filed an action for damages against CB and MB. The suit prayed for the lifting of the conservatorship and payment of damages allegedly suffered by PBP due to the malicious and untimely declaration of conservatorship. It also prayed for a preliminary injunction /TRO against the conservatorship. RTC granted the injunction. ISSUE Whether the conservatorship was proper HELD YES. It must be stressed in this connection that the banking business is properly subject to reasonable regulation under the police power of the state because of its nature and relation to the fiscal affairs of the people and the revenues of the state. 55 Banks are affected with public interest because they receive funds from the general public in the form of deposits. Due to the nature of their transactions and functions, a fiduciary relationship is created between the banking institutions and their depositors. Therefore, banks are under the obligation to treat with meticulous care and utmost fidelity the accounts of those who have reposed their trust and confidence in them. It is then Government's responsibility to see to it that the financial interests of those who deal with banks and banking institutions, as depositors or otherwise, are protected. In this country, that task is delegated to the Central Bank which, pursuant to its Charter, 57 is authorized to administer the monetary, banking and credit system of the Philippines. Under both the 1973 and 1987 Constitutions, the Central Bank is tasked with providing policy direction in the areas of money, banking and credit; corollarily, it shall have supervision over the operations of banks. 58 Under its charter, the CB is further authorized to take the necessary steps against any banking institution if its continued operation would cause prejudice to its depositors, creditors and the general public as well. This power has been expressly recognized by this Court. In Philippine Veterans Bank Employees UnionNUBE vs. Philippine Veterans Bank, 59 this Court held that: . . . Unless adequate and determined efforts are taken by the government against distressed and mismanaged banks, public faith in the banking system is certain to deteriorate to the prejudice of the national economy itself, not to mention the losses suffered by the bank depositors, creditors, and stockholders, who all deserve the protection of the government. The government cannot simply cross its arms while the assets of a bank are being depleted through mismanagement or irregularities. It is the duty of the Central Bank in such an event to step in and salvage the remaining resources of the bank so that they may not continue to be dissipated or plundered by those entrusted with their management.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Strikes and Lockouts The banking industry is hereby declared as indispensable to the national interest and, not withstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same (Sec. 22, GBL) When, in his opinion, there exists a labor dispute causing or likely to cause a strike or lockout in an industry indispensable to the national interest, the Secretary of Labor and Employment may assume jurisdiction over the dispute and decide it or certify the same to the Commission for compulsory arbitration. Such assumption or certification shall have the effect of automatically enjoining the intended or impending strike or lockout as specified in the assumption or certification order. If one has already taken place at the time of assumption or certification, all striking or locked out employees shall immediately return-to-work and the employer shall immediately resume operations and readmit all workers under the same terms and conditions prevailing before the strike or lockout. The Secretary of Labor and Employment or the Commission may seek the assistance of law enforcement agencies to ensure compliance with this provision as well as with such orders as he may issue to enforce the same. In line with the national concern for and the highest respect accorded to the right of patients to life and health, strikes and lockouts in hospitals, clinics and similar medical institutions shall, to every extent possible, be avoided, and all serious efforts, not only by labor and management but government as well, be exhausted to substantially minimize, if not prevent, their adverse effects on such life and health, through the exercise, however legitimate, by labor of its right to strike and by management to lockout. In labor disputes adversely affecting the continued operation of such hospitals, clinics or medical institutions, it shall be the duty of the striking union or locking-out employer to provide and maintain an effective skeletal workforce of medical and other health personnel, whose movement and services shall be unhampered and unrestricted, as are necessary to insure the proper and adequate protection of the life and health of its patients, most especially emergency cases, for the duration of the strike or lockout. In such cases, therefore, the Secretary of Labor and Employment may immediately assume, within twenty four (24) hours from knowledge of the occurrence of such a strike or lockout, jurisdiction over the same or certify it to the Commission for compulsory arbitration. For this purpose, the contending parties are strictly enjoined to comply with such orders, prohibitions and/or injunctions as are issued by the Secretary of Labor and Employment or the Commission, under pain of immediate disciplinary action, including dismissal

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or loss of employment status or payment by the locking-out employer of backwages, damages and other affirmative relief, even criminal prosecution against either or both of them. The foregoing notwithstanding, the President of the Philippines shall not be precluded from determining the industries that, in his opinion, are indispensable to the national interest, and from intervening at any time and assuming jurisdiction over any such labor dispute in order to settle or terminate the same (Art. 263 (g), Labor Code) b. Fiduciary Nature of Banking Business i. Degree of Diligence Required SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992) DOCTRINE: As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. FACTS Simex was a food exporter that drew stock in the Philippines then sold it abroad. It deposited 100k in Traders Royal Bank , raising the balance to P190,380.74, then later issued checks that were suddenly dishonored – California Manufacturing and others issued demand letters for the dishonored check. Simex’s credit line was canceled because of the dishonored check – Traders bank said the deposit of 100k was not credited, the error was rectified but Simex filed a case against the bank and demanded reparation for gross and wanton negligence: not met – complaint for 1m moral and 500k exemplary damages + 25% atty. fees and costs – CFI: moral and exemplary damages not called for, but nominal damages 20k plus 5k atty. fees – affirmed by CA ISSUE Was there Gross negligence in not crediting the deposit? RULING YES. Banking system: indispensable institution in modern world; plays vital role in economic life of every civilized nation. – Trusted and active associate – depositor expects bank to treat account with utmost fidelity, must record each transaction accurately – Fiduciary nature of relationship – Traders was remiss in duty – 20k moral damages, 50k exemplary (by way of example or correction for the public good)

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 BANK OF THE PHILIPPINE ISLANDS v IAC, 206 SCRA 408 (1992) DOCTRINE: The is no merit in the argument that a bank should not be considered negligent, much less held liable for damages on account of the inadvertence of its bank employees for Article 1173 of the Civil Code only requires it to exercise the diligence of a good father of the family. While the bank’s negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to the depositors for which they are entitled to reasonable moral damages. FACTS The spouses Arthur and Vivienne Canlas opened a joint account in CBTC Q.C. with an initial deposit of P2,250. Before that, Arthur Canlas had an existing separate personal checking account there. When they opened this account, the "new accounts" teller of the bank pulled out from the bank's files the old signature card of Arthur Canlas for use as I D and reference. By mistake, she placed the old personal account number of Arthur Canlas on the deposit slip for the new joint checking account of the spouses so that the initial deposit of P2,250 for the joint checking account was miscredited to Arthur's personal account. The spouses subsequently deposited other amounts in their joint account. When Vivienne Canlas issued a check for Pl,639.89 in April 1977 and another check for P1,160.00 on June 1, 1977, one of the checks was dishonored by the bank for insufficient funds and a penalty of P20 was deducted from the account in both instances. Thereafter, the spouses filed a case for damages agaisnt the bank for serious anxiety, embarrassment and humiliation by reason of the dishonor of the checks. The RTC and the IAC found that the bank had been seriously negligent and awarded damages to the spouses Canlas. ISSUE Whether the mistake of the teller can be considered as serious negligence entitling the spouses Canlas to an award of damages. RULING YES. There is no merit in CBTC's argument that it was only required to exercise the diligence of a good father of family. The fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of it in handling the accounts entrusted to its care is a great responsibility. "In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos

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or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation." The bank is not expected to be infallible but it must bear the blame for not discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass through a battery of bank personnel whose duty it is to check and countercheck them for possible errors. Apparently, the officials and employees tasked to do that did not perform their duties with due care, as may be gathered from the testimony of the bank's lone witness, Antonio Enciso, who casually declared that "the approving officer does not have to see the account numbers and all those things. Those are very petty things for the approving manager to look into." Unfortunately, it was a "petty thing," like the incorrect account number that the bank teller wrote on the initial deposit slip for the newly-opened joint current account of the Canlas spouses, that sparked this half-a-million-peso damage suit against the bank. While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to the private respondents for which they are entitled to recover reasonable moral damages. ii.

When Utmost Diligence Required 1. In dealing with Accounts of Depositors

PHILIPPINE BANKING CORPORATION v CA, 419 SCRA 487 (2004) DOCTRINE: Sec. 2 of RA 8791 (GBL) expressly imposes a fiduciary duty on the banks when it declares that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.” The fiduciary relationship means that the bank’s obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. FACTS Florencio Pagsaligan, a close friend and officer of the bank, persuaded Leonilo Marcos to deposit money with Philippine Banking Corporation (BANK). Marcos yielded and made a time deposit with the Bank on two occasions.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Later, Marcos wanted to withdraw from the Bank to buy material for his construction business. However, the bank convinced him to keep his time deposit and instead, open several domestic letters of credit. Trusting the bank and Pagsaligan, he again yielded. Marcos executed 3 Trust Receipt Agreements totaling 851k. He deposited 30% of the amount of Trust Agreement as marginal deposit. He believed that the remaining 70% would be credited from his time deposit and accumulated interest. However, the bank did not offset his time deposit due to an alleged promissory note amount to 500k. The Bank demanded for the balance of the Trust Agreement from him. Due to failure to pay, several penalties and interest accumulated against Marcos. Marcos now files a complaint against the Bank. In their defense, the bank argues that the complaint was only an attempt to avoid liability under several trust receipt agreements that were subject of a criminal complaint. The RTC ruled in favor of Marcos. The CA modified the decision only by reducing the damages. ISSUE Whether the Bank is liable for damages RULING YES, the bank is liable. The bank is liable on the ground of offsetting Marcos’s time deposit with a fictitious promissory note. The Bank failed to present the original copy of the note. They only presented machine copies of the duplicate. But these copies have no evidentiary value, contradicting the Best Evidence Rule. Sec 2 of the General Banking law of 2000 expressly imposes the fiduciary duty of on banks. The fiduciary nature of banking requires high standards of integrity and performance. Although the GBL only took effect in 2000, jurisprudence has already imposed the same high standard of diligence from banks at the time the Bank transacted with Marcos. This fiduciary relationship means that the bank’s obligation to observe high standards of integrity is deemed written into every deposit agreement between a bank and its depositor. The business of banking is imbued with public interest. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. As its depositor, Marcos had the right to expect the bank was accurately recording his transactions. He also had a right to withdraw the amount in his time deposit upon maturity. Due to the bank’s failure to

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produce the original copies of the promissory note and ledges, it failed to treat Marcos’s account with meticulous care. Whether it was Pagsaligan who caused such fictitious loan agreement, it will not excuse the bank from its obligation to return the correct amount to Marcos. As stated before, a bank is liable for the wrongful acts of its officers done in the interest of the bank or in their dealings as bank representatives but not for acts outside the scope of their authority. BANK OF THE PHILIPPINE ISLANDS v CASA MONTESSORI INTERNATIONALE, 430 SCRA 261 (2004) DOCTRINE: Since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general, the highest degree of diligence is expected and high standards of integrity and performance are even required of it. FACTS CASA Montessori International (CASA for brevity) opened a current account with defendant BPI, with CASA’s President Ms. Ma. Carina C. Lebron as one of its authorized signatories. In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been encashed by a certain Sonny D. Santos since 1990 in the total amount of P782,000.00 It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt Branch [was] a fictitious name used by third party defendant Leonardo T. Yabut who worked as external auditor of CASA. Third party defendant voluntarily admitted that he forged the signature of Ms. Lebron and encashed the checks. "The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded that the handwritings thereon compared to the standard signature of Ms. Lebron were not written by the latter On March 4, 1991, respondent filed the herein Complaint for Collection with Damages against defendant bank praying that the latter be ordered to reinstate the amount of P782,500.007 in the current and savings accounts of the plaintiff with interest at 6% per annum. CA apportioned the loss between BPI and CASA. The appellate court took into account CASA’s contributory negligence that resulted in the undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total amount claimed; and CASA, the other half. It also disallowed attorney’s fees and moral and exemplary damages. ISSUE Were any of the parties negligent and therefore precluded from setting up forgery as a defense? Whether BPI is liable?

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 RULING BPI is solely liable. (skipped the Negotiable Instruments part- it was established that there was indeed a forgery) xxx Having established the forgery of the drawer’s signature, BPI -- the drawee -- erred in making payments by virtue thereof. The forged signatures are wholly inoperative, and CASA -- the drawer whose authorized signatures do not appear on the negotiable instruments -- cannot be held liable thereon. Neither is the latter precluded from setting up forgery as a real defense. We have repeatedly emphasized that, since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is "under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.” BPI contends that it has a signature verification procedure, in which checks are honored only when the signatures therein are verified to be the same with or similar to the specimen signatures on the signature cards. Nonetheless, it still failed to detect the eight instances of forgery. Its negligence consisted in the omission of that degree of diligence required78 of a bank. It cannot now feign ignorance, for very early on we have already ruled that a bank is "bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged."79 In fact, BPI was the same bank involved when we issued this ruling seventy years ago.

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with IBAA (later merged with PCI) and cleared by CB – proceeds never reached CIR – Ford forced to make 2nd payment to CIR which was received – check was a crossed check for ‘payee’s account only’ – Ford wrote separate demand letters to the banks - both banks refused to pay – NBI discovered that Godofredo Rivera, General Ledger Accountant of Ford recalled the check, supposedly because there was a computation error – Rivera instructed PCI Bank to replace the check with 2 manager’s checks – syndicate members deposited MCs with Pacific Banking Corp. – Rivera could not be found, “fugitive from justice” – TC: Both banks liable, IBAA (PCI) should reimburse Citi – CA: only IBAA (PCI) liable Action #2: Ford drew Citibank checks in 1978 (P5.851m) and 1979 (P6.311m) payable to CIR for percentage taxes – both crossed checks - never reached CIR – though receipts were issued, considered by BIR as “fake and spurious” – Ford paid BIR again – Godofredo Rivera (the legend returns) as Ledger Accountant prepared the check - delivered it to Remberto Castro, pro-manager of PCIB San Andres – Castro and Dulay, an assistant manager of the Meralco Branch of PCI, opened a account in the name of a fictitious “Reynaldo Reyes” – deposited a worthless Bank of America check in the same amount as the Ford check – replaced the worthless check with the Ford check for clearing – Reynaldo Reyes account was credited with amount – same procedure with 2nd check – Castro then distributed checks drawn from Reynaldo Reyes account to other conspirators – RTC held Citibank liable, absolved PCI – CA: affirmed ISSUE Were the banks negligent?

2. In Selection and Supervision of Employees PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK v CA, 350 SCRA 446 (2001) DOCTRINE: Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. By the very nature of their work, the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. FACTS Ford Philippines instituted actions against Citibank (drawee bank) and PCI Bank (collecting bank) – Action #1: Ford drew and issued a Citibank check for P4.7m in 1977 in favor of the CIR for manufacturer’s sales tax – deposited

RULING YES. The direct perpetrators are fugitives – present parties must bear the burden of loss – although employees of Ford initiated the transactions, their actions are not the proximate cause of encashing the checks – BoD of ford did not confirm Rivera’s recall of the check – PCI neglected to verify authority of Rivera – crossed check is a warning that it should be deposited only in CIR’s account – PCI liable for 4.7m check – although no conscious participation, PCI is responsible frauds perpetrated by its officers – Citibank should have scrutinized the checks: no clearing stamps, no initials – both banks negligent in selection and supervision of their employees for 2nd and 3rd check – equally liable for the loss – by very nature of banking business, degree of responsibility, care and trustworthiness of bank employees is far greater than those of ordinary clerks and employees – banks are expected to exercise the highest degree of diligence in the selection and supervision of employees.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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3. To be Mortgagees in Good Faith CRUZ v BANCOM FINANCE CORPORATION, 379 SCRA 490 (2002) DOCTRINE: Mortgagee-banks, unlike private individuals, are expected to exercise greater care and prudence in their dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations. FACTS Edilberto Cruz and Simplicio Cruz offered to sell their parcel of land to Norma Sulit. In order to facilitate the sale, the Cruz’s executed a deed of sale in favor of Candelaria Sanchez, but no consideration was paid. On the same day Candelaria Sanchez conveyed the land to Norma Sulit. Unknown to the plaintiffs, Norma managed to obtain a loan from Bancom secured by a mortgage over the land now titled in her name. Norma defaulted on her obligations to the plaintiffs and later on also defaulted on her payments with Bancom. The land was foreclosed and auctioned, Bancom was the highest bidder. Cruz then filed for reconveyance of the land. While Bancom claimed priority right over Cruz, alleging it was a mortgagee in good faith. ISSUE Whether Bancom is a mortgagee in good faith HELD NO. As a general rule, every person dealing with registered land may safely rely on the correctness of the certificate of title and is no longer required to look behind the certificate in order to determine the actual owner. Respondent, however, is not an ordinary mortgagee; it is a mortgageebank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations. In Rural Bank of Compostela v. CA, we held that a bank that failed to observe due diligence was not a mortgagee in good faith. In the words of the ponencia: “x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.

“Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, for their business is one affected with public interest, keeping in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence which amounts to lack of good faith by which they would be denied the protective mantle of the land registration statute, Act [No.] 496, extended only to purchasers for value and in good faith, as well as to mortgagees of the same character and description.” (Citations omitted) Recently, in Adriano v. Pangilinan, we said that the due diligence required of banks extended even to persons regularly engaged in the business of lending money secured by real estate mortgages. The evidence before us indicates that respondent bank was not a mortgagee in good faith. First, at the time the property was mortgaged to it, it failed to conduct an ocular inspection. Judicial notice is taken of the standard practice for banks before they approve a loan: to send representatives to the premises of the land offered as collateral and to investigate the ownership thereof. As correctly observed by the RTC, respondent, before constituting the mortgage over the subject property, should have taken into consideration the following questions: “1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978? “2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on the same date, June 21, 1978 when she supposedly acquired it from the plaintiffs? “3) Being agricultural land, didn’t it occur to the intervenors that there would be tenants to be compensated or who might pose as obstacles to the mortgagee’s exercise of acts of dominion? “4) In an area as big as that property, [why] did they not verify if there were squatters? “5) What benefits or prospects thereof could the ultimate owner expect out of the property? “Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they could have discovered that possession of the land was neither with Candelaria nor with Norma.”[43] Respondent was clearly wanting in the observance of the necessary precautions to ascertain the flaws in the title of Sulit and to examine the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 condition of the property she sought to mortgage.[44] It should not have simply relied on the face of the Certificate of Title to the property, as its ancillary function of investing funds required a greater degree of diligence.[45] Considering the substantial loan involved at the time, it should have exercised more caution. OMENGAN v PHILIPPINE NATIONAL BANK, 512 SCRA 305 (2007) DOCTRINE: A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. This rule is strictly applied to banking institutions. Banks should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Thus, the rule that persons dealing with registered lands can rely solely on the certificate of title does NOT apply to banks. FACTS The PNB approved the Omengan's application for a revolving credit line of P3 million. The loan was secured by two residential lots in the name of Edgar Omengan. The first P2.5 million was released on three separate dates. The release of the final half million was, however, withheld by Montalvo because of a letter allegedly sent by Edgarís sisters, praying that the last half million not be realeased since: "the property mortgaged, while in the name of Edgar Omengan, is owned in co-ownership by all the children of the late Roberto and Elnora Omengan. The lawyer who drafted the document registering the subject property under Edgarís name can attest to this fact. We had a prior understanding with Edgar in allowing him to make use of the property as collateral, but he refuses to comply with such arrangement. Hence, this letter." Nevertheless, the half million was released. Subsequently, the Omengans applied for an increase in credit line from 3 to 5 mil. This was approved subject to the condition that Edgarís sisters gave their conformity. But petitioners failed to secure the consent of Edgarís sisters; hence, PNB put on hold the release of the additional P2 million. Still, Edgar Omengan demanded the release of the P2 million. He claimed that the condition for its release was not part of his credit line agreement with PNB because it was added without his consent. PNB denied his request. Thus the present complaint for breach of contract and damages.

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ISSUE Whether there was Breach of contract in this case RULING NO. In this case, the parties agreed on a P3 million credit line. This sum was completely released to petitioners who subsequently applied10 for an increase in their credit line. This was conditionally approved by PNBís credit committee. For all intents and purposes, petitioners sought an additional loan. The condition attached to the increase in credit line requiring petitioners to acquire the conformity of Edgarís sisters was never acknowledged and accepted by petitioners. Thus, as to the additional loan, no meeting of the minds actually occurred and no breach of contract could be attributed to PNB. There was no perfected contract over the increase in credit line. The business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the bank concerns itself with proper information regarding its debtors. Any investigation previously conducted on the property offered by petitioners as collateral did not preclude PNB from considering new information on the same property as security for a subsequent loan. The credit and property investigation for the original loan of P3 million did not oblige PNB to grant and release any additional loan. At the time the original P3 million credit line was approved, the title to the property appeared to pertain exclusively to petitioners. By the time the application for an increase was considered, however, PNB already had reason to suspect petitionersí claim of exclusive ownership. Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks. 4. In the custody of documents; Integrity of Records, Security of Premises HEIRS OF EDUARDO MANLAPAT v CA, 459 SCRA412 (2005) DOCTRINE: A mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than those contractually and legally entitled to its possession. The act of a bank of allowing complete strangers to take possession of the owner’s duplicate certificate even if the purpose is merely for photocopying constitutes manifest negligence which would hold it liable for damages under Article 1170 and other relevant provisions of the Civil Code.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 FACTS Lot 2204 was originally in possession of Jose Alvarez (Eduardo’s grandfather). Eduardo Manalapat, Alvarez’s successor-in-interest, sold a portion of it to Ricardo Cruz executing a Kasulatan and Sinumpaang Salaysay to document it. In 1976, the lot became registered only under the name of Eduardo Manalapat pursuant to a free patent. The sale of Manalapat and Cruz was forgotten, as Cruz did not even know an OCT was already issued to Manalapat. Leon Banaag, as atty-in-fact of Eduardo, executed a mortgage with Rural Bank of San Pascual for 100k with Lot 2204 as collateral. Banaag deposited the owner’s duplicate OCT with the bank. However, when the Cruz’s heirs learned of such sale, they wanted to secure the OCT for presentation to the Register of Deeds and for issuance of a separate OCT. They urged to obtain the OCT from Manalapat’s heirs but were denied. Then, they went to the Rural Bank to photocopy the owner’s duplicate OCT deposited with the bank. The Rural bank’s Manager, Jose Salazar, allowed them to borrow the OCT for photocopying. Ultimately, the heirs secured a TCT for a portion of the Lot. When Banaag went to the Rural bank to tender payment of the mortgage, he learned of the actions of the Cruz’s heirs that led to the subdivision of the lot and the issuance of two separate titles. 3 cases were filed with the trial court, all involving the issuance of the TCT. RTC ruled in favor of Manalapat. CA reversed and ruled in favor of Cruz and Rural Bank. ISSUE 1. Whether the cancellation of the OCT and the splitting into two separate titles may be accorded legal recognition. 2. Whether the bank is liable for letting the mortgaged document be borrowed by 3rd persons. RULING YES, the two separate titles are valid. The heirs of Cruz have sufficiently proven their claim of ownership over a portion of Lot 2204. The fact that the Oct was not registered with their name is immaterial. Registration is not a requirement for validity of contract between parties. The principal purpose of registration is merely to notify other persons that a transaction involving the property has been entered into. The issuance of the OCT in favor of Manalapat does not disregard the fact that the Cruz owned a portion of the land. The principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title.

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The issuance of the two TCT was valid. The Cruz’s heirs presented to the RD the original owners duplicate of the OCT. aside from that, they presented the Kasulatan and Sinumpaang Salaysay where Manalapat acknowledge the sale in favor of Cruz. The manner of obtaining the OCT did not invalidate the TCT. The bank is liable for damages. A mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its possession. Though they rightfully acknowledged the ownership of Cruz’s heirs, the bank lent the original OCT w/o prior investigation and did not even notified Manalapat’s heirs of the transaction. The bank should not have lent the certificate even only for the purpose of photocopying it. Such act constitutes manifest negligence on the part of the bank, which would necessarily hold it liable for damages under Art 1170 and other relevant provisions of the Civil Code. Thus, the bank is liable for 50k as nominal damages to Manalapat’s heirs. iii.

Applicability to Commercial Transactions Outside of Core Banking Functions FAR EAST BANK AND TRUST COMPANY

REYES v CA, 363 SCRA 51 (2001) DOCTRINE: The same higher degree of diligence is NOT expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. FACTS In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a foreign exchange demand draft in Australian dollars. Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia. Godofredo asked if there could be a way for respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance to Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia

Demand draft to sydney bank then have them reimburse from respondent bank's a count insydney

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account of the respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This arrangement has been customarily resorted to since the 1960's and the procedure has proven to be problemfree. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in order to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20th Asian Racing Conference. Petitioners later went to Austraila to attend the said racing conference. Geofredo, together with other delegates, went to the Hotel Regent Sydney to register only to find out that their demand draft was dishonored. Shortly after, his wife followed and met the same fate. They were greatly inconvenienced and embarassed of the incident. Although things eventually went well, damage was already done. As soon as the demand draft was dishonored, the respondent bank, thinking that the problem was with the reimbursement and without any idea that it was due to miscommunication, re-confirmed the authority of Westpac-New York to debit its dollar account for the purpose of reimbursing WestpacSydney.Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why the demand draft was not honored. It was later found out that the source of the problem was Westpac-Sydney’s decoding error. (“7” was encoded as “1” in the SWIFT message) They sued the respondent bank for damages for the said incident. ISSUE Whether the respondent bank is liable for damages RULING NO. There is no basis to hold the respondent bank liable for damages for the reason that it exerted every effort for the subject foreign exchange demand draft to be honored. It was in fact due to erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message which led to the problem. Also, The peitioners were briefed by a representative of the respondent bank regarding the porcedure thus they are estopped from the denying the said procedure. The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank and its clients, the respondent should have exercised a higher degree of diligence than that expected of an ordinary prudent person in the handling of its affairs as in the case at bar.

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In Philippine Bank of Commerce v. Court of Appeals15 upholding a long standing doctrine, we ruled that the degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. iv.

Applicability to Government Financial Institutions

GSIS v SANTIAGO, 414 SCRA 563 (2003) Due diligence required of banks extend even to persons, or institutions regularly engaged in the business of lending money secured by real estate mortgages, such as government financial institutions. These are likewise expected to exercise greater care and prudence in its dealings, including those involving registered land. v.

Applicability to those Engaged in Lending Money Secured by Real Estate Mortgages

ADRIANO v PANGILINAN, 373 SCRA 544 (2002) While it is true that a person dealing with registered lands need not go beyond the certificate of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. vi.

Liability for Negligence 1. Applicable Rules on Determination of Negligence

PHILIPPINE BANK OF COMMERCE v CA, 269 SCRA 695 (1997) DOCTRINE: Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides the test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that.

ROMMEL'S MARKETING CORP

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the Solidbank passbook. At the bank, Calapre gave the passbook to the teller and went out to do another errand. When Calapre returned and asked for the passbook, the teller told (redundant teller-told) him that somebody got the passbook. Calapre reported the incident to Macaraya.

FACTS RMC had account in P; RMC gave funds to secretary to deposit in P!instead of doing so, secretary deposited funds in name of her husband!modus operandi: wrote the name of husband and his account number on original deposit slip, then, on duplicate slip, left name blank but filled in husband’s account number!when teller asked why, she said it was because the 2nd slip would only be for personal records! when teller approved slip, she’d fill in RMC under the name then change the account number!R filed action for recovery against P.

Later on, it was discovered that an unauthorized withdrawal of P300,000.00 was made using the lost passbook. LC Diaz demanded from Solidbank the return of the money. Solidbank solidly refused prompting LC Diaz to file a recovery suit. RTC absolved Solidbank based on the rules on savings account which gives presumption that the holder of the passbook is the owner. CA held Solidbank liable based on negligence and culpa aquiliana.

ISSUE

HELD YES. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan.[17] Article 1980 of the Civil Code expressly provides that “x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.” There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties.

RULING 1. Negligence = omission to do something that a reasonable man would do! here, teller negligent in stamping slips w/o asking for name to be put on the duplicate!bank also negligent in not exercising proper supervision over the teller (since they didn’t know until they conducted an investigation that the teller was doing that) 2. The negligence of the bank was the proximate cause!since even if the secretary filled out the slip wrong, she would never have gotten away with it had the slips not been approved by the teller 3. Bank also liable under “last clear chance” 4. But, since RMC contributorily negligent, damages reduced CONSOLIDATED BANK AND TRUST CORPORATION v CA, 410 SCRA 562 (2003) DOCTRINE: In culpa contractual (negligence), once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The Doctrine of Last Clear Chance is inapplicable in culpa contractual because neither the contributory negligence of one party (bank) nor its last chance to avoid the loss would exonerate the other party (depositor) from liability. Such contributory negligence or last chance merely serves to reduce the recovery of damages by the plaintiff but does NOT exculpate the depositor from his breach of contract. FACTS LC Diaz, an accounting firm, through its cashier Macaraya, filled up a deposit slip and a savings deposit slip. Macaraya instructed the messenger, Calapre to deposit the money with Solidbank. Macaraya also gave Calapre

ISSUE Whether Solidbank is liable for the loss

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (“RA 8791”),[18] which took effect on 13 June 2000, declares that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.”[19] This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals,[20] holding that “the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.”[21] This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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family.[22] Section 2 of RA 8791 prescribes the statutory diligence required from banks – that banks must observe “high standards of integrity and performance” in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diaz’s savings account, jurisprudence[23] at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791.

Upon inquiry, the Bank of America acknowledged that it was due to an error and that for some reason, the check had been encoded with the wrong account number.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust.[24] The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan.

The check of $500 was actually paid by the Bank of America to First National City Bank. However, Bank of America claimed that such had been inadvertently made and returned the check to First National City Bank, with the request that the amount be credited to Bank of America. In turn, First National City Bank informed the depositor (Saldana) about the check’s return. However, before Saldana even replied, Bank of America recalled the check and honored it.

The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791. 2. Award of Actual, Moral, Compensatory Damages

or Temperate

Months after, Araneta issued 2 checks for $500 and $150 payable to cash and drawn against Bank of America. When these checks were presented for payment, they were again dishonored due to a closed account.

Because of these incidents, Araneta, through counsel, sent a letter to the Bank of America demanding damages in the sum of $20,000. Although it admitted its responsibility for the inconvenience, the bank claimed that the damages sought were excessive and instead offered to ay $2,000. Thus, in 1962, Araneta filed a complaint against the Bank of America for the recovery of (1) actual damages, (2) moral damages, (3) temperate damages, (4) exemplary damages, and (5) attorney’s fees for an aggregate total of $120,000. The trial court awarded all the damages prayed for, but the Court of Appeals eliminated the award of compensatory and temperate damages, and reduced the amount of moral damages, exemplary damages, and attorney’s fees.

ARANETA v BANK OF AMERICA, 40 SCRA 144 (1970) DOCTRINE: The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. In the US, temperate damages are allowed. There were cases where from the nature of the case, definite proof of pecuniary loss cannot be offered, although the court is convinced that there has been such loss. FACTS Leopoldo Araneta, a local merchant, issued a check for $500 payable to cash and drawn against Bank of America (San Francisco branch). At that time, he had a credit balance of $523.81 in his account. Unfortunately, when it was received by the bank a day after, it was dishonored due to a closed account.

The first check appeared to have come into the hands of Rufina Saldana, who deposited it to her account the First National City Bank of New York.

ISSUE Whether temperate and moral damages should be awarded to Araneta RULING TEMPERATE DAMAGES: YES. The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. The incidents obviously affected the credit of Araneta with Saldana and with any other person who would come to know about the refusal of the defendant to honor said checks. It cannot hardly be possible that a customer’s check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury x x x.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 In the US, temperate damages are allowed. There were cases where from the nature of the case, definite proof of pecuniary loss cannot be offered, although the court is convinced that there has been such loss. For instance, injury to one’s commercial credit or to the goodwill of the business firm is often hard to show with certainty in terms of money. MORAL DAMAGES: YES. Under Art. 2217 of the Civil Code, “besmirched reputation” is a ground upon which moral damages can be claimed, but the Court of Appeals did take this element into consideration. Quoting from its decision, “ x x x the damages to his reputation as an established and wellknown international trader entitled him to recover moral damages x x x his wounded feelings and the mental anguish suffered by him cause his blood pressure to rise beyond normal limits, x x x”

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RTC dismissed the complaint. However, CA reversed the decision, making Prudential Bank liable for damages. ISSUE Whether Prudential bank is liable for damages RULING YES, the bank is liable. It is the bank’s fault for misposting the initial check to another account and delayed the posting of the same to the Leticia’s account. Although the mistake was not attended with malice and bad faith, there is still clear proof of lack of supervision or due care and caution expected of a bank.

PRUDENTIAL BANK v CA, 328 SCRA 264 (2000) DOCTRINE: The bank’s negligence was the result of a lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking. While the bank’s negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment, and humiliation. Hence, the offended party is entitled to recover reasonable moral damages. The law allows the grant of exemplary damages by way of example for the public good. The public relies on the banks’ sworn profession of diligence and meticulousness in giving irreproachable service. This meticulousness must be maintained at all times by the banking sector. FACTS Leticia Tupasi-Valenzula opened a Savings Account and Current Account with Prudential Bank. Initially, she deposited a check amounting to 35k on June 1, 1988. As payment for purchasing jewelry, Leticia issued a check amounting to 11.5k in favor of Belen Legaspi. Belen then endorsed the check to Philip Lhuillier. When Philip deposited the check in his account, the check was dishonored due to insufficient funds. Leticia was surprised to learn of the dishonor of the check. She inquired with Prudential Bank, showing her passbook indicating she had sufficient funds. However, Albert Angeles Reyes (OIC of her account) ignored the passbook, stating that the bank ledger was the best proof that she did not have enough funds. However, it was found out that the 35k check initially deposited by Leticia was credited only on June 24, 1988, or after 23 days. The 11k check was redeposited and properly cleared only on June 27, 1988. Leticia filed a complaint against Prudential Bank due to the incident for causing embarrassment and humiliation.

The relationship between a bank and depositor is fiduciary in nature. The extent of diligence expected from the bank is with utmost fidelity. As a business affected with public interest and due to its nature, a bank is under obligation to treat the account of its depositors with meticulous care. It does not matter whether the account consists of only a few hundred pesos or of millions of pesos. In this case, even if there was no malice, the fact still remain that Leticia experienced serious anxiety, embarrassment and humiliation. Thus, she is entitled to recover damages; 100k for moral, 20k for exemplary 30k for atty’s fees. CITYTRUST BANKING CORPORATION v VILLANUEVA, 361 SCRA 446 (2001) DOCTRINE: Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant’s wrongful act or omission. Requisites for the award of moral damages: 1. There must be an injury, whether physical, mental, or psychological, clearly sustained by the claimant 2. There must be a culpable act or omission factually established 3. The wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant 4. The award of damages is predicated on any of the cases stated in Art. 2219 of the Civil Code Art. 2219: Moral damages may be recovered in the following and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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analogous cases: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A criminal offense resulting in physical injuries; Quasi-delicts causing physical injuries; Seduction, abduction, rape, or other lascivious acts; Adultery or concubinage; Illegal or arbitrary detention or arrest; Illegal search; Libel, slander or any other form of defamation; Malicious prosecution; Acts mentioned in Article 309; Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages. The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of this article, in the order named. FACTS Sometime in February, 1984, the respondent opened a savings and a current account with the petitioner bank. On May 21, 1986, respondent ran out of checks so he requested a new checkbook from one of the respondent bank’s customer service representative. He then filled up a checkbook requisition slip with the obligatory particulars, except for his current account number which he could not remember. Respondent expressed his predicament and the representative assured that the bank shall look into the bank’s account records. Villanueva was thus later on issued a new checkbook. On June 17, 1986, Respondent Villanueva issued a P50,000 check payable to the order of Kingly Commodities Traders and Multi Resources, Inc. (hereafter Kingly) Respondent had sufficient funds in his account by the time the Kingly representative deposited his check. Despite this, the check was dishonoured for insufficient funds. Respondent notified the bank regarding the matter and the bank representative told him that they will Ask for look into the matter and instructed the former to advise Kingly to redeposit an the check. The representative assured Villanueva that the check would be extensi honoured after the sufficiency of the funds was ascertained. The check was on for then re-deposited but was again dishonoured. Due to this, Villanueva prayed payet to Kingly Commodities to give him until 5:30pm that same day to make good his check. Respondent went to the bank to personally inquire on the matter. It was found out that respondent was issued a check under another “Isagani Villanueva” with a different middle initial. Upon knowing this fact, the bank branch manager issued a managers check which the respondent was able to give before the above-said deadline.

After the incident, Respondent demanded that he be paid indemnity for the alleged losses and damage suffered by him as a result of the repeated dishonour of his well-funded check. The bank apologized but refused to pay such indemnity, so respondent filed a complaint against the bank claiming P240,000 actual damages, P2M as moral damages and P500,000 for exemplary damages, attorney’s fees, litigation expenses and costs of the suit. RTC did not grant any damages. CA partly reversed and granted a smaller amount as damages thus this case.

Bank voluntarily process the req. slip

ISSUE Whether Villanueva is entitled to damages

He did not suffered any compensable injury RULING NO. The issue whether respondent suffered actual or compensatory damages in the form of loss of profits is factual. Bothe CA and the RTC have ascertained that Villanueva was unable to prove his demand for compensatory damages arising from loss. His evidence thereon was found inadequate, uncorroborated, speculative, hearsay and not the best evidence. Basic is the jurisprudential rule principle that in determining actual damages, the court cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on competent proof and on the best obtainable evidence of the actual amount of the loss. Actual damages cannot be presumed but must be duly proved with reasonable certainty. It may be true that Villanueva may have suffered some form of inconvenience and discomfort as a result of the dishonour of his check. However, the same could not have been so grave or intolerable as he attempts to portray or impress upon the Court. Furthermore, the alleged embarrassment or inconvenience caused to Villanueva as a result of the incident was timely and adequately contained, corrected, mitigated, if not entirely eradicated. Villanueva, thus, failed to support his claim for damages. Also, respondent is not entitled to Attorney’s fees because there was no presence of bad faith. The SC did not see it fit to discuss whose negligence was the proximate cause of the respondent’s injury because, in the first place, he did not sustain any compensable injury. (RTC, however, touched on this matter. RTC pointed out that Villanueva was the proximate cause, amongst others, for failure to state his account number. The bank may have been negligent but its negligence was only contributory.)

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 3. Reliance on Judgment of Other Banks METROBANK v CABLIZO, 510 SCRA 259 (2006) It owes the highest degree of fidelity to its client and should not therefore lightly rely on the judgment of other banks on occasions where its clients’ money were involved, no matter how small or substantial the amount at stake. 4. Recovery Against Erring Employee PACIFIC BANKING CORPORATION v CA, 173 SCRA 102 (1989) Article 2181 of the Civil Code merely gives the employer the right to reimbursement from the employee for what is paid to the offended party. It does NOT make recovery from the employee a mandatory requirement. A right to relief shall be recognized only when the party concerned asserts it through a proper pleading filed in court. E. AUTHORITY TO OPERATE a. Incorporation Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be

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accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (Corporation Code, BP 68) Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of bylaws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, bylaws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (Corporation Code, BP 68) Section 14. The Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Such

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it: 14.1 That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with; 14.2. That the public interest and economic conditions, both general and local, justify the authorization; and 14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest. The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral (GBL). b. Operation: i. Authority Required: No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions (Sec. 6, Par. 1, GBL) ii.

iii.

MB Determination: The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking functions and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or other special laws (Sec. 6, Par. 2, GBL) Unauthorized Advertisement/Business Representation: No person, association, or corporation unless duly authorized to engage in the business of a bank, quasi-bank, trust entity, or savings and loan association as defined in this Act, or other banking laws, shall advertise or hold itself out as being engaged in the business of such bank, quasi-bank, trust entity, or association, or use in connection with its business title, the

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word or words "bank", "banking", "banker", "quasi-bank", "quasibanking", "quasi-banker", "savings and loan association", "trust corporation", "trust company" or words of similar import or transact in any manner the business of any such bank, corporation or association (Sec. 64, GBL). iv. v.

Change in Name Sanctions for Operating Without Authority: Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws (Sec. 6, Par. 5, GBL). Unless otherwise herein provided, the violation of any of the provisions of this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer. If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General (Sec. 66, GBL).

REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19 SCRA 58 (1967) DOCTRINE: A corporation, which misused its corporate funds and franchise by engaging in illegal banking, may be dissolved. Its acts were willful, were repeated 59,643 times and the continuance of its illegal operations causes public injury owing to the number of persons affected thereby. A writ of quo warranto for its dissolution is proper. FACTS This is a quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security and Acceptance Corporation for allegedly engaging in banking operations without the authority required therefor by the General Banking Act (Republic Act No. 337). Security Credit and Acceptance Corporation is a duly registered corporation with the SEC. It’s articles of incorporation authorize it to o engage primarily in financing agricultural, commercial and industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation. The Superintend of Banks of the Central Bank of the Philippines thru its legal counsel rendered an opinion that Security Credit and Acceptance Corporation is a banking institution within the purview of Republic Act No. 337. Central Bank advised the corporation to comply with the requirements

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 of the General Banking Act. Notwithstanding, the corporation, as well as the members of its Board of Directors and the officers of the corporation, continued performing the functions and activities which had been declared to constitute illegal banking operations; the corporation established 74 branches in principal cities and towns throughout the Philippines; that through a systematic and vigorous campaign undertaken by the corporation, the same had managed to induce the public to open 59,463 savings deposit accounts. ISSUE Whether the corporation is engaged in banking RULING YES. It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank has been defined as: ... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, banking without securing the administrative authority required in Republic Act No. 337. That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby. CENTRAL BANK v MORFE, 20 SCRA 507 (1967) DOCTRINE: The law requiring compliance with certain requirements before anybody can engage in banking obviously seeks to protect the public against actual, as well as potential, injury. FACTS First Mutual Savings and Loan Organization (Organization) is a registered non-stock corporation, whose main purpose is “to encourage x x x and implement savings and thrift among its members, and to extend financial assistance in the form of loans” to them. In 1962, the Central Bank Legal Department rendered an opinion finding the Organization as a banking institution, falling within the purview of the Central Bank Act. Hence, it applied for a search warrant with the Municipal Court of Manila against the Organization, alleging that it was engaged in illegal banking activities, “by receiving deposits of money for deposit, disbursement, safekeeping or otherwise or transacts the business of a

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348] founded to facilitate the borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46). Moreover, it has been held that: An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.) ... any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised. (MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30.) Accordingly, defendant-corporation has violated the law by engaging in savings and mortgage bank and/or building and loan association x x x without having first complied with the provisions of RA 337. Judge Cancino issued the warrant applied for there being “good and sufficient reasons to believe” that the Organization has under its control the articles/items subject of the offense complained of. On the same day, the Organization commenced an action with the CFI of Manila against the Municipal Court, the sheriff, the Manila Police Department and the Central Bank to annul the search warrant on the ground that it was issued with GADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order in favor of the Organization. Accordingly, the Bank moved for reconsideration but was denied and commenced the present action. ISSUE Whether the Organization is a banking institution within the purview of the Central Bank Act RULING YES. The records suggested clearly that the transactions objected to by the Central Bank constitute the general pattern of the business of the Organization. Indeed, the main purpose thereof, according to its By-Laws, is “to extend financial assistance, in the form of loans, to its members, with funds deposited by them. It is true that such funds are referred to as their “savings” and that the depositors thereof are designated as “members,” but, even a cursory examination of said documents will readily show that anybody can be a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 depositor and thus be “participating member.” In other words, the Organization is open to the public for deposit accounts, and the funds so raised may be lent by the Organization. Moreover, the power to dispose of said funds is placed under the exclusive authority of the “founding members,” and “participating members” are expressly denied the right to vote or be voted for, their privileges and benefits being limited to those, which the BoT may in its discretion, determine from time to time. Thus, the membership of the “participating members” is purely nominal in nature. This situation is fraught, precisely, with the very dangers or evils, which RA 337 seeks to forestall, by exacting compliance with the requirements of said Act, before the transactions in question could be undertaken.

II. CLASSIFICATION OF BANKS A. Universal Banks (UB): Sec. 3.2 (a), GBL (a) Governing Law: General Banking Law (b) Powers Sec. 23, GBL: A universal bank shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act. Sec. X101 (b)(1), MRB and BSP Circular No. 271, Series of 2001 A UB shall have the authority to exercise, in addition to the powers and services authorized for a KB as enumerated in Item “b(2)” and those provided by other laws, the following: (a) The powers of an investment house (IH) as provided under existing laws; (b) The power to invest in non-allied enterprises; (c) The power to own up to one hundred percent (100%) of the equity in a TB, an RB, a financial allied enterprise, or a non- financial allied enterprise; and (d) In case of publicly-listed UBs, the power to own up to one hundred percent (100%) of the voting stock of only one (1) other UB or KB. A UB may perform the functions of an IH either directly or indirectly through a subsidiary IH; in either case, the underwriting of equity securities and securities dealing shall be subject to

NOTES

22

pertinent laws and regulations of the Securities and Exchange Commission (SEC): Provided, That if the IH functions are performed directly by the UB, such functions shall be undertaken by a separate and distinct department or other similar unit in the UB: Provided, further, That a UB cannot perform such functions both directly and indirectly through a subsidiary. i.

Commercial Banks (KB) Powers Sec. 29, GBL: A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. Sec. X101 (b)(2), MRB In addition to the general powers incident to corporations and those provided in other laws, a KB shall have the authority to exercise all such powers as may be necessary to carry on the business of commercial banking, such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. It may also exercise or perform any or all of the following: (a) Invest in the equities of allied enterprises as provided in Sections 31 and 32 of R.A. No. 8791; (b) Purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No. 8791; (c) Receive in custody funds, documents and valuable objects; (d) Act as financial agent and buy and sell, by order of and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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(e)

(f)

(g) (h) ii.

for the account of their customers, shares, evidences of indebtedness and all types of securities; Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/ advisory/ consultancy accounts; Rent out safety deposit boxes; and Engage in quasi-banking functions.

Investment House powers Sec. 7, Investment Houses Law In addition to the powers granted to corporations in general, an Investment House is authorized to do the following: 1. Arrange to distribute on a guaranteed basis securities of other corporations and of the Government or its instrumentalities; 2. Participate in a syndicate undertaking to purchase and sell, distribute or arrange to distribute on a guaranteed basis securities of other corporations and of the Government or its instrumentalities; 3. Arrange to distribute or participate in a syndicate undertaking to purchase and sell on a best-efforts basis securities of other corporations and of the Government or its instrumentalities; 4. Participate as soliciting dealer or selling group member in tender offers, block sales, or exchange offering or securities; deal in options, rights or warrants relating to securities and such other powers which a dealer may exercise under the Securities Act (Act No. 83, as amended); 5. Promote, sponsor, or otherwise assist and implement ventures, projects and programs that contribute to the economy's development; 6. Act as financial consultant, investment adviser, or broker; 7. Act as porfolio manager, and/or financial agent, but not as trustee of a trust fund or trust property as provided for in Chapter VII of Republic Act No. 337, as amended; 8. Encourage companies to go public, and initiate and/or promote, whenever warranted, the formation, merger, consolidation, reorganization, or recapitalization of productive enterprises, by providing assistance or

NOTES

23

participation in the form of debt or equity financing or through the extension of financial or technical advice or service; 9. Undertake or contract for researches, studies and surveys on such matters as business and economic conditions of various countries, the structure of financial markets, the institutional arrangements for mobilizing investments;10. Acquire, own, hold, lease or obtain an interest in real and/or personal property as may be necessary or appropriate to carry on its objectives and purposes; 10. Design pension, profit-sharing and other employee benefits plans; and 11. Such other activities or business ventures as are directly or indirectly related to the dealing in securities and other commercial papers, unless otherwise governed or prohibited by special laws, in which case the special law shall apply. Nothing in this section shall preclude other enterprises not covered by this Decree from engaging in the activities listed under subsections (3) to (11) of this section, except as may otherwise be governed by special laws. SEC Omnibus Rules and Regulations for Investment Houses and Universal Banks Registered as Underwriter of Securities “Investment House” is any enterprise, which primarily engages, whether regularly or on an isolated basis, in the underwriting of securities of another person or enterprise, including securities of the Government or its instrumentalities. “Underwriting of Securities” is the act or process of guaranteeing by an Investment House duly licensed under PD 129 or a Universal Bank registered as an Underwriter of Securities with the Commission, the distribution and sale of securities issued by another person or enterprise, including securities of the Government or its instrumentalities. The distribution and sale may be on a public or private placement basis: Provided, that nothing shall prevent an Investment House or Universal Bank registered as Underwriter of Securities from entering into a contract with another entity to further distribute securities that it has underwritten. 1. Definition/Function of Investment House Sec. 3, Investment Houses Law For the purpose of this Decree, unless the context

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 otherwise indicates, the following definition of terms are hereby adopted: (a) "Underwriting" is the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. (b) "Securities" are written evidences of ownership, interest, or participation, in an enterprise, or written evidences of indebtedness of a person or enterprise. It includes, but is not limited to the instruments enumerated in Section 2 of the Securities Act (Commonwealth Act No. 83, as amended). Sec. 2 (a), IRR of Investment Houses Law “Investment House” is any enterprise, which primarily engages, whether regularly or on an isolated basis, in the underwriting of securities of another person or enterprise, including securities of the Government or its instrumentalities. 2. Limitations on UB’s exercise of investment house powers Sec. X101 (b)(1), MRB …in either case, the underwriting of equity securities and securities dealing shall be subject to pertinent laws and regulations of the Securities and Exchange Commission (SEC): Provided, That if the IH functions are performed directly by the UB, such functions shall be undertaken by a separate and distinct department or other similar unit in the UB: Provided, further, That a UB cannot perform such functions both directly and indirectly through a subsidiary. iii.

To invest in equity of non-allied enterprises Sec. 27, GBL: The equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single nonallied enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. Sec. 1381, MRB: Only UBs may invest in the equity of an enterprise engaged in non-allied or non-related activities.

NOTES

24

B. Commercial Banks (KB): Sec. 3.2 (b), GBL (a) Governing Law: General Banking Law (b) Powers Sec. 101 (b)(2), MRB and BSP Circular No. 271, Series of 2001 In addition to the general powers incident to corporations and those provided in other laws, a KB shall have the authority to exercise all such powers as may be necessary to carry on the business of commercial banking, such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. It may also exercise or perform any or all of the following: (a) Invest in the equities of allied enterprises as provided in Sections 31 and 32 of R.A. No. 8791; (b) Purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No. 8791; (c) Receive in custody funds, documents and valuable objects; (d) Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; (e) Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; (f) Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/ advisory/ consultancy accounts; (g) Rent out safety deposit boxes; and (h) Engage in quasi-banking functions. i.

KB Powers Sec. 29, GBL: A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. 1. 2. 3. 4. 5. 6. 7. 8. ii.

iii.

To invest in equity of allied enterprises Sec. 31, GBL: A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank. Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise. Sec. 32, GBL: A commercial bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise.

iv.

bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board. Sec. 52, GBL: Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances: 52.1. Such as shall be mortgaged to it in good faith by way of security for debts; 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings, or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it.

Accepting drafts Issuing letters of credit (L/Cs) Discounting and negotiating promissory notes (PNs), drafts, bills of exchange, and other evidences of debt Accepting or creating demand deposits Receiving other types of deposits and deposit substitutes Buying and selling foreign exchange and gold or silver bullion Acquiring marketable bonds and other debt securities Extending credit

Engage in quasi-banking functions Sec. 6, par. 1, GBL: No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

To purchase, hold and convey real estate Sec. 51, GBL: Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a

25

Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section. v.

Other services Sec. 53, GBL: In addition to the operations specifically authorized in this Act, a bank may perform the following services: 53.1. Receive in custody funds, documents and valuable objects; 53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; 53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; 53.4 Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and 53.5. Rent out safety deposit boxes. The bank shall perform the services permitted under Subsections 53.1, 53.2,53.3 and 53.4 as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities: The Monetary Board may regulate the operations authorized by this Section in order to ensure

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 that such operations do not endanger the interests of the depositors and other creditors of the bank. In case a bank or quasi-bark notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. 1. 2. 3. 4. 5. vi.

Receive in custody funds, documents and valuable objects Act as financial agent and buy and sell, by order of and for the account of customers, shares, evidences of indebtedness and all types of securities Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business Upon prior MB approval, act as managing agent, adviser, consultant or administrator of investment and management/advisory/consultancy accounts Rent out safety deposit boxes

To issue guarantees Sec. 74, General Banking Act: No bank or banking institution shall enter, directly or indirectly, into any contract of guaranty or suretyship, or shall guarantee the interest or principal of any obligation of any person, co-partnership, association, corporation or other entity. The provisions of this section shall, however, not be held to apply to the borrowing of money by any such bank or institution through the rediscounting of its receivables, or otherwise, as may be permitted by law, nor to the granting or guaranteeing of acceptance credits in the ordinary course of its business. Nor shall the provisions of this section apply to the certification of checks or to transactions involving the release of documents attached to items received for collection, nor to any other transaction, which may properly be regarded as common usage and accepted banking practice.

C. Thrift Banks (TB): Sec. 3.2 (c), GBL (a) Governing Law Sec. 71, par. 1 and 3, GBL: The organization, the ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The

NOTES

26

organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern. i. ii.

Organization, ownership, capital requirements, powers, supervision, and general conduct of business Net worth to risk assets ratio Sec. 71, par. 3: …However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern. Sec. 33, GBL: A bank other than a universal or commercial bank cannot accept or create demand deposits except upon prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board.

iii.

Other matters—GBL suppletory application

(b) Declaration of Policy Sec. 2, Thrift Banks Act It is hereby declared the policy of the State to: a. Recognize the indispensable role of the private sector, to encourage private enterprise, and to provide incentives to needed investments; (b) Promote economic development pursuant to the socioeconomic program of the government, to expand industrial and agricultural growth, to encourage the establishment of more private thrift banks in order to meet the needs for capital, personal and investment credit or mediumand long-term loans for Filipino entrepreneurs; (c) Encourage and assist the establishment of thrift bank system which will promote agriculture and industry and at the same time place within easy reach of the people the medium-and long-term credit facilities at reasonable cost; (d) Encourage industry, frugality and the accumulation of savings among the public, and the members and stockholders of thrift banks; and (e) Regulate and supervise the activities of thrift banks in order to place their operations on a sound, stable and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 efficient basis and to curtail or prevent acts or practices, which are prejudicial to the public interest. (c) Definition/Purpose: Sec. 3.2 (c), GBL Sec. 3 (a), Thrift Banks Act "Thrift banks" shall include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws, and any banking corporation that may be organized for the following purposes: (1) Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or unsecured, or in financing for homebuilding and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives; (2) Providing short-term working capital, medium- and longterm financing, to businesses engaged in agriculture, services, industry and housing; and (3) Providing diversified financial and allied services for its chosen market and constituencies specially for small and medium enterprises and individuals. (d) Powers Sec. 10, Thrift Banks Act In addition to powers granted it by this Act and existing laws, any thrift bank may: (a) Accept savings and time deposits; (b) Open current or checking accounts: Provided, That the thrift bank has net assets of at least Twenty million pesos (P20,000,000) subject to such guidelines as may be established by the Monetary Board; and shall be allowed to directly clear its demand deposit operations with the Bangko Sentral and the Philippine Clearing House Corporation; (c) Act as correspondent for other financial institutions; (d) Act as collection agent for government entities, including but not limited to, the Bureau of Internal Revenue, Social Security System, and the Bureau of Customs; (e) Act as official depository of national agencies and of municipal, city or provincial funds in the municipality, city or province where the thrift bank is located, subject to such

NOTES

27

guidelines as may be established by the Monetary Board; (f) Rediscount paper with the Philippine National Bank, the Land Bank of the Philippines, the Development Bank of the Philippines, and other government-owned or -controlled corporations. Said institutions shall specify the nature of paper deemed acceptable for rediscount, as well as rediscounting rate to be charged by any of these institutions; and (g) Issue mortgage and chattel mortgage certificates, buy and sell them for its own account or for the account of others, or accept and receive them in payment or as amortization of its loan. Such mortgage and chattel mortgage certificates shall be issued exclusively in national currency and exclusively for the financing of equipment loans, mortgage loans for the acquisition of machinery and other fixed installations, conservation, enlargement or improvement of productive properties and real estate mortgage loans for: (1) the construction, acquisition, expansion or improvement of rural and urban properties; (2) the refinancing of similar loans and mortgages; and (3) such other purposes as may be authorized by the Monetary Board. A thrift bank shall coordinate the amounts and maturities of its certificates with those of its loans, so as to ensure adequate cash receipts for the payment of principal and interest at the time they become due. The bank shall accept its own certificates at least at the actual price of issue, in any prepayment of loans which mortgage or chattel mortgage debtors may wish to make: Provided, That the date of maturity of the certificates is not later than the date on which the payment would otherwise become due, in the absence of the aforesaid prepayment; (h) Purchase, hold and convey real estate under the same conditions as those governing commercial banks as specified under Section 25 of Republic Act No. 337; (i) Engage in quasi-banking and money market operations; (j) Open domestic letters of credit; (k) Extend credit facilities to private and government employees: Provided, That in the case of a borrower who is a permanent employee or wage earner, the treasurer, cashier or paymaster of the office employing him is authorized, notwithstanding the provisions of any existing law, rules and regulations to the contrary, to make deductions from his salary, wage or income pursuant to the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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terms of his loan, to remit deductions to the thrift bank concerned, and collect such reasonable fee for his services; (l) Extend credit against the security of jewelry, precious stones and articles of similar nature, subject to such rules and regulations as the Monetary Board may prescribe; and (m) Offer other banking services as provided in Section 72 of Republic Act No. 337 and Republic Act No. 6426, as amended.

With prior approval of the Monetary Board, and subject to such guidelines as may be established by it, TBs may also perform the following services: (l) Open current or checking accounts; (m) Engage in trust, quasi-banking functions and money market operations; (n) Act as collection agent for government entities, including but not limited to, the Bureau of Internal Revenue (BIR), Social Security System (SSS) and the Bureau of Customs (BOC); (o) Act as official depository of national agencies and of municipal, city or provincial funds in the municipality, city or province where the TB is located; (p) Issue mortgage and chattel mortgage certificates, buy and sell them for its own account or for the account of others, or accept and receive them in payment or as amortization of its loan; and (q) Invest in the equity of allied undertakings.

Thrift banks may perform the services under subsections (b), (d), (e), (g) and (i) only upon prior approval of the Monetary Board. Nothing in this Section shall be construed as precluding a thrift bank from performing, with prior approval of the Monetary Board, commercial banking services, or from operating under an expanded banking authority, nor from exercising, whenever applicable and not inconsistent with the provisions of this Act and Bangko Sentral regulations, and such other powers incident to a corporation. Sec. 101 (b)(3), MRB and BSP Circular No. 271, Series of 2001 In addition to the powers provided in other laws, a TB may perform any or all of the following services: (a) Grant loans, whether secured or unsecured; (b) Invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; (c) Issue domestic letters of credit; (d) Extend credit facilities to private and government employees; (e) Extend credit against the security of jewelry, precious stones and articles of similar nature, subject to such rules and regulations as the Monetary Board may prescribe; (f) Accept savings and time deposits; (g) Rediscount paper with the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP), and other government-owned or-controlled corporations; (h) Accept foreign currency deposits as provided under R.A. No. 6426, as amended; (i) Act as correspondent for other financial institutions; (j) Purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No. 8791; and (k) Offer other banking services as provided in Section 53 of R.A. No. 8791.

28

D. Rural Banks (RB): Sec. 3.2 (d), GBL (a) Governing Law Sec. 71, par. 1 and 3, GBL: The organization, the ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern. i. ii.

Organization, ownership, capital requirements, supervision, and general conduct of business Other matters—GBL of suppletory application

powers,

(b) Declaration of Policy Sec. 2, Rural Banks Act: The State hereby recognizes the need to promote comprehensive rural development with the end in view of attaining acquitable distribution of opportunities, income and wealth; a sustained increase in the amount of goods and services produced by the nation of the benefit of the people; and in expanding productivity as a key raising the quality of life for all, especially the underprivileged.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

Towards these ends, the State hereby encourages and assists in the establishment of rural banking system designed to make needed credit available and readily accessible in the rural areas on reasonable terms (c) Powers Sec. 12, Rural Banks Act: In addition to the operations especially authorized in this Act, any rural bank may: • Accept saving and time deposit; • Open current or checking accounts, provided the rural bank has net assets of at least Five million (P5,000,000) subject to such guidelines as may be established by the Monetary Board: • Act as correspondent for other financial institutions; • Act as a collection agent; • Act as official depositary of municipal, city or provincial funds in the municipality, city or province where it is located, subject to such guidelines as may be established by the Monetary Board; • Rediscount paper with the Philippine National Bank, the Land Bank of the Philippines, the Development Bank of the Philippines, or any other banking institution, including its branches and agencies. Said institution shall specify the nature of paper deemed acceptable for rediscount, as well as the rediscount rate to be charged by any of these institutions; • Offer other banking service as provided in Section 72 of Republic Act No. 337, as amended, and • Extend financial assistance to public and private employees in accordance with the provisions of Section 5 of Republic Act No. 3779, as amended. With written permission of the Monetary Board of the Central bank, any rural bank may act as trustee over estates or properties of farmer and merchants. Nothing in this section shall be construed as precluding a rural bank from performing, with prior approval of the Monetary Board, all the services authorized and mortgage banks, of for commercial banks, under an expanded banking authority as provided in Section 21-B of the same Act Sec. 101 (b)(4), MRB and BSP Circular No. 271, Series of 2001 In addition to the powers provided in other laws, an RB may perform any or all of the following services:

NOTES

29

(a) Extend loans and advances primarily for the purpose of meeting the normal credit needs of farmers, fishermen or farm families as well as cooperatives, merchants, private and public employees; (b) Accept savings and time deposits; (c) Act as correspondent of other financial institutions; (d) Rediscount paper with the LBP, DBP or any other bank, including its branches and agencies. Said banks shall specify the nature of paper deemed acceptable for rediscount, as well as the rediscount rate to be charged by any of these banks; (e) Act as collection agent; (f) Offer other banking services as provided in Section 53 of R.A. No. 8791. With prior approval of the Monetary Board, an RB may perform any or all of the following services: (g) Accept current or checking accounts: Provided, That such RB has net assets of at least P5 million; (h) Accept NOW accounts; (i) Act as trustee over estates or properties of farmers and merchants; (j) Act as official depository of municipal, city or provincial funds in the municipality, city or province where it is located; (k) Sell domestic drafts; and (l) Invest in allied undertakings.

E. Cooperative Banks (Coop Banks): Sec. 3.2 (e), GBL (a) Governing Law Sec. 71, par. 1 and 3, GBL: The organization, the ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern. Art. 99, Cooperative Code: (1) The provisions of this Chapter shall primarily govern cooperative banks registered under this Code and the other provisions of this Code shall apply to them

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

only insofar as they are not inconsistent with the provisions contained in this Chapter. (2) Cooperatives duly established and registered under the provisions of this Code may organize among themselves a cooperative bank, which shall likewise be considered a cooperative registerable under the provision of this Code subject to the requirements of and requisite authorization from the Central Bank. i. ii.

Organization, ownership, capital requirements, supervision, and general conduct of business Other matters—GBL of suppletory application

powers,

(b) Declaration of Policy Art. 2, Cooperative Code: (c) Definitions/Functions Art. 100, Cooperative Code A cooperative bank is one organized by the majority shares of which is owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. The term "cooperative bank" shall include cooperative rural banks. A cooperative bank may perform the following functions: (1) To carry on banking and credit services for the cooperatives; (2) To receive financial aid or loans from the Government and the Central Bank of the Philippines for and in behalf of the cooperative banks and primary cooperatives and their federations engaged in business and to supervise the lending and collection of loans; (3) To mobilize savings of its members for the benefit of the cooperative movement; (4) To act as a balancing medium for the surplus funds of cooperatives and their federations; (5) To discount bills and promissory notes issued and drawn by cooperatives; (6) To issue negotiable instruments to facilitate the activities of cooperatives; (7) To issue debentures subject to the approval of and under conditions and guarantees to be prescribed by the Government; (8) To borrow money from banks and other financial institutions within the limit to be prescribed by the Central Bank; and (9) To carry out all other functions as may be prescribed by the

30

Authority: Provided, That the performance of any banking function shall be subject to prior approval by the Central Bank of the Philippines. (d) Powers: same as RB Sec. 101 (b)(5), MRB and BSP Circular No. 271, Series of 2001 A Coop Bank shall be organized primarily to provide financial and credit services to cooperatives and may per- form any or all of the services offered by RBs.

F. Islamic Banks (IB): Sec. 3.2 (f), GBL (a) Governing Law Sec. 71, par. 2, GBL: …The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. i.

Organization, ownership, capital requirements, supervision and general conduct of business

powers,

(b) Purpose Sec. 3, Islamic Bank Charter: The primary purpose of the Islamic Bank shall be to promote and accelerate the socioeconomic development of the Autonomous Region by performing banking, financing and investment operations and to establish and participate in agricultural, commercial and industrial ventures based on the Islamic concept of banking. All business dealings and activities of the Islamic Bank shall be subject to the basic principles and rulings of Islamic Shari'a within the purview of the aforementioned declared policy. Any zakat or "ithe" paid by the Islamic Bank on behalf of its shareholders and depositors shall be its obligation to appropriate said zakat fund and to disburse it in legitimate channels to be ascertained first by the Shari'a Advisory Council. (c) Powers Sec. 6, Islamic Bank Charter: The Al-Amanah Islamic Investment Bank of the Philippines, upon its organization, shall be a body corporate and shall have the power: (1) To prescribe its bylaws and its operating policies; (2) To adopt, alter and use a corporate seal; (3) To make contracts, to sue and be sued; (4) To borrow money; to own real or personal property and introduce improvements thereon, and to sell, mortgage or otherwise dispose of the same; (5) To employ such officers and personnel, preferably from the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 qualified Muslim sector, as may be necessary to carry Islamic banking business; (6) To establish such branches and agencies in provinces and cities in the Philippines, particularly where Muslims are predominantly located, and such correspondent offices in other areas in the country or abroad as may be necessary to carry on its Islamic banking business, subject to the provisions of Section 2 hereof; (7) To perform the following banking services: (a) Open current or checking accounts; (b) Open savings accounts for safekeeping or custody with no participation in profit and losses except unless otherwise authorized by the account holders to be invested; (c) Accept investment account placements and invest the same for a term with the Islamic Bank's funds in Islamically permissible transactions on participation basis; (d) Accept foreign currency deposits from banks, companies, organizations and individuals, including foreign governments; (e) Buy and sell foreign exchange; (f) Act as correspondent of banks and institutions to handle remittances or any fund transfers; (g) Accept drafts and issue letters of credit or letters of guarantee, negotiate notes and bills of exchange and other evidence of indebtedness under the universally accepted Islamic financial instruments; (h) Act as collection agent insofar as the payment orders, bills of exchange or other commercial documents are exclusive of riba or interest prohibitions; (i) Provide financing with or without collateral by way of leasing, sale and leaseback, or cost plus profit sales arrangement; (j) Handle storage operations for goods or commodity financing secured by warehouse receipts presented to the Bank; (k) Issue shares for the account of institutions and companies assisted by the Bank in meeting subscription calls or augmenting their capital and/or fund requirements as may be allowed by law; (l) Undertake various investments in all transactions allowed by Islamic Shari'a in such a way that shall not permit the haram (forbidden), nor forbid the halal (permissible); (8) To act as an official government depository, or its branches, subdivisions and instrumentalities and of

NOTES

31

government-owned or controlled corporations, particularly those doing business in the autonomous region; (9) To issue investment participation certificates, muquaradah (non-interest-bearing bonds), debentures, collaterals and/or the renewal or refinancing of the same, with the approval of the Monetary Board of the Central Bank of the Philippines, to be used by the Bank in its financing operations for projects that will promote the economic development primarily of the Autonomous Region; (10) To carry out financing and joint investment operations by way of mudarabah partnership, musharaka joint venture or by decreasing participation, murabaha purchasing for others on a cost-plus financing arrangement, and to invest funds directly in various projects or through the use of funds whose owners desire to invest jointly with other resources available to the Islamic Bank on a joint mudarabah basis; (11) To invest in equities of the following allied undertakings: (a) Warehousing companies; (b) Leasing companies; (c) Storage companies; (d) Safe deposit box companies; (e) Companies engaged in the management of mutual funds but not in the mutual funds themselves; and (f) Such other similar activities as the Monetary Board of the Central Bank of the Philippines has declared or may declare as appropriate from time to time, subject to existing limitations imposed by law; (12) To exercise the powers granted under this Charter and such incidental powers as may be necessary to carry on its business, and to exercise further the general powers mentioned in the Corporation Law and the General Banking Act, insofar as they are not inconsistent or incompatible with the provisions of this Charter. Sec. 101 (b)(6), MRB and BSP Circular No. 271, Series of 2001 In addition to the general powers incident to corporations and those provided in other laws, as well as in Circular No. 105 (Appendix 44), insofar as they are not inconsistent or incompatible with the provisions of R.A. No. 6848, an IB may perform any or all of the following services: (a) Open savings accounts for safekeeping or custody with no participation in profit and losses except unless otherwise authorized by the account holders to be invested;

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (b) Accept investment account placements and invest the same for a term with the IB’s funds in Islamically permissible transactions on participation basis; (c) Accept foreign currency deposits from banks, companies, organizations and individuals, including foreign governments; (d) Buy and sell foreign exchange; (e) Act as correspondent of banks and institutions to handle remittances or any fund transfers; (f) Accept drafts and issue letters of credit or letters of guarantee, negotiate notes and bills of exchange and other evidence of indebtedness under the universally accepted Islamic financial instruments; (g) Act as collection agent in so far as the payment orders, bills of exchange or other commercial documents are exclusive of riba or interest prohibitions; (h) Provide financing with or without collateral by way of leasing, sale and leaseback, or cost plus profit sales arrangement; (i) Handle storage operations for goods or commodity financing secured by warehouse receipts presented to the bank; (j) Issue shares for the account of institutions and companies assisted by the bank in meeting subscription calls or augmenting their capital and/or fund requirements as may be allowed by law; (k) Undertake various investments in all transactions allowed by the Islamic Shari’a in such a way that shall not permit the haram (forbidden), nor forbid the halal (permissible); (l) Act as an official government depository, or its branches, subdivisions and instrumentalities and of governmentowned or -controlled corporations, particularly those doing business in the autonomous region; (m) Issue investment participation certificates, muquaradah (non-interest- bearing bonds), debentures, collaterals and/ or the renewal and refinancing of the same, with the approval of the Monetary Board to be used by the IB in its financing operations for projects that will promote the economic development primarily of the Autonomous Region; (n) Carry out financing and joint investment operations by way of mudarabh purchasing for others on a cost-plus financing arrangement, and invest funds directly in various projects or through the use of funds whose owners desire to invest jointly with other resources available to the IB on a joint mudarabh basis; and (o) Invest in equities of the following allied undertakings:

NOTES i. ii. iii. iv. v.

32

Warehousing companies; Leasing companies; Storage companies; Companies engaged in the management of mutual funds but not in the mutual funds themselves; and Such other similar activities as the Monetary Board has declared or may declare as appropriate from time to time, subject to existing limitations imposed by law.

G. Other Classification of Banks: Sec. 3.2 (g), GBL (a) Land Bank of the Philippines Code of Agrarian Reform of the Philippines Section 74. Creation - To finance the acquisition by the Government of landed estates for division and resale to small landholders, as well as the purchase of the landholding by the agricultural lessee from the landowner, there is hereby established a body corporate to be known as the "Land Bank of the Philippines", hereinafter called the "Bank", which shall have its principal place of business in Manila. The legal existence of the Bank shall be for a period of fifty years counting from the date of the approval hereof. The Bank shall be subject to such rules and regulations as the Central Bank may from time to time promulgate. Section 75. Powers in General - To carry out this main purpose, the Bank shall have the power: (1) To prescribe, repeal, and alter its own by laws, to determine its operating policies, and to issue such rules and regulations as may be necessary to achieve the main purpose for the creation of the Bank; (2) To adopt, alter and use a corporate seal; (3) To acquire and own real and personal property and to sell, mortgage or otherwise dispose of the same; (4) To sue and be sued, make contracts, and borrow money from both local and foreign sources. Such loans shall be subject to approval by the President of the Philippines and shall be fully guaranteed by the Government of the Philippines; (5) Upon recommendation of the Committee on Investments, to hold, own, purchase, acquire, sell or otherwise invest, or reinvest in stocks, bonds or other securities capable of giving the Bank a reasonably assured income sufficient to support its financing activities and give its private stockholders a fair return on their holdings: Provided, however, That pending the organization of the Committee on Investments, the Bank may exercise the powers herein provided without the recommendation of said Committee on Investments: Provided, further, That in case of the dissolution of the Land Bank all unsold public lands transferred to it which may be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 allocated to the Government of the Philippines in the course of liquidation of the business of the Bank shall revert to the Department of Agriculture and Natural Resources; and (6) To provide, free of charge, investment counselling and technical services to landowners whose lands have been acquired by the Land Bank. For this purpose, the Land Bank may contract the services of private consultants. Section 76. Issuance of Bonds - The Land Bank shall, upon recommendation by the Board of Trustees and approval of the Monetary Board of the Central Bank, issue bonds, debentures and other evidences of indebtedness at such terms, rates and conditions as the Bank may determine up to an aggregate amount not exceeding, at any one time, five times its unimpaired capital and surplus. Such bonds and other obligations shall be secured by the assets of the Bank and shall be fully tax exempt both as to principal and income. Said income shall be paid to the bondholder every six (6) months from the date of issue. These bonds and other obligations shall be fully negotiable and unconditionally guaranteed by the Government of the Republic of the Philippines and shall be redeemable at the option of the Bank at or prior to maturity, which in no case shall exceed twenty-five years. These negotiable instruments of indebtedness shall be mortgageable in accordance with established banking procedures and practices to government institutions not to exceed sixty per centum of their face value to enable the holders of such bonds to make use of them in investments in productive enterprises. They shall also be accepted as payments for reparation equipment and materials. The Board of Trustees shall have the power to prescribe rules and regulations for the registration of the bonds issued by the Bank at the request of the holders thereof. Section 77. Issuance of Preferred Shares of Stock to Finance Acquisition of Landed Estates - The Land Bank shall issue, from time to time, preferred shares of stock in such quantities not exceeding six hundred million pesos worth of preferred shares as may be necessary to pay the owners of landed estates in accordance with Sections eighty and eighty-one of this Code. The amount of shares that the Bank may issue shall not exceed the aggregate amount need to pay for acquired estates in the proportions prescribed in said Section eighty of this Code. The Board of Trustees shall include as a necessary part of the by-laws that it shall issue under Section seventy-five of this Code, such formula as it deems adequate for determining the net asset value of its holdings as a guide and basis for the issuance of preferred shares. The shares of stock issued under the authority of this provision shall be guaranteed a rate of return of six per centum per annum. In the event that the earnings of the Bank for any single fiscal year are not sufficient to enable the Bank, after making reasonable allowance for administration, contingencies and growth, to declare dividends at the guaranteed rate, the

NOTES

33

amount equivalent to the difference between the Bank's earnings available for dividends and that necessary to pay the guaranteed rate shall be paid by the Bank out of its own assets but the Government shall, on the same day that the Bank makes such payment, reimburse the latter in full, for which purpose such amounts as may be necessary to enable the Government to make such reimbursements are hereby appropriated out of any moneys in the National Treasury not otherwise appropriated. The Bank shall give sufficient notice to the Budget Commissioner and the President of the Philippines in the event that it is not able to pay the guaranteed rate of return on any fiscal period. The guaranteed rate of return on these shares shall not preclude the holders thereof from participating at a percentage higher than six per centum should the earnings of the Bank for the corresponding fiscal period exceed the guaranteed rate of return. The Board of Trustees shall declare and distribute dividends within three months after the close of each fiscal year at the guaranteed rate unless a higher rate of return in justified by the Bank's earnings after making reasonable allowance for administration, contingencies and growth, in which case dividends shall be declared and distributed at a higher rate. The capital gains derived from the sale or transfer of such shares and all income derived therefrom in the form of dividends shall be fully exempt from taxes. Section 78. Special Guaranty Fund - In the event that the Bank shall be unable to pay the bonds, debentures, and other obligations issued by it, a fixed amount thereof shall be paid from a special guaranty fund to be set up by the Government, to guarantee the obligation of the Land Bank, and established in accordance with this Section, and thereupon, to the extent of the amounts so paid, the Government of the Republic of the Philippines shall succeed to all the rights of the holders of such bonds, debentures or other obligations: Provided, however, That for the next four years after the establishment of the Bank, the payment to the special guaranty fund should not exceed one million pesos per year, after which period, the Government shall pay into the guaranty fund the sum of five hundred thousand pesos each year until the cumulative total of such guaranty fund is no less than twenty percent of the outstanding net obligation of the Land Bank at the end of any single calendar year. The guaranty fund shall be administered by the Central Bank of the Philippines in the manner most consistent with its charter. For the purpose of such fund, there shall be appropriated annually the sum of one million pesos out of any moneys in the National Treasury not otherwise appropriated, until the total amount of twenty million pesos shall have been attained. Section 79. Receiving Payments and Time Deposits - The Bank, under the supervision of the Monetary Board and subject to the provisions of the General Banking Act, shall receive savings and time deposits from the small landholders in whose favor public lands or landed estates acquired by the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Land Authority have been sold and, for this purpose, establish, and maintain branches and offices in such areas as may be necessary to service such deposits. The Monetary Board shall supervise and authorize the Bank to receive savings and time deposits from the public in areas where facilities for such a service do not exist or cannot be adequately provided by other deposit institutions. Section 80. Making Payment to Owners of Landed Estates - The Land bank shall make payments in the form herein prescribed to the owners of land acquired by the Land Authority for division and resale under this Code. Such payment shall be made in the following manner: ten per centum in cash and the remaining balance in six percent, tax-free, redeemable bonds issued by the Bank in accordance with Section seventy-six, unless the landowner desires to be paid in shares of stock issued by the Land Bank in accordance with Section seventy-seven in an amount not exceeding thirty per centum of the purchase price. In the event there is an existing lien on encumbrance on the land in favor of any Government institution at the time of acquisition by the Land Bank, the bonds and/or shares, in that order, shall be accepted as substitute collaterals to secure the indebtedness. The profits accruing from payment shall be exempt from the tax on capital gains. Section 81. Capital - The authorized capital stock of the Bank shall be one billion five hundred million pesos divided into ninety million shares with a par value of ten pesos each, which shall be fully subscribed by the Government and sixty million preferred shares with a par value of ten pesos each which shall be issued in accordance with the provisions of Sections seventy-seven and eighty-three of this Code. Of the total capital subscribed by the Government, two hundred million pesos shall be paid by the Government within one year from the approval of this Code, and one hundred million pesos every year thereafter for two years for which purpose the amount of two hundred million pesos is hereby appropriated upon the effectivity of this Code, and one hundred million pesos every year for the next two years thereafter, out of the funds in the National Treasury not otherwise appropriated for the purpose: Provided, That if there are not enough funds in the National Treasury for the appropriation herein made, the Secretary of Finance, with the approval of the President of the Philippines, shall issue bonds or other evidence of indebtedness to be negotiated either locally or abroad in such amount as may be necessary to cover any deficiency in the amount above-appropriated but not exceeding four hundred million pesos, the proceeds of which are hereby appropriated: Provided, further, That the bonds to be issued locally shall not be supported by the Central Bank: Provided, finally, That there is automatically appropriated out of the unappropriated funds in the National Treasury such

NOTES

34

amounts as is necessary to cover the losses which shall include among other things loss of earnings occasioned by the limitation of the resale cost herein provided such that said amount together with the administrative expenses mentioned in Section ninety hereof shall not exceed in the aggregate the equivalent of two and one-half per centum of its assets limited therein. Section 82. Government Shares - All shares of stock in the Bank subscribed or owned by the Government shall not be entitled to participate in the income earned by the Bank from its investments and other operations, whether in the form of cash or stock dividends or otherwise. Amounts expended for the administration of the Bank shall not be deemed as a participation of the Government in income. Section 83. Preferred Shares - All preferred shares of stock issued under Section seventy-seven of this Code shall be entitled to the income earned by the Bank on its investments and other operations and shall have a limited right to elect annually one member of the Board of Trustees and one member of the Committee on Investments: Provided, That the holders of such preferred shares of stock shall not bring derivative suits against the Bank. Such preferred shares shall be fully transferable: Provided, further, That upon the liquidation of the Bank, the redemption of such preferred shares shall be given priority and shall be guaranteed at par value. Section 84. Voting of Shares - The voting power of all the shares of stock of the Land Bank owned or controlled by the Government shall be vested in the President of the Philippines or in such person or persons as he may from time to time designate. Section 85. Use of Bonds - The bonds issued by the Land Bank may be used by the holder thereof and shall be accepted in the amount of their face value as any of the following: (1) Payment for agricultural lands or other real properties purchased from the Government; (2) Payment for the purchase of shares of stock of all or substantially all of the assets of the following Government owned or controlled corporations: The National Development Company; Cebu Portland Cement Company; National Shipyards and Steel Corporation; Manila Gas Corporation; and the Manila Hotel Company. Upon offer by the bondholder, the corporation owned or controlled by the Government shall, through its Board of Directors, negotiate with such bondholder with respect to the price and other terms and conditions of the sale. In case there are various bondholders making the offer, the one willing to purchase under terms and conditions most favorable to the corporation shall be preferred. If no price is acceptable to the corporation, the same shall be determined by a Committee of Appraisers composed of three members, one to be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 appointed by the corporation, another by the bondholder making the highest or only offer, and the third by the two members so chosen. The expenses of appraisal shall be borne equally by the corporation and the successful purchaser. Should the Government offer for sale to the public any or all of the shares of stock or the assets of any of the Government owned or controlled corporations enumerated herein, the bidder who offers to pay in bonds of the Land Bank shall be preferred provided that the various bids be equal in every respect except in the medium of payment. (3) Surety or performance bonds in all cases where the Government may require or accept real property as bonds; and (4) Payment for, reparations goods. Section 86. Board of Trustees - The affairs and business of the Bank shall be directed, its powers exercised and its property managed and preserved by a Board of Trustees. Such Board shall be composed of one Chairman and four members, one of whom shall be the head of the Land Authority who shall be an ex-officio member of such Board and another to be elected by the holders of preferred shares. The Chairman and two members of the Board of Trustees shall serve on full-time basis with the Bank. With the exception of the head of the Land Authority and the member elected by the holders of preferred shares, the Chairman and all members of the Board shall be appointed by the President with the consent of the Commission on Appointments for a term of seven years, except that the first Chairman and members to be appointed under this Code shall serve for a period of three, five and seven years, such terms to be specified in their respective appointments. Thereafter the Chairman and members, with the exception of the ex-officio member, appointed after such initial appointment shall serve for a term of seven years including any Chairman or member who is appointed in place of one who resigns or is removed or otherwise vacates his position before the expiration of his seven-year term. The Chairman and the two full-time members of the Board shall act as the heads of such operating departments as may be set up by the Board under the authority granted by Section eighty-seven of this Code. The Chairman shall have authority, exerciseable at his discretion, to determine from time to time the organizational divisions to be headed by each member serving full time and to make the corresponding shifts in designations pursuant thereto. The compensation of the Chairman and the members of the Board of Trustees serving full time shall be twenty-four thousand and eighteen thousand pesos, respectively. The other members of the Board shall receive a per diem of one hundred pesos for each session of the Board that they attend. Section 87. The Chairman and Vice-Chairman - The Chairman of the Board shall be the chief executive officer of the Bank. He shall have direct control

NOTES

35

and supervision of the business of the Bank in all matters which are not by this Code or by the by-laws of the Bank specifically reserved to be done by the Board of Trustees. He shall be assisted by an Executive Vice-Chairman and one or more vice-chairman who shall be chosen and may be removed by the Board of Trustees. The salaries of the Vice-Chairmen shall be fixed by the Board of Trustees with the approval of the President of the Philippines. Section 88. Qualifications of Members - No person shall be appointed Chairman or member of the Board unless he is a man of accepted integrity, probity, training and experience in the field of banking and finance, at least thirty-five years of age and possessed of demonstrated administrative skill and ability. Section 89. Committee on Investments - There shall be a Committee on Investments composed of three members; the member of the Board of Trustees elected by the holders of preferred shares as Chairman, one member to be appointed by the President of the Philippines from among the government members of the Board of Trustees, and another member to be selected by the holders of preferred shares under Section eighty-three of this Code. The Committee on Investments shall recommend to the Board of Trustees the corporations or entities from which the Land Bank shall purchase shares of stock. The Land Bank shall not invest in any corporation, partnership or company wherein any member of the Board of Trustees or of the Committee on Investments or his spouse, direct descendant or ascendant has substantial pecuniary interest or has participation in the management or control of the enterprise except with the unanimous vote of the members of the Board of Trustees and of the Committee on Investments, excluding the member interested, in a joint meeting held for that purpose where full and fair information of the extent of such interest or participation has been adequately disclosed in writing and recorded in the minutes of the meeting: Provided, That such interested member shall not in any manner participate in the deliberations and shall refrain from exerting any pressure or influence whatever on any official or member of the Bank whose functions bear on or relate to the investment of the funds of the Bank in the enterprise: Provided, further, That the total investment in any single corporation, partnership, company, or association shall not exceed five per centum of the total investible funds. Section 90. Personnel; Cost of Administration - The Administrative expenses of the Bank during any single fiscal year shall not in any case exceed two and one-half per centum of its total assets. The Board of Trustees shall provide for an organization and staff of officers and employees necessary to carry out the functions of the Bank, fix their compensation, and appoint and remove such officers and employees for cause. The Bank officers and employees shall be subject to the rules and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 regulations issued by the Civil Service Commission but shall not fall under the Wage and Position Classification Office. The Board of Trustees shall recommend to the Civil Service Commission rules and regulations for the recruitment, appointment, compensation, administration, conduct, promotion and removal of all Bank officers and employees under a strict merit system and prepare and conduct examinations under the supervision of said Commission. Section 91. Legal counsel - The Secretary of Justice shall be ex-officio legal adviser of the Bank. Any provision of law to the contrary notwithstanding, the Land Bank shall have its own Legal Department, the chief and members of which shall be appointed by the Board of Trustees. The composition, budget and operating expenses of the Office of the Legal Counsel and the salaries and traveling expenses of its officers and employees shall be fixed by the Board of Trustees and paid by the Bank. Section 92. Auditor - The Auditor General shall be the ex-officio auditor of the Bank and shall appoint a representative, who shall be the auditor in charge of the auditing office of the Bank. The Auditor General shall, upon the recommendation of the auditor of the Bank, appoint or remove the personnel of the auditing office. The compensation, budget and operating expenses of the auditing office and the salaries and traveling expenses of the officers and employees thereof shall be fixed by the Board of Trustees and paid by the Bank notwithstanding any provision of law to the contrary. Section 93. Report on Condition of Bank - The representative of the Auditor General shall make a quarterly report on the condition of the Bank to the President of the Philippines, to the Senate through its President, to the House of Representatives through its Speaker, to the Secretary of Finance, to the Auditor General and to the Board of Trustees of the Bank. The report shall contain, among other things, a statement of the resources and liabilities including earnings and expenses, the amount of capital stock, surplus, reserve and profits, as well as losses, bad debts, and suspended and overdue paper carried in the books as assets of the Bank, and a plantilla of the Bank. Section 94. Auditing Rules and Regulations - The Auditor General shall, with respect to the Bank, formulate improved and progressive auditing rules and regulations designed to expedite the operations of the Bank and prevent the occurrence of delays and bottlenecks in its work. Section 95. Removal of Members - The President of the Philippines may, at any time, remove the Chairman or any member of the Board appointed by him if the interest of the Bank so requires, for any of the following causes: (1) Mismanagement, grave abuse of discretion, infidelity in the conduct of fiduciary relations, or gross neglect in the performance of duties; (2) Dishonesty, corruption, or any act involving moral turpitude; and

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(3) Any act or performance tending to prejudice or impair the substantial rights of the stockholders. Conviction of the Chairman or a member for a crime carrying with it a penalty greater than arresto mayor shall cause the removal of such Chairman or member without the necessity of Presidential action. The Chairman or member may, in any of the above cases, be civilly liable for any damage that may have been suffered by the stockholders. Section 96. Transfer of Claims and Liabilities - The assets of the former Land Tenure Administration and the National Resettlement and Rehabilitation Administration in the form of claims and receivables arising from the sale or transfer of private and public lands, agricultural equipment, machinery, tools and work animals, but excluding advances made for subsistence, to small landholders shall, after an exhaustive evaluation to determine their true asset value, be irrevocably transferred to the Bank under such arrangements as the Land Authority and the Bank shall agree upon. Thereafter, the Bank shall have authority and jurisdiction to administer the claims, to collect and make adjustments on the same and, generally, to do all other acts properly pertaining to the administration of claims held by a financial institution. The Land Authority, upon request of the Bank, shall assist the latter in the collection of such claims. The Land Authority shall be entitled to collect from the Bank no more than the actual cost of such collection services as it may extend. The claims transferred under this Section shall not be considered as part of the Government's subscription to the capital of the Bank. Section 97. Regulation - The Bank shall not be subject to the laws, rules and regulations governing banks and other financial institutions of whatever type except with respect to the receipt of savings and time deposits in accordance with Section seventy-nine of this Code, in which case the legal reserve and other requirements prescribed by the Central Bank for such deposits shall apply. The Bank shall be operated as an autonomous body and shall be under the supervision of the Central Bank. Section 98. Tax Exemption - The operations, as well as holdings, equipment, property, income and earnings of the Bank from whatever sources shall be fully exempt from taxation. Section 99. Organization of Bank - The Bank shall be organized within one year from the date that this Code takes effect. Section 100. Penalty for Violation of the Provisions of this Chapter - Any trustee, officer, employee or agent of the Bank who violates or permits the violation of any of the provisions of this Chapter, or any person aiding or abetting the violations of any of the provisions of this Chapter, shall be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment at the discretion of the Court. (b) Development Bank of the Philippines Revised Charter of DBP Sec. 2. Name, Purpose and Domicile. The Development Bank of the Philippines, hereinafter called the Bank, operating under the provisions of Republic Act No. 85, as amended, shall henceforth operate under the provisions of this 1986 Revised Charter. The Bank shall be a body corporate and shall exist for a period of fifty years. The primary purpose of the Bank shall be to provide banking services principally to service the medium and long term needs of agricultural and industrial enterprises, particularly in the country-side and preferably for small and medium scale enterprises; Provided, however, that the pursuit of these objectives shall be undertaken within the context of a financially viable and stable banking institutions; Provided, further that the Bank shall continue to be classified as a development Bank, Provided, finally, that unless otherwise provided herein, the Bank may perform all other functions of a thrift bank. The Bank's principal office and place of business shall be in the National Capital Region, also known as Metro Manila. It may open and maintain branches, agencies or other offices at such places in the Philippines as its Board of Directors may deem advisable, with the prior approval of the Monetary Board of the Central Bank of the Philippines. Sec. 3. Corporate Powers. The Development Bank of the Philippines shall have the power. (a) To accept such deposits as are allowed thrift banks under existing law and Central Bank regulations, including but not limited to demand, savings, and time deposits. (b) To grant loans for the establishment, development or expression of any agricultural or industrial enterprise; (c) To accept and manage trust funds and properties and carry on the business of a trust corporation; (d) To act as official government depository with authority to maintain deposits of the government, its subdivisions, branches, and instrumentalities, and of government-owned or controlled corporations, subject to such rules and regulations as the Monetary Board may prescribe; (e) To acquire, assign, or otherwise dispose of marketable securities and other debt instruments which are essential to the effective conduct of its general banking activities; (f) To enter into such contracts of guaranty on suretyship as are generally allowed domestic banking institutions under the General

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Banking Act; and (g) To adopt, amend, or charge its By-laws; to adopt, alter and use a seal; to make contracts; to sue and be sued; and to exercise the general powers of a corporation mentioned in the Corporation Code of the Philippines, and of a thrift bank under the General Banking Act, insofar as such powers are not inconsistent or incompatible with the provisions of this Charter. Unless otherwise provided in this Charter, the exercise of the abovementioned powers on banking shall be subject to applicable law, as well as regulations promulgated by the Central Bank of the Philippines. Sec. 4. Loans and other Investments. Loans and other investments of the Bank shall be subject to the same limits and ceilings applicable to thrift banks under existing provisions of law and regulations promulgated by the Monetary Board, including but not limited to prescribed limits and ceilings; Provided, that loans and investments existing as of the date of the effectivity of this Charter and which loans and investments would exceed the prescribed limits as a result of the implementation of its rehabilitation program, as well as those investment authorized under Section 6 hereof which are in excess of the prescribed limits shall be reduced within five years in accordance with such program of reduction as may be approved by the Monetary Board. The period of reduction may be extended up to another five years by the President of the Philippines upon recommendation by the Monetary Board. Sec. 5. Issuance of Bonds. The Bank may issue all kinds of bonds, debentures, and securities, and/or the renewal or refunding thereof (hereinafter called "Bonds"), within and/or outside the Philippines, at such terms, rates, and conditions as the Board of Directors of the Bank may determine, subject to compliance with the provisions of applicable law, and rules and regulations promulgated by the Monetary Board. The Bank shall provide for appropriate reserves for the redemption or retirement of the bonds. These bonds and other obligations shall be redeemable at the option of the Bank at or before maturity and in such manner as may be stipulated therein and shall bear such rate of interest as may be fixed by the Bank. Such obligations shall be secured by the assets of the Bank, including the stocks, bonds, debentures, and other securities purchased or held by it under the provisions of this Charter. These bonds and debentures may be long-term, medium, or short-term, with fixed interest rate or floating interest rate. Sec. 6. Private Development Banks, Other Thrift Banks and Rural Banks. The Bank may assist private development banks and other privately owned

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 banks in the thrift bank category, as well as rural banks, through general credit accommodations including but not limited to conduit lending and rediscounting operations, and extension of technical and managerial assistance; Provided, That the Bank may likewise make equity investments in private development banks and other private owned banks in the thrift bank category, as well as rural banks, if such investment is in connection with the privatization of certain branches of the Bank; Provided, further, That the extent of such equity investment may, with the prior approval of the Monetary Board, exceed the ceilings prescribed in Section 4 hereof; and, Provided, finally, That after five years from effectivity of this Charter, any equity investment shall not exceed thirty (30%) per cent of the equity in any such bank nor shall its total equity investments exceed the prescribed aggregate ceiling on such investments. Sec. 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per share. These are available for subscription by the National Government. Upon the effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid for by the Government with the net asset values of the Bank remaining after the transfer of assets and liabilities as provided in Section 30 hereof. Sec. 8. Board of Directors Composition Tenure Per Diems. The affairs and business of the Bank shall be directed and its properties managed and preserved and its corporate powers exercised, unless otherwise provided in this Charter, by a Board of Directors consisting of nine members, to be appointed by the President of the Philippines. The term of office of the Chairman, Vice-Chairman, and the members of the Board of Directors shall be for a period of one year or until such time as their successors are appointed. The Chairman and the Vice Chairman of the Board shall be appointed by the President of the Philippines. The Vice Chairman of the Board shall assist the Chairman and act in his stead in case of absence or incapacity. In case of incapacity or absence of both the chairman and vice-chairman, the Board of Directors shall designate a temporary chairman from among its members. No person shall be elected director of the Bank unless he is a natural-born citizen of the Philippines, not less than thirty-five years of age, of good moral character and has attained proficiency, expertise and recognized competence in one or more of the following: banking, finance, economics, law, agriculture, business management, public utility or government administration. At least four of the members of the Board shall come from the private sector.

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Except for the Chairman and the Vice Chairman of the Board, no officer or employee of the Bank may be appointed as a member of the Board of Directors of the Bank; nor shall any director, officer, or employee of any other bank be eligible as a member of the Board of Directors of the Bank. Unless otherwise set by the Board and approved by the President of the Philippines, members of the Board shall be paid a per diem of one thousand pesos for each meeting of the Board of Directors actually attended: Provided, that the total amount of per diems for every single months shall not exceed the sum of Five Thousand Pesos. Sec. 9. Powers and Duties of the Board of Directors. The Board of Directors shall have, among others, the following duties, powers and authority: (a) To formulate policies necessary to carry out effectively the provisions of this Charter and to prescribe, amend, and repeal bylaws, rules and regulations for the effective operation of the Bank, and the manner in which the general business of the Bank may be conducted and the powers granted by law to the Bank exercised; (b) To approve loans, to fix rates of interest on loans and to prescribe such terms and conditions for loans and credits as may be deemed necessary, consistent with the provisions of this Charter; Provided, that the Board may delegate the authority to approve loans to such officers as may be deemed necessary; (c) To adopt an annual budget for the effective operation and administration of the Bank; (d) To create and establish a "Provident Fund" which shall consist of contributions, made both by the Bank and its officers or employees, to a common fund for the payment of benefits to such officers or employees, or their heirs, under such terms and conditions as the Board of Directors may fix; (e) To compromise or release, in whole or in part, any claim or settled liability to the Bank regardless of the amount involved, under such terms and conditions it may impose to protect the interests of the Bank. This authority to compromise shall extend to claims against the Bank; and (f) To appoint, promote or remove officers from the rank of Vice President or its equivalent, and other more senior officer positions, excluding the Chairman and the Vice Chairman. Sec. 10. Chairman and Chief Executive Officer. The Chairman shall be the Chief Executive Officer of the Bank and, as such, shall, on behalf of the Board, have the direction and control of the business affairs and properties of the Bank in all matters which are not by this Charter or by the By-Laws of the Bank specifically reserved to be done by the Board or other officers of the Bank. For this purpose, he shall, among other powers and duties, execute, carry out, and administer the policies, measures, orders, and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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resolutions approved by the Board; direct and supervise the operation and administration of the Bank; and exercise such other powers and perform such other functions or duties as may be directed or assigned to him by law or by the Board from time to time.

enforcement of court writs and processes in cases involving the Bank. The special sheriff of the Bank shall make a report to the proper court after any action taken by him, which shall treat such action as if it were an act of its own sheriffs in all respects.

Particularly, he shall have the power and duty: (a) To sign and execute all contracts concluded by the Bank and enter into all necessary obligations required or permitted by this Charter, upon proper authorization by the Board; and sign all notes, securities certificates, and other major documents of the Bank; (b) To exercise, as Chief Executive Officer of the Bank, the powers of control and supervision over decisions and actions of subordinate officers and all other powers that may be granted by the Board; (c) To report to the Board the main facts concerning the operations of the Bank and to recommend changes in policies which he may deem advisable; (d) To submit an annual report to the President of the Philippines on the result of the operations of the Bank; (e) To recommend to the Board the appointment, promotion, or removal of all officers of the Bank, with the rank of at least vicepresident or its equivalent; (f) To appoint, promote or remove employees and officers below the rank of vice-president or its equivalent; Provided, that promotions, transfers, assignments or reassignments of officers and personnel of the Bank are personnel actions deemed made in the interest of the service and not disciplinary, any provision of the Civil Service Law to contrary notwithstanding; and (g) As required by circumstances, to delegate any of his powers, duties or functions to any officer or director of the Bank, with the approval of the Board.

Sec. 13. Other Officers and Employments. The Board of Directors shall provided for an organization and staff of officers and employees of the Bank and upon recommendation of the Chairman of the Board, fix their remunerations and other emoluments. No Officer or employee of the Bank subject to Civil Service Law shall be dismissed except as provided by law.

Sec. 11. Vice Chairman and Chief Operating Officer. The Vice Chairman shall be the Chief Operating Officer of the Bank and shall assume and exercise such specific duties and responsibilities as may be delegated to him by the Chairman. Sec. 12. Legal Matters and Cases. The Bank shall have its own Legal Department, the head of which shall be appointed by the Board of Directors of the Bank upon recommendation of the Chairman. In appropriate cases, the Bank may avail also of the legal services of any government legal office authorized to render such services to governmentowned or controlled corporations. The Bank may, upon the recommendation of its Chief Legal Counsel, deputize any member of its legal staff to act as special sheriff in foreclosure cases, in the sale or attachment of the debtor's properties and in the

Sec. 14. Exemption from Attachment. The provisions of any law to the contrary notwithstanding, securities on loans and/or other accommodation granted by the Bank or its predecessors-in-interest shall not be subject to attachment, execution or any other court process, nor shall they be included in the property of insolvent persons or institutions, unless all debts and obligations of the debtor to the Bank and its predecessors-in-interest have been previously paid, including accrued interest, penalties, collection expenses, and other charges, subject to the provisions of paragraph (e) of Section 9 of this Charter. Sec. 15. Officer to Conduct Sale. In case of sale of mortgaged properties under the provisions of existing laws or of this Charter, such sale shall be conducted under the direction of the sheriff of the Province or any special sheriff of the Bank, or of a municipal judge or notary public of the City or Municipality where the sale is to be made, who shall be entitled to collect the fees provided for in the Rules of the Court with respect to sale of properties under execution. Sec. 16. Right of Redemption. Any mortgagor of the Bank whose real property has been extrajudicially sold at public auction shall, within one (1) year counted from the date of registration of the certificate of sale, have the right to redeem the real property by paying to the Bank all of the latter's claims against him, as determined by the Bank. The Bank may take possession of the foreclosed property during the redemption period. When the Bank takes possession during such period, it shall be entitled to the fruits of the property with no obligation to account for them, the same being considered compensation for the interest that would otherwise accrue on the account. Neither shall the Bank be obliged to post a bond for the purpose of such possession. Sec. 17. Inhibition from Board Meeting of Member with Personal Interest. Whenever any member attending a meeting of the Board of Directors has a direct personal interest in the discussion or resolution of any given matter, or any of his relatives within the second civil degree or consanguinity or

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 second civil degree of affinity has such an interest, said member shall not participate in the discussion or resolution of the matter and must retire from the meeting during the deliberation thereon. The minutes of the meeting, which shall note the subject matter, when resolve, the fact that a member had a personal interest in it, and the withdrawal of the member concerned, may be made available to the public. For this purpose, the member of the Board shall, at the beginning of their respective terms, disclose to the board any and all interests they may have in any corporation, partnership. or association and shall, thereafter, disclosed to the Board, any charges thereto. Sec. 18. Prohibition on Persons with Personal Interest. No member of the Board, officer, attorney, agent, or employee of the Bank shall in any manner, directly participate in the deliberation upon or the determination of any question affecting his direct personal interest or the personal interests of his relatives within the second civil degree of consanguinity or second civil degree of affinity, or of any corporation, partnership, or association in which he has a direct interest. Any person violating the provisions of this section shall be summarily removed from office and shall upon conviction be punished with a not less than one thousand pesos nor more than ten thousand pesos or with imprisonment of not less than one year nor more than five years, or by both fine and imprisonment at the discretion of the court. Sec. 19. Borrowing by Directors, Officer and Employees Restriction and Limitation. No director or officer or employees of the Bank or any corporation, partnership, or company wherein any member of the Board of Directors, officer or employee, and/or their respective immediate family is a controlling shareholder, or wherein he is a director or officer shall, either directly or indirectly, for himself or as representative or agent of others, borrow any of the deposits of funds from the bank, nor shall he become a guarantor, or in any manner be an obligator for money borrowed from the bank or loaned by it: Provided, That this prohibition on loans to directors, officers and employees shall not include loans allowed in the form of fringe benefits granted in accordance with rules and regulations as may be prescribed by the Monetary Board of the Central Bank. Sec. 20. Rules and Regulations on Conflict of Interest. The foregoing provisions notwithstanding and in addition thereto, the Board of Directors is hereby authorized to issue rules and regulations for the purposes of determining and resolving conflict of interest questions, which rules shall, in particular, include the requirement on all officers and employees of the Bank to disclose any shareholdings they, or their relatives within the second civil degree of consanguinity or second civil degree of affinity, may have in any corporation, partnership, or company in excess of 2% of the equity of said corporation, partnership, or company.

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Sec. 21. Examination of the Bank. The Bank shall be subject to supervision and examination by the appropriate department of the Central Bank of the Philippines. Sec. 22. Prohibition on Officers and Employees of the Bank. Except as required by law, or upon order of a court of competent jurisdiction, or the express order of the President of the Philippines or written permission of the client, no officer or employee of the Bank shall reveal to, nor allow to be examined, inquired or looked into, by any third person, government official, bureau or office any information relative to details of individual accounts or specific banking transactions: Provided, that in respect to deposits or whatever nature, the provisions of existing law shall apply. This prohibition shall not apply to the exchange of confidential credit information among government financial institutions or among banks, in accordance with established banking practices or as may be allowed by law. Sec. 23. Exaction of Fee, Commission, Gift or Charge. No authorized fee, commission, gift, or charge of any kind shall be exacted, demanded, or paid, for obtaining loans from the Bank, and any officer, employee, or agent of the Bank found guilty of exacting, demanding, or receiving any fee services in obtaining a loan, shall be punished by a fine of not less than one thousand nor more than twenty thousand pesos, imprisonment for not less than one year nor more than ten years, and perpetual disqualification from public office. Sec. 24. Penal Provisions of General Banking Act. The penal provisions of Section 87-A of the General Banking Act shall be applicable to officers, employees and borrowers of the Bank. Sec. 25. General Penal Provisions. Any officer or employee of the Bank who violates, or permits any of the officers, employees or agents of said Banks or any other person to violate, any of the provision of this Chapter not specifically punished in the preceding section and any person violating any provision of this Charter or aiding and abetting the violation thereof, shall be punished with a fine not less than one thousand nor more than ten thousand pesos and with imprisonment not less than one year nor more than five years. Sec. 26. Other Liability of Guilty Officer or Employee. Any member of the Board of Directors or officer or employee of the Bank who willfully violates any of the provisions of this Charter shall in, addition to the criminal and administrative liability resulting from such act, be held liable for any loss or injury suffered by the Bank as a result of such violation. Sec. 27. Liability of Directors, Officers or Partners of Offending Corporation or Partnership. If the violation of the provisions of this Charter is committed

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 by a corporation or partnership, the directors, officers or partners hereof who participated in the violation shall be criminally liable for such violation. Sec. 28. Applicability of Banking Laws. The provisions of Republic Act No. 265, as amended, and Republic Act No. 337, as amended, insofar as applicable and not in conflict with any provision of this Charter, shall apply to the Bank. TRANSITORY PROVISIONS Sec. 29. Preparatory Work. Upon the effectivity of this Charter, the Board of Directors and management of the Bank shall undertake the appropriate steps to establish its current financial condition for the purpose of determining its net asset values and the book value of shares thereof. The shares of stock held by the Government of the Philippines in the Bank are deemed cancelled and exchange for common voting shares of the Bank. Sec. 30. Transfer of Assets and Liabilities of the Development Bank of the Philippines. The Bank shall transfer to the National Government such of its assets and liabilities as may be necessary to rehabilitate the bank and to start its operations under the Revised Charter on a viable basis, as determined by the appropriate authorities, such assets to include but need not be limited to its acquired assets and non-performing accounts and such liabilities to include real as well as contingent liabilities. The National Government is hereby authorized to accept the same under terms and conditions as may be mutually acceptable to the Bank and the National Government. Sec. 31. Maintenance, Care and Preservation of Assets Transferred to the National Government. The Bank is hereby authorized to enter into an agreement with the National Government as transferee of assets from the Bank as hereinabove provided, either as an interim arrangement or otherwise and under such terms and conditions as may be necessary to preserve and/or to maintain and/or to dispose of such assets transferred to the National Government. Sec. 32. Authority to Reorganize. In view of the new scope of operations of the Bank, a reorganization of the Bank and a reduction in force are hereby authorized to achieve simplicity and economy in operations, including adopting a new staffing pattern to suit the reduced operations envisioned. The formulation of the program of reorganization shall be completed within six months after the approval of this Charter, and the full implementation of the reorganization program within thirty months thereafter. Sec. 33. Implementing Details; Organization and Staffing of the Bank. Upon the effectivity of this Charter, the Board of Directors of the Bank shall be constituted and its Chairman appointed. The Chairman is hereby authorized, subject to the approval of the Board of Directors as appropriate, to issue

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such orders, rules and regulations as may be necessary to implement the provisions of this Charter including those relative to the financial aspects, if any, and to the reorganization of the Bank as hereinabove authorized which will involve the determination and adoption of (1) the new internal structure of the Bank as reorganized down to the divisional section or lowest organizational levels, including such appropriate units as may be needed to handle caretaking activities such as the disposition of certain assets and the collection of certain accounts; (2) a new staffing pattern including appropriate salary rates, and (3) the initial operating budget. In the implementation of the reorganization of the Bank, as authorized under the preceding section, qualified personnel of the Bank may be appointed to appropriate positions in the new staffing pattern thereof and those not so appointed are deemed separated from the service. No preferential or priority rights shall be given to or enjoyed by any officer or personnel of the Bank for appointment to any position in the new staffing pattern nor shall any officer or personnel be considered as having prior or vested rights with respect to retention in the Bank or in any position as may have been created in its new staffing pattern, even if he should be the incumbent of a similar position thereon. Pending the completion of the personnel actions above provided and the issuance of the appropriate implementing orders, all present remaining incumbents of position in the Bank shall continue to exercise their usual functions, duties and responsibilities. Sec. 34. Separation Benefits. All those who shall retire from the service or are separated therefrom on account of the reorganization of the Bank under the provisions of this Charter shall be entitled to all gratuities and benefits provided for under existing laws and/or supplementary retirement plans adopted by and effective in the Bank: Provided, that any separation benefits and incentives which may be granted by the Bank subsequent to June 1, 1986, which may be in addition to those provided under existing laws and previous retirement programs of the Bank prior to the said date, for those personnel referred to in this section shall be funded by the National Government; Provided, further, that, any supplementary retirement plan adopted by the Bank after the effectivity of this Chapter shall require the prior approval of the Minister of Finance. Sec. 35. Banking Operations under 1986 Revised Charter, Government Laws. The banking operations of the Bank shall be governed by the provisions of the 1986 Revised Charter beginning on January 2, 1987 on such subsequent date as may be determined by the President of the Philippines upon the recommendation of the Minister of Finance.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (c) Philippine Veterans Bank Philippine Veterans Bank Act Section 1. Name Domicile and place of business. There is hereby created a bank to be known as the Philippine Veterans Bank, which shall be commonly called the Veterans Bank. Its principal domicile and place of business shall be in the City of Manila but branches or agencies may be established in the provinces and cities as the Board of Directors may decide. CORPORATE POWERS Section 2. Corporate powers and duties. The said Veterans Bank shall be a body corporate and shall have the power: (a) To prescribe is by-laws; (b) To adopt and use a seal; (c) To sue and be sued; (d) To carry on a trust business is accordance with the provisions of laws governing trust corporations; (e) To grant long-term loans and advances preferably to veterans, their widows, orphans or compulsory heirs against security and real estate and/or other acceptable assets including backpay certificates issued by the National Treasurer pursuant to Republic Act No. 304 and Republic Act No. 897 at the discretion of the Board of Directors for the establishment, rehabilitation or expansion of agriculture, industrial, and other productive enterprises: Provided, That the aggregate of such loans shall not exceed the sum total of the paid-up capital and unimpaired surplus, long-term indebtedness and thirty per cent of the total deposits: Provided, further, That notarial services in connection with loan applications of not more than one thousand pesos (P1,000.00) shall be furnished by the Bank free of charge and in case where the Veterans Bank has no lawyers, notarial services shall be performed by the justice of the peace and other government notaries public, free of charge; (f) To invest in stocks other than shares of stock in mining companies, government guaranteed bonds, and secured collaterals having maturities of not more than thirty (30) years: Provided, That the priorities in the grant of loans for secured collaterals having maturities of not more than thirty years shall be in accordance with the rules and regulations established by the Central Bank; (g) With the approval of the President of the Philippines, to issue bonds and other certificates of indebtedness against its credits secured by real estate but not in excess of ninety per cent of the value thereof. The proceeds from

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the sale of such bonds and/or certificates of indebtedness are to be used in its lending operations for the industrial and agricultural development of the country. The Board of Directors shall determine the interest rates, maturities, and other requirements of said obligations; (h) To contract any obligation, or enter into any agreement essential to the proper management of its corporate powers and to carry out its aims and purposes; (i) To appoint and dismiss its officers and employees; (j) To grant loans to cooperative associations to facilitate production, the marketing of crops, and the acquisition of essential commodities: Provided, That preference should be given to such cooperative associations which are owned or controlled by the veterans, their widows, orphans or compulsory heirs; (k) To grant loans to government employees and employees of governmentowned or controlled corporations, and to employees of private corporations or entities for the purpose of enabling said employee to buy shares of stocks in corporations or industries engaged in the development and/or expansion of agriculture and industries: Provided, That the yearly amortization of such loans shall not exceed ten per cent (10%) of the total annual salaries and wages of the employees: Provided, further, That such loan shall be payable in full within a period of not exceeding five years and that preference be given to employees who are veterans; (l) To exercise the powers granted in this Act and such incidental owners as may be necessary to carry on and engage in the business of general banking; (m) To exercise the general powers mentioned in the Corporation Law and the General Banking Act, insofar as they are not inconsistent or incompatible with the provisions of this Act. Section 3. Authorized capital stock Par value. (a) The capital stock of the Veterans shall be one hundred million pesos (P100,000,000.00) divided into five hundred ten thousand (510,000) common shares and four hundred ninety thousand (490,000) preferred shares with a par value of one hundred (P100.00) pesos each. (b) At least fifty-one per cent (51%) of the capital stock of the Veterans Bank shall be divided into common shares which shall be fully subscribed by the government of the Republic of the Philippines for and in behalf of the veterans, their widows, orphans or compulsory heirs as defined and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 determined under Section 4, subsection (e) of this Act, and shall be initially paid from the Veterans Trust Fund provided for in Section 2, subsection (d) of Republic Act Numbered Seventeen hundred and eighty-nine as amended, and from or out of earnings, dividends, or profits from the operations of the Veterans Bank; and for the payment of said subscription, all the available cash deposits with the Philippine National Bank and/or any other banks to the credit of the Veterans Trust Fund shall be transferred immediately to the Veterans Bank: Provided, That after the approval of this Act and notwithstanding the provisions of any existing law and/or executive orders, rules and regulations to the contrary, every and all additional cash payments on account of the said Veterans' Trust Fund shall be remitted and paid directly and exclusively to the said Veterans' Bank to be applied as additional paid-up payments of the aforesaid common shares subscription: Provided, further, That nothing shall be transferred to, or received by, the said Veterans' Bank representing any portion of the proceeds of the aforesaid Veterans' Trust Fund except cash payments only of the peso equivalent thereof at the prevailing rate of exchange: And provided, finally, That within five years from the organization of the Bank all shares of stock equivalent to fifty-one per cent subscription of the capital stock held by the government of the Republic of the Philippines for and in behalf of the veterans, their widows, orphans or compulsory heirs shall be transferred to and in the name of the veterans who shall thereafter vote said common shares. The shares shall be divided equally among the veterans at the rate of one share of one hundred pesos for each veteran or fraction thereof. The balance of about forty-nine (49%) per cent shall be divided into preferred shares which shall be opened for subscription by any recognized veteran, widow, orphans or compulsory heirs of said veteran at the rate of one (1) preferred share per veteran: Provided, That in case of failure of any particular veteran to subscribe for any preferred share of stock so offered to him as herein provided, within thirty (30) days from the date of receipt of notice, said share of stock shall be available for subscription to other veterans in accordance with such rules or regulations as may be promulgated by the Board of Directors. Any share of stock corresponding to the capital stock subscribed and paid by the Republic of the Philippines in the manner aforementioned, shall be issued in the name of the Republic of the Philippines, in trust for the benefit of veterans, their widows, orphans or compulsory heirs as determined in this Act, and any share of stock subscribed and paid by individual veteran shall be issued in the name of the individual veteran, his widow, orphan or compulsory heir. The sale or transfer of a share or stock of a veteran, widow, orphan or compulsory heir of a veteran to a party not a veteran, widow, orphan or compulsory heir of a veteran shall not be allowed under any circumstances. Any share may be sold or transferred to the Bank which shall issue the same to the stockholders who are veterans, their widows, orphans or compulsory heirs: Provided, That no veterans, widow, orphan or compulsory heir shall be issued a total of more than twenty shares.

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Section 4. Determination of veterans entitled to benefit from this Act. (a) The term "veteran or veterans" shall include any person or persons who served in the regularly constituted air, land, or naval services or arms, or in such non-regularly organized military units in the Philippines during World War II, and whose services with such units are duly recognized by the Republic of the Philippines or by the Government of the United States: Provided, That for the purposes of this Act, the term "veteran or veterans" also include the widow, orphan or a compulsory heir of a deceased veteran, as determined by existing laws; (b) The term "organized or acknowledged veterans organizations" as used in this Act shall mean a veterans organization duly recognized or acknowledged as such by the Philippine Veterans Administration which shall keep an official roster of such veterans organizations; (c) On the basis of the acknowledged or duly established official records and data from the Treasury of the Philippines and any other record or evidence admissible under the rules of evidence, such as the records of the Philippine Veterans Administration and of the Armed Forces of the Philippines, the Philippine Veterans Administration shall determine immediately after the approval of this Act, who and how many are the veterans of the Philippines of World War II and their widows, orphans or compulsory heirs as determined by existing laws who are entitled to the benefits of this Act. The decision of the Philippine Veterans Administration on the matter shall be final, unless appeal for review, within fifteen days from notice thereof, is made to the President of the Philippines or to the Supreme Court whose decision shall be final. The appeal shall be perfected in the same manner as in other proceedings and it may be prosecuted by the interested party or by the head of any acknowledged veterans organization; (d) The reckoning day for determining the status and number of such veterans, their widows, orphans or compulsory heirs shall be the date of approval of this Act; (e) The share of each beneficiary, war veteran or widow, orphan or compulsory heir of a deceased veteran, in the distribution of the benefits accruing to the Republic of the Philippines, will be equal regardless of rank and services rendered: Provided, That in the case of orphan or orphans of a deceased veteran, they shall be counted as one unit only and the share of all of them regardless of their number will be the same or equal to that of a surviving war veteran or surviving widow; (f) Notice of the decision of the Philippine Veterans Administration on the question of who are entitled to participate in the benefits accruing to the Veterans Trust Fund shall immediately be served on the interested parties, either directly on thru the organization to which they belong in writing and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 by registered mail. In addition, the Philippine Veterans Administration shall publish for three consecutive weeks a notice in two newspapers of general circulation in the Philippines to the effect that the Philippine Veterans Administration has already completed its work of determining the number and the identity of those entitled to participate in the trust fund and advising any party interested who has not received yet the notice of the decision served upon him that he may verify his inclusion or exclusion from the official register in the Philippine Veterans Administration. This Office shall keep a complete list and official register of those included and excluded from the enjoyment of the benefit, which list shall be available for inspection during office hours. The official registry book shall constitute an irrevocable public record, certified true copies of which may be released by the custodian of records for official purpose only. BANKING OPERATION IN GENERAL Section 5. Loans, investigation and liabilities. The Veterans Bank is hereby authorized: (a) To grant loans for the establishment, rehabilitation, expansion or development of any agricultural, commercial or industrial enterprise, or personal service including public utilities, under such rules and regulations as may be prescribed by the Board of Directors and that preference be given to applicants who are veterans; (b) To make loans on, or to discount notes and/or receipts secured by, harvested and stored crops: Provided, That no loans on the security of such harvested and stored crops shall exceed eighty per cent of the market value thereof on the date of the loans: Provided, further, That the crops so mortgaged shall be insured by the mortgagor for the benefit of the Veterans Bank for their entire market value at the discretion of the Board of Directors: Provided, furthermore, That if owing to any circumstances the value of the crops given as security shall diminish, the mortgagor shall furnish the Veterans Bank with additional security or refund such part of the loan as the Bank may deem necessary: Provided, finally, That such loans shall be granted for a period of not to exceed one year, subject to extension, in the discretion of the Board of Directors; (c) To make loans to agriculturists in installments, on standing crops of the natural products of the Philippines such as palay, copra, sugar, tobacco, corn, abaca and maguey, of not exceeding seventy per centum of the estimated value of such crops: Provided, however, That before granting such loans, the Veterans Bank may require additional security in the nature of mortgage on landed estate duly registered in the name of the debtor, or chattel mortgage including those upon livestock, machineries and agricultural implements or personal bonds with sufficient surety or sureties satisfactory to the bank;

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(d) Generally, to make advances or discount paper for agricultural, manufacturing, industrial or commercial purposes: Provided, That loans, discounts, or advances made under this section shall have maturities of not exceeding one year, renewable from year to year, in the discretion of the Board of Directors: (e) The aggregate amount of loans for any single industry shall at no time exceed twenty per cent of the Banks lending capacity; The total liabilities to the bank of any person, or of any company, corporation, or firm for money borrowed, including in the liabilities of the company or firm, the liabilities of the several members thereof, shall at no time exceed fifteen per centum of the unimpaired capital and surplus of the Bank. But the discount of bills of exchange drawn in good faith against actually existing values owned by the person negotiating the same shall not be considered as money borrowed, and in addition to the fifteen per centum of the unimpaired capital and surplus of the Bank, hereinbefore provided for, the total liabilities of any borrower, may amount to a further fifteen per centum of the unimpaired capital and surplus of the Bank provided such additional liabilities are secured by shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, nonperishable stocks, when such staples are fully covered by insurance and when such staples have a market value equal to at least one hundred twenty-five per centum of such additional liabilities. The Bank shall not make any loan upon the security of the stock of any other corporation if the aggregate market value of all such stocks as collateral exceeds an amount equal to ten per centum of the unimpaired capital stock and surplus of the Bank. The term "loan" whenever used in this Act shall include overdrafts and the limitations contained in this section shall apply to any loan of any kind whenever secured wholly or party by real estate mortgage. BOARD OF DIRECTORS COMPOSITION AND ORGANIZATION Section 6. Qualifications and per diems of the Board of Directors. (a) Within the first five years from the organization of the Veterans Bank or until the transfer of the common shares of its capital stock to the veterans as provided in Section three of this Act, the affairs and business of the Veterans Bank shall be directed and its property managed, controlled and preserved, unless otherwise provided in this Act, by a Board of Directors consisting of eleven (11) members to be composed of three ex-officio members to wit: the Philippine Veterans Administrator, the President of the Veterans Federation of the Philippines, and the Secretary of National Defense, and the remaining members who shall be veterans of good standing with formal business training and/or experience in banking and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 finance, shall, upon the recommendation of the Supreme Council of the Veterans Federation of the Philippines, be appointed by the President of the Philippines with the consent of the Commission on Appointments. The Supreme Council of the Veterans Federation of the Philippines shall submit to the President of the Philippines a list of sixteen veterans from which list the President shall choose eight who shall hold office for one year and until their successors are duly appointed and qualified. After the transfer of the common shares of the capital stock of the Veterans Bank to the veterans as provided for in Section three of this Act, the members of the Board of Directors shall be elected annually by the stockholders in the manner prescribed by the Corporation Law: Provided, That no director, officer, or employee of any bank shall be eligible as member of the Board of Directors of the Veterans Bank: Provided, further, That no member of the Supreme Council of the Veterans Federation of the Philippines who participated in the election of a member of the Board of Directors other than the Federation President who is an ex officio member can be appointed to the Board unless he first resigns as a member of the Supreme Council. The members of the Board shall receive a per diem allowance of fifty pesos (P50.00) for every meeting of the Board actually attended by them. (b) The Board of Directors, shall upon a majority vote of all its members, elect its Chairman, Vice-Chairman, and Secretary which Secretary may or may not be a member of the Board, at such a time and place as shall be provided for in its By-Laws. Pending the election of its Chairman, the President of the Veterans Bank shall preside over the Board of Directors. POWER AND AUTHORITY OF THE BOARD OF DIRECTORS Section 7. The Board of Directors shall (a) Formulate policies necessary to carry out effectively the provisions of this Act and adopt such By-Laws rules and regulations for the effective operation of the Bank in conformity with this Act and other existing laws; (b) Determine the organization of the Bank by creating the necessary departments or offices as are essential for the efficient operation of the Bank; (c) Subject to prior approval of the Monetary Board, establish branches or agencies in other countries; and, (d) That during the first five years of transition; mentioned in Section three (a) of this Act, with the authorization of the proper Department Secretary first had, the Board of Directors may appoint as agents of the Bank the provincial or municipal treasurers, who shall receive such additional compensation as the Board may determine.

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THE EXECUTIVE OFFICERS Section 8. President and Vice-Presidents Appointment and removal Salaries. The chief executive of the Bank shall be the President who shall be chosen by the Board of Directors and, during the first five years of Transition already mentioned, with the advice and consent of the President of the Philippines. He shall be assisted by an Executive Vice-President and such number of Vice-Presidents who shall be elected and may be removed by the Board of Directors. The President and the Executive Vice-President shall possess practical experience in banking or finance as executives for at least five years. The salaries of the President and the Executive VicePresident shall be fixed by the Board of Directors but, in no case, shall it be more than thirty thousand (P30,000.00) pesos and twenty-five thousand (P25,000.00) pesos yearly, respectively. THE PRESIDENT POWERS AND DUTIES Section 9. Duties and powers of the President. The President of the Bank shall among others, execute and administer the policies, measures, orders, and resolutions approved by the Board of Directors, and direct and supervise the operation and administration of the Bank. Particularly, he shall have the power and duty: (a) To make loans on commercial paper for such period of time not to exceed four months, in sums not exceeding ten thousand pesos (P10,000.00) to anyone person, company, corporations, or firm, but he is required to submit a report on such loans to the Board of Directors at its succeeding session: Provided, That the total amount of such loans shall not exceed five (5%) per cent of the paid-up capital and surplus; (b) To make, with the advice and consent of the Board of Directors, all contracts on behalf of the said Bank and to enter into all necessary obligations that this Act requires or permits: (c) To report weekly to the Board of Directors the main facts concerning the operations of the Bank during the preceding week and to suggest changes in rates of discount of interest, exchange, or policy which to him may seem best; (d) To exercise such other powers and perform such other duties as may be directed by the Board of Directors from time to time. LEGAL DEPARTMENT Section 10. Legal Counsel. The Veterans Bank shall have its own legal department, the chief and members of which shall be appointed by the Board of Directors.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 AUDITING DEPARTMENT Section 11. Bank Auditor Reports. The Veterans Bank shall have its own auditing department, the chief of which shall be appointed by the Board of Directors from among recognized veterans of good standing who are certified public accountants and with actual experience in the work of a comptroller. The auditor may not be removed except for cause and neither may his salary be reduced during his term of office. All other employees of the auditing department shall be appointed by the auditor with the advice and consent of the Board of Directors. Unless otherwise prescribed by the Board of Directors, the auditor of the Veterans Bank shall have the rank and pay of a Vice-President and shall receive a salary of eighteen thousand pesos (P18,000.00) per annum. The auditor, with the approval of the Board of Directors, shall fix the salaries of the employees of the auditing department. The auditor shall make an annual report of the condition of the Bank to the Board of Directors, to the President of the Veterans Federation of the Philippines, and to the Administrator of the Philippine Veterans Administration. The report shall contain among other things a statement of the resources and liabilities, including earnings and expenses, the amount of capital stock, dividends paid, surplus reserved, and undivided profits, as well as the losses, bad debts and suspend and overdue papers carried in the Bank's assets as of the day in which the statements are compiled. APPOINTMENTS, REMOVAL AND SALARIES OF THE OTHER OFFICERS AND EMPLOYEES OF THE VETERANS

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Section 14. Inspection by Department of Supervision and Examination of the Central Bank. The Veterans Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank in accordance with Republic Act Numbered Two hundred sixty-five and Republic Act Numbered Three hundred thirty-seven. Section 15. Prohibition against owing stock in or incurring indebtedness to the Bank. The Secretary of Finance. the Governor of the Central Bank, all other members of the Monetary Board, and the Chief of the Auditing Department of the Veterans Bank are hereby prohibited from owing stock in the Veterans Bank, or from becoming indebted to said Bank, directly or indirectly. PROHIBITED LOANS Section 16. Loans to officers, directors, and employees; restriction and limitation. The Veterans Bank shall not directly or indirectly, grant loans to any director, officer, employee, or agent of the Bank, and no loans shall be granted to a corporation, partnership, or company wherein any member of the Board of Directors is a shareholder, agent or employee in any matter, except by the unanimous vote of the members of the Board present, excluding the member interested: Provided, That the total liabilities to the Bank of any corporation wherein any member of the Board of Directors of the Veterans Bank is a shareholder, agent or employee in any manner, shall at no time exceed five (5%) per centum of the surplus and paid-up capital of the Bank. ACQUISITION AND DISPOSAL OF REAL ESTATE

Section 12. Appointments, removal and salaries of other officers and employees. All other officers and employees of the Bank shall be appointed and removed by the Board of Directors upon recommendation of the President of the Bank: Provided, however, That all other circumstances being equal, preference shall be given to veterans, or their widows, orphans or compulsory heirs in the appointment of said personnel. Said officers and employees shall have duties and compensation which shall be fixed by the President with the approval of the Board of Directors.

Section 17. The Veterans Bank is hereby authorized to purchase and own such real estate as may be necessary for the purpose of carrying on its business. It is also authorized to hold such real estate as it may find necessary to acquire in the collection of debts due to the said Bank or to its branches, but real estate acquired in the collection of debts shall be sold by the Bank within five (5) years after the date of its acquisition.

Section 13. Fidelity bond of officers and employees. The Board of Directors may require any officer and employees of the Bank and its branches, before entering upon the performance of their duties, to furnish a fidelity bond for the benefit of the Bank, in the form and amount prescribed by the Board of Directors. For this purpose, and for this purpose only, all officers and employees of whom a bond, is required shall be deemed public officers and employees, respectively, and the provisions of the Public Bonding Law, Chapter Fifteen of the Administrative Code and related legislations are hereby made applicable to them.

Section 18. Right of redemption of property foreclosed. The mortgagor shall have the right, within one year after the sale of the real estate as a result of the foreclosure of a mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, with interest thereon at the rate specified in the mortgaged, and all the costs and other judicial expenses incurred by the Bank by reason of the execution and sale, and for the custody of said property.

REDEMPTION OF MORTGAGED PROPERTY

Section 19. Right to demand additional securities; disposal of same Advanced maturity of credits Right to collect deficiency. If, from any cause

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 whatsoever, any of the securities specified for the loans provided for in this Act or accepted by said Bank as security for loans or discounts should decline or depreciate in market value in part or as a whole, or upon nonperformance of any promise made to secure the loan or discount, or bill of exchange, notes, and checks, the said Bank may demand additional securities or may forthwith declare any such obligation due and payable and upon three days' notice, demand, sell, assign, transfer, and deliver the whole of said securities or any part thereof, or any substitute therefor, or any addition thereto, or any other securities given unto or left in the possession of, or hereafter given unto or left in the possession of the said Bank for safekeeping or otherwise, at any broker's board or at public or private sale, at the option of said Bank, and at such sale, if public, the said Bank may itself purchase the whole or any part of the property sold, free from any right of redemption on the part of the mortgagor or pledgor. In case of sale for any cause, after deducting all costs, or expenses of any kind for collection, sale or delivery, the said Bank may apply the residue of the proceeds of the sale so made, to pay the said Bank, as its President shall deem proper whether then due or not due, making proper rebate for interest or liabilities not then due, returning the overplus, if any, to the mortgagor or pledgor, who shall remain liable to and pay to said Bank any deficiency arising upon such sale or sales. Section 20. Action to collect balance of indebtedness. If the proceeds of the sale of securities held as collateral for loans by said Bank do not cover the full amount of the loan, together with the interest and other charges thereon, the Bank may proceed against the debtor for the difference, but any amount exceeding the full indebtedness to the Bank shall be paid to the debtor. PROHIBITED REMUNERATION Section 21. Prohibition against charging fees in securing loans Penalties for violation. No fee, charge or commission in any form shall be exacted, demanded, or paid, for obtaining loans, directly or indirectly, by any director, officer, employee, or agent of the Veterans Bank. Any director, officer, employee or agent so exacting, demanding or receiving any fee for his service or for the use of his influence in obtaining a loan shall be punished as hereinafter provided for, for the violation of this Act. NET PROFIT Section 22. Allocation of net Profits. At the close of each calendar year, the Bank shall determine the net result of its operations, in the calculation of which, adequate allowances shall be made for probable losses, and the net profit arrived thereat shall be distributed as follows:

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(a) Twenty (20%) per cent of such net profit shall accrue to the reserve account: Provided, That should the accumulated reserves equal to or in excess of the authorized capital of the Bank, the twenty per cent herein authorized to be accumulated shall be distributed under the subsection immediately following: (b) From the remaining eighty (80%) per cent of the net profit shall be deducted the guaranteed earning of the preferred shares of stock owned by individual veterans, their widows, orphans or compulsory heirs: Provided, That the share in the net profits corresponding to the Republic of the Philippines shall first be applied in payment of its capital stock subscription, until said shares shall have been fully paid. Thereafter, twenty per centum of the net profits after deducting the guaranteed earnings of the preferred shares shall be paid in cash to the Board of Trustees as hereinafter provided in Section 23 hereof for disposition and shall be available for 'grants-in-aid' to veterans, their widows, orphans, or compulsory heirs, for educational, social, charitable, and rehabilitation purposes, to organization doing service for the cause of the veterans, and for such other purposes beneficial to the veterans. The remaining profits shall be paid as dividends on common shares held by the individual veterans as provided in Section three of this Act. Section 23. Board of Trustees of World War II. There is hereby created a Board of Trustees for the veterans of World War II to be known as "The Board of Trustees of the Veterans of World War II", consisting of eleven (11) members to be selected from among the veterans of World War II by the Supreme Council of the Veterans Federation of the Philippines organized pursuant to Republic Act Numbered Twenty-six hundred and forty. The Board of Trustees shall be organized within ninety (90) days after the approval of this Act. Immediately after its organization the members of the Board of Trustees shall elect from among themselves a Chairman and a Vice-Chairman. The members of the Board of Trustees shall serve without compensation other than actual and necessary expenses incurred either in attendance upon meetings of the Board or upon other official business authorized by resolution thereof, but a vote of the majority of all the members shall be necessary to authorize the disposal of the funds held by the Board. The Board shall appoint a secretary and such necessary other officials and employees and fix their compensations.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 LEGAL EXISTENCE Section 24. Term of legal existence. The legal existence of the Bank under this Act shall be for a period of fifty (50) years, from and after the date of the approval of this Act. Section 25. Prohibition against the use of the word "Veterans" Penalty for violation. All banks other than the Veterans Bank, and such other banks now licensed to do business in the Philippines whose names already include the word "veterans" are prohibited from using the word "veterans" as a portion of their names or titles. Any party violating this provision shall be subject to a fine of not less than one hundred (P100.00) pesos for each day during which said violation is committed or repeated. PENALTIES Section 26. Penalties for violation of the provisions of this Act. Any director, officer, employee, or agent of the Bank who violates or permits the violation of any of the provisions of this Act, or any person aiding or abetting the violation of any provision of this Act, shall be punished by a fine not exceeding ten thousand (P10,000.00) pesos or imprisonment of not more than five (5) years, or both, in the discretion of the court. VETERANS BANK A GOVERNMENT DEPOSITORY Section 27. Veterans Bank authorized to receive deposit of government funds as a Government Depository. The Secretary of Finance, the National Treasurer and his authorized representatives, city and municipal treasurers as well as official custodians of public funds or those belonging to government-owned or controlled corporations are hereby authorized if they so desire to make and actually maintain deposits of any government or corporate funds with the Veterans Bank, which is hereby declared to be a government depository. GENERAL PROVISIONS Section 28. Articles of incorporation. This Act, upon its approval, shall be deemed and accepted to all legal intents and purposes as the statutory articles of incorporation or Charter of the Philippine Veterans' Bank; and that, notwithstanding the provisions of any existing law to the contrary, said Bank shall be deemed registered and duly authorized to do business and operate as a commercial bank as of the date of approval of this Act. Section 29. By-laws. Within one month after the approval of this Act, the by-laws of the Philippine Veterans' Bank for its organizational, functional and operational government and procedures shall be adopted by the affirmative vote of the stockholders representing a majority of all the subscribed capital stock entitled to vote, whether paid or unpaid, subject to

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certification by the Monetary Board pursuant to Section ten of Republic Act Numbered Three hundred thirty-seven. The by-laws, duly certified by the Monetary Board as aforesaid, shall be signed by the stockholders voting for them and shall be kept in the principal office of the Bank, subject to the inspection of the stockholders during office hours, and a copy thereof, duly certified by a majority of the directors and countersigned by the Bank secretary, shall be filed and registered with the Securities and Exchange Commissioner. An Act of Rehabilitate the PVB Section 1. Declaration of Policy. – In order to give meaning and realization to the constitutional mandate to provide immediate and adequate care, benefits and other forms of assistance to war veterans and veterans of military campaigns, their surviving spouses and orphans, it is hereby declared the policy of the Government to provide the necessary mechanisms to rehabilitate the Philippine Veterans Bank, hereinafter known as the Veterans Bank, a bank owned by the Filipino veterans of World War II and deeply imbued and impressed with public interest. Section 2. Settlement of Liabilities. – The National Government deposit of One billion four hundred eighty-nine million pesos (P1,489,000,000.00) with the Veterans Bank is hereby restructured into a seven-year promissory note of the said bank, carrying an interest rate of four percent (4%) per annum effective on the date of actual operation: Provided, That only the interest shall be paid in the first three (3) years: Provided, further, That repayment of the principal shall be divided into four (4) equal amortizations: Provided, finally, that the said promissory note shall be exempted from the reserve equipment rule of commercial banks.1awphi1© The accrued interests due to the National Government deposits up to and during the time of the Veterans Bank's closure in 1985 and the tax liabilities incurred by the Veterans Bank also up to and during the time of the Veterans Bank's closure are hereby condoned and extinguished. The obligations of the Veterans Bank with the Central Bank of the Philippines and the Philippine Deposit Insurance Corporation are hereby restructured in the same manner governing National Government deposits provided in the first paragraph of this section. With respect to deposits of local government units and other private deposits with the Veterans Bank, the terms and conditions for the retention or withdrawal thereof shall be negotiated individually but may carry more favorable terms in favor of the Veterans Bank. Section 3. Operations and Changes in the Capital Structure of the Veterans Bank and other Amendments. – The operations and changes in the capital

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 structure of the Veterans Bank, as well as other amendments to its articles of incorporation and bylaws as prescribed under Republic Act No. 3518, shall be in accordance with the Corporation Code, the General Banking Act, and other related laws.1awphi1© Section 4. Repeal of Amendatory Presidential Decrees. – Presidential Decree Nos. 236, 1637, 919 and 1906 which are inconsistent with this Act are hereby repealed, thus restoring the full force and legal effect of Republic Act No. 3518. Section 5. Reopening of the Veterans Bank and Its Branches. – Pursuant to and within ninety (90) days from the effectivity of this Act, the Central Bank is hereby authorized to reopen within the period of three (3) years from the date of the reopening of the head office with no branch licensing cost to the said bank. Section 6. Veterans Bank as a Government Depository. – The Secretary of Finance, the National Treasurer and his authorized representatives, city and municipal treasurers, as well as custodians of public funds or those belonging to government-owned or controlled corporations, are hereby authorized if they so desire to make and actually maintain deposits, of any government of corporate funds with the Veterans Bank, which is hereby declared to be a government depository. Section 7. Rehabilitation Committee. – To facilitate the implementation of the provisions of this Act, there is hereby created a rehabilitation committee which shall have a term of three (3) months from the date of the approval of this Act composed of the following: the Executive Secretary, as Chairman, and the Administrator of the Philippine Veterans Affairs Office, the President of the Veterans Foundation of the Philippines, a representative from the executive board of the Veterans Federation of the Philippines and a representative from the Board of Trustees of the Veterans of World War II or their respective representatives, as members. Specifically, the committee shall: (a) Prepare, finance and submit a viable rehabilitation plan to the Monetary Board of the Central Bank; (b) Select and organize an initial manning force headed by a management team to be composed of competent, experienced and professional managers who must possess all qualifications and none of the disqualifications provided under Central Bank rules and regulations. The management team shall be staffed by a trained work force: Provided, That preference shall be given to the veterans and their dependents, other qualifications being equal;

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(c) Exercise management oversight and liaison with Central Bank officers for a period which shall not exceed three (3) months reckoned from the date of approval by the Monetary Board to reopen the Veterans Bank; and (d) Submit to the Monetary Board of the Central Bank other recommendations for the successful reopening and operations of the Veterans Bank. Section 8. Transitory Provisions. – Without requiring new capital infusion either from the Government or from outside investigators, the Filipino veterans of World War II who are real owners-stockholders of the Veterans Bank shall cause the said bank to have at least Seven hundred fifty million pesos (P750,000,000.00) in total unimpaired capital accounts prior to reopening pursuant to this Act as a commercial bank. It is hereby provided that the Board of Trustees of the Veterans of World War II (BTVWW II) created under Republic Act No. 3518 is hereby designated as trustee of all issued but undelivered shares of stock. (d) Philippine National Bank Revised Charter of PNB SEC.2. Name; Place of Business; Branches; Agencies and Other Offices- The Philippine National Bank (hereinafter referred to as the "Bank"), a bank created under Act No. 2612, as amended, and operating under the provisions of Presidential Decree No. 694, as amended, shall henceforth operate under the provisions of this 1986 Revised Charter. The Bank's principal office and place of business shall be in the National Capital Region, also known as Metro Manila. It may open and maintain other branches, agencies or other offices at such places in the Philippines or abroad as its Board of Directors may deem advisable, with the prior approval of the Monetary Board of the Central Bank of the Philippines. SEC. 3. Corporate Powers and Purposes- The Bank shall be a body corporate and shall have the following powers and purposes: (a) To perform commercial banking, as well as expanded commercial banking functions; and, within the context of a financially viable and stable baking institution, to provide banking services for the development of agriculture and small and medium scale commercial and industrial enterprises particularly in the in the countryside, as provided in Section 4; to provide banking services to the National Government, other government entities and local governments; and to engage in international banking activities, particularly in the promotion of exports; b) To accept foreign deposits and operate a foreign currency deposit unit as established under Republic Act No. 6426, as amended;

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (c) To accept and administer trusts and to carry on a general trust business; (d) To act as official government depository with authority to maintain deposits of the government, its branches, subdivisions and instrumentalities, and of government owned or controlled corporations, subject to the provisions of Section 6 hereof and such rules and regulations as the Monetary Board may prescribe; and (e) To adopt, amend or change its By-laws; to adopt, alter and use a seal, to make contracts; to sue and be sued; and to exercise the general powers of a corporation as provided in the Corporation Code of the Philippines and the powers of a bank of its category under the General Banking Act. The exercise of the above-mentioned powers on banking shall be subject to applicable law, as well as regulations promulgated by the Central Bank of the Philippines. SEC. 4. Granting of Loans; Exposure Ceilings and Limits on Equity Investments. -- In the exercise of its lending authority, the Bank shall give preference to loans for agricultural and small-and medium-scale commercial and industrial enterprises, particularly in the countryside. Unless otherwise provided in this Charter, loans and other credit accommodations granted by the Bank shall be subject to the appropriate applicable loan limits to any single borrower as provided for under Republic Act No. 337, as amended. The aggregate amount of loans, guarantees and contingent accounts, to Government agencies and entities including government owned and controlled corporations shall at no time exceed the deposits and book value of the shareholdings of the Government, including government agencies and entities, government owned or controlled corporations plus twenty percent (20%) of such total. The authority of the Bank to invest in equities of allied undertakings, financial or non-financial, as well as in non-allied undertakings, shall be governed by the provisions of Republic Act No. 337, as amended. SEC. 5. Authorized Capital Stock; Par Value; Sale of Shares. -- The authorized capital stock of the Bank shall be Ten Billion Pesos to be divided into One Hundred Million common shares with par value of P100 per share which are available for subscription by the National Government. The common shares may be offered for sale to or subscription by private; investors; Provided, That, the investment of private investors shall be subject to the applicable provisions of the General Banking Act.

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The Board of Directors shall have authority to convert such number of unissued common voting shares into preferred non-voting shares to be issued for sale or subscription, with such features, terms, and restrictions as it may determine. The issue and offering for sale of additional shares to private investors which will result in more than one-third of the common voting shares being eligible for acquisition by such investors shall require prior approval of the President of the Philippines; provided, that, where the sale of shares will result in a majority ownership by the private sector, the prior approval of the President shall also be required. SEC. 6. Change in Ownership of the Majority of the Voting Equity of the Bank. -- When the ownership of the majority of the issued common voting shares passes to private investors, the stockholders shall cause the adoption and registration with the Securities and Exchange Commission of the appropriate Articles of Incorporation and revised by-laws within three (3) months from such transfer of ownership. Upon the issuance of the certificate of incorporation under the provisions of the Corporation Code, this Charter shall cease to have force and effect, and shall be deemed repealed. Any special privileges granted to the Bank such as the authority to act as official government depository, or restrictions imposed upon the Bank, shall be withdrawn, and the Bank shall thereafter be considered a privately organized bank subject to the laws and regulations generally applicable to private banks. The Bank shall likewise cease to be a government owned or controlled corporation subject to the coverage of service-wide agencies such as the Commission on Audit and the Civil Service Commission. The fact of the change of the nature of the Bank from a government-owned and controlled financial institution to a privately-owned entity shall be given publicity. SEC. 7. National Government Subscription. -- Upon the effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million common shares of stock worth Two Billion Five Hundred Million Pesos which shall be deemed paid for by the Government with the net asset values of the Bank remaining after the transfer of assets and liabilities as provided in Section 29 hereof. SEC. 8. Who may Vote Government-Owned Stock. -- The voting rights of all the stock of the Bank owned and controlled by the National Government shall be vested in the President of the Philippines, or in such person or persons as the President may from time to time designate. SEC. 9. Board of Directors; Composition; Tenure; Per Diems. -- The affairs and business of the Bank shall be directed and its properties managed and preserved and its corporate powers exercised, unless otherwise provided in

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 this Charter, by a Board of Directors consisting of nine members, duly elected as herein provided for a term of one year or until their successors are duly elected and qualified. The Chairman of the Board shall be appointed by the President of the Philippines from among members of the Board: Provided, That the position of Chairman of the Board and President of the Bank shall not be held by the same person. The Chairman shall preside at meetings of the Board and of the stockholders. The President of the Bank shall be vice-chairman of the Board and, as such shall assist the chairman and act in his stead in case of absence or incapacity. In case of incapacity or absence of both the chairman and vicechairman, the Board of Directors shall designate a temporary chairman from among its members. Unless otherwise set by the Board and approved by the President of the Philippines, members of the Board shall be paid a per diem of one thousand pesos for each meeting of the Board of Directors actually attended: Provided, That the total amount of per diems for every single month shall not exceed the sum of Five Thousand Pesos. SEC. 10. Election and Qualification of Members of the Board of Directors. -Annually on the first Tuesday after the first Monday in March, the stockholders shall meet to elect the members of the Board of Directors for the current year. Each stockholder or proxy will be entitled to as many votes as he may have shares of stock registered in his name on the thirty-first of January last preceding and held by him at the time of the election multiplied by the number of directors to be elected. In the election of the members of the Board, stockholders shall have the right of cumulative voting as recognized by law. No person shall be elected director of the Bank unless he is a natural-born citizen of the Philippines, not less than thirty-five years of age, of good moral character and has attained proficiency, expertise and recognized competence in one or more of the following: banking, finance, economics, law, agriculture, business management, public utility or government administration. At least four of the elective members of the Board shall not concurrently hold appointive or elective positions in the National Government, any government-owned or controlled corporation, or in any local government. No director, officer on employee of any other bank shall be eligible as a member of the Board of Directors of the Bank.

NOTES

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SEC. 11. Powers of the Board of Directors. -- The Board of Directors shall have, among others, the following duties, powers and authority: (a) To formulate policies necessary to carry out effectively the provisions of this Charter; (b) To adopt, amend or change the by-laws as well as such rules and regulations as may be necessary for the effective operation of the Bank, in conformity with this Charter and existing laws; (c) To prescribe such terms and conditions to govern the granting of loans and credits, consistent with the provisions of this Charter; (d) To adopt an annual budget for the effective operation and administration of the Bank; (e) To create, establish and operate a "Self-Insurance System" in order to effect possible damage or loss of cash-in-transit that the Bank may suffer on account of cash and check remittances to its branches and agencies and vice-versa, as well as those that may arise from irregular encashment or negotiation of checks, drafts, telegraphic transfers and similar instruments, or losses arising from other forms of fraud; (f) To create and establish a Provident Fund which shall consist of contributions made both by the Bank and its officers or employees to a common fund for the payment of benefits to such officer or employee or his heirs under such terms and conditions as the Board of Directors may fix; (g) To compromise or release, in whole or in part, any claim, liability, or demand for or against the Bank, regardless of the amount involved, under such terms and conditions as it may impose to protect the interests of the Bank (h) To determine the procedure and requirements for the acquisition of properties necessary for the business of the Bank and (i) To dispose of properties of the Bank, whether used in the conduct of its business or acquired as a result of its banking operations, by public bidding or private negotiations as provided in Sec. 21 of this Charter. The Board shall meet as frequently as necessary and the presence of five members shall constitute a quorum. SEC. 12. President of the Bank. - The Chief Executive Officer of the Bank shall be the President who shall be elected by the Board of Directors from

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 among themselves with the advise and consent of the President of the Philippines. No person shall be appointed President of the Bank unless he is at least forty years of age, of good moral character and reputation, with at least ten years previous experience in banking, and has a reputed proficiency, expertise and recognized competence in banking or financial management. The President of the Bank shall, among other powers and duties, execute and administer the policies, measures, order and resolutions approved by the Board of Directors, and direct and supervise the operations and administration of the Bank. Particularly, he shall have the power and duty: (a) To execute all contracts and to enter into all authorized transactions in behalf of the Bank; (b) To exercise, as Chief Executive Officer, the power of supervision and control over decisions or actions of subordinate officers and all other powers that may be granted by the Board. (c) To recommend to the Board the appointment, promotion, or removal of all officers of the Bank with the rank of at least Vice President or its equivalent; (d) To appoint, promote or remove employees and officers below the rank of Vice President; (e) To transfer, assign or reassign officers and personnel of the Bank in the interest of the service; (f) To report periodically to the Board of Directors on the operations of the Bank; (g) To submit annually a report on the result of the operations of the Bank to the President of the Philippines and to private shareholders in the Bank, if any; and (h) To delegate any of his powers, duties or functions to unto any official of the Bank, with the approval of the Board of Directors. SEC. 13. Legal Matters and Cases. -- The Bank shall have its own Legal Department, the head of which shall be appointed by the Board of Directors of the Bank upon recommendation of the President of the Bank. The Bank may, subject to court approval, deputize any member of its legal staff to act as Special Sheriff in the enforcement of court writs and processes in cases involving the Bank.

NOTES

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SEC. 14. Bank Auditor. -- The Commission on Audit shall be ex-officio auditor of the Bank and shall designate a representative to the Bank. SEC. 15. Other Officers and Employees. - The Board of Directors shall provide for an organization and staff of officers and employees of the Bank and upon recommendation of the President of the Bank, fix their remunerations and other emoluments. No officer or employee of the Bank subject to the Civil Service Law shall be dismissed or suspended except as provided by law. SEC. 16. Examination of the Bank. -- The Bank shall be subject to supervision and examination by the appropriate department of the Central Bank of the Philippines. SEC. 17. Inhibition from Board Meeting of Member with Personal Interest. -Whenever any member attending a meeting of the Board of Directors has a persona interest directly or indirectly, in the discussion or resolution of any given matter, said member shall not participate in the discussion or resolution of the matter and must retire from the meeting during the deliberation thereon. The minutes of the meeting which shall not the subject matter, when resolved, the fact that a member had a personal interest in it, and the withdrawal of the members concerned, may be made available to the public. SEC. 18. Prohibition on Officers and Employees of the Bank. -- Excepts as required by law, or upon order of a court of competent jurisdiction, or express order of the President of the Philippines or writ of permission of the client, no officer or employee of the Bank shall reveal to, nor allow, to be examined, inquired or looked into by any relative to details of individual accounts or specific banking transactions: Provided, that in respect to deposits of whatever nature, the provisions of existing laws shall apply. This prohibition shall not apply to the exchange of confidential credit information among government financial institutions or among banks, in accordance with established banking practices or as may be allowed by law. SEC. 19. Borrowings by Directors, Officers and Employees - Restrictions and Limitations. -- No director of officer or employee of the Bank or any corporation, partnership, or company wherein any member of the Board of Directors, officer or employee, and/or their respective relatives within the second degree of consanguinity or affinity, is a director, officer, or controlling shareholder, shall either directly or indirectly, for himself or as representative or agent of others, borrow any of the deposits of funds from the Bank, nor shall he become a guarantor, indorser, or surety for loans from the Bank to others, or in any manner be an obligor for money borrowed from the Bank or loaned by it: Provided, That this provision on

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

53

loans to directors, officers and employees shall not include loans allowed in the form of fringe benefits granted in accordance with rules and regulations as may be prescribed by the Monetary Board of the Central Bank.

used for the declaration of Dividends corresponding to the shares of the Government and the private stockholders. Dividends may either be in the form of cash or stock as the Board of Directors shall determine.

The Bank shall not grant, directly or indirectly, any loans or credit accommodations to the head or to any officer or personnel directly exercising supervisory or regulatory authority over the activities of the Bank such as those of the Central Bank of the Philippines or of the Commission on Audit.

SEC. 24. Payment of Cash Dividends Corresponding to Government-Owned Shares. -- Cash Dividends corresponding to the shares of the National Government shall first be set aside and used for the purpose of retiring the government securities which may have been issued by the Minister of Finance for additional Government subscriptions to the unissued shares of the capital stock of the Bank prior to the effectivity of this Charter. Thereafter, cash dividends corresponding to the Government-owned shares shall be paid unto the Treasury of the Philippines to become part of the general funds.

SEC. 20. Prohibited Interest or Fees with Reference to Obtaining Loans. -No Director, officer or employee of the Bank shall, except as provided in the preceding Section, directly or indirectly, have any pecuniary interest in any loan from the Bank. Neither shall he charge, exact, demand or receive any fee, charge or commission in any form for his service or the use of his influence in obtaining a loan. Any violation of this Section shall be punished as hereinafter provided in Section 27 of this Charter. SEC. 21. Disposal of Real Estate and Other Properties in the Collection of Debts. -- Real and other properties acquired by the Bank in the collection of debts, receivables or investments by way of foreclosure or other means shall be sold or otherwise disposed of in accordance with the policies and guidelines adopted by the Board of Directors within five years after date of their acquisition. SEC. 22. Rights of Redemption of Foreclosed Property - Right of Possession During Redemption Period. - Within one year from the registration of the foreclosure sale of real property, the mortgagor shall have the right to redeem the property by paying the principal, interests, charges, commissions and all claims of whatever nature of the Bank outstanding and due as of the date of the sale including all the costs and other expenses incurred by reason of the foreclosure sale and custody of the property, as well as charges and accrued interest. The Bank may take possession of the foreclosed property during the redemption period. When the Bank takes possession during such period, it shall be entitled to the fruits of the property with no obligation to account for them, the same being considered compensation for the interest that would otherwise accrue on the account. Neither shall the Bank be obliged to post a bond for the purpose of such possession. SEC. 23. Allocation of Current Net Profits. -- At the close of the calendar year, the Bank shall determine the net results of its operations in the calculation of which adequate allowances shall be made for probable losses. Of the net profits arrived at, at least fifty percent (50%) shall be set aside and accumulated in the earned surplus account. The remaining current net profits may after an examination of the financial condition of the Bank be

SEC. 25. Term of Legal Existence. -- The legal existence of the Bank shall be for a period of fifty years, counted from the date the Bank operates under the provisions of this Charter. SEC. 26. Applicability of Banking Laws. - The provisions of Republic Acts No. 265, as amended, and No. 337, as amended, insofar as applicable and not in conflict with any provisions of this Charter shall apply to the Bank. SEC. 27. Penalties for Violation of the Provisions of this Charter. -- Any director, officer or employee of the Bank who violates or knowingly permits the violation and any person aiding or abetting any violations of any of the provisions of this Charter, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment or not more than five years or both such fine and imprisonment. TRANSITORY PROVISIONS SEC. 28. Preparatory Work. -- Upon the effectivity of this Executive Order, the Board of Directors and management of the Bank shall undertake the appropriate steps to establish its current financial condition for the purpose of determining its net asset values and the book value of shares thereof. All shares of stock held by the Government of the Philippines in the Bank are deemed cancelled and exchanged for Twenty Five Million common shares of stock subscribed and paid-in by the Government, pursuant to Section 7 hereof. The ratio of the shareholdings of the Government of the Philippines to the shareholdings of the private shareholders before the effectivity of this Charter shall be maintained. Private shareholders of the Bank, including holders of Common "A" shares, shall exchange their shares for such number of shares of stock of the Bank computed on the basis of the ratio of the common shares held by the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Government immediately prior to the effectivity of this Charter to the new shares of stock subscribed and paid-in by the Government pursuant to Section 7 hereof. SEC. 29. Transfer of Assets and Liabilities of the Philippine National Bank. -The Bank shall transfer to the National Government such of its assets and liabilities as may be necessary to rehabilitate the Bank and to start its operations under the Revised Charter on a viable basis, as determined by the appropriate authorities, such assets to include but not necessarily be limited to its acquired assets and non-performing accounts, and such liabilities to include real as well as contingent liabilities. The National Government is hereby authorized to accept the same under terms and conditions as may be mutually acceptable to the Bank and the National Government. SEC. 31. Banking Operations under the 1986 Revised Charters; Governing Laws. -- The Banking operations of the Bank shall be governed by the provisions of this Charter beginning on January 1, 1987, or on such subsequent date as may be determine by the President of the Philippines upon the recommendation of the Minister of Finance. SEC. 32. Loans and Other Investments, and Liabilities is Excess of Prescribed Limits. -- Loans and other investments as well as liabilities existing as of the date of the effectivity of this Revised Charter which as a result of the assets and liabilities transfer under Section 29 hereof will exceed the limits prescribed under the provisions of this Act, the General Banking Act or Central Bank regulations shall not be subject to such prescribed limits but shall be reduced within a period of two years unless a longer period is prescribed by the Monetary Board, and once reduced, shall not be increased beyond the prescribed limits.

NOTES

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implement the provisions of this Charter, including those relative to the financial aspects, if any, and to the reorganization of the Bank as hereinabove authorized under Section 33 which will involve the determination and adoption of (1) the new internal structure of the Bank as reorganized down to the divisional, section or lowest organizational levels, including such appropriate units as may be needed to handle caretaking activities such the disposition of certain assets and the collection of certain accounts; (2) a new staffing pattern including appropriate salary rates; and (3) the initial operating budget. In the implementation of the reorganization of the Bank as authorized under Section 33, and in appointments to appropriate positions in the new staffing pattern of the Bank, no personnel of the Bank shall have vested rights to any position in the new staffing pattern or to be otherwise retained in the Bank even if he should be the incumbent of the same or similar position in the new staffing pattern. SEC. 35. Recall of External Personnel in the Bank. -- Effective on the date the Bank commences to operate in accordance with this Charter, all representatives and/or personnel of other government offices, Commission and government corporations assigned to or on detail with the bank are considered recalled to their respective offices and/or units. New designations to the Bank shall be made by the respective government offices or Commissions conformably with the mandate of law and the requirements of the Bank. SEC. 36. Separation Benefits. -- All those who are separated from the Bank as a result of its reorganization in pursuance of Section 33 hereof shall be entitled to all gratuities and benefits provided for under existing laws and/or supplementary retirement plans adopted by and effective in the Bank.

SEC. 33. Authority to Reorganize. -- In view of reduced operations contemplated under this Charter in pursuance of the national policy expressed in the "whereas" clauses hereof, a reorganization of the Bank and a reduction in force are hereby authorized to achieve greater efficiency and economy in operations, including the adoption. The program or reorganization shall begin immediately after the approval of this Order, and shall be completed within six months and shall be fully implemented within eighteen months thereafter.

SEC. 37. No legal action or suit brought by or on behalf of any aggrieved officer or personnel of the Bank in connection with any matter treated in these Transitory Provisions shall be received in any court unless the verified complaint shows on its face that the cause has first been submitted to, and adversely resolved by, the Civil Service Commission.

SEC. 34. Implementing Details; Organization and Staffing of the Bank. -Upon the effectivity of this Charter, the incumbent Board of Directors and President of the Bank shall continue in office unless or until replaced by the President of the Philippines, provided that the provisions of Section 10 of this Charter shall be observed. The President of the Bank is hereby authorized, subject to the approval of the Board of Directors as appropriate, to issue such orders, rules and regulations as may be necessary to

(a) Entry of Foreign Banks i. Modes of Entry 1. By acquiring, purchasing or owning up to 60% of the voting stock of an existing domestic bank 2. By investing in up to 60% of a new banking subsidiary incorporated under the laws of the Philippines 3. By establishing branches with full banking authority

PNB v. Velasco, 564 SCRA 512 (2008)

H. Foreign Banks

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

Sec. 2, Foreign Banks Liberalization Act The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary. ii.

Subject to MB Approval, Guidelines Sec. 2, Foreign Banks Liberalization Act The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary. Sec. 3, Foreign Banks Liberalization Act In approving entry applications of foreign banks, the Monetary Board shall: (i) ensure geographic representation and complementation; (ii) consider strategic trade and investment relationships between the Philippines and the country of incorporation of the foreign bank; (iii) study the demonstrated capacity, global reputation for financial innovations and stability in a competitive environment of the applicant; (iv) see to it that reciprocity rights are enjoyed by Philippine banks in the applicant's country; and (v) consider willingness to fully share their technology. chan robles virtual law library Only those among the top one hundred fifty (150) foreign banks in the world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in accordance with Section 2 (ii) and (iii) hereof.

55

In the exercise of this authority, the Monetary Board shall adopt such measures as may be necessary to: (i) ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos; (ii) prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, participations, partnerships, groups or individuals with related interests; and (iii) secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under Section 2(i) and (ii) of this Act: Provided, That said banking corporations shall establish stock option plans for their officers and employees as the resources or assets of these corporations may allow in the best business judgment of their respective boards of directors, pursuant to the Corporation Code of the Philippines. To qualify to establish a branch or a subsidiary, the foreign bank applicant must be widely-owned and publicly-listed in its country of origin, unless the foreign bank applicant is owned by the government of its country of origin. iii.

Limitation on Availment of Mode of Entry Sec. 2, Foreign Banks Liberalization Act The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary. Subsec. X121.10, MRB a. As a general rule, a foreign bank which has been authorized to operate in the Philippines through any one of the allowable modes of entry may change to another mode by giving up the first mode it availed of. b. A foreign bank which pursuant to Items “a” and “b” of Subsec. X121.1, has established or acquired a banking subsidiary may sell its stockholdings therein and may apply for

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 authority to establish a branch subject to the provisions of Subsec. X121.9c and to the following conditions: (i)

That the disposition/sale of its stockholdings in the subsidiary is done within five (5) years from June 5, 1994; (ii) That the foreign bank qualifies under the provisions of Subsec. X121.2b; and (iii) That the limit of ten (10) foreign banks establishing branches as a mode of entry has not yet been reached. c. Foreign banks with existing branches in the Philippines, as well as those that may be allowed to establish branches under R.A. No. 7721, may incorporate under Philippine laws, in which case said foreign banks may own up to sixty percent (60%) of the voting stock of the new bank. iv.

Limitation of Foreign Penetration Sec. 73, par. 3, GBL: In the exercise of the authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. Sec. 3, par. 3, Foreign Banks Liberalization Act In the exercise of this authority, the Monetary Board shall adopt such measures as may be necessary to: (i) ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos; (ii) prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, participations, partnerships, groups or individuals with related interests; and (iii) secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under Section 2(i) and (ii) of this Act: Provided, That said banking corporations shall establish stock option plans for their officers and employees as the resources or assets of these corporations may allow in the best business judgment of their respective boards of directors, pursuant to the Corporation Code of the Philippines.

NOTES v.

56

Equal Treatment Sec. 73, par. 4, GBL: Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines. Sec. 8, Foreign Banks Liberalization Act Foreign banks authorized to operate under Section 2 of this Act, shall perform the same functions, enjoy the same privileges, and be subject to the same limitations imposed upon a Philippine bank of the same category. These limits include, among others, the single borrower's limit and capital to risk asset ratio as well as the capitalization required for expanded commercial banking activities under the General Banking Act and other related laws of the Philippines. The basis for computing the ratio shall be the capital of the foreign bank branch in the Philippines. The foreign banks shall guarantee the observance of the rights of their employees under the Constitution. Any right, privilege or incentive granted to foreign banks or their subsidiaries or affiliates under this Act, shall be equally enjoyed by and extended under the same conditions to Philippine banks. Philippine corporations whose shares of stocks are listed in the Philippine Stock Exchange or are of long standing for at least ten (10) years shall have the right to acquire, purchase or own up to sixty percent (60%) of the voting stock of a domestic bank.

(b) Rules on Acquisition of Voting Stock in Existing Domestic Bank i. Extent of Acquisition Sec. 2, Foreign Banks Liberalization Act The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 ii.

Further acquisition of voting stock Sec. 73, par. 1, GBL: Within seven (7) years from the effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines. Sec. 73, par. 2, GBL: Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof.

iii.

iv.

NOTES

Listing in PSE Sec. 3, par. 3, Foreign Banks Liberalization Act In the exercise of this authority, the Monetary Board shall adopt such measures as may be necessary to: (i) ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos; (ii) prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, participations, partnerships, groups or individuals with related interests; and (iii) secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under Section 2(i) and (ii) of this Act: Provided, That said banking corporations shall establish stock option plans for their officers and employees as the resources or assets of these corporations may allow in the best business judgment of their respective boards of directors, pursuant to the Corporation Code of the Philippines. License to Do Business Sec. 3(d), Foreign Investments Act of 1991 The praise "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that

57

imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; (c) Rules on Acquisition of Voting Stock in New Domestic Bank i. Extent of Acquisition Sec. 2, Foreign Banks Liberalization Act The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary. ii.

Qualifications Sec. 3, par. 2, Foreign Banks Liberalization Act Only those among the top one hundred fifty (150) foreign banks in the world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in accordance with Section 2 (ii) and (iii) hereof. Sec. 3, par. 4, Foreign Banks Liberalization Act To qualify to establish a branch or a subsidiary, the foreign bank applicant must be widely-owned and publicly-listed in its country of origin, unless the foreign bank applicant is owned by the government of its country of origin. Sec. 4(i), Foreign Banks Liberalization Act For Locally Incorporated Subsidiaries. — The minimum capital required for locally incorporated subsidiaries of foreign banks

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 shall be equal to that prescribed by the Monetary Board for domestic banks of the same category. iii.

iv.

Listing in PSE Sec. 3, par. 3, Foreign Banks Liberalization Act In the exercise of this authority, the Monetary Board shall adopt such measures as may be necessary to: (i) ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos; (ii) prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, participations, partnerships, groups or individuals with related interests; and (iii) secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under Section 2(i) and (ii) of this Act: Provided, That said banking corporations shall establish stock option plans for their officers and employees as the resources or assets of these corporations may allow in the best business judgment of their respective boards of directors, pursuant to the Corporation Code of the Philippines. License to Do Business Sec. 3(d), Foreign Investments Act of 1991 The praise "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account;

NOTES

58

(d) Rules on Establishing Branches i. Governing Laws 1. Creation, formation, organization or dissolution of corporations; fixing of relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other and the corporation Sec. 77, GBL: In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation. 2.

Entry into the Philippines through establishment of branches Sec. 72, par. 1, GBL: The entry of foreign banks in the Philippines through the establishment of branches shall be governed by the provisions of the Foreign Banks Liberalization Act.

3.

Conduct of offshore banking business Sec. 72, par. 2, GBL: The conduct of offshore banking business in the Philippines shall be governed by the provisions of the Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree."

4.

All other matters Sec. 77, GBL: In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 stockholders, members, directors or officers corporations to each other or to the corporation. ii.

NOTES of

Qualifications Sec. 3, par. 2, Foreign Banks Liberalization Act Only those among the top one hundred fifty (150) foreign banks in the world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in accordance with Section 2 (ii) and (iii) hereof.

Philippine currency: Provided, finally, That the Monetary Board shall monitor the effective use of the "net due to" funds.Whenever there results "net due from head office" outside the Philippines, this shall be deducted from the capital accounts for purposes of determining the required capital ratios. iii.

Time limitation on entry Sec. 6, Foreign Banks Liberalization Act Foreign banks shall be allowed entry under Section 2 (iii) within five (5) years from the effectivity of this Act. During this period, six (6) new foreign banks shall be allowed entry under Section 2(iii) upon the approval of the Monetary Board. An additional four (4) foreign banks may be allowed entry on recommendation of the Monetary Board, subject to compliance with Sections 2, 3, 4, and 5 of this Act, upon approval of the President as the national interest may require.

iv.

Treatment of Multiple Branches Sec. 74, GBL: In the case of a foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be held to refer to such units.

Sec. 3, par. 4, Foreign Banks Liberalization Act To qualify to establish a branch or a subsidiary, the foreign bank applicant must be widely-owned and publicly-listed in its country of origin, unless the foreign bank applicant is owned by the government of its country of origin. Sec. 4(ii), Foreign Banks Liberalization Act Foreign banks seeking entry pursuant to Section 2 (iii) of this Act shall permanently assign capital of not less than the U.S. dollar equivalent of Two hundred ten million pesos (P210,000,000.00) at the exchange rate on the date of the effectivity of this Act, as ascertained by the Monetary Board. The permanently assigned capital shall be inwardly remitted and converted into Philippine currency. The foreign bank shall be entitled to three (3) branches. chan robles virtual law library. The foreign bank may open three (3) additional branches in locations designated by the Monetary Board by inwardly remitting and converting into Philippine currency as permanently assigned capital, the U.S. dollar equivalent of Thirty-five million pesos (P35,000,000.00) per additional branch at the exchange rate on the date of the effectivity of this Act, as ascertained by the Monetary Board. The total number of branches for each new foreign bank entrant shall not exceed six (6). For purposes of meeting the prescribed capital ratios, the term "capital" shall include permanently assigned capital plus "net due to head office, branches and subsidiaries and offices outside the Philippines" in the ratio prescribed by law or as may be prescribed by the Monetary Board: Provided, That in all cases, the permanently assigned capital and fifteen percent (15%) of "net due to" required to comply with prescribed capital ratios shall be inwardly remitted and converted to Philippine currency: Provided, further, That amounts invested in productive enterprises or utilized by Philippine companies for export activities, shall not be subject to conversion into

59

Citibank, N.A. v. Sabeniano, 514 SCRA 441 (2007) FACTS Sabeniano was a client of Citibank, where she had several deposits and market placements, as well as outstanding loans with an aggregate amount of P1.92M. However, when she failed to repay these, Citibank used her deposits and money market placements to off-set and liquidate her outstanding loans, a large amount coming from Citibank-Geneva. Sabeniano denied having any outstanding loans with Citibank and demanded that she recover her deposits and money market placements. She instituted a complaint for "Accounting, Sum of Money and Damages" against Citibank with RTC of Makati, which declared the setoff illegal, null and void and that Sabeniano is still indebted to Citibank (P1.07M). ISSUE Whether it was proper for Citibank to offset Sabeniano's outstanding loan balance with her dollar deposits in Citibank-Geneva RULING NO. Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of respondent’s dollar accounts with CitibankGeneva and to apply them to her outstanding loans. It cannot effect legal

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct and separate entity. As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the debtor; and as for the outstanding loans, petitioner Citibank was the creditor and respondent was the debtor. The parties in these transactions were evidently not the principal creditor of each other. It is true that the afore-quoted Section 20 of the General Banking Law of 2000 expressly states that the bank and its branches shall be treated as one unit. It should be pointed out, however, that the said provision applies to a universal9 or commercial bank, duly established and organized as a Philippine corporation in accordance with Section 8 of the same statute,11 and authorized to establish branches within or outside the Philippines. The General Banking Law of 2000, however, does not make the same categorical statement as regards to foreign banks and their branches in the Philippines. What Section 74 of the said law provides is that in case of a foreign bank with several branches in the country, all such branches shall be treated as one unit. As to the relations between the local branches of a foreign bank and its head office, Section 75 of the General Banking Law of 2000 and Section 5 of the Foreign Banks Liberalization Law provide for a "Home Office Guarantee," in which the head office of the foreign bank shall guarantee prompt payment of all liabilities of its Philippine branches. While the Home Office Guarantee is in accord with the principle that these local branches, together with its head office, constitute but one legal entity, it does not necessarily support the view that said principle is true and applicable in all circumstances. The Home Office Guarantee is included in Philippine statutes clearly for the protection of the interests of the depositors and other creditors of the local branches of a foreign bank. Since the head office of the bank is located in another country or state, such a guarantee is necessary so as to bring the head office within Philippine jurisdiction, and to hold the same answerable for the liabilities of its Philippine branches. Hence, the principle of the singular identity of that the local branches and the head office of a foreign bank are more often invoked by the clients in order to establish the accountability of the head office for the liabilities of its local branches. It is under such attendant circumstances in which the American authorities and jurisprudence presented by petitioners in their Motion for Partial Reconsideration were rendered. Now the question that remains to be answered is whether the foreign bank can use the principle for a reverse purpose, in order to extend the liability of a client to the foreign bank’s Philippine branch to its head office, as well as to its branches in other countries. Thus, if a client obtains a loan from the foreign bank’s Philippine branch, does it absolutely and automatically make the client a debtor, not just of the Philippine branch, but also of the head office and all other branches of the foreign bank around the world? This Court rules in the negative.

NOTES

60

Section 25 of the United States Federal Reserve Act states that – Every national banking association operating foreign branches shall conduct the accounts of each foreign branch independently of the accounts of other foreign branches established by it and of its home office, and shall at the end of each fiscal period transfer to its general ledger the profit or loss accrued at each branch as a separate item. v.

Head Office Guarantee Sec. 75, GBL: In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch. (69) Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance with the existing laws. Sec. 5, Foreign Banks Liberalization Act The head office of foreign bank branches shall guarantee prompt payment of all liabilities of its Philippine branches.

vi.

License to Do Business Sec. 133, Corporation Code No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

Hang Lung Bank, Ltd. v. Saulog, 201 SCRA 137 (1991) FACTS Hang Lung Bank, Ltd., which was not doing business in the Philippines, entered into a guarantee agreement with Cordova Chin San in Hongkong whereby the latter agreed to pay on demand all sums of money which may be due the bank from Worlder Enterprises to the extent of HK $250,000. Worlder Defaulted, HLB sued for collection, and the HK Supreme Court rendered judgment against Cordova and Worlder. HLB then filed a case for enforcement and recognition of the HK judgment, since Cordova was a Philippine resident. Cordova Chin San filed a motion to dismiss on the basis of lack of capacity to sue, grounded on Section 14 of the General Banking Act: "No foreign bank or banking corporation formed,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

organized or existing under any laws other than those of the Republic of the Philippines, shall be permitted to transact business in the Philippines, or maintain by itself any suit for the recovery of any debt, claims or demands whatsoever until after it shall have obtained, upon order of the Monetary Board, a license for that purpose."

61

Thusly, like any corporation, a bank not doing business in the Philippines need not possess a SEC license to sue before our courts.

proceedings against the bank and of notices affecting the bank may be made, and to file with the Securities and Exchange Commission a duly authenticated nomination of such agent. In the absence of the agent or head or should there be no person authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments and such service shall be as effective as if made upon the bank or its duly authorized agent or head. In case of service for the bank upon the Bangko Sentral Deputy Governor In-charge of the supervising and examining departments, the said deputy Governor shill register and transmit by mail to the president or the secretary of the bank at its head or principal office a copy, duly certified by him, of the summons, process, or notice. The sending of such copy of the summons, process, or notice shall be a necessary part of the services and shall complete the service. The registry receipt of mailing shall be prima facie evidence of the transmission of the summons, process or notice. All costs necessarily incurred by the said Deputy Governor for the making and mailing and sending of a copy of the summons, process, or notice to the president or the secretary of the bank at its head or principal office shall be paid in advance by the party at whose instance the service is made.

Since petitioner foreign banking corporation was not doing business in the Philippines, it may not be denied the privilege of pursuing its claims against private respondent for a contract which was entered into and consummated outside the Philippines. Otherwise we will be hampering the growth and development of business relations between Filipino citizens and foreign nationals. Worse, we will be allowing the law to serve as a protective shield for unscrupulous Filipino citizens who have business relationships abroad.

Sec. 12, Rule 14, Rules of CivPro: When the defendant is a foreign private juridical entity which has transacted business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines.

The motion to dismiss was granted. Hence, this petition for certiorari. ISSUE Can HLB, a foreign bank not doing business in the Philippines, sue in the Philippines without a license? RULING YES, they can. The court looked at both Section 69 of the Old Corporation Law and Section 133 of the Corp Code which says "No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines." The provision in the General Banking Act and the corporation Code mean the same thing: it is not the lack of the prescribed license (to do business in the Philippines) but doing business without license, which bars a foreign corporation from access to our courts.

vii.

Summons and Legal Processes Sec. 76, GBL: Summons and legal process served upon the Philippine agent or head of any foreign bank designated to accept service thereof shall give jurisdiction to the courts over such bank, and service of notices on such agent or head shall be as binding upon the bank which he represents as if made upon the bank itself. Should the authority of such agent or head to accept service of summons and legal processes for the bank or notice to it be revoked, or should such agent or head become mentally incompetent or otherwise unable to accept service while exercising such authority, it shall be the duty of the bank to name and designate promptly another agent or head upon whom service of summons and processes in legal

viii.

Revocation of License Sec. 78, GBL: The Monetary Board may revoke the license to transact business in the Philippines of, any foreign bank, if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. After the revocation of its license, it shall be unlawful for any such foreign banks to transact business in the Philippines unless its license is renewed or reissued. After the revocation of such license, the Bangko Sentral shall take the necessary action to protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (e) Offshore Banking Units (OBUs) Sec. 1(a), Offshore Banking System Decree "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds as provided in this Decree. Sec. 1(b), Offshore Banking System Decree "Offshore Banking Unit" shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines. Chapter 1, Part 3, BSP Circular No. 1389 SECTION 45. Definition of Terms. — As used in this Chapter, the following terms shall have the meaning indicated unless the context clearly indicates otherwise: 1. "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external sources and, as allowed in this Circular, from internal sources and utilization of such funds, as provided herein. 2. "Offshore Banking Unit" or "OBU" shall refer to a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines. 3. "Net office funds" shall refer to the net credit balance of the "Due to Head Office (HO)/Branches/Parent Company Account" after deducting the "Due from HO/Branches/Parent Company Account", as shown in the following computation: Due to HO/Branches/Parent Remittances/Advances/Deposits to HO/Branches/Parent Company

Company OBU by xxxxx

Unremitted earnings of OBU

xxxxx

Total

$xxxxx

Less: Due from HO/Branches/Parent Company Remittances/Advances/ Deposits of OBU with its HO/Branches/Parent Company xxxxx Net Office Funds

$xxxxx

4. "Deposits" shall refer to funds in foreign currencies which are accepted and held by an OBU in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest.

NOTES

62

5. "Resident" shall mean — a. an individual citizen of the Philippines residing therein; or b. an individual who is not a citizen of the Philippines but is permanently residing therein; or c. a corporation or other juridical person organized under the laws of the Philippines; or d. a branch, subsidiary, affiliate, extension office or any other unit of corporations or juridical persons which are organized under the laws of any country and operating in the Philippines. 6. "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "resident". 7. "Foreign currency deposit unit" or "FCDU" shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Central Bank to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. "Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended. 8. "Acceptable foreign exchange" comprise those foreign currencies which are acceptable to and exchangeable at the Central Bank and which form part of the international reserves of the country. SECTION 46. Approvals Required. — A foreign bank may operate an offshore banking unit (OBU) in the Philippines, after issuance to it of a Certificate of Authority to operate by the Monetary Board and registration with the Securities and Exchange Commission. SECTION 47. Criteria for Selection. — The following factors shall serve as basis for the issuance of certificate of authority to operate an offshore banking unit: (1) liquidity and solvency positions; (2) networth and resources base; (3) managerial and international banking expertise of applicant bank (4) contribution to the Philippine economy; and (5) other relevant factors, such as participation in the equity of local commercial banks and appropriate geographic representations. SECTION 48. Pre-Operation Requirements. — Upon advice from the Central Bank, a qualified bank shall submit a sworn undertaking of its head office, or parent company, through any of its duly authorized officers, supported by an appropriate resolution of its board of directors, to the effect that it shall: 1. on demand, provide the necessary currencies to cover liquidity needs that may arise or other shortfall that its OBU may incur.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

63

2. manage the operations of its OBU soundly and with prudence.

Bank approval.

3. train continually a specific number of Filipinos in international banking and foreign exchange trading with a view to reducing the number of expatriates;

SECTION 52. Transactions with Residents which are not Banks. — An OBU may engage in the following transactions with residents which are not banks:

4. provide and maintain in its offshore banking unit at all times net office funds in the minimum amount of US$1 million.

1. Deal in foreign currency instruments.

5. start operations of its OBU within one hundred eighty (180) days from receipt of its certificate of authority to operate such unit. 6. comply with applicable local laws relating to labor and employment. 7. submit before start of operations, other documents as may be required by the Central Bank such as certification or similar documents showing that it is duly authorized by the proper Government entity of its country to engage in offshore banking business in the Philippines. SECTION 49. Annual Fee. — Upon issuance of a certificate of authority to operate an OBU in the Philippines, and yearly thereafter, the authorized bank shall pay the Central Bank a fee of not less than US$20,000.00. SECTION 50. Transactions with Non-Residents and/or with OBUs. — An OBU may freely engage in all normal banking transactions with nonresidents and/or with other OBUs, involving any currency other than the Philippine peso. SECTION 51. Transactions with Foreign Currency Deposit Units (FCDUs). — Subject to Central Bank regulations, an OBU may engage in the following transactions with local banks incorporated or registered in the Philippines as FCDU(s) in any currency other than the Philippine peso: 1. Accept time, demand and call deposits or issue negotiable certificates of time deposits. 2. Borrow with maturities not exceeding 360 days. 3. Deposit. 4. Extend loans and advances. 5. Deal in foreign currency instruments. 6. Discount bills, acceptances, and negotiable certificates of deposits. 7. Engage in foreign exchange trading. 8. Engage in such other transactions as are authorized under this section between OBUs and resident banks authorized to accept foreign currency deposits under the provisions of R.A. No. 6426, as amended. Interbank short-term transactions of not exceeding 360 days such as credit lines of Philippine banks with correspondent banks, interbank call loans and interbank loans for general liquidity purposes shall not require prior Central

2. Extend foreign currency loans regulations on foreign borrowings.

and

advances,

subject

to

existing

3. Open letters of credit (L/Cs) for importations of resident-borrowers provided such importations shall be funded by a Central Bank-approved OBU foreign currency loan to the resident borrower involved. 4. Negotiate inward (export) Letters of Credit (L/Cs) and handle other export transactions (including documents against acceptance [D/A] and documents against payments ([D/P] and open account arrangements [O/A]) coursed thru their worldwide network of branches and correspondents subject to the following conditions: a. OBUs shall bring in foreign exchange sourced outside of the Trade Facility which shall be sold to the domestic banking system; and b. OBUs' share in the total export L/C negotiation business shall be limited to ½ of the growth (incremental) element in the country's total annual export. This limit shall be observed yearly until this equals 10 percent of total exports. Exports not covered by L/Cs, i.e., done thru documents against acceptance/open account arrangements shall be considered subject to this overall limit; 5. Provide full foreign exchange service for all foreign currency non-trade remittances and trade remittances resulting from or related to their own negotiations of export L/Cs. 6. Render financial, advisory and related services. 7. Refinance trust receipts without prior Central Bank approval arising from import transactions of Philippine residents in U.S. dollars or in other acceptable foreign currencies. The refinancing shall be evidenced by bankers acceptances. SECTION 53. Peso Deposits. — OBUs may open and maintain peso deposit accounts with domestic agent banks exclusively for the following purposes: 1. To meet administrative and other operating expenses, such as salaries, rentals and the like. 2. To pay the peso equivalent of foreign exchange sold by beneficiaries of inward remittances of Filipino overseas workers or of Filipino or multinational companies, coursed through the OBUs' correspondent banks abroad.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 3. To pay to the designated beneficiaries in the Philippines the peso equivalent of foreign exchange inward remittances other than remittances related to trade.

NOTES i.

Qualification Sec. 2, Offshore Banking System Decree Subject to such regulatory guidelines as the Monetary Board may prescribe, only banks which are organized under any law other than those of the Republic of the Philippines their branches, subsidiaries or affiliates, shall be qualified to operate offshore banking units in the Philippines. However, local branches of foreign banks already authorized to accept foreign currency deposits under the provisions of R.A. No. 6426 may opt to apply for authority to operate an offshore banking unit under the provisions of this Decree: Provided, that, upon their receipt of a corresponding certificate of authority to operate as an offshore banking unit, the license to transact business under the provisions of R.A. No. 6426 shall be deemed automatically withdrawn.

ii.

Certificate of Authority to Operate Sec. 3, Offshore Banking System Decree The Monetary Board of the Central Bank of the Philippines is hereby authorized to issue certificates of authority to operate offshore banking units: Provided, however, that, in issuing such certificates, the Monetary Board shall take into consideration the applicant's liquidity and solvency position, networth and resources, management, international banking expertise, contribution to the Philippine economy, and other relevant factors such as participation in equity of local commercial banks and appropriate geographic representation.

4. To pay the peso equivalent of foreign exchange sold by beneficiaries of export L/Cs negotiated with the OBUs. The peso deposit accounts shall be funded exclusively by inward remittances of foreign exchange eligible to form part of the Philippine international reserves. OBUs may also sell inward remittances of foreign exchange for pesos to the Central Bank through the Treasury Department, for credit to the demand deposit account of the designated commercial bank for account of the OBU. SECTION 54. Financial Assistance to Officers/Employees. — OBUs may extend financial assistance (real estate, car, personal loans, etc.) in local or foreign currency to their Filipino officers and employees as part of their fringe benefit program. They may likewise grant foreign currency loans to their expatriate officers without need of Central Bank approval. SECTION 55. Secrecy of Deposits. — The provisions of R.A. No. 6426 (Foreign Currency Deposit Act), as amended, shall apply to deposits in OBUs; Provided, however, that numbered deposit accounts shall not be used. SECTION 56. Exemption from Certain Laws. — The provisions of Act No. 2655 (Usury Law) as amended, R.A. No. 529 (Uniform Currency Law) as amended, and R.A. No. 3591 (Deposit Insurance Law) as amended, shall not apply to transactions and/or deposits in OBUs in the Philippines. SECTION 57. Accounting and Reporting. — OBUs shall maintain an accounting system in accordance with guidelines prescribed by the Central Bank. Periodically or as required, existing reports shall continue to be submitted in the prescribed forms to the Central Bank. SECTION 58. Supervision. — The operations and activities of offshore banking units shall be conducted under the supervision of the Central Bank of the Philippines. SECTION 59. Taxes, Customs Duties. — Transactions of OBUs in the Philippines shall be subject to such taxes as are prescribed in Presidential Decree No. 1034, as implemented by regulations of the Bureau of Internal Revenue. SECTION 60. Revocation/Suspension. — The Monetary Board, by the recommendation of the Governor, may revoke or suspend the authority of an Offshore Banking Unit to operate in the Philippines for violation of P. D. No. 1034 or these regulations.

64

The Central Bank of the Philippines is hereby authorized to collect a fee of not less than US$ 20,000.00 upon issuing any certificate of authority to operate and annually thereafter on the anniversary date of such certificate. iii.

Head Office Guarantee Sec. 4, Offshore Banking System Decree No application to operate as an offshore banking unit under the provisions of this Decree shall be considered unless the applicant shall have first submitted to the Central Bank of the Philippines a sworn undertaking of its head office or parent or holding company, duly supported by an appropriate resolution of its board of directors, that, among other things: (a) it will, on demand, provide the necessary specified currencies to cover liquidity needs that may arise or other shortfall that is offshore banking unit may incur; (b) the operations of its offshore banking unit shall be managed soundly and with prudence; (c) it will train and continually educate a specific number of Filipinos in international banking and foreign exchange trading with a view to reducing the number of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 expatriates; (d) it will provide and maintain in its offshore banking unit net office funds in the minimum amount of US$ 1,000,000.00 and (e) it will start operations of its offshore banking unit within 180 days from receipt of its certificate of authority to operate such unit. iv.

Effects of Certain Laws Sec. 8, Offshore Banking System Decree The provisions of Act No. 2566 (Usury Law), Republic Act No. 529, as amended (Uniform Currency Law), and Republic Act No. 3591, as amended (Deposit Insurance Law), shall not apply to transactions and/or deposits in offshore banking units in the Philippines: Provided, however, that the provisions of R.A. No. 1405 (Secrecy of Bank Deposits Law) shall apply to deposits in offshore banking units.

III. DEPOSIT FUNCTION A. Nature of Deposit

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When Serrano presented the TD certificates for encashment to Overseas Bank of Manila, none was honored by said bank. Serrano alleged that the Central Bank failed to strictly supervise the acts of Overseas Bank of Manila and protect the interests of its depositors by virtue of the constructive trust created when Central Bank required the bank to increase its collaterals for its overdrafts and emergency loans, said collaterals allegedly acquired through the use of depositors money. Hence, Serrano prayed for Central Bank’s solidary liability with Overseas Bank of Manila to him for the P350,000 TDs made, among others. ISSUE Whether Central Bank should be held solidarily liable RULING NO. Serrano’s claims of mandamus and prohibition are not proper as there is no shown clear abuse of discretion by the Central Bank in its exercise of supervision over the bank. If there was, the proper party to invoke in this case was Overseas Bank of Manila, not the Central Bank.

a. Deposits as Simple Loans ART. 1953, NCC: A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. ART. 1980, NCC: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. SERRANO v. CENTRAL BANK, 96 SCRA 96 (1980) DOCTRINE: Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans. Current and savings deposits are loans to a bank because it can use the same. FACTS Manuel Serrano made a time deposit (TD) for 1 year with 6% interest of P150,000 with the Overseas Bank of Manila, while Concepcion Maneja made a similar deposit for 1 year with 6.5% interest of P200,000 with the same bank. When Concepcion Maneja married Felixberto Serrano (presumably the brother of Manuel Serrano), she assigned and conveyed to Manuel her TD of P200,000.

Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when Serrano claimed that there should be created a constructive trust in his favor when Overseas Bank of Manila increased its collaterals in favor of Central Bank for its overdrafts and emergency loans, since these collaterals were acquired by the use of depositors’ money. Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans. Current and savings deposits are loans to a bank because it can use the same. Serrano, in making TDs that earn interests with the bank, was in reality its creditor. Failure of the bank to honor the TD is failure to pay its obligation as debtor and not a breach of trust arising from a depositary’s failure to return the subject matter of the deposit. b. Bank as Debtor i. Deposit is voluntary standards

agreement;

“Know

Your

Customer”

SEC. X262.1, MRB: All banking institutions are required to set a minimum of three (3) specimen signatures to be simultaneously required from each of their depositors and to update the specimen signatures of their depositors every five (5) years or sooner, at the discretion of the bank. Banks may,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 at their option, require their depositors to submit ID photos together with the specimen signatures. ii.

Ownership of money deposited

GUINGONA, JR. v. CITY FISCAL OF MANILA, 128 SCRA 577 (1984) DOCTRINE: The relationship between the depositor and the bank is that of creditor and debtor. Consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. FACTS From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments and those of his sister; that on July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments were entered in the records of NSLA; that, therefore, the respondents in I.S. No. 8131938 misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00. Guingona, Martin and Santos were charged with estafa before the City Fiscal of Manila. The herein petitioners (Guingona et al) contend that the Fiscal has no authority to conduct a preliminary investigation and to prosecute them because the acts alleged by David was only civil in nature and not criminal. ISSUE Whether the charges against Guingona (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions) is within the jurisdiction of the City Fiscal? RULING Fiscal has no jurisdiction over the subject matter. It must be pointed

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out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that: Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan. Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have nojurisdiction. BPI FAMILY BANK v. FRANCO, 538 SCRA 184 (2007) DOCTRINE: Money bears no earmarks of peculiar ownership. Its primary function is to pass from hand to hand as a medium of exchange, without other evidence of its title. Money, which passed through various transactions in the general course of banking business, even if of traceable origin, bears no earmarks of peculiar ownership. FACTS In 1989, Tevesteco Arrastre-Stevedoring Co. (Tevesteco) opened a savings and current account with BPI-FB. Soon thereafter, First Metro Investment Corporation (FMIC) opened a time deposit account with the same branch of BPI-FB with a deposit of P100M to mature 1 year after. Subsequently, Franco opened savings (P500K), current (P500K) and time deposit (P1M) accounts with BPI-FB. The funding of Franco’s checks was part of the P80M debited by BPI-FB from FMIC’s TD account and credited to Tevesteco’s current account pursuant to an Authority to Debit signed by FMIC’s officers. This, however, was found to be forged, as declared by Antonio Ong, one of the alleged signatories. Although Tevesteco already made some withdrawals from the P80M credited to its account, BPI-FB debited Franco’s savings and current accounts for the amounts remaining therein. His accounts were also garnished pursuant to an Order of Attachment issued by the RTC Makati. Due to this, his checks drawn against the current account were dishonored (stamped with “Account under garnishment”). However, when Franco issued the checks, neither was he furnished a Notice of Garnishment nor impleaded in the case instituted

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 by BPI-FB to recover the amount. It was only about a year after that he was impleaded in the case. Thus, he filed a Motion to Discharge Attachment, which was granted. But this cannot be complied since the amount had already been debited due to the forgery. As to his savings account, it appears that he agreed to an arrangement where P400K from his savings account was temporarily transferred to Quiaoit’s savings account, subject to immediate return upon issuance of a certificate of deposit which Quiaoit needed for his Taiwan visa application. FMIC filed a complaint against BPI-FB to recover the P80M debited from its account, infra, where BPI-FB was found liable to FMIC due to its failure to exercise the degree of diligence required of banks in treating the accounts of its depositors with meticulous care. Franco filed a suit against BPI-FB to cease freezing his accounts and to release the deposits therein. The lower court ruled in favor of Franco, which the CA affirmed with modification. ISSUE Who has a better right to the deposits in Franco’s account—Franco or BPIFB? HELD BPI-FB. The deposit in Franco’s accounts consists of money, which is generic and fungible. The quality of being fungible depends upon the possibility of the property, because of its nature or the will of the parties, being substituted by others of the same kind, not having a distinct individuality. It bears emphasizing that money bears no earmarks of peculiar ownership, and this characteristic is manifest in the case which involves money in a banking transaction gone awry. It primary function is to pass from hand to hand as a medium of exchange, without other evidence of its title. Money, which passed through various transactions in the general course of banking business,, even if traceable origin, is no exception. There is no doubt that BPI-FB owns the deposited money in the accounts of Franco, but not as a legal consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB conveniently forgets that the deposit of money in banks is governed by the NCC provision on simple loan or mutuum. As there is a creditor-debtor relationship between a depositor and a bank, BPI-FB ultimately acquired ownership of Franco’s deposits, but such ownership is coupled with a corresponding obligation to pay him an equal amount on demand. BPI-FB does not have the right to unilaterally freeze the accounts of Franco based on its mere suspicion that the funds therein were proceeds of the

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multi-million peso scam Franco was allegedly involved in. To grant that right would open floodgates of public distrust in the banking industry.

iii.

Payment to proper party-depositor

FULTON IRON WORKS CO. v. CHINA BANKING CORP., 55 PHIL. 208 (1930) DOCTRINE: A depositor is presumed to be the owner of funds standing in his name in a bank deposit, and where a bank is not chargeable with notice that the money deposited therein is the property of another person, it is justified in paying out the money to the depositor, or upon his order, and in so doing cannot be held liable to any other person as the true owner. FACTS Fulton Iron Works Co. (Fulton) sold to Binalbagan Estate Inc.(Binalbagan) machinery for a sugar mill. As payment, Binalbagan executed 3 notes amounting to 80,000 dollars. The notes were never paid at maturity because Binalbagan suspended payments in favor of its other creditor. As a result, Fulton employed the services of a law firm, which S. C. Schwarzkopf was a member then, for the collection of the payment. The firm was subsequently dissolved and Schwarzkopf was alone in handling the case. He opened a personal account (ACCOUNT 1) in China Banking Corp and deposited a modest amount. Later on, Binalbagan Estate’s financial condition began to improve. It executed a check amounting to 10,000 to Schwarzkopf as part payment of the original transaction. Schwarzkopf deposited the check in a new account (ACCOUNT 2) in China Bank. But was subsequently withdrawn and used for individual purposes. Binalbagan again executed a check amounting to 61,000 and delivered it to Schwarzkopf in favor of Fultan. He deposited it in a new account again in China Bank entitled “Schwarzkopf, Atty-in-fact, Fulton Iron Works” (ACCOUNT 3). When Schwarzkopf’s ACCOUNT 2 was overdrawn, he transferred the money from ACCOUNT 2 to settle the discrepancy. Ultimately, he remitted only 30,000 to Fulton. Fulton now argues that the both Schwarzkopf and China bank is liable for the amount misappropriated. (Schwarzkopf was already convicted of estafa in a criminal case and made civilly liable, so this case is simply against China Bank.) ISSUE Whether the bank is liable for the amount misappropriated by Schwarzkopf.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 RULING Party. The Bank is only liable for compensating the overdraft of ACCOUNT 2 with ACCOUNT 3. But the Bank is not liable for the whole amount of misappropriation by Schwarzkopf specifically for withdrawals in ACCOUNT 2. Bank accounts and commercial papers can have earmarks. And earmarks give notice that the money/credit rightfully belongs to some other person then the one having control of the account. ACCOUNT 3 clearly indicates that the account was for his client Fulton, as indicated in the name. Thus, the bank cannot offset the overdraft of the personal account of Schwarzkopf from the Account in favor of Fulton. For this transaction, the Bank is liable. However, the bank cannot be held liable for the money drawn by Schwarzkopf from Account 2 for individual purposes. There was no proof that the bank had any knowledge of the misappropriation of the money, as there was no indication the account was also for Fulton. Thus, there was no duty for the bank to intervene especially from the first few deposits. The specialized function of bank is to serve as a place of deposit for money, to keep it safely while on deposit, and to pay it out, upon demand to the person who effected the deposit or upon his order. A bank is not a guardian of trust funds deposited with it in the sense that it must see to their proper application nor is it its business to pry into the uses to which moneys on deposit in its vault are being put; and so long as it serves its function and pays the money out in good faith to the person who deposited it, or upon his order, without knowledge or notice that it is in fact assisting in the misappropriation of the fund, the bank will be protected. Thus, the mere act of a bank in entering a trust fund to the personal account of the fiduciary, knowing it to be a trust fund, will not make the bank liable in case of the subsequent misappropriation of the money by the fiduciary BPI v. CA, 232 SCRA 302 (1994) DOCTRINE: A bank is under no duty or obligation to make the application. To apply the deposit to the payment of the loan is a privilege, a right to setoff which the bank has the option to exercise. FACTS Benigno Lim had 2 accounts at CBTC (BPI's predecessor): One jointly with Eastern Plywood Corporation, of which he was an officer, and another joint checking account with Mariano Velasco. Subsequently, Velasco died in April 1977. In August 1977, Eastply and Lim obtained a loan from CBTC for P73,000 evidenced by a promissory note and secured by a Holdout Agreement giving CBTC the power to take funds from the joint account with Velasco (approx P331,000) and apply the same as payment for the loan.

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In the meantime, a case for the settlement of Velasco's estate was filed wherein the whole balance in the joint account of Velasco and Lim was claimed as part of Velasco's estate. The intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account. In 1980, CBTC merged with BPI. In 1987, BPI filed a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement. The Court of Appeals rendered a decision stating: 1) On the claim: It was the duty of BPI to debit the account of the defendants under the promissory note to set off the loan even though the same has no fixed maturity. 2) On the counterclaim: The settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with BPI as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, BPI should have protected the defendants' interest in the case when the said account was claimed by Velasco's estate. It then ordered BPI to pay defendants the amount of representing the outstanding balance in the bank account of defendants. ISSUES 1) Whether BPI was duty-bound to debit the account of the defendants to set off the loan because of the Holdout Agreement, and 2) Whether the counterclaim for the amount in the joint account can be awarded despite the same being given to the heirs of Velasco already. RULING 1) NO. It is clear from the Holdout Agreement that BPI had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. 2) YES. In Serrano vs. Central Bank of the Philippines it was held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor.

time deposits. In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum of P50,584 plus accumulated interest.

BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the unceertain ownership of the money deposited in the account.

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses Augusta A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance of their time deposits, plus interests, P70,000 as moral and exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where the action was filed on September 6, 1971).

Moreover, the order of the court in the intestate case merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property is disputed, the determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution. Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern. iv.

The Central Bank appealed to SC by certiorari. It contends that the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a) they were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of the Central Bank and the General Banking Law, no final judgment can be validly obtained against an insolvent bank. The lower court, in justifying the award for damages to the spouses, reasoned out that, because such actions are not suspended, judgments against insolvent banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code. It further noted that, in contrast with the Central Act, section 18 of the Insolvency Law provides that upon the issuance by the court of an order declaring a person insolvent "all civil proceedings against the said insolvent shall be stayed." On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets "for the equal benefit of all the creditors, including the depositors". The Central Bank cites the ruling that "the assets of an insolvent banking institution are held in trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise"

Whether or not preferred credits

CENTRAL BANK v. MORFE, 63 SCRA 114 (1975) FACTS Monetary Board found the Fidelity Savings Bank to be insolvent. The Board directed the Superintendent of Banks to take charge of its assets, forbade it to do business and instructed the Central Bank Legal Counsel to take legal actions. Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or, specifically, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against the Fidelity Savings Bank for the recovery of the sum of P50, 584 as the balance of their

ISSUE 1) Whether deposits are deemed as preferred credits and if not, 2) may they be elevated to the level of preferred credits by acquiring a court judgment? RULING NO to both. It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are considered simple loans and, as such, are not preferred credits. Evidently, one purpose in prohibiting the insolvent bank from doing business is to prevent some depositors from having an undue or fraudulent

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 preference over other creditors and depositors. That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some depositors could be maintained and judgments would be rendered for the payment of their deposits and then such judgments would be considered preferred credits under article 2244 (14) (b) of the Civil Code. A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as entitled to priority would mean that depositors in insolvent banks, after learning that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from doing business, would rush to the courts to secure judgments for the payment of their deposits. In such an eventuality, the courts would be swamped with suits of that character. Some of the judgments would be default judgments. Depositors armed with such judgments would pester the liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable situation could not have been contemplated by the framers of section 29. The general principle of equity that the assets of an insolvent are to be distributed ratably among general creditors applies with full force to the distribution of the assets of a bank. A general depositor of a bank is merely a general creditor, and, as such, is not entitled to any preference or priority over other general creditors Considering that the deposits in question, in their inception, were not preferred credits, it does not seem logical and just that they should be raised to the category of preferred credits simply because the depositors, taking advantage of the long interval between the declaration of insolvency and the filing of the petition for judicial assistance and supervision, were able to secure judgments for the payment of their time deposits. The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969, was forbidden to do business (and that ban would include the payment of time deposits) implies that suits for the payment of such deposits were prohibited. What was directly prohibited should not be encompassed indirectly.

NOTES v.

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Bank’s right to compensation

GULLAS v. PNB, 62 PHIL. 519 (1935) DOCTRINE: A bank has the right of set off of the deposit in its hands for the payment of any indebtedness to it on the part of the depositor. FACTS (Version 1) The treasurer of the US for the US Veterans Bureau issued a treasurer warrant in the amount of $361, which was indorsed by Paulino Gullas and Pedro Lopez, payable to Francisco Bacos. PNB encashed the warrant, but was dishonored by the Insular Treasurer. Gullas had $509 in his bank account, which was sequestered by the bank. At the time the notice of dishonor was sent, he was still in Manila and did not receive the notice. Due to such event, he was not able to pay the fees for his insurance for insufficient balance, and he was greatly humiliated by such event. ISSUE Whether PNB has the right to apply Gullas’s deposit against his debt to the bank RULING NO. According to the NCC, compensation shall take place upon the existence of two persons being a creditor and debtor to each other. Gullas, being a depositor of the bank, is considered a creditor of the bank and the bank being the debtor. Under the Negotiable Instruments Law, when a check has been dishonored, a general indorser becomes liable to the amount of the check upon the knowledge of the dishonor. Gullas, being a general indorser, became a debtor to the bank for the dishonor of the check, upon knowledge of the dishonor, and the bank becomes the creditor. Compensation should have taken place, except that Gullas DID NOT have knowledge of the dishonor. Such action became prejudicial to Gullas, and he may therefore claim from the bank any damages sustained by him from such event. However, since no actual damages was proved, nominal damages in the amount of $250 is awarded to him. FACTS (Version 2) • Attorney Paulino Gullas has a current account with PNB. • On August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. • The warrant was cashed by PNB but the Insular Treasurer dishonored the warrant. At that time the outstanding balance of Gullas on the books of the bank was P509. Against this balance Gullas had issued certain cheeks which could not be paid when the money was sequestered. • On August 20, 1933, Gullas left his Cebu residence for Manila.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 • When PNB learned of the dishonor of the warrant, it sent notices by mail to Atty. Gullas. However, the notices could not be delivered to Gullas because he was in Manila. In its letter dated Aug. 21, 1933, PNB informed Gullas and Lopez that the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment for which had been received has been returned by its Manila office with the notation that the payment of his check has been stopped by the Insular Treasurer. PNB stated that because of this, it applied the outstanding balances in their current accounts (Gullas - P509). • When Gullas returned to Cebu on August 31, 1933, he received the notice of dishonor and he immediately paid the unpaid balance of the United States Treasury warrant. • Because of this incident, (1) checks that Gullas issued, including one for his insurance, were not paid because of lack of funds standing to his credit in the bank; (2) periodicals in the vicinity gave prominence to the news to the great mortification of Gullas. • CFI: PNB should return the sum of P5098 to Gullas, with legal interest and costs. Gullas is entitled to damages in the amount of P10K more or less. ISSUES (1) WON PNB has the right to apply a deposit to the debt of depositor to the bank (2) What amount of damages, if any, should be awarded to Gullas RULING 1. PNB has the right to apply the deposit. • Art. 1195 Civil Code provides that compensation shall take place when two persons are reciprocally creditor and debtor of each other. It has been held that the relation existing between a depositor and a bank is that of creditor and debtor. • Sec. 66 Negotiable Instruments Law provides that the general indorser of negotiable instrument engages that if he be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. It has been held that notice of dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice is given. • As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. • [In Louisiana, a bank has no right, without an order from or special assent of the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. This rule is based on the theory of confidential contracts arising from irregular deposits, e. g., the deposit of money with a banker.]

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2. Gullas is entitled to nominal damages. • PNB did not enforce the remedy properly. o PNB made use of the money in Gullas’ account to make good for the treasury warrant even prior to the mailing of the notice of dishonor and without waiting for any action by Gullas. o It has been held that a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. o As to an indorser, notice should actually have been given him in order that he might protect his interests. • PNB’s action was prejudicial to Gullas. o PNB is not primarily liable for the alleged libelous articles against Gullas. The same same remark could be made relative to the loss of business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas had been reimbursed. o On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave for Manila, and on return find that those checks had not been cashed because of the action taken by the bank. o Gullas should be awarded nominal damages worth P250 because of the premature action of the bank against which Gullas had no means of protection. REPUBLIC v. CA, 65 SCRA 186 (1975) DOCTRINE: Since the relation between a depositor and a bank is that of a creditor and debtor, the depositor has the right to apply his deposits/credit with the bank against the loans he had obtained from his deposits. FACTS Shortly after the liberation of the Philippines in 1945, all the assets belonging to the enemy government, were confiscated by the Government of the United States. The assets located in the Philippines were subsequently turned over to the Philippines by agreement between the two Governments. Among these assets are 20 promissory notes secured by a chattel mortgage executed by Cuaycong in favor of the Bank of Taiwan. Based on the Ballyntine schedule, the money value of these promissory notes adds up to P4,986, and, including the stipulated interest accumulated up to September 30, 1961, the total indebtedness amounts to P14,654.17.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 The Republic then filed suit against Cuaycong to recover the value of the 20 promissory notes executed by Cuaycong in favour of the Bank of Taiwan. Based on the findings of the trial court which were adopted by the Court of Appeals, it would appear that during the Japanese occupation of Negros Occidental, the military administration commandeered all available stocks of sugar in that province, including those belonging to Cuaycong; that no record of the precise amount of sugar taken from Cuaycong has survived the war but Cuaycong claimed that the same was valued at P10,242.60; and that Cuaycong's stocks of sugar were mortgaged at the time with the Philippine National Bank (the PNB, at the beginning of the Japanese occupation, was taken over by the Bank of Taiwan) to guarantee payment of a likewise undetermined amount of crop loan(s) granted prior to the outbreak of the war. the stocks of sugar belonging to Cuaycong were sold by the Victories Planters' Association, acting as agent for the Bank of Taiwan, to the Mitsui Bussan Kaisha of Japan. The proceeds of this sale were, in effect, retained by the Bank of Taiwan to constitute a deposit of Cuaycong and made part of the so-called "Farmers Rehabilitation Fund" mentioned in the military directive. The Fund allowed the planters to borrow money therefrom, against their respective deposits, in order to finance new plantings of sugar cane and cotton in their haciendas. The twenty promissory notes subject of the present action by the Government were executed by Cuaycong between April 16, 1943 and March 25, 1944 under the above-mentioned financing scheme. Upon the foregoing facts, the Court of Appeals held, among others, that (a) the right of action of the Government against Cuaycong has already prescribed, and (b) Cuaycong's indebtedness to the Bank of Taiwan may be considered set off against the proceeds of the sale of his sugar retained by the same bank. The Government disputes these rulings. ISSUE Whether the government may still collect on the promissory notes against Cuaycong RULING: NO. 1. On the matter of prescription, the SC held that the statute of limitations does not operate against the Government as to bar it from collecting the sums owing to the Bank of Taiwan during the last war for, in recovering these loans, the Government is merely acting "in the exercise of its sovereign functions to protect the interests of the State over a public property." 2. The Court of Appeals is correct in allowing a set-off of Cuaycong's indebtedness to the Bank of Taiwan against his money-deposit with the same bank. No record of Cuaycong's deposit is available but the inference

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drawn by the Court of Appeals as to the existence and extent of such deposit cannot be flawed. The fact is clear that all the proceeds derived from the sale or confiscation of the sugar stocks belonging to the planters in Negros Occidental were retained as deposits by the Bank of Taiwan and made part of the "Farmers Rehabilitation Fund." Planters like Cuaycong were allowed to borrow money from the Fund but only to the extent of their deposits with the Bank of Taiwan or, as the military directive adverted to states, "Within the limit of the proceeds of sugar sale of each planter." The conclusion is logical and inevitable that the sums covered by the promissory notes drawn by Cuaycong were well within the size of his then existing deposit. And since the relation between a depositor in a bank and the bank is that of creditor and debtor, 3 Cuaycong has every right to apply his credit with the Bank of Taiwan against the loans he had obtained from his deposit. All the elements necessary for a set-off are present, and under the law then obtaining, 4 compensation takes place ipso jure from the day all the necessary requisites concur, without need of any conscious intent on the part of the parties. Moreover, the Court is satisfied with the explanation proffered by Cuaycong that, under the abnormal conditions then prevailing, the only way by which he could utilize the proceeds from the sale of the stocks of sugar seized from him was for him to make use of the loans made available by the very agency that arbitrarily retained the said proceeds. In ultimate effect, it was as though Cuaycong had merely withdrawn his deposits with the Bank of Taiwan. BPI v. CA, 512 SCRA 620 (2007) DOCTRINE: A bank generally has the right of set-off over the deposits therein for the payment of any withdrawals on the part of a depositor—the right of a collecting bank to debit a client’s account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. FACTS Julio Templonuevo demanded from BPI payment of P267,000 (approx.) representing the aggregate amount of 3 checks, payable to him, but deposited with Annabelle Salazar’s BPI account without his knowledge and corresponding indorsement. Accepting Templonuevo’s claim as a valid one, BPI froze the account of AA Salazar Construction and Engineering Services (ASCES), instead of Annabelle Salazar’s, where the checks were deposited, as this was already closed due to insufficiency of funds. Salazar was advised to settle this with Templonuevo, but no settlement was arrived at. Hence, BPI decided to debit the amount of P267,000 (approx.)

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 from her account and paid this, in turn, to Templonuevo by means of a cashier’s check. Hence, Salazar instituted an action against BPI for the recovery of the sum of P267,000. The RTC rendered a decision in favor of Salazar, which the CA affirmed on the ground that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction and Trading actually belonged to Salazar and would be deposited to her account, with Templonuevo acquiescing to the arrangement. ISSUE Whether it was proper for BPI to withdraw unilaterally from the depositor’s account the amount it had previously paid upon certain unendorsed order instruments deposited by the depositor to another account that she closed HELD NO. Although as the collecting bank, BPI had the right to debit Salazar’s account for the value of the checks it previously credited in her favor, it was improper for it to do so. It is of no moment that the account debited by BPI was different from the original account to which the proceeds of the check were credited because both admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no separate and distinct personality form her, and that the latter being her personal account. As business affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In this regard, BPI was clearly remiss in its duty to Salazar as its depositor. Despite the obvious lack of indorsement on the checks, BPI permitted the encashment of these checks three times on 3 separate occasions. This negates BPI’s contention that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that BPI recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. Although the Court ordered the return of the amount of the checks to Templonuevo, it affirmed CA’s award of damages to Salazar. This would have been avoided had BPI adhered to the standard of diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the bank’s negligence may not have been attended with malice or bad faith, if the former suffered mental anguish, serious anxiety, embarrassment, and humiliation.

NOTES vi.

73

No breach of trust; Mandamus not a remedy

LUCMAN v. MALAWI, 511 SCRA 268 (2006) Bank deposits are in the nature of irregular deposits—they are really loans because they earn interest. All kinds of bank deposits are to be treated as loans and are to be covered by the law on loans. Mandamus does NOT lie to enforce the performance of contractual obligations. c.

Bank’s Duty of Utmost Care SEC. 2, GBL: The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.

CONSOLIDATED BANK AND TRUST COMPANY v. CA, 410 SCRA 562 (2003) DOCTRINE: The fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositors. It requires banks to assume a degree of diligence higher than that of a good father of a family. FACTS (Similar with the earlier case where the messenger left the passbook in the bank) ISSUE Who should bear the loss, Consolidated Bank or L.C. Diaz? RULING Both will share in the losses- 60% to Consolidated Bank, 40% to L.C. Diaz. The Bank was made liable because of its duty to its depositors. This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791. Solidbank’s tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same. In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its employees.

B. Kinds of Deposit a. Demand Deposits SEC. 58, NCBA: For purposes of this Act, the term "demand deposits" means all those liabilities of the Bangko Sentral and of other banks, which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. SEC. 59, NCBA: Only banks duly authorized to do so may accept funds or create liabilities payable in pesos upon demand by the presentation of checks, and such operations shall be subject to the control of the Monetary Board in accordance with the powers granted it with respect thereto under this Act. SEC. 60, NCBA: Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided,

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however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. SEC. X201, MRB: Banks may accept or create demand deposits subject to withdrawal by check. A UB/KB may accept or create demand deposits subject to withdrawal by check, without prior authority from the BSP. A TB/RB/Coop Bank may accept or create demand deposits upon prior authority of the BSP. SEC. X202, MRB: The following regulations shall govern temporary over-drawings and drawings against uncollected deposits (DAUDs). a.

Temporary over-drawings. Temporary over-drawings against current account shall not be allowed, unless caused by normal bank charges and other fees incidental to handling such accounts. Banks which violate these regulations shall be subject to a fine of one-tenth of one percent (1/10 of 1%) per day of violation, computed on the basis of the amount of overdrawing or fines in amounts as may be determined by the Monetary Board, but not to exceed P30,000 a day for each violation, whichever is lower. Technical over-drawings arising from “force posting” in-clearing checks shall be debited by banks under “Returned Checks and Other Cash Items Not in Process of Collection” which is part of “Other Assets” in the Statement of Condition. Items to be lodged under this account shall consist only of in-clearing checks which may result in “technical overdrawn” accounts and shall be immediately reversed the following day. The checks lodged under “Returned Checks, etc.” shall either be returned or honored the following day before clearing. The items to be used as cover for the honored checks should only consist of any of the following: (1) Cash (2) Cashier’s, Manager’s or Certified Checks (3) Bank Drafts (4) Postal Money Orders (5) Treasury Warrants (6) Duly funded “On us” Checks (7) Fund transfers/credit memos within the same bank representing proceeds of loans granted under existing regulations.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Peso demand deposit accounts maintained by foreign correspondent banks with commercial banks shall not be subject to the above-mentioned regulations: Provided, That: (a) The maintenance of non-resident correspondent bank’s peso checking accounts and overdrawings therefrom are covered by reciprocal arrangement; (b) Temporary overdrawings are covered within fifteen (15) days from the date overdrawings are incurred; and (c) Such accounts are credited only through foreign exchange inward remittance. b. Drawings against uncollected deposits. DAUDs shall be prohibited except when the drawings are made against uncollected deposits representing manager’s/cashier’s/treasurer’s checks, treasury warrants, postal money orders and duly funded “on us” checks, which may be permitted at the discretion of each bank. SEC. X203, MRB: To complement the provisions of Batas Pambansa Blg. 22, (An Act Penalizing the Making or Drawing and Issuance of a Check Without Sufficient Funds or Credit), the following regulations shall govern: a. The drawee bank shall stamp, write or print on a dishonored check or on a paper attached thereto the date the check is presented for payment and the reason for the refusal to pay the same to the holder thereof. b. Where the reason for the dishonor of a check is stamped, written or printed on a paper attached to the checks, the drawee bank shall indicate the pertinent details, such as the names of the drawer, the payee and the drawee bank, the date and amount of the check, the check number and the date of dishonor. c. The drawee bank shall use only the remark or notation “Drawn Against Insufficient Funds”, “No Funds”, or “Insufficient Funds” stamped, written, or printed on, or attached to the check dishonored or returned byreason of insufficiency of funds or credit. d. Notwithstanding receipt of an order to stop payment, the drawee bank shall likewise stamp, write, or print on, or attach to the check any of the remarks or notations mentioned in Item “c” hereof indicating that there were no sufficient funds in or credit with such bank for the payment in full of such check, if such be the fact. The bank shall also indicate receipt of a stop payment order. e. A check and other clearing item (COCI) dishonored by reason of insufficiency of funds or credit shall be returned by the drawee bank to the negotiating bank not later than the next clearing for returned COCI. (1) For Local Exchanges There shall be two (2) separate clearing windows for COCIs returned due to insufficient funds or credit in the local exchanges in the

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integrated Metro Manila area served by the PCHC and the BSP Regional Clearing Centers (RCCs). (The settlement of interbank transactions vis-à-vis covering reserve requirement/deficiency of banks’ DDA is shown in Appendix 39.) (a) AM Returned COCI Clearing - The AM returned COCI clearing in the integrated Metro Manila local exchange shall be conducted from 7:30 AM to 10:00 AM on the banking day immediately following the original date of presentation of the COCI to PCHC. The AM returned COCI clearing window for local exchanges in the BSP RCCs shall be conducted from 8:00 AM to 9:30 AM on the banking day immediately following the original date of presentation of the COCI to the RCC. Returned COCI in the AM clearing windows shall be given value on the same date as the date of original presentation of the COCI to PCHC and RCC. The amount of debits and credits on the date of original presentation shall be reversed to the extent of the amount of credits and debits arising from the returned COCI. The process restores the balances of the demand deposits of banks with the BSP to their position prior to the settlement of the clearing results affected by the COCI later returned due to insufficient funds or credit. (b) PM Returned COCI Clearing - The PM returned COCI clearing window shall coincide with the afternoon regular clearing. Other dishonored COCI not returned in the morning clearing session shall be presented by the drawee bank to the negotiating bank in the afternoon regular clearing. Such returned COCI shall be given value on the date the returned COCI was presented to PCHC for the integrated Metro Manila area and to BSP RCCs. Return of Dishonored COCI - A COCI dishonored by reason of insufficiency of funds or credit shall be returned by the drawee bank to the negotiating bank not later than the next clearing for returned COCI. (2) For Out-of-town Exchanges For out-of-town exchanges, a COCI so dishonored shall be returned by the drawee bank to the negotiating bank within the period specified in the clearing Circular Letters issued by BSP. (3) COCI not coursed through the Clearing System A COCI dishonored by reason of insufficiency of funds or credit which was not coursed through the clearing system shall be returned by the drawee bank to the holder or the negotiating bank, as the case may be, not later than the business day following the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 date the COCI is presented for payment with the drawee bank. The negotiating bank shall, in turn, return a COCI dishonored by reason of insufficiency of funds or credit to the holder not later than the business day following its receipt of the dishonored COCI from the drawee bank. SEC. X204, MRB: The following officers and employees of banks are prohibited from maintaining demand deposits or current accounts with the banking office in which they are assigned: a. All officers; b. Employees of the bank’s cash department/cash units; and c. Other employees who have direct and immediate responsibility in the handling of transactions and/or records pertaining to demand deposits or current accounts. The above-mentioned prohibition shall include the spouses and relatives within the second degree of consanguinity and affinity of the officers and employees covered by the prohibition, and the business interests of such officers and employees, their spouses and relatives within the second degree of consanguinity and affinity, in single proprietorships, or partnerships or corporations in which such officers and employees, individually or as a group, own or control at least a majority of the capital of the partnership or the outstanding subscribed capital stock (voting and non-voting) of the corporation. BPI FAMILY SAVINGS BANK v. FIRST METRO INVESTMENT CORP, 429 SCRA 30 (2004) DOCTRINE: Demand Deposits are “all those liabilities of the Bangko Sentral and of other banks which are denominated in the Philippine currecncy and are subject to payment in legal tender upon demand by the presentation of depositor’s checks. Under CB Circular No. 22 (Series of 1994), “demand deposits shall not be subject to any interest rate ceiling.” This, in effect, is an open authority to pay interest on demand deposits, such interest not being subject to any rate ceiling. FACTS FMIC, through its Executive Vice President Antonio Ong, opened a current account and deposited a METROBANK check P100 million with BPI Family Bank* (BPI FB). BPI FB, guaranteed the payment of P14,667,687.01 representing 17% per annum interest of P100 million deposited by FMIC. The latter, in turn, assured BPI FB that it will maintain its deposit of P100 million for a period of one year on condition that the interest of 17% per annum is paid in advance. Subsequently, BPI FB paid FMIC 17% interest or P14,667,687.01 upon clearance of the latter’s check deposit.

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by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferred P80 million from FMIC’s current account to the savings account of Tevesteco Arrastre – Stevedoring, Inc. FMIC denied having authorized the transfer of its funds to Tevesteco, claiming that the signatures of Ong and David were falsified. To recover immediately its deposit, FMIC, on September 12, 1989, issued BPI FB check no. 129077 for P86,057,646.72 payable to itself and drawn on its deposit with BPI FB SFDM branch. But upon presentation for payment on September 13, 1989, BPI FB dishonored the check as it was "drawn against insufficient funds" (DAIF). FMIC filed with the RTC a civil case against BPI FB. RTC ruled in favor of FMIC, ordering BPI to pay P80M + interest at legal rate. CA modified amount to P65M + interest at 17% ISSUE Is it a Time Deposit or interest-bearing current account? HELD Time Deposit. The parties did not intend the deposit to be treated as a demand deposit but rather as an interest-earning time deposit not withdrawable any time. Both agreed that the deposit of P100 million was non-withdrawable for one year upon payment in advance of the 17% per annum interest. Ordinarily, a time deposit is defined as "one the payment of which cannot legally be required within such a specified number of days." In contrast, demand deposits are "all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of (depositor’s) checks."4 While it may be true that barely one month and seven days from the date of deposit, respondent FMIC demanded the withdrawal of P86,057,646.72 through the issuance of a check payable to itself, the same was made as a result of the fraudulent and unauthorized transfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s savings account. Certainly, such was a normal reaction of respondent as a depositor to petitioner’s failure in its fiduciary duty to treat its account with the highest degree of care. Under this circumstance, the withdrawal of deposit by respondent FMIC before the one-year maturity date did not change the nature of its time deposit to one of demand deposit. i.

For UB and KB SEC. 33, GBL: A bank other than a universal or commercial bank cannot accept or create demand deposits except upon

However, on August 29, 1989, on the basis of an Authority to Debit signed ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. ii.

For TB SEC. 10 (B), THRIFT BANKS ACT: Open current or checking accounts: Provided, That the thrift bank has net assets of at least Twenty million pesos (P20,000,000) subject to such guidelines as may be established by the Monetary Board; and shall be allowed to directly clear its demand deposit operations with the Bangko Sentral and the Philippine Clearing House Corporation;

iii.

For RB/Coop Bank SEC. 12 (B), RURAL BANKS ACT: In addition to the operations especially authorized in this Act, any rural bank may: xxx Open current or checking accounts, provided the rural bank has net assets of at least Five million (P5,000,000) subject to such guidelines as may be established by the Monetary Board;

iv.

For Islamic Banks SEC. 6, PAR. 7 (A), ISLAMIC BANK CHARTER: To perform the following banks services: xxx Open current or checking accounts;

b. Savings Deposits SEC. X213, MRB: Banks may be authorized by the BSP to solicit and accept deposits outside their bank premises, subject to the following conditions: a. The financial condition of the bank applying for authority to solicit and collect savings deposits outside its bank premises is sound and the operations and the quality of the management thereof could reasonably assure the safety of the funds which may be entrusted to its deposit collectors and/or solicitors; b. The proposed area where applicant bank intends to solicit shall be clearly defined; c. Solicitation of deposits shall only be confined within a locality where there are no other banks in operation, or where it can be clearly established that the deposit potentials of the said locality are still untapped; and

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d. Applicant bank shall institute and maintain the following minimum safeguards: (1) All deposit solicitors shall be initially bonded for at least P1,000 subject to the increase thereof to approximate their daily collections; (2) Deposit solicitors shall be provided with proper identification cards with photograph and signature of each respective solicitor, certified to by the appropriate officer of the bank. Said identification cards shall be worn by each solicitor at all times at the upper breast of his outer garment when soliciting deposits; (3) Adequate insurance coverage for funds in transit (representing deposits collected outside banking premises) shall be secured by applicant bank from insurance companies not included in the list of companies blacklisted by the Insurance Commissioner; (4) Deposit slips shall be in booklet form, pre-numbered, intriplicate copies and in three (3) colors - the original to be issued to the depositor, the second copy to be used for posting reference, and the third copy to be retained in the booklet; (5) All collections shall be turned over to the cashier at the end of each day accompanied by a Collection Summary Report to be accomplished in duplicate which shall contain the following minimum information: (a) Date of the report (b) Names and addresses of the depositors (c) Deposit slip numbers (d) Amounts of deposit (e) Savings account and passbook numbers (f) Name and signature of solicitor rendering the report (6) Depositors shall always be required to accomplish a Signature Card when opening an account, which card shall be used always as reference in checking the genuineness/authenticity of signatures affixed on withdrawal slips or authorizations for withdrawal; (7) Deposits/withdrawals shall be recorded by the bookkeeper or any ledger clerk, except any bank solicitor, in the depositor’s ledger cards and passbooks on the same day that such deposits/withdrawals are accepted. Passbooks shall be returned to the depositors not later than the following business day; (8) At the end of each month, depositors shall be advised in writing of the balances of their deposits with the bank, the advise slips of which shall never be handcarried by the solicitors themselves; and (9) Places of assignments of bank solicitors shall be rotated at least quarterly.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 SEC. X214, MRB: Banks are prohibited from issuing/accepting withdrawal slips or any other similar instruments designed to effect withdrawals of savings deposits without requiring the depositors concerned to present their passbooks and accomplishing the necessary withdrawal slips, except for banks authorized by the BSP to adopt the no passbook withdrawal system: Provided, That banks which are already adopting the no passbook withdrawal system shall be given six (6) months from effectivity of this Manual of Regulations (MOR) to seek approval from the BSP. The provisions of Sec. X202b shall also apply to withdrawals from savings deposits. INTERNATIONAL EXCHANGE BANK v. CIR, 520 SCRA 688 (2007) DOCTRINE: A Fixed Savings Deposit (FSD), like a time deposit, provides for a higher interest rate when the deposit is not withdrawn within the required fixed period, otherwise, it earns interest pertaining to a regular savings deposit. FACTS International Exchange Bank served a Letter of Authority by the Commissioner of Internal Revenue, directing the examination of the bank’s book of accounts and other account records. The CIR found that it was liable for tax deficiencies, mostly Documentary Stamp Tax (DST). The Bank protested the assessment, arguing that there is no law imposing DST on Savings Account-Fixed Savings Deposit. CTA Division decided that the bank was not liable for the whole assessment but still liable for the DST. CTA En Banc affirmed. ISSUE Whether a Savings Account-Fixed Savings Deposit evidenced by a passbook is subject to Documentary Stamp Tax RULING YES, it is subject to DST. Section 180 of the Tax Code provides DST shall be imposed on “…certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand…” a passbook representing an interest earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest. A document to be deemed a certificate of deposit requires no specific form as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor. What is important and controlling is the nature or meaning conveyed by the passbook and not the particular label or nomenclature attached to it, inasmuch as substance, not form, is paramount.

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A depositor of a savings deposit-FSD is required to keep the money with the bank for at least thirty (30) days in order to yield a higher interest rate. Otherwise, the deposit earns interest pertaining only to a regular savings deposit. The same feature is present in a time deposit. A depositor is allowed to withdraw his time deposit even before its maturity subject to bank charges on its pre-termination and the depositor loses his entitlement to earn the interest rate corresponding to the time deposit. Instead, he earns interest pertaining only to a regular savings deposit. (Question) Sino superhero mahilig mag promise?) In both cases, the deposit may be withdrawn anytime but the depositor gets to earn a lower rate of interest. The only difference lies on the evidence of deposit, a savings deposit-FSD is evidenced by a passbook, while a time deposit is evidenced by a certificate of time deposit." In order for a depositor to earn the agreed higher interest rate in a SA-FSD, the amount of deposit must be maintained for a fixed period. Thus, SA-FSD is a deposit account with a fixed term. Withdrawal before the expiration of said fixed term results in the reduction of the interest rate. Having a fixed term and reduction of interest rate in case of pre-termination are essentially the features of a time deposit. Ultimately, the Bank’s SA-FSD and time deposit are substantially the same It bears emphasis that DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. It is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just taxes. (Answer: eh di si Peksman!)To claim that time deposits evidenced by passbooks should not be subject to DST is a clear evasion of the rule on equality and uniformity in taxation that requires the imposition of DST on documents evidencing transactions of the same kind, in this particular case, on all certificates of deposits drawing interest. In addition, further amendments to Section 180 includes provisions with the purpose to eliminate precisely the scheme used by banks of issuing passbooks to "cloak" its time deposits as regular savings deposits. CHINA BANKING CORP. v. CIR, 602 SCRA 316 (2009) A certificate of deposit is a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 c.

Negotiable Order of Withdrawal (NOW) Accounts SEC. X223, MRB: Negotiable Order of Withdrawal (NOW) accounts are interest-bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings accounts. A UB/KB may offer NOW accounts without prior authority of the Monetary Board. A TB/RB/Coop Bank may accept NOW accounts upon prior approval of the Monetary Board. SEC. X224, MRB: The following rules shall be observed in servicing NOW accounts: a. Prior to or simultaneous with the opening of a NOW account, the bank shall inform the depositor of its terms and conditions. b. The bank shall be responsible for the proper identification of its depositors; it shall require, among other things, two (2) specimen signatures and such other pertinent information. c. Deposits shall be covered by deposit slips in duplicate duly validated and initialed by the teller receiving the deposit. A copy of the deposit slip shall be furnished the depositor. d. NOW accounts shall be kept and maintained separately from the regular savings deposits. e. Blank NOW forms shall be pre-numbered and shall be controlled as in the case of unissued blank checks. f. A bank statement shall be sent to each depositor at the end of each month for confirmation of balances. g. Banks must use the form prescribed by present rules for NOW accounts. Nothing herein shall be construed as precluding a TB, RB or Coop Bank from applying for authority to accept both demand deposits and NOW accounts. SEC. X225, MRB: The order of withdrawal form shall have a size of three (3) inches by seven (7) inches, and shall be printed on security/check paper. It shall contain as a minimum the features of the proforma order of withdrawal shown in Appendix 11. SEC. X226, MRB: Any NOW which may be deposited with a bank other than the drawee bank may be cleared through the PCHC in Manila and the Regional Clearing Units in regional clearing centers designated by the BSP in accordance with the clearing procedures. Nothing in this Section shall prevent direct settlement between the parties concerned.

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The provision of Sec. X202 shall also apply for withdrawals on NOW accounts. PEOPLE v. REYES, 454 SCRA 635 (2005) DOCTRINE: NOW Accounts are defined as interest-bearing deposit accounts that combine the payable on demand feature of checks and the investment feature of savings accounts. FACTS Aloma Reyes and her daughter Tricha (at large) were convicted for ESTAFA. Private complainant Jules Alabastro bases his complaint on one subject check (for P280,000); each time a check issued by the Reyes's (a total of 5 or 6) bounced, he would return it, and it would be replaced by them with cash, except this last one, which they refused to replace with cash. Complainant claims that the transactions between himself and the Reyes's involved the rediscounting of checks. Defendant claims that she issued the instruments as payment for loans she obtained from Alabastro with respect to her and her daughter's softdrinks business, which eventually went under. She allegedly issued 16 instruments, one for P6k and the rest for P13k, to pay for the (232k) obligation. These would come from a NOW (Negotiable Order of Withdrawal) Account, described as "a savings account where the drawer may issue instrument payable only to a specific payee. A NOW check cannot be issued payable to “BEARER.” Hence, it cannot be further negotiated. On appeal to the SC, she raises the following issues: 1) whether the nature of a NOW instrument is a "check" within the meaning of Art. 315 of the Revised Penal Code, since the NOW check is drawn against the savings, not the current account, of appellant, and it is payable only to a specific person or the “payee” and is not valid when made payable to “bearer” or to “cash.and 2) whether her and her daughter's liability should be merely civil, since the check was issued in payment of a pre-existing obligation. ISSUE 1) Whether the nature of a NOW instrument is a "check" within the meaning of Art. 315 of the Revised Penal Code, and 2) Whether the Reyes's liability should be merely civil, since the check was issued in payment of a pre-existing obligation. RULING 1) NO. Section X223 of the Manual of Regulations for Banks defines Negotiable Order of Withdrawal (NOW) Accounts as "interest-bearing deposit accounts that combine the payable on demand feature of checks and the investment feature of savings accounts."

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 The fact that a NOW check shall be payable only to a specific person, and not valid when made payable to “BEARER” or to “CASH” or when indorsed by the payee to another person, is inconsequential. The same restriction is produced when a check is crossed: only the payee named in the check may deposit it in his bank account. If a third person accepts a cross check and pays cash for its value despite the warning of the crossing, he cannot be considered in good faith and thus not a holder in due course. The purpose of the crossing is to ensure that the check will be encashed by the rightful payee only. Yet, despite the restriction on the negotiability of cross checks, we held that they are negotiable instruments. 2) YES. Conviction Reversed. A careful examination of the records establishes that appellant issued him the subject check in payment of a preexisting obligation. It puzzles the Court that after the NOW check dated August 31, 1997 bounced on September 3, 1997 for the reason “ACCOUNT CLOSED,” private complainant would still discount appellant’s checks in succession. It baffles us more that private complainant would discount a P280,000.00-check in February 1998 despite knowledge of the closure of appellant’s NOW Account. In the case at bar, private complainant knew that appellant did not only have insufficient funds; he knew her NOW Account was closed at the time he allegedly discounted the subject check. There is no estafa through bouncing checks when it is shown that private complainant knew that the drawer did not have sufficient funds in the bank at the time the check was issued to him. Such knowledge negates the element of deceit and constitutes a defense in estafa through bouncing checks.

d. Time Deposits SEC. X231, MRB: Time deposits shall be issued for a specific period of term. BPI FAMILY SAVINGS BANK v. FIRST METRO INVESTMENT CORP., 429 SCRA 30 (2004) DOCTRINE: A Time Deposit is defined as “one the payment of which cannot legally be required within such a specified number of days. FACTS FMIC, through its Executive Vice President Antonio Ong, opened a current account and deposited a METROBANK check P100 million with BPI Family Bank* (BPI FB). BPI FB, guaranteed the payment of P14,667,687.01 representing 17% per annum interest of P100 million deposited by FMIC. The latter, in turn, assured BPI FB that it will maintain its deposit of P100 million for a period of one year on condition that the interest of 17% per annum is paid in advance. Subsequently, BPI FB paid FMIC 17% interest or P14,667,687.01 upon clearance of the latter’s check deposit.

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However, on August 29, 1989, on the basis of an Authority to Debit signed by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferred P80 million from FMIC’s current account to the savings account of Tevesteco Arrastre – Stevedoring, Inc. FMIC denied having authorized the transfer of its funds to Tevesteco, claiming that the signatures of Ong and David were falsified. To recover immediately its deposit, FMIC, on September 12, 1989, issued BPI FB check no. 129077 for P86,057,646.72 payable to itself and drawn on its deposit with BPI FB SFDM branch. But upon presentation for payment on September 13, 1989, BPI FB dishonored the check as it was "drawn against insufficient funds" (DAIF). FMIC filed with the RTC a civil case against BPI FB. RTC ruled in favor of FMIC, ordering BPI to pay P80M + interest at legal rate. CA modified amount to P65M + interest at 17% ISSUE Is it a Time Deposit or interest-bearing current account? HELD Time Deposit. The parties did not intend the deposit to be treated as a demand deposit but rather as an interest-earning time deposit not withdrawable any time. Both agreed that the deposit of P100 million was non-withdrawable for one year upon payment in advance of the 17% per annum interest. Ordinarily, a time deposit is defined as "one the payment of which cannot legally be required within such a specified number of days." In contrast, demand deposits are "all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of (depositor’s) checks."4 While it may be true that barely one month and seven days from the date of deposit, respondent FMIC demanded the withdrawal of P86,057,646.72 through the issuance of a check payable to itself, the same was made as a result of the fraudulent and unauthorized transfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s savings account. Certainly, such was a normal reaction of respondent as a depositor to petitioner’s failure in its fiduciary duty to treat its account with the highest degree of care. Under this circumstance, the withdrawal of deposit by respondent FMIC before the one-year maturity date did not change the nature of its time deposit to one of demand deposit.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 INTERNATIONAL EXCHANGE BANK v. CIR, 520 SCRA 688 (2007) DOCTRINE: Having a fixed term and the reduction of interest rate in case of pre-termination are essential features of a time deposit. FACTS International Exchange Bank served a Letter of Authority by the Commissioner of Internal Revenue, directing the examination of the bank’s book of accounts and other account records. The CIR found that it was liable for tax deficiencies, mostly Documentary Stamp Tax (DST). The Bank protested the assessment, arguing that there is no law imposing DST on Savings Account-Fixed Savings Deposit. CTA Division decided that the bank was not liable for the whole assessment but still liable for the DST. CTA En Banc affirmed. ISSUE Whether a Savings Account-Fixed Savings Deposit evidenced by a passbook is subject to Documentary Stamp Tax RULING YES, it is subject to DST. Section 180 of the Tax Code provides DST shall be imposed on “…certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand…” a passbook representing an interest earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest. A document to be deemed a certificate of deposit requires no specific form as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor. What is important and controlling is the nature or meaning conveyed by the passbook and not the particular label or nomenclature attached to it, inasmuch as substance, not form, is paramount. A depositor of a savings deposit-FSD is required to keep the money with the bank for at least thirty (30) days in order to yield a higher interest rate. Otherwise, the deposit earns interest pertaining only to a regular savings deposit. The same feature is present in a time deposit. A depositor is allowed to withdraw his time deposit even before its maturity subject to bank charges on its pre-termination and the depositor loses his entitlement to earn the interest rate corresponding to the time deposit. Instead, he earns interest pertaining only to a regular savings deposit. (Question) Sino superhero mahilig mag promise?) In both cases, the deposit may be withdrawn anytime but the depositor gets to earn a lower rate of interest. The only difference lies on the evidence of deposit, a savings deposit-FSD is evidenced by a passbook, while a time deposit is evidenced by a certificate of time deposit." In order for a depositor to earn the agreed higher interest

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rate in a SA-FSD, the amount of deposit must be maintained for a fixed period. Thus, SA-FSD is a deposit account with a fixed term. Withdrawal before the expiration of said fixed term results in the reduction of the interest rate. Having a fixed term and reduction of interest rate in case of pre-termination are essentially the features of a time deposit. Ultimately, the Bank’s SA-FSD and time deposit are substantially the same It bears emphasis that DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. It is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just taxes. (Answer: eh di si Peksman!)To claim that time deposits evidenced by passbooks should not be subject to DST is a clear evasion of the rule on equality and uniformity in taxation that requires the imposition of DST on documents evidencing transactions of the same kind, in this particular case, on all certificates of deposits drawing interest. In addition, further amendments to Section 180 includes provisions with the purpose to eliminate precisely the scheme used by banks of issuing passbooks to "cloak" its time deposits as regular savings deposits. e. Foreign Currency Deposits SEC. 2, FCDA: Any person, natural or juridical, may, in accordance with the provisions of this Act, deposit with such Philippine banks in good standing, as may, upon application, be designated by the Central Bank for the purpose, foreign currencies which are acceptable as part of the international reserve, except those which are required by the Central Bank to be surrendered in accordance with the provisions of Republic Act Numbered two hundred sixty-five (Now Rep. Act No. 7653). SEC. 3, FCDA: The banks designated by the Central Bank under Section two hereof shall have the authority: (1) To accept deposits and to accept foreign currencies in trust Provided, That numbered accounts for recording and servicing of said deposits shall be allowed; (2) To issue certificates to evidence such deposits; (3) To discount said certificates; (4) To accept said deposits as collateral for loans subject to such rules and regulations as may be promulgated by the Central Bank from time to time; and (5) To pay interest in foreign currency on such deposits.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 f.

Money Market Placements

ALLIED BANKING CORP. v. LIM SIO WAN, 549 SCRA 504 (2008) DOCTRINE: A Money Market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other by through a middle man or dealer in open market—in a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. FACTS Respondent Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) at its Quintin Paredes Branch in Manila a money market placement of PhP 1,152,597.35 for a term of 31 days to mature on December 15, 1983, On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and instructed the latter to pre-terminate Lim Sio Wan's money market placement, to issue a manager's check representing the proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up the check. Lim Sio Wan described the appearance of Santos so that So could easily identify her. Later, Santos arrived at the bank and signed the application form for a manager's check to be issued. The bank issued a Manager's Check for PhP 1,158,648.49, representing the proceeds of Lim Sio Wan's money market placement in the name of Lim Sio Wan, as payee. The check was crosschecked "For Payee's Account Only" and given to Santos. Thereafter, the manager's check was deposited in the account of Filipinas Cement Corporation (FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of Lim Sio Wan as indorser. the Allied check was deposited with Metrobank in the account of FCC as Producers Bank's payment of its obligation to FCC. Metrobank stamped a guaranty on the check, which reads: "All prior endorsements and/or lack of endorsement guaranteed." The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded the check even without checking the authenticity of Lim Sio Wan's purported indorsement. Thus, the amount on the face of the check was credited to the account of FCC and as a result Producers Bank’s obligation to the former was extinguished. On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan went to Allied to withdraw it. She was then informed that the placement had been pre-terminated upon her instructions. Allied refused to pay Lim Sio Wan, claiming that the latter had authorized the pre-termination of the placement and its subsequent release to Santos Consequently, Lim Sio Wan filed with the RTC a Complaint against Allied to

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recover the proceeds of her first money market placement. Allied filed a third party complaint against Metrobank and Santos. In turn, Metrobank filed a fourth party complaint against FCC. FCC for its part filed a fifth party complaint against Producers Bank. Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant, along with Allied. MTC made Allied solely liable RTC modified the decision as follows: Allied Banking Corporation to pay sixty (60%) percent and defendantappellee Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral damages, attorney's fees and costs of suit shall likewise be paid in 60-40 ratio. ISSUES 1) Kind of deposit present in the case (relevant to the banking) 2) Who are liable? (Main issue of the case- not relevant to banking) RULING (Relevant) 1) Money Market Placement. The Court discusses is as follows: Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or mutuum. More succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled that a money market placement is a simple loan or mutuum.[43] Further, we defined a money market in Cebu International Finance Corporation v. Court of Appeals, as follows: [A] money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of a loan. Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her request, or upon maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, the obligation of Allied to Lim Sio Wan remains unextinguished. Since there was no effective payment of Lim Sio Wan's money market placement, the bank still has an obligation to pay her at six percent (6%) interest from March 16, 1984 until the payment thereof.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

2) (Not important but will mention the summary of it anyway) Allied and Metrobank liable in 60-40 ratio. Producer’s Bank shall reimburse the amount paid by both Allied and Metrobank. Allied Bank is liable as negligent drawee bank who issued the manager’s check to Santos. MetroBank is liable as the negligent collecting bank who certified the authenticity of the signatures. Producers bank liable because it was unjustly enriched the amount was paid to FCC, which extinguished the obligation of the former to the latter.

(3) Women shall have equal rights to act as incorporators and enter into insurance contracts; and (4) Married women shall have rights equal to those of married men in applying for passport, secure visas and other travel documents, without need to secure the consent of their spouses. In all other similar contractual relations, women shall enjoy equal rights and shall have the capacity to act, which shall in every respect be equal to those of men under similar circumstances.

C. Capacity of Depositors a. Minors SEC. 1, PD 734: Minors who are at least seven years of age, are able to read and write, have sufficient discretion, and are not otherwise disqualified by any other incapacity, are hereby vested with special capacity and power, in their own right and in their own names, to make savings or time deposits with and withdraw the same as well as receive interests thereon from banking institutions, without the assistance of their parents or guardians, the provisions of existing laws and regulations to the contrary notwithstanding. Parents may nevertheless deposit for their minor children and guardians for their wards. SEC. 22, THRIFT BANKS ACT: Minors in their own rights and in their own names may make deposits and withdraw the same, and may receive dividends and interest: Provided, however, That, if any guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian.

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Corporations SEC. 23, CORPORATION CODE: Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

b. Married Women SEC. 5, RA 7192: Women of legal age, regardless of civil status, shall have the capacity to act and enter into contracts which shall in every respect be equal to that of men under similar circumstances. In all contractual situations where married men have the capacity to act, married women shall have equal rights. To this end: (1) Women shall have the capacity to borrow and obtain loans and execute security and credit arrangement under the same conditions as men; (2) Women shall have equal access to all government and private sector programs granting agricultural credit, loans and non-material resources and shall enjoy equal treatment in agrarian reform and land resettlement programs;

d. Bank Officers and Employees SEC. X204, MRB: : The following officers and employees of banks are prohibited from maintaining demand deposits or current accounts with the banking office in which they are assigned: a. All officers; b. Employees of the bank’s cash department/cash units; and c. Other employees who have direct and immediate responsibility in the handling of transactions and/or records pertaining to demand deposits or current accounts. The above-mentioned prohibition shall include the spouses and relatives within the second degree of consanguinity and affinity of the officers and employees covered by the prohibition, and the business interests of such officers and employees, their spouses and relatives within the second degree of consanguinity and affinity, in

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

single proprietorships, or partnerships or corporations in which such officers and employees, individually or as a group, own or control at least a majority of the capital of the partnership or the outstanding subscribed capital stock (voting and non-voting) of the corporation.

ART. 379, NCC: The employment of pen names or stage names is permitted, provided it is done in good faith and there is no injury to third persons. Pen names and stage names cannot be usurped. ART. 380, NCC: Except as provided in the preceding article, no person shall use different names and surnames.

D. OPENING OF DEPOSIT ACCOUNTS 1. Know Your Customer Standards SUBSEC. X262.1, MRB: Specimen signatures, ID photos. All banking institutions are required to set a minimum of three (3) specimen signatures to be simultaneously required from each of their depositors and to update the specimen signatures of their depositors every five (5) years or sooner, at the discretion of the bank. Banks may, at their option, require their depositors to submit ID photos together with the specimen signatures. 2. Prohibitions a. Anonymous Accounts/Fictitious Names SEC. 9 (A), AMLA: Prevention of Money Laundering; Customer Identification Requirements and Record Keeping. – (a) Customer Identification, - Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf. The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts. b.

Pseudonyms ART. 178, RPC: Using fictitious name and concealing true name. — The penalty of arresto mayor and a fine not to exceed 500 pesos shall be imposed upon any person who shall publicly use a fictitious name for the purpose of concealing a crime, evading the execution of a judgment or causing damage. Any person who conceals his true name and other personal circumstances shall be punished by arresto menor or a fine not to exceed 200 pesos.

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Exception: NUMBERED ACCOUNTS SEC. 9 (A), AMLA: Prevention of Money Laundering; Customer Identification Requirements and Record Keeping. – (a) Customer Identification, - Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf. The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts. SEC. 3 (1), FDCA: Authority of banks to accept foreign currency deposits. – The banks designated by the Central Bank under Section two hereof shall have the authority: (1) To accept deposits and to accept foreign currencies in trust Provided, That numbered accounts for recording and servicing of said deposits shall be allowed.

3. Joint Accounts ART. 485, NCC: The share of the co-owners, in the benefits as well as in the charges, shall be proportional to their respective interests. Any stipulation in a contract to the contrary shall be void. The portions belonging to the co-owners in the co-ownership shall be presumed equal, unless the contrary is proved. ART. 1207, NCC: The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 expressly so states, or when the law or the nature of the obligation requires solidarity. ART. 1208, NCC: If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits.

E. ADMINISTRATION OF DEPOSIT ACCOUNTS 1. Deposit of Funds a. Delivery Required ART. 1934, NCC: An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. b.

Acceptability of Withdrawal Slips as Deposits

Cases Firestone Tire & Rubber Co. of the Phil. v CA DOCTRINE: A bank is under the obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or millions of pesos. The fact that the other withdrawal slips were honored and paid by the other bank was no license for the bank to presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care. FACTS Fojas-Arca is one of the client depositors of Luzon Development Bank (LDB). Fojas-Arca has an arrangement with LDB, where the latter authorized and allowed withdrawal of its funds through special deposit slips, which are supplied by LDB to Fojas-Arca. In January to May 1978, Fojas-Arca purchased on credit from Firestone amounting to P4M. In payment, Fojas-Arca delivered to Firestone six (6) special withdrawal slips drawn upon defendant. These were deposited by Firestone with its current account with Citibank. All of them were honored and paid by LDB. Relying on the same arrangement, Firestone extended other purchases on credit to Fojas-Arca. In December 1978, Firestone was informed by Citibank that several special withdrawal slips were dishonored for “NO ARRANGEMENT.” Citibank debited the amount from Firestone’s account. Firestone then filed an action for damages against LDB alleging that it suffered pecuniary losses.

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RTC dismissed the case. CA affirmed. ISSUE Whether LDB is liable for damages suffered by Firestone, due to its allegedly belated notice of non-payment of the subject withdrawal slip? RULING NO. At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable. Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply in this case. Petitioner itself concedes this point. Thus, respondent bank was under no obligation to give immediate notice that it would not make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as checks by other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation involving checks. A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions of pesos. The fact that the other withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care. In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in check. The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having erroneously accepted them as such, Citibank — and petitioner as accountholder — must bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their admitted mistake. c. Acceptability of Checks Without Indorsement of Payee Cases PNB v Rodriguez DOCTRINE: A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its operations.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to the named payee in the check. FACTS Respondent spouses erlando and norma Rodriguez were clients of petitioner PNB, Cebu City. They maintained savings and demand/checking accounts. The spouses were engaged in the informal lending business. They had a discounting arrangement with Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB. PEMSLA regularly granted loans to its members, spouses Rodriguez would rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members.

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duty to them as depositors. PNB argued that the spouses did not intend to give the checks to the invidual payees, only to PEMSLA, hence, the payees were fictitious, thus the checks became bearer instruments based on the Negotiable Instruments law. The checks could be negotiated with just delivery. RTC rendered in favour of the spouses, CA reversed stating that the spouses really intended the checks to go PEMSLA, not the payees, hence, the payees were fictitious, thus converting the check into a bearer intrument, thus they did not require indorsement for negotiation. Spouses filed and Motion for Reconsideration, and the CA reversed itself due to the argument of the spouses that the checks, on their face, were payable to order, hence, PNB breached their contract of deposit. ISSUE Are the checks payable to order or to bearer? HELD: Payable to order.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the Rodriguez spoues for rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks. In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were despited by the spouses to their account. Meanwhile, the Rodriguez checks were despotied directly by PEMSLA to its savings account without any indorsement from the named payees. This was an irregular procedure made possible through the treasurer of PEMSLA who was also a bank teller in the PNB branch of Cebu. This because the usual practice for the two. For the period of November 1998 and February 1999, sixty-nine (69) checks, in the amount of 2.345 million pesos were issued payable to 47 individual payees. PNB got wind of the scheme and closed the current account of PEMSLA which led the checks deposited by the Rodriguez from PEMSLA into their account to bounce. The checks from the Rodriguezes to PEMSLA though were still debited from the account of the spouses, hence, they went to court to have PNB return the money debited from their account stating that PNB credited the checks to PEMSLA even if they were without indorsements, thus breaching their

As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument based on Sections 8 and 9 of the NIL. The drawee bank is then absolved from liability and the drawer bears the loss. However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any trasnferee of the check for that matter, will work to strip it of this defense. For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to be part of the transaction involving the checks. At most, the bank’s thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks’ proceeds. Considering that the respondents were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the finformation given by the officers of PEMSLA that the payees would be receiving the checks. Verily, the subject checks are presumed order instruments. PNB failed to present sufficient evidence to defeat the claim of respondent spouses that the named payees were the intended recipients of the check proceeds. Thus PNB was remiss as the drawee bank 2. Withdrawal of Funds a. From Current Accounts i. When funds insufficient

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Cases Moran v CA DOCTRINE: A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's funds, where the check is drawn for an amount larger than what the drawer has on deposit. Such a practice of paying checks in part has never existed. Upon partial payment, the check holder could not be called upon to surrender the check, and the bank would be without a voucher affording a certain means of showing the payment. The rule is based on commercial convenience, and any rule that would work such manifest inconvenience should not be recognized. A check is intended not only to transfer a right to the amount named in it, but to serve the further purpose of affording evidence for the bank of the payment of such amount when the check is taken up. FACTS Spouses Moran are the owners of the Wack-Wack Petron Gasoline. They buy fuel and other related products from Petrophil on a cash on delivery basis. They maintain three accounts with Citytrust, one current account allowed to have zero balance, and two savings account. One of the savings account was allowed to have automatic transfer of funds whenever the current account was insufficient to pay withdrawals, and the other needs authorization to transfer funds. On December 12, 1983, Librada Moran issued a check for P50,576 payable to Petrophil. On the next day, she issued another check for 56,090, payable to the same corporation. On December 14, 1983, the checks were deposited to PNB, which presented both for clearing. On this day, the current account had zero balance, while the savings account covered by the automatic transfer only had P26,104.30, both accounts being insufficient to pay the issued checks. (The other savings account, where authorization is needed only had P43,268.39.) On December 15, 1983, George Moran deposited some funds which were supposed to be used to pay the earlier transaction. However, Librada informed George that Petrophil refused to deliver their orders, and that the checks issued were dishonored due to insufficiency of funds. The branch manager tried to fix the problem by bringing a manager's check to be signed by the spouses to pay off the balance with Petrophil. The bank also tried to apologize to Petrophil, stating in the the letter that it committed "operational error". 6 months later, the spouses demanded that the bank pay them P1M for moral damages, which the bank refused to pay. They filed a case, which the RTC dismissed, and affirmed by the CA. ISSUE Whether the spouses had sufficient funds when the bank dishonored the check RULING NO. When PNB presented the check for collection, the current account had zero balance, while the savings account had P26,104.30, which is

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insufficient to pay off the checks. This would lead to dishonoring of the checks. There is a presumption in law that the ordinary course of business (clearing and withdrawing) has ben followed. Where the spouses failed to show that the checks underwent a different process of clearing, it is presumed that the acts of clearing underwent the same process. Also, there is no obligation with the bank to release amount in the savings account, when the balance being collected is higher. They cannot partially honor a check, being insufficient to pay the whole amount. Neither can they transfer from the other savings account the balance to pay off the check, since authority is needed to be able to transfer such amount. The bank had no obligation to settle the spouses account with Petrophil, but they still tried to in order that they would not have stained relations with the spouses. Villanueva v Nite DOCTRINE: If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder cannot sue the bank—the payee should instead sue the drawer who might in turn sue the bank. Sec. 189 is sound law based on logic and established legal principles—no privity of contract exists between the drawee-bank and the payee. FACTS Nite borrowed P409k from Villanueva secured by an Asian Bank check for P325k dated February 8, 1994.The date was later changed to June 8, 1994 with the consent and concurrence of Villanueva. The check was, however, dishonored due to a material alteration when Villanueva deposited the check on due date. On August 24, 1994, Nite remitted P235k to petitioner as partial payment of the loan, through a representative, since she was out of the country. The balance of P174k was now due on or before December 8, 1994. On August 30, 1994, however, petitioner filed an action for a sum of money and damages against Asian Bank for the full amount of the dishonored check. The RTC ruled in his favor. Pursuant thereto, Asian Bank issued a P325k check to Villanueva. When respondent later on went to Asian Bank to withdraw money from her account, she was unable to do so because the trial court had ordered Asian Bank to pay petitioner the value of respondent’s ABC check. She went to the CA and filed a petition for annulment of judgment (Rule 47), which was granted on the ground of extrinsic fraud. The CA found that 6 days after receipt of the partial payment of P235k and agreeing that the balance of P174k shall be paid on or before December 8, 1994, Villanueva filed his complaint against Asian Bank for the full amount of the dishonored check without impleading Nite. The apparent haste by which he filed his complaint and his failure to implead Nite showed his intent to prevent her from opposing his action.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Thus this petition for certiorari. ISSUE 1) Whether the CA was correct to annul judgment despite the fact that Nite was not a party to the original collection case; 2) Whether Villanueva could properly sue the bank for non payment of the check in the first place. RULING 1) YES. A petition for annulment of judgment can be properly filed by a person not a party to the case. In this case, there was no speedy or adequate remedy available to Marlyn Nite because she was not a party to the collection proceedings. Extrinsic fraud existed in this case since such refers to acts committed by a party to keep the other away from the courts, as where there is a false promise of a compromise. In fact, the RTC had no jurisdiction in this case. The contract of loan was between Villanueva and Nite; as debtor, Nite was an indispensible party to the case, and any judgment rendered without impleading such a party is void. 2) NO. Sec 185 of the Negotiable Instruments Law provides: "A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check." Furthermore, Sec. 189. provides: "A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check." If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder cannot sue the bank. The payee should instead sue the drawer who might in turn sue the bank. No privity of contract exists between the drawee-bank and the payee. There was no such privity of contract between Asian Bank and Villanueva. ii. Prior to clearing Cases Associated Bank v Tan DOCTRINE: Although a collecting bank has the right to debit a client’s account for the value of a dishonored check that has previously been credited, it should nevertheless exercise such right with the highest degree of diligence, as it is a business impressed with public interest. FACTS Vicente Tan is a businessman and regular depositor-creditor of the Associated Bank. In 1990, he deposited a postdated UCPB check (P101,000)

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with the bank. This check was issued to him by Willy Cheng from Tarlac and was duly entered into his bank record. Upon advice and instructions by the bank that the check was already cleared, Tan withdrew P240,000 on the same day, and on the next day, he deposited P50,000 (account thereafter has approx. P108,000) because he issued several checks amounting to approx. P75,000. Unfortunately, his suppliers and business partners went back to him alleging that the checks he issued bounced for insufficiency of funds. Thereafter, he, through his lawyer, informed the bank to take steps regarding the matter for he has adequate funds to pay the amount of the checks issued. But the bank did not bother or offer any apology regarding the incident. Thus, Tan instituted a complaint for damages against the bank. The RTC ruled in favor of Tan on the ground that he was not informed about the debiting of the P101,000 from his existing balance and that the bank merely allowed him to use the fund prior to clearing merely for accommodation because it considered him as one of its valued clients. Hence, it held that the bank manager was negligent in handling the particular check account of Tan. On appeal, the CA affirmed the RTC’s decision. ISSUE 1) Whether the bank, as collecting bank, has the right to debit the account of Tan for a check deposit, which was dishonored by the drawee bank 2) Whether the bank properly exercised its right to debit/setoff RULING 1. YES. A bank generally has the right to setoff over the deposits therein for the payment of any withdrawals on the part of the depositor. The right of a collecting bank to debit a client’s account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. 2.

NO. The degree of diligence required of banks is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care. It is undisputed that purportedly as an act of accommodation to a valued client, the bank allowed the withdrawal of the face value of the deposited check prior to its clearing. That act certainly disregarded the clearance requirement of the banking system. Such a practice is unusual, because a check is not legal tender or money, and its value can

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 properly be transferred to a depositor’s account only after the check has been cleared by the drawee bank. Reasonable business practice and prudence dictates that the bank should NOT have advised and authorized Tan’s withdrawal of P240,000 as this amount was over and above his outstanding cleared balance of around P197,000. When the bank came to know of the checks’ dishonor, it should have immediately and duly informed Tan of the debiting of his account. Notice was proper and ought to be expected. As a valued client, Tan deserved nothing less than an official notice of the precarious condition of his account. iii. When check crossed Cases Traders Royal Bank v Radio Philippine Network Inc. DOCTRINE: The crossing of a check should put a bank on guard. It was duty bound to ascertain the indorser’s title to the check or the nature of his possession. Its effects are that (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank; and (c) the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course.

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RULING YES. The crossing of one of the subject checks should have put TRB on guard; it was duty bound to ascertain the indorser’s title to the check. TRB should have known the effects of a crossed check: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with the bank; (c) the act of crossing the check serves as a warning to the holder that the heck has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose. By encashing in favor of unknown persons checks which were on their face payable to the BIR. A government agency which can only act through its agents, TRB did so in at its peril and must suffer the consequences of the unauthorized endorsement. TRB cannot exculpate itself from liability by claiming that RPN was itself negligent. iv. In contrast with manager’s check Cases Equitable PCI Bank v Ong DOCTRINE: A manager’s check is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its issuance, and by its peculiar character and general use in commerce, a manager’s check is regarded substantially to be as good as the money it represents.

FACTS On April 1985, the BIR assessed Radio Philippines Network (RPN) for their tax obligations for the taxable years 1978 to 1983.

FACTS Warliza Sarande deposited a check of 225k in her account at Philippine Commercial International Bank (Davao City). She inquired about the status of the check and the bank said it has been cleared.

Mrs. Vera, RPN’s comptroller, purchased from Trader’s Royal Bank (TRB) three manager’s checks to be used as payment for their tax liabilities. The checks issued were made payable to the order of BIR and one of the checks was also crossed. Mrs. Vera personally received the checks and was supposed to deliver the same to BIR in payment of RPN’s tax liabilities.

Relying on the assurance of the clearance, she issued two checks. One of those check was issued to Rowena Ong, amounting to 180k due to a business transaction. On the same day, Ong claimed the check the amount of the check from PCI Bank. Instead of encashing it, Ong requested to convert the proceeds into a manager’s check.

Shortly thereafter, RPN was assessed again by BIR for their tax liabilities for the years 1972-1978. As RPN learned the three manager’s checks never reached BIR and was supposedly deposited and withdrawn by three unknown individuals in Security Bank (SB).

The next day, Ong deposited the check in her account in Equitable PCI Bank (Davao City). a few days later, she received a notice that PCI Bank has stopped the payment of her check on the ground of irregular issuance. Despite several demands to PCI Bank for the payment of the check, there was no positive result. Thus, Ong filed a case against PCI Bank.

RPN sent letters to TRB and SB demanding that the amounts covered by the checks be reimbursed or credited to their account. The two banks refused. ISSUE Whether TRB is liable for the wrongful payment of a check made payable to BIR.

PCI Bank argues that it did nothing wrong because the account against which the check was drawn (Sarande) was already closed. The bank also said that it gave notice to Sarande and Ong about the return of the check. The Trial Court ruled in favor of Ong. The Court of Appeals affirmed the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 decision. ISSUE 1. Whether Ong was not a holder in due course and whether there was a lack of consideration in issuing the manager’s check, ultimately absolving PCI from liability. 2. Whether PCI Bank exercised the requisite degree of diligence required of it. RULING (1) The argument of PCI Bank is out of synch because, by operation of law, it assumed the liabilities of an acceptor under the Negotiable Instruments Law (NIL) A manager's check is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its issuance. By its peculiar character and general use in commerce, a manager's check is regarded substantially to be as good as the money it represents. Said check stands on the same footing as a certified check. As stated in Sec 187 of the NIL, when the manager’s check is certified by the bank on which it was drawn, the certification is equivalent to an acceptance. Jurisprudence adds that a manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. It is really the bank's own check and may be treated as a promissory note with the bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. By accepting the check issued by Sarande to Ong and issuing in turn a manager’s check in exchange thereof, PCI Bank assumed the liabilities of an acceptor under the Negotiable Instruments Law. By operation of law under Section 62 of the NIL, the Bank admits the existence of the drawer, genuineness of his signature, capacity to draw the instrument and the existence of the payee and his capacity to indorse. Thus, the argument that Ong is not a holder in due course and failure of consideration for the issuance of the Manager’s check is untenable. (2) NO, it did not exercise the standard of diligence required from it. In Section 2 of the General Banking Law states that • SEC. 2. Declaration of Policy. – The State recognizes the vital role of banks in providing an environment conducive to the sustained

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development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. In this case, PCI bank distinctly admitted that the check deposited by Sarande was inadvertently send by the PCI bank through the “local clearing” when it should have been sent through “inter-regional” clearing check since the check was drawn in General Santos City. It also admitted the mistake in assuring Sarande that the check has been cleared upon her inquiry, because they were not aware that it was inadvertently sent in the “local clearing”. Both uncontested admissions prove that PCI failed to exercise the highest degree of care required of it under the law. *Non-banking issue: Summary Judgment the summary judgment of the trial court is proper because the facts as pleaded appear uncontested, all that is required is a judgment of the court. This is evident when PCI bank admitted it committed an error in clearing the check of Sarande. *Non-banking issue: Award of Moral and Exemplary Damages. The bank is liable for moral damages because Ong suffered embarrassment and humiliation arising from the dishonor of the check. The bank is also liable for exemplary damages because of failure to guard against injury attributable to negligence or bad faith, considering the banking system plays a vital role in the economic life. b. From Savings Accounts Cases BPI v CA (2000) DOCTRINE: The requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the person making the withdrawal is authorized by the depositor to do so. FACTS Private respondent deposited in Foreign Currency Deposit Unit (FCDU) Savings Account which he maintained in petitioner bank's Buendia Avenue Extension Branch, Continental Bank Manager's Check payable to "cash" in the amount of $2,500.00 and duly endorsed by private respondent. It appears that the check belonged to a certain Henry who went to the office of private respondent and requested him to deposit the check in his dollar account by way of accommodation and for the purpose of clearing the same. Private respondent acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw the amount of the check

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 upon private respondent's presentation to the bank of his passbook. Using the blank withdrawal slip given by private respondent to Chan, one Ruben Gayon, Jr, petitioner’s employee was able to withdraw the amount of $2,541.67 from FCDU Savings Account. Notably, the withdrawal slip shows that the amount was payable to” Ramon A. de Guzman and Agnes C. de Guzman” and was duly initialed by the branch assistant manager. The withdrawal was made even before the amount of the check was credited in the account of the private respondent and without the presentation of the passbook of the respondent. Thereafter, petitioner bank received communication from the Wells Fargo Bank International of New York that the said check deposited by private respondent was a counterfeit check because it was "not of the type or style of checks issued by Continental Bank International." Now the petitioner is asking the private respondent, through his son (who is employed by the petitioner bank), to return the amount of 2,500. The private respondent, in his letter to the petitioner, refused to do so stating that he is not primarily liable. Because of this, petitioner was constrained to file a suit to collect the said balance. ISSUE Whether petitioner was grossly negligent in allowing the withdrawal RULING YES. Petitioner anchors its argument on the fact that the respondent as an indorser guaranteed the validity of the check and the signatures therein and that the private respondent signed a blank withdrawal slip bearing only 2 of his signatures and payee de Guzmans therein. To hold private respondent liable for the amount of the check he deposited by the strict application of the law and without considering the attending circumstances in the case would result in an injustice and in the erosion of the public trust in the banking system Under the rules issued by the petitioner in the private respondent’s passbook, to be able to withdraw from the savings account deposit under the Philippine foreign currency deposit system, two requisites must be presented to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositor's passbook. Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and presented with the corresponding foreign currency savings passbook by the depositor in person. Despite the fact that private respondent’s passbook was not presented at the time of the withdrawal, the petitioner still allowed the said withdrawal in violation of their rules.

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Considering petitioner's clear admission that the withdrawal slip was a blank one except for private respondent's signature, the unavoidable conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by petitioner to withdraw the amount. In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus: 2. All deposits will be received as current funds and will be repaid in the same manner; provided, however, that deposits of drafts, checks, money orders, etc. will be accented as subject to collection only and credited to the account only upon receipt of the notice of final payment. xxx In depositing the check in his name, private respondent did not become the outright owner of the amount stated therein. Under the above rule, by depositing the check with petitioner, private respondent was, in a way, merely designating petitioner as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or ordinary check, is not legal tender. As such, after receiving the deposit, under its own rules, petitioner shall credit the amount in private respondent's account or infuse value thereon only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit. A bank is under obligation to treat the accounts of its depositors "with meticulous care, always having in mind the fiduciary nature of their relationship."27 As such, in dealing with its depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care. Petitioner herein failed to do this, and in fact, violated its own rules by allowing the withdrawal of an amount that is definitely over and above the aggregate amount of private respondent's dollar deposits that had yet to be cleared. In so doing, petitioner assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and hence, it should suffer the resulting damage. c. From Time Deposits Cases Far East Bank and Trust Company v Querimit DOCTRINE: A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without its production and surrender after proper indorsement. FACTS In 1986, Estrella Querimit opened a dollar saving account with FEBTC Harrison Plaza Branch. She was issued for certificates of deposit, each

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 representing $15,000.00 or a total of $60,000.00. The certificates were to mature in 60 days, payable to bearer at 4.5% interest per annum. The certificates bore the word “accrued” which meant that if they were not presented for encashment or pre-terminated, the money deposited with accrued interest would be rolled-over by the bank and annual interest would accumulate automatically. In 1993, after her husband died, Querimit went to FEBTC to withdraw her deposit but she was told that her husband had withdrawn the money in deposit. FEBTC produced documents showing that the deposits have been paid to Querimit’s husband. However Querimit insisted that she was or her husband have not been paid as evidenced by the Cerificates of Deposit which are still in her possession. She sent a demand letter but FEBTC refused to pay. So she filed a collection suit. RTC and CA both ruled for Querimit. ISSUE Whether the subject certificates of deposit have already been paid? RULING NO. Petitioner bank failed to prove that it had already paid Estrella Querimit, the bearer and lawful holder of the subject certificates of deposit. The finding of the trial court on this point, as affirmed by the Court of Appeals, is that petitioner did not pay either respondent Estrella or her husband the amounts evidenced by the subject certificates of deposit. A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. The principles governing other types of bank deposits are applicable to certificates of deposit, as are the rules governing promissory notes when they contain an unconditional promise to pay a sum certain of money absolutely. The principle that payment, in order to discharge a debt, must be made to someone authorized to receive it is applicable to the payment of certificates of deposit. Thus, a bank will be protected in making payment to the holder of a certificate indorsed by the payee, unless it has notice of the invalidity of the indorsement or the holder's want of title. A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without its production and surrender after proper indorsement. As a rule, one who pleads payment has the burden of proving it. Even where the plaintiff must allege nonpayment, the general rule is that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove payment. The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.

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In this case, the certificates of deposit were clearly marked payable to "bearer," which means, to "[t]he person in possession of an instrument, document of title or security payable to bearer or indorsed in blank."Petitioner should not have paid respondent's husband or any third party without requiring the surrender of the certificates of deposit. Petitioner claims that it did not demand the surrender of the subject certificates of deposit since respondent's husband, Dominador Querimit, was one of the bank's senior managers. But even long after respondent's husband had allegedly been paid respondent's deposit and before his retirement from service, the FEBTC never required him to deliver the certificates of deposit in question. Moreover, the accommodation given to respondent's husband was made in violation of the bank's policies and procedures. Petitioner FEBTC thus failed to exercise that degree of diligence required by the nature of its business. Because the business of banks is impressed with public interest, the degree of diligence required of banks is more than that of a good father of the family or of an ordinary business firm. The fiduciary nature of their relationship with their depositors requires them to treat the accounts of their clients with the highest degree of care. A bank is under obligation to treat the accounts of its depositors with meticulous care whether such accounts consist only of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance of every kind of obligation is demandable. Petitioner failed to prove payment of the subject certificates of deposit issued to the respondent and, therefore, remains liable for the value of the dollar deposits indicated thereon with accrued interest. d.

From Foreign Currency Deposits SEC. 5, FCDA: Withdrawability and transferability of deposits. – There shall be no restriction on the withdrawal by the depositor of his deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank.

e.

If Deceased Depositor i. Tax Clearance Required SEC. 97, NIRC: Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. ii.

Survivorship Agreements

Cases Vitug v CA DOCTRINE: Survivorship agreements are permitted by the Civil Code. The validity of the contract seems debatable by reason of its “survivor-take-all” feature. But in reality, the contract imposed a mere obligation with a term being death. However, if it be shown that such an agreement is a mere cloak to hide an inofficious donation, it may be assailed and annulled on such ground. FACTS • On January 13, 1985, Romarico G. Vitug filed a motion asking for authority from the probate court to sell certain shares of stock and real properties belonging to the estate to cover allegedly his advances to the estate in the sum of P667,731.66, plus interests which he claimed were personal funds. • He claimed that the advances were spent for the payment of estate tax and other increments thereto. He withdrew the sums of P518,834.27 and P90,749.99 from savings account No. 35342-038 of the Bank of America, Makati, Metro Manila. • Rowena Corona opposed the motion, on the ground that the funds withdrawn from savings account No. 35342-038 were conjugal partnership properties and part of the estate. She also sought his ouster for failure to include the sums in question for inventory and for “concealment of funds belonging to the estate.” • Vitug insists that the said funds are his exclusive property having acquired the same through a survivorship agreement executed with his late wife and the bank on June 19, 1970. The agreement provides at the instance of the death of himself or his wife, the amount in the account shall be the sole property of the survivor or survivors and shall be payable to and collectible or withdrawable by such survivor or survivors.

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RTC: upheld the validity of this agreement and granted the motion of Vitug CA: held that the survivorship agreement constitutes a conveyance mortis causa which “did not comply with the formalities of a valid will as prescribed by Article 805 of the CC, and evne assuming that it was a mere donation inter vivos, it is a prohibited donation under the provisions of Article 133 of the Civil Code ISSUE Whether the survivorship agreement is void (No) HELD The agreement didn’t modify the conjugal funds of the spouse. Spouses are not prohibited by law to invest conjugal property, say by way of a joint and several bank account, or an “and/or” account. When the spouses Vitug opened the savings account, they merely put what rightfully belonged to them in a money-making venture. They did not dispose of it in favor of the other, which would have arguably been sanctionable as a prohibited donation. And since the funds were conjugal, it cannot be said that one spouse could have pressured the other in placing his or her deposits in the money pool. The agreement was in the nature of an aleatory contract. In reality what is involved here is a contract with a term the fulfillment of which depends on either the happening of an event which is (1) “uncertain,” (2) “which is to occur at an indeterminate time.” A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value of currency, and insurance have been held to fall under the first category, while a contract for life annuity or pension under Article 2021, et sequential, has been categorized under the second. In either case, the element of risk is present, In the case at bar, the risk was the death of one party and survivorship of the other. Warning of the Court But although the survivorship agreement is per se not contrary to law its operation or effect may be violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to hide and inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and annulled upon such grounds. No such vice has been imputed and established against the agreement involved in this case

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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3. Booking of Deposits SEC. X261, MRB: Booking of Deposits and Withdrawals. The following regulations shall govern the booking of deposits and withdrawals of banks.

§ X261.5 Booking of deposits after regular banking hours. Deposits, whether cash or non-cash, received after the close of the regular banking hours shall be treated as contingent accounts on the day of receipt and shall be booked as deposits the following banking day.

§ X261.1 Clearing cut-off time. As a general rule, all deposits and withdrawals during regular banking hours shall be credited or debited to deposit liability accounts on the date of receipt or payment thereof: Provided, however, That a bank may set a clearing cut-off time for its head office not earlier than two (2) hours before the start of clearing at the BSP, and not earlier than three and one-half (3-1/2) hours before the start of clearing for all its branches, agencies and extension offices doing business in the Philippines, after which time, deposits received shall be booked as hereinafter provided: Provided, further, That banks which are located in areas where there are no BSP regional/clearing arrangements may set a clearing cut-off time not earlier than two (2) hours before the start of their local clearing after which time, deposits received shall be booked likewise as hereinafter provided.

§ X261.6 Other records required. For record and control purposes, banks shall prepare a daily abstract of deposit transactions treated as contingent accounts.

§ X261.2 Definitions. As used in this Section, the following terms shall have the following meanings: a. Regular banking hours shall refer to the banking hours reported to the BSP pursuant to Sec. X156, including the extended banking hours reported for servicing deposits and withdrawals; and b. Clearing cut-off time shall mean the bank’s closing time for the acceptance of deposits in the form of checks, bills and other demand items for clearing on the day of their receipt. § X261.3 Booking of cash deposits. Cash deposits received after the selected clearing cut-off time until the close of the regular banking hours shall be booked as deposits on the day of receipt. § X261.4 Booking of non-cash deposits. Deposits of checks including “on us” checks, manager’s/cashier’s/ treasurer’s checks and demand drafts, which are drawn against the depository bank and all its offices, as well as treasury warrants and postal money orders, received after the selected clearing cut-off time until the close of the regular banking hours, may, at the option of the bank, be booked as deposits on the day of receipt. Other non-cash deposits received after the selected clearing cut-off time shall be treated as contingent accounts on the day of receipt and shall be booked as deposits the following banking day.

§ X261.7 Notice required. Banks shall post at a conspicuous place near each teller’s window a notice to depositors indicating their selected clearing cut-off time and a statement to the effect that non-cash items deposited after said cut-off time shall be treated as transactions for the next banking day. 4. Interest on Deposits SEC. X242, MRB: Interest on Deposits/Deposit Substitutes. Demand, savings, NOW accounts, time deposits and deposit substitutes shall not be subject to interest ceilings. § X242.1 Time of payment of interest on time deposits/deposit substitutes. Interest or yield on time deposit/deposit substitute may be paid at maturity or upon withdrawal or in advance: Provided, however, That interest or yield paid in advance shall not exceed the interest for one (1) year. § X242.2 Treatment of matured time deposits/deposit substitutes a. A time deposit not withdrawn or renewed on its due date shall be treated as a savings deposit and shall earn interest from maturity to the date of actual withdrawal or renewal at a rate applicable to savings deposits. b. A deposit substitute instrument not withdrawn or renewed on its maturity date shall from said date become payable on demand and shall earn an interest or yield from maturity to actual withdrawal or renewal at a rate applicable to a deposit substitute with a maturity of fifteen (15) days. Banks performing quasi-banking functions shall continue to consider matured and unwithdrawn deposit substitutes as such and subject to reserves. Cases Citibank, NA v Cabamongan DOCTRINE: In a loan or forbearance of money, the interest due should be that stipulated in writing and in the absence thereof, the rate shall be 12% per annum counted from the time of demand.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 FACTS On August 16, 1993, spouses Cabamongan opened a joint foreign currency time deposit for their sons Lito and Luis Jr. in the amount of $55,216.69 for a term of 182 days at 2.5625% (from August 16, 1993 to February 14,1994). On November 10, 1993, a person claiming to be Carmelita Cabamongan (the wife) pre-terminated the foreign currency account, for which she presented a Bank of America card, passport, an ATM, and Mabuhay card. Yeye San Pedro processed the pre-termination. The person executed a notarize release and waiver document for failure to surrender the original Certificate of Deposit. The release and waiver document was not notarized, but the money was released. The person left an ID card, for which San Pedro called the spouses residence. Upon calling, she was told that the spouses was in the US, and that she couldn't have pre-terminated the account. On September 16, 1994, the spouses demanded that the amount withdrawn be returned, plus interest, which the bank refused. The spouses filed a complaint, where the RTC ruled in favor of them. The CA affirmed but ruled that the interest of 12% should run only at the time of demand. ISSUE Whether interest should be 2.5625%, 6%, or 12% RULING 12%. The bank argues that the interest should be 2.5625%, or the interest which was agreed upon. In arguendo that they were negligent, it should be 6% since the funds did not constitute a loan. The facts show that the bank employees were negligent when they released the funds upon showing that (1) failure to produce the original certificate of deposit, and in lieu of it, a notarized release and waiver document; (2) there was discrepancy with the signature; (3) the picture of the depositors did not match the person withdrawing the funds. However, the Court ruled that under Article 1980 of the Civil Code, bank deposits are considered as simple loan. The relationship between a bank and a depositor are really a debtor-creditor relationship, where deposits are treated as loan by the bank from its depositors. As ruled in Eastern Shipping Lines v CA, a loan should have an interest that is stipulated, and in absence, should be 12% per annum from the time of demand. ***Therefore, the interest would be 2.5625% per annum from August 16, 1993 to February 14, 1994, the same rate from February 14, 1994 to September 16, 1994, and 12% per annum from September 16, 1994 up to the present date of the case.

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5. Closing of Account Cases Far East Bank and Trust Company v Pacilan, Jr. DOCTRINE: No malice or bad faith could be imputed on a bank for closing the account of a depositor for frequently drawing checks against insufficient funds. Neither is there malice or bad faith, but only negligence, when the bank accepted a deposit made by the depositor the day following the closure of his account. FACTS: Pacilan had a current account with FEBTC. He was in the practice of issuing several postdated checks against the account. One day in March 1988, he issued a postdated check for P680. It was dishonored (on April 4) for insufficiency of funds. The next day, he deposited P800. Subsequently, he called FEBTC to inquire about the dishonor and was informed that his account was closed on the ground that it was "IMPROPERLY HANDLED". The reason given by the bank was that on the evening of April 4, as a result of his practice of issuing postdated checks, Pacilan's account had an overdraft of P428. Thus his account was closed. He sued the bank for moral and exemplary damages. He claimed that the bank closure was unjustified. His account was closed on the evening of April 4; but if FEBTC had followed normal banking procedure, it had until the close of April 5 to honor the check or return it. He claimed that the closure of his account was done with undue haste. Further, the closure of his account has exposed him to criminal prosecution for BP22. He claimed that he was a cashier of Prudential Bank just across the street, that the closure of the account was patently malicious, and that it had caused him humiliation, wounded feelings, insurmountable worries and sleepless nights. In response, the bank claimed that Pacilan had overdrawn his account close to 200 times in the past 2 years. The bank's Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits provide that ìthe Bank reserves the right to close an account if the depositor frequently draws checks against insufficient funds and/or uncollected depositsî and that ìthe Bank reserves the right at any time to return checks of the depositor which are drawn against insufficient funds or for any reason.î They also alleged that Pacilan had used a signature different from the specimen on several occasions. RTC and CA found for Pacilan. They found that according to the bank's rules, any uncleared check could actually have been subjected to a P10 charge per check, and could actually have been sent back for clearing one more time. Further, in previous instances, FEBTC notified the respondent when he incurred an overdraft and he would then deposit sufficient funds the following day to cover the overdraft. Petitioner bank thus acted unjustifiably when it immediately closed the respondentís account on April 4 and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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deprived him of the opportunity to reclear his check or deposit sufficient funds therefor the following day. It also caused him humiliation and tainted his credit standing. They found the bank liable for damages for violation of Art. 19 of the Civil Code.

otherwise, as prescribed by law.

ISSUE Whether the bank properly exercised their right to close Pacilan's account.

ART. III, SEC. 7 (CONSTITUTION): The right of the people to information on matters of public concern shall be recognized. Access to official records, and to documents and papers pertaining to official acts, transactions, or decisions, as well as to government research data used as basis for policy development, shall be afforded the citizen, subject to such limitations as may be provided by law.

RULING YES. REVERSED. Petitioner bank has the right to close the account. The Bank Rules also state that: "...the depositor is NOT ENTITLED, AS A MATTER OF RIGHT, TO OVERDRAW on this deposit and the bank reserves the right at any time to return checks of the depositor which are drawn against insufficient funds or for any other reason." There was no right of the petitioner that was violated. The fact that petitioner constantly overdrew his account and used signatures not on file was sufficient ground to close the account; therefore, there was no bad faith. He had improperly handled his account hundreds of time. The depositor is bound by the terms and conditions of the agreement with the bank. Neither the fact that petitioner bank accepted the deposit made by the respondent the day following the closure of his account constitutes bad faith or malice on the part of petitioner bank. The same could be characterized as simple negligence by its personnel. Said act, by itself, is not constitutive of bad faith. No legal right was established nor bad faith proved by Pacilan. Damnum Absque Injuria.

F. SECRECY OF BANK DEPOSITS 1. General Rules a. Rationale ART. III, SEC. 2 (CONSTITUTION): The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures of whatever nature and for any purpose shall be inviolable, and no search warrant or warrant of arrest shall issue except upon probable cause to be determined personally by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched and the persons or things to be seized. ART. III, SEC. 3 (CONSTITUTION): (1) The privacy of communication and correspondence shall be inviolable except upon lawful order of the court, or when public safety or order requires

(2) Any evidence obtained in violation of this or the preceding section shall be inadmissible for any purpose in any proceeding.

ART. II, SEC. 28 (CONSTITUTION): Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of full public disclosure of all its transactions involving public interest. Cases REPUBLIC v. EUGENIO, 545 SCRA 384 (2008) DOCTRINE: There is a right to privacy governing bank accounts in the Philippines, as expressed in Sec. 2, RA 1405 (Bank Secrecy Act of 1995). Exceptions provided for in Sec. 2 (may be examined by any person, government official, bureau or office), are as follows: • Upon written permission of the depositor • In cases of impeachment • Examination of bank accounts is upon order of a competent court in cases of bribery or dereliction of duty of public officials • Money deposited or invested is the subject matter of litigation FACTS (This case stemmed from the case of Agan v PIATCO) After the promulgation of the Agan case, a series of investigation was conducted by the Ombudsman, the Compliance and Investigation Staff, and Anti-Money Laundering Council (AMLC). AMLC issued a resolution authorizing the Executive Director of AMLC to examine the bank accounts of Pantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and their related web accounts. Under the authority of such resolution, AMLC filed an application to inquire into or examine the deposits or investments of Alvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which the court granted. Months later, Special Prosecutor Dennis Villa-Ignacio requested AMLC to investigate the accounts of Alvarez, PIATCO and all accounts related to the annulled contract. AMLC issued another resolution, authorizing the executive director to inquire into the bank accounts named in the letter. AMLC filed the same application, this time to the Manila RTC, which was raffled to Judge Antonio Eugenio Jr. The court likewise granted such ex parte application. Alvarez filed an Urgent Motion to Stay of Enforcement of Order, which the Manila RTC granted. The Republic filed a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 motion for reconsideration which was granted. Alvarez then filed an Urgent Motion and Manifestation, stating that AMLC was about to implement the Manila RTC bank inquiry even though he intends to appeal such order. The Manila RTC refrained AMLC from implementing such order against Alvarez. Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging that AMLC likewise cannot implement such order against the others stated in the order. Manila RTC issued an order, stating that the ex parte application cannot be implemented in its totality (first of four rulings contested in this case). Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO and preliminary injunction against the orders of Makati and Manila RTC stating grave abuse of discretion that AMLA can only inquire to bank accounts after the creation of the Anti-Money Laundering Act (AMLA), and not prior to its promulgation. The CA issued a TRO, granting such petition (second of four rulings contested in this case). With relation to the Urgent Motion for Clarification, the Manila RTC issued an order reiterated that bank inquiry order it issued cannot be implemented by the AMLC until the appeal (of Alvarez of the order granting the ex parte application) is finally resolved (third of four rulings contested in this case). The CA issued a writ of preliminary injunction with regard to the petition filed by Lilia Cheng (last ruling contested in this case) ISSUE Whether a bank inquiry order issued in accordance with section 10 AMLA may be stayed with injunction RULING YES. There is a right to privacy governing bank accounts in the Philippines, expressed in RA 1405 known as Bank Secrecy Act of 1955. Section 2 of such law states that all deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are herby considered as of an absolutely confidential nature and may not be examined, inquired, or looked into by any person. Although there may have been subsequent laws that would add to the exceptions, the Bank Secrecy Act remains as the general rule. However, there are exceptions, such as (1) written permission of he depositors; (2) in cases of impeachment; (3) upon order of competent courts in cases of bribery or dereliction of duty of public officials; (4) money deposited is the subject matter of litigation. Subsequent laws adding to the exception are the Anti-Graft and Corrupt Practices Act, the Ombudsman Act, and the Anti-Money Laundering Act**.

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b. Applicable Law Cases INTENGAN v. CA, 377 SCRA 63 (2002) DOCTRINE: Where the accounts in question are US dollar deposits, the applicable law is RA 6426 (FCDA), not RA 1405 (Bank Secrecy Law). Under the applicable law, the only exception to the secrecy of foreign currency deposits is upon the written permission of the depositor. FACTS In 1993, Citibank filed a complaint for violation of Sec. 31, in relation to Sec. 144 of the Corporation Code against its 2 officers, Santos and Genuino. It was alleged in the affidavit executed by its VP Vic Lim that Santos and Genuino managed or caused existing bank clients/depositors to divert their money from Citibank NA to products offered by other companies (Torrance Development Corporation and Global Pacific Corporation) that were yielding higher interest rates. In return, Santos and Genuino derived substantial financial gains. It was also determined that the bank clients accommodated by Santos and Genuino include Intengan, Neri and Brawner, who have long standing accounts with Citibank NA in savings/dollar deposits and/or in trust accounts and/or money placements. As evidence, Lim annexed bank records, including dollar deposits of Intengan, Neri and Brawner, to establish the deception practiced by Santos and Genuino. In turn, Global Consumer Banking Group of Citibank’s VP/Business Manager Reyes admitted to having authorized Lim to state the names of the clients involved and to attach said bank records. Intengan, Neri and Brawner filed their respective motions for the exclusion and physical withdrawal of their bank records, which was initially dismissed by 2nd Asst. Provincial Prosecutor Ubana, Sr. However, Provincial Prosecutor Castro directed the filing of informations against Rajkotwala, Ferguson, Reyes and Lim for alleged violation of the Bank Secrecy Law. On appeal before the DOJ, this was reversed. ISSUE Whether the Bank Secrecy Law, RA 1405 applies in this case HELD NO. The accounts in question are US dollar deposits. Consequently, the applicable law is RA 6426 known as the Foreign Currency Deposit Act of the Philippines, and not RA 1405 (Bank Secrecy Law). Under Sec. 8 of RA 6426, there is only a single exception to the secrecy of foreign currency deposits, that is, disclosure is allowed only upon the written permission of the depositor. Incidentally, the acts of the Citibank officials

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 complained of happened before the enactment of RA 9160, Anti-Money Laundering Act of 2001. A case for violation of RA 6426 should have been the proper case brought against the bank’s officials. Lim and Reyes admitted that they had disclosed details of petitioners’ dollar deposits without the latter’s written permission. It does not matter if that such disclosure was necessary to establish the bank’s case against Santos and Genuino. Lim’s act of disclosing details of petitioners’ bank records regarding their foreign currency deposits, with the authority of Reyes, would appear to belong to the species of criminal acts punishable under special laws—malum prohibitum. a.

Applicability of Exclusionary Rule ART. III, SEC. 2 (CONSTITUTION): The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures of whatever nature and for any purpose shall be inviolable, and no search warrant or warrant of arrest shall issue except upon probable cause to be determined personally by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched and the persons or things to be seized. ART. III, SEC. 3 (CONSTITUTION): (1) The privacy of communication and correspondence shall be inviolable except upon lawful order of the court, or when public safety or order requires otherwise, as prescribed by law. (2) Any evidence obtained in violation of this or the preceding section shall be inadmissible for any purpose in any proceeding.

Cases EJERCITO v. SANDIGANBAYAN, 509 SCRA 190 (2006) DOCTRINE: RA 1405 nowhere provides that an unlawful examination of bank accounts shall render the evidence obtained therefrom inadmissible in evidence. Sec. 5 only states that “any violation of this law will subject the offender upon conviction, to an imprisonment of not more than 5 years or fine of not more than P20,000 or both, in the discretion of the court.” FACTS This case arose from the plunder charges against former president Joseph Ejercito Estrada. The Special Prosecution Panel filed before the Sandiganbayan a request for issuance of subpoenas directing the President of Export and Industry Bank (EIB) or his/her authorized representative to produce a number of documents allegedly part of the Jose Velarde account. The Sandiganbayan granted the requests and subpoenas were issued.

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Estrada filed a Motion to Quash alleging that the documents were by R.A. No. 1405 (The Secrecy of Bank Deposits Law). He further claimed that the specific identification of documents in the questioned subpoenas, including details on dates and amounts, could only have been made possible by an earlier illegal disclosure thereof by the EIB and the Philippine Deposit Insurance Corporation (PDIC). The disclosure being illegal, petitioner concluded, the prosecution in the case may not be allowed to make use of the information. ISSUE Whether the “extremely-detailed” information contained in the Special Prosecution Panel’s requests for subpoena was obtained through a prior illegal disclosure of petitioner’s bank accounts, in violation of the “fruit of the poisonous tree” doctrine HELD NO. The court first held that the bank documents were not covered by RA 1405, hence not fruits of illegal disclosure. Petitioner’s attempt to make the exclusionary rule applicable to the instant case fails. R.A. 1405, it bears noting, nowhere provides that an unlawful examination of bank accounts shall render the evidence obtained therefrom inadmissible in evidence. Section 5 of R.A. 1405 only states that “[a]ny violation of this law will subject the offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.” Even assuming arguendo, however, that the exclusionary rule applies in principle to cases involving R.A. 1405, the Court finds no reason to apply the same in this particular case. Clearly, the “fruit of the poisonous tree” doctrine1[13] presupposes a violation of law. If there was no violation of R.A. 1405 in the instant case, then there would be no “poisonous tree” to begin with, and, thus, no reason to apply the doctrine. The investigation conducted by the Ombudsman were legal as credited by the Sandiganbayan. The documents were released pursuant to a letter request sent to the officers of EIB and were not obtained through illegal means. In fine, the subpoenas issued by the Ombudsman in this case were legal, hence, invocation of the “fruit of the poisonous tree” doctrine is misplaced.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 2. Rules for Peso Deposits a. Coverage SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation. Cases EJERCITO v. SANDIGANBAYAN, 509 SCRA 190 (2006) DOCTRINE: The term “deposits” used therein is to be understood broadly and not limited only to accounts, which give rise to a creditor-debtor relationship between the depositor and the bank. If the money deposited under an account may be used by banks for authorized loans to third persons, then such accounts, regardless of whether it creates a creditordebtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country. FACTS In the ombudsman case PP v. Estrada, the Sandiganbayan issued a subpoena duces tecum for Trust Account no 858, a savings account, certain specified documents, as well as all accounts pertaining to one "Jose Velarde". ERAP filed motions to quash alleging that the trust account which was allegedly his was a "deposit" within the meaning of sec. 2 of RA 1405, and therefore protected; and that since he was charged with plunder, not bribery or dereliction of duty, his case does not fall under any of the exceptions under sec.2. These motions to quash were denied. were denied. Thus this petition for certiorari. "Section 2. 1 All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation." Note: Trust Account: a savings account deposited in the name of a trustee

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who controls it during his lifetime, after which the balance is payable to a prenominated beneficiary. It may be invested by the bank. ISSUES: 1) Whether a trust account is a deposit, and 2) Whether a plunder charge falls under the exceptions under Section 2 RULING 1) YES, it is a deposit. The contention of the Sandiganbayan that trust accounts are not covered by the term “deposits,” as used in R.A. 1405, by the mere fact that they do not entail a creditor-debtor relationship between the trustor and the bank, does not lie. If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country. 2) YES, it falls under the exceptions. The protection afforded by the law is not absolute, there being recognized exceptions thereto, as above-quoted Section 2 provides. Two exceptions apply here: (1) the examination of bank accounts is upon order of a competent court in cases of bribery or dereliction of duty of public officials, and (2) the money deposited or invested is the subject matter of the litigation. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential. The crime of bribery and the overt acts constitutive of plunder are crimes committed by public officers, and in either case the noble idea that “a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny” applies with equal force. Plunder being thus analogous to bribery, the exception to R.A. 1405 applicable in cases of bribery must also apply to cases of plunder. b.

Prohibitions SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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cases where the money deposited or invested is the subject matter of the litigation.

the bank, or in the maximum amount permitted by law, whichever is lower, shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of his deposits shall be held strictly confidential and may be used by the examiners only in connection with their supervisory and examination responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving the deposit account.

SEC. 3, LAW ON SECRECY OF BANK DEPOSITS: It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits. SEC. 55.1 (B), GBL: No director, officer, employee, or agent of any bank shall, without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail;

SEC. X337, MRB: Waiver of Secrecy of Deposit Any director, officer or stockholder who, together with his related interest, contracts a loan or any form of financial accommodation from: a. his bank; or b. from a bank (1) which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries; or

SEC. 55.4, GBL: Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or nonregular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits. c.

Exceptions i. Under the Law on Secrecy of Bank Deposits SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

(2) in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank, in excess of five percent (5%) of the capital and surplus of the bank, or in the maximum amount permitted by law, whichever is lower, shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of his deposits shall be held strictly confidential and may be used by the examiners only in connection with their supervisory and examination responsibility or by the BSP in an appropriate legal action it has initiated involving the deposit account. b.

1.

Upon written permission of the depositor or inventor: a. DOSRI loans SEC. 26, NCBA: Bank Deposits and Investments. Any director, officer or stockholder who, together with his related interest, contracts a loan or any form of financial accommodation from: (1) his bank; or (2) from a bank (a) which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries or (b) in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank, in excess of five percent (5%) of the capital and surplus of

100

2. 3.

For loans secured by hold-out or assignment of CTDs SEC. X315 (F), MRB: Loans Secured by Certificates of Time Deposit. The following rules shall govern the grant of loans secured by hold- out on and/or assignment of CTDs issued by the lending bank, as well as its branches or subsidiaries abroad: The loan documents shall include a waiver on the part of the depositor of his rights under existing law to the confidentiality of his deposits.

In cases of impeachment Upon the order of a competent court in cases of bribery or dereliction of duty of public officials

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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In cases where the money deposited or invested is the subject of litigation

2 of the Bank Secrecy Law by providing an additional exception to the rule against the disclosure of bank deposits.

Under the Anti-Graft and Corrupt Practices Act SEC. 8, RA 3019: Dismissal due to unexplained wealth. If in accordance with the provisions of Republic Act Numbered One thousand three hundred seventy-nine, a public official has been found to have acquired during his incumbency, whether in his name or in the name of other persons, an amount of property and/or money manifestly out of proportion to his salary and to his other lawful income, that fact shall be a ground for dismissal or removal. Properties in the name of the spouse and unmarried children of such public official may be taken into consideration, when their acquisition through legitimate means cannot be satisfactorily shown. Bank deposits shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.

BANCO FILIPINO SAVINGS AND MORTGAGE BANK v. PURISIMA, 161 SCRA 576 (1988) DOCTRINE: By enacting Sec. 8 of RA 3019, Congress intended to provide an additional ground for the examination of bank deposits for without such provision, the prosecutors would be hampered if not altogether frustrated in the prosecution of those charged with having acquired unexplained wealth while in public office.

Cases PNB v. GANCAYAO, 15 SCRA 91 (1965) DOCTRINE: Sec. 8 of RA 3019 directs in mandatory terms that bank deposits shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary. FACTS Prosecutor Gancayao required PNB to produce the records of the bank deposits of Jimenez, the former administrator of the Agricultural Credit and Cooperative Administration. Jimenez was under investigation for unexplained wealth. PNB refused to produce the records of the bank deposits for fear of prosecution under RA 1405 (Bank Secrecy Law). Gancayao on the other hand relied on the provisions of RA 3019 (Anti Graft and Corrupt Practices Act), stating Sec. 8. Dismissal due to unexplained wealth. – xx xx xx Bank deposits shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary. ISSUE Whether RA 3019 prevails over RA 1405? RULING YES. Anti Graft and Corrupt Practices Act prevails over the Bank Secrecy Law. The anti graft law directs in mandatory terms that bank deposits “shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.” The only conclusion possible is that Section 8 of the Anti Graft Law is intended to amend Section

FACTS The Tanodbayan issued a subpoenaduces tecum to the Banco Filipino Savings & Mortgage Bank, commanding its representative to appear at a specified time at the Office of the Tanodbayan and furnish the latter with duly certified copies of the records in all its branches and extension offices, of the loans, savings and time deposits and other banking transactions, dating back to 1969, appearing in the names of Caturla, his wife, Purita Caturla, their children — Manuel, Jr., Marilyn and Michael — and/or Pedro Escuyos. Caturla moved to quash the subpoena duces tecum arguing that compliance therewith would result in a violation of Sections 2 and 3 of the Law on Secrecy of Bank Deposits. Then Tanodbayan Vicente Ericta not only denied the motion for lack of merit, and directed compliance with the subpoena, but also expanded its scope through a second subpoena duces tecum, this time requiring production by Banco Filipino of the bank records in all its branches and extension offices, of Siargao Agro-Industrial Corporation, Pedro Escuyos or his wife, Emeterio Escuyos, Purita Caturla, Lucia Escuyos or her husband, Romeo Escuyos, Emerson Escuyos, Fraterno Caturla, Amparo Montilla, Cesar Caturla, Manuel Caturla or his children, Manuel Jr., Marilyn and Michael, LTD Pub/Restaurant, and Jose Buo or his wife, Evelyn. Two other subpoena of substantially the same tenor as the second were released by the Tanodbayan's Office. The last required obedience under sanction of contempt. The Banco Filipino Savings & Mortgage Bank, hereafter referred to simply as BF Bank, took over from Caturla in the effort to nullify the subpoenae. It filed a complaint for declaratory relief with the Court of First Instance of Manila, which was assigned by raffle to the sala of respondent Judge Fidel Purisima. BF Bank prayed for a judicial declaration as to whether its compliance with the subpoenae duces tecum would constitute an infringement of the provisions of Sections 2 and 3 of R.A. No. 1405 in relation to Section 8 of R.A. No. 3019. It also asked that pending final resolution of the question, the Tanodbayan be provisionally restrained from exacting compliance with the subpoenae.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Respondent Judge Purisima issued an Order denying for lack of merit the application by BF Bank for a preliminary injunction and/or restraining order. It further argues that subpoenae in question are in the nature of "fishing expeditions" or "general warrants" since they authorize indiscriminate inquiry into bank records; that, assuming that such an inquiry is allowed as regards public officials under investigation for a violation of the Anti-Graft & Corrupt Practices Act, it is constitutionally impermissible with respect to private individuals or public officials not under investigation on a charge of violating said Act; and that while prosecution of offenses should not, as a rule, be enjoined, there are recognized exceptions to the principle one of which is here present, i.e. to avoid multiplicity of suits, similar subpoenae having been directed to other banks as well. ISSUE Whether the "Law on Secrecy of Bank Deposits" precludes production by subpoena duces tecum of bank records of transactions by or in the names of the wife, children and friends of a special agent of the Bureau of Customs, accused before the Tanodbayan of having allegedly acquired property manifestly out of proportion to his salary and other lawful income, in violation of the "Anti-Graft and Corrupt Practices Act. RULING The provisions of R.A. No. 1405 subject of BF's declaratory action, read as follows: Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of litigation. Sec. 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits The other provision involved in the declaratory action is Section 8 of R.A. No. 3019. It reads: Sec. 8. Dismissal due to unexplained wealth. — If in accordance with the provisions of Republic Act Numbered One thousand three hundred seventy-nine, a public official has been found to have acquired during his incumbency, whether in his name or in the name of other persons, an amount of property and/or money manifestly out of proportion to this salary and to his other lawful income, that

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fact shall be a ground for dismissal or removal. Properties in the name of the spouse and unmarried children of such public official may be taken into consideration, when their acquisition through legitimate means cannot be satisfactorily shown. Bank deposits shall be taken into consideration in the enforcement of this section, notwithstanding any prohibition of law to the contrary. The only conclusion possible is that section 8 of the Anti-Graft Law is intended to amend section 2 of Republic Act No. 1405 by providing an additional exception to the rule against the disclosure of bank desposits. The inquiry into illegally acquired property — or property NOT "legitimately acquired" — extends to cases where such property is concealed by being held by or recorded in the name of other persons. This proposition is made clear by R.A. No. 3019 which quite categorically states that the term, "legitimately acquired property of a public officer or employee shall not include .. property unlawfully acquired by the respondent, but its ownership is concealed by its being recorded in the name of, or held by, respondent's spouse, ascendants, descendants, relatives or any other persons. To sustain the petitioner's theory, and restrict the inquiry only to property held by or in the name of the government official or employee, or his spouse and unmarried children is unwarranted in the light of the provisions of the statutes in question, and would make available to persons in government who illegally acquire property an easy and fool-proof means of evading investigation and prosecution; all they would have to do would be to simply place the property in the possession or name of persons other than their spouse and unmarried children. This is an absurdity that we will not ascribe to the lawmakers. iii.

Under the Ombudsman Act SEC. 15 (8), RA 6770: Powers, Functions and Duties. — The Office of the Ombudsman shall have the following powers, functions and duties: Administer oaths, issue subpoena and subpoena duces tecum, and take testimony in any investigation or inquiry, including the power to examine and have access to bank accounts and records;

Cases MARQUEZ v. DESIERTO, 359 SCRA 772 (1991) DOCTRINE: Before an in camera inspection by the Ombudsman may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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notified to be present during the inspection, and such inspection may cover only the account identified in the pending case. FACTS Petitioner is being held in indirect contempt for not allowing in camera inspection of the accounts related to an investigation being done by the Ombudsman relating to pay-offs for the PEA-AMARRI scandal. Petitioner hopes to nullify order for the in camera investigation and to hold her in contempt. Petitioner is the branch manager of Union Bank, Julio Vargas Branch. She received an Order from the Respondent to produce several bank documents for inspection in camera relative to a pending investigation before Respondent (Ombudsman Desierto). Respondent’s case is the Fact Finding and Intelligence Bureau (FFIB) vs. Amado Lagdameo – relative to the JVA between PEA and AMARI. The Order emphasized Respondent’s power to issue subpoena and subpoena duces tecum and contempt power under RA 6770 aka the Ombudsman Act of 1989. The Act is a later legislation to RA 1405 aka Secrecy of Bank Deposits law; hence amending some provisions of the latter. • Order’s objective: to trail the managers checks purchased by Trivinio respondent in the pending case) Trivinio purchased 51 managers checks worth P272.1M from Traders Royal Bank, UN Ave. 11 of these checks, P70.6M, were deposited to an account handled by Petitioner’s branch Though Union Bank’s lawyer told Petitioner to comply with the Order, she had some difficulty making her ask for some time extensions. She said the accounts cannot be easily identified and despite diligent efforts and from the account numbers presented, she cannot identify these accounts since the checks were issued in cash or bearer o Surmised that the account has been dormant since it is not covered by the new account number generated by the Union Bank system o Hence, she has to verify from the Interbank records archives for the whereabouts of the account After two extensions, Respondent issued the controversial order threatening to hold Petitioner in indirect contempt for causing delays in the investigation. Petitioner and Union Bank filed for declaratory relief in the RTC of Makati to clarify their rights and duties, seeing complying with the Order may conflict or violate the Secrecy of Bank Deposits law. Lower

Court

Denied

the

Petition,

but

Petitioner

sought

103

reconsideration. Grounds used by the lower court: No great or irreparable injury to restrain respondent The Ombudsman would have to file to the RTC for the indirect contempt charge Petitioner failed to show prima facie evidence that the subject matter of the investigation is outside the jurisdiction of Respondent. Reconsideration was likewise denied. A motion to cite Petitioner in contempt was filed with the Office of the Ombudsman. Petitioner asserted that such was premature since there was a pending case in the lower court, but eventually she was held in contempt ISSUE (Ombudsman act) whether petitioner may be cited for indirect contempt for her failure to produce the documents requested by the Ombudsman. And whether the order of the Ombudsman to have an in camera inspection of the questioned account is allowed as an exception to the law on secrecy of bank deposits (R. A. No. 1405). RULING NO, she may not be held in contempt or may the Ombudsman have an in camera inspection. Examination of the secrecy of bank deposits law (R. A. No. 1405) would reveal the following exceptions: 1. Where the depositor consents in writing; 2. Impeachment case; 3. By court order in bribery or dereliction of duty cases against public officials; 4. Deposit is subject of litigation; 5. Sec. 8, R. A. No. 3019, in cases of unexplained wealth as held in the case of PNB vs. Gancayco The order of the Ombudsman to produce for in camera inspection the subject accounts with the Union Bank of the Philippines, Julia Vargas Branch, is based on a pending investigation at the Office of the Ombudsman against Amado Lagdameo, et. al. for violation of R. A. No. 3019, Sec. 3 (e) and (g) relative to the Joint Venture Agreement between the Public Estates Authority and AMARI. We rule that before an in camera inspection may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to be present during the inspection, and such inspection may cover only the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 account identified in the pending case. In Union Bank of the Philippines v. Court of Appeals, we held that “Section 2 of the Law on Secrecy of Bank Deposits, as amended, declares bank deposits to be “absolutely confidential” except: (1) In an examination made in the course of a special or general examination of a bank that is specifically authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity, (2) In an examination made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank, (3) Upon written permission of the depositor, (4) In cases of impeachment, (5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or (6) In cases where the money deposited or invested is the subject matter of the litigation” In the case at bar, there is yet no pending litigation before any court of competent authority. What is existing is an investigation by the office of the Ombudsman. In short, what the Office of the Ombudsman would wish to do is to fish for additional evidence to formally charge Amado Lagdameo, et. al., with the Sandiganbayan. Clearly, there was no pending case in court, which would warrant the opening of the bank account for inspection. iv.

Under the Plunder Law SEC. 1 (D), RA 7080: Ill-gotten wealth means any asset, property, business enterprise or material possession of any person within the purview of Section Two (2) hereof, acquired by him directly or indirectly through dummies, nominees, agents, subordinates and/or business associates by any combination or series of the following means or similar schemes: 1) Through misappropriation, conversion, misuse, or malversation of public funds or raids on the public treasury; 2) By receiving, directly or indirectly, any commission, gift, share,

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percentage, kickbacks or any other form of pecuniary benefit from any person and/or entity in connection with any government contract or project or by reason of the office or position of the public officer concerned; 3) By the illegal or fraudulent conveyance or disposition of assets belonging to the National Government or any of its subdivisions, agencies or instrumentalities or government-owned or -controlled corporations and their subsidiaries; 4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation including promise of future employment in any business enterprise or undertaking; 5) By establishing agricultural, industrial or commercial monopolies or other combinations and/or implementation of decrees and orders intended to benefit particular persons or special interests; or 6) By taking undue advantage of official position, authority, relationship, connection or influence to unjustly enrich himself or themselves at the expense and to the damage and prejudice of the Filipino people and the Republic of the Philippines. SEC. 4, RA 7080: Rule of Evidence - For purposes of establishing the crime of plunder, it shall not be necessary to prove each and every criminal act done by the accused in furtherance of the scheme or conspiracy to amass, accumulate or acquire illgotten wealth, it being sufficient to establish beyond reasonable doubt a pattern of overt or criminal acts indicative of the overall unlawful scheme or conspiracy. Cases EJERCITO v SANDIGANBAYAN, 509 SCRA 190 (2006) DOCTRINE: The plunder case under the Sandiganbayan necessarily involves an inquiry into the whereabouts of the amount purportedly acquired illegally by Erap, and the subject matter of the litigation cannot be limited to bank accounts under his name alone, but must include those accounts to which the money purportedly acquired illegally or a portion thereof was alleged to have been transferred. A public office is a public trust. FACTS In the criminal case of People v. Estrada for plunder, the Special Prosecution Panel filed a request for issuance of Subpeona Duces Tecum for directing the President of Export and Industry Bank (EIB) to produce the following documents from the following: (1) Trust Account 858 (2) Savings Account

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 0116-17345-9 (3) Urban Bank Manager’s Check. (4) Account of Jose Velarde. The Sandiganbayan granted the requests and the subpoena were issued. Ejercito contested the issuance of the subpoenas. He opposed such motion on the ground of Bank Secrecy Laws (RA 1405). He filed a motion to quash and urgent motion to quash to such request for subpoena. Sandiganbayan, however, denied all his motion to quash. ISSUE (1) W/N Ejercito’s Trust Account is covered by the term “deposit” as used in RA 1405. (2) W/N Ejercito’s Trust Account is excepted from the protection of RA 1405. (3) the request for subpoena was obtained through a prior illegal disclosure of bank accounts, in violation of “fruit of the poisonous tree” doctrine. RULING (1) Ejercito’s Account is within the coverage of the term “deposit. RA 1405 Bank Secrecy Law • SECTION 1. It is hereby declared to be the policy of the Government to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country. (Underscoring supplied) • SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

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"deposits." Moreover, it is clear from the immediately quoted provision that the law applies not only to money which is deposited but also to those which are invested. This further shows that the law was not intended to apply only to "deposits" in the strict sense of the word. Otherwise, there would have been no need to add the phrase "or invested." (2) Ejercito’s Account is excepted from the protection of RA 1405. The protection given by RA 1405 not absolute. Two exceptions apply (1) the examination of bank accounts is upon order of a competent court in cases of bribery or dereliction of duty of public officials, and (2) the money deposited or invested is the subject matter of the litigation. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential. The policy as to one cannot be different from the policy as to the other. This policy expresses the notion that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny. Thus, cases for plunder involve unexplained wealth. Cases for plunder involve unexplained wealth, as provided in Section 2 of the Plunder Law. • Section 2 of R.A. No. 7080 - Definition of the Crime of Plunder; Penalties. — Any public officer who, by himself or in connivance with members of his family, relatives by affinity or consanguinity, business associates, subordinates or other persons, amasses, accumulates or acquires ill-gotten wealth through a combination or series of overt or criminal acts

If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect. Trust Account No. 858 is, without doubt, one such account. The Trust Agreement between Ejercito and Urban Bank provides that the trust account covers "deposit, placement or investment of funds" by Urban Bank for and in behalf of petitioner.

In addition, the crime of plunder is similar with bribery since it is one of the acts for committing plunder. • Section 1(d) of RA 7080 • d) "Ill-gotten wealth" means any asset, property, business enterprise or material possession of any person within the purview of Section Two (2) hereof, acquired by him directly or indirectly through dummies, nominees, agents, subordinates and or business associates by any combination or series of the following means or similar schemes. • 1) Through misappropriation, conversion, misuse, or malversation of public funds or raids on the public treasury; • 2) By receiving, directly or indirectly, any commission, gift, share, percentage, kickbacks or any other form of pecuniary benefit from any person and/or entity in connection with any government contract or project or by reason of the office or position of the public officer concerned

The phrase "of whatever nature" proscribes any restrictive interpretation of

The crime of bribery and the overt acts constitutive of plunder are crimes

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 committed by public officers, and in either case the noble idea that "a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny" applies with equal force. Plunder being thus analogous to bribery, the exception to R.A. 1405 applicable in cases of bribery must also apply to cases of plunder. In addition, the money deposited in Ejercito’s Account is said to form part of the subject matter of the plunder case. Making it again excluded from the protection of the Bank Secrecy Law. (3) The “fruit of the poisonous tree” doctrine is misplaced. He relies on Marquez v. Desierto, where the court held for an inspection of the bank account is allowed, there must be a pending case because of competent jurisdiction against Ejercito. Having no case filed during the investigation of the Ombudsman, the information were illegally acquired. However, R.A. 1405, it bears noting, nowhere provides that an unlawful examination of bank accounts shall render the evidence obtained therefrom inadmissible in evidence. Section 5 of R.A. 1405 only states that "any violation of this law will subject the offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court." Even if the exclusionary rule applies to RA 1405, it is inapplicable to this case. The "fruit of the poisonous tree" doctrine presupposes a violation of law. If there was no violation of R.A. 1405 in the instant case, then there would be no "poisonous tree" to begin with, and, thus, no reason to apply the doctrine. Despite the Marquez v. Desierto, the examination of accounts by the Ombudsman, conducted before a case was filed with a court of competent jurisdiction, was lawful. For the Ombudsman issued the subpoenas bearing on the bank accounts of petitioner about four months before Marquez was promulgated on June 27, 2001. The doctrine in Marquez would have no retroactive effect. In addition, the recent filing case for plunder empowers the Ombudsman to investigate such accounts. Thus, the subpoenas were legal and the invocation of the exclusionary doctrine is misplaced. v.

Under the AMLA SEC. 11, AMLA: Authority to Inquire into Bank Deposits. Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any

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particular deposit or investment with any banking institution or non- bank financial institution upon order of any competent court in cases of violation of this Act when it has been established that there is probable cause that the deposits or investments involved are in any way related to a money laundering offense: Provided, That this provision shall not apply to deposits and investments made prior to the effectivity of this Act. Cases REPUBLIC v. EUGENIO, 545 SCRA 384 (2008) DOCTRINE: Even if bank inquiry order may be availed of without need of a pre-exisitng case under the AMLA, it does not follow that such order may be availed of ex parte. FACTS (This case stemmed from the case of Agan v PIATCO) After the promulgation of the Agan case, a series of investigation was conducted by the Ombudsman, the Compliance and Investigation Staff, and Anti-Money Laundering Council (AMLC). AMLC issued a resolution authorizing the Executive Director of AMLC to examine the bank accounts of Pantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and their related web accounts. Under the authority of such resolution, AMLC filed an application to inquire into or examine the deposits or investments of Alvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which the court granted. Months later, Special Prosecutor Dennis Villa-Ignacio requested AMLC to investigate the accounts of Alvarez, PIATCO and all accounts related to the annulled contract. AMLC issued another resolution, authorizing the executive director to inquire into the bank accounts named in the letter. AMLC filed the same application, this time to the Manila RTC, which was raffled to Judge Antonio Eugenio Jr. The court likewise granted such ex parte application. Alvarez filed an Urgent Motion to Stay of Enforcement of Order, which the Manila RTC granted. The Republic filed a motion for reconsideration which was granted. Alvarez then filed an Urgent Motion and Manifestation, stating that AMLC was about to implement the Manila RTC bank inquiry even though he intends to appeal such order. The Manila RTC refrained AMLC from implementing such order against Alvarez. Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging that AMLC likewise cannot implement such order against the others stated in the order. Manila RTC issued an order, stating that the ex parte application cannot be implemented in its totality (first of four rulings contested in this case). Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO and preliminary injunction against the orders of Makati and Manila RTC stating grave abuse of discretion that AMLA can only inquire to bank accounts after the creation of the Anti-Money Laundering Act (AMLA), and not prior to its promulgation. The CA issued a TRO, granting such petition (second of four

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 rulings contested in this case). With relation to the Urgent Motion for Clarification, the Manila RTC issued an order reiterated that bank inquiry order it issued cannot be implemented by the AMLC until the appeal (of Alvarez of the order granting the ex parte application) is finally resolved (third of four rulings contested in this case). The CA issued a writ of preliminary injunction with regard to the petition filed by Lilia Cheng (last ruling contested in this case) ISSUE Whether a bank inquiry order issued in accordance with section 10 AMLA may be stayed with injunction RULING YES. Under this section, the AMLC is authorized to inquire into a bank account upon establishing probable cause where the deposits are related to kidnapping for ransom, violation of the Dangerous Drugs Act, hijacking, destructive arson and murder. The exception does not dispense the Bank Secrecy Act to all deposits, except for cases related to the enumerations above. (Take note that the application done by AMLC has no connection with any of the following enumerations above) Since the application of AMLC has nothing to do with any of the provided enumerations under Section 11, it must prove that there is probable cause with the case, in order to inquire into the bank accounts. Probable cause may only be decided by the courts (Art III, Sec 2 of Constitution). Section 10 contains the application for ex parte, but it is connected to freezing of accounts. This must be done ex parte, since notifying the accused my cause him to disburse the account before the order freezing the account is issued. Section 11 does not contain the application for ex parte, for the fact that there is nothing wrong with the accused knowing that his accounts are being checked. It is immaterial for the accused to know that his accounts are being checked, since he cannot hide the bank records to prove that the accounts are linked to the crime imputed against him. Hence, using the ex parte application found in section 10 in inquiring into bank accounts (section 11) may be stayed with injunction. 1. 2. vi.

Upon order of competent court BSP inquiry or examination

Independent Auditor DOJ OPINION NO. 243, SERIES OF 1957

Cases MARQUEZ v. DESIERTO, 359 SCRA 772 (2001) DOCTRINE: Sec. 2 of Bank Secrecy Law provides for exceptions to the confidentiality rule of bank deposits, one of which is in an examination made

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by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank. FACTS Petitioner is being held in indirect contempt for not allowing in camera inspection of the accounts related to an investigation being done by the Ombudsman relating to pay-offs for the PEA-AMARRI scandal. Petitioner hopes to nullify order for the in camera investigation and to hold her in contempt. Petitioner is the branch manager of Union Bank, Julio Vargas Branch. She received an Order from the Respondent to produce several bank documents for inspection in camera relative to a pending investigation before Respondent (Ombudsman Desierto). Respondent’s case is the Fact Finding and Intelligence Bureau (FFIB) vs. Amado Lagdameo – relative to the JVA between PEA and AMARI. The Order emphasized Respondent’s power to issue subpoena and subpoena duces tecum and contempt power under RA 6770 aka the Ombudsman Act of 1989. The Act is a later legislation to RA 1405 aka Secrecy of Bank Deposits law; hence amending some provisions of the latter. • Order’s objective: to trail the managers checks purchased by Trivinio respondent in the pending case) Trivinio purchased 51 managers checks worth P272.1M from Traders Royal Bank, UN Ave. 11 of these checks, P70.6M, were deposited to an account handled by Petitioner’s branch Though Union Bank’s lawyer told Petitioner to comply with the Order, she had some difficulty making her ask for some time extensions. She said the accounts cannot be easily identified and despite diligent efforts and from the account numbers presented, she cannot identify these accounts since the checks were issued in cash or bearer o Surmised that the account has been dormant since it is not covered by the new account number generated by the Union Bank system o Hence, she has to verify from the Interbank records archives for the whereabouts of the account After two extensions, Respondent issued the controversial order threatening to hold Petitioner in indirect contempt for causing delays in the investigation. Petitioner and Union Bank filed for declaratory relief in the RTC of Makati to clarify their rights and duties, seeing complying with the Order may conflict or violate the Secrecy of Bank Deposits law.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Lower Court Denied reconsideration.

the

Petition,

but

Petitioner

NOTES sought

Grounds used by the lower court: No great or irreparable injury to restrain respondent The Ombudsman would have to file to the RTC for the indirect contempt charge Petitioner failed to show prima facie evidence that the subject matter of the investigation is outside the jurisdiction of Respondent. Reconsideration was likewise denied. A motion to cite Petitioner in contempt was filed with the Office of the Ombudsman. Petitioner asserted that such was premature since there was a pending case in the lower court, but eventually she was held in contempt ISSUE Whether the order of the Ombudsman to have an in camera inspection of the questioned account is allowed as an exception to the law on secrecy of bank deposits (R. A. No. 1405).

(4) In cases of impeachment, (5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or (6) In cases where the money deposited or invested is the subject matter of the litigation” In the case at bar, there is yet no pending litigation before any court of competent authority. What is existing is an investigation by the office of the Ombudsman. In short, what the Office of the Ombudsman would wish to do is to fish for additional evidence to formally charge Amado Lagdameo, et. al., with the Sandiganbayan. Clearly, there was no pending case in court, which would warrant the opening of the bank account for inspection. vii.

Under the PDIC Charter SEC. 8, PAR. 8, PDIC CHARTER: The Corporation as a corporate body shall have the power To conduct examination of banks with prior approval of the Monetary Board: Provided, That no examination can be conducted within twelve (12) months from the last examination date: Provided, however, That the Corporation may, in coordination with the Bangko Sentral, conduct a special examination as the Board of Directors, by an affirmative vote of a majority of all of its members, if there is a threatened or impending closure of a bank; Provided, further, That, notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other laws, the Corporation and/or the Bangko Sentral, may inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe or unsound banking practice; Provided, finally, That to avoid overlapping of efforts, the examination shall maximize the efficient use of the relevant reports, information, and findings of the Bangko Sentral, which it shall make available to the Corporation; (As amended by R.A. 9302, 12 August 2004, R.A. 9576,29 April 2009)

viii.

Under the Human Security Act SEC. 27. Judicial Authorization Required to Examine Bank Deposits, Accounts, and Records. – The provisions of Republic Act No. 1405 as amended, to the contrary notwithstanding, the justices of the Court of Appeals designated as a special court to handle anti-terrorism cases after satisfying themselves of the existence of probable cause in a hearing called for that purpose that (1) a person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, (2) of a judicially declared and outlawed terrorist organization, association, or group

RULING NO, she may not be held in contempt or may the Ombudsman have an in camera inspection. We rule that before an in camera inspection may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to be present during the inspection, and such inspection may cover only the account identified in the pending case. In Union Bank of the Philippines v. Court of Appeals, we held that “Section 2 of the Law on Secrecy of Bank Deposits, as amended, declares bank deposits to be “absolutely confidential” except: (1) In an examination made in the course of a special or general examination of a bank that is specifically authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity, (2) In an examination made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank, (3) Upon written permission of the depositor,

108

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 of persons, and (3) of a member of such judicially declared and outlawed organization, association, or group of persons, may authorize in writing any police or law enforcement officer and the members of his/her team duly authorized in writing by the antiterrorism council to: (a) examine, or cause the examination of, the deposits, placements, trust accounts, assets and records in a bank or financial institution; and (b) gather or cause the gathering of any relevant information about such deposits, placements, trust accounts, assets, and records from a bank or financial institution. the bank or financial institution concerned shall not refuse to allow such examination or to provide the desired information, when so ordered by and served with the written order of the Court of Appeals. SEC. 28. Application to Examine Bank Deposits, Accounts, and Records. – The written order of the Court of Appeals authorizing the examination of bank deposits, placements, trust accounts, assets, and records: (1) of a person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, (2) of any judicially declared and outlawed terrorist organization, association, or group of persons, or (3) of any member of such organization, association, or group of persons in a bank or financial institution, and the gathering of any relevant information about the same from said bank or financial institution, shall only be granted by the authorizing division of the Court of Appeals upon an ex parte application to that effect of a police or of a law enforcement official who has been duly authorized in writing to file such ex parte application by the Anti-Terrorism Council created in Section 53 of this Act to file such ex parte application, and upon examination under oath or affirmation of the applicant and the witnesses he may produce to establish the facts that will justify the need and urgency of examining and freezing the bank deposits, placements, trust accounts, assets, and records: (1) of the person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, (2) of a judicially declared and outlawed terrorist organization, association or group of persons, or (3) of any member of such organization, association, or group of persons. SEC. 29. Classification and Contents of the Court Order Authorizing the Examination of Bank Deposits, Accounts, and Records. – The written order granted by the authorizing division of the Court of Appeals as well as its order, if any, to extend or renew the same, the original ex parte application of the applicant, including his ex parte application to extend or renew, if any, and the written authorizations of the Anti Terrorism Council, shall be deemed and are hereby declared as classified information: Provided, That the person whose bank deposits, placements, trust accounts, assets,

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and records have been examined, frozen, sequestered and seized by law enforcement authorities has the right to be informed of the acts done by the law enforcement authorities in the premises or to challenge, if he or she intends to do so, the legality of the interference. The written order of the authorizing division of the Court of Appeals designated to handle cases involving terrorism shall specify: (a) the identity of the said: (1) person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, (2) judicially declared and outlawed terrorist organization, association, or group of persons, and (3) member of such judicially declared and outlawed organization, association, or group of persons, as the case may be, whose deposits, placements, trust accounts, assets, and records are to be examined or the information to be gathered; (b) the identity of the bank or financial institution where such deposits, placements, trust accounts, assets, and records are held and maintained; (c) the identity of the persons who will conduct the said examination and the gathering of the desired information; and, (d) the length of time the authorization shall be carried out. SEC. 30. Effective Period of Court Authorization to Examine and Obtain Information on Bank Deposits, Accounts, and Records. – The authorization issued or granted by the authorizing division of the Court of Appeals to examine or cause the examination of and to freeze bank deposits, placements, trust accounts, assets, and records, or to gather information about the same, shall be effective for the length of time specified in the written order of the authorizing division of the Court of Appeals, which shall not exceed a period of thirty (30) days from the date of receipt of the written order of the authorizing division of the Court of Appeals by the applicant police or law enforcement official. The authorizing division of the Court of Appeals may extend or renew the said authorization for another period, which shall not exceed thirty (30) days renewable to another thirty (30) days from the expiration of the original period, provided that the authorizing division of the Court of Appeals is satisfied that such extension or renewal is in the public interest, and provided further that the application for extension or renewal, which must be filed by the original applicant, has been duly authorized in writing by the AntiTerrorism Council. In case of death of the original applicant or in case he is physically disabled to file the application for extension or renewal, the one next in rank to the original applicant among the members of the team named in the original written order of the authorizing division of the Court of Appeals shall file the application for extension or renewal: Provided, That, without prejudice to the liability of the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 police or law enforcement personnel under Section 19 hereof, the applicant police or law enforcement official shall have thirty (30) days after the termination of the period granted by the Court of Appeals as provided in the preceding paragraphs within which to file the appropriate case before the Public Prosecutor’s Office for any violation of this Act. If no case is filed within the thirty (30)-day period, the applicant police or law enforcement official shall immediately notify in writing the person subject of the bank examination and freezing of bank deposits, placements, trust accounts, assets and records. The penalty of ten (10) years and one day to twelve (12) years of imprisonment shall be imposed upon the applicant police or law enforcement official who fails to notify in writing the person subject of the bank examination and freezing of bank deposits, placements, trust accounts, assets and records. Any person, law enforcement official or judicial authority who violates his duty to notify in writing as defined above shall suffer the penalty of six (6) years and one day to eight (8) years of imprisonment. SEC. 31. Custody of Bank Data and Information Obtained after Examination of Deposits, Placements, Trust Accounts, Assets and Records. – All information, data, excerpts, summaries, notes, memoranda, working sheets, reports, and other documents obtained from the examination of the bank deposits, placements, trust accounts, assets and records of: (1) a person charged with or suspected of the crime of terrorism or the crime of conspiracy to commit terrorism, (2) a judicially declared and outlawed terrorist organization, association, or group of persons, or (3) a member of any such organization, association, or group of persons shall, within forty-eight (48) hours after the expiration of the period fixed in the written order of the authorizing division of the Court of Appeals or within forty-eight (48) hours after the expiration of the extension or renewal granted by the authorizing division of the Court of Appeals, be deposited with the authorizing division of the Court of Appeals in a sealed envelope or sealed package, as the case may be, and shall be accompanied by a joint affidavit of the applicant police or law enforcement official and the persons who actually conducted the examination of said bank deposits, placements, trust accounts, assets and records. SEC. 32. Contents of Joint Affidavit. – The joint affidavit shall state: (a) the identifying marks, numbers, or symbols of the deposits, placements, trust accounts, assets, and records examined; (b) the identity and address of the bank or financial

NOTES

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institution where such deposits, placements, trust accounts, assets, and records are held and maintained; (c) the number of bank deposits, placements, trust accounts, assets, and records discovered, examined, and frozen; (d) the outstanding balances of each of such deposits, placements, trust accounts, assets; (e) all information, data, excerpts, summaries, notes, memoranda, working sheets, reports, documents, records examined and placed in the sealed envelope or sealed package deposited with the authorizing division of the Court of Appeals; (f) the date of the original written authorization granted by the Anti-Terrorism Council to the applicant to file the ex parte application to conduct the examination of the said bank deposits, placements, trust accounts, assets and records, as well as the date of any extension or renewal of the original written authorization granted by the authorizing division of the Court of Appeals; and (g) that the items enumerated were all that were found in the bank or financial institution examined at the time of the completion of the examination. The joint affidavit shall also certify under oath that no duplicates or copies of the information, data, excerpts, summaries, notes, memoranda, working sheets, reports, and documents acquired from the examination of the bank deposits, placements, trust accounts, assets and records have been made, or, if made, that all such duplicates and copies are placed in the sealed envelope or sealed package deposited with the authorizing division of the Court of Appeals. It shall be unlawful for any person, police officer or custodian of the bank data and information obtained after examination of deposits, placements, trust accounts, assets and records to copy, to remove, delete, expunge, incinerate, shred or destroy in any manner the items enumerated above in whole or in part under any pretext whatsoever. Any person who copies, removes, deletes, expunges incinerates, shreds or destroys the items enumerated above shall suffer a penalty of not less than six (6) years and one day to twelve (12) years of imprisonment. SEC. 33. Disposition of Bank Materials. – The sealed envelope or sealed package and the contents thereof, which are deposited with the authorizing division of the Court of Appeals, shall be deemed and are hereby declared classified information, and the sealed envelope or sealed package shall not be opened and its contents shall not be divulged, revealed, read, or used as evidence unless authorized in a written order of the authorizing division of the Court of Appeals, which written order shall be granted only upon a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 written application of the Department of Justice filed before the authorizing division of the Court of Appeals and only upon a showing that the Department of Justice has been duly authorized in writing by the Anti-Terrorism Council to file the application, with notice in writing to the party concerned not later than three (3) days before the scheduled opening, to open, reveal, divulge, and use the contents of the sealed envelope or sealed package as evidence. Any person, law enforcement official or judicial authority who violates his duty to notify in writing as defined above shall suffer the penalty of six (6) years and one day to eight (8) years of imprisonment. SEC. 34. Application to Open Deposited Bank Materials. – The written application, with notice in writing to the party concerned not later than three (3) days of the scheduled opening, to open the sealed envelope or sealed package shall clearly state the purpose and reason: (a) for opening the sealed envelope or sealed package; (b) for revealing and disclosing its classified contents; and, (c) for using the classified information, data, excerpts, summaries, notes, memoranda, working sheets, reports, and documents as evidence. SEC. 35. Evidentiary Value of Deposited Bank Materials. – Any information, data, excerpts, summaries, notes, memoranda, work sheets, reports, or documents acquired from the examination of the bank deposits, placements, trust accounts, assets and records of: (1) a person charged or suspected of the crime of terrorism or the crime of conspiracy to commit terrorism, (2) a judicially declared and outlawed terrorist organization, association, or group of persons, or (3) a member of such organization, association, or group of persons, which have been secured in violation of the provisions of this Act, shall absolutely not be admissible and usable as evidence against anybody in any judicial, quasi-judicial, legislative, or administrative investigation, inquiry, proceeding, or hearing. SEC. 36. Penalty for Unauthorized or Malicious Examination of a Bank or a Financial Institution. – Any person, police or law enforcement personnel who examines the deposits, placements, trust accounts, assets, or records in a bank or financial institution of: (1) a person charged with or suspected of the crime of terrorism or the crime of conspiracy to commit terrorism, (2) a judicially declared and outlawed terrorist organization, association, or group of persons, or (3) a member of such organization, association, or group of persons, without being authorized to do so by the Court of Appeals, shall be guilty of an offense and shall

NOTES

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suffer the penalty of ten (10) years and one day to twelve (12) years of imprisonment. In addition to the liability attaching to the offender for the commission of any other offense, the penalty of ten (10) years and one day to twelve (12) years of imprisonment shall be imposed upon any police or law enforcement personnel, who maliciously obtained an authority from the Court of Appeals to examine the deposits, placements, trust accounts, assets, or records in a bank or financial institution of: (1) a person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, (2) a judicially declared and outlawed terrorist organization, association, or group of persons, or (3) a member of such organization, association, or group of persons: Provided, That notwithstanding Section 33 of this Act, the party aggrieved by such authorization shall upon motion duly filed be allowed access to the sealed envelope or sealed package and the contents thereof as evidence for the prosecution of any police or law enforcement personnel who maliciously procured said authorization. SEC. 37. Penalty of Bank Officials and Employees Defying a Court Authorization. – An employee, official, or a member of the board of directors of a bank or financial institution, who refuses to allow the examination of the deposits, placements, trust accounts, assets, and records of: (1) a person charged with or suspected of the crime of terrorism or the crime of conspiracy to commit terrorism, (2) a judicially declared and outlawed terrorist organization, association, or group of persons, or (3) a member of such judicially declared and outlawed organization, association, or group of persons in said bank or financial institution, when duly served with the written order of the authorizing division of the Court of Appeals, shall be guilty of an offense and shall suffer the penalty of ten (10) years and one day to twelve (12) years of imprisonment. SEC. 38. Penalty for False or Untruthful Statement or Misrepresentation of Material Fact in Joint Affidavits. – Any false or untruthful statement or misrepresentation of material fact in the joint affidavits required respectively in Section 12 and Section 32 of this Act shall constitute a criminal offense and the affiants shall suffer individually the penalty of ten (10) years and one day to twelve (12) years of imprisonment. SEC. 39. Seizure and Sequestration. – The deposits and their outstanding balances, placements, trust accounts, assets, and records in any bank or financial institution, moneys, businesses, transportation and communication equipment, supplies and other

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 implements, and property of whatever kind and nature belonging: (1) to any person suspected of or charged before a competent Regional Trial Court for the crime of terrorism or the crime of conspiracy to commit terrorism; (2) to a judicially declared and outlawed organization, association, or group of persons; or (3) to a member of such organization, association, or group of persons shall be seized, sequestered, and frozen in order to prevent their use, transfer, or conveyance for purposes that are inimical to the safety and security of the people or injurious to the interest of the State. The accused or a person suspected of may withdraw such sums as may be reasonably needed by the monthly needs of his family including the services of his or her counsel and his or her family’s medical needs upon approval of the court. He or she may also use any of his property that is under seizure or sequestration or frozen because of his or her indictment as a terrorist upon permission of the court for any legitimate reason. Any person who unjustifiably refuses to follow the order of the proper division of the Court of Appeals to allow the person accused of the crime of terrorism or of the crime of conspiracy to commit terrorism to withdraw such sums from sequestered or frozen deposits, placements, trust accounts, assets and records as may be necessary for the regular sustenance of his or her family or to use any of his or her property that has been seized, sequestered or frozen for legitimate purposes while his or her case is pending shall suffer the penalty of ten (10) years and one day to twelve (12) years of imprisonment. SEC. 40. Nature of Seized, Sequestered and Frozen Bank Deposits, Placements, Trust Accounts, Assets and Records. – The seized, sequestered and frozen bank deposits, placements, trust accounts, assets and records belonging to a person suspected of or charged with the crime of terrorism or conspiracy to commit terrorism shall be deemed as property held in trust by the bank or financial institution for such person and the government during the pendency of the investigation of the person suspected of or during the pendency of the trial of the person charged with any of the said crimes, as the case may be and their use or disposition while the case is pending shall be subject to the approval of the court before which the case or cases are pending. SEC. 41. Disposition of the Seized, Sequestered and Frozen Bank Deposits, Placements, Trust Accounts, Assets and Record. – If the person suspected of or charged with the crime of terrorism or conspiracy to commit terrorism is found, after his investigation, to be innocent by the investigating body, or is acquitted, after his

NOTES

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arraignment or his case is dismissed before his arraignment by a competent court, the seizure, sequestration and freezing of his bank deposits, placements, trust accounts, assets and records shall forthwith be deemed lifted by the investigating body or by the competent court, as the case may be, and his bank deposits, placements, trust accounts, assets and records shall be deemed released from such seizure, sequestration and freezing, and shall be restored to him without any delay by the bank or financial institution concerned without any further action on his part. The filing of any appeal on motion for reconsideration shall not state the release of said funds from seizure, sequestration and freezing. If the person charged with the crime of terrorism or conspiracy to commit terrorism is convicted by a final judgment of a competent trial court, his seized, sequestered and frozen bank deposits, placements, trust accounts, assets and records shall be automatically forfeited in favor of the government. Upon his or her acquittal or the dismissal of the charges against him or her, the amount of Five Hundred Thousand Pesos (P500,000.00) a day for the period in which his properties, assets or funds were seized shall be paid to him on the concept of liquidated damages. The amount shall be taken from the appropriations of the police or law enforcement agency that caused the filing of the enumerated charges against him or her. SEC. 42. Penalty for Unjustified Refusal to Restore or Delay in Restoring Seized, Sequestered and Frozen Bank Deposits, Placements, Trust Accounts, Assets and Records. – Any person who unjustifiably refuses to restore or delays the restoration of seized, sequestered and frozen bank deposits, placements, trust accounts, assets and records of a person suspected of or charged with the crime of terrorism or conspiracy to commit terrorism after such suspected person has been found innocent by the investigating body or after the case against such charged person has been dismissed or after he is acquitted by a competent court shall suffer the penalty of ten (10) years and one day to twelve (12) years of imprisonment. SEC. 43. Penalty for the Loss, Misuse, Diversion or Dissipation of Seized, Sequestered and Frozen Bank Deposits, Placements, Trust Accounts, Assets and Records. – Any person who is responsible for the loss, misuse, diversion, or dissipation of the whole or any part of the seized, sequestered and frozen bank deposits, placements, trust accounts, assets and records of a person suspected of or charged with the crime of terrorism or conspiracy

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

to commit terrorism shall suffer the penalty of ten (10) years and one day to twelve (12) years of imprisonment. ix.

113

"(b) The amount and the date of the outstanding unclaimed balance and whether the same is in money or in security, and if the latter, the nature of the same;

Under the NIRC SEC. 6 (F), NIRC: Authority of the Commissioner to inquire into Bank Deposit Accounts. - Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of:

"(c) The date when the person in whose favor the unclaimed balance stands died, if known, or the date when he made his last deposit or withdrawal; and "(d) The interest due on such unclaimed balance, if any, and the amount thereof.

(1) a decedent to determine his gross estate; and "A copy of the above sworn statement shall be posted in a conspicuous place in the premises of the bank, building and loan association, or trust corporation concerned for at least sixty days from the date of filing thereof: Provided, That immediately before filing the above sworn statement, the bank, building and loan association, and trust corporation shall communicate with the person in whose favor the unclaimed balance stands at his last known place of residence or post office address.

(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. 1. 2.

x.

Upon inquiry by the CIR for the purpose of determining the net estate of a deceased depositor In case a taxpayer files an application to compromise his tax liabilities on the ground of financial incapacity (waiver required)

Under the Unclaimed Balances Law SEC. 2, ACT NO. 3936: Immediately after the taking effect of this Act and within the month of January of every odd year, all banks, building and loan associations, and trust corporations shall forward to the Treasurer of the Philippines a statement, under oath, of their respective managing officers, of all credits and deposits held by them in favor of persons known to be dead, or who have not made further deposits or withdrawals during the preceding ten years or more, arranged in alphabetical order according to the names of creditors and depositors, and showing: "(a) The names and last known place of residence or post office addresses of the persons in whose favor such unclaimed balances stand;

"It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from time to time the existence of unclaimed balances held by banks, building and loan associations, and trust corporations. DOJ OPINION NO. 104, SERIES OF 1975 xi.

Under the Rules of Court 1. Garnishment SEC. 9 (C), RULE 39: Garnishment of debts and credits. The officer may levy on debts due the judgment obligor and other credits, including bank deposits, financial interests, royalties, commissions and other personal property not capable of manual delivery in the posssession or control of third parties. Levy shall be made by serving notice upon the person owing such debts or having in his possession or control such credits to which the judgment obligor is entitled. The garnishment shall cover only such amount as will satisfy the judgment and all lawful fees. The garnishee shall make a written report to the court within five (5) days from service of the notice of garnishment stating whether or not the judgment obligor has sufficient funds or credits to satisfy the amount of the judgment. If not, the report shall state how much funds or credits the garnishee holds for the judgment obligor. The garnished amount in cash, or certified bank check issued in the name of the judgment obligee, shall be delivered directly to the judgment obligee within ten (10) working days from

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 service of notice on said garnishing requiring such delivery, except the lawful fees which shall be paid directly to the court. In the event there are two or more garnishees holding deposits or credits sufficient to satisfy the judgment, the judgment obligor, if available, shall have the right to indicate the garnishee or garnishees who shall be required to deliver the amount due; otherwise, the choice shall be made by the judgment obligee. The executing sheriff shall observe the same procedure under paragraph (a) with respect to delivery of payment to the judgment obligee.

NOTES

issued by it, so that the bank would hold the same intact and not allow any withdrawal until further order. It is clear from the discussion of the conference committee report of the 2 houses of Congress that the prohibition against examination of or inquiry into a bank deposit under RA 1405 does NOT preclude its being garnished to insure satisfaction of a judgment. There is no real inquiry in this case, and if the existence of the bank account is disclosed, the disclosure is purely incidental to the execution process. 2.

Cases CHINA BANKING CORPORATION v. ORTEGA, 49 SCRA 356 (1973) DOCTRINE: Garnishment of bank deposit judgment debtor is not violative of RA 1405. The Court merely required the cashier of the bank to inform the court whether or not the defendant had a deposit in said bank only for purposes of the garnishment issued by it, so that the bank would hold the same intact and not allow any withdrawal until further order.

To satisfy the judgment, Acaban sought the garnishment of the bank deposit of B & B Forest Development Corporation with China Banking Corporation. Accordingly, a notice of garnishment was issued and served on the bank’s cashier, Tan Kim Liong.

ISSUE Whether there was a violation of the provisions of the Bank Secrecy Law prohibiting the disclosure of any information relative to bank deposits HELD NO. The lower court did not order an examination of or inquiry into the deposit of B&B Forest Development Corporation. It merely required Tan Kim Liong to inform the court of the existence of B&B Forest Development Corporation’s deposit in said bank only for the purpose of the garnishment

Preliminary Attachment SEC. 10, RULE 57: Examination of party whose property is attached and persons indebted to him or controlling his property; delivery of property to sheriff. Any person owing debts to the party whose property is attached or having in his possession or under his control any credit or other personal property belonging to such party, may be required to attend before the court in which the action is pending, or before a commissioner appointed by the court, and be examine on oath respecting the same. The party whose property is attached may also be required to attend for the purpose of giving information respecting his property, and may be examined on oath. The court may, after such examination, order personal property capable of manual delivery belonging to him, in the possession of the person so required to attend before the court, to be delivered to the clerk of the court or sheriff on such terms as may be just, having reference to any lien thereon or claim against the same, to await the judgment in the action.

FACTS In 1968, Acaban filed a complaint against Bautista Logging Co., Inc., B & B Forest Development Corporation and Marino Bautista for the collection of sum of money. RTC declared the defendants in default for failure to file their responsive pleadings within the reglementary period.

In reply, Tan Kim Liong invoked the provisions of the Bank Secrecy Law prohibiting the disclosure of any information relative to bank deposits. RTC, in denying Acaban’s motion to cite Tan Kim Liong in contempt, nevertheless ordered the latter to inform the court whether or not there is a deposit with China Banking Corporation of B & B Forest Development Corporation, and if any, to hold the same intact and not to allow any withdrawal until further orders.

114

d.

Penalty for Violation SEC. 5, LAW ON SECRECY OF BANK DEPOSITS: Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

3. Rules for Foreign Currency Deposits a. Coverage SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign currency deposits authorized under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative, or any other

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 entity whether public or private; Provided, however, That said foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (As amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977.) Cases SALVACION v. CENTRAL BANK, 278 SCRA 27 (1997) DOCTRINE: Sec. 113 of CB Circular No. 960, which exempts from garnishment, attachment or any other order or process of any court, legislative body, government agency or any administrative body whatsoever foreign currency deposits, is NOT applicable to a foreign transient, but only to foreign lenders and investors to the development of the Foreign Currency Deposit System and Offshore Banking System in the Philippines. FACTS On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed and lured petitioner Karen Salvacion, then 12 years old to go with him to his apartment. Therein, Greg Bartelli detained Karen Salvacion for four days, or up to February 7, 1989 and was able to rape the child. Greg was eventually apprehended but he escaped from detention. The Deputy Sheriff of Makati served a Notice of Garnishment on China Banking Corporation. In a letter dated March 13, 1989 to the Deputy Sheriff of Makati, China Banking Corporation invoked Republic Act No. 1405 as its answer to the notice of garnishment served on it. On March 15, 1989, Deputy Sheriff of Makati Armando de Guzman sent his reply to China Banking Corporation saying that the garnishment did not violate the secrecy of bank deposits since the disclosure is merely incidental to a garnishment properly and legally made by virtue of a court order which has placed the subject deposits in custodia legis. In answer to this letter of the Deputy Sheriff of Makati, China Banking Corporation, in a letter dated March 20, 1989, invoked Section 113 of Central Bank Circular No. 960 to the effect that the dollar deposits of defendant Greg Bartelli are exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body, whatsoever. After hearing the case ex-parte, the court rendered judgment in favor of petitioners on March 29, 1990. But China Bank still refuses to garnish the foreign denominated deposits of Greg. ISSUE Should Section 113 of Central Bank Circular No. 960 and Section 8 of R.A. 6426, as amended by P.D. 1246, otherwise known as the Foreign Currency

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Deposit Act be made applicable to a foreign transient? RULING NO. If Karen's sad fate had happened to anybody's own kin, it would be difficult for him to fathom how the incentive for foreign currency deposit could be more important than his child's rights to said award of damages; in this case, the victim's claim for damages from this alien who had the gall to wrong a child of tender years of a country where he is a mere visitor. This further illustrates the flaw in the questioned provisions. It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the country's economy was in a shambles; when foreign investments were minimal and presumably, this was the reason why said statute was enacted. But the realities of the present times show that the country has recovered economically; and even if not, the questioned law still denies those entitled to due process of law for being unreasonable and oppressive. The intention of the questioned law may be good when enacted. The law failed to anticipate the iniquitous effects producing outright injustice and inequality such as the case before us. b.

Prohibition SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign currency deposits authorized under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative, or any other entity whether public or private; Provided, however, That said foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (As amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977.)

c.

Exceptions i. Upon written consent of the depositor SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign currency deposits authorized under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative, or any other entity whether public or private; Provided,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 however, That said foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (As amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977.) Cases CHINA BANKING CORP. v. CA, 511 SCRA 110 (2006) DOCTRINE: The only exception to the secrecy of foreign currency deposits is in the case of a written permission of the depositor. FACTS A Complaint for recovery of sums of money and annulment of sales of real properties and shares of stocks was filed by Jose "Joseph" Gotianuy against his son-in-law, George Dee, and his daughter, Mary Margaret Dee, before the RTC. Jose Gotianuy accused his daughter Mary Margaret Dee of stealing, among his other properties, US dollar deposits with Citibank N.A. amounting to not less than P35,000,000.00 and US$864,000.00. Mary Margaret Dee received these amounts from Citibank N.A. through checks which she allegedly deposited at China Banking Corporation (China Bank). He likewise accused his son-in-law, George Dee, husband of his daughter, Mary Margaret, of transferring his real properties and shares of stock in George Dee's name without any consideration. Jose Gotianuy, died during the pendency of the case before the trial court.1 He was substituted by his daughter, Elizabeth Gotianuy Lo. The latter presented the US Dollar checks withdrawn by Mary Margaret Dee from his US dollar placement with Citibank The lower court issued a subpoena ad testificandum requiring MS. ISABEL YAP and CRISTOTA LABIOS of China Banking Corporation, Cebu Main Branch, corner Magallanes and D. Jakosalem Sts., Cebu City, to appear in person and to testify with regards to Citibank Checks and other matters material and relevant to the issues of this case The petitioner moved for reconsideration and contends (amongst others) that the absolute confidentiality under the law covers even the name of the depositor and is beyond the compulsive process of the courts. The CA ruled against the petitioner for the reason amongst others that. “The contention of petitioner that the [prescription] on absolute confidentiality under the law in question covers even the name of the depositor and is beyond the compulsive process of the courts is palpably untenable as the law protects only the deposits itself but not the name of the depositor. To uphold the theory of petitioner CBC is reading into the statute "something that is not within the manifest intention of the legislature as gathered from the statute itself, for to depart from the meaning

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expressed by the words, is to alter the statute, to legislate and not to interpret, and judicial legislation should be avoided.” ISSUE Whether petitioner China Bank is correct in its submission that the Citibank dollar checks with both Jose Gotianuy and/or Mary Margaret Dee as payees, deposited with China Bank, may not be looked into under the law on secrecy of foreign currency deposits. As a corollary issue, sought to be resolved is whether Jose Gotianuy may be considered a depositor who is entitled to seek an inquiry over the said deposits. RULING As amended by Presidential Decree No. 1246, the law reads: SEC. 8. Secrecy of Foreign Currency Deposits. – All foreign currency deposits authorized under this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall such foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative or any other entity whether public or private: Provided, however, that said foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (As amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977) (Emphasis supplied.) Under the above provision, the law provides that all foreign currency deposits authorized under Republic Act No. 6426, as amended by Sec. 8, Presidential Decree No. 1246, Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034 are considered absolutely confidential in nature and may not be inquired into. There is only one exception to the secrecy of foreign currency deposits, that is, disclosure is allowed upon the written permission of the depositor. The following facts are established: (1) Jose Gotianuy and Mary Margaret Dee are co-payees of various Citibank checks; (2) Mary Margaret Dee withdrew these checks from Citibank; (3) Mary Margaret Dee admitted in her Answer to the Request for Admissions by the Adverse Party sent to her by Jose Gotianuy that she withdrew the funds from Citibank upon the instruction of her father Jose Gotianuy and that the funds belonged exclusively to the latter; (4) these checks were endorsed by Mary Margaret Dee at the dorsal portion; and (5) Jose Gotianuy discovered that these checks were deposited with China Bank as shown by the stamp of China Bank at the dorsal side of the checks. Thus, with this, there is no issue as to the source of the funds

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

As the owner of the funds unlawfully taken and which are undisputably now deposited with China Bank, Jose Gotianuy has the right to inquire into the said deposits.

iii.

A depositor, in cases of bank deposits, is one who pays money into the bank in the usual course of business, to be placed to his credit and subject to his check or the beneficiary of the funds held by the bank as trustee. Furthermore, it is indubitable that the Citibank checks were drawn against the foreign currency account with Citibank, NA. The monies subject of said checks originally came from the late Jose Gotianuy, the owner of the account. Thus, he also has legal rights and interests in the CBC account where said monies were deposited. More importantly, the Citibank checks readily demonstrate that the late Jose Gotianuy is one of the payees of said checks. Being a co-payee thereof, then he or his estate can be considered as a co-depositor of said checks. Ergo, since the late Jose Gotianuy is a codepositor of the CBC account, then his request for the assailed subpoena is tantamount to an express permission of a depositor for the disclosure of the name of the account holder. The April 16, 1999 Order perforce must be sustained. One more point. It must be remembered that in the complaint of Jose Gotianuy, he alleged that his US dollar deposits with Citibank were illegally taken from him. On the other hand, China Bank employee Cristuta Labios testified that Mary Margaret Dee came to China Bank and deposited the money of Jose Gotianuy in Citibank US dollar checks to the dollar account of her sister Adrienne Chu. This fortifies our conclusion that an inquiry into the said deposit at China Bank is justified. At the very least, Jose Gotianuy as the owner of these funds is entitled to a hearing on the whereabouts of these funds. ii.

Under the AMLA 1. Upon order of a competent court 2. BSP inquiry or examination SEC. 11, AMLA: Authority to Inquire into Bank Deposits. Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non- bank financial institution upon order of any competent court in cases of violation of this Act when it has been established that there is probable cause that the deposits or investments involved are in any way related to a money laundering offense: Provided, That this provision shall not apply to deposits and investments made prior to the effectivity of this Act.

d.

117

Under the PDIC Charter SEC. 8, PAR. 8, PDIC CHARTER: The Corporation as a corporate body shall have the power To conduct examination of banks with prior approval of the Monetary Board: Provided, That no examination can be conducted within twelve (12) months from the last examination date: Provided, however, That the Corporation may, in coordination with the Bangko Sentral, conduct a special examination as the Board of Directors, by an affirmative vote of a majority of all of its members, if there is a threatened or impending closure of a bank; Provided, further, That, notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other laws, the Corporation and/or the Bangko Sentral, may inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe or unsound banking practice; Provided, finally, That to avoid overlapping of efforts, the examination shall maximize the efficient use of the relevant reports, information, and findings of the Bangko Sentral, which it shall make available to the Corporation; (As amended by R.A. 9302, 12 August 2004, R.A. 9576,29 April 2009)

Penalty for Violation SEC. 10, FCDA: Penal provisions. – Any willful violation of this Act or any regulation duly promulgated by the Monetary Board pursuant hereto shall subject the offender upon conviction to an imprisonment of not less than one year nor more than five years or a fine of not less than five thousand pesos nor more than twenty-five thousand pesos, or both such fine and imprisonment at the discretion of the court.

4. Rules for Deposits in Specific Banks and Financial Institutions a. Under the GBL SEC. 55.1 (B), GBL: No director, officer, employee, or agent of any bank shall, without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; b.

Islamic Banks SEC. 33, ISLAMIC BANK CHARTER: Confidential Information. Banking transactions relating to all deposits of whatever nature are confidential and may not be examined, inquired or looked into by any person, government official, bureau or office except as provided in the preceding section, or upon written permission by the depositor, or in cases where the money deposited or the transaction concerned is the subject of a court order.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 It shall be unlawful for any official or employee of the Islamic Bank or any person as may be designated by the Board of Director to examine or audit the books of the Bank to disclose or reveal to any person any confidential information except under the circumstances mentioned in the preceding paragraph. SEC. 45, ISLAMIC BANK CHARTER: Penalties for Violation. - Any director, officer, employee, auditor, or agent of the Islamic Bank who violates or permits the violation of any provision of this Act shall be punished by a fine not exceeding Ten thousand pesos (P10,000.00) or an imprisonment of not more than five (5) years, or both at the discretion of the court.

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or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of litigation. It shall be unlawful for any official or employee of an Association to disclose to any person any information concerning said deposits, except in the cases mentioned in the preceding paragraph of this section. Any official or employee of an Association who violates this section shall be punished under Republic Act No. 1405, as amended. G. GARNISHMENT

c.

Rural Banks SEC. 26 (A) (2), RURAL BANKS ACT: Without prejudice to any prosecution under any law which may have been violated, a fine of not more than Ten thousand pesos (P10,000), or imprisonment for not less than six (6) months but more than ten (10) years, or both, at the discretion of the court, shall be imposed upon. (a) Any officer, employee, or agent of a rural bank who shall: (2) Without order of a court of competent jurisdiction, disclose any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity;

d.

Thrift Banks SEC. 21 (A) (2), THRIFT BANKS ACT: Prohibited Acts. — Without prejudice to any prosecution under any law which may have been violated, a fine of not more than Ten thousand pesos (P10,000) or imprisonment for not less than six (6) months but not more than ten (10) years, or both, at the discretion of the court, shall be imposed upon: (a) Any officer, employee, or agent of a thrift bank who shall: (2) Without order of a court of competent jurisdiction, disclose any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity;

1. Procedure SEC. 9 (C), RULE 39 OF RULES OF COURT: Garnishment of debts and credits. - The officer may levy on debts due the judgment obligor and other credits, including bank deposits, financial interests, royalties, commissions and other personal property not capable of manual delivery in the posssession or control of third parties. Levy shall be made by serving notice upon the person owing such debts or having in his possession or control such credits to which the judgment obligor is entitled. The garnishment shall cover only such amount as will satisfy the judgment and all lawful fees. The garnishee shall make a written report to the court within five (5) days from service of the notice of garnishment stating whether or not the judgment obligor has sufficient funds or credits to satisfy the amount of the judgment. If not, the report shall state how much funds or credits the garnishee holds for the judgment obligor. The garnished amount in cash, or certified bank check issued in the name of the judgment obligee, shall be delivered directly to the judgment obligee within ten (10) working days from service of notice on said garnishing requiring such delivery, except the lawful fees which shall be paid directly to the court. In the event there are two or more garnishees holding deposits or credits sufficient to satisfy the judgment, the judgment obligor, if available, shall have the right to indicate the garnishee or garnishees who shall be required to deliver the amount due; otherwise, the choice shall be made by the judgment obligee. The executing sheriff shall observe the same procedure under paragraph (a) with respect to delivery of payment to the judgment obligee.

e.

Non-Stock Savings and Loan Association SEC. 6, REVISED NON-STOCK SAVINGS AND LOANS ASSOCIATION ACT OF 1997: Prohibition against inquiry into or disclosure of deposits. — All deposits of whatever nature with an Association in the Philippines are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery

2. Exempt Deposits a. Foreign Currency Deposits SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign currency deposits authorized under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 office whether judicial or administrative or legislative, or any other entity whether public or private; Provided, however, That said foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (As amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977.) b.

Under the Rules of Court SEC. 13, RULE 39 OF RULES OF COURT: Property exempt from execution. Except as otherwise expressly provided by law, the following property, and no other, shall be exempt from execution: (a) The judgment obligor's family home as provided by law, or the homestead in which he resides, and land necessarily used in connection therewith; (b) Ordinary tools and implements personally used by him in hs trade, employment, or livelihood; (c) Three horses, or three cows, or three carabaos, or other beasts of burden such as the judgment obligor may select necessarily used by him in his ordinary occupation; (d) His necessary clothing and articles for ordinary personal use, excluding jewelry; (e) Household furniture and utensils necessary for housekeeping, and used for that purpose by the judgment obligor and his family, such as the judgment obligor may select, of a value not exceeding one hundred thousand pesos; (f) Provisions for individual or family use sufficient for four months; (g) The professional libraries and equipment of judges, lawyers, physicians, pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other professionals, not exceeding three hundred thousand pesos in value; (h) One fishing boat and accessories not exceeding the total value of one hundred thousand pesos owned by a fisherman and by the lawful use of which he earns his livelihood;

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(i) So much of the salaries, wages, or earnings of the judgment obligor of his personal services within the four months preceding the levy as are necessary for the support of his family; (j) Lettered gravestones; (k) Monies benefits, privileges, or annuities accruing or in any manner growing out of any life insurance; (l) The right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the Government; (m) Properties specially exempt by law. But no article or species of property mentioned in his section shall be exempt from executio issued upon a judgment recovered for its price or upon a judgment of foreclosure of a mortgage thereon. 3. No violation of Law on Secrecy of Bank Deposits Cases CHINA BANKING v. ORTEGA, 49 SCRA 356 (1973) The prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank. PCI BANK v. CA, 193 SCRA 452 (1991) It is clear from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 4. Liability for Release Cases RCBC v. DE CASTRO. 168 SCRA 49 (1988) FACTS In connection with a civil case between Badoc Planters Inc(BADOC) vs. Philippine Virginia Tobacco Administration (PVTA) et al, an action for recovery of unpaid tobacco deliveries, the Judge issued a partial order, directing PVTA to pay plaintiff BADOC. BADOC filed a motion to for a writ of execution, which was granted on the same day. The sheriff then issued a Notice of Garnishment addressed to RCBC asking if PVTA had any proterty in the possession RCBC. to which RCBC replied in the affirmative. PVTA was notified by RCBC of such notice. Later on the Judge issued and order directing RCBC to ""to deliver in check the amount garnished to the Sheriff and the Sheriff in turn is ordered to cash the check and deliver the amount to BADOC". RCBC complied with the order, the check was issued, delivered to the Sheriff, and subsequently encashed. PVTA however filed an MR assailing the execution. The court granted the MR, invalidated the execution, and ordered RCBC and BADOC to jointly and severally restore the account of PVTA. ISSUE Whether RCBC is liable to restore the account of PVTA HELD NO. RCBC merely obeyed a mandatory directive from the respondent Judge, ordering it "to deliver in check the amount garnished to the Sheriff and the Sheriff is in turn ordered to cash the check and deliver the amount to BADOC." As to the allegation by PVTA that RCBC was negligent in prematurely releasing its funds. The court held that the contention by PVTA was without merit since RCBC was expressly ordered by the court to deliver and encash the check. RCBC had already filed a reply to the Notice of Garnishment stating that it had in its custody funds belonging to the PVTA. Also, RCBC promptly notified PVTA of the existence of the Notice of Garnishment. It is important to stress, at this juncture, that there was nothing irregular in the delivery of the funds of PVTA by check to the sheriff, whose custody is equivalent to the custody of the court, he being a court officer. The order of the court was composed of two parts, requiring: 1) RCBC to deliver in check the amount garnished to the designated sheriff and 2) the sheriff in turn to cash the check and deliver the amount to the plaintiffs representative and/or counsel on record. It must be noted that in delivering the garnished

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amount in check to the sheriff, the RCBC did not thereby make any payment, for the law mandates that delivery of a check does not produce the effect of payment until it has been cashed. [Article 1249, Civil Code.] Moreover, by virtue of the order of garnishment, the same was placed in custodia legis and therefore, from that time on, RCBC was holding the funds subject to the orders of the court a quo. That the sheriff, upon delivery of the check to him by RCBC encashed it and turned over the proceeds thereof to the plaintiff was no longer the concern of RCBC as the responsibility over the garnished funds passed to the court. Thus, no breach of trust or dereliction of duty can be attributed to RCBC in delivering its depositor's funds pursuant to a court order, which was merely in the exercise of its power of control over such funds. The bank had no choice but to comply with the order demanding delivery of the garnished amount in check. The very tenor of the order called for immediate compliance therewith. On the other hand, the bank cannot be held liable for the subsequent encashment of the check as this was upon order of the court in the exercise of its power of control over the funds placed in custodia legis by virtue of the garnishment.

H. DEPOSIT INSURANCE 1. Coverage SEC. 5, PDIC CHARTER: The deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits as herein defined on the effective date of this Act, or which thereafter may engage in the business of receiving deposits, shall be insured with the Corporation. (As amended by R.A. 6037, 04 August 1969; renumbered from Sec. 4 by R.A. 9302, 12 August 2004) SEC. 9, FCDA: Deposit insurance coverage. – The deposits under this Act shall be insured under the provisions of Republic Act No. 3591, as amended (Philippine Deposit Insurance Corporation), as well as its implementing rules and regulations: Provided, That insurance payment shall be in the same currency in which the insured deposits are denominated. 2. Amount Insured SEC. 4 (G), PDIC CHARTER: The term “insured deposit” means the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed Five Hundred Thousand Pesos (P500,000.00).2 Such net amount shall be determined according to such regulations as the Board of Directors may prescribe. In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 capacity for his benefit either in his own name or in the name of others. A joint account regardless of whether the conjunction "and," "or," "and/or" is used, shall be insured separately from any individuallyowned deposit account: Provided, That (1) If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit, and (2) if the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity: Provided, further, That the aggregate of the interest of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of Five Hundred Thousand Pesos (P500,000.00): Provided, furthermore, That the provisions of any law to the contrary notwithstanding, no owner/holder of any negotiable certificate of deposit shall be recognized as a depositor entitled to the rights provided in this Act unless his name is registered as owner/holder thereof in the books of the issuing bank: Provided, finally, That, in case of a condition that threatens the monetary and financial stability of the banking system that may have systemic consequences, as defined in section 17 hereof, as determined by the Monetary Board, the maximum deposit insurance cover may be adjusted in such amount, for such a period, and/or for such deposit products, as may be determined by a unanimous vote of the Board of Directors in a meeting called for the purpose and chaired by the Secretary of Finance, subject to the approval of the President of the Philippines. (As amended by R.A. 9302, 12 August 2004; R.A. 9576, 2009) 3. Rules on Payment SEC. 10 (B), PDIC CHARTER: REPEALED ALREADY. For purposes of this Act an insured bank shall be deemed to have been closed on account of insolvency when ordered closed by the Monetary Board of the Central Bank of the Philippines pursuant to Section 29 of R.A. 265, as amended. SEC. 10 (C), PDIC CHARTER: Whenever an insured bank shall have been closed by the Monetary Board pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank shall be made by the Corporation as soon as possible either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor: Provided, however, That the Corporation, in its discretion, may require proof of claims to be filed before paying the insured deposits, and that in any case where the Corporation is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of

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competent jurisdiction before paying such claim: Provided, further, That failure to settle the claim, within six (6) months from the date of filing of claim for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction, subject the directors, officers or employees of the Corporation responsible for the delay, to imprisonment from six (6) months to one (1) year: Provided, furthermore, That the period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by Corporation together with such other office, body or agency." SEC. 10 (D), PDIC CHARTER: The Corporation, upon payment of any depositor as provided for in subsection (c) of this Section3, shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment. Such subrogation shall include the right on the part of the Corporation to receive the same dividends and payments from the proceeds of the assets of such closed bank and recoveries on account of stockholders’ liability as would have been payable to the depositor on a claim for the insured deposits but, such depositor shall retain his claim for any uninsured portion of his deposit. All payments by the Corporation of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code: Provided, further, That this preference shall be likewise effective upon liquidation proceedings already commenced and pending as of the approval of this Act, where no distribution of assets has been made. (As amended by P.D. 1940, 27 June 1984; R.A. 7400, 13 April 1992; renumbered from Sec. 10(d) by R.A. 9302, 12 August 2004) 4. Liability of PDIC Cases PDIC v. CA FACTS Rosa Aquero (and 8 others) invested in money market placements with the Premiere Financing Corporation (Premiere) in the sum of P10,000.00 each for which they were issued by the PFC corresponding promissory notes and checks. Their lawyer, on the same day, went to PFC to encash, but they were referred to Regent savings Bank (Regent). Instead of paying these, Regent, in an agreement with the lawyer, issued 13 Certificates of Time Deposit (CTD), each stating that "that the same certifies that the bearer thereof has deposited with the RSB the sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the certificate is INSURED up to P15,000.00 with the PDIC". Regent was not able to pay on maturity. In fact, the Central bank liquidated

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Regent. When Aquero et al filed a claim with the PDIC, it was rejected since the check (125k) that Premiere had issued in consideration for the CTDs had bounced;and said check was not replaced by the Premiere, resulting in the cancellation of the certificates as indebtedness or liabilities of Regent. Thus this collection case against PDIC. ISSUES 1) Are the CTDs negotiable instrument, and does it matter? 2) Does the fact that the CTDs state that the same were insured by the PDIC make PDIC liable? 3) Were the CTDs issued for consideration, and if not, what is the consequence? HELD 1) It doesn't matter. Whether the CTDs in question are negotiable or not is immaterial in the present case. The Philippine Deposit Insurance Corporation was created by law and, as such, is governed primarily by the provisions of the special law creating it. The liability of the PDIC for insured deposits therefore is statutory and such liability rests upon the existence of deposits with the insured bank, not on the negotiability or non-negotiability of the certificates evidencing these deposits.

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Philippines to be used as the National Assembly may direct. "Banks", "building and loan associations" and "trust corporations", within the meaning of this Act, shall refer to institutions defined under Section two, thirty-nine and fifty-six, respectively, of Republic Act Numbered Three Hundred Thirty Seven, otherwise known as the General Banking Act, as amended, whether organized under special charters or not. 2. Report to Treasurer; Notice, Posting, Publication SEC. 2, UNCLAIMED BALANCES LAW: Immediately after the taking effect of this Act and within the month of January of every odd year, all banks, building and loan associations, and trust corporations shall forward to the Treasurer of the Philippines a statement, under oath, of their respective managing officers, of all credits and deposits held by them in favor of persons known to be dead, or who have not made further deposits or withdrawals during the preceding ten years or more, arranged in alphabetical order according to the names of creditors and depositors, and showing: "(a) The names and last known place of residence or post office addresses of the persons in whose favor such unclaimed balances stand;

2) NO. the deposit liability of PDIC is determined by the provisions of the law that created it, RA 3519, and statements in the certificates that the same are insured by PDIC are not binding upon the latter.

"(b) The amount and the date of the outstanding unclaimed balance and whether the same is in money or in security, and if the latter, the nature of the same;

3) NO consideration. PDIC not liable. In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. The problem is that Regent did not receive anything in consideration for the CTDs it issued, since the check representing the vale of the CTDs (issued by Premiere) bounced; therefore no deposit ever came into existence. Accordingly, there is nothing here for PDIC to insure.

"(c) The date when the person in whose favor the unclaimed balance stands died, if known, or the date when he made his last deposit or withdrawal; and

I. UNCLAIMED BALANCES 1. Definition SEC. 1, UNCLAIMED BALANCES LAW: "Unclaimed balances", within the meaning of this Act, shall include credits or deposits of money, bullion, security or other evidence of indebtedness of any kind, and interest thereon with banks, buildings and loan associations, and trust corporations, as hereinafter defined, in favor of any person known to be dead or who has not made further deposits or withdrawals during the preceding ten years or more. Such unclaimed balances, together with the increase and proceeds thereof, shall be deposited with the Treasurer of the Philippines to the credit of the Government of the Republic of the

"(d) The interest due on such unclaimed balance, if any, and the amount thereof. "A copy of the above sworn statement shall be posted in a conspicuous place in the premises of the bank, building and loan association, or trust corporation concerned for at least sixty days from the date of filing thereof: Provided, That immediately before filing the above sworn statement, the bank, building and loan association, and trust corporation shall communicate with the person in whose favor the unclaimed balance stands at his last known place of residence or post office address. "It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from time to time the existence of unclaimed balances held by banks, building and loan associations, and trust corporations.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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Cases Republic v. CA, 345 SCRA 63 (2000) FACTS On December 28, 1988, a complaint for escheat filed by petitioner, Republic of the Philippines, with the Regional Trial Court of Davao City against several banks which had branches within the jurisdiction of the said court.

of unclaimed balances would only result in additional and unnecessary expense to the government.

The complaint alleged that pursuant to Act No. 3936 as amended by P.D. 679, the respective managers of the defendant banks submitted to the Treasurer of the Republic of the Philippines separate statements prepared under oath which listed all deposits and credits held by them in favor of depositors or creditors either known to be dead, have not been heard from, or have not made depositors or withdrawals for ten years or more since December 31, 1970.

Petitioner filed with the Court of Appeals a petition for mandamus and certiorari, which was also dismissed.

The complaint prayed that after due notice to the defendant banks, and after hearing, judgment be rendered declaring that the deposits, credits and unpaid balances in question be escheated to petitioner, commanding defendant banks to forthwith deposit the same with the Treasurer of the Philippines. The lower court issued an order directing petitioner to show cause why the complaint should not be dismissed for failure to state a cause of action. According to the order, the complaint contained no allegation that defendant banks have complied with two of the conditions in Section 2 of Act No. 3936, compliance with the requirements being necessary for the complaint to prosper Petitioner submitted amended complaint prayed that judgment be rendered ordering that the amount of P97,263.38, deposited with the defendant banks by depositors who are known to be dead or have not made further deposits or withdrawals during the preceding ten years or more be escheated in favor of the Republic of the Philippines. The trial court found the amendment sufficient and issued an order requiring petitioner to publish a notice in the Mindanao Forum Standard once a week for two consecutive weeks, containing the summons, notice to the public, the amended petition incorporated in the summons and the list of unclaimed balances. The notice was estimated to occupy 27 pages of the said newspaper at an estimated cost of P50,000.00. On July 11, 1989, petitioner submitted a manifestation to the lower court praying that the publication of the list of the unclaimed balances be dispensed with. Petitioner posited that under Section 3, Act No. 3936, only the following are required to be published: (1) summons to respondent banks; and (2) notice to all persons other than those named defendants therein. Petitioner submitted that to require it to publish the names and list

The court however issued an order that if petitioner fails to comply with the publication of unclaimed balances as already ordered, the petition shall be dismissed.

ISSUE (1) Whether or not respondent RTC judge committed grave abuse of discretion tantamount to lack of jurisdiction in ordering the publication of the list of unclaimed balances listed under annexes “A” to “P” of the complaint. HELD The petition is without merit. The publication of the list of unclaimed balances is intended to safeguard the right of the depositors, their heirs and successors to due process. This was made clear by the lower court in its assailed Order, to wit: Moreover, how would other persons who may have an interest in any of the unclaimed balances know what this case is all about and whether they have an interest in this case if the amended complaint and list of unclaimed balances are not published? Such other persons may be heirs of the bank depositors named in the list of unclaimed balances. xxx The fact that the government is in a tight financial situation is not a justification for this Court to dispense with the elementary rule of due process. As declared by the trial court in its Order dated August 1, 1989, the dismissal of the petition for escheat is without prejudice. In other words, the State can refile the said petition, notwithstanding the lapse of time. Prescription of action does not run against the government. WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated August 14, 1990 is AFFIRMED. SO ORDERED. 3. Escheat Proceedings SEC. 3, UNCLAIMED BALANCES LAW: Whenever the Solicitor General shall be informed of such unclaimed balances, he shall commence an

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 action or actions in the name of the People of the Republic of the Philippines in the Court of First Instance of the province or city where the bank, building and loan association or trust corporation is located, in which shall be joined as parties the bank, building and loan association or trust corporation and all such creditors or depositors. All or any of such creditors or depositors or banks, building and loan association or trust corporations may be included in one action. Service of process in such action or actions shall be made by delivery of a copy of the complaint and summons to the president, cashier, or managing officer of each defendant bank, building and loan association or trust corporation and by publication of a copy of such summons in a newspaper of general circulation, either in English, in Filipino, or in a local dialect, published in the locality where the bank, building and loan association or trust corporation is situated, if there be any, and in case there is none, in the City of Manila, at such time as the court may order. Upon the trial, the court must hear all parties who have appeared therein, and if it be determined that such unclaimed balances in any defendant bank, building and loan association or trust corporation are unclaimed as hereinbefore stated, then the court shall render judgment in favor of the Government of the Republic of the Philippines, declaring that said unclaimed balances have escheated to the Government of the Republic of the Philippines and commanding said bank, building and loan association or trust corporation to forthwith deposit the same with the Treasurer of the Philippines to credit of the Government of the Republic of the Philippines to be used as the National Assembly may direct. "At the time of issuing summons in the action above provided for, the clerk of court shall also issue a notice signed by him, giving the title and number of said action, and referring to the complaint therein, and directed to all persons, other than those named as defendants therein, claiming any interest in any unclaimed balance mentioned in said complaint, and requiring them to appear within sixty days after the publication or first publication, if there are several, of such summons, and show cause, if they have any, why the unclaimed balances involved in said action should not be deposited with the Treasurer of the Philippines as in this Act provided and notifying them that if they do not appear and show cause, the Government of the Republic of the Philippines will apply to the court for the relief demanded in the complaint. A copy of said notice shall be attached to, and published with the copy of, said summons required to be published as above, and at the end of the copy of such notice so published, there shall be a statement of the date of publication, or first publication, if there are several, of said summons and notice. Any person interested may appear in said action and become a party thereto. Upon the publication or the completion of the publication, if there are several, of the summons and notice, and the service of the summons on the defendant banks, building and loan associations or trust corporations, the court shall have

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full and complete jurisdiction in the Republic of the Philippines over the said unclaimed balances and over the persons having or claiming any interest in the said unclaimed balances, or any of them, and shall have full and complete jurisdiction to hear and determine the issues herein, and render the appropriate judgment thereon. 4. Effects of Compliance/Non-Compliance SEC. 4, UNCLAIMED BALANCES LAW: If the president, cashier or managing officer of the bank, building and loan association, or trust corporation neglects or refuses to make and file the sworn statement required by this action, such bank, building and loan association, or trust corporation shall pay to the Government the sum of five hundred pesos a month for each month or fraction thereof during which such default shall continue. SEC. 5, UNCLAIMED BALANCES LAW: Any bank, building and loan association or trust corporation which shall make any deposit with the Treasurer of the Philippines in conformity with the provisions of this Act shall not thereafter be liable to any person for the same and any action which may be brought by any person against in any bank, building and loan association, or trust corporation for unclaimed balances so deposited with the Treasurer of the Philippines shall be defended by the Solicitor General without cost to such bank, building and loan association or trust corporation."

J. ANTI-MONEY LAUNDERING ACT 1. Declared Policy SEC. 2, AMLA: Declaration of Policy. - It is hereby declared the policy of the State to protect and preserve the integrity and confidentiality of bank accounts and to ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity. Consistent with its foreign policy, the State shall extend cooperation in transnational investigations and prosecutions of persons involved in money laundering activities wherever committed. 2. Covered Transactions SEC. 3 (B), AMLA: "Covered transaction" is a single, series, or combination of transactions involving a total amount in excess of Four million Philippine pesos (Php4,000,000.00) or an equivalent amount in foreign currency based on the prevailing exchange rate within five (5) consecutive banking days except those between a covered institution and a person who, at the time of the transaction was a properly identified client and the amount is commensurate with the business or financial capacity of the client; or those with an underlying legal or trade obligation, purpose, origin or economic justification.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

It likewise refers to a single, series or combination or pattern of unusually large and complex transactions in excess of Four million Philippine pesos (Php4,000,000.00) especially cash deposits and investments having no credible purpose or origin, underlying trade obligation or contract. 3. Suspicious Transactions SEC. 3 (B-1), AMLA: SEC. 3 (B), AMLA: "Covered transaction" is a single, series, or combination of transactions involving a total amount in excess of Four million Philippine pesos (Php4,000,000.00) or an equivalent amount in foreign currency based on the prevailing exchange rate within five (5) consecutive banking days except those between a covered institution and a person who, at the time of the transaction was a properly identified client and the amount is commensurate with the business or financial capacity of the client; or those with an underlying legal or trade obligation, purpose, origin or economic justification. 4. Covered Institutions SEC. 3 (A), AMLA: "Covered Institution" refers to: 1. banks, non-banks, quasi-banks, trust entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP); 2.

insurance companies and all other institutions regulated by the Insurance Commission; and

supervised

or

3.

securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant, (ii) mutual funds, close and investment companies, common trust funds, pre-need companies and other similar entities, (iii) foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities, and (iv) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by Securities and Exchange Commission.

5. Obligations of Covered Institutions SEC. 9, AMLA: Prevention of Money Laundering; Customer Identification Requirements and Record Keeping. 1.

Customer Identification. - Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well

125

as the authority and identification of all persons purporting to act on their behalf. The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts. 2.

Record Keeping. -All records of all transactions of covered institutions shall be maintained and safely stored for five (5) years from the date of transactions. With respect to closed accounts, the records on customer identification, account files and business correspondence, shall be preserved and safely stored for at least five (5) years from the dates when they were closed.

3.

Reporting of Covered report to the AMLC all days from occurrence concerned prescribes working days.

Transactions. - Covered institutions shall covered transactions within five (5) working thereof, unless the Supervising Authority a longer period not exceeding ten (10)

When reporting covered transactions to the AMLC, covered institutions and their officers, employees, representatives, agents, advisors, consultants or associates shall not be deemed to have violated Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791 and other similar laws, but are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person the fact that a covered transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned officer, employee, representative, agent, advisor, consultant or associate of the covered institution, shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any person for having made a covered transaction report in the regular performance of his duties and in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other Philippine law. When reporting covered transactions to the AMLC, covered institutions and their officers, employees, representatives, agents, advisors, consultants or associates are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person, entity, the media, the fact that a covered transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 violation thereof, the concerned officer, employee, representative, agent, advisor, consultant or associate of the covered institution, or media shall be held criminally liable. a. Customer Identification b. Record Keeping c. Reporting of Covered and Suspicious Transactions to AMLC 6. Money-Laundering Crime SEC. 4, AMLA: Money Laundering Offense. - Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following: 1. Any person knowing that any monetary instrument or property represents. involves, or relates to the proceeds of any unlawful activity, transacts or attempts to transact said monetary instrument or property. 2. Any person-knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraph (a) above. 3. Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so. a. b. c.

Transacting or attempting to transact, with monetary instrument or property, knowing it represents, involves, or related to proceeds of any Unlawful Activity Facilitating money-laundering referred to in Item (a) above, by failing to perform an act Failing to disclose and file report with AMLC of any monetary instrument or property as required under AMLA

7. Unlawful Activities SEC. 3 (i), AMLA: "Unlawful activity" refers to any act or omission or series or combination thereof involving or having relation to the following: a. Kidnapping for ransom under Article 267 of Act No.3815, otherwise known as the Revised Penal Code, as amended; b. Sections 3,4,5,7,8 and 9 of Article Two of Republic Act No.6425, as amended, otherwise known as the Dangerous Drugs Act of 1972; c. Section 3 paragraphs B,C,E,G,H and I of Republic Act No.3019, as amended; otherwise known as the Anti-Graft and Corrupt Practices Act; d. Plunder under Republic Act No.7080, as amended; e. Robbery and extortion under Articles 294,295,296,299,300,301 and 302 of the Revised Penal Code, as amended;

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f.

Jueteng and Masiao punished as illegal gambling under Presidential Decree No.1602; g. Piracy on the high seas under the Revised Renal Code, as amended and Presidential Decree No.532; h. Qualified theft under Article 310 of the Revised Penal Code, as amended; (9) Swindling under Article 315 of the Revised Penal Code, as amended; i. Smuggling under Republic Act Nos. 455 and 1937; j. Violations under Republic Act No.8792, otherwise known as the Electronic Commerce Act of 2000; k. Hijacking and other violations under Republic Act No.6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against noncombatant persons and similar targets; l. Fraudulent practices and other violations under Republic Act No.8799. otherwise known as the Securities Regulation Code of 2000; m. Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. 8. Jurisdiction SEC. 5, AMLA: Jurisdiction of Money Laundering Cases. - The regional trial courts shall have jurisdiction to try all cases on money laundering. Those committed by public officers arid private persons who are in conspiracy with such public officers shall be under the jurisdiction of the Sandiganbayan. 9. Prosecution SEC. 6, AMLA: Prosecution of Money Laundering. – 1. 2.

Any person may be charged with and convicted of both the offense of money laundering and the unlawful activity as herein defined. Any proceeding relating to the unlawful activity shall be given precedence over the prosecution of any offense or violation under this Act without prejudice to the freezing and other remedies provided.

10. Prohibition against Political Harassment SEC. 16, AMLA: Prohibitions Against Political Harassment. - This Act shall not be used for political prosecution or harassment or as an instrument to hamper competition in trade and commerce. No case for money laundering may be filed against and no assets shall be frozen, attached or forfeited to the prejudice of a candidate for an electoral office during an election period.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

11. Penalties and Other Consequences a. Penalties SEC. 14, AMLA: Penal Provisions. -

the same or purposely fails to testify shall suffer the same penalties prescribed herein. 4.

1.

2.

3.

Penalties for the Crime of Money Laundering. The penalty of imprisonment ranging from seven (7) to fourteen (14) years and a fine of not less than Three million Philippine pesos (Php , 3,000,000.00) but not more than twice the value of the monetary instrument or property involved in the offense, shall be imposed upon a person convicted under Section 4(a) of this Act. The penalty of imprisonment from four (4) to seven (7) years and a fine of not less than One million five hundred thousand Philippine pesos (Php 1,500,000.00) but not more than Three million Philippine pesos (Php 3,000,000.00), shall be imposed upon a person convicted under Section 4(b) of this Act. The penalty of imprisonment from six (6) months to four (4) years or a fine of not less than One hundred thousand Philippine pesos (Php 100,000.00) but not more than Five hundred thousand Philippine pesos (Php 500,000.00), or both, shall be imposed on a person convicted under Section 4(c) of this Act. Penalties for Failure to Keep Records. The penalty of imprisonment from six (6) months to one (1) year or a fine of not less than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos (Php500,000.00), or both, shall be imposed on a person convicted under Section 9(b) of this Act. Malicious Reporting. Any person who, with malice, or in bad faith, report or files a completely unwarranted or false information relative to money laundering transaction against any person shall be subject to a penalty of six (6) months to four (4) years imprisonment and a fine of not less than One hundred thousand Philippine pesos (Php 100,000.00) but not more than Five hundred thousand Philippine pesos (Php500,000.00), at the discretion of the court: Provided, That the offender is not entitled to avail the benefits of the Probation Law. If the offender is a corporation, association, partnership or any juridical per- son, the penalty shall be imposed upon the responsible officers, as the case may be, who participated in the commission of the crime or who shall have knowingly permitted or failed to prevent its commission. If the offender is a juridical person, the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the offender is a public official or employee, he shall, in addition to the penalties prescribed herein, suffer perpetual or temporary absolute disqualification from office, as the case may be. Any public official or employee who is called upon to testify and refuses to do

127

Breach of Confidentiality. The punishment of imprisonment ranging from three (3) to eight (8) years and a fine of not less than Five hundred thousand Philippine pesos (Php 500,000.00) but not more than One million Philippine pesos (Php 1,000,000.00), shall be imposed on a person convicted for a violation under Section 9 (c). (i) (ii) (iii) (iv)

b.

Money Laundering Failure to Keep Records Malicious Reporting Breach of Confidentiality

Civil Forfeiture SEC. 12, AMLA: Forfeiture Provisions. – 1.

Civil Forfeiture. - When there is a covered transaction report made, and the court has, in a petition filed for the purpose ordered seizure of any monetary instrument or property, in whole or in part, directly or indirectly, related to said report, the Revised Rules of Court on civil forfeiture shall apply.

2.

Claim on Forfeited Assets. - Where the court has issued an order of forfeiture of the monetary instrument or property in a criminal prosecution for any money laundering offense defined under Section 4 of this Act, the offender or any other person claiming an interest therein may apply, by verified petition, for a declaration that the same legitimately belongs to him and for segregation or exclusion of the monetary instrument or property corresponding thereto. The verified petition shall be filed with the court which rendered the judgement of conviction and order of forfeiture, within fifteen (15) days from the date of the order or forfeiture, in default of which the said order shall become final and executory. This provision shall apply in both civil and criminal forfeiture.

3.

Payment in Lieu of Forfeiture. - Where the court has issued an order of forfeiture of the monetary instrument or property subject of a money laundering offense defined under Section 4, and said order cannot be enforced because any particular monetary instrument or property cannot, with due diligence, be located, or it has been substantially altered, destroyed, diminished in value or otherwise rendered worthless by any act or omission, directly or indirectly, attributable to the offender, or it has been concealed, removed, converted or otherwise transferred to prevent the same from being found or to avoid forfeiture thereof, or it is located outside the Philippines or has been placed or brought outside the jurisdiction of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 the court, or it has been commingled with other monetary instruments or property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be segregated for purposes of forfeiture, the court may, instead of enforcing the order of forfeiture of the monetary instrument or property or part thereof or interest therein, accordingly order the convicted offender to pay an amount equal to the value of said monetary instrument or property. This provision shall apply in both civil and criminal forfeiture. Cases Republic v. Glasgow Credit and Collection Services, 542 SCRA 384 (2008) FACTS Republic filed a complaint for civil forfeiture of assets against the bank deposits of Glasgow in Citystate Savings Bank (CSB). This is pursuant to the Anti-Money Laundering Act (RA 9160). The court issued summons and several alias summons. However, all the summons to Glasgow was left unserved as it could not be found at its last known address. Glasgow now files a motion to dismiss on the ground that the court has no jurisdiction over its person due to lack of summons served, the complaint was premature and there was failure to prosecute by the Republic. The RTC dismissed the case on the grounds of improper venue, insufficiency in form and substance and failure to prosecute. ISSUE Whether the complaint for Civil Forfeiture was correctly dismissed on the grounds of (1) improper venue (2) insufficiency in form and substance and (3) failure to prosecute. RULING (1) NO, the trial court was the proper venue. The Rules of Procedure in Cases of Civil Forfeiture applies to this case. Sec. 3. Venue of cases cognizable by the regional trial court. – A petition for civil forfeiture shall be filed in any regional trial court of the judicial region where the monetary instrument, property or proceeds representing, involving, or relating to an unlawful activity or to a money laundering offense are located; provided, however, that where all or any portion of the monetary instrument, property or proceeds is located outside the Philippines, the petition may be filed in the regional trial court in Manila or of the judicial region where any portion of the monetary instrument, property, or proceeds is located, at the option of the petitioner. The venue of civil forfeiture cases is any RTC of the judicial region where the monetary instrument, property or proceeds representing, involving, or

NOTES

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relating to an unlawful activity or to a money laundering offense are located. Pasig City, where the account sought to be forfeited in this case is situated, is within the National Capital Judicial Region (NCJR). Clearly, the complaint for civil forfeiture of the account may be filed in any RTC of the NCJR. Since the RTC Manila is one of the RTCs of the NCJR, it was a proper venue of the Republic’s complaint for civil forfeiture of Glasgow’s account. (2) NO, it was sufficient in form and substance. In a motion to dismiss for failure to state a cause of action, the focus is on the sufficiency, not the veracity, of the material allegations. The determination is confined to the four corners of the complaint and nowhere else. The test of the sufficiency of the facts alleged in the complaint is whether or not, admitting the facts alleged, the court could render a valid judgment upon the same in accordance with the prayer of the complaint. Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture provides: Sec. 4. Contents of the petition for civil forfeiture. - The petition for civil forfeiture shall be verified and contain the following allegations: (a) The name and address of the respondent; (b) A description with reasonable particularity of the monetary instrument, property, or proceeds, and their location; and (c) The acts or omissions prohibited by and the specific provisions of the Anti-Money Laundering Act, as amended, which are alleged to be the grounds relied upon for the forfeiture of the monetary instrument, property, or proceeds; and (d) The reliefs prayed for. Here, the verified complaint of the Republic contained the following allegations: (a) the name and address of the primary defendant therein, Glasgow; (b) a description of the proceeds of Glasgow’s unlawful activities with particularity, as well as the location thereof, account no. CA005-10-000121-5 in the amount of P21,301,430.28 maintained with CSBI; (c) the acts prohibited by and the specific provisions of RA 9160, as amended, constituting the grounds for the forfeiture of the said proceeds. In particular, suspicious transaction reports showed that Glasgow engaged in unlawful activities of estafa and violation of the Securities Regulation Code (under Section 3(i)(9) and (13), RA 9160, as amended); the proceeds of the unlawful activities were transacted and deposited with CSBI in account no. CA-005-10000121-5 thereby making them appear to have originated from legitimate sources; as such, Glasgow engaged in money laundering (under Section 4, RA 9160, as amended); and the AMLC subjected the account to freeze order and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (d) the reliefs prayed for, namely, the issuance of a TRO or writ of preliminary injunction and the forfeiture of the account in favor of the government as well as other reliefs just and equitable under the premises. The form and substance of the Republic’s complaint substantially conformed with Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture. In relation thereto, Rule 12.2 of the Revised Implementing Rules and Regulations of RA 9160 states the following: RULE 12 Forfeiture Provisions xxx xxx xxx Rule 12.2. When Civil Forfeiture May be Applied. – When there is a SUSPICIOUS TRANSACTION REPORT OR A COVERED TRANSACTION REPORT DEEMED SUSPICIOUS AFTER INVESTIGATION BY THE AMLC, and the court has, in a petition filed for the purpose, ordered the seizure of any monetary instrument or property, in whole or in part, directly or indirectly, related to said report, the Revised Rules of Court on civil forfeiture shall apply. RA 9160, as amended, and its implementing rules and regulations lay down two conditions when applying for civil forfeiture: (1) when there is a suspicious transaction report or a covered transaction report deemed suspicious after investigation by the AMLC (Anti-Money Laundering Council) (2) the court has, in a petition filed for the purpose, ordered the seizure of any monetary instrument or property, in whole or in part, directly or indirectly, related to said report. Since account of Glasgow in CSB was (1) covered by several suspicious transaction reports and (2) placed under the control of the trial court upon the issuance of the writ of preliminary injunction, the conditions provided in RA 9160 were satisfied. Hence, the Republic, represented by the AMCL, properly instituted the complaint for civil forfeiture. Whether or not there is truth in the allegation that account of Glasgow contains the proceeds of unlawful activities is an evidentiary matter that may be proven during trial. The complaint, however, did not even have to show or allege that Glasgow had been implicated in a conviction for, or the commission of, the unlawful activities of estafa and violation of the Securities Regulation Code. A criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil forfeiture proceeding. Stated otherwise, a finding of guilt for an unlawful activity is not an essential element of civil forfeiture. Thus,

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regardless of the absence, pendency or outcome of a criminal prosecution for the unlawful activity or for money laundering, an action for civil forfeiture may be separately and independently prosecuted and resolved. (3) NO, there was no failure to prosecute on the part of the Republic. Immediately after the complaint was filed, the trial court ordered the process server to serve summons to Glasgow. The subpoena to Glasgow was, however, returned unserved as Glasgow "could no longer be found at its given address" and had moved out of the building. Republic then filed a motion for issuance of alias summons and leave of court to serve summons by publication. The court archived the case for failure to cause service of alias summons, still, the Republic motioned the case to be reinstated. Meanwhile, the Republic continued to exert efforts to obtain information from other government agencies on the whereabouts or current status of respondent Glasgow. Its efforts, however, proved futile. The alias summons was again unserved. It was then that Glasgow filed the motion to dismiss. Given these circumstances, how could the Republic be faulted for failure to prosecute the complaint for civil forfeiture? While there was admittedly a delay in the proceeding, it could not be entirely or primarily ascribed to the Republic. That Glasgow’s whereabouts could not be ascertained was not only beyond the Republic’s control, it was also attributable to Glasgow which left its principal office address without informing the Securities and Exchange Commission or any official regulatory body of its new address. Moreover, as early as October 8, 2003, the Republic was already seeking leave of court to serve summons by publication. ADDINTIONAL RULING: the service of summons may be made by publication in cases of civil forfeiture as they are proceedings in rem. The Rules of Procedure in Cases of Civil Forfeiture also allows summons by publication in cases where the whereabouts of the owner are unknown and cannot be ascertained by diligent inquiry. 12. Freezing of Accounts SEC. 10, AMLA: Authority to Freeze. - Upon determination that probable cause .exists that any deposit or similar account is in any way related to an unlawful activity, the AMLC may issue a freeze order, which shall be effective immediately, on the account for a period not exceeding fifteen (15) days. Notice to the depositor that his account has been frozen shall be issued simultaneously with the issuance of the freeze order. The depositor shall have seventy-two (72) hours upon receipt of the notice to explain why the freeze order should be lifted. The AMLC has seventy-two (72) hours to dispose of the depositor's explanation. If it fails to act within seventy-two (72) hours from receipt of the depositor’s explanation, the freeze order shall automatically be dissolved. The fifteen (15)-day freeze order of the AMLC may be extended upon order of the court, provided that the fifteen (15)-day

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 period shall be tolled pending the court's decision to extend the period. No court shall issue a temporary restraining order or writ of injunction against any freeze order issued by the AMLC except the Court of Appeals or the Supreme Court. Cases Republic v. Eugenio FACTS (This case stemmed from the case of Agan v PIATCO) After the promulgation of the Agan case, a series of investigation was conducted by the Ombudsman, the Compliance and Investigation Staff, and Anti-Money Laundering Council (AMLC). AMLC issued a resolution authorizing the Executive Director of AMLC to examine the bank accounts of Pantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and their related web accounts. Under the authority of such resolution, AMLC filed an application to inquire into or examine the deposits or investments of Alvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which the court granted. Months later, Special Prosecutor Dennis Villa-Ignacio requested AMLC to investigate the accounts of Alvarez, PIATCO and all accounts related to the annulled contract. AMLC issued another resolution, authorizing the executive director to inquire into the bank accounts named in the letter. AMLC filed the same application, this time to the Manila RTC, which was raffled to Judge Antonio Eugenio Jr. The court likewise granted such ex parte application. Alvarez filed an Urgent Motion to Stay of Enforcement of Order, which the Manila RTC granted. The Republic filed a motion for reconsideration which was granted. Alvarez then filed an Urgent Motion and Manifestation, stating that AMLC was about to implement the Manila RTC bank inquiry even though he intends to appeal such order. The Manila RTC refrained AMLC from implementing such order against Alvarez. Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging that AMLC likewise cannot implement such order against the others stated in the order. Manila RTC issued an order, stating that the ex parte application cannot be implemented in its totality (first of four rulings contested in this case).

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The CA issued a writ of preliminary injunction with regard to the petition filed by Lilia Cheng (last ruling contested in this case) ISSUE Whether a bank inquiry order issued in accordance with section 10 AMLA may be stayed with injunction RULING YES . Under this section, the AMLC may file an application ex parte, with the CA, and upon determination of probable cause, they may issue a freeze order effective immediately. This is to prevent funds that is related to any money-laundering from being misused while the case is being tried. It is ex parte because the fact of freezing the account must be kept secret from the owner, else the funds may just be moved elsewhere before the freeze order may be issued. Since the application of AMLC has nothing to do with any of the provided enumerations under Section 11, it must prove that there is probable cause with the case, in order to inquire into the bank accounts. Probable cause may only be decided by the courts (Art III, Sec 2 of Constitution). Section 10 contains the application for ex parte, but it is connected to freezing of accounts. This must be done ex parte, since notifying the accused my cause him to disburse the account before the order freezing the account is issued. Section 11 does not contain the application for ex parte, for the fact that there is nothing wrong with the accused knowing that his accounts are being checked. It is immaterial for the accused to know that his accounts are being checked, since he cannot hide the bank records to prove that the accounts are linked to the crime imputed against him. Hence, using the ex parte application found in section 10 in inquiring into bank accounts (section 11) may be stayed with injunction.

Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO and preliminary injunction against the orders of Makati and Manila RTC stating grave abuse of discretion that AMLA can only inquire to bank accounts after the creation of the Anti-Money Laundering Act (AMLA), and not prior to its promulgation. The CA issued a TRO, granting such petition (second of four rulings contested in this case).

13. Examination of Accounts SEC. 11, AMLA: Authority to Inquire into Bank Deposits. Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non- bank financial institution upon order of any competent court in cases of violation of this Act when it has been established that there is probable cause that the deposits or investments involved are in any way related to a money laundering offense: Provided, That this provision shall not apply to deposits and investments made prior to the effectivity of this Act.

With relation to the Urgent Motion for Clarification, the Manila RTC issued an order reiterated that bank inquiry order it issued cannot be implemented by the AMLC until the appeal (of Alvarez of the order granting the ex parte application) is finally resolved (third of four rulings contested in this case).

14. AMLC; Composition and Powers SEC. 7, AMLA: Creation of Anti-Money Laundering Council (AMLC). – The Anti-Money Laundering Council is hereby created and shall be composed of the Governor of the Bangko Sentral ng Pilipinas as

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 chairman, the Commissioner of the Insurance Commission and the Chairman of the Securities and Exchange Commission as members. The AMLC shall act unanimously in the discharge of its functions as defined hereunder: 1.

to require and receive covered transaction reports from covered institutions;

2.

to issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction report or request for assistance from a foreign State, or believed by the Council, on the basis of substantial evidence to be in whole or in part, wherever located, representing, involving. or related to, directly or indirectly, in any manner or by any means. the proceeds of an unlawful activity;

3.

to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General;

4.

to cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses;

5.

to initiate investigations of covered transactions, money laundering activities and other violations of this Act;

6.

to freeze any monetary instrument or property alleged to be proceed of any unlawful activity;

7.

to implement such measures as may be necessary and justified under this Act to counteract money laundering; to receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations provided in this Act;

8.

9.

to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; and

10. to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including governmentowned and -controlled corporations, in undertaking any and all antimoney laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering offenses and prosecution of offenders.

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15. Mutual Assistance among States SEC. 13, AMLA: Mutual Assistance among States. – 1. Request for assistance from a Foreign State. - Where a foreign State makes a request for assistance in the investigation or prosecution of a money laundering offense, the AMLC may execute the request or refuse to execute the same and inform the foreign State of any valid reason for not executing the request or for delaying the execution thereof. The principles of mutuality and reciprocity shall, for this purpose, be at all times recognized. 2.

Power of the AMLC to Act on a Request for Assistance from a Foreign State. - The AMLC may execute a request for assistance from a foreign State by: (1) tracking down, freezing, restraining and seizing assets alleged to be proceeds of any unlawful activity under the procedures laid down in this Act; (2) giving information needed by the foreign State within the procedures laid down in this Act; and (3) applying for an order of forfeiture of any monetary instrument or property in the court: Provided, That the court shall not issue such an order unless the application is accompanied by an authenticated p copy of the order of a court in the requesting State ordering the forfeiture of said monetary instrument or property of a person who has been convicted of a money laundering offense in the requesting State, and a certification of an affidavit of a competent officer of the requesting State stating that the conviction and the order of forfeiture are final and then no further appeal lies in respect or either.

3.

Obtaining Assistance from Foreign States. -The AMLC may make a request to any foreign State for assistance in (1) tracking down, freezing, re- straining and seizing assets alleged to be proceeds of any unlawful activity; (2) obtaining information that it needs relating to any covered transaction, money laundering offense or any other matter directly or indirectly, related thereto; (3) to the extent allowed by the law of the Foreign State, applying with the proper court therein for an order to enter any premises belonging to or in the possession or control of, any or all of the persons named in said request, and/or search any or all such persons named therein and/or remove any document, material or object named in said request: Provided, That the documents accompanying the request in support of the application have been duly authenticated in accordance with the applicable jaw or regulation of the foreign State; and (4) applying for an order of forfeiture of any monetary instrument or property in the proper court in the foreign State: Provided, That the request is accompanied by an authenticated copy of the order of the regional trial court ordering the forfeiture of said monetary instrument or property of a convicted offender and an affidavit of the clerk of court stating that the conviction and the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 order of forfeiture are final and that no further appeal lies in respect of either. 4.

5.

6.

7.

Limitations on Request for Mutual Assistance. – The AMLC may refuse to comply with any request for assistance where the action sought by the request contravenes any provision of the Constitution or the execution of a request is likely to prejudice the national interest of the Philippines unless therein is a treaty between the Philippines and the requesting State relating to the provision of assistance in relation to money laundering offenses. Requirements for Requests for Mutual Assistance from Foreign States. - A request for mutual assistance from a foreign State must (1) confirm that an investigation or prosecution is being conducted in respect of a money launderer named therein or that he has been convicted of any money laundering offense; (2) state the grounds on which any person is being investigated or prosecuted for money laundering or the details of his conviction; (3) gives sufficient particulars as to the identity of said person; (4) give particulars sufficient to identify any covered institution believed to have any information, document, material or object which may be of assistance to the investigation or prosecution; (5) ask from the covered institution concerned any information, document, material or object which may be of assistance to the investigation or prosecution; (6) specify the manner in which and to whom said information, document, material or object detained pursuant to said request, is to be produced; (7) give all the particulars necessary for the issuance by the court in the requested State of the writs, orders or processes needed by the requesting State; and (8) contain such other information as may assist in the execution of the request. Authentication of Documents. - For purposes of this Section, a document is authenticated if the same is signed or certified by a judge, magistrate or equivalent officer in or of, the requesting State, and authenticated by the oath or affirmation of a witness or sealed with an official or public seal of a minister, secretary of State, or officer in or of, the government of the requesting State, or of the person administering the government or a department of the requesting territory, protectorate or colony. The certificate of authentication may also be made by a secretary of the embassy or legation, consul general, consul, vice consul, consular agent or any officer in the foreign service of the Philippines stationed in the foreign State in which the record is kept, and authenticated by the seal of his office. Extradition. -The Philippines shall negotiate for the inclusion of money laundering offenses as herein defined among extraditable offenses in all future treaties.

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IV. LOAN FUNCTION A. Basic Concepts 1.

Grant, Purpose and Requirement of Loans a.

Grant of Loans SEC. 39, GBL: A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices.

b.

Purpose of Loans SEC. 39, GBL: The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation.

c.

Requirement of Loans SEC. 40, GBL: Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. Toward this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation. In formulating rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of micro financing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Cases United Coconut Planters Bank v Ramos, 415 SCRA 596 (2003) FACTS UCPB granted a P2.8M loan to Zamboanga Development Corp. (ZDC) with VIvencio Ramos and the Spouses Teofilo Ramos, Sr. and Amelita Ramos as sureties. Teofilo Ramos Sr. was the Executive officer of Iglesia ni Kristo. ZDC defaulted on its obligation. UCPB filed a collection suit and obtained a favorable judgment. A writ of execution was issued for the enforcement of the decision ordering Sheriff Villapana to levy and attach all the real and personal properties belonging to ZDC and the Ramoses to satisfy the judgment. To help the Sheriff implement the writ, UCPB through its employees ascertained if defendants (ZDC et al) had any leviable real and personal property. UCPB produced a copy of a Tax Declaration covering a property in Quezon City under the name of Teofilo C. Ramos, President and Chairman of Ramdustrial Corp. married to Rebecca E. Ramos. UCPB informed the Sheriff of the existence of such property and caused the annotation of a notice of levy on the title thereof. Meanwhile, Ramdustrial Corporation applied for a loan with UCPBusing the same property as collateral. Ramdustrial intended to use the proceeds of the loan as additional capital to participate in a bidding project. Teofilo C. Ramos was informed that there was an annotation on said property, because of which the bank had to hold in abeyance any action on its loan application. Teofilo C. Ramos was of course surprised. He sent a letter to the Sheriff to have the annotation cancelled or else appropriate legal action will be taken. The loan was eventually approved. Business was not good so Teofilo C. Ramos and Rebecca Ramos again applied for a loan with Planters Dev’t Bank to pay their obligations with UCPB. Again they encountered problems with the approval of the loan due to the annotation on their property which until now has not been cancelled. Spouses Ramos again demanded UCPB to have the annotation cancelled. UCPB told the spouses to file a motion to cancel said annotation and UCPB promised that the will not oppose. The annotation was eventually cancelled. Still spouses Ramos filed an action for damages against UCPB. ISSUES (1) Whether the petitioner acted negligently in causing the annotation of levy on the title of the respondent? YES. (2) Whether the respondent was the real party-in-interest as plaintiff to file an action for damages against the petitioner considering that the loan applicant with UCPB and PDB was RAMDUSTRIAL CORPORATION? YES.

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(3) Whether the respondent is entitled to damages? YES. HELD (1) It bears stressing that the petitioner is a banking corporation, a financial institution with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution for its own benefit, for one or more of the purposes of making temporary loans and discounts, of dealing in notes, foreign and domestic bills of exchange, coin bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits, and making collection for the holders of negotiable paper, if the institution sees fit to engage in such business.[25] In funding these businesses, the bank invests the money that it holds in trust of its depositors. For this reason, we have held that the business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith.[26] In approving the loan of an applicant, the bank concerns itself with proper informations regarding its debtors. The petitioner, as a bank and a financial institution engaged in the grant of loans, is expected to ascertain and verify the identities of the persons it transacts business with.[27] In this case, the petitioner knew that the sureties to the loan granted to ZDC and the defendants in Civil Case No. 94-1822 were the Spouses Teofilo Ramos, Sr. and Amelita Ramos. The names of the Spouses Teofilo Ramos, Sr. and Amelita Ramos were specified in the writ of execution issued by the trial court. The petitioner has access to more facilities in confirming the identity of their judgment debtors. It should have acted more cautiously, especially since some uncertainty had been reported by the appraiser whom the petitioner had tasked to make verifications. It appears that the petitioner treated the uncertainty raised by appraiser Eduardo C. Reniva as a flimsy matter. It placed more importance on the information regarding the marketability and market value of the property, utterly disregarding the identity of the registered owner thereof. (2) It must be underscored that the registered owner of the property which was unlawfully levied by the petitioner is the respondent. As owner of the property, the respondent has the right to enjoy, encumber and dispose of his property without other limitations than those established by law. The owner also has a right of action against the holder and possessor of the thing in order to recover it.[32] Necessarily, upon the annotation of the notice of levy on the TCT, his right to use, encumber and dispose of his property was diminished, if not negated. He could no longer mortgage the same or use it as collateral for a loan. Arising from his right of ownership over the said property is a cause of action against persons or parties who have disturbed his rights as an

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 owner.[33] As an owner, he is one who would be benefited or injured by the judgment, or who is entitled to the avails of the suit[34] for an action for damages against one who disturbed his right of ownership. Hence, regardless of the fact that the respondent was not the loan applicant with the UCPB and PDB, as the registered owner of the property whose ownership had been unlawfully disturbed and limited by the unlawful annotation of notice of levy on his TCT, the respondent had the legal standing to file the said action for damages. In both instances, the respondent’s property was used as collateral of the loans applied for by Ramdustrial Corporation. Moreover, the respondent, together with his wife, was a surety of the aforesaid loans. While it is true that the loss of business opportunities cannot be used as a reason for an action for damages arising from loss of business opportunities caused by the negligent act of the petitioner, the respondent, as a registered owner whose right of ownership had been disturbed and limited, clearly has the legal personality and cause of action to file an action for damages. Not even the respondent’s failure to have the annotation cancelled immediately after he came to know of the said wrongful levy negates his cause of action. (3) For the award of moral damages to be granted, the following must exist: (1) there must be an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil Code.[35] In the case at bar, although the respondent was not the loan applicant and the business opportunities lost were those of Ramdustrial Corporation, all four requisites were established. First, the respondent sustained injuries in that his physical health and cardio-vascular ailment were aggravated; his fear that his one and only property would be foreclosed, hounded him endlessly; and his reputation as mortgagor had been tarnished. Second, the annotation of notice of levy on the TCT of the private respondent was wrongful, arising as it did from the petitioner’s negligent act of allowing the levy without verifying the identity of its judgment debtor. Third, such wrongful levy was the proximate cause of the respondent’s misery. Fourth, the award for damages is predicated on Article 2219 of the Civil Code, particularly, number 10 thereof Liable for Attorneys fees but no exemplary damages.

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Banco De Oro-EPCI Inc v JAPRL Development Corporation, 551 SCRA 342 (2008) FACTS JPRL obtained a P230M loan from Banco de Oro but soon after defaulted on its obligations. It was later discovered that the loan was obtained by JPRL by fraudulently bloating its sales revenue. Upon knowing of this fraud, BDO demanded immediate payment of JPRL’s outstanding obligations. Banco de Oro tried to attach the properties of JPRL but was unsuccessful in all its attempt since no proper officer of JPRL could be found and served with summonses. Meanwhile, JPRL filed two applications for corporate rehabilitation. The first was denied while the second was granted. By virtue of the granted rehabilitation, all proceedings against JPRL. Banco de Oro appealed the case alleging that JPRL maliciously evaded the service of summonses to prevent the court from acquiring jurisdiction. Furthermore, they employed bad faith to delay proceedings by cunningly exploiting procedural technicalities to avoid payment of their obligation. ISSUES Whether there was malice and bad faith on the part of JPRL by avoiding service of summons? Whether the court acquired jurisdiction even of the summons were served only to administrative officers of JPRL and not to the officers enumerated in the Corp Code? HELD The Makati RTC may proceed to hear Civil Case No. 03-991 only against Arollado if there is no ground to go after JAPRL and RFC (as will later be discussed). A creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation. Respondents abused procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least delaying, the collection of their legitimate obligations. Their reprehensible scheme impeded the speedy dispensation of justice. More importantly, however, considering the amount involved, respondents utterly disregarded the significance of a stable and efficient banking system to the national economy. Banks are entities engaged in the lending of funds obtained through deposits[45] from the public.[46] They borrow the public's excess money (i.e., deposits) and lend out the same.[47] Banks therefore redistribute wealth in the economy by channeling idle savings to profitable investments. Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public.[48] They plough back the bulk of said deposits into the economy in the form of loans.[49] Since banks deal with

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 the public's money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance. Protecting the integrity of the banking system has become, by large, the responsibility of banks. The role of the public, particularly individual borrowers, has not been emphasized. Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining loans without intending to pay the same.

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cash flow-based lending to the basic sectors that are not covered by traditional collateral. (emphasis supplied) Under this provision, banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud. Petitioner would then be entitled to the immediate payment of P194,493,388.98 and other appropriate damages. 2.

In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities. Considering the amount of petitioner's exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not respondents indeed committed fraud in securing the credit accomodation.

Prohibited Transactions SEC. 55.1 (C): No director, officer, employee, or agent of any bank shall – (c) Accept gifts, fees, or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

A finding of fraud will change the whole picture. In this event, petitioner can use the finding of fraud to move for the dismissal of the rehabilitation case in the Calamba RTC.

SEC. 55.1 (D): Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank;

The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud.

SEC. 55.2: No borrower of a bank shall (a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank;

Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 against the three respondents guided by Section 40 of the General Banking Law which states:

(b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof;

Section 40. Requirement for Grant of Loans or Other Credit Accommodations. Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation. In formulating the rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as

(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or (d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. 3.

MB Regulation a. Unsecured Loans SEC. 41, GBL: Unsecured Loans or Other Credit Accommodations. – The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 b.

Other Security Requirements SEC. 42, GBL: Other Security Requirements for Bank Credits. - The Monetary Board may, by regulation, prescribe further security requirements to which the various types of bank credits shall be subject, and, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, the Board may by regulation, reduce the maximum ratios established in Sections 36 and 37 of this Act, or, in special cases, increase the maximum ratios established therein. SEC. 106, NCBA: Required Security Against Bank Loans. — In order to promote liquidity and solvency of the banking system, the Monetary Board may issue such regulations as it may deem necessary with respect to the maximum permissible maturities of the loans and investments which the banks may make, and the kind and amount of security to be required against the various types of credit operations of the banks.

c.

d.

e.

NOTES

Terms and Conditions SEC. 43, GBL: Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations. - The Monetary Board, may, similarly in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. Renewal or Extension SEC. 48, GBL: Renewal or Extension of Loans and Other Credit Accommodations. – The Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations. Provisions for Losses and Write-Offs SEC. 49, GBL: Provisions for Losses and Write-Offs. - All debts due to any bank on which interest is past due and unpaid for such period as may be determined by the

136

Monetary Board, unless the same are welt-secured and in the process of collection shall be considered bad debts within the meaning of this Section. The Monetary Board may fix, by regulation or by order in a specific case, the amount of reserves for bad debts or doubtful accounts or other contingencies. Writing off of loans, other credit accommodations, advances and other assets shall be subject to regulations issued by the Monetary Board. 4.

Development Assistance Incentives SEC. 46, GBL: Development Assistance Incentives. - The Bangko Sentral shall provide incentives to banks which, without government guarantee, extend loans to finance educational institutions cooperatives, hospitals and other medical services, socialized or lowcost housing, local government units and other activities with social content.

5.

Disclosure Requirements SEC. 2, RA 3765: Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. SEC. 4, RA 3765: Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: (5) The cash price or delivered price of the property or service to be acquired; (6) The amounts, if any, to be credited as down payment and/or trade-in; (7) The difference between the amounts set forth under clauses (1) and (2); (8) The charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (9) The total amount to be financed;

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (10) The finance charge expressed in terms of pesos and centavos; and (11) The percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. SEC. 6, RA 3765: (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court costs as determined by the court. (b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation contained in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or transactions. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. (d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof. (e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto.

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Cases New Sampaguita Builders Construction, Inc. v PNB, 435 SCRA 565 (2004) FACTS NSBC obtained a loan with PNB in an aggregate amount of P8M, using or mortgaging the real estate properties registered in the name of its Pres. Mr. Dee as collateral. Spouses Dee were authorized to secure the loan and to sign any document which may be required by PNB. Further, the spouses shall act as sureties or co- obligors who shall be solidarily liable with NSBC for the payment of any of the obligations. Upon request of PNB, the P8M loan was broken down into a revolving credit line of P7.7M and an unadvised line of P0.3M for additional operating and working capital to mobilize its various construction projects. The loan was secured by a first mortgage on several parcels of residential land owned by the spouses Dee. It was further secured by the joint and several signatures of spouses Dee, who signed as accommodationmortgagors since all the collaterals were owned by them. NSBC also executed 3 promissory notes (PNs) as follows: 1) in the amount of P5M (issued on June 29, 1989 and to mature on: Oct. 27); 2) P2.7M with due date on Dec.30; 3) in the amount of P300k (issued on Sept 6, 1989, with due date on Jan. 4, 1990). NSBC also signed 2 Credit Agreements. Then, spouses Dee also executed a Joint and Solidary Agreement (JSA) in favor of PNB. Later on, NSBC failed to pay their obligations under the PNs. Mr. Dee asked for an extension for the payment of interests and the restructuring of its loan. Petitioners tried to pay but there are still unpaid obligations. PNB accepted Mr. Dee’s proposal to remit to the bank post-dated checks covering interests, penalties and part of the principals of his due account, provided however, that the total payment should be P4M++ which would cover the amount of P1M++ as principal, and P3M++ as interests and penalties! Mr. Dee reiterated his proposal for the settlement of NSBC’s past due loan account (P7M++). Then, Mr. Dee tendered 4 post-dated checks aggregating to P1M++. However, 2 of those checks were dishonored and returned due to a ‘stop payment order’ from petitioners. PNB demanded for NSBC to fulfill its obligation. But petitioners still failed to pay their loan obligations, so to make the story shorter, petitioners’ properties were extrajudicially foreclosed and sold at public auction (P10M++) to PNB. Petitioners failed to redeem the properties within 1 year. However, the proceeds of the sale were not sufficient to cover PNB’s total claim (12M++) and thus demanded from petitioners the deficiency of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 P2M++ plus interest and other charges, until the amount was fully paid. Petitioners refused to pay the same.

NOTES B. Terms and Conditions 1.

CA RULING: “The increases in the interest rates on NSBCI’s loan were also held to be authorized by law and the Monetary Board and -- like the increases in penalty rates -- voluntarily and freely agreed upon by the parties in the Credit Agreements they executed. Thus, these increases were binding upon petitioners. However, after considering that two to three of Petitioner NSBCI’s projects covered by the loan were affected by the economic slowdown in the areas near the military bases in the cities of Angeles and Olongapo, the appellate court annulled and deleted the adjustment in penalty from 6 percent to 36 percent per annum. The attorney’s fees were also reduced by the appellate court from 10 percent to 1 percent of the total indebtedness. Respondent was also declared to have the unquestioned right to foreclose the Real Estate Mortgage. It was allowed to recover any deficiency in the mortgage account not realized in the foreclosure sale, since petitioner- spouses had agreed to be solidarily liable for all sums due and payable to respondent. Finally, the appellate court concluded that the extrajudicial foreclosure proceedings and auction sale were valid” ISSUES 1. W/N the loan accounts were bloated accounts YES. 2. W/N the foreclosure and the subsequent claim for deficiency are valid and proper NO.

Petitioners’ accessory duty to pay interest did not give PNB unrestrained freedom to charge any rate other than that which was agreed upon. No interest shall be due, unless expressly stipulated in writing. The “unilateral determination and imposition” of increased rates is violative of the principle of mutuality of contracts.

Amortization SEC. 44, GBL: Amortization on Loans and Other Credit Accommodations. - The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed. In case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic amortization payments, but such payments must be made at least annually: Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted. In case of loans and other credit accommodations to micro finance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks.

2.

Pre-Payment SEC. 45, GBL: Prepayment of Loans and Other Credit Accommodations. – A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower.

3.

Interest ART. 1956, NCC: No interest shall be due unless it has been expressly stipulated in writing.

HELD 1. YES. Petitioner NSBC’s loan accounts with PNB appear to be bloated with some iniquitous imposition of interests, penalties, other charges and attorney’s fees. The Court primarily held that the increases in interest are baseless. The 3 PNs issued specified the interest rate to be charged: 19.5% in the first, and 21.5 in the second and third. However, a uniform clause therein permitted PNB to increase the rate “within the limits allowed by law at any time depending on whatever policy it may adopt in the future” without even giving prior notice to petitioners.

138

a. No Ceiling Cases Bulos Jr v Yasuma, 527 SCRA 727 (2007) FACTS The original loan obtained by the petitioner, together with Dr. Lim and Atty. Tabalingcos, from the respondent amounted to P2,500,000.00 with 4% interest for three months, or from 11 October 1988 up to 10 January 1989, and in case of extension of the loan, the interest of 5% per month will be imposed. The obligation of the petitioner, Dr. Lim and Atty. Tabalingcos was joint and solidary. Petitioner failed to pay the loan by 10 January 1989; thus, from 11 October 1988 up to February 1989, the loan obligation,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 including interest, reached a total amount of P2,700,000.00. Petitioner made a partial payment via a dacion en pago, amounting to P1,630,750.00, which was deducted from the total loan obligation of P2,700,000.00 leaving a balance of P1,069,000.00 as of 24 February 1989. By March 1989, the balance of the loan began earninga 5% interest per month after all the parties agreed to an increase in the interest rate during the extended period. Taking into consideration the outstanding loan balance of P1,069,000.00, plus interest, and minus a discount granted by respondent, the amount still due respondent was determined by the parties to be P2,240,000.00. And to pay the remaining indebtedness, Atty. Tabalingcos issued a check covering the amount but it was dishonored, therefore, the indebtedness remains at P2,240,000.00.

NOTES

interest rate agreed upon by parties does not violate the Usury Law, as amended by P.D. 116. The Court has consistently held that for sometime now, usury has been legally non-inexistent and that interest can now be charged as lender and borrower may agree upon. Petitioners also cannot find refuge in Medel. In this case, what this Court declared as unconscionable was the imposition of a 66% interest rate per annum. In the instant case, the interest rate is only 24% per annum, agreed upon by both parties. By no means can it be considered unconscionable or excessive. b.

In the absence of stipulation SEC. X305.1, MRB: Rate of interest in the absence of stipulation. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of expressed contract as to such rate of interest, shall be twelve percent (12%) per annum.

c.

Escalation Clause, when allowable ART. 1308, NCC: The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

ISSUE Whether or not the imposed interest (4% per month imposed originally by the bank and the lowered rate of 21% p.a. imposed by the RTC) has legal and factual basis. RULING NO, the interest is highly unconscionable and inordinate. The agreed interest rate of 4% per month or 48% per annum is unconscionable and must be mitigated.Following established jurisprudence, the legal interest rate of 12% should apply, computed from the date of judicial demand, that is, 7 April 1990.The aforequoted paragraph 3 of the guidelines is also appropriate herein, and a 12% interest per annum is imposed on petitioners monetary liability to respondent. Bacolor v Bangko Filipino Savings and Mortgage Bank, 515 SCRA 79 (2007) FACTS On February 11, 1982, spouses Zacarias and Catherine Bacolor, herein petitioners, obtained a loan of P244,000.00 from Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, respondent. They executed a promissory note providing that the amount shall be payable within a period of ten (10) years with a monthly amortization of P5,380.00 beginning March 11, 1982 and every 11th day of the month thereafter; that the interest rate shall be twenty-four percent (24%) per annum. From March 11, 1982 to July 10, 1991, petitioners paid respondent bank P412, 199.36. Thereafter, they failed to pay the remaining balance of the loan. ISSUE Whether or not the interest of 24% p.a. imposed is legal? RULING In the present case, the term of the subject loan is for a period of 10 years. Considering that its maturity is more than 730 days, the interest rate is not subject to any ceiling following the above provision. Therefore, the 24%

139

SEC. X305.2, MRB: Escalation clause; when allowable. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. Cases PNB v CA, 196 SCRA 536 (1991) FACTS Ambrosio Padilla applied for and was granted a by PNB a credit line of P1.8M, secured by a real estate mortgage, for a term of two years with 18% interest per annum. The Real Estate Mortgage Contract provided that: (k) INCREASE OF INTEREST RATE

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. August 10, 1984 the Bank unilaterally increased the interest rate from 18% to 32%. On September 12, 1984 the interest rate was again adjusted from 32% to 41%. On October 1984 it was again increased to 48%. ISSUE Whether or not the increase of interest from 18% to 48% is valid. RULING NO. The interest is exorbitant and highly unconscionable. PNB’s successive increases of the interest rate on Ambrosio’s loan, over the latter’s protest, were arbitrary as they violated an express provision of the Credit Agreement that by its terms “may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment.” The increases imposed by PNB also contravene ART. 1956 of the Civil Code which provides that “no interest shall be sue unless it has been expressly stipulated in writing.” The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% p.a., hence, he is not bound to pay a higher rate than that. That an increase in the interest rate from 18% to 48% within a period of four months is excessive. New Sampaguita Builders Construction Inc v PNB, 435 SCRA 565 (2004)—supra d.

Floating rates of interest SEC. X305.3, MRB: Floating rates of interest. The rate of interest on a floating rate loan during each interest period shall be stated on the basis of Manila Reference Rates (MRRs), T- Bill Rates (TBRs) or other market based reference rates plus a margin as may be agreed upon by the parties. The MRRs for various interest periods shall be determined and announced by the BSP every week and shall be based on the weighted average of the interest rates paid during the immediately preceding week by the ten (10) commercial banks with the highest combined levels of outstanding

NOTES

140

deposit substitutes and time deposits, on promissory notes issued and time deposits received by such banks, of P100,000 and over per transaction account, with maturities corresponding to the interest periods for which such MRRs are being determined. Such rates and the composition of the sample commercial banks shall be reviewed and determined at the beginning of every calendar semester on the basis of the banks' combined levels of outstanding deposit substitutes and time deposits as of May 31 or November 30, as the case may be. The rate of interest on floating rate loans existing and outstanding as of December 23, 1995 shall continue to be determined on the basis of the MRRs obtained in accordance with the provisions of the rules existing as of January 1, 1989: Provided, however, That the parties to such existing floating rate loan agreements are not precluded from amending or modifying their loan agreements by adopting a floating rate of interest determined on the basis of the TBR or other market based reference rates. Where the loan agreement provides for a floating interest rate, the interest period, which shall be such period of time for which the rate of interest is fixed, shall be such period as may be agreed upon by the parties. For the purpose of computing the MRRs, banks shall accomplish the report forms, RS Form 2D and Form 2E (BSP 5-17-34A). Cases Consolidated Bank and Trust Corp v CA, 356 SCRA 671 (2001) FACTS Continental Cement Corp and Gregory Lim (Both as Respondents)obtained a Letter of Credit with Consolidated Bank and Trust Corp (CBTC). The Letter of Credit was used to purchase bunker fuel oil from Petrophil Corp. In relation to the same transaction, a Trust Receipt was executed by Continental Cement, with Lim as signatory. CBTC file a complaint with the RTC, arguing that respondents failed to turn over the goods covered by the Trust Receipt. In their defense, CCC content that the transaction was a simple loan and not a trust receipt. RTC dismissed the complaint by CBTC but granted the counterclaim by respondents. CA revered the decision. (The disputed transaction had a provision on interest)

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

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ISSUE W/N the floating rate of interest imposed by CBTC is valid.

ordered Equitable to pay moral/exemplary damages to respondents. The CA dismissed the appeal of Equitable

RULING NO. The trust agreement provides: I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% per month until the amount/s or installment/s due and unpaid under the trust receipt on the reverse side hereof is/are fully paid

ISSUE W/N there was extraordinary deflation.

The stipulation is invalid, having no reference rate set by either by it or by the Central Bank, essentially leaving the determination thereof to the CBTC. While it may be acceptable for banks to stipulate interest rates that are depended upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest. An example of such is given in Polotan v. CA – “if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate. In this example, the basis of any increase / decrease is the market rates. In the present case, there was no basis for any increase / decrease. *The transaction is a simple loan. It is not a trust receipt as the goods was received before the trust receipt was executed. (Vic is gay) Thus, respondents were required to comply with their loan obligation. 4.

Extraordinary Inflation/Deflation ART. 1250, NCC: In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.

Cases EPCI Bank v Ng Sheung Ngor, 541 SCRA 223 (2007) FACTS Ng Sheung Ngor, Ken Appliance Division and Benjamin Go (Respondents) filed an annulment/reformation case against Equitable PCI Bank and its employees. They claim that the Equitable induced them to avail of its PesoDollar credit facilities (evidenced by Promissory Notes) by offering low interest rates. However, there were not aware that escalation clauses were also stipulated, thus allowing Equitable to increase interest rates w/o their consent. RTC validated the transaction but invalidated the escalation clause. Nevertheless, it took judicial notice of extraordinary deflation during the intervening period and ordered to use 1996 Dollar Exchange Rate. It also

RULING NO. Extraordinary inflation exists when there is an unusual decrease in the purchasing power of the currency and such decrease could not be reasonably foreseen or manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary Deflation involves an inverse situation. For Extraordinary inflation/deflation to affect an obligation, the following must be present. (1) official declaration by the BSP (2) obligation was contractual in nature (3) parties expressly agreed to consider the effects of extraordinary inflation/deflation. In the present case, BSP never declared a situation of extraordinary inflation. In addition, the parties did not agree to recognize the effects of extraordinary inflation. Thus, the rate should be pegged at the simply on exchange rate fixed by the BSP on the date of maturity. *the promissory notes are valid because despite being a contract of adhesion, there was no situation where the dominant party took advantage of the weakness of the other party. *Escalation clauses in this case are void as Equitable as unbridled discretion in determining the rate when the notes are extended, not based by law or by the Monetary Board. (Again, Vic is gay) Thus, the petitioners were required to comply with their obligation with 12% legal interest . 5.

Restructuring SEC. X322, MRB: Restructured Loans; General Policy. Banks shall have full discretion in the restructuring of loans in order to provide flexibility in arranging the repayment of such loans without impairing or endangering the lending bank’s financial interest, except in special cases approved by the Monetary Board such as loans funded by foreign currency obligations. However, the restructuring of loans granted to DOSRI should be upon terms not less favorable to the bank than those offered to others. While agreements on loan restructuring should be considered as management tools to maintain or improve the soundness of the bank’s lending operations, these should be drawn mainly to assist borrowers towards the settlement of their obligations, taking into account their capacity to pay.

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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 C. Single Borrowers Limit 1.

Ceilings SEC. 35.1, GBL: Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single borrower limit is the total credit commitment of the bank to the borrower. SEC. 35.2, GBL: Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. SEC. 24, GBL: Equity Investments of a Universal Bank. – A universal bank may, subject to the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise prescribe: 24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and 24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank. As used in this Act, “net worth” shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments. .

NOTES 2.

142

What is Included in Ceiling SEC. 35.3, GBL: The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (b) in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c)

in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and

(d) in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. SEC. 35.4, GBL: Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to, any of the following situations: . (e) the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; (f)

the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or

(g) the subsidiaries though separate entities operate merely as departments or divisions of a single entity. SEC. 35.6, GBL: Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. SEC. 35.7, GBL: Certain types of contingent accounts of borrowers may be included among those subject to these prescribed limits as may be determined by the Monetary Board.

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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 3.

Exceptions SEC. 35.1, GBL: Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single borrower limit is the total credit commitment of the bank to the borrower. SEC. 17, RURAL BANKS ACT: Deposits of rural banks with government-owned or controlled financial institutions like the Land Bank of the Philippines, the Development Bank of the Philippines, and the Philippine National Bank are exempted from the Single Borrower's Limit imposed by the General Banking Act. In areas where there are no government banks, rural banks may deposit in private banks more than the amount prescribed by the Single Borrower's Limit, subject to Monetary Board regulations.

4.

Sanctions SUBSEC. 303.5, MRB: Sanctions. Violations of the provisions of this Section shall be subject to the following: a. Monetary penalties - Fines of one- tenth of one percent (1/10 of 1%) of the excess over the ceiling but not to exceed P30,000.00 a day for each SBL violation shall be assessed on the bank to be reckoned from the date the excess started up to the date when such excess was eliminated: Provided, That a maximum fine of P500.00 a day for each violation shall be imposed against banks with total resources of less than P50 million at the time of granting of loan/credit accommodation. b. Other sanctions First Offense – Reprimand for the directors/officers who approved the credit availment which resulted in the excess with a warning that subsequent violations will be subject to more severe sanctions. Subsequent offenses – (1) Fine of P1,000.00 for directors/ officers who approved the credit availment which resulted in the excess. (2) Suspension of the bank’s branching privileges and access to BSP rediscounting facilities until the excess is eliminated. (3) Other penalties as the Monetary Board may impose depending on the gravity of the offense.

NOTES

143

Transitory provision. Outstanding credit commitments of a bank as of 2 May 2004 which are within the ceiling prescribed under the regulations existing prior to said date but will exceed the limitations prescribed in this Section shall not be subject to penalty for a period of one (1) year or until said credit commitments become past due or are extended, renewed or restructured whichever comes later: Said credit commitments shall, however, be reported to the Bangko Sentral within fifteen (15) banking days from 2 May 2004.

D. DOSRI Accounts SEC. 36, GBL: Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. - No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned: Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral. Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in enterprises owned or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans, credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit

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accommodations and advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit.

board of directors of a bank or who is directly or indirectly the registered or beneficial owner of more than ten percent (10%) of any class of its equity security.

The Monetary Board shall define the term “related interests.”

e. Related interest shall refer to any of the following: (1) Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or stockholder of the bank;

The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. SEC. 26, NCBA: Any director, officer or stockholder who, together with his related interest, contracts a loan or any form of financial accommodation from: (1) his bank; or (2) from a bank (a) which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries or (b) in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank, in excess of five percent (5%) of the capital and surplus of the bank, or in the maximum amount permitted by law, whichever is lower, shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of his deposits shall be held strictly confidential and may be used by the examiners only in connection with their supervisory and examination responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving the deposit account. 1.

Coverage: Persons and Transactions Covered SEC. X326, MRB: General Policy. Dealings of a bank with any of its DOSRI should be in the regular course of business and upon terms not less favorable to the bank than those offered to others. Definitions. For purposes definitions shall apply:

of

these

regulations,

the

following

a. Directors shall refer to bank directors as defined in Subsec. X141.1. b. Officers shall refer to bank officers as defined in Subsec. X142.1. c. Stockholder shall refer to any stockholder of record in the books of the bank, acting personally, or through an attorney-in-fact, or any other person duly authorized by him. Stockholder shall also refer to a juridical person such as corporation, association or firm. d. Substantial stockholder shall mean a person, or group of persons whether natural or juridical, owning such number of shares that will allow such person or group to elect at least one (1) member of the

(2) Partnership of which a director, officer, or stockholder of a bank or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner; (3) Co-owner with the director, officer, stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or other credit accommodations, except when the mortgage, pledge or assignment covers only said co-owner’s undivided interest; (4) Corporation, association, or firm of which a director or officer of the bank, or his spouse is also a director or officer of such corporation, association or firm, except (a) where the securities of such corporation, association or firm are listed and traded in the big board or commercial and industrial board of domestic stock exchanges and less than fifty percent (50%) of the voting stock thereof is owned by any one (1) person or by persons related to each other within the first degree of consanguinity or affinity; or (b) where the director, officer or stockholder of the bank sits as a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the minimum shares required by law, rules and regulations, or by the by-laws of the corporation: Provided, further, That the borrowing corporation is not among those mentioned in Items “e(5)”, “e(6)”, “e(7)” and “e(8)” of this Section; (5) Corporation, association or firm of which any or a group of directors, officers, stockholders of the lending bank and/or their spouses or relatives within the first degree of consanguinity or affinity, or relative by legal adoption, hold or own at least twenty percent (20%) of the subscribed

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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 capital of such corporation, or of the equity of such association or firm; (6) Corporation, association or firm wholly or majorityowned or controlled by any related entity or a group of related entities mentioned in Items “e(2)”, “e(4)” and “e(5)” of this Section. (7) Corporation, association or firm which owns or controls directly or indirectly whether singly or as part of a group of related interest at least twenty percent (20%) of the subscribed capital of a substantial stockholder of the lending bank or which controls majority interest of the bank pursuant to Subsec. X303.1. (8) Corporation, association or firm in which the lending bank and/or its parent/ subsidiary holds or owns at least twenty percent (20%) of the subscribed capital of such corporation, or in the equity of such association or firm, or has an existing management contract or any similar arrangement with the lending bank or its parent/subsidiary. f. Subsidiary shall refer to a corporation or firm more than fifty percent (50%) of the outstanding voting stock of which is directly or indirectly owned, controlled or held with power to vote by its parent corporation. g. Unencumbered deposits shall refer to savings, time and demand deposits, which are not subject to an assignment or hold-out agreement or any other encumbrance. h. Book value of the paid-in capital contribution shall mean the proportional amount of the bank’s total capital accounts (net of such unbooked valuation reserves and other capital adjustments as may be required by the BSP) as the corresponding paid-in capital contribution of each of the bank’s directors, officers, stockholders and their related interests bear to the total paid-in capital of the bank: Provided, That as a basis for determining the individual ceiling referred to in Sec. X330, the corresponding book value of the shares of stock of said directors, officers, stockholders and their related interests which are the subject of pledge, assignment or any other encumbrance shall be deducted therefrom. i. Net worth shall mean the total of the unimpaired paid-in capital including paid- in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the BSP.

NOTES

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j. Total loan portfolio shall refer to the sum of all loan accounts outstanding, gross of valuation reserves, as reflected in the bank’s consolidated statement of condition, excluding outstanding loans financed by special/specific funds from the government financial institutions. k. Secured loan, borrowing or other credit accommodation shall refer to any loan, or credit accommodation or portion thereof referred to in Sec. X327 which is secured by: (1) Real estate mortgage, chattel mortgage on tangible assets, and pledge of jewelry, precious stones and other valuable articles; (2) Assignment of intangible assets such as patents, trademarks, trade names and copyrights; (3) Unconditional payment guarantees such as standby letters of credit and letter of indemnity issued by banks/multilateral financial institutions; (4) Assignment of, or hold-out on, deposits or deposit substitutes maintained in the lending bank; (5) Cash margin deposits; or assignment or pledge of government securities or readily marketable bonds and other high-grade debt securities and “blue-chip” stocks, except those issued by the lending entity, or by its parent company which owns more than fifty percent (50%) of its outstanding shares of stocks, subject to the additional provision that the issuer corporation has a net worth of at least P1 billion and with annual net earnings during the immediately preceding five (5) years; (6) Customer’s liability under import bills outstanding for not more than thirty (30) days from date of original entry; (7) Sales contract receivables arising from sale of real property on credit where title to the property is retained by the bank; and (8) Customer’s liability-import bills under trust receipts outstanding for not more than thirty (30) days from date of booking: Provided, That the booking under trust receipts shall have been made not later than the thirty-first day from the date of original entry referred to in Item “(6)” above.

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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 l. Unsecured loan, borrowing or other credit accommodation shall refer to any loan, or other credit accommodation or portion thereof referred in Sec. X327 which is not secured in accordance with Item “k” above. SEC. X327, MRB: Transactions Covered. The terms loans, other credit accommodations and guarantees as used herein shall refer to transactions of the bank which involve the grant of any loan, advance or other credit accommodation in any form whatsoever, whether renewal, extension or increase, and shall include: a. Any advance by means of an incidental or temporary overdraft, cash item, “vale”, etc.; b. Any advance of unearned salary or other unearned compensation for periods in excess of thirty (30) days; c. Any advance by means of DAUDs; d. Outstanding availments under an established credit line; e. Drawings against an existing letter of credit; f. The acquisition of any note, draft, bill of exchange or other evidence of indebtedness upon which the bank’s directors, officers, stockholders, and their related interests may be liable as makers, drawers, acceptors, endorsers, guarantors or sureties; g. Indirect lending such as loans or other credit accommodations granted by another financial intermediary to said directors, officers, stockholders, and their related interests from funds of the bank invested in the other institution’s trust or other department when there is a clear relationship between the transactions;

NOTES

146

SEC. X328, MRB: Transactions Not Covered. The terms loans, other credit accommodations and guarantees as used herein shall not refer to the following: a. Advances against accrued compensation, or for the purpose of providing payment of authorized travel, legitimate expenses or other transactions for the account of the bank or for utilization of maternity and other leave credits; b. The increase in the amount of outstanding credit accommodations as a result of additional charges or advances made by the bank to protect its interest such as taxes, insurance, etc.; c. The discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, including, but not limited to, the acquisition by a domestic bank of export bills from any of its DOSRI which are drawn in accordance with the terms and conditions of the covering letters of credit: Provided, That the transaction shall automatically be subject to the ceilings as herein provided once the DOSRI who is a party to the transaction becomes directly liable to the bank; d. Transactions with a foreign bank which has stockholdings in the local bank where the foreign bank acts as guarantor through the issuance of letters of credit or assignment of a deposit in a currency eligible as part of the international reserves and held in a bank in the Philippines to secure other credit accommodations granted to another person or entity: Provided, That the foreign bank stockholder shall automatically be subject to the ceilings as herein provided in the event that its contingent liability as guarantor becomes a real liability; and e. Interbank call loan transactions.

h. The increase of an existing indebted- ness, as well as additional availments under a credit line or additional drawings against a letter of credit; i. The sale of assets, such as shares of stock, on credit; and j. Any other transactions as a result of which the bank’s directors, officers, stockholders and their related interests become obligated or may become obligated to the lending bank, by any means whatsoever to pay money or its equivalent.

SEC. X329, MRB: Direct or Indirect Borrowings Loans, other credit accommodations and guarantees to DOSRI shall be considered direct or indirect borrowings in accordance with the following criteria: a. Direct borrowing. If the director, officer or stockholder of the lending bank is a party to any of the transactions enumerated in Sec. X327 for himself, or as the representative or agent of others, or if he acts as a guarantor, endorser or surety for loans from the bank, or if the loan or other credit accommodation to another party is secured by a property interest or right of the director, officer or stockholder.

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b. Indirect Borrowing. If in any of the transactions in Sec. X327 the borrower, guarantor, endorser or surety is a related interest as defined in Item “e”, Subsec. X326.1. Other cases of direct/indirect borrowing shall be resolved on a caseto-case basis. It shall be the responsibility of the bank concerned to ascertain whether the borrower, guarantor, endorser or surety is related or connected with the bank or with any of the directors, officers or stockholders of the bank in any of the capacities mentioned in Item “e” of Subsec. X326.1. In determining indirect borrowings, as enumerated above, only those cases involving living relatives shall be considered. 2.

Ceilings: Individual and Aggregate Ceilings and Exclusions SEC. X330, MRB: Individual Ceilings. The total outstanding loans, other credit accommodations and guarantees to each of the bank’s DOSRI shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That unsecured loans, other credit accommodations and guarantees to each of the bank’s DOSRI shall not exceed thirty percent (30%) of their respective total loans, other credit accommodations and guarantees. Exclusions from individual ceiling. The following loans, other credit accommodations and guarantees shall be excluded in determining compliance with the individual ceiling. a. Loans, other credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board; Assets considered as non-risk shall refer to the following: (1) Cash; (2) Debt securities issued by the BSP or the Philippine government; (3) Deposits maintained in the lending bank and held in the Philippines; (4) Debt securities issued by the U.S. government; (5) Debt securities issued by central governments, central banks of foreign countries and multilateral financial institutions such as International Finance Corporation, Asian Development Bank and World Bank, with the highest credit quality given by any two (2) internationally accepted rating agencies; and

NOTES

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(6) Such other assets considered as non- risk by the Monetary Board. b. Loans, other credit accommodations and advances to officers in the form of fringe benefits granted in accordance with existing regulations; and c. Loans, other credit accommodations and guarantees extended by a Coop Bank to its cooperative shareholders. SEC. X331, MRB: Aggregate Ceiling; Ceiling on Unsecured Loans, Other Credit Accommodations and Guarantees. Except with the prior approval of the Monetary Board, the total outstanding loans, other credit accommodations and guarantees to DOSRI shall not exceed fifteen percent (15%) of the total loan portfolio of the bank or 100% of net worth whichever is lower: Provided, That in no case shall the total unsecured loans, other credit accommodations and guarantees to said DOSRI exceed thirty percent (30%) of the aggregate ceiling or the outstanding loans, other credit accommodations and guarantees, whichever is lower. For the purpose of determining compliance with the ceiling on unsecured loans, other credit accommodations and guarantees, banks shall be allowed to average their ceiling on unsecured loans, other credit accommodations and guarantees every quarter. In evaluating requests for extension of loans in excess of the aggregate ceiling, the BSP shall consider the credit standing of the borrower, viability of the projects financed by such other credit accommodations in relation to national objectives, collateral or security and other pertinent considerations. SEC. X332. MRB: Exclusions from Aggregate Ceiling. The following loans, other credit accommodations and guarantees shall be excluded in determining compliance with the aggregate ceiling: a. Credit accommodations or portions thereof to the extent secured by assets considered as non-risk by the Monetary Board; b. Credit accommodations to a corporate stockholder which meets all the following conditions: (1) The corporation is a non-financial institution; (2) Its shares are listed and traded in the domestic stock exchanges; and (3) No person or group of persons related within the first degree of consanguinity or affinity holds/owns more than twenty percent (20%) of the subscribed capital of the corporation.

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NOTES

c. Credit accommodations to government-owned or controlled corporations, in cases where a director, officer or stockholder of the lending bank is a representative of the government in the borrowing corporation and does not hold any proprietary interest in such corporation: Provided, That other rules on loans to DOSRI, such as procedural and reportorial requirements under Sections X334 and X335 are followed.

participated in the board meeting and who approved such resolution failed to sign, the corporate secretary may issue a certification to this effect indicating the reason for the failure of the said director to sign the resolution. e. Transmittal of copy of board approval; contents thereof. A copy of the written approval of the board of directors, as herein required, shall be submitted to the appropriate supervising and examining department of the BSP within twenty (20) banking days from the date of approval. The copy may be a duplicate of the original, or a reproduction copy showing clearly the signatures of the approving directors: Provided, That if a reproduction copy is to be submitted, it shall contain on its face or reverse side a signed certification by the secretary that it is a reproduction of the original written approval: Provided, further, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the BSP.

d. Exclusions from individual ceiling mentioned under Items “(b)” and “(c)” of Subsec. X330.1. 3.

148

Requirements: Procedural and Reportorial SEC. X334, MRB: Procedural Requirements. The following provisions shall apply if the bank’s DOSRI are parties to, or act as representatives or agents of others in, any of the transactions enumerated under Sec. X327: a. Approval of the board, when to obtain. Except with prior written approval of the majority of the directors, excluding the director concerned, no loan, other credit accommodation and guarantee shall be granted nor shall any of the transactions enumerated under Sec. X327 be entered into.

SEC. X335, MRB: Reportorial Requirements. Each bank shall maintain a record of loans, other credit accommodations and guarantees covered by these regulations in a manner and form that will facilitate verification of such transactions by BSP examiners.

b. Approval by the board, how manifested. The approval shall be manifested in a resolution passed by the board of directors during a meeting and made of record.

The appropriate supervising and examining department may require banks to furnish such data or information as may be necessary for purposes of implementing the provisions of the foregoing rules.

c. Determination of majority of the directors. The determination of the majority of the directors, excluding the director concerned, shall be based on the total number of directors of the bank as provided in its articles of incorporation and by-laws. d. Contents of the resolution. The resolution of the board of directors shall contain the following information: (1) Name of the director or officer concerned and his involvement as regards the credit accommodation, such as principal, endorser, spouse of borrower, etc.; (2) Nature of the loan or other credit accommodation, purpose, amount, credit basis for such loan or other credit accommodation, security and appraisal thereof, maturity, interest rate, schedule of repayment and other terms of the loan or other credit accommodation; (3) Date of resolution; (4) Names of the directors who participated in the deliberations of the meeting; and (5) Names in print and signatures of the directors approving the resolution: Provided, That in instances where a director who

4.

Sanctions SEC. X336, MRB: Sanctions. Any violation of the provisions of the foregoing rules shall be subject to any or all of the following sanctions: a. Restriction or prohibition on the bank from declaring dividends for non-compliance with the prescribed ceiling on DOSRI until the outstanding loans and other credit accommodations have been reduced to within the herein prescribed ceilings; b. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act; c. Application of (1) the borrowing director’s or officer’s share in the bank’s profit sharing program; and (2) the share of the director voting for the approval of the loan or other credit accommodation, against the excess of such loan or other credit accommodation over any of the herein prescribed ceilings; and

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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

d. For the duration of each violation, imposition of a fine of onetenth of one percent (1/10 of 1%) of the excess over the ceilings per day but not to exceed P30,000 a day on the following: (1) The lending bank; (2) The director, officer or stockholder whose borrowing exceeds his individual ceiling; and (3) Each of the directors voting for the approval of the loan or other credit accommodation in excess of any of the ceilings prescribed in Secs. X330 and X331. The penalty for exceeding the individual ceiling, aggregate ceiling and ceiling on unsecured loans shall be computed on the average amount of loans in excess of said ceilings during the same week.

E. Collateral/Security 1.

Unsecured Loans SEC. X319, MRB: General guidelines. Before granting a loan or other credit accommodation, a bank must ascertain that the borrowers, co-makers, endorsers, sureties and/or guarantors are financially capable of fulfilling their commitments to the bank. For this purpose, banks shall obtain adequate information on their credit standings and financial capacities. Proof of financial capacity of borrower. In addition to the usual information sheet about the borrower, banks may require submission of a statement of the borrower’s assets and liabilities. Banks shall, however, require the following: a. A copy of the latest Income Tax Return (ITR) of the borrower and his co-maker, if applicable, duly stamped as received by the Bureau of Internal Revenue (BIR); and b. Except as otherwise provided in other regulations, if the borrower is engaged in business, a copy of the borrower’s latest financial statements as submitted for taxation purposes to the BIR. Should the document(s) submitted prove to be spurious or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said document(s) and shall have the right to demand immediate repayment or liquidation of the obligation. Moreover, the bank may seek redress from the court for any harm done by the borrower’s submission of spurious documents. Signatories. Banks shall require that loans and other credit accommodations be made under the signature of the principal

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borrower and in the case of unsecured loans and other credit accommodations to an individual borrower, at least one (1) comaker, except when the principal borrower has the financial capacity and a good track record of paying his obligations. 2.

Joint and Solidary Signature (JSS) ART. 2047, NCC: By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

Cases PNB v CA, 198 SCRA 767 (1991) PNB v. CA FACTS EE Depusoy Construction entered into a building contract with the Bureau of Public Works for the construction of the GSIS Building. Requiring money for such construction, Depusoy applied credit accommodation by PNB. As security, Depusoy executed a Deed of Assignment in favor of PNB, assigning all money to be received from GSIS. As additional security, Luzon Surety executed 2 surety bonds. 2 years later, Depusoy defaulted in the building contract. As a result, GSIS stopped payment. PNB now demands payment for the credit accommodation it extended to Depusoy. It filed a complaint in the courts. RTC granted PNB’s recourse against Depusoy but not with Luzon Surety. CA affirmed the decision. Initially, SC dismissed the appeal of PNB due to lack of merit and pertaining to factual issues. This is the MR. ISSUE W/N Luzon Surety should be held solidarily liable with Depusoy. RULING NO. As based on the findings of both RTC and CA, Depusoy and Luzon Surety bound themselves jointly and severally to PNB on the ground of the Deed of Assignment only. Luzon Surety executed the bonds to guarantee the faithful performance of Depusoy in his obligation under the Deed of Assignment, NOT to guarantee the payment of loans of Depusoy to PNB. Even Delfin Santiago, Manager of PNB, admitted that what was guaranteed was the Deed of Assignment and not the loan. As the language of the bonds is clear and explicit, there is no doubt to require an interpretation. Even if there is doubt, the issue should be resolved in favor of the surety based on Art 2055 – “guaranty is not

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 presumed, it must be expressed and cannot extend to more than what is stipulated therein”. Thus, the liability of the surety is measured by the terms of the contract and strictly limited by its terms.

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longer connected with the corporation. They should have introduced a new surety for the new loan. 3.

Security Bank v Cuenca, 341 SCRA 781 (2000) FACTS Sta Ines is a corporation engaged in logging operations. They were able to obtain a credit line from Security Bank expiring on November 1 1981 for an amount not exceeding P8.8M. Sta Ines executed a chattel mortgage over its machineries and equipments, while having Rodolfo Cuenca execute an indemnity agreement, being solidary liable with Sta Ines. They availed of the credit line only on one instance, worth P6.1M. Four years after the expiration, Cuenca resigned as President, and his shares of stock was sold to Adolfo Angala through public auction. Sta Ines was able to obtain additional loan, and restructured its previous credit line with the bank to accommodate the extra loan obtained, without informing Cuenca of such deal. Sta Ines defaulted and the bank demanded from both the corporation and Cuenca.

4.

***A "joint and solidary signature" is a common practice of a bank where they require a major stockholder or corporate officer as an additional security for loans granted to the corporation for two reasons: the bank can go beyond the veil of separate corporate entity and go after the surety; second, it assures the bank that the loan will be used for the purpose agreed upon. As Cuenca was not related to the bank at the time of the restructuring of the credit line for which he was previously a surety, there is no reason to include him again. There had been negligence on the part of the bank when he was still considered as a surety, as it failed to realize that Cuenca was no

Loans Secured by Chattels or Intangible Property a. Limits SEC. 38, GBL: Loans And Other Credit Accommodations on Security of Chattels and Intangible Properties. - Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, an such loans and other credit accommodation may be made to the title-holder of the chattels and intangible properties or his assignees. b.

ISSUE Whether Cuenca is still liable to the bank RULING NO. When additional loan was given to Sta Ines that paved way for the restructuring of the credit line, there had been a novation of agreements between the bank and the corporation, which removed the accessory obligation of Cuenca as surety. There were also several inconsistencies between both agreements that the two cannot coexist. Art 1296 states that, "when principal obligation is extinguished in consequence of a novation, accessory obligation (in this case a surety agreement) may subsist only insofar as they may benefit third persons who did not give their consent." Also, Art 2079 which the CA relied on states that, "an extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty."

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Types of Security i. Chattel Mortgage ii. Pledge iii. Hold-Out and/or Assignment

Loans Secured by Real Estate Mortgages (REMs) a. Limits SEC. 37, GBL: Loans and Other Credit Accommodations Against Real Estate. – Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees.

b. Mortgagee in Good Faith v Mortgagee in Bad Faith Cases Phil. National Coop Bank v Carandang-Villalon, 139 SCRA 570 (1985) FACTS Faustino Galvan was the owner of the parcel of land, being litigated in this case, when it was donated to his daughter, Aida Galvan. He was a lessee of Spouses Dionisio Galvan and Carmen Cabrera when he failed to pay rentals. The spouses sued him for the unpaid rentals where he lost the case. During execution, the spouses died, and the administrators Bengzon and Jimenez continued the execution. A year after the finality of the case against her father, Aida mortgaged the property to the bank. The administrators failed to execute the judgement, thus they tried to rescind the donation, alleging that it was done in fraud of creditors. The bank was not impleaded in this case. The administrators won in the CA level, which became final and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 executory. The property was sold at public auction to the administrators. The bank then foreclosed the property upon failure of Aida to pay the bank, where the bank was the highest bidder. However, it failed to register the property in its name, since the mortgagor was no longer the owner of the property.

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harmonious system. It simply confirms a title already created and already vested, rendering it forever indefeasible. If one happened to obtain a certificate of title by mistake, to the prejudice of another, with or without bad faith, the certificate of title should be cancelled.

ISSUE Whether or not the bank is entitled to the protection accorded to "innocent purchasers for value"

2. YES. Cajes can still claim the property since constructive trust that prescribes in ten years does not run on property held by in possession by the plaintiff. When a person claiming to be the owner has actual possession of the property, an action to seek reconveyance does prescribe.

RULING YES. Where the Torrens Title of the land was in the name of the mortgagor and later given as security for a bank loan, the subsequent declaration of said title as null and void is not a ground for nullifying the mortgage rights of the bank, which acted in good faith. The claim cannot be justified that the bank, before accepting the mortgage, should have made an investigation of the title, as such claim would be unreasonable.

3. NO. DBP was not in good faith when it became a mortgagee on two grounds. First, the bank was told by the spouses that the property was in possession of Cajes. Second, the bank's representative conducted an investigation of the property when Cajes mortgaged the property with the bank. DBP was fully aware that a person, other than the registered owner was in possession of the property. They disregarded such fact, and now they cannot feign ignorance of Cajes's claim.

DBP v CA, 331 SCRA 267 (2000) FACTS Ulpiano Mumar was the original owner of the disputed land when it was sold to Carlos Cajes. Cajes was issued a tax declaration for the property he bought. Unknown to them, Jose Alvarez was able to register a parcel of land, which included the property sold to Cajes. Alvarez sold the land to Spouses Beduya, which they were issued a TCT. The spouses mortgaged the property to DBP, for a loan which they were not able to pay. DBP foreclosed the property, and consolidated its ownership over the property.

Canlas v CA, 326 SCRA 425 (2000) FACTS Osmundo Canlas and Vicente Mañosca decided to venture into business and to raise the capital needed. The former executed an SPA authorizing the latter to mortgage two parcels of land in the name of himself and his wife Angelina.

Prior to the foreclosure, Cajes also applied for a loan with DBP, using the property sold to him. The property was inspected, and the loan was granted. However, it was discovered the property was really part of the land mortgaged by the spouses for which they cancelled the loan. A year after the foreclosure, they tried to re-appraise the property, and found out that the property was occupied by the Cajes. DBP filed a suit for recovery of property. ISSUES: (non-banking) 1. Whether DBP has a right over the property 2. Whether Cajes can still claim the property 3. Whether DBP was in good faith when the property was bought (banking issue) RULING: 1. NO. Registration has never been a mode of acquiring ownership over immovable property. The sole purpose of the creation of Land Registration was to bring land titles of the Philippines under one comprehensive and

Subsequently, Canlas agreed to sell the said lands to Manosca for P850K, P500K of which was payable within one week, and the balance of P350K to serve as his investment. Canlas delivered the TCTs and Mañosca issued two postdated checks in the amounts of P40K and P460K respectively, but it turned out that the latter check was not sufficiently funded. Later on, Mañosca was able to mortgage the same parcels of land for P100k to a certain Atty Magno, with the help of impostors who misrepresented themselves as the spouses Canlas. After that, Mañosca was granted a loan by the respondent Asian Savings Bank (ASB) in the amount of P500,000.00, with the lands as security, and with the same impostors who again introduced themselves as the Canlas spouses. When the loan it extended was not paid, respondent bank extrajudicially foreclosed the mortgaged. Before the auction could be held, (the real) Osmundo Canlas wrote a letter informing the respondent bank that the execution of subject mortgage over the two parcels of land in question was without their authority, and requested that steps be taken to annul the questioned mortgage. But Asian Savings Bank refused and proceeded with the scheduled auction sale. Consequently, Canlas instituted the present case for annulment of deed of real estate mortgage; the trial court issued an Order restraining the sheriff from issuing the corresponding Certificate of Sheriff’s Sale. Mañosca was declared in default.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 The lower court annulled the mortgage. CA reversed, reinstating the mortgage. ISSUE Whether the bank was a mortgagee in good faith HELD NO. Reversed. Not even a single identification card was exhibited by the said impostors to show their true identity; and yet, the bank acted on their representations simply on the basis of the residence certificates bearing signatures which tended to match the signatures affixed on a previous deed of mortgage to a certain Atty. Magno, covering the same parcels of land in question. But the previous deed of mortgage did not bear the tax account number of the spouses, nor the Community Tax Certificate of Angelina Canlas. But such fact notwithstanding, the bank did not require the impostors to submit additional proof of their true identity. Under the doctrine of last clear chance, which is applicable here, the respondent bank must suffer the resulting loss. Settled is the rule that a contract of mortgage must be constituted only by the absolute owner on the property mortgaged; a mortgage constituted by an impostor is void. c.

Acquisition of Property By Way of Satisfaction of Claims SEC. 52, GBL: Acquisition of Real Estate by Way of Satisfaction of Claims. – Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances: 52.1. Such as shall be mortgaged to it in good faith by way of security for debts; 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section.

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d. “Dragnet Clause” or “Blanket Mortgage Clause” Cases Union Bank v CA, 471 SCRA 751 (2005) FACTS DRossa Incorporated (DRI) mortgaged parcels of land in favor of Union Bank as security for the credit facility of Josephine Marine Trading Corporation (JMTC). JMTC availed P3m from the credit line. It was increased to 8.61m. Subsequently, Union Bank unilaterally increased the credit facility of JMTC to P27 million, from which JMTC availed P18.3M. Upon JMTC's failure to pay its obligation, Union Bank instituted foreclosure proceedings on DRI's properties. Union bank was the highest bidder. DRI filed a complaint seeking to declare the public sale as null. It claimed that its liability is only P8.61 million which was the liability incurred by JMTC under its first agreement with Union Bank. However, Union Bank alleged that DRI was liable to JMTC's total outstanding obligations, regardless of whether it was incurred during or subsequent to the first agreement. The Trial Court dismissed the complaint, the CA reversed. The CA said that the mortgage was pegged at 8.61M and thus DRI could not be made liable for more than this. ISSUE What is the liability of DRI? HELD DRI is liable to the full extent of JMTC's obligations, because the mortgage contained a dragnet clause. The pertinent provisions of the Real Estate Mortgage provide: "The obligations secured by this Mortgage (the Secured Obligations') are the following:...any and all instruments or documents issued upon the renewal, extension, amendment or novation of the Notes, the Agreement and this Mortgage, irrespective of whether such obligations as renewed, extended, amended or novated are in the nature of new, separate or additional obligations" "A blanket mortgage clause, also known as a 'dragnet clause in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are 'carefully scrutinized and strictly construed. Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A 'dragnet clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered." 5.

Foreclosure of REMs a. Types of Foreclosure i. Judicial RULE 68, ROC Section 1. Complaint in action for foreclosure. In an action for the foreclosure of a mortgage or other encumbrance upon real estate, the complaint shall set forth the date and due execution of the mortgage; its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of the mortgaged property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action. Sec. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. Sec. 3. Sale of mortgaged property; effect. When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgment within the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution. Such

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sale shall not affect the rights of persons holding prior encumbrances upon the property or a part thereof, and when confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law. Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure. Sec. 4. Disposition of proceeds of sale. The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled to it. Sec. 5. How sale to proceed in case the debt is not all due. If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment, as soon as a sufficient portion of the property has been sold to pay the total amount and the costs due, the sale shall terminate; and afterwards, as often as more becomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire debt and costs shall be paid, if the proceeds of the sale be sufficient therefor, there

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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being a rebate of interest where such rebate is proper. Sec. 6. Deficiency judgment. If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment. Sec. 7. Registration. A certified copy of the final order of the court confirming the sale shall be registered in the registry of deeds. If no right of redemption exists, the certificate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser. Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the certificate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said certificate of title. If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. Sec. 8. Applicability of other provisions. The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial foreclosure of real

154

estate mortgages under this Rule insofar as the former are not inconsistent with or may serve to supplement the provisions of the latter. ii.

Extra-Judicial ACT NO. 3135, as amended

iii.

Specific Rules for TB/RB/Coop Banks SEC. 6, RURAL BANKS ACT: Loans or advances extended by rural banks organized and operated under this Act shall be primarily for the purpose of meeting the normal credit needs of farmers, fishermen or farm families owning or cultivating land dedicated to agricultural production as well as the normal credit needs of cooperatives and merchants. In the granting of loans, the rural bank shall give preference to the application of farmers and merchants whose cash requirements are small. Loans may be granted by rural banks on the security of lands without Torrens Title where the owner of private property can show five (5) years or more of peaceful, continuous and uninterrupted possession in concept of owner; or of portions of friar land estates or other lands administered by the Bureau of Lands that are covered by sales contracts and the purchasers have paid at least five (5) years installment thereon, without the necessity of prior approval and consent by the Director of Lands, or of portions of other estates under the administration of the Department of Agrarian Reform or other governmental agency which are likewise covered by sales contracts and the purchasers have paid at least five (5) years installment thereon, without the necessity of prior approval and consent of the Department of Agrarian Reform or corresponding governmental agency; or of homesteads or free patent lands pending the issuance of titles but already approved, the provisions of any law or regulations to the contrary notwithstanding: Provided, That when the corresponding titles are issued, the same shall be delivered to the Register of Deeds of the province where such lands are situated for the annotation of the encumbrance: Provided, further, That in the case of lands pending homestead or free patent titles, copies of the notices for the presentation of the final proof shall also be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 furnished the creditor rural bank and, if the borrower applicants fail to present the final proof within thirty (30) days from date of notice, the creditor rural bank may do so for then at their expense: Provided, furthermore, That the applicant for homestead or free patent has already made improvements on the land and the loan applied for is to be used for further development of the same or for other productive economic activities: Provided, finally, That the appraisal and verification of the status of a land is a full responsibility of the rural bank and any loan granted on any land which shall be found later to be within the forest zone shall be for the sole account of the rural bank. The foreclosure of mortgages covering loans granted by rural banks and executions of judgment thereon involving real properties levied upon by sheriff shall be exempt from the publications in newspapers now required by law where the total amount of loan, excluding interests due and unpaid, does not exceed One Hundred thousand Pesos (P100,000) or such amount as the Monetary Board may prescribe as may be warranted by prevailing economic conditions. It shall be sufficient publication in such cases if the notices of foreclosure and execution of judgment are posted in the most conspicuous area of the municipal building, the municipal public market, the rural bank, the barangay hall, and the barangay public market, if any, where the land mortgaged is situated during the period of sixty (60) days immediately preceding the public auction or execution of judgment. Proof of publication as required herein shall be accomplished by an affidavit of the sheriff or officer conducting the foreclosure sale or execution of judgment and shall be attached with the records of the case: Provided, That when a homestead or free patent is foreclosed, the homesteader or free patent holder, as well as his heirs shall have the right to redeem the same within one (1) year from the date of foreclosure in the case of land not covered by a Torrens Title or one (1) year from the date of the registration of the foreclosure in the case of land covered by a Torrens Title: Provided, finally, That in any case, borrowers, especially those who are mere tenants, need only to

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secure their loans with the procedure corresponding to their share. A rural bank shall be allowed to foreclosure lands mortgaged to it; Provided, That said lands shall be covered under Republic Act No. 6657. b.

Right and Period of Redemption SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. (i) Exception SEC. 47 (2), GBL: Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (ii) Exercise of Right of Redemption Cases Metrobank v Tan, 569 SCRA 814 (2009) FACTS Lamb Construction Consortium Corporation obtained a P5.5M loan from Metropolitan Bank & Trust Co. To secure the loan, respondent executed a Real Estate Mortgage involving six parcels of land. Lamb failed to pay the loan upon maturity hence petitioner filed a petition for the extra-judicial foreclosure of the said properties. During the auction sale MBTC emerged as the highest bidder with the bid amount of P6.7M. During the period of redemption, MBTC filed a verified petition for issuance of a writ of possession. It alleged that notwithstanding its demands, Lamb refused and failed to turn over actual possession of the foreclosed properties. The RTC denied the issuance of the writ on the ground that because MBTC had not yet deposited the surplus (1.4M) from the foreclosure sale. The CA reversed and allowed the issuance of the writ, but still ordered MBTC to pay the surplus. MBTC appealed to the SC, arguing that in a petition for the issuance of a writ of possession, it is improper to rule upon the surplus or excess of the purchase price because the only issue that must be resolved is the purchaser’s entitlement to the writ. If there is any surplus or excess, the remedy of the respondent is to file an independent action for collection of surplus. ISSUE Whether or not the above statement is correct, and whether the writ of possession should be issued. HELD YES, the only issue to be resolved is the purchaser's entitlement to the writ. But for peculiar reasons, the writ of possession should NOT be a matter of right, but a matter of discretion. However, since the period to redeem has already lapsed, this point has become moot and the writ must now be issued. As a general rule, the issuance of a writ of possession is ministerial. However, there are exceptions. In Sulit v. Court of Appeals we withheld the issuance of a writ of possession because the mortgagee failed to deliver the surplus from the proceeds of the foreclosure sale which is equivalent to approximately 40% of the total mortgage debt. In Barican v. IAC, long before the mortgagee bank had sold the disputed property to the respondent therein, it was no longer the judgment debtor who was in possession but the petitioner spouses who had assumed the mortgage, and that there was a pending civil case involving the rights of

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third parties. Hence, it was ruled therein that under the circumstances, the obligation of a court to issue a writ of possession in favor of the purchaser in a foreclosure of mortgage case ceases to be ministerial, because under Act 3135, the possession of the mortgaged property may be awarded to a purchaser in the extrajudicial foreclosure "unless a third party is actually holding the property adversely to the judgment debtor." In Cometa v. IAC, where the properties in question were found to have been sold at an unusually lower price than their true value, that is, properties worth at least P500K were sold for only P57K, the court decided to withhold the issuance of the writ of possession on the ground that it could work injustice because the petitioner might not be entitled to the same. The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is based on the theory that the lesser the price the easier it will be for the owner to effect the redemption. The same thing cannot be said where the amount of the bid is in excess of the total mortgage debt. The reason is that in case the mortgagor decides to exercise his right of redemption. The redemption price should be equivalent to the amount of the purchase price, plus 1% monthly interest up to the time of the redemption, plus assessments or taxes which the purchaser may have paid, and interest. Applying this to the present case would be highly iniquitous because that would mean exacting payment at a price unjustifiably higher than the real amount of the mortgage obligation. Simply put, such a construction will undeniably be prejudicial to the substantive rights of private respondent and it could even effectively prevent it from exercising the right of redemption. HOWEVER, since the period to redeem has already lapsed, as in this case, the writ must be granted. The failure of the mortgagee to deliver the surplus proceeds does not affect the validity of the foreclosure sale. It gives rise to a cause of action for the mortgagee to file an action to collect the surplus proceeds. An action to collect the surplus proceeds is improper where there is a pending action for the nullification of the foreclosure proceedings. (iii) Extension of Redemption Period Cases Lazo v Republic Surety and Insurance Co, 31 SCRA 329 (1970) FACTS Jose Robles obtained a loan (12k) from Philippine Bank of Commerce. Republic Surety & Insurance Co (Respondent) acted as the surety/co-debtor for Robles with respect the loan obtained from the bank. On the other hand, lazo spouses (petitioners) are the guarantors of Robles for the surety contract and, in connection therewith, petitioner spouses executed a Real Estate Mortgage over their property in favor of Respondent.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

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Robles defaulted in the payment of the note covering the obligation with the bank. It has been renewed several times until finally, the note was transferred by the bank to Republic Investment. Robles still defaulted in payment, hence, Respondent already paid the obligation. In turn, Respondent foreclosed extra-judicially the REM on July 1, 1958, respondent being the purchaser of the property. The sheriff cert. was issued on Aug. 2 1958. After which, due to the insistence of the petitioners, they started paying rent to respondent and they were able to secure an extension for the redemption of the foreclosed property. Several more extension were sought and granted until 1963 where Jose Robles still reneged in his obligation to redeem the property. The title to the property was consolidated in the name of Respondent via registration of the deed of absolute sale and sheriff’s cert. of sale on Mar. 28, 1963.

Ibaan Rural Bank v CA, 321 SCRA 88 (1999) FACTS The spouses Reyes were owners of 3 lots covered by 3 TCTs. The spouses mortaged these lots to Ibaan Rural Bank, Inc.

The Petitioner claims that the 1 year legal period of redemption should start to run from Mar. 28, 1963. Since, they filed their action on December of the same year (1968), then their right to redeem has not prescribed.

Private respondents then tried to redeem the properties and tendered payment. However, the bank refused the redemption on the ground that it had consolidated its tiles over the lot. Respondents then filed a complaint asking the foreclosure to be held void because there was no notice and that they were entitled to redeem the lots because they tendered payment for redemption before the 2-year period for redemption expired. TC ruled in favour of the private respondents.

ISSUE Whether the period of redemption already expired? RULING: No it did not expire. The court ruled that the parties had abandoned entirely the concept of legal redemption in this case and converted it into one of conventional redemption, in which the only governing factor was the agreement between them. The registration of the certificate of sale on March 28, 1963 was entirely unnecessary and irrelevant to the question of when the period of redemption agreed upon expired. The record shows that the last request for extension approved by the defendant is that contained in the letter of Jose Robles dated May 30, 1960, at the bottom of which appears the handwrittten notation: "Ok for last extension one month. Please attach note of Mr. Lazo," this last evidently referring to the latter's confirmatory letter of May 31, 1960, Consequently, the period to redeem expired on June 30, 1960. The plaintiffs' repeated requests for time within which to redeem, each with a definite date of expiration, generated binding contracts when approved by the defendant company. A contract, needles to say, has the force of law between the parties. In any event, the principle of estoppel would step in to prevent the plaintiffs from going back upon their own acts and representations to the prejudice of the other party who relied upon them. This is a principle of equity and natural justice, expressly adopted in our Civil Code and in Rule 31 of the Rules of Court.

The spouses Reyes, as sellers, and the spouses Tarnate (private respondents) entered into a Deed of Absolute Sale with Assumption of Mortgage of the lots. Respondents failed to pay the assumed loan so Ibaan Rural Bank foreclosed on the property extra-judicially. The provincial Sheriff conducted a public auction of the lots and awarded the lots to the bank, the sole bidder. The certificate of sale stated that the redemption period expires in 2 years from the registration of the sale. No notice of extrajudicial foreclosure was given to the private respondents.

ISSUE Was there proper redemption despite the expiration of the 1 year right of redemption? Was the 2-year redemption period unilaterally made by the sheriff valid despite neither party agreeing to such? HELD Yes, there was a proper redemption by the respondents. When petitioner received a copy of the certificate of sale registered at the RD, it had actual and constructive knowledge of the certificate and its contents. For two years it did not object to the two-year extension of the redemption period. Thus it could be said that the petitioner consented to the two-year redemption period especially since It had time to object to it and did not. When circumstances imply a duty to speak on the part of a person for whom an obligation is proposed, his silence can be construed as consent. By its silence and inaction, petitioner misled private respondent to believe that they had two years within which to redeem the mortgage. After the lapose of two years, petitioner is esopped from asserting that the period for redemption was only one year and that the period had already lapsed. Estoppel in pais arises when one, by his acts, representations or admissions, or by his own silence when he out to speak out, intentionally or though culpable negligence, induces another to believe certain facts to exist and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts. The CA in affirming decision of the TC relied on Lazo vs Republic surety, which stated that the one year period of redemption provided in act no. 3135 is only directory and can be extended by agreement of the parties. This is not so in the instant case. There was no voluntary agreement. The sheriff unilaterally and arbitrarily extended the period of redemption to two years in the certificate of sale. The parties were not privy to the extension made by the sheriff. Nonetheless, as above discussed, the bank can not after the lapse of two years insist that the redemption period was one year only. The rule on redemption is liberally interpreted in favor of the original owner of the property. Such interpretation will be as loose as the morals of Alex as proven by his many homosexual advances on men. (iv) Tolling of Redemption Period Cases Sumerariz v DBP, 21 SCRA 1374 (1967) FACTS Plaintiffs Spouses Sumerariz constituted in favour of Rehabilitation Finance Corporation, now Development Bank of the Philippines, an REM on two parcels of land in San Andres Subdivision, Manila with TCTs in the couple’s name to guarantee a loan for 15K. Plaintiffs did not pay for the loan so DBP foreclosed. After several postponements of the public auction on plaintiff’s request, sale was set for march 29, 1955. Upon the behest of Juan sumerariz, made the day before, the bank agreed to postpone the sale if there was a token payment of at least 100 before 9am the next day. No such payment was made so the bank bought the property on march 29 for 8k as the highest bidder. Bank notified plaintiffs they had one year to redeem the property or note later than march 29, 1956 upon down payment of P2806, the balance payable in ten years at the rate of 166 per month. Instead of exercising redemption, on march 26, 1956 plaintiffs filed a case against the bank and sheriff of manila to set aside the foreclosure sale on the ground that the bank failed to comply with its agreement to postpone the auction sale scheduled to be held on march 29, 1956. In July 1956 the bank sold the property to Philippine Surety and Insurance Co. In 1958 the case of the Sumerariz was dismissed because the plaintiffs had not redeemed the property within the period prescribed by law therefore the bank has thereby become its absolute owner. The couple lost all the way to the SC hence the present case against the bank and the Surety Co to annul the sale made to the latter by the bank and to be allowed to redeem the property in question.

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Defendants plead res judicata and prescription and set a counterclaim for rentals plus attorney’s fees. Court dismissed the case and demanded plaintiffs to vacate the property and to pay 100 a month to the bank from march 30 1060 until property is vacated. Plaintiffs appealed to the CA, which the CA then certified to the SC on questions of law. ISSUE Whether or not the plaintiffs had a right to redeem the property still? (whether or not the filing of a case to annul foreclosure suspends the period for redemption? HELD NO, it does not suspend the period. There is no statue or decision that supports the plaintiff’s contention that the period of one year to redeem land sold at a sheriff’s sale was suspended by the institution of an action to annul the foreclosure sale. Moreover, up to now, plaintiffs have not exercised the right to redemption. Indeed, although they have intimated their wish to redeem the property in question, they have not deposited the amount necessary therefore. As to res judicata, although not a party in the first case, the inclusion of the surety co as a defendant in the case at bar does not detract from the legal identity of both cases because by buying the property subject matter of both cases from the bank, the sure co became merely the bank’s successor in interest. Neither does the absence of the sheriff in the first case negate the identiy inasmuch as the sheriff was but a formal party in said previous case and is virtually a party in the present case although not mentioned explicitly as such therein. People’s Financing Corp v CA, 192 SCRA 34 (1990) FACTS Kalmar Construction and Muning Exploration Co. purchased several pieces of heavy equipment from J.P. Enterprises for the total amount of P787,000. The buyer paid 30% (P237,000) of the price and 18 paid monthly instalments for the rest (P550,000). Additional charges were stated therein in cases where there is overdue instalments/amount. A promissory note and a chattel mortgage were signed by the officers, including the respondents herein, of Kalmar to secure the amount unpaid by the latter. On the same date, the seller assigned the promissory note and the chattel to People’s Financing Corporation. Respondent Manliguez and his wife executed a real estate mortgage on one of the parcel of land owned by them as additional security for the existing obligation (re: promissory note). Thereafter, the petitioners caused the foreclosure of this mortgage for nonpayment of the promissory note. Petitioner PFC was the highest bidder and was registered accordingly.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 The private respondents moved to annul the foreclosure and sure for damages. The lower court issued an injunction of the registration of Final Deed of Sale and ruled in favor of the complainants granting them 1) P191,906.00 worth of additional charges to be returned by the petitioners for not properly informing the private respondents of such charges, 2) right to redeem the mortgaged property. On the matter of right of redemption. The lower court ruled that the oneyear period of redemption has never commenced because the issuance of the Final Deed of Sale set for by the Sheriff was stopped by the trial court. On registered lands, the one-year period of redemption starts not from the date of the sale but from the date when the certificate of sale issued by the sheriff is registered in the office of the register of deeds. ISSUE (Relevant to topic) Whether the right to redemption was properly granted? RULING NO. The certificate of sale was duly registered by the petitioners in the Office of the Register of Deeds of Mandaue City. From thereon, the one-year redemption began. Since the private respondents did not exercise their right of redemption from the said time, the consequence is that ownership was legally consolidated in PFC, which had a right to the issuance of a new certificate of title in its name. The one-year period to redeem a mortgage of land covered by Torrens Title is not stopped or suspended by any TRO issued by the courts. An experienced businessman cannot claim that he and his wife did not know of the “total finance charges” for he was one of the signatories to the promissory note. Consolidated Bank v IAC, 150 SCRA 591 (1987) FACTS Originally, petitioned Solidbank loaned private respondent NICOS sums of money. NICOS failed to pay back the loan prompting Solidbank to file a collection case. Pursuant to the writ of attachment issued by the Court and upon petitioner’s posting of sufficient bond, the Sheriff of Manila levied and attached the two real properties described by the foregoing order of attachment. Pursuant to the foregoing inscription and annotations, guards were deputized by the Manila Sheriff to secure the premises of the two attached realties. A year later, however, the attached properties which had been mortgaged by NICOS to the UCPB were extra-judicially foreclosed by the latter. As the highest bidder, a certificate of sale was issued to it over the subject realties

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including the buildings and improvements. Two transactions occurred thereafter: (1) UCPB sold all of its rights, interests and participation over the properties to a certain Manuel Go (2) Manuel Go sold all the rights he acquired from the UCPB over the same lots on that very same day to private respondent GOLDEN STAR. Barely a month later, respondent NICOS suddenly executed a document entitled “Waiver of Right of Redemption” in favor of respondent GOLDEN STAR, which then filed a petition for the issuance of a writ of possession over the subject realties before the RTC. It was granted. Petitioner Solidbank filed an omnibus motion to annul the writ of possession issued to GOLDEN STAR and to punish for contempt of court the persons who implemented the writ of possession with the use of force and intimidation. Petitioner interposed an appeal before the Intermediate Appellate Court arguing inter alia that the properties were under custodia legis, hence the extra-judicial foreclosure and the writ of possession were null and void, and that the right of NICOS to redeem the auctioned properties had been acquired by Solidbank. The Intermediate Appellate Court found no merit to this appeal. Hence the petition for review, on the grounds that appellate court decided the case contrary to law and applicable decisions of the SC. ISSUE Whether the subject properties were under custodia legis by virtue of the prior annotation of a writ of attachment in petitioner’s favor at the time the properties were extrajudicially foreclosed? RULING YES. The disputed real properties were under custodia legis by virtue of a valid attachment at the time the same were extrajudicially foreclosed by a third party mortgagee. The rule is well settled that when a writ of attachment has been levied on real property or any interest therein belonging to the judgment debtor, the levy thus effected creates a lien which nothing can destroy but its dissolution. (1) It follows that the writ of possession issued by the Malolos court in favour of respondent GOLDEN STAR is null and void because it interfered with the jurisdiction of a coordinate and co-equal court. (2) The transactions on which respondent GOLDEN STAR’s right to a writ of possession are based are highly irregular and questionable. The attempts to bring the disputed properties out of the petitioner’s reach inspite of the attachment, are plain and apparent. They conspired to defeat petitioner’s lien on the attached properties and to deny the latter its right of redemption. In issuing the writ of possession, the Malolos court relied on copies of documents submitted to it by GOLDEN STAR. It was thus led into the error of ruling that the petitioner’s attachment was not properly annotated. It

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 likewise follows that the petitioner (the attaching creditor) has acquired by operation of law the right of redemption over the foreclosed properties. It has been held that “an attaching creditor may succeed to the incidental rights to which the debtor was entitled by reason of his ownership of the property, as for example, a right to redeem from a prior mortgage. The fact that respondent NICOS executed a waiver of right of redemption in favour of respondent GOLDEN STAR is of no moment as by that time it had no more right which it may waive in favor of another. (Relevant to topic starts here) GOLDEN STAR argues that even if the attachment in issue was duly registered and the petitioner has a right of redemption, the certificate of sale of the lands in question was registered on September 6, 1983. It claims that the period to redeem therefore lapsed on September 6, 1984 without the petitioner bank ever exercising any right to redemption. Well settled is the rule that the pendency of an action tolls the term of the right of redemption. In the case at bar, the petitioner commenced the instanct action by way of an omnibus motion before the Bulacan Court on November 21, 2983 or barely two months after the certificate of sale was registered on September 6, 1983, well within the one year period. CMS Stock Brokerage v CA, 275 SCRA 790 (1997) FACTS Petitioner, as judgment debtor, seeks to redeem two parcels of land sold on execution none years earlier upon the contention that the pendency of an action involving the ownership thereof suspended the 12-month period of redemption provided by the present Rules. The deputy sheriff refused to execute a deed of redemption. Petitioner went to the RTC. Respondent Judge Buenaventura thereafter ruled against petitioner on the ground that the right of redemption had long expired. Dissatisfied with this ruling which sustained the deputy sheriff's action, petitioner filed a petition for certiorari and mandamus, with a prayer for a writ of preliminary injunction with respondent CA. The appellate court dismissed the petition hence the instant petition for review on certiorari. The SC declared petitioner as the real owner of the subject parcel of land and not Rosario S. Sandejas who initiated the proceedings for "quieting of ownership of real property, injunction and damages". Petitioner filed a notice to redeem and tendered the redemption money. Petitioner also paid an additional sum as Sheriff's Commission. Respondents Sheriffs informed petitioner that they cannot execute and issue the certificate of redemption because of the absence a court order directing them to do so, and they informed the latter that they accepted the tendered amounts for safekeeping.

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Petitioner filed a "Motion to require Sheriff to Execute Certificate of Redemption". Respondent Judge issued the challenged order denying petitioner's motion requiring the Sheriff to execute a certificate of redemption. A motion for reconsideration was denied by respondent Judge. ISSUE 1) Whether petitioner could have effected the redemption of the subject property within the 12-month period provided under the Rules; and (Relevant topic) 2) Whether petitioner's period to redeem is tolled by an action to quiet title filed by a third-party claimant questioning the ownership of the property sold on execution? RULING (1) It is petitioner's contention that it could not have exercised the right of redemption before the lapse of the 12-month redemption period because its title at the time was clouded by the claim of a third party, Rosario Sandejas. The CA rejected this contention principally because under the established factual circumstances, petitioner considered itself to be the owner of the subject property despite the alleged pending case for quieting of title. The petitioner's reliance on the supposed cloud or uncertainty in its ownership for not effecting redemption within the 12-month redemption period is misplaced. The real property sold on execution may be redeemed by the judgment debtor (CMS Stock Brokerage, Inc.) or his successors in interest, in the whole or any part of the property. The exercise of this right of redemption by the judgment debtor is not conditioned upon ownership of the property sold on execution but by virtue of a writ of execution directed against such judgment debtor. In instances when a piece of property is claimed by a third person, as in the case at hand When, however, property is levied upon and sold, despite a claim by a third person who must vindicate then his claim in a proper action, Section 29 determines who shall have a right of redemption. Clearly, the right of redemption is given to the judgment debtor and not to any third-party claimant. The judgment debt or obligation and not ownership is the main consideration in granting the judgment debtor the right to redeem. Petitioner's supposition that unquestioned ownership of the subject property is a requisite for its exercise of the right of redemption in this case has no legal basis. Petitioner could have effected its right of redemption had it wanted to within the 12-month redemption period provided under the Rules. This is the law and ignorance thereof is no excuse for petitioner's failure to exercise such right.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (2) NO. As already pointed out, the issue of ownership insofar as petitioner’s right of redemption as judgement debtor is concerned, has no bearing whatsoever, so as have the effect of tolling or interrupting the running o running of the 12-month redemption period. If at all, as pointed out by respondent CA, the condition imposed after the execution sale relating to the pending action for quieting of title, may only benefit the third-party claimant, Rosario Sandejas, that is should her claim prosper, only then may the execution sale be declared null and void. But with respect to petitioner's right of redemption as judgment debtor this condition is of no moment. (v) Payment of CGT and DST c.

Redemption Price SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. SEC. 6, ACT NO. 3135: In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the

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provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act. SEC. 28, RULE 39 (ROC): Time and manner of, and amounts payable on, successive redemptions; notice to be given and filed. The judgment obligor, or redemptioner, may redeem the property from the purchaser, at any time within one (1) year from the date of the registration of the certificate of sale, by paying the purchaser the amount of his purchase, with one per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount at the same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. Property so redeemed may again be redeemed within sixty (60) days after the last redemption upon payment of the sum paid on the last redemption, with two per centum thereon in addition, and the amount of any assessments or taxes which the last redemptioner may have paid thereon after redemption by him, with interest on such last-named amount, and in addition, the amount of any liens held by said last redemptioner prior to his own, with interest. The property may be again, and as often as a redemptioner is so disposed, redeemed from any previous redemptioner within sixty (60) days after the last redemption, on paying the sum paid on the last previous redemption, with two per centum thereon in addition, and the amounts of any assessments or taxes which the last previous redemptioner paid after the redemption thereon, with interest thereon, and the amount of any liens held by the last redemptioner prior to his own, with interest. Written notice of any redemption must be given to the officer who made the sale and a duplicate filed with the registry of deeds of the place, and if any assessments or taxes are paid by the redemptioner or if he has or acquires any lien other than that upon which the redemption was made, notice thereof must in like manner be given to the officer and filed with the registry of deeds; if such notice be not filed, the property may be redeemed without paying such assessments, taxes, or liens.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Cases Union Bank v CA, 359 SCRA 480 (2001) FACTS Spouses Vincoy obtained a loan from Union Bank in the amount of P2M, which they secured with a mortgage over their residence. For failure to pay on its maturity date, Union Bank extrajudicially foreclosed the mortgage and it became the highest bidder in the scheduled auction for P3.29K. Before the expiration of the redemption period, Spouses Vincoy, together with Gregorio sisters, filed a complaint for annulment of mortgage, alleging that the property had been constituted as a family home as early as 1989 and that the Gregorio sisters did not consent to the mortgage. RTC declared that the constitution of the family home is void because its actual value exceeded P300K and that the mortgage in favor of Union Bank valid. It also ordered Spouses Vincoy to pay their O/S balance to Union bank in the amount of P4.8M. CA sustained the finding of RTC as to the issue of the family home, but found that the proper redemption price should be P3.29M, which is the purchase price at the foreclosure sale plus 1% monthly interest pursuant to Rule 39 of the RoC. ISSUE Whether the redemption price set by the Court of Appeals is proper RULING NO. Section 78 of GBL governs the determination of the redemption price of the subject property. The Court has settled that the amount at which the foreclosed property is redeemable is the amount due under the mortgage deed, or the O/S obligation of the mortgagor plus interests and expenses in accordance with Sec. 78, GBL. It was therefore erroneous for the CA to apply Rule 39 of the RoC in determining the redemption price in this case. DBP v West Negros College, 391 SCRA 330 (2002) FACTS Bacolod Medical Center (BMC) obtained a loan worth P2.4M from DBP, secured by a mortgage on 2 parcels of land, hospital building and medical equipment. For failure to pay, DBP extrajudicially foreclosed the mortgage under Act No 3135. At the public auction, DBP emerged as the highest bidder for P4.09M. The O/S balance of BMC with DBP as of the date of public auction amounted to P32.5M. Before the expiration of the redemption period, BMC and DBP Bacolod agreed to peg the redemption price at P21.5M, as a compromise settlement of the O/S account--subject to approval of DBP Head Office.

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During the process of paying the 20% installment agreed upon, BMC executed a Deed of Assignment to West Negros College, assigning to the latter the interests of BMC in the properties foreclosed, as well as the right to redeem them. West Negros demanded that the redemption price be reduced for excessive interest charges. Thereafter, DBP Head Office REJECTED the compromise amount of P21.5M saying that the re-appraised value of the properties is P28.9M as of May 1991. West Negros College requested the issuance of the certificate of redemption after it had paid DBP P4.3M as 1% monthly interest. Its computation was based on Rule 39 of the RoC and Act 3135, while that of DBP's was based on its charter requiring payment of the amount owed as of the date of the foreclosure sale. Pursuant to this, DBP refused to hand over the TCTs of the foreclosed properties. However, West Negros was vested with possession of the properties. West Negros filed a petition with the RTC for the surrender of the TCTs (or the issuance of new ones) alleging full payment of the redemption price under Rule 39 of RoC and Act No 3135--the amount of purchase with 1% monthly interest + expenses at the sale. DBP, on the other hand, contends that the proper redemption price is based on the total outstanding loan as of the date of the foreclosure sale, plus interests and expenses. RTC ruled in favor of West Negros, which the CA sustained. ISSUE What is the proper redemption price? RULING TOTAL OUTSTANDING BALANCE AS OF THE DATE OF FORECLOSURE SALE. It has long been settled that where real property is mortgaged to and foreclosed judicially or extrajudicially by DBP, the right of redemption may only be exercised by paying all the amount owed on the date of the sale, with interest on the total indebtedness at the rate agreed upon, unless the bidder has taken material possession of the property or unless it has been delivered to him, in which case, the proceeds of the property shall compensate the interest. This is applied whether the foreclosed property is sold to DBP or to another person at the public auction, provided that the property was mortgaged to DBP. Where property is sold to persons other than the mortgagee, the procedure is for DBP to return to the bidder the amount it received from him as a result of the auction sale with interest. This rule is embodied in the charters of DBP and its predecessor agencies. CA 459 (Agricultural and Industrial Bank) set the redemption price at the total indebtedness plus interest as of the date of the auction sale.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Several cases had settled that CA 459, NOT Rule 39 of RoC, is applicable in case of redemption of real estate mortgaged to DBP to secure a loan. As such, the redemption price to be paid by the mortgagor to DBP is all amount he owes on the date of the sale, with interest on the total indebtedness, and NOT merely the amount paid for by the purchaser in the public auction. d.

Possession SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Cases Samson v Rivera FACTS Spouses Samson obtained a loan amounting to P55M from Far East Bank, which they secured with 2 REMs covering 5 parcels of commercial property in Antipolo, Rizal. Due to their failure to pay, FEBTC filed an Application for Extra-Judicial Foreclosure of REM. FEBTC and Lenjul Realty were the 2 bidders in the 2nd auction (1st auction was postponed because there was only 1 bidder then), with the latter declared as the highest bidder in the amount of P80M. Thereafter, Lenjul Realty filed a Petition for the Issuance of a Writ of Possession, which the Spouses Samson opposed.

NOTES

163

Pending the Petition, Spouses Samson filed an action for Annulment of EJ Foreclosure and/or Nullification of the Sale against Lenjul Realty, FEBTC, BPI, the clerk of court and the RD of Antipolo City. Judge Rivera gave due course to the Petition for Issuance Possession and denied the opposition. Pursuant to this, a Writ of was issued directing the sheriff to place Lenjul Realty in physical of the foreclosed properties. On the same date, the sheriff issued Vacate to Rempson Corp (owned by Samson spouses).

of Writ of Possession possession a Notice to

Spouses Samson then filed with the CA a SCA for Certiorari with Prohibition/Mandamus under Rule 65 to annul orders of Judge Rivera. CA ruled that certiorari was improper and premature and that there was an adequate remedy available--to file a petition to set aside the foreclosure sale and to cancel the writ of possession. ISSUE 1. Whether RTC committed GADLEJ in granting Petition for Issuance of Writ of Possession 2. Whether Petition for Certiorari was the proper remedy HELD 1. NO. The issuance of the Writ is explicitly authorized by Act No. 3135, which regulates the methods of effecting an EJ Foreclosure of Mortgage. Under Sec. 7 of Act No. 3135, the purchaser in a foreclosure sale may apply for a writ of possession during the redemption period by filing for that purpose an ex parte motion under oath. Upon the filing of such motion and the approval of the corresponding bond, the court is expressly directed to issue the writ. The duty of the RTC to grant a writ of possession is ministerial. Such writ issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond. 2. NO. SCA for Certitorari could be availed of only if RTC acted with GADLEJ and if there is no appeal or any other plain, speedy and adequate remedy in the ordinary course of law. There is grave abuse when the court acts in a capricious, whimsical, arbitrary or despotic manner equivalent to acting with lack of jurisdiction. In this case, there was no GADLEJ since the RTC only issued the Writ in compliance with Act No. 3135. Since there was no GADLEJ, Spouses Samson should have filed an ordinary appeal instead of a petition for certiorari.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 e.

NOTES

164

Injunction and Bond SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Sec. 24.1, GBL: Except as the Monetary Board may otherwise prescribe, the total investment in equities of allied and nonallied enterprises shall not exceed fifty percent (50%) of the net worth of the bank.

V. INVESTMENTS AND OTHER FUNCTIONS OF BANKS

xSec. 52, GBL: Acquisition of Real Estate by Way of Satisfaction of Claims. – Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances:

A. EQUITY INVESTMENTS

(iii)

Sec. 24.2, GBL: Except as the Monetary Board may otherwise prescribe, the equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank. (iv)

Definition of net worth

Sec. 24, par. 3, GBL: As used in this Act, “net worth” shall mean the total of the unimpaired paid-in capital including paidin surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral. (v)

Do the foregoing conversions?

limits

apply

to

debt-to-equity

xSubsec. X116.3(i)., MRB: Equity investments. This refers to investments in capital stock of companies, firms or enterprises, made for purposes of control, affiliation or other continuing business advantage.

52.1. Such as shall be mortgaged to it in good faith by way of security for debts;

1. Limits on Equity Investments of UB a.

Investment in equity of any one enterprise

In general

52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or

Sec. 24, par. 1, GBL: A universal bank may, subject to the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.

52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it.

Sec. 24, par. 4, GBL: The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments.

Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section.

(ii)

(vi)

(i) Prior approval of MB

Total investment in equities of allied and non-allied enterprises

Sanctions if without prior MB approval

xSec. 385, MRB: Sanctions. The following sanctions shall be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 imposed for equity investments made without prior Monetary Board approval: a.

b.

First Offense - If the investment is not allowable under existing regulations, divestment of the investment and reprimand on officer/director who recommended/ approved the investment. Subsequent Offense On the Bank. If the investment is not allowable under existing regulations, divestment of the investment.

On the Director/Officer. Fine of P20,000 for each investment to be imposed on the members of the board and the executive officers who recommended/approved the investment per investment and to be shouldered personally by the officer/director: Provided, That if the subsequent offense is an investment in a non-allied enterprise, the fine shall be P40,000. b.

In specific areas (i)

In financial allied enterprises

Sec. 25, GBL: Equity Investments of a Universal Bank in Financial Allied Enterprises. - A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise.

A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank. (ii)

In Venture Capital Corporations (VCCs)

xSec. X379, MRB: Investments in Venture Capital Corporations. The following rules and regulations shall implement Presidential Decree No. 1688 entitled “Authorizing Banks to Invest in the Equity of Venture Capital Corporations to Assist Small and Medium- Scale Enterprises”.

For purposes of this Section, a venture capital corporation (VCC) shall refer to an entity organized jointly by private banks, the National Development Corporation and the Technology Livelihood and Resource Center and/or such other government agency as may be authorized by the appropriate authority, the

NOTES

165

primary purpose of which is to develop, promote and assist, thru debt or equity financing or any other means, any small and medium-scale enterprise in the country. X379.2 Equity investments of venture capital corporations. Equity investment of a VCC in small and medium- scale enterprises shall be subject to the following conditions: a. Equity financing by a VCC may be extended to a small and medium-scale enterprise engaged in an industry certified as desirable by the Department of Trade and Industry; and b. The total assets of the enterprises shall not exceed P4 million, including the VCC's equity investment. Should the total assets of the small and medium-scale enterprise subsequently exceed the prescribed P4 million maximum, the VCC equity investment therein made before the total assets of the enterprise exceeded P4 million, may be maintained but shall not be increased. (iii)

In non-financial allied enterprises

Sec. 26, GBL: Equity Investments of a Universal Bank in NonFinancial Allied Enterprises. – A universal bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. xSec. X380, MRB: Non-Financial Allied Under- takings. A bank may acquire up to 100% of the equity of a non-financial allied undertaking: Provided, That the equity investment of a TB/RB in any single enterprise shall remain less than fifty percent (50%) of the voting shares in that enterprise: Provided, further, That prior Monetary Board approval is required if the investment is in excess of forty percent (40%) of the total voting stock of such allied undertaking. (iv)

In non-allied enterprises

Sec. 27, GBL: Equity Investments of a Universal Bank in NonAllied Enterprises. - The equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single nonallied enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. xSec. 1381, MRB: Investments in Non-Allied or Non-Related Undertakings. Only UBs may invest in the equity of an enterprise engaged in non-allied or non-related activities. 1381.2 Limits on investments in non- allied enterprises a. The equity investment of a UB, or of its wholly or majority-

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 owned subsidiaries, in a single non-allied enterprise shall not ex- ceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. For the purpose of determining compliance with the ceiling prescribed in the preceding paragraph, (i) the equityinvestment of the bank; and (ii) the equity investment of the bank’s subsidiaries, shall be combined. b.

(v)

In no case shall the total equity investments in a single nonallied enterprise of UBs, NBFIs performing QB functions and their subsidiaries, whether or not the parent financial intermediaries have equity investments in the enterprise, amount to fifty percent (50%) or more of the voting stock of that enterprise: Provided, however, That equity investments in excess of the ceilings prescribed herein as of April 1, 1980 may be maintained but may not be increased and if reduced, shall not be increased thereafter beyond the ceiling prescribed herein.

In subsidiaries and affiliates abroad

xSec. X382, MRB: Investments in Subsidiaries and Affiliates Abroad. The establishment or acquisition of subsidiaries or affiliates abroad shall require prior approval of the BSP. X382.8 Investment of a bank subsidiary in a foreign subsidiary. The following guidelines shall govern the investment in a foreign subsidiary by a bank subsidiary: a. The investment of a bank subsidiary in the equity of a subsidiary located abroad shall be subject to prior BSP approval; b. The bank subsidiary may invest in a subsidiary if it meets the following pre- qualification requirements: (1) It has complied with the minimum capital requirement of the host country; (2) It has booked the required valuation reserves and other capital adjustments, if any; and (3) Its operations in the preceding three (3) years were

166

profitable; otherwise, the feasibility study on the proposed subsidiary should show profits in the first two (2) years of operations. 2. Limits on Equity Investments of KB a.

In general Sec. 30, par. 1, GBL: A commercial bank may, subject to the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. (i)

Prior approval of MB

Sec. 30, par. 3, GBL: The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investment. (ii)

In quasi-banks

Sec. 28, GBL: Equity Investments in Quasi-Banks. – To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (vi)

NOTES

Total investment in equities of allied (financial or nonfinancial) enterprises

Sec. 30.1, GBL: The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bank. (iii)

Investment in equity of any one enterprise

Sec. 30.2, GBL: The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of tile net worth of the bank. (iv)

Definition of net worth

Sec. 24, par. 3, GBL: As used in this Act, “net worth” shall mean the total of the unimpaired paid-in capital including paidin surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral. (v)

Sanctions if without prior MB approval

xSec. 385, MRB: Sanctions. The following sanctions shall be imposed for equity investments made without prior Monetary Board approval: a.

First Offense - If the investment is not allowable under existing regulations, divestment of the investment and reprimand on officer/director who recommended/ approved the investment.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 b.

Subsequent Offense On the Bank. If the investment is not allowable under existing regulations, divestment of the investment.

On the Director/Officer. Fine of P20,000 for each investment to be imposed on the members of the board and the executive officers who recommended/approved the investment per investment and to be shouldered personally by the officer/director: Provided, That if the subsequent offense is an investment in a non-allied enterprise, the fine shall be P40,000. b.

In specific areas (i)

In financial allied enterprises

Sec. 31, GBL: Equity Investments of a Commercial Bank in Financial Allied Enterprises. - A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank.

Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise. (ii)

In VCCs

xSec. X379, MRB: Equity investments of venture capital corporations. Equity investment of a VCC in small and mediumscale enterprises shall be subject to the following conditions: a. Equity financing by a VCC may be extended to a small and medium-scale enterprise engaged in an industry certified as desirable by the Department of Trade and Industry; and b. The total assets of the enterprises shall not exceed P4 million, including the VCC's equity investment. Should the total assets of the small and medium-scale enterprise subsequently exceed the prescribed P4 million maximum, the VCC equity investment therein made before the total assets of the enterprise exceeded P4 million, may be maintained but shall not be increased. (iii)

In non-financial allied enterprises

Sec. 32, GBL: Equity Investments of a Commercial Bank in Non-Financial Allied Enterprises. - A commercial bank may own

NOTES

167

up to one hundred percent (100%) of the equity in a nonfinancial allied enterprise. (iv)

In quasi-banks

Sec. 28, GBL: Equity Investments in Quasi-Banks. – To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (v)

In subsidiaries and affiliates abroad

xSec. X382, MRB: Equity Investments in Quasi-Banks. – To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (vi)

In subsidiaries and affiliates abroad

xSec. X382, MRB: Investments in Subsidiaries and Affiliates Abroad. The establishment or acquisition of subsidiaries or affiliates abroad shall require prior approval of the BSP. X382.8 Investment of a bank subsidiary in a foreign subsidiary. The following guidelines shall govern the investment in a foreign subsidiary by a bank subsidiary: a. The investment of a bank subsidiary in the equity of a subsidiary located abroad shall be subject to prior BSP approval; b. The bank subsidiary may invest in a subsidiary if it meets the following pre- qualification requirements: (1) It has complied with the minimum capital requirement of the host country; (2) It has booked the required valuation reserves and other capital adjustments, if any; and (3) Its operations in the preceding three (3) years were profitable; otherwise, the feasibility study on the proposed subsidiary should show profits in the first two (2) years of operations. 3. Limits on Equity Investments of TB Sec. 12, Thrift Banks Act: Investment in Allied Undertakings. — Subject to such guidelines as may be established by the Monetary Board, thrift banks may invest in equities of allied undertakings as hereinafter enumerated: Provided, That: (a) the total investments in equities shall not exceed twenty-five percent (25%) of the net worth of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

the thrift bank; (b) the equity investment in any single enterprise shall be limited to fifteen percent (15%) of the net worth of the thrift bank; (c) the equity investment in any single enterprise shall remain a minority holding in that enterprise; and (d) the equity investment in other banks shall be subject to the same provisions governing similar investments of commercial banks and shall be deducted from the investing bank's net worth for the purpose of computing of the prescribed ratio as provided in Section 9 hereof: Provided, further, That equity investments shall not be permitted in non-related activities.Where the allied activity is a wholly- or majority-owned subsidiary of the thrift bank, the Bangko Sentral may subject it to examination. Investment in allied undertaking shall include institutions engaged in the following activities:

(c) Fertilizer distribution;

and

agricultural

chemical

and

168

pesticides

(d) Farm equipment distribution; (e) Trucking and transportation of agricultural products; (f) Marketing of agricultural products; (g) Leasing; and (h) Other undertakings as may be determined by the Monetary Board. 5. Limits on Equity Investments of Islamic Bank

(a) Banking and financing;

Sec. 6(11), Islamic Bank Charter: Islamic Bank's Powers. - The Al-Amanah Islamic Investment Bank of the Philippines, upon its organization, shall be a body corporate and shall have the power:

(b) Warehousing and other post-harvesting activities;

To invest in equities of the following allied undertakings:

(c) Fertilizer distribution;

and

agricultural

chemical

and

pesticides

(a) Warehousing companies; (b) Leasing companies;

(d) Farm equipment distribution;

(c) Storage companies;

(e) Trucking and transportation of agricultural products;

(d) Safe deposit box companies;

(f) Marketing of agricultural products;

(e) Companies engaged in the management of mutual funds but not in the mutual funds themselves; and

(g) Leasing; and (h) Other undertakings Monetary Board.

as

may

be

determined

by

the

4. Limits on Equity Investments of RB Sec. 13, Rural Banks Act: Subject to such guidelines as may be established by the Monetary Board, rural banks may invest in equities of allied undertakings as hereinafter enumerated: Provided, That: (a) the total investment to equities shall not exceed twenty-five percent (25%) of the net worth of the rural bank; (b) the equity investment in any single enterprise shall be limited to fifteen percent (15%) of the net worth of the rural bank; and (c) the equity investment of the rural bank in any single enterprise shall remain a minority holding in that enterprise: Provided, further, That equity investment shall not be permitted in non-related activities; Allied undertakings shall include; (a) Banks, financial intermediaries;

institutions

and

non-bank

(b) Warehousing and other post-harvest facilities;

financial

(f) Such other similar activities as the Monetary Board of the Central Bank of the Philippines has declared or may declare as appropriate from time to time, subject to existing limitations imposed by law; B. OTHER KB FUNCTIONS Sec. 29, GBL: Powers of a Commercial Bank. - A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. 1. Non-Core/Quasi-Banking Functions

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Sec. 4, GBL: The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. . For the purposes of this Act, “quasi-banks” shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the “New Central Bank Act”) for purposes of re-lending or purchasing of receivables and other obligations. Sec. 95, NCBA: The term "deposit substitutes" is defined as an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose ofrelending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. The Monetary Board shall determine what specific instruments shall be considered as deposit substitutes for the purposes of Section 94 of this Act: Provided, however, That deposit substitutes of commercial, industrial and other non-financial companies for the limited purpose of financing their own needs or the needs of their agents or dealers shall not be covered by the provisions of Section 94 of this Act. 2. Issuing L/Cs Sec. 105, NCBA: Margin Requirements Against Letters of Credit. — The Monetary Board may at any time prescribe minimum cash margins for the opening of letters of credit, and may relate the size of the required margin to the nature of the transaction to be financed. Cases Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993) FACTS Bank of America received an irrevocable letter of credit purportedly issued by Bank of Ayudhua to cover the sale of plastic ropes and agricultural files between General Chemicals Ltd of Thailand (Buyer) and Inter-Resin Industrial Corporation of Philippines (Seller). Inter-Resin tried to have the letter of credit confirmed. However, the Bank of America said that there was no need for confirmation, as the letter of credit would not have been transmitted if it were not genuine. Afterwards, Inter-Resin sought to make partial availment under the letter of credit from Bank of America, its advising bank. Assured by the “genuineness” of letter of credit, Bank of America, issued a Cashier’s check amounting to 10M in favor of Inter-Resin. Again, Inter-Resin sought for

NOTES

169

another availment under the same letter of credit. However, the Bank of Ayudhua informed the Bank of America that the letter of credit was fraudulent. After investigation of the NBI, the officers of Inter-resin was charged with estafa but their cases were dismissed due to lack of prima facie evidence. Now, Bank of America files a case against Inter-Resin for the recovery of 10M it issued under the fraudulent letter of credit. The TC ruled in favor of Inter-Resin, stating that the Bank of America lead Inter-Resin to believe the letter of credit was genuine. The CA affirmed the decision. ISSUE W/N the Bank of America is a mere advising/notifying bank or a confirming bank. RULING The Bank is only an advising bank, based on the provisions of the letter of credit, the bank’s letter of advice and request for payment of advising fee. The fact that the Bank asked Inter-Resin to submit documents and paid the proceeds did not make it a confirming bank. the Bank’s letter clearly limited its obligation only to being an advising bank. As an advising/notifying bank, it did not incur any obligation other than just notifying Inter-Resin of the issuance of the letter of credit. The statement of one of the bank employees regarding the genuineness of the letter of credit did not have an effect of novating the position of the bank as an advising bank. in addition, the Bank is bound only to check the “apparent authenticity” of the letter of credit, which it did. Thus, the Bank of America can recover what it has paid to Inter-Resin, under the discounting agreement with the bank being a negotiating bank. With this agreement, the bank independently assumed the obligation under the letter of credit, with right of recourse against the bank of Ayudha, saving Inter-Resin the trouble of traveling to Thailand. Definition A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 shipment of the goods to the buyer. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires said documents and control over the goods only after reimbursing the bank. Parties There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper document of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a confirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to have the draft discounted. Governing Law Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy of contract rules. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there

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are other principles, which, although part of lex mercatoria, are not dealt with the U.C.P. Transfield Philippines, Inc. v. Luzon Hydro Corporation, 443 SCRA 307 (2004) FACTS On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey Contract whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project. To secure performance of petitioner’s obligation on or before the target completion date, or such time for completion as may be determined by the parties’ agreement, petitioner opened in favor of LHC two (2) standby letters of credit. In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were requested allegedly due to several factors which prevented the completion of the Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between the parties which culminated in the instant petition. ISSUE Whether or not the beneficiary of an LOC can invoke the Independence Principle? RULING YES. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Vintola v. Insular Bank of Asia and America, 150 SCRA 578 (1987) FACTS The Vintola spouses were engaged in manufacturing finished products from raw seashells. They applied for a Letter of Credit with IBAA, which authorized IBAA to negotiate for the Vintolas account drafts drawn by a certain Stalin Tan who was their supplier of seashells. Stalin Tan delivered shells worth forty thousand. The Vintolas executed a Trust Receipt Agreement with IBAA Cebu agreeing to hold the goods in trust for IBAA and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 to turn over the proceeds in case of a sale. The Vintolas defaulted, hence, IBAA demands from the Vintolas but they were not able to dispose of the shells and offered them to IBAA. IBAA refused and charged them with estafa. TC acquitted the Vintolas because the element of misappropriation was not present and that under the Trust Receipt, the remedy of IBAA is civil in nature not criminal. IBAA then filed a civil case but the TC dismissed it again, but later reconsidered, ordering the Vintolas to pay twenty-seven thousand and attorney’s fees. ISSUE (1) Does the delivery of the seashells first to IBAA, and upon IBAA’s refusal, to the trial court extinguish the Vintolas’ liability? (2) Does the previous acquittal bar the filing of the civil action since IBAA did not reserve the right to enforce civil liability?

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banks to sell to the Bangko Sentral or to other banks all or part of their surplus holdings of foreign exchange. Such transfers may be required for all foreign currencies or for only certain of such currencies, according to the decision of the Monetary Board. The transfers shall be made at the rates established under the provisions of Section 74 of this Act. The Monetary Board may, whenever warranted, determine the net assets and net liabilities of banks and shall, in making such a determination, take into account the bank's networth, outstanding liabilities, actual and contingent, or such other financial or performance ratios as may be appropriate under the circumstances. Any such determination of net assets and net liabilities shall be applied in all banks uniformly and without discrimination.

Both NO. Delivery of the seashells did not extinguish Vintola’s liability and the previous acquittal did not bar the filing of a civil action.

Sec. 77, NCBA: Requirement of Balanced Currency Position. — The Monetary Board may require the banks to maintain a balanced position between their assets and liabilities in Philippine pesos or in any other currency or currencies in which they operate. The banks shall be granted a reasonable period of time in which to adjust their currency positions to any such requirement.

A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under the agreed set up, the bank extends a loan covered by the letter of credit, with the trust receipt as security for the loan.

The powers granted under this section shall be exercised only when special circumstances make such action necessary, in the opinion of the Monetary Board, and shall be applied to all banks alike and without discrimination.

According to Samo. V. People: “a trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported or purchased.”

Sec. 78, NCBA: Regulation of Non-spot Exchange Transactions. — In order to restrain the banks from taking speculative positions with respect to future fluctuations in foreign exchange rates, the Monetary Board may issue such regulations governing bank purchases and sales of non-spot exchange as it may consider necessary for said purpose.

So IBAA never became the real owner of the goods, and was merely the holder of a security title for the advances made under the LC. The Vintolas own the shells and hold it at their own risk, the trust agreement did not make the IBAA an investor. IBAA remained a creditor and a lender. Depositing of the goods with IBAA did not convert them to investors and extinguish the liability of the Vintolas. Even if they did not misappropriate or misapply or convert the seashells, they are still liable ex contractu under the terms of the LC/Trust Receipt separately from the estafa, hence they were properly sued despite the acquittal in the criminal case.

Sec. 79, NCBA: Other Exchange Profits and Losses. — The banks shall bear the risks of non- compliance with the terms of the foreign exchange documents and instruments which they buy and sell, and shall also bear any other typically commercial or banking risks, including exchange risks not assumed by the Bangko Sentral under the provisions of the preceding section.

HELD

3. Foreign Exchange Operations Sec. 76, NCBA: Foreign Exchange Holdings of the Banks. — In order that the Bangko Sentral may at all times have foreign exchange resources sufficient to enable it to maintain the international stability and convertibility of the peso, or in order to promote the domestic investment of bank resources, the Monetary Board may require the

Sec. 80, NCBA: Information on Exchange Operations. — The banks shall report to the Bangko Sentral the volume and composition of their purchases and sales of gold and foreign exchange each day, and must furnish such additional information as the Bangko Sentral may request with reference to the movements in their accounts in foreign currencies.The Monetary Board may also require other persons and entities to report to it currently all transactions or operations in gold, in any shape or form, and in foreign exchange whether entered into or undertaken by them directly or through agents, or to submit such data as may be required on operations or activities giving rise to or in connection with or relating to a gold or foreign exchange transaction.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 The Monetary Board shall prescribe the forms on which such declarations must be made. The accuracy of the declarations may be verified by the Bangko Sentral by whatever inspection it may deem necessary.

C. OTHER SERVICES 1. Custodian of Funds, Documents, Valuable Objects Sec. 53.1, GBL: Other Banking Services. – In addition to the operations specifically authorized in this Act, a bank may perform the following services, receive in custody funds, documents and valuable objects. 2. Financial Agent Sec. 53.2, GBL: Other Banking Services. – In addition to the operations specifically authorized in this Act, a bank may perform the following services, act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities

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4. Financial Adviser Sec. 53.4, GBL: Other Banking Services. – In addition to the operations specifically authorized in this Act, a bank may perform the following services, upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts.

5. Renting Out Safety Deposit Boxes Sec. 53.5, GBL: Other Banking Services. – In addition to the operations specifically authorized in this Act, a bank may perform the following services, rent out safety deposit boxes. Cases CA Agro-Industrial Development Corporation v. Court of Appeals, 219 SCRA (1993)

Cases

FACTS

Panlilio v. Citibank, N.A., 539 SCRA 69 (2007)

CA-Agro (through its President, Aguirre) and the spouses Pugao entered into an agreement whereby the former bought two parcels of land for P350K with a P75k downpayment. Among the terms were that the titles will be transferred to CA-Agro upon full payment and that the owner's copies of the titles will be deposited in a safety deposit box in a bank. The same could be withdrawn upon the joint signatures of a representative of CA-Agro and the Pugaos upon full payment of the purchase price. They then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company. For this purpose, both signed a contract of lease which contains these provisos:

The Central Bank, through the Monetary Board, is empowered to conduct investigations and examine the records of savings and loan associations. If any irregularity is discovered in the process, the Monetary Board may impose appropriate sanctions, such as suspending the offender from holding office or from being employed with the Central Bank, or placing the names of the offenders in a watchlist. The requirement of prior notice is also relaxed under Section 28 (c) of RA 3779 as investigations or examinations may be conducted with or without prior notice "but always with fairness and reasonable opportunity for the association or any of its officials to give their side." As may be gathered from the records, the said requirement was properly complied with by the respondent Monetary Board.

3. Collection/Payment Agent Sec. 53.3, GBL: Other Banking Services. – In addition to the operations specifically authorized in this Act, a bank may perform the following services, make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business

"13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith." Renters keys were given to Aguirre, and the Pugaos. A guard key remained with the bank. Thereafter, a certain Margarita Ramos offered to buy the land from Ca-Agro at a price P280k higher than market, but demanded immediate execution of deeds of sale and transfer of OCTs. Aguirre and the Pugaos went to SBTC to open the safety deposit box, but when they opened it...the titles were GONE (dun dun dun). Ca-Agro attempted to have the Titles reconstituted, but because of the delay Ms. Ramos withdrew her offer to purchase. CA-Agro then filed this damage suit against the bank, losing at the RTC and CA level.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 ISSUES What is the contractual relation between the bank and a third party in a contract of safety deposit? (If lease, then bank not liable because of SDB being in total control of depositor, as held by RTC and CA). Is SBTC Liable?

NOTES

that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present."

HELD

Sia v. Court of Appeals, 222 SCRA 24 (1993)

SBTC is liable because the contract is not one of lease. The contract of safety deposit is a special kind of deposit.

FACTS

Note that clauses 13 and 14 in the contract do not exempt the bank from liability. Any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy, and are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. Our provisions on safety deposit boxes are governed by Section 72(a) of the General Banking Act, and this primary function is still found within the parameters of a contract of deposit like the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. Thus, a depositary's liability is governed by our Civil Code rules on oblicon, and thus the SBTC would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. "Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious

173

Luzan Sia rented a safety deposit box with the Security Bank and Trust Company to put his collection of stamps. An agreement was entered between the parties that the liability of the bank will be limited only to prevent the opening of the box by any person other than the renter, and that the bank will not be considered a depositary. There had been a flood that entered into the bank’s premises, which seeped through the box, and destroyed the stamps. Sia filed a complaint with the RTC, which ruled in his favor. The CA reversed. ISSUE Whether or not renting of a deposit box is lease or deposit agreement RULING It is a deposit agreement. Both stipulations (stated above) are contrary to law and public policy, and must be considered void. The primary functions of the bank are within the scope of an agreement of deposit, and not of a lease agreement. Under the General Banking Act, a bank shall perform the act of renting out a safety deposit box as depositaries. *The bank was also considered negligent when it did not report the effects of the flooding with Sia. It failed to apply the diligence of a good father in protecting the stamps deposited with them. It also aggravated the status of the stamps in its failure to tell Sia that flood entered its premises.

D. OTHER FUNCTIONS/OPERATIONS 1. Issue Guarantees Sec. 74, General Banking Act: No bank or banking institution shall enter, directly or indirectly, into any contract of guaranty or suretyship, or shall guarantee the interest or principal of any obligation of any person, co-partnership, association, corporation or other entity. The provisions of this section shall, however, not be held to apply to the borrowing of money by any such bank or institution through the rediscounting of its receivables, or otherwise, as may be permitted by law, nor to the granting or guaranteeing of acceptance credits in the ordinary course of its business. Nor shall the provisions of this section

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 apply to the certification of checks or to transactions involving the release of documents attached to items received for collection, nor to any other transaction which may properly be regarded as common usage and accepted banking practice. 2. Act as Correspondent Bank

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that the condition was void since it depended on the sole will of the debtor, the defendant Christiansen. The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond. ISSUE

Cases

Whether or not a correspondent bank is to be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof?

Feati Bank & Trust Company v. Court of Appeals, 196 SCRA 576 (1991)

RULING

FACTS

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank.

Villaluz agreed to sell to the then defendant Christiansen 2,000 cubic meters of lauan logs. The Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of the total purchase price. The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." The letter of credit provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by some specified documents, including a Certification from Christiansen stating that logs have been approved prior to shipment. However, Christiansen refused to issue the certification as required, despite several requests made by the private respondent. Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment on the letter of credit. Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company before the Court. The Court agreed with the plaintiff that the defendant bank may be held liable under the principles and laws on both trust and estoppels, arguing that when the defendant bank accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of the plaintiff under the terms of the letter of credit. When the defendant bank assumed the role of a notifying and negotiating bank, it in effect represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit and presents the same to the bank together with the documents mentioned therein the said bank will pay the plaintiff the amount of the letter of credit. The defendant bank, in insisting upon the certification of defendant Christiansen as a condition precedent to negotiating the letter of credit, in the Court's opinion acted in bad faith, not only because of the clear declaration of the Central Bank that such a requirement was illegal, but because the bank, with all the legal counsel available to it must have known

The bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary. In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank, it was found to be erroneous. The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter. The trial court overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal relations’ arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa. Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court and the CA made was to confuse the obligation assumed by the petitioner. In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering the aforesaid instruction to the petitioner by the issuing bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private respondent and its obligation ends there. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit. No proof was found. Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of the private respondent is justified.

Philippine National Bank v. Court of Appeals, 259 SCRA 174 (1996) FACTS Lapez had remittances from Jeddah and Libya to be credited to his Citibank and PNB accounts, respectively. Prior to this, in 1980 and 1981, Lapez's PNB account was doubly credited with $5,600 and $5,800 (total of P87,000). PNB made a demand upon Lapez for the refund of the double credits erroneously made on his account. Thereafter, a reduction of P34,000 was made by PNB not without the knowledge and consent of Lapez, who was in fact issued a receipt.

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To be able to recover the amounts credited, PNB applied/appropriated the amounts of $2,600 and P34,000 from the remittances of Lapez's principals abroad. ISSUE Whether PNB was justified in making the set-off against the 2 remittances coursed though it in favor of Lapez to recover on the double credits, based on solutio indebiti RULING NO. Not all requisites for legal compensation are existing in this case. The telegraphic money transfer was sent by the IBN, Lapez’s principal in Jeddah, Saudi Arabia, thru the National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for his account with Citibank, coursed thru the PNB's head office, the NCB's correspondent bank in the Philippines. The credit account, or simply account means that the amount stated in the telegraphic money transfer is to be credited in the account of plaintiff with the Citibank, and, in that sense, presupposes a creditor-debtor relationship between the PNB, as creditor and the Citibank, as debtor. Withal the telegraphic money transfer, no such creditor-debtor relationship could have been created between them. The telegraphic money transfer, or simply telegraphic transfer, was purchased by the IBN from the NCB in Saudi Arabia, and since the PNB is the NCB's corresponden) bank in the Philippines, there is created between the two banks a sort of communication exchange for the correspondent bank to transmit and/or remit and/or pay the value of the telegraphic transfer in accordance with the dictate of the correspondence exchange. Some such responsibility of the correspondent bank is akin to section 7 of the Rules and Regulations Implementing E.O. 857, as amended by E.O. 925, ". . . to take charge of the prompt payment" of the telegraphic transfer, that is, by transmitting the telegraphic money transfer to the Citibank so that the amount can be promptly credited to the account of the plaintiff with the said bank. That is all that the PNB can do under the remittance arrangement that it has with the NCB. With its responsibility as defined as well as by the nature of its banking business and the responsibility attached to it, and through which the industry, trade and commerce of all countries and communities are carried on, the PNB's liability as correspondent bank continues until it has completely performed and discharged its obligation thereunder." Even if the beneficiary (Lapez) is indebted to PNB, the bank cannot do a shortcut and simply intercept the funds being coursed through it, for transmittal to another bank (Citi) and eventually to be deposited to the account of the beneficiary. The bank cannot invoke legal compensation in such case.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 3. Credit Card Operations – xSec. X320, MRB: Credit Card Operations; General Policy. The BSP shall foster the development of consumer credit through innovative products such as credit cards under conditions of fair and sound consumer credit practices. The BSP likewise encourages competition and transparency to ensure more efficient delivery of services and fair dealings with customers. Towards this end, the following rules and regulations shall govern the credit card operations of banks and subsidiary/affiliate credit card companies, aligned with global best practices.

E. TRUST OPERATIONS Sec. 79, GBL: Authority to Engage in Trust Business. – Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others. For purposes of this Act, such a corporation shall be referred to as a trust entity. Sec. 80, GBL: Conduct of Trust Business. – A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims. No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign, or lend money or property to, or purchase debt instruments of, any of the departments, directors, officers, stockholders, or employees of the trust entity, relatives within the first degree of consanguinity or affinity, or the related interests, of such directors, officers and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the other party involved in the transaction is fully disclosed to the trustor of beneficiary of the trust prior to the transaction. The Monetary Board shall promulgate such rules and regulations as may be necessary to prevent circumvention of this prohibition or the evasion of the responsibility herein imposed on a trust entity. Sec. 81, GBL: Registration of Articles of Incorporation and By-Laws of a Trust Entity. – The Securities and Exchange Commission shall not register the articles of incorporation and by-laws or any amendment thereto, of any trust entity, unless accompanied by a certificate of authority issued by the Bangko Sentral. Sec. 82, GBL: Minimum Capitalization. – A trust entity, before it can engage in trust or other fiduciary business, shall comply with the minimum paid-in capital requirement which will be determined by the Monetary Board. Sec. 83, GBL: Powers of a Trust Entity. – A trust entity, in addition to the

NOTES

176

general powers incident to corporations, shall have the power to: 83.1. Act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any trust consistent with law; 83.2. Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other incompetent person, and as receiver and depositary of any moneys paid into court by parties to any legal proceedings and of property of any kind which may be brought under the jurisdiction of the court; 83.3. Act as the executor of any will when it is named the executor thereof; 83.4. Act as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased person when there is no will; 83.5. Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; and 83.6. Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board. Sec. 84, GBL: Deposit for the Faithful Performance of Trust Duties. – Before transacting trust business, every trust entity shall deposit with the Bangko Sentral, as security for the faithful performance of its trust duties, cash or securities approved by the Monetary Board in an amount equal to or not less than Five hundred thousand pesos (P500,000.00) or such higher amount as may fixed by the Monetary Board: Provided, however, That the Monetary Board shall require every trust entity to increase the amount of its cash or securities on deposit with the Bangko Sentral in accordance with the provisions of this paragraph. Should the capital and surplus fall below said amount, the Monetary Board shall have the same authority as that granted to it under the provisions of the fifth paragraph of Section 34 of this Act. A trust entity so long as it shall continue to be solvent and comply with laws or regulations shall have the right to collect the interest earned on such securities deposited with the Bangko Sentral and, from time to time, with the approval of the Bangko Sentral, to exchange the securities for others. If the trust entity fails to comply with any law or regulation, the Bangko Sentral shall retain such interest on the securities deposited with it for the benefit of rightful claimants. Al claims rising out of the trust business of a trust entity shall have priority over all other claims as regards the cash or securities deposited as above provided. The Monetary Board may not permit the cash or securities deposited in accordance with the provisions of this Section to be reduced below the prescribed minimum amount until the depositing entity shall discontinue its trust business and shall satisfy the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Monetary Board that it has complied with all its obligations in connection with such business. Sec. 85, GBL: Bond of Certain Persons for the Faithful Performance of Duties. – Before an executor, administrator, guardian, trustee, receiver or depositary appointed by the court enters upon the execution of his duties, he shall, upon order of the court, file a bond in such sum as the court may direct. Upon the application of any executor, administrator, guardian, trustee, receiver, depositary or any other person in interest, the court may, after notice and hearing, order that the subject matter of the trust or any part, thereof be deposited with a trust entity. Upon presentation of proof to the court that the subject matter of the trust has been deposited with a trust entity. Upon presentation of proof to the court that the subject matter of the trust has been deposited with a trust entity, the court may order that the bond given by such persons for the faithful performance of their duties be reduced to such sums as it may deem proper: Provided, however, That the reduced bond shall be sufficient to secure adequately the proper administration and care of any property remaining under the control of such persons and the proper accounting for such property. Property deposited with any trust entity in conformity with this Section shall be held by such entity under the orders and direction of the court. Sec. 86, GBL: Exemption of Trust Entity from Bond Requirement. – No bond or other security shall be required by the court from a trust entry for the faithful performance of its duties as court-appointed trustee, executor, administrator, guardian, receiver, or depositary. However, the court may, upon proper application with it showing special cause therefore, require the trust entity to post a bond or other security for the protection of funds or property confided to such entity. Sec. 87, GBL: Separation of Trust Business from General Business. – The trust business and all funds, properties or securities received by any trust entity as executor, administrator, guardian, trustee, receiver, or depositary shall be kept separate and distinct from the general business including all other funds, properties, and assets of such trust entity. The accounts of all such funds, properties, or securities shall likewise be kept separate and distinct from the accounts of the general business of the trust entity. Sec. 88, GBL: Investment Limitations of a Trust Entity. – Unless otherwise directed by the instrument creating the trust, the lending and investment of funds and other assets acquired by a trust entity as executor, administrator, guardian, trustee, receiver or depositary of the estate of any minor or other incompetent person shall be limited to loans or investments as may be prescribed by law, the Monetary Board or any court of competent jurisdiction.

NOTES

177

Sec. 89, GBL: Real Estate Acquired by a Trust Entity. – Unless otherwise specifically directed by the trustor or the nature of the trust, real estate acquired by a trust entity in whatever manner and for whatever purposes, shall likewise be governed by the relevant provisions of Section 52 of this Act. Sec. 90, GBL: Investment of Non-Trust Funds. – The investment of funds other than trust funds of a trust entity which is a bank, financing company or an investment house shall be governed by the relevant provisions of this Act and other applicable laws. Sec. 91, GBL: Sanctions and Penalties. - A trust entity or any of its officers and directors found to have willfully violated any pertinent provisions of this Act, shall be subject to the sanctions and penalties provided tinder Section 66 of this Act as well as Sections 36 and 37 of the New Central Bank Act. Sec. 92, GBL: Exemption of Trust Assets from Claims. - No assets held by a trust entity in its capacity as trustee shall be subject to any claims other than those of the parties interested in the specific trusts. Sec. 93, GBL: Establishment of Branches of a Trust Entity. – The ordinary business of a trust entity shall be transacted at the place of business specified in its articles of incorporation. Such trust entity may, with prior approval of the Monetary Board, establish branches in the Philippines and the said entity shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office. For the purpose of this Act, the trust entity and its branches shall be treated as one unit.

F. PROHIBITED ACTS 1. Insurance business Sec. 54, GBL: Prohibition to Act as Insurer. - A bank shall not directly engage in insurance business as the insurer. Sec. 2, Insurance Code: Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires: (1) A "contract of insurance" is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if made by a surety who or which, as such, is doing an insurance business as hereinafter provided.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (2) The term "doing an insurance business" or "transacting an insurance business", within the meaning of this Code, shall include: (a) making or proposing to make, as insurer, any insurance contract; (b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. (3) As used in this code, the term "Commissioner" means the "Insurance Commissioner". 2. Outsourcing of inherent bank functions Sec. 55(1)(e), GBL: No director, officer, employee, or agent of any bank shall outsource inherent banking functions.

VI. BANK REGULATIONS A. OWNERSHIP/CAPITALIZATION OF BANKS 1. Organization Sec. 8, GBL: Organization. – The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions: 8.1 That the entity is a stock corporation; 8.2 That its funds are obtained from the public, which shall mean twenty (20) or more persons; and 8.3 That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied. No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability

NOTES

178

in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank’s ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base. a.

Stock corporation (Sec. 8.1, GBL) See supra (i)

Issuance of stocks

Sec. 9, GBL: Issuance of Stocks. – The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks; Provided, That banks shall issue par value stocks only. (ii)

Treasury stocks

Sec. 10, GBL: Treasury Stocks. – No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary Board: Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. Cases Fua Cun v. Summers, 44 Phil. 705 (1923) FACTS Chua Soco subscribed 500 shares of stock with China Bank. He already made payment of P25,000 representing 250 shares of stock, with the balance forthcoming. On a different transaction, Chua executed a promissory note in favor of Fue Cun for P25,000 payable within 90 days. The note was secured by a chattel mortgage on the shares of stock subscribed. Meanwhile, Chua became indebted to China Bank for dishonored acceptances of commercial papers. China bank brought an action against Chua, resulting in the attachment of the whole 500 shares of stock. It was after the attachment that Fue brought an action against Chua due to default in payment. In addition, Fue allege that he is the owner of 250 shares of stock by virtue of the chattel mortgage. The TC ruled in favor of Fue. ISSUE W/N Fue owns the 250 shares of stock. RULING YES. Fue owns the 250 shares. China Bank has no right over the shares of stock of Chua on account of non-payment of drafts. The Corporation Act (old

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 law) provides that a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation. The rationale being that if the corporations were given a lien on their own stocks for indebtedness of the stockholders, the prohibition against granting loans or discounts upon the security of the stock would become largely ineffective. It is decided that shares of stock are classified as equity not permitted to be a subject of a chattel mortgage. Having a character of intangibility, it would be difficult to place it under a chattel mortgage. Though that being the case, the shares of stock can still be validly assigned. The endorsement presented explicitly mentions the assignment of rights in the shares from Chua to Fue. The TC erred in holding Chua, as the owner of the shares upon the payment of P25,000, had the right to dispose it to Fue. It should have been held that Chua, having interest in the shares of stock, validly assigned said stocks to Fue.

Filipinas Mils, Inc. v. Dayrit, 192 SCRA 177 (1990) FACTS FMI obtained a loan of P70,000 from CBT . Despite repeated demands, the loan remained unpaid. CBT filed a complaint before the RTC where it was able to obtain a Decision, and a writ of execution was issue pursuant to the Decision. A Notice of garnishment was issued on the goods, effects, interests, credits, moneys, stocks, shares and any other personal property in the possession of FMI. A Notice of Sale was issued but the shares of stock (issued by CBT, and owned by FMI) were not included in the items for sale. ISSUE Whether or not the sale of CBT’s capital stock (owned by FMI) in a public auction initiated by CBT itself, is a violation of Sec. 24 of the GBL. RULING NO. The sale in a public auction is not a violation. CBT must have misread the provision. There is a specific exception (“unless such security or purchase be necessary to prevent loss upon a debt previously contracted in good faith”) and a general exception (“or purchased or acquired for any other reason in the course of its operations”) mentioned therein. Thus, if and when, CBT decides to purchase those shares of stock in the public auction sale will not be a violation of Sec. 24 as it will come under the general exception.

b.

Funds obtained from the public (Sec. 8.2, GBL) See supra

c.

Minimum capital requirements (Sec. 8.3, GBL) See supra

NOTES d.

179

Capability and other requirements

Sec. 8, par. 2, GBL: No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank’s ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base. 2. Stockholdings a.

Foreign stockholdings

Cases Nunga, Jr. v. Nunga III, 574 SCRA 760 (2008) FACTS Gonzalez decided to sell his shares of stock in the Rural Bank of Apalit. Petitioners (father and son tandem) Francisco Nunga Jr and Victor Nunga then negotiated a contract to sell with Gonzalez for the shares of stock for 200k. Initial payment of 50k the rest after. Gonzalez wrote a letter to the Corp. Sec Isabel Firme to transfer to Victor the remaining shares of stock but they could no longer be found. The contract to sell was notarized only on February 28 1996. Before Petitioners could pay the balance they found out that on Feb 27 Gonzalez executed a Deed of Assignment of his RBA shares in favor of Francisco III (respondent) for 300k paid in full. On the 28th Francisco Jr. arrives from the USA and proceeded with his son to the residence of Gonzalez and convinced him to accept the balance despite having been told the shares were sold the day before. Gonzales signed his name at the dorsal portion of the stock certificates to endorse the same to Francisco Jr. and also executed the absolute deed of sale in favor of Junior. On the same day, the 28th of Feb, Franciso III demanded that Junior surrender the shares to him, while Junior demanded corp sec. Firme to register the sale to Junior but she denied because Franciso III had already bought them the day before. They sued each other with Francisco III contending that Junior was not allowed to own shares of stock of a Rural Bank because he was a US citizen. Junior said that RA 8179, an act to liberalize foreign investments granted Junior, who was a former natural born citizen equal investment rights in rural banks of the Philippines because it had retroactive effect (the act came after the sale of the shares of stock). CA sided with Franciso III, hence the SC case.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

NOTES

180

ISSUE

subsequent law.

Whether or not a former natural born citizen who is now a foreigner may invest in Rural Banks by virtue of RA 8179 “The act to further liberalize foreign investments”?

Nonetheless, it would not matter that Gonzalez executed the contract to sell in favor of Junior prior to the Deed of Assignment to Franciso III because the Contract to Sell between Gonzalez and Francisco was void and without effect for being contrary to law.

HELD NO. Petition without merit.

(i)

Francisco Jr. was disqualified from acquiring Gonzalez’s shares of stock in RBA. The argument of junior and victor that there was no specific provision in RA 7353 that prohibited the transfer of rural bank shares to individuals who were not Philippine citizens or declared such transfer void is both erroneous and unfounded.

Sec. 11, GBL: Foreign Stockholdings – Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations.

Section 4 of RA 3353 states:

The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.

“With exception of shareholdings of corporations organized primarily to hold equities in rural banks as provided for under section 12-C of RA 337, as amended, and of Filipino-controlled domestic banks, the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock: xxx.” IN SUMMARY The court held that the afore-quoted provision categorically provides that only citizens of the Philippines can own and hold, directly or indirectly, the capital stock of a rural bank, subject only to the exception of corporations, associations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock. This was the very interpretation of Section 4 of RA 7353 made by this court in Bulos, Jr. v. Yasuma, on the basis of which the Court disqualified Yasuma, a foreigner from owning capital stock in the Rural Bank of Paranaque. In the instant case, it is undisputed that when Gonzalez executed the contract to sell and the deed of absolute sale covering his RBA shares of stock in favor of Franciso Jr, the latter was already a naturalized citizen of the Untied States of America. Consequently, the acquisition by Franciso Jr. of the disputed RBA shares by virtue of the foregoing contracts is a violation of the clear and mandatory dictum of RA 7353 which the Court cannot countenance. Even with the subsequent enactment of RA 8179 (Foreign Invenstment Liberalization Act), such cannot benefit Franciso Junior. It is true that under the Civil Code, laws shall have no retroactive effect, unless the contrary is provided or when the statute is curative or remedial, or when it creates new rights PROVIDED such rights do not prejudice or impair any vested right. Francisco III clearly already had a vested right when such act was enacted hence junior’s qualification could not have been cured by the

(ii)

Individuals and non-bank corporations

Foreign banks

Sec. 11, GBL: See supra Sec. 73, GBL: Acquisition of Voting Stock in a Domestic Bank. – Within seven (7) years from the effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines. Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof. In the exercise of the authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines. b.

Filipino stockholdings (i)

Individuals and non-bank corporations

Sec. 11, par. 1, GBL: Foreign Stockholdings – Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. (iii)

Domestic banks

Sec. 25, GBL: Equity Investments of a Universal Bank in Financial Allied Enterprises. - A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise. A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank. Sec. 31, GBL: Equity Investments of a Commercial Bank in Financial Allied Enterprises. - A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank. Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise. c.

Stockholdings of family groups or related interests Sec. 12, GBL: Stockholdings of Family Groups of Related Interests. – Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. Sec. 13, GBL: Corporate Stockholdings. - Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related group of persons with the bank.

d.

Required public offering –

NOTES

181

xSec. 2.2, BSP Circular No. 271 (Series of 2001) Public offering of bank shares. A domestic bank applying for a UB authority shall, as a condition to the approval of its application, make a public offering of at least ten percent (10%) of the required minimum capital and this condition must be complied with before it can be granted the license for authority to operate as a UB. The term public offering shall mean the offer to sell equity shares to the public stockholders. Public stockholders shall refer to all stockholders, excluding the bank’s directors, shareholders owning twenty percent (20%) or more of the bank’s subscribed capital stock together with those of their relatives within the fourth degree of consanguinity or affinity, and corporations controlled or affiliated with them. A bank whose shares of stock are already listed in the Philippine Stock Exchange (PSE) at the time of filing of its application for UB authority shall be deemed to have complied with the public offering requirement. Likewise, an applicant bank may opt to have its shares listed in the PSE directly instead of passing through the process of public offering. In either case, at least ten percent (10%) of the applicant bank’s capital stock should be held by public stockholders before it can be granted the license for authority to operate as a UB.

B. DIRECTORS AND OFFICERS 1. Composition of Board Sec. 15, GBL: Board of Directors. - The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board or directors of a bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. . Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing. Sec. 17, GBL: Directors of Merged or Consolidated Banks. - In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21). Sec. 7, Foreign Banks Liberalization Act: Board of Directors. Non-Filipino citizens may become members of the Board of Directors of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 a bank to the extent of the foreign participation in the equity of said bank. Sec. 23, Corporation Code: The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. 2. Qualifications a.

Own at least one share

Sec. 23, Corporation Code: See supra b.

Fit and proper rule

Sec. 16, GBL: Fit and Proper Rule. - To maintain the quality of bank management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit. After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position. In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence. Cases Busuego v. Court of Appeals, 304 SCRA 473 (1999) FACTS On the 16th regular examination, Central Bank examiners discovered several anomalies and irregularities committed by PAL Employees Savings and Loan

NOTES

182

Association (PESALA). CB sent letters to the Board of Directors of PESALA inviting them to a conference to discuss the findings. Petitioners did not attend. The Monetary Board adopted and issued MB Resolution No. 805, which noted, among others, the findings in the 16th regular examination. It also contained a provision which states: 5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego and Mr. Renato Lim in the Sector's watchlist to prevent them from holding responsible positions in any institution under Central Bank supervision; Petitioners then filed an injunction suit to enjoin the Monetary Board from implementing the resolution putting them under a watch list. According to them their right to due process was violated since they were not granted opportunity to be heard. ISSUE (1) W/N petitioners’ right to due process was violated? (2) W/N the MB Resolution is valid insofar as it deprives petitioner of the opportunity to seek employments in the field which they can excel and are best fitted? HELD 1. NO. Petitioners were duly afforded their right to due process by the Monetary Board but they did not appear. Petitioners therefore cannot complain of deprivation of their right to due process, as they were given ample opportunity by the Monetary Board to air their submission and defenses as to the findings of irregularity during the said 16th regular examination. The essence of due process is to be afforded a reasonable opportunity to be heard and to submit any evidence one may have in support of his defense. What is offensive to due process is the denial of the opportunity to be heard. Petitioner having availed of their opportunity to present their position to the Monetary Board by their letters-explanation, they were not denied due process. 2. NO. The resolution is valid. t must be remembered that the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas), through the Monetary Board, is the government agency charged with the responsibility of administering the monetary, banking and credit system of the country and is granted the power of supervision and examination over banks and nonbank financial institutions performing quasi-banking functions of which savings and loan associations, such as PESALA, from part of. The special law governing savings and loan associations is Republic Act No. 3779, as amended, otherwise known as the "Savings and Loan Association Act." Said law authorizes the Monetary Board to conduct regular yearly examinations of the books and records of savings and loans associations, to

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 suspend a savings and loan association for violation of law, to decide any controversy over the obligations and duties of directors and officers, and to take remedial measures, among others.

c.

Other minimum qualifications –

xSubsec. X141.2, MRB: Qualifications of a director A director shall have the following minimum qualifications: a.

He shall be at least twenty-five (25) years of age at the time of his election or appointment;

b.

He shall be at least a college graduate or have at least five (5) years experience in business;

c.

He must have attended a special seminar on corporate governance for board of directors conducted or accredited by the BSP: Provided, That incumbent directors as well as those elected after September 17, 2001 must attend said seminar on or before June 30, 2003 or within a period of six (6) months from date of election for those elected after June 30, 2003, as the case may be; and

d.

He must be fit and proper for the position of a director of the bank. In determining whether a person is fit and proper for the position of a director, the following matters must be considered: integrity/probity, competence, education, diligence and experience/training.

The foregoing qualifications for directors shall be in addition to those required or prescribed under R.A. No. 8791 and other existing applicable laws and regulations. 3. Disqualifications – xSubsec. X141.2, MRB: See supra a.

Criminal conviction

Sec. 27, Corporation Code: Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. Sec. 17, PDIC Charter a. Money of the Corporation not otherwise employed shall be invested in obligations of the Republic of the Philippines or in

NOTES

183

obligations guaranteed as to principal and interest by the Republic of the Philippines. (As amended by R.A. 6037, 04 August 1969; renumbered from Sec. 12 by R.A. 9302, 12 August 2004) b. The banking or checking accounts of the Corporation shall be kept with the Bangko Sentral ng Pilipinas, with the Philippine National Bank, or with any other bank designated as depository or fiscal agent of the Philippine government. (As amended by R.A. 9302, 12 August 2004) c. It is hereby declared to be the policy of the State that the Deposit Insurance Fund of the Corporation shall be preserved and maintained at all times. Accordingly, all tax obligations of the Corporation for a period of five (5) years reckoned from the date of effectivity of this Act shall be chargeable to the Tax Expenditure Fund (TEF) in the annual General Appropriations Act pursuant to the provisions of Executive Order No. 93, series of 1986; Provided, That, on the 6th year and thereafter, the Corporation shall be exempt from income tax, final withholding tax, value-added tax on assessments collected from member banks, and local taxes. (As added by R.A 9576, 29 April 2009) d. When the Corporation has determined that an insured bank is in danger of closing, in order to prevent such closing, the Corporation, in the discretion of its Board of Directors, is authorized to make loans to, or purchase the assets of, or assume liabilities of, or make deposits in, such insured bank, upon such terms and condition as the Board of Directors may prescribe, when in the opinion of the Board of Directors, the continued operation of such bank is essential to provide adequate banking service in the community or maintain financial stability in the economy. (Renumbered from Sec. 17 (c) by R.A. 9576, 29 April 2009) The authority of the Corporation under the foregoing paragraph to extend financial assistance to, assume liabilities of, purchase the assets of an insured bank may also be exercised in the case of a closed insured bank if the Corporation finds that the resumption of operations of such bank is vital to the interests of the community, or a severe financial climate exists which threatens the stability of a number of banks possessing significant resources: Provided, That the reopening and resumption of operations of the closed bank shall be subject to the prior approval of the Monetary Board. (As amended by R.A. 7400, 13 April 1992) The Corporation may provide any corporation acquiring control of, merging or consolidating with or acquiring the assets of an insured bank in danger of closing in order to prevent such closing or of a closed insured bank in order to restore to normal operations, with such financial assistance as it could provide an insured bank under

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 this subsection: Provided, That, within sixty (60) days from date of assistance the Corporation shall submit a report thereof to the Monetary Board. (As amended by R.A. 7400, 13 April 1992) The Corporation, prior to the exercise of the powers under this Section, shall determine that actual payoff and liquidation thereof will be more expensive than the exercise of this power: Provided, That when the Monetary Board has determined that there are systemic consequences of a probable failure or closure of an insured bank, the Corporation may grant financial assistance to such insured bank in such amount as may be necessary to prevent its failure or closure and/or restore the insured bank to viable operations, under such terms and conditions as may be deemed necessary by the Board of Directors, subject to concurrence by the Monetary Board and without additional cost to the Deposit Insurance Fund. (As amended by R.A. 9302, 12 August 2004) A systemic risk refers to the possibility that failure of one bank to settle net transactions with other banks will trigger a chain reaction, depriving other banks of funds leading to a general shutdown of normal clearing and settlement activity. Systemic risk also means the likelihood of a sudden, unexpected collapse of confidence in a significant portion of the banking or financial system with potentially large real economic effects. Finally, the Corporation may not use its authority under this subsection to purchase the voting or common stock of an insured bank but it can enter into and enforce agreements that it determines to be necessary to protect its financial interests: Provided, That the financial assistance may take the form of equity or quasiequity of the insured bank as may be deemed necessary by the Board of Directors with concurrence by the Monetary Board: Provided, further, That the Corporation shall dispose of such equity as soon as practicable. (As amended by R.A. 9302, 12 August 2004) b.

Public officials

Sec. 19, GBL: Prohibition on Public Officials. - Except as otherwise provided in the Rural Banks Act, no appointive or elective public official whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government owned or controlled corporation to the bank or unless otherwise provided under existing laws. Sec. 5, Rural Banks Act: All members of the Board of Directors of the rural bank shall be citizens of the Philippines at the time of their assumption to office: Provided, however, That nothing in this Act shall be construed as prohibiting any appointive or in any capacity in the bank.

NOTES

184

No director or officer of any rural bank shall, either directly or indirectly, for himself or as the representative or agent of another, borrow any of the deposits or funds of such banks, nor shall he become a guarantor, indorser, or surety for loans from such bank to others, or in any manner be an obligor for money borrowed from the bank or loaned by it except with the written approval of the majority of the directors of the bank, excluding the director concerned. Any such approval shall be entered upon the records of the corporation and a copy of such entry shall be transmitted forthwith to the appropriate supervising department. The director/officer of the bank who violates the provisions of this section shall be immediately dismissed from his office and shall be penalized in accordance with Section 26 of this Act. The Monetary Board may regulate the amount of credit accommodations that may be extended directly to the directors, officers or stockholders of rural banks of banking institutions. However, the outstanding credit accommodations which a rural bank may extend to each of its stockholders owning two percent (2%) or more of the subscribed capital stock, its directors, or officers shall be limited to an amount equivalent to the respective outstanding deposits and book value of the paid-in capital contributions in the bank. c.

MB member/BSP personnel

Sec. 9, NCBA: Disqualifications. — In addition to the disqualifications imposed by Republic Act No. 6713, a member of the Monetary Board is disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of office as member of the Monetary Board. The members of the Monetary Board coming from the private sector shall not hold any other public office or public employment during their tenure. No person shall be a member of the Monetary Board if he has been connected directly with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment; likewise, no member of the Monetary Board shall be employed in any such institution within two (2) years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution. Sec. 27, NCBA: Prohibitions. — In addition to the prohibitions

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 found in Republic Act Nos. 3019 and 6713, personnel of the Bangko Sentral are hereby prohibited from: a.

b.

c.

d.

Being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, except nonstock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in this Act; Directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral; Revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board, information relating to the condition or business of any institution. This prohibition shall not be held to apply to the giving of information to the Monetary Board or the Governor of the Bangko Sentral, or to any person authorized by either of them, in writing, to receive such information; and Borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary Board, and shall be subject to such further rules and regulations as the Monetary Board may prescribe: Provided, however, That personnel of the supervising and examining departments are prohibited from borrowing from a bank under their supervision or examination.

4. Compensation and Other Benefits Sec. 18, GBL: Compensation and Other Benefits of Directors and Officers. To protect the finds of depositors and creditors the Monetary Board may regulate the payment by the bark to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

NOTES

185

for reasonable pre diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. 5. Meetings Sec. 15, par. 3, GBL: The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing. Sec. 25, Corporation Code: Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. 6. Powers of Directors a.

General Powers

18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition.

Sec. 23, Corporation Code: The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified.

Sec. 30, Corporation Code: Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except

Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who

18.1. When a bank is under comptrollership or conservatorship; or 18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

(10) To meet regularly (11) To keep the individual members of the board and the shareholders informed. (12) To ensure that the bank has beneficial influence on the economy. (13) To assess at least annually its performance and effectiveness as a body, as well as its various committees, the chief executive officer and the bank itself. (14) To keep their authority within the powers of the institution as prescribed in the articles of incorporation, charter, by-laws and in existing laws, rules and regulations.

xSubsec. X141.3, MRB: General responsibility of the board of directors. The position of a bank director is a position of trust. A director assumes certain responsibilities to different constituencies or stakeholders, i.e., the bank itself, its stockholders, its depositors and other creditors, its management and employees, and the public at large. These constituencies or stakeholders have the right to expect that the institution is being run in a prudent and sound manner.

c.

Specific Duties/ Responsibilities

xSubsec. X141.5, MRB: Specific duties and responsibilities of the board of directors (1) (2) (3) (4) (5) (6) (7) (8) (9)

To select and appoint officers who are qualified to administer the bank’s affairs effectively and soundly and to establish adequate selection process for all personnel. To establish objectives and draw up a business strategy for achieving them. To conduct the affairs of the institution with high degree of integrity. To establish and ensure compliance with sound written policies. To prescribe a clear assignment of responsibilities and decision-making authorities, incorporating a hierarchy of required approvals from individuals to the board of directors. To effectively supervise the bank’s affairs. To monitor, assess and control the performance of management. To adopt and maintain adequate risk management policy. To constitute the following committees (optional for banks with net worth of less than P20 million but mandatory if a subsidiary of other banks)

Certification of Directors

xBSP Circular No. 283 (Series of 2001): The directors concerned shall each be required to acknowledge receipt of the copies of such specific duties and responsibilities and shall certify that they fully understand the same.

The board of directors is primarily responsible for the corporate governance of the bank. To ensure good governance of the bank, the board of directors should establish strategic objectives, policies and procedures that will guide and direct the activities of the bank and the means to attain the same as well as the mechanism for monitoring management’s performance. While the management of the day-to-day affairs of the institution is the responsibility of the management team, the board of directors is, however, responsible for monitoring and overseeing management action. b.

186

Copies of the acknowledgement and certification herein required shall be submitted to the appropriate supervisory and examining department of SES within fifteen (15) days from date thereof. It shall be considered a major report (category a-2) and delay in its submission shall be subject to penalty in accordance with existing regulations. 7. Doctrine of Apparent Authority Cases Prudential Bank v. Court of Appeals, 223 SCRA 350 (1993) FACTS Aurora Cruz invested P200k in Central Bank bills with Prudential Bank. The placement was for 63 days at 13.75% annual interest. For this purpose, the amount of P196,122.88 was withdrawn from her account and applied to the investment. The difference of P3,877.07 represented the pre-paid interest. Susan Quimbo was the employee of the bank to whom Cruz was referred and who was apparently in charge of such transactions. The transaction was evidenced by a Confirmation of Sale delivered to Cruz , together with a Debit Memo in the amount withdrawn and applied to the confirmed sale. Upon maturity of the placement, Cruz returned to the bank to "roll-over" or renew her investment. Quimbo, who again attended to her, prepared a Credit Memo crediting the amount of P200k in Cruz's savings account passbook. She also prepared a Debit Memo for the amount of P196,122.88 to cover the re-investment of P200,000.00 minus the prepaid interest of P3,877.02.This time, Cruz was asked to sign a Withdrawal Slip for P196,122.98, representing the amount to be re-invested after deduction of the prepaid interest. Quimbo explained this was a new requirement of the bank. Several days later, Cruz received another Confirmation of Sale and a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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copy of the Debit Memo.

is considered as entered into between the principal and the third person.

Subsequently, Cruz returned to the bank and sought to withdraw her P200k. However, she was informed that the investment appeared to have been already withdrawn by her (on the same day of the renewal) There was no copy on file of the (2nd) Confirmation of Sale and the Debit Memo allegedly issued to her by Quimbo. Quimbo herself was not available for questioning as she had not been reporting for the past week. Shocked by this information, Cruz became hysterical and burst into tears.

A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A bank holding out its officers and agent as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit.

She then filed suit for breach of contract against the bank. The RTC and CA awarded damages in her favor. ISSUE Whether or not the bank should be liable (for Quimbo's acts)? HELD 1. "It could not be that plaintiff Aurora F. Cruz withdrew only the amount of P196,122.98 from their savings account, if her only intention was to make such a withdrawal. For, if, indeed, it was the desire of the plaintiffs to withdraw their money from the defendant/third-party plaintiff, they could have withdrawn an amount in round figures. Certainly, it is unbelievable that their withdrawal was in the irregular amount of P196,122.98." 2. "The bank has also not succeeded in impugning the authenticity of the Confirmation of Sale and the Debit Memo which were made on its official, forms...[e]ven assuming that they were not signed by its authorized officials, as it claims, there was no obligation on the part of Cruz to verify their authority because she had the right to presume it. The documents had been issued in the office of the bank itself and by its own employees with whom she had previously dealt. Such dealings had not been questioned before, much leas invalidated. There was absolutely no reason why she should not have accepted their authority to act on behalf of their employer." 3. "The liability of the principal for the acts of the agent is not even debatable. Law and jurisprudence are clearly and absolutely against the petitioner. He who does a thing by an agent is considered as doing it himself. This rule is affirmed by the Civil Code thus: Art. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority. Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers. Conformably, we have declared in countless decisions that the principal is liable for obligations contracted by the agent. The agent's apparent representation yields to the principal's true representation and the contract

First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996) FACTS Producer Bank (now FPIB) obtained six parcels of land with a size o totaling to 101 hectares. Demetrio Demeteria and Jose Janolo wanted to buy the property, for which they wrote a letter with Mercurio Rivera, Manager of the Property Management Department of the bank, offering P3.5M. Rivera wrote back, making a counter-offer worth P5.5M. Demetria and Janolo made another counter-offer worth P4.25M for which the bank did not reply to. Two weeks later, they met with the majority stockholder, Mr. Co and Rivera, and eventually accepted the P5.5M counter-offer. Two weeks had passed, the bank was put under conservatorship. Demetria and Janolo demanded the compliance for their agreement, which the bank ignored. After multiple demands, they filed a case for specific performance, tendering payment with the court. The bank lost with the RTC and CA level. ISSUES Whether there was a perfected contract of sale RULING 1. Yes. Although a counter-offer was made for P4.25M and was rejected by the bank, the previous offer of P5.5M was revived when the respondents met with Co and Rivera, to which they acceded two days after. This was evidenced by the letter and their meetings. Since there was meeting of the minds, when the bank offered a price, to which respondents accepted, object, the six parcels of land, and price, worth P5.5M, there was a perfected contract of sale. ***Petitioners contend that Rivera did not have the authority to negotiate as to the property involved in the litigation. There had been an apparent authority when Rivera was the Manager of the Property Management Department; he was the one who talks to potential buyers of such property;

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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he referred the prices offered to him to the committee that decided the counter-offer worth P5.5M; he was present in all transactions involving the property. The bank cannot feign ignorance to the acts of its Manager that handled the property.

BPI Family Savings Bank, Inc. Corporation, 429 SCRA 30 (2004)

v.

First

Metro

Investment

FACTS Respondent FMIC, through Executive VP Ong, opened an account and deposited P100 million to petitioner BPI FB. Ong made the deposit upon request of his friend who is a close acquaintance of Sebastian, then Branch Manager of the BPI FB branch. Sebastian’s aim was to increase the deposit level in his Branch. BPI FB, through Sebastian, guaranteed a payment of 17% per annum interest of what was deposited by FMIC. The latter, in turn, assured BPI FB that it will maintain its deposit for a period of one year on condition that the interest of 17% per annum is paid in advance. This agreement between the parties was reached through their communications in writing. BPI FB paid FMIC 17% interest upon clearance of the latter’s check deposit. However, on the basis of an Authority to Debit signed by Ong, BPI FB transferred P80 million from FMIC’s current account to the savings account of Tevesteco. FMIC denied having authorized the transfer of its funds to Tevesteco, claiming that the signatures were falsified. To recover immediately its deposit, FMIC, issued a BPI FB check payable to itself and drawn on its deposit with BPI FB. But upon presentation for payment, BPI FB dishonored the check as it was "drawn against insufficient funds". FMIC filed with the RTC against BPI FB. The court adjudged BPI FB liable to FMIC for the amount plus interest at 17% per annum, among others. BPI FB then filed a motion for reconsideration which was denied. Petitioner BPI FB contended that the CA erred in awarding the 17% per annum interest corresponding to the amount deposited by respondent FMIC. Petitioner insists that respondent’s deposit is not a special savings account similar to a time deposit, but actually a demand deposit, withdrawable upon demand, proscribed from earning interest. It also contended that the transaction is not valid as its Branch Manager clearly overstepped his authority in entering into such an agreement with Ong. ISSUE Whether the deposit is a demand deposit or a time deposit? (Relevant) Whether the bank was bound by the acts of its Branch Manager?

188

RULING It’s a time deposit. While it may be true that barely one month and seven days from the date of deposit, respondent FMIC demanded the withdrawal through the issuance of a check payable to itself, the same was made as a result of the fraudulent and unauthorized transfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s savings account. It was a normal reaction of respondent as a depositor to petitioner’s failure in its fiduciary duty to treat its account with the highest degree of care. Under this circumstance, the withdrawal of deposit by respondent FMIC before the one-year maturity date did not change the nature of its time deposit to one of demand deposit. Petitioner bound by the act of its Branch Manager. Petitioner maintains that respondent should have first inquired whether the deposit of P100 Million and the fixing of the interest rate were pursuant to its internal procedures. Petitioner’s stance is a futile attempt to evade an obligation clearly established by the intent of the parties. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the part of respondent’s representative in failing to find out the scope of authority of Sebastian. Indeed, the public has the right to rely on the trustworthiness of bank managers and their acts. Significantly, the transaction was actually acknowledged and ratified by petitioner when it paid respondent in advance the interest for one year. Thus, petitioner is estopped from denying that it authorized Sebastian to enter into an agreement with Ong concerning the deposit with the corresponding 17% interest per annum.

Associated Bank v. Pronstroller, 558 SCRA 113 (2008) FACTS In 1988, Spouses Vaca executed a REM in favor of Associated Bank (now United Overseas Bank) over a parcel of residential land and the house constructed thereon. For failure to pay, the property was sold at a public auction with the bank as the highest bidder. However, Spouses Vaca commenced an action for the nullification of the REM and the foreclosure sale. A writ of possession was granted by the CA, after it was denied by the RTC. This CA decision was questioned by Spouses Vaca before the SC in another case. Pending these cases, the bank advertised the property for sale for P9.7M. Spouses Pronstroller offered to purchase the property for P7.5M, which was accepted by the bank.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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Prior to the expiration of the 90-day period within which to make the escrow deposit (as stipulated in the Letter-Agreement setting forth the terms and conditions of the sale), Spouses Pronstroller requested that the balance of the purchase price be made payable only upon service on them of a final decision of the SC affirming the bank's right to possess the property. Atty. Soluta, acting for the bank, allowed the Spouses' request.

certain acts for and on his behalf, the board may validly delegate some of its functions and powers to officers, committees and agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly, by habit, custom, or acquiescence, in the general course of business.

In 1994, the bank reorganized its management. Atty. Dayday replaced Atty. Soluta as Asst. VP and Head of Documentation Section. Atty. Dayday discovered that Spouses Pronstroller failed to pay the balance of the purchase price and that they requested extension of time to pay. Upon referral to ARRMC (Asset Recovery and Remedial Management Committee), it was disapproved. Consequently, this was referred to the bank's Legal Department for rescission of the contract.

The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. The doctrine of "apparent authority," with special reference to banks, had long been recognized in this jurisdiction. Apparent authority is derived not merely from practice. Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.

Spouses Pronstroller proposed to pay the balance of the purchase price (P3M upon approval and the balance after 6 months). But this was disapproved by the bank's president and will only be allowed if they would pay interest at 24.5% p.a. on the unpaid balance. For failure to arrive to an agreement, Spouses Pronstroller reiterated that they would enforce their agreement with Atty. Soluta. However, Atty. Soluta's authority to enter into that agreement was denied by the bank. In 1994, Spouses Pronstroller instituted this suit against the bank. The bank countered saying that their contract had already been rescinded because of the Spouses' failure to deposit in escrow the balance of the purchase price. During the pendency of this case, the bank sold the property to Spouses Vaca, who registered the sale. RTC ruled in favor of Spouses Pronstroller on the ground of the rule of "Apparent Authority" vested upon Atty. Soluta. CA affirmed ruling further that the bank had no right to unilaterally rescind the contract and that the bank were estopped from questioning the efficacy of the Soluta-Pronstroller agreement because of its failure to repudiate the same for 1 year. ISSUE Whether the bank is bound by the agreement signed by Atty. Soluta under the doctrine of apparent authority RULING YES. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. The power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board of directors. However, just as a natural person may authorize another to do

Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was exercised without any objection from its board or shareholders. Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. Naturally, the third person has little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Soluta's authority. Indeed, the public has the right to rely on the trustworthiness of bank officers and their acts. If a corporation knowingly permits its officer, or any other agent, to perform acts within the scope of an apparent authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any person who has dealt in good faith with the corporation through such agent, be estopped from denying such authority.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 8. Prohibited Acts Sec. 55.1, GBL: No director, officer, employee, or agent of any bank shall –

NOTES

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Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.

(a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person;

Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance with the existing laws.

(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; (c) Accept gifts, fees, or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank; (d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or (e) Outsource inherent banking functions.

2. Banking Days and Hours

C. BANK OPERATIONS 1. Branches Sec. 20, GBL: Bank Branches. - Universal or commercial banks may open branches or other offices within or outside the Philippines upon prior approval of the Bangko Sentral. Branching by all other banks shall be governed by pertinent laws. A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and/or sale of the financial products of its allied undertaking or of its investment house units. A bank authorized to establish branches or other offices shall be responsible for all business conducted in such branches and offices to the same extent and in the same manner as though such business had all been conducted in the head office. A bank and its branches and offices shall be treated as one unit. Sec. 74, GBL: Local Branches of Foreign Banks. – In the case of a foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be held to refer to such units. Sec. 75, GBL: Head Office Guarantee. – In order to provide effective protection of the interests of the depositors and other creditors of

Sec. 21, GBL: Banking Days and Hours. – Unless otherwise authorized by the Bangko Sentral in the interest of the banking public, all banks including their branches and offices shall transact business on all working days for at least six (6) hours a day. In addition, banks or any of their branches or offices may open for business on Saturdays, Sundays or holidays for at least three (3) hours a day: Provided, That banks which opt to open on days other than working days shall report to the Bangko Sentral the additional days during which they or their branches or offices shall transact business. For purposes of this Section, working days shall mean Mondays to Fridays, except if such days are holidays. 3. Independent Auditor Sec. 58, GBL: Independent Auditor. - The Monetary Board may require a bank, quasi-bank or trust entity to engage the services of an independent auditor to be chosen by the bank, quasi-bank or trust entity concerned from a list of certified public accountants acceptable to the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be on a continuing basis where the auditor shall act as resident examiner, or on the basis of special engagements; but in any case, the independent auditor shall be responsible to the bank’s, quasi-bank’s or trust entity’s board of directors. A copy of the report shall be furnished to the Monetary Board. The Monetary Board may also direct the board of directors of a bank, quasi-bank, trusty entity and/or the individual members thereof; to conduct, either personally or by a committee created by the board, an annual balance sheet audit of the bank, quasi-bank or trust entity to review the internal audit and control system of the bank, quasi-bank or trust entity and to submit a report of such audit. 4. Financial Statements Sec. 60, GBL: Financial Statements. – Every bank, quasi-bank or trust entity shall submit to the appropriate supervising and examining department of the Bangko Sentral financial statements in such form and frequency as may be prescribed by the Bangko Sentral. Such statements, which shall be as of a specific date designated by the Bangko Sentral, shall show thee actual financial condition of the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 institution submitting the statement, and of its branches, offices, subsidiaries and affiliates, including the results of its operations, and shall contain such information as may be required in Bangko Sentral regulations. Sec. 61, GBL: Publication of Financial Statements. - Every bank, quasibank or trust entity, shall publish a statement of its financial condition, including those of its subsidiaries and affiliates, in such terms understandable to the layman and in such frequency as may be prescribed Bangko Sentral, in English or Filipino, at least once every quarter in a newspaper of general circulation in the city or province where the principal office, in the case of a domestic institution or the principal branch or office in the case of a foreign bank, is located, but if no newspaper is published in the same province, then in a newspaper published in Metro Manila or in the nearest city or province. The Bangko Sentral may by regulation prescribe the newspaper where the statements prescribed herein shall be published. . The Monetary Board may allow the posting of the financial statements of a bank, quasi-bank or trust entity in public places it may determine, lieu of the publication required in the preceding paragraph, when warranted by the circumstances. Additionally, banks shall make available to the public in such form and manner as the Bangko Sentral may prescribe the complete set of its audited financial statements as well as such other relevant information including those on enterprises majority-owned or controlled by the bank, that will inform the public of the true financial condition of a bank as of any given time. . In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary Board, by a vote of at least five (5) of its members, in special cases and upon application of the bank, quasi-bank or trust entity, may allow such bank, quasi-bank or trust entity to defer for a stated period of time the publication of the statement of financial condition required herein. Sec. 62, GBL: Publication of Capital Stock. – A bank, quasi-bank or trust entity incorporated under the laws of the Philippines shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid up. No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head office, or of the bank in its entirety without indicating at the same time and with equal prominence the amount of the capital, if any, definitely assigned to such branch, such fact shall be stated in, and shall form part of the publication.

NOTES

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5. Electronic Transactions Sec. 59, GBL: Authority to Regulate Electronic Transactions. - The Bangko Sentral shall have full authority to regulate the use of electronic devices, such as computers, and processes for recording, storing and transmitting information or data in connection with the operations of a bank; quasi-bank or trust entity, including the delivery of services and products to customers by such entity. 6. Unsound Banking Practice Sec. 56, GBL: Conducting Business in an Unsafe or Unsound Manner In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances: 56.1. The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution; 56.2. The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general; 56.3. The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or 56.4. The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby. Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. a.

Factors to be considered by MB

b.

Effect of persistence in conducting business in unsafe and unsound manner

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 7. Settlement of Disputes Sec. 63, GBL: Settlement of Disputes. – The provisions of any law to the contrary notwithstanding, the Bangko Sentral shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks, quasi-banks or trust entities arising out of and involving relations between and among their directors, officers or stockholders, as well as disputes between any or all of them and the bank, quasi-bank or trust entity of which they are directors, officers or stockholders. Cases Home Bankers Savings and Trust Co. v. Court of Appeals, 318 SCRA 558 (1999) FACTS Victor Tancuan issued a check amounting to P25,250,000 while Eugene Arriesgado issued 3 checks, all amounting to P25,200,000. Both exchanged each other’s check and deposited them with their respective banks for collection. When Far East Bank and Trust Company (FEBTC) presented Victor’s check to Home Bankers Savings and Trust Company (HBSTC), HBSTC dishonored the check for insufficiency of funds. on the other hand, when HBSTC presented Eugene’s checks to FEBTC, it was also dishonored for insufficiency. HBSTC returned the checks to FEBTC through the Philippine Clearing House Corporation for the reason “Beyond Reglementary Period”, implying that HBSTC already treasted Eugene’s checks as cleared and allowed to be withdrawn. Now, FEBTC demands reimbursements for the returned checks. The issue was subjected for arbitration. However, during the pendency of the arbitration, FEBTC filed a case in court with prayer for attachment. HBSTC countered with a motion to dismiss, arguing the case cannot be filed while the arbitration is still on going. The LC ruled dismissed the motion of FEBTC. ISSUE W/N FEBTC can file a separate case in court over the same subject matter of an arbitration, while the arbitration is still ongoing. RULING YES. Section 14 of of RA 876 “Arbitration Law allows any party to the arbitration proceeding to petition the court to take measures to safeguard and/or conserve any matter which is the subject of the dispute in arbitration Section 14. Subpoena and subpoena duces tecum. - Arbitrators shall have the power to require any person to attend a hearing as a witness. They shall have the power to subpoena witnesses and documents when

NOTES

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the relevancy of the testimony and the materiality thereof has been demonstrated to the arbitrators. Arbitrators may also require the retirement of any witness during the testimony of any other witness. All of the arbitrators appointed in any controversy must attend all the hearings in that matter and hear all the allegations and proofs of the parties; but an award by the majority of them is valid unless the concurrence of all of them is expressly required in the submission or contract to arbitrate. The arbitrator or arbitrators shall have the power at any time, before rendering the award, without prejudice to the rights of any party to petition the court to take measures to safeguard and/or conserve any matter which is the subject of the dispute in arbitration. Participants in the regional clearing operations of the Philippine Clearing House Corporation cannot bypass the arbitration process laid out by the body and seek relief directly from the courts. In the case at bar, undeniably, private respondent has initiated arbitration proceedings as required by the PCHC rules and regulations, and pending arbitration has sought relief from the trial court for measures to safeguard and/or conserve the subject of the dispute under arbitration, as sanctioned by section 14 of the Arbitration Law, and otherwise not shown to be contrary to the PCHC rules and regulations. Basically, the case filed by FEBTC is allowed on the ground of primarily taking measures to safeguard the subject matter of the dispute (attachment), notwithstanding the arbitration proceedings.

Allied Banking Corporation v. Court of Appeals, 294 SCRA 803 (1998) FACTS Hyatt Terraces Baguio issued two crossed checks drawn against Allied Banking Corp. (hereinafter, ALLIED) in favor of appellee Meszellen Commodities Services, Inc. (hereinafter, MESZELLEN). Said checks were deposited on August 5, 1980 and August 18, 1980, respectively, with the now defunct Commercial Bank and Trust Company (hereinafter, COMTRUST). Upon receipt of the above checks, COMTRUST stamped at the back thereof the warranty "All prior endorsements and/or lack of endorsements guaranteed." After the checks were cleared through the Philippine Clearing House Corporation (hereinafter, PCHC), ALLIED BANK paid the proceeds of said checks to COMTRUST as the collecting bank. On March 17, 1981, the payee, MESZELLEN, sued the drawee, ALLIED BANK, for damages which it allegedly suffered when the value[s] of the checks were paid not to it but to some other person. Before defendant ALLIED BANK could finish presenting its evidence, it filed a third party complaint against Bank of the Philippine Islands (hereinafter, BPI, appellee herein) as successor-in-interest of COMTRUST, for reimbursement in the event that it would be adjudged liable in the main

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 case to pay plaintiff, MESZELLEN. A Motion to Dismiss was filed by BPI on the ground that the trial court had no jurisdiction over the case as they are subject to mandatory arbitration under the PCHC Rules.

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petition for review in the earlier case filed by respondent at the RTC Makati. Respondent filed a Motion to Dismiss Petition for Review for Lack of jurisdiction. RTC upheld and stated that petitioner should have been filed as a separate case. ISSUE

ISSUE Whether or not the trial court has jurisdiction over the Third Party Complaint of ALLIED against BPI.

Whether or not RTC erred in dismissing the Petition of Petitioner for lack of jurisdiction on the ground it should have been docketed as a separate case? HELD

RULING NO. The parties are subject to mandatory arbitration. Sec. 38 — Arbitration Any dispute or controversy between two or more clearing participants involving any check/item cleared thru PCHC shall be submitted to the Arbitration Committee, upon written complaint of any involved participant by filing the same with the PCHC serving the same upon the other party or parties, who shall within fifteen (15) days after receipt thereof file with the Arbitration Committee its written answer to such written complaint and also within the same period serve the same upon the complaining participant, . . . . We defer to the primary authority of PCHC over the present dispute, because its technical expertise in this field enables it to better resolve questions of this nature. This is not prejudicial to the interest of any party, since primary recourse to the PCHC does not preclude an appeal to the regional trial courts on questions of law.

Insular Savings Bank v. Far East Bank and Trust Company, 492 SCRA 145 (2006) FACTS Far East filed a complaint against Home Banks Trust and Company (HBTC) with the Philippine Clearing House Corporation’s (PCHC) arbitration committee for 25.2M. for the total amount of three checks drawn and debited against its clearing account. HBTC sent these checks to respondent for to respondent for clearing through the PCHC clearing system. Respondent dishonour the checks for insuffiency of funds and returned to HBTC however, the latter refused to accept them since the checks were returned by respondent after the reglementary regional clearing period. Pending arbitration respondent filed another complaint but this time with the RTC in Makati. The RTC then suspended the case pending the outcome of arbitration. Arbitration was in favour of respondent and petitioners were told to pay the 25.2M. MR was denied at the arbitration committee so petitioner filed a

Petition Lacks merit. RTC ruling upheld except for ruling on requirement to file a separate case. PCHC has its own rules of procedure for arbitration. However, this is governed by the arbitration law and supplemented by the rules of court. As provided in the PCHC rules, the findings of facts of the decision or awared rendered by the Arbitration Committee shall be final and conclusive upon all the parties in said arbitration dispute. Under Article 2055 of the Civil Code, the validy of any stipulation on the finality of arbitratior’s award or decision is recognized however, where the conditions desrbied in articles 2038-2040 applicable to both compromises and arbitration obtaining, the arbitrators awards may be annulled or resciended. Consequently, the decision of the arbi committee is subject to judicial review. Furthermore, petitioner had several judicial remedies available at its disposal after the Arbitration Committee denied its Motion for Reconsideration. It may petition the proper RTC to issue an order vacating the award on the grounds provided for under Section 24 of the Arbitration Law. Petitioner likewise has the option to file a petition for review under Rule 43 of the Rules of Court with the Court of Appeals on questions of fact, of law, or mixed questions of fact and law. Lastly, petitioner may file a petition for certiorari under Rule 65 of the Rules of Court on the ground that the Arbitrator Committee acted without or in excess of its jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction. Since this case involves acts or omissions of a quasi-judicial agency, the petition should be filed in and cognizable only by the Court of Appeals. In this instance, petitioner did not avail of any of the abovementioned remedies available to it. Instead it filed a petition for review with the RTC where Civil Case No. 92-145 is pending pursuant to Section 13 of the PCHC Rules to sustain its action. Clearly, it erred in the procedure it chose for judicial review of the arbitral award. In the instant case, petitioner and respondent have agreed that the PCHC Rules would govern in case of controversy. However, since the PCHC Rules came about only as a result of an agreement between and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 among member banks of PCHC and not by law, it cannot confer jurisdiction to the RTC. Thus, the portion of the PCHC Rules granting jurisdiction to the RTC to review arbitral awards, only on questions of law, cannot be given effect. Consequently, the proper recourse of petitioner from the denial of its motion for reconsideration by the Arbitration Committee is to file either a motion to vacate the arbitral award with the RTC, a petition for review with the Court of Appeals under Rule 43 of the Rules of Court or a petition for certiorari under Rule 65 of the Rules of Court. In the case at bar, petitioner filed a petition for review with the RTC when the same should have been filed with the Court of Appeals under Rule 43 of the Rules of Court. Thus, the RTC of Makati did not err in dismissing the petition for review for lack of jurisdiction but not on the ground that petitioner should have filed a separate case but on the necessity of filing the correct petition in the proper court. It is immaterial whether petitioner filed the petition for review in Civil Case No. 92-145 as an appeal of the arbitral award or whether it filed a separate case in the RTC, considering that the RTC will only have jurisdiction over an arbitral award in cases of motions to vacate the same. Otherwise, as elucidated herein, the Court of Appeals retains jurisdiction in petitions for review or in petitions for certiorari.

D. OTHER REGULATIONS 1. Risk Based Capital Sec. 34, GBL: Risk-Based Capital. - The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. For purposes of this Section, the Monetary Board may require such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible conform to internationally accepted standards, including those of the Bank for International Settlements (BIS), relating to risk-based capital requirements: Provided further, That it may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided, finally, That such ratio shall be applied uniformly to banks of the same category. . In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by

NOTES

194

such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. . In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe. Before the effectivity of rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force. a.

MB Authority

b.

Effect of Non-Compliance

2. Major Investments/Ownership of Real Property Sec. 50, GBL: Major Investments. - For the purpose or enhancing bank supervision, the Monetary Board shall establish criteria for reviewing major acquisitions of investments by a bank including corporate affiliations or structures that may expose the bank to undue risks or in any way hinder effective supervision. Sec. 51, GBL: Ceiling on Investments in Certain Assets. – Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank’s total investment in real estate, unless otherwise provided by the Monetary Board. Sec. 52, GBL: Acquisition of Real Estate by Way of Satisfaction of Claims. – Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances: 52.1. Such as shall be mortgaged to it in good faith by way of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 security for debts; 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section. 3. Declaration of Dividends Sec. 57, GBL: Prohibition on Dividend Declaration. – No bank or quasibank shall declare dividends, if at the time of declaration: 57.1. Its clearing account with the Bangko Sentral is overdrawn; or 57.2. It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days, or 57.3. It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or 57.4. It has committed a major violation as may be determined by the Bangko Sentral.

E. PENALTY FOR VIOLATIONS Sec. 66, GBL: Penalty for Violation of this Act. – Unless otherwise herein provided, the violation of any of the provisions of this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer. If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General. Sec. 34, NCBA: Refusal to Make Reports or Permit Examination. — Any officer, owner, agent, manager, director or officer-in-charge of any institution subject to the supervision or examination by theBangko Sentral within the purview of this Act who, being required in writing by the Monetary Board or by the head of the supervising and examining department willfully refuses to file the required report or permit any lawful examination into the affairs of such institution shall be punished by a fine of not less than Fifty thousand pesos (P50,000) nor more than One hundred

NOTES

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thousand pesos (P100,000) or by imprisonment of not less than one (1) year nor more than five (5) years, or both, in the discretion of the court. Sec. 35, NCBA: False Statement. — The willful making of a false or misleading statement on a material fact to the Monetary Board or to the examiners of the Bangko Sentral shall be punished by a fine of not less than One hundred thousand pesos (P100,000) nor more than Two hundred thousand pesos (P200,000), or by imprisonment of not more than (5) years, or both, at the discretion of the court. Sec. 36, NCBA: Proceedings Upon Violation of This Act and Other Banking Laws, Rules, Regulations, Orders or Instructions. — Whenever a bank or quasi-bank, or whenever any person or entity willfully violates this Act or other pertinent banking laws being enforced or implemented by the Bangko Sentral or any order, instruction, rule or regulation issued by the Monetary Board, the person or persons responsible for such violation shall unless otherwise provided in this Act be punished by a fine of not less than Fifty thousand pesos (P50,000) nor more than Two hundred thousand pesos (P200,000) or by imprisonment of not less than two (2) years nor more than ten (10) years, or both, at the discretion of the court. Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner, the Board may, without prejudice to the penalties provided in the preceding paragraph of this section and the administrative sanctions provided in Section 37 of this Act, take action under Section 30 of this Act. Sec. 37, NCBA: Administrative Sanctions on Banks and Quasi-banks. — Without prejudice to the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board may, at its discretion, impose upon any bank or quasi-bank, their directors and/or officers, for any willful violation of its charter or by-laws, willful delay in the submission of reports or publications thereof as required by law, rules and regulations; any refusal to permit examination into the affairs of the institution; any willful making of a false or misleading statement to the Board or the appropriate supervising and examining department or its examiners; any willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation issued by the Monetary Board, or any order, instruction or ruling by the Governor; or any commission of irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Monetary Board, the following administrative sanctions, whenever applicable: (a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank;

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 (b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities; (c) suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments; (d) suspension of interbank clearing privileges; and/or (e) revocation of quasi-banking license. Resignation or termination from office shall not exempt such director or officer from administrative or criminal sanctions.The Monetary Board may, whenever warranted by circumstances, preventively suspend any director or officer of a bank or quasi-bank pending an investigation: Provided, That should the case be not finally decided by the Bangko Sentral within a period of one hundred twenty (120) days after the date of suspension, said director or officer shall be reinstated in his position: Provided, further, That when the delay in the disposition of the case is due to the fault, negligence or petition of the director or officer, the period of delay shall not be counted in computing the period of suspension herein provided. The above administrative sanctions need not be applied in the order of their severity. Whether or not there is an administrative proceeding, if the institution and/or the directors and/or officers concerned continue with or otherwise persist in the commission of the indicated practice or violation, the Monetary Board may issue an order requiring the institution and/or the directors and/or officers concerned to cease and desist from the indicated practice or violation, and may further order that immediate action be taken to correct the conditions resulting from such practice or violation. The cease and desist order shall be immediately effective upon service on the respondents. The respondents shall be afforded an opportunity to defend their action in a hearing before the Monetary Board or any committee chaired by any Monetary Board member created for the purpose, upon request made by the respondents within five (5) days from their receipt of the order. If no such hearing is requested within said period, the order shall be final. If a hearing is conducted, all issues shall be determined on the basis of records, after which the Monetary Board may either reconsider or make final its order. The Governor is hereby authorized, at his discretion, to impose upon banking institutions, for any failure to comply with the requirements of law, Monetary Board regulations and policies, and/or instructions issued by the Monetary Board or by the Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of which shall be final and executory until reversed, modified or lifted by the Monetary Board on appeal.

NOTES

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Cases Perez v. Monetary Board, 20 SCRA 592 (1967) FACTS Perez instituted mandamus proceedings against the Monetary Board, the Superintendent of Banks, the Central Bank and the Secretary of Justice. His object was to compel respondents to prosecute, Pablo Roman and several other Republic Bank officials for violations of the General Banking Act (specifically secs. 76-78 and 83 thereof) and the Central Bank Act, and for falsification of public or commercial documents in connection with certain alleged anomalous loans authorized by Roman and the other bank officials. Respondents assailed the propriety of mandamus. The Secretary of Justice claimed that it was not their specific duty to prosecute the persons denounced by Perez. The Central Bank and its respondent officials, on the other hand, averred that they had already done their duty under the law by referring to the special prosecutors of the Department of Justice for criminal investigation and prosecution those cases involving the alleged anomalous loans. ISSUE W/N mandamus would lie against respondents? (specifically the Central Bank) HELD NO. The Central Bank and its respondent officials may have the duty under the Central Bank Act and the General Banking Act to cause the prosecution of those alleged violators, yet We find nothing in said laws that imposes a clear, specific duty on the former to do the actual prosecution of the latter. The Central Bank is a government corporation created principally to administer the monetary and banking system of the Republic, not a prosecution agency like the fiscal's office. Being an artificial person, The Central Bank is limited to its statutory powers and the nearest power to which prosecution of violators of banking laws may be attributed is its power to sue and be sued. But this corporate power of litigation evidently refers to civil cases only. The Central Bank and its respondent officials have already done all they could, within the confines of their powers, to cause the prosecution of those persons denounced by Perez.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011

VII. BANKS IN DISTRESS; CESSATION OF BANKING BUSINESS A. LOANS TO BANKS 1. Loans without collateral Sec. 83, NCBA: Loans for Liquidity Purposes. — The Bangko Sentral may extend loans and advances to banking institutions for a period of not more than seven (7) days without any collateral for the purpose of providing liquidity to the banking system in times of need. 2. Emergency loans Sec. 84, NCBA: Emergency Loans and Advances. — In periods of national and/or local emergency or of imminent financial panic which directly threaten monetary and banking stability, the Monetary Board may, by a vote of at least five (5) of its members, authorize the Bangko Sentral to grant extraordinary loans or advances to banking institutions secured by assets as defined hereunder: Provided, That while such loans or advances are outstanding, the debtor institution shall not, except upon prior authorization by the Monetary Board, expand the total volume of its loans or investments. The Monetary Board may, at its discretion, likewise authorize the Bangko Sentral to grant emergency loans or advances to banking institutions, even during normal periods, for the purpose of assisting a bank in a precarious financial condition or under serious financial pressures brought by unforeseen events, or events which, though foreseeable, could not be prevented by the bankconcerned: Provided, however, That the Monetary Board has ascertained that the bank is not insolvent and has the assets defined hereunder to secure the advances: Provided, further, That a concurrent vote of at least five (5) members of the Monetary Board is obtained. The amount of any emergency loan or advance shall not exceed the sum of fifty percent (50%) of total deposits and deposit substitutes of the banking institution and shall be disbursed in two (2) or more tranches. The amount of the first tranche shall be limited to twentyfive percent (25%) of the total deposit and deposit substitutes of the institution and shall be secured by government securities to the extent of their applicable loan values and other unencumbered first class collaterals which the Monetary Board may approve: Provided, That if as determined by the Monetary Board, the circumstances surrounding the emergency warrant a loan or advance greater than the amount provided hereinabove, the amount of the first tranche

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may exceed twenty-five percent (25%) of the bank's total deposit and deposit substitutes if the same is adequately secured by applicable loan values of government securities and unencumbered first class collaterals approved by the Monetary Board, and the principal stockholders of the institution furnish an acceptable undertaking to indemnify and hold harmless from suit a conservator whose appointment the Monetary Board may find necessary at any time. Prior to the release of the first tranche, the banking institution shall submit to the Bangko Sentral a resolution of its board of directors authorizing the Bangko Sentral to evaluate other assets of the banking institution certified by its external auditor to be good and available for collateral purposes should the release of the subsequent tranche be thereafter applied for. The Monetary Board may, by a vote of at least five (5) of its members, authorize the release of a subsequent tranche on condition that the principal stockholders of the institution: (a) furnish an acceptable undertaking to indemnify and hold harmless from suit a conservator whose appointment the Monetary Board may find necessary at any time; and (b)

provide acceptable security which, in the judgment of the Monetary Board, would be adequate to supplement, where necessary, the assets tendered by the banking institution to collateralize the subsequent tranche.

In connection with the exercise of these powers, the prohibitions in Section 128 of this Act shall not apply insofar as it refers to acceptance as collateral of shares and their acquisition as a result of foreclosure proceedings, including the exercise of voting rights pertaining to said shares: Provided, however, That should the Bangko Sentral acquire any of the shares it has accepted as collateral as a result of foreclosure proceedings, the Bangko Sentral shall dispose of said shares by public bidding within one (1) year from the date of consolidation of title by the Bangko Sentral. Whenever a financial institution incurs an overdraft in its account with the Bangko Sentral, the same shall be eliminated within the period prescribed in Section 102 of this Act. B. CONSERVATORSHIP Sec. 67, GBL: Conservatorship. – The grounds and procedures for placing a bank under conservatorship, as well as, the powers and duties of the conservator appointed for the bank shall be governed by the provisions of Section 29 and the last two paragraphs of Section 30 of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 the New Central Bank Act: Provided, That this Section shall also apply to conservatorship proceedings of quasi-banks. Sec. 29, NCBA: Appointment of Conservator. — Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. The conservatorshall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed one (1) year. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any time within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board, on the basis of the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case the provisions of Section 30 shall apply.

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Sec. 30, NCBA: Proceedings in Receivership and Liquidation. — Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasi- bank: (a) Is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (b) By the Bangko Sentral, to meet its liabilities; or (c) Cannot continue in business without involving probable losses to its depositors or creditors; or (d) Has willfully violated a cease and desist order under Section 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver. The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in nonspeculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board.If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall: 1. File ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the institution. 2. Convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator under Section 29 of this Act or the appointment of a receiver under this section shall be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is not a precondition to the designation of a receiver. Sec. 5, FRIA: Exclusions. - The term debtor does not include banks, insurance companies, pre-need companies, and national and local government agencies or units. For purposes of this section: (a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially or actually subject to conservatorship, receivership or

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liquidation proceedings under the New Central Bank Act (Republic Act No. 7653) or successor legislation; (b) Insurance company shall refer to those companies that are potentially or actually subject to insolvency proceedings under the Insurance Code (Presidential Decree No. 1460) or successor legislation; and (c) Pre-need company shall refer to any corporation authorized/licensed to sell or offer to sell pre-need plans. Provided, That government financial institutions other than banks and government-owned or controlled corporations shall be covered by this Act, unless their specific charter provides otherwise. 1. Grounds Sec. 29, par. 1, NCBA: Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasibank. 2. Appointment of Conservator Sec. 29, par. 1, NCBA: see supra Sec. 30, last par. NCBA: The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator under Section 29 of this Act or the appointment of a receiver under this section shall be vested exclusively with the Monetary Board. Furthermore, the designation

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 of a conservator is not a precondition to the designation of a receiver. 3. Powers of Conservator Sec. 29, par. 1, NCBA: see supra Cases First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996) FACTS First Phil International Bank (formerly Producers Bank of the Phil) acquired 6 parcels of land from BYME Investment and Development Corporation through mortgage and foreclosure. Now, Demetrio Demetria and Jose Janolo desire to buy the said property from the Bank. The potential buyers coursed his offer to Mecurio Rivera, the manager of property management department of the bank. initially, both offered 3.5M. Rivera counter-offered with 5.5M. Both again offered 4.2M but later agreed to the 5.5M purchase price. However, the Conservator of the bank was replaced by an Acting Conservator, thus, the offer by Demetria and Janolo was subjected to further review. Demetria and Janolo insisted that there was a perfected contract of sale already. They tendered the price of 5.5M but the Bank refused to acknowledge the “perfected contact”. RTC ruled in favor of Demetria and Janolo. CA affirmed. Note that the bank was placed under conservatorship during the time of negotiation and perfection of the contact. ISSUE W/N the Conservator of the Bank can unilaterally repudiate the authority of Bank Officers. RULING NO. The Conservator has no power to repudiate the contract. First, the issue of Conservator’s authority to repudiate a contract was raised for the first time on appeal. Issues not raised in the trial court cannot be raised for the first time on appeal, as it is offensive to basic rules of fair play. Second, there was no evidence that the Conservator actually repudiated the contract at the time it was perfected. The Acting Conservator never objected to the contact, it only informed that the transaction was subject to review. What the Acting Conservator did was he repudiated the authority of Rivera to make a binding offer, NOT repudiate the contract itself.

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Third, the power under the Central Bank Law regarding conservatorship in preservation of the bank’s assets CANNOT EXTEND to the post-facto repudiation of perfected transaction; otherwise, it would infringe the nonImpairment clause of the Constitution. Thus, the authority under Section 28-A only pertains the power to revoke defective contracts – void, voidable, unenforceable or rescissible. The conservator cannot repudiate a contract validly made under the doctrine of implied authority. Its only authority in such case is to assail such contract in court. NOTE: The Bank is guilty of Forum-Shopping. There is a Perfected Contract of Sale. Such Contract is Enforceable. There is no Reversible Error of Facts. 4. Qualifications and Remuneration Sec. 29, pars. 2 and 3, NCBA: The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed one (1) year. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any time within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. 5. Period—NOT EXCEED 1 YEAR Sec. 29, par. 2, NCBA: see supra 6. Termination of Conservatorship Sec. 29, par. 2 and last par., NCBA: